SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996 or
/ / Transition report pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the transition period from ____________ to
____________
Commission file number 1-1915
DeSoto, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-1899490
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 E. Washington St., Joliet, Illinois 60433
(Address of principal executive offices)
815 - 727 - 4931
(Registrant's telephone number, including area code)
The registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
At April 30, 1996 the registrant had 4,686,023 shares of common
stock outstanding.
PAGE 2
DeSOTO, INC. AND SUBSIDIARIES
INDEX
Page
No.
PART I. FINANCIAL INFORMATION
Consolidated Condensed Statements of
Operations for the Three Months ended
March 31, 1996 and March 31, 1995 3
Consolidated Condensed Balance Sheets as of
March 31, 1996 and December 31, 1995 4
Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 1996
and March 31, 1995 5
Notes to Consolidated Condensed Financial
Statements 6-7
Management's Analysis of Financial Statements 8-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10-11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 12
PAGE 3
PART I. FINANCIAL INFORMATION
DeSOTO, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
1996 1995
(in thousands except
per share amounts)
NET REVENUES........................... $5,846 $18,927
COSTS AND EXPENSES:
Cost of sales....................... 5,041 19,443
Selling, administrative and general. 1,439 2,815
Retirement security program......... (1,660) (1,682)
Nonrecurring expense................ 1,562 -
------ -------
TOTAL OPERATING COSTS AND EXPENSES..... 6,382 20,576
------ -------
LOSS FROM OPERATIONS................... (536) (1,649)
OTHER CHARGES AND CREDITS:
Interest expense.................... - 247
Nonoperating income................. - (271)
------ -------
Loss before Income Taxes............... (536) (1,625)
Benefit for Income Taxes............... (202) (603)
------ -------
NET LOSS............................... (334) (1,022)
Dividends on Preferred Stock........... (111) (83)
------ -------
Net Loss Available for Common Shares... $ (445) $(1,105)
====== =======
NET LOSS PER COMMON SHARE............... $(0.10) $ (0.24)
====== =======
Average Common Shares Outstanding....... 4,681 4,672
====== =======
Dividends Declared per Common Share..... - -
====== =======
See accompanying notes to consolidated condensed financial
statements.
PAGE 4
DeSOTO, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31,
1996 December 31,
(Unaudited) 1995
(in thousands of dollars)
ASSETS
Current Assets:
Cash...................................... $ 13 $ 51
Restricted cash........................... 19 29
Restricted short-term investments......... 1,180 1,180
Trade accounts and notes receivable-net... 5,248 4,764
Inventories - net:
Finished goods.......................... 169 405
Raw materials and work-in-process....... 226 380
------- -------
395 785
Deferred income taxes..................... 2,039 2,049
Prepaid expenses and other current assets. 246 .231
------- -------
Total Current Assets.................... 9,140 9,089
Restricted Investments...................... 3,821 3,770
Property, Plant and Equipment - net......... 1,435 2,610
Prepaid Pension............................. 48,812 46,913
Other Non-Current Assets.................... 2,466 2,586
------- -------
$65,674 $64,968
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................... $13,909 $14,263
Reserves and liabilities related to
restructuring programs.................. 4,529 3,226
Waste site clean-up....................... 2,025 2,025
Other..................................... 4,687 4,500
------- -------
Total Current Liabilities............... 25,150 24,014
Waste site clean-up - long-term............. 5,319 5,269
Post Retirement and Post
Employment Insurance......... ........... 1,340 1,223
Deferred Income Taxes....................... 11,265 11,461
Long-Term Deferred Gain..................... 2,680 2,779
Redeemable Preferred Stock.................. 4,455 4,288
Common Stock and Other Stockholders' Equity. 15,465 15,934
------- -------
$65,674 $64,968
======= =======
See accompanying notes to consolidated condensed financial statements.
PAGE 5
DeSOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
1996 1995
(in thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $ (334) $ (1,022)
Non-cash items:..
