FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10281
Smith Corona Corporation
(Exact name of registrant as specified in its charter)
Delaware 51-0286862
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
65 Locust Avenue, New Canaan, Connecticut 06840
(Address of principal executive offices) (Zip Code)
(203) 972-1471
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Outstanding at
Class November 10, 1995
Common Stock, par value $.01 30,250,000
per share
<PAGE>
SMITH CORONA CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 1995
and June 30, 1995 1
Consolidated Statements of Operations - For the
three months ended September 30, 1995 and 1994 2
Consolidated Statement of Changes in Stockholders'
Equity - For the three months ended
September 30, 1995 3
Consolidated Statements of Cash Flows - For the
three months ended September 30, 1995 and 1994 4
Notes to Consolidated Financial Statements 5-14
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 15-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index
<PAGE>
SMITH CORONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1995 1995
(audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,236 $ 7,003
Accounts receivable (net of allowance
for doubtful accounts of $1,820 and
$1,484, respectively) 37,108 37,654
Inventories 46,100 54,335
Prepaid expenses and other current
assets 11,322 9,471
Total current assets 96,766 108,463
Property, plant and equipment, net 21,448 22,888
Deferred income taxes 3,406 3,406
Other assets 1,281 1,309
TOTAL $122,901 $136,066
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans $ 13,200 $ 17,400
Trade payables 4,762 19,807
Accrued liabilities 21,967 35,449
Income taxes payable 46 5,791
Total current liabilities 39,975 78,447
Postretirement benefits 67 12,999
Pension liability 270 18,801
Other long-term liabilities 112 5,569
Liabilities subject to compromise 67,656 -
Total liabilities 108,080 115,816
Stockholders' equity:
Common stock-30,250,000 shares issued
and outstanding 303 303
Additional paid-in capital 44,697 44,697
Accumulated deficit (30,179) (24,750)
Total stockholders' equity 14,821 20,250
TOTAL $122,901 $136,066
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SMITH CORONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended
September 30,
1995 1994
<S> <C> <C>
Net sales $ 33,463 $ 60,114
Cost of goods sold 29,460 47,103
Gross margin 4,003 13,011
Selling, administrative
and research expenses 6,755 11,270
Reorganization costs 3,209 -
Restructuring income (1,524) -
Other expense 415 -
Operating income (loss) (4,852) 1,741
Interest expense 402 243
Income (loss) from continuing
operations before income
taxes (5,254) 1,498
Income taxes 175 554
Income (loss) from continuing
operations (5,429) 944
Income from discontinued
operations (net of income taxes) - 270
Net income (loss) ($ 5,429) $ 1,214
Earnings per common share-
Income (loss) from continuing
operations ($.18) $.03
Income from discontinued
operations (net of income taxes) - .01
Net income (loss) per share ($.18) $.04
</TABLE>
See accompanying notes to consolidated financial statements.
SMITH CORONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended September 30, 1995
($ in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
<S> <C> <C> <C> <C>
Balance June 30, 1995 $303 $44,697 $(24,750) $20,250
Net loss - - (5,429) (5,429)
Balance September 30, 1995 $303 $44,697 $(30,179) $14,821
</TABLE>
See accompanying notes to consolidated financial statements.
SMITH CORONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
<TABLE>
<CAPTION>
Three months ended
September 30,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($ 5,429) $ 1,214
Adjustments to reconcile net
income (loss) to net cash (used in)
provided by continuing operating
activities:
Discontinued operations - (270)
Depreciation and amortization 1,448 1,458
Deferred income taxes - 231
Other noncash items (1,039) 2
Changes in assets and liabilities:
Accounts receivable 131 (8,741)
Inventories 8,235 (6,748)
Prepaid expenses and
other current assets (1,851) (651)
Other assets 18 (299)
Trade payables (4,039) (734)
Accrued liabilities and income taxes
payable 1,578 (1,181)
Postretirement benefits and pension
liability 337 (475)
Other long-term liabilities 112 441
Net cash used in continuing operations (499) (15,753)
Net cash provided by discontinued
operations - 1,987
Net cash used in operating activities (499) (13,766)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of discontinued
operations - 13,000
Capital expenditures (68) (1,288)
Net cash provided by (used in) investing
activities (68) 11,712
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank loans (repayments), net (4,200) 498
Dividends paid - (1,512)
Net cash used in financing activities (4,200) (1,014)
Decrease in cash and cash equivalents (4,767) (3,068)
Cash and cash equivalents:
Beginning of period 7,003 6,472
End of period $ 2,236 $ 3,404
</TABLE>
See accompanying notes to consolidated financial statements.