Depreciation and amortization.......................... 115 441
Pension income......................................... (1,899) (1,821)
Deferred income taxes.................................. (186) (603)
Amortization of deferred gain ......................... (99) (99)
Other non-cash items................................... 33 -
------- --------
Net non-cash items..................................... (2,036) (2,082)
Changes in assets and liabilities resulting
from operating activities:
Net increase (decrease) in other liabilities......... 1,656 (399)
Net (increase) decrease in inventories............... 390 665
Net (increase) decrease in other non-current assets.. 69 (39)
Net (increase) decrease in trade accounts
and notes receivable............................. (484) 2,046
Net increase (decrease) in accounts payable.......... (354) 198
Net (increase) decrease in other current assets...... (5) 227
Other................................................ - (5)
------- --------
Net cash flows from operating activities................. (1,098) (411)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment.... 1,060 -
Additions to property, plant and equipment............. - (108)
------- --------
Net cash flows from investing activities............ 1,060 (108)
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to borrowing under Revolving Credit Agreement. - 305
------- --------
Net increase (decrease) in cash and cash equivalents..... (38) (214)
Cash and cash equivalents at beginning of period......... 51 1,702
------- --------
Cash and cash equivalents at end of period.............. $ 13 $ 1,488
======== ========
See accompanying notes to consolidated condensed financial statements.
PAGE 6
DeSOTO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
In the opinion of management, the accompanying unaudited
consolidated condensed financial statements contain all adjustments
(consisting of normal recurring accruals) necessary for a fair
presentation of the results of operations for the periods
indicated.
The results of operations for the three months ended March 31, 1996
are not necessarily indicative of the results to be expected for
the full year.
A. ACCOUNTING POLICIES
The reader is directed to the Company's 1995 Annual Report on
Form 10-K previously filed with the Securities and Exchange
Commission for details of the accounting policies followed by
the Company.
B. INCOME TAXES
The provision (benefit) for income taxes is computed at the
current estimated effective income tax rate for the year.
C. INVENTORY VALUATION
Inventory at March 31, 1996 is valued at the last-in, first-out
(LIFO) method of inventory accounting. If the first-in, first-
out (FIFO) method of inventory accounting had been used for all
of the Company's inventories, inventories would have been
$1,493,000 higher than reported at both March 31, 1996 and
December 31, 1995.
D. ACCOUNTS RECEIVABLE
During the first quarter of 1996, the Company sold certain of
its accounts receivable to fund short-term cash requirements.
Proceeds of $1,170,000 were received during the quarter of which
$624,000 related to invoices due after March 31, 1996. The
accounts receivable sold were excluded from Trade Accounts and
Notes Receivable on the balance sheet as of March 31, 1996. The
Company has retained the risk of loss in the event of nonpayment
of the receivables. The Company does not believe, however, that
there is significant risk in the collectibility of the
receivables.
PAGE 7
E. DISPOSITIONS
On July 21, 1995, the Company announced the transfer and
assignment of various operations and assets involved in its
liquid detergent and fabric softener dryer sheet businesses to
two separate buyers. The Company assigned the rights to certain
customers with respect to these businesses. The Company also
sold other assets which included certain accounts receivable,
inventory and machinery and equipment. The proceeds of these
transactions were utilized to reduce the Company's senior debt
owed to CIT. Both transactions also provide for the Company to
receive royalties and other earn-out opportunities over a three-
year period in one case and over a four-year period in the other
case.
The statement of operations for the three months ended March 31,
1995 includes the results of operations of these businesses.
The following information is provided on a pro forma basis to
illustrate the effect of certain adjustments to the historical
consolidated financial statements that would have resulted from
the above dispositions if such transactions had occurred on
January 1, 1995. The results are not necessarily indicative of
actual results had the foregoing transactions occurred as
described above, nor do they purport to represent results of
future operations of the Company.
Three Months Ended
March 31, 1995
(in thousands except per share
amounts - unaudited)
Net revenues $ 7,078
=======
Net earnings $ (322)
=======
Net earnings per common share $ (0.09)
=======
On April 11, 1996, the Company announced that it had sold the
domestic business and assets of its laundry detergent
manufacturing and distribution operations, at its Union City,
California, plant, to Star Pacific, Inc. The buyer will
continue production under a sublease of the plant from DeSoto.
The Company will retain its international detergent business at
the Union City facility, under a production arrangement with
Star Pacific.
A charge of $1.6 million was recorded in the 1996 first quarter
related to the costs associated with the Union City disposition.
This provision included the write-down of fixed assets to net
realizable value, future rental commitments on a leased
warehouse, and severance pay. The provision is reflected on the
statement of operations as nonrecurring expense and the accrual
is included with restructuring reserves on the balance sheet.
F. NONOPERATING INCOME
Nonoperating income during the first quarter of 1995 resulted
primarily from royalty income related to technology sold by the
Company in 1990.
PAGE 8
MANAGEMENT'S ANALYSIS OF FINANCIAL STATEMENTS
Liquidity and Capital Resources
The Company reported negative operating cash flows of approximately
$1.1 million during the first quarter of 1996. This cash outflow
was primarily funded by the proceeds from the sale, in February
1996, of machinery and equipment formerly used in the Company's
liquid laundry detergent and fabric softener sheet businesses;
these businesses were sold in 1995. The Company has also factored
certain accounts receivable from time to time to address short-term
cash requirements. Proceeds of $1,170,000 were received from
factoring during the quarter of which $624,000 related to invoices
due after March 31, 1996.
As previously disclosed, the Company has been negotiating a Trade
Composition Agreement and a related Security Agreement with its
trade creditors as represented by a committee of six major
creditors of the Company. The proposed agreements include a
standstill agreement related to accounts payable existing as of
September 22, 1995. Also, as part of the proposed Trade
Composition Agreement, the Company initiated the termination of its
overfunded pension plan to be effective contingent upon the receipt
of appropriate governmental approvals. Under the proposed
standstill agreement, if certain conditions are met, the creditors
who sign the agreement agree not to initiate litigation or other
efforts to collect amounts owed to them. Under the proposed
agreement, the Company would agree to pay each Qualified Trade
Creditor (as defined) the balance owed to that creditor within 10
days of receipt of the reverted excess pension plan assets. If
payment is not made by July 1, 1996, interest would accrue from
that date at 8% per annum on the outstanding balance. The proposed
Security Agreement would grant a security interest and lien on all
of the Company's assets to secure the obligations of the Company to
the Qualified Trade Creditors if the Trade Committee obtains
standstill agreements from 80%, in dollar amount, of the trade
creditors, which the Trade Committee is seeking to collect. The
proposed Trade Composition Agreement further stipulates that the
Company may suspend efforts to terminate its pension plan if the
Company enters into a binding agreement for a merger, asset sale or
similar transaction, involving substantially all of the Company's
assets, which provides that all Qualified Trade Creditors will be
paid in full. The Company and most of its creditors have been
operating within the understanding outlined above. The final Trade
Composition Agreement and related documents were circulated for
signatures on March 11, 1996 and execution of the documents has not
yet been completed. There can be no assurance as to the resolution
of the proposed trade creditor payout plan.
As previously reported, the Company has been in merger discussions
with Keystone Consolidated Industries, Inc., which talks are
continuing. Additionally, such prospective transaction would
require a satisfactory resolution of the proposed trade creditor
payout plan. There can be no assurance, however, as to the outcome
of such discussions.
As a result of its liquidity situation, the Company is currently
operating on a C.O.D. or limited credit basis with respect to
purchases of supplies and raw materials. The Company has been able
to operate within these constraints and expects to be able to
continue to do so for the immediate future. Lower inventory levels
at March 31, 1996 versus December 31, 1996 reflect the Company's
efforts to manage its cash flow.
On April 11, 1996, the Company announced that it had sold the
domestic business and assets of its laundry detergent manufacturing
and distribution operations, at its Union City, California, plant
to Star Pacific, Inc. The proceeds from that transaction did not
have a material impact on the Company's results of operations, cash
flows or financial position.
PAGE 9
Accounts receivable at March 31, 1996 increased versus December 31,
1995, reflecting higher end-of-period sales in the first quarter
versus the 1995 fourth quarter. The increase in trade receivables
is net of factored accounts receivable as discussed above.
The decline in property, plant and equipment reflects the sale of
machinery and equipment no longer used in operations as discussed
above. This equipment was sold as part of an auction that took
place in February 1996. The balance of the reduction in property,
plant and equipment represents depreciation.
Reserves and liabilities related to restructuring programs
increased during the first quarter of 1996 due to provision for
expenses related to the disposition of the Union City operations.