SMITH CORONA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
($ in thousands, except per share amounts)
NOTE 1 - PETITION FOR REORGANIZATION UNDER CHAPTER 11 AND BASIS
OF PRESENTATION
On July 5, 1995, Smith Corona Corporation (the "Company") filed a
voluntary petition for relief under Chapter 11 of the United
States Bankruptcy Code in the District of Delaware. Prior to
August 18, 1995, the bankruptcy proceedings did not include any
of the subsidiaries of the Company. On August 18, 1995, SCM
Office Supplies, Inc., SCC LI Corp. (formerly known as
"Histacount Corporation") and Hulse Manufacturing Company, all
wholly-owned nonoperating subsidiaries of Smith Corona
Corporation filed Chapter 11 petitions (collectively, the filings
by the Company and such debtor subsidiaries are referred to
herein as the "Bankruptcy Proceedings"). The Bankruptcy
Proceedings primarily relate to all U.S. assets and operations
and do not pertain to Smith Corona Corporation's international
subsidiaries. Condensed consolidating financial information for
the entities included in the Bankruptcy Proceedings is presented
in Note 10. Since July 5, 1995, the Company has been operating
as a debtor-in-possession. Consequently, the consolidated
financial statements have been presented in accordance with the
guidelines established by Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy
Code," as issued by the American Institute of Certified Public
Accountants in November 1990.
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles
applicable to a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal
course of business. Accordingly, the consolidated financial
statements do not reflect adjustments or provide for the
potential consequences of the Bankruptcy Proceedings on the
Company. In particular, the consolidated financial statements do
not purport to show (a) the realizable value of assets on a
liquidation basis or their availability to satisfy liabilities;
(b) prepetition liability amounts that may be allowed for claims
or contingencies or the status and priority thereof; (c) the
effect of any changes that may be made to the capitalization of
the Company; or (d) the effect of any changes that may be made in
the Company's business operations. The outcome of these matters
is not presently determinable. The Company has recently
experienced recurring losses from operations; has an accumulated
deficit at September 30, 1995; had difficulty in meeting its
Amended and Restated Revolving Credit Agreement covenants and has
had to obtain waivers to meet certain of its Debtor-In-Possession
Credit Agreement covenants; and cannot presently determine with
certainty the ultimate liability which may result from the filing
of claims in connection with the Bankruptcy Proceedings. These
conditions raise substantial doubt as to the Company's ability to
continue as a going concern.
Due to the Bankruptcy Proceedings, substantially all claims
against the Company prior to July 5, 1995 (and prior to August
18, 1995 for the three nonoperating subsidiaries added to the
proceedings) are subject to the automatic stay provisions under
the Bankruptcy Code while the Company continues business
operations as a debtor-in-possession. Pre-petition claims may
arise from the determination by the Bankruptcy Court of allowed
claims for contingencies and other disputed amounts.
Liabilities recorded by the Company as of September 30, 1995 and
June 30, 1995, respectively, that are expected to be compromised
under any plan of reorganization consist of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1995 1995
<S> <C> <C>
Trade payables $11,006 $11,760
Accrued liabilities 15,171 16,207
Income taxes payable 5,634 5,634
Postretirement benefits 12,999 12,999
Pension liability 17,277 18,801
Other long-term liabilities 5,569 5,569
Total(1) $67,656 $70,970
</TABLE>
(1) Excludes a net intercompany payable in the amount of $8,948
and $9,076, respectively, to the Company's subsidiaries not
included in the Bankruptcy Proceedings.
The Company recorded reorganization costs for its Bankruptcy
Proceedings aggregating $3,200 for the first quarter of fiscal
year 1996. These charges include professional fees incurred
during the first quarter.
At the Company's request, the Bankruptcy Court established a bar
date of October 31, 1995 for pre-petition claims against the
Company. A bar date is the date by which claims against the
Company must be filed if the claimants wish to receive any
distribution in the Bankruptcy Proceedings. The Company has
given notice to all known actual or potential claimants subject
to the bar date of their need to file a proof of claim with the
Bankruptcy Court. The Company will reconcile claims that differ
from the Company's records, and any differences that cannot be
resolved by negotiated agreement between the Company and the
claimant will be resolved by the Bankruptcy Court. Accordingly,
allowed claims may arise which are not currently reflected in the
Company's financial statements and recorded claims are subject to
change. The ultimate amount of and settlement terms for such
liabilities are subject to a plan of reorganization which is
subject to approval by the Bankruptcy Court and, accordingly, are
not presently determinable.