Significant components of this accrual include the write-down of
fixed assets to net realizable value, future rental commitments on
a leased warehouse and severance pay.
The Company expects to fund operations in 1996 with proceeds from
insurance settlements and other settlements as well as continued
spot factoring of accounts receivable.
Results of Operations for the Three Months Ended March 31, 1996
First quarter net revenues were $5.8 million in 1996 versus net
revenues of $18.9 million in the 1995 first quarter. Gross profit
for the 1996 first quarter was $805,000 versus a negative gross
profit in 1995 of $516,000. Results of operations for the first
quarter of 1995 include the Company's former liquid detergent and
fabric softener dryer sheet operations which were sold on July 14,
1995. These businesses accounted for approximately $11.8 million
of net revenues in the 1995 first quarter. This change in customer
mix contributed to the 1996 increase in gross profit
Sales to Sears, Roebuck and Co., the Company's largest customer, in
1996 were flat when compared to the same period of 1995. Volume
increases in 1996 have been offset by changes in selling prices.
Contract packaging revenues declined in 1996 versus the prior year
largely due to a change in the manner of doing business with
Procter & Gamble. The Procter & Gamble business in 1995 included
packaging materials that had been purchased by the Company; in 1996
the materials are being furnished by Procter & Gamble which has
resulted in a corresponding decrease in revenues and cost of sales.
A temporary change in Procter and Gamble's purchasing pattern
resulted in increased first quarter volume at the Company's Union
City location and a favorable impact on gross profit. Sales by the
Company to Procter & Gamble will be discontinued as of April 1996
as a result of the Union City disposition discussed above. First
quarter revenues in 1996 related to Union City were $2.0 million.
Selling, general and administrative costs were $1.4 million in the
1996 first quarter versus $2.8 million in the comparable quarter in
1995. This decrease primarily reflects the elimination of
administrative personnel and other costs as a result of the
business dispositions in 1995.
Nonrecurring expense in 1996 represents the provision for expenses
related to the disposition of the Union City operations.
Significant components of this provision include the write-down of
fixed assets to net realizable value, future rental commitments on
a leased warehouse and severance pay.
The Company reported no interest expense in 1996 because the
Company had no outstanding borrowing subsequent to September 1995,
when the Company completely repaid the outstanding borrowing under
its credit facility with CIT. Nonoperating income in 1995
primarily resulted from royalty income related to technology sold
by the Company in 1990.
PAGE 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(i) Lundman Development Corporation v. DeSoto, Inc.
As previously reported, the Company was served with a Summons
and Complaint filed in the United States District Court for
the Eastern District of Wisconsin. The Complaint alleges,
inter alia, that DeSoto violated the Comprehensive
Environmental Response, Compensation and Liability Act
("CERCLA") with respect to property the Company once owned in
Fredonia, Wisconsin. The Company has denied the allegations
in the Complaint. Motions for summary judgment are pending,
and a September 1996 trial date has been set.
(ii) West County Landfill v. Raychem International et al
As previously reported, the Company was served with an Amended
Complaint filed in the United States District Court for the
Northern District of California. The Amended Complaint
alleges, inter alia, that DeSoto violated CERCLA with respect
to the West County Landfill in California. The Company has
denied the allegations in the Amended Complaint. The Company
has reached a tentative settlement on undisclosed terms, which
is not material to the Company.
(iii) Ninth Avenue Remedial Group et al v. Allis-Chambers
Corporation et al
As previously reported, the Company was named in a complaint
filed in the United States District Court for the Northern
District of Indiana. The complaint alleges that DeSoto and
numerous other parties are jointly and severally responsible
under CERCLA for the cleanup and future cleanup of the site.
Also, as previously reported, the U. S. EPA issued an
administrative order against the Company under Section 106(a)
of CERCLA demanding that the Company, inter alia, undertake
the remediation at the Ninth Avenue Site. DeSoto has
responded that it intends to comply with all terms of the
order. The matter is in the discovery stage.
(iv) As previously reported, the Company was named as a defendant
in an action brought by Liberty Mutual Insurance Company in
the Circuit Court of Cook County, Illinois, seeking
declaratory relief with respect to insurance coverage
previously purchased by the Company from Liberty, claiming
that Liberty had no insurance obligation to the Company with
respect to environmental sites and litigations where the
Company has been named as a defendant or been identified as a
potentially responsible party. The Company moved to dismiss
on the grounds that the Company had previously filed a more
comprehensive action in the federal district court in New
Jersey. In December 1995, the state court ruled in favor of
the Company and dismissed the action. Liberty filed a notice
of appeal seeking to overturn the court's ruling, which it has
since withdrawn.
In August 1995, the Company commenced an action in the federal
district court in New Jersey, seeking contract and declaratory
relief with respect to insurance coverage that the Company
purchased from Liberty. Liberty moved to dismiss the
complaint on the grounds that the District of New Jersey is
not a proper forum for the dispute, which motion has since
been withdrawn. The matter is now in the pre-trial discovery
stage.
PAGE 11
(v)As previously reported, the Company received a unilateral
Administrative Order issued by the U. S. EPA under Section 106
of CERCLA, alleging that the Company is a potentially
responsible party in connection with the Marina Cliffs Site in
the South Milwaukee, Wisconsin. The Company presently
believes that it has no liability because it is not the
successor in interest to the party that allegedly used the
site.
Item 6. Exhibits and Reports on Form 8-K
a) The exhibits to this report are listed in the
Index to Exhibits on page 13 hereof.
b) Reports on Form 8-K
A current report on Form 8-K, dated as of January
16, 1996, was filed to report under Item 5 that the
Company had notified the Pension Benefit Guaranty
Corporation of its intention to terminate its Employee
Retirement Plan, contingent upon the receipt of
appropriate governmental approvals.
A current report on Form 8-K, dated as of March 13,
1996, was filed to report under Item 5 that the Company
was discussing a possible merger with Keystone
Consolidated Industries, Inc.
A current report on Form 8-K, dated as of April 11,
1996, was filed to report under Item 5 that the Company
had sold the domestic business and assets of its
laundry detergent manufacturing and distribution
operations, at its Union City, California, plant, to
Star Pacific, Inc.
PAGE 12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
DeSOTO, INC.
(Registrant)
Anne E. Eisele
Anne E. Eisele
President and Chief
Financial Officer
William Spier
William Spier
Chairman and
Chief Executive Officer
May 10, 1996
Date
PAGE 13
DeSOTO, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
11 - Computation of Fully Diluted Earnings Per Share
27 - Financial Data Schedule
PAGE 14
Exhibit
11
DeSOTO, INC. AND SUBSIDIARIES
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
(in thousands except per share amounts)
Three Months Ended
March 31,
1996 1995
Net Loss $ (334) $(1,022)
Preferred Dividends (111) (83)
------- -------
Net Loss
Applicable to Common Stock $ (445) $(1,105)
======= =======
Net Loss
Per Common Share $ (0.10) $ (0.24)
======= =======
Average Common Shares
Outstanding (A) 4,681 4,672
======= =======
Fully Diluted Loss
Per Common Share (B) $ (0.10) $ (0.24)
======= =======
Average Common Shares Outstanding 4,681 4,672
Additional Shares Outstanding
After Application of the
Treasury Stock Method - -
------- -------
Total (B) 4,681 4,672
======= =======
(A) Outstanding common stock options and common stock warrants
have been omitted because the effect reduces the net loss per
share.
(B) Reflecting the dilutive effect of outstanding common stock
options and common stock warrants under the treasury stock
method.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated Balance Sheet as of March 31, 1996 and the Consolidated Statement
of Operations for the three months ended March 31, 1996 and is qualified in its
entirety by reference to such financial information.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 32
<SECURITIES> 1,180
<RECEIVABLES> 5,248
<ALLOWANCES> 0
<INVENTORY> 395
<CURRENT-ASSETS> 9,140
<PP&E> 13,380
<DEPRECIATION> 11,945
<TOTAL-ASSETS> 65,674
<CURRENT-LIABILITIES> 25,150
<BONDS> 0
<COMMON> 5,619
4,455
0
<OTHER-SE> 9,846
<TOTAL-LIABILITY-AND-EQUITY> 65,674
<SALES> 5,846
<TOTAL-REVENUES> 5,846
<CGS> 5,041
<TOTAL-COSTS> 6,382
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (536)
<INCOME-TAX> (111)
<INCOME-CONTINUING> (445)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (445)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