On October 24, 1995, the Company announced that it had reached an
agreement to sell its ongoing business to a group led by Empire
Capital Corporation, an investment company based in Southport,
CT. The proposed sale, which is subject to higher and better
offers in accordance with the Bankruptcy Code, forms the
foundation of Smith Corona's plan of reorganization. The plan
calls for secured creditors to be paid in full and general
unsecured creditors to be paid a substantial percentage of their
allowed claims in cash. The plan provides no consideration to
the Company's current stockholders. Smith Corona's plan of
reorganization and disclosure statement were filed on October 24,
1995 in the U.S. Bankruptcy Court for the District of Delaware.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim consolidated financial statements,
although not necessarily indicative of results of operations for
the entire fiscal year, include all adjustments of a normal
recurring nature which are, in the opinion of management,
necessary for a fair presentation of the results for the periods
covered. They have been prepared by Smith Corona Corporation
without audit in accordance with the instructions to Form 10-Q
and should be read in conjunction with the consolidated financial
statements and the notes thereto for the fiscal year ended June
30, 1995, as contained in the Company's Annual Report on Form
10-K.
An administrator was appointed on August 2, 1995 for the
Company's wholly-owned subsidiary in Australia. The
Administrator was appointed as Liquidator on August 29, 1995.
Due to the liquidation, the Australian subsidiary's assets,
liabilities and operating results were not included in the
consolidated financial statements as of September 30, 1995 and
the Company has recorded in other expense an estimated loss on
liquidation of approximately $415. The Company is currently
exploring potential distributor relationships in its Australian
market for the purpose of maintaining its distribution capacity.
Amounts in the prior year's financial statements have been
reclassified to reflect continuing operations (see Note 8).
NOTE 3 - CONTINGENCIES
Certain past practices of the Company regarding hazardous
substances and/or hazardous wastes are the subject of
investigation by federal and state regulatory authorities, or are
the subject of lawsuits filed by such authorities. At September
30, 1995 and June 30, 1995, the Company had recorded
approximately $4,172 and $4,203, respectively, related to
environmental matters. Because of the uncertainties associated
with assessing environmental matters, the related ultimate
liability is not determinable. However, based on facts presently
known, management does not believe that these investigations or
lawsuits, if resolved adversely to the Company, would
individually or in the aggregate have a material adverse effect
on the Company's financial position or results of operations.
The Company is involved in proceedings with the New York
Department of Environmental Conservation (DEC) and the United
States Environmental Protection Agency regarding the clean-up of
a now-closed manufacturing facility and certain waste disposal
sites in upstate New York. The remedial investigation and
feasibility study of the now-closed manufacturing facility site
has been completed. The feasibility study report has been
approved by the DEC and the record of decision has been
finalized. On March 31, 1993, the Company executed a final
signed consent order from the DEC and remedial actions commenced.
Remediation activities at the site have been delayed as a result
of an extension of the public comment period to address the
remediation plan approved by the DEC. Management believes that
the Company has made adequate provision for the approved
remediation activities.
In June 1992, the Company was served with a summons and complaint
in the U.S. District Court, Northern District of New York, in a
private contribution action. The plaintiffs in this action are
Coopers Industries, Inc., Keystone Consolidated Industries, Inc.,
The Monarch Machine Tool Co., Niagara Mohawk Power Corporation
and Overhead Door Corporation. The action, which lists the
Company as a defendant with fourteen other defendants, seeks
contribution for response costs incurred to date, and to be
incurred in the future, for the remediation of a site in
Cortland, New York. Management does not believe it disposed of
any hazardous substances at this site and is vigorously
contesting this matter.
The Company filed a complaint on November 4, 1994 against CoStar
Corporation("CoStar") seeking (i) a declaratory judgment that the
Company was not infringing CoStar's trade dress, (ii) damages for
breach of warranty and fraud and (iii) rescission of contracts
induced by such fraud. The complaint related to envelope
printers purchased by the Company from CoStar and label printers
manufactured by a third party for the Company. CoStar
subsequently filed an answer denying the Company's allegations
and asserting counterclaims alleging that the Company had
infringed its label printer's trade dress, breached the
provisions of a confidentiality agreement between the Company and
CoStar, and tortiously injured CoStar's business reputation. In
addition, CoStar filed a related third-party complaint against DH
Technology, Inc. ("DH"). On June 23, 1995, the Company entered
into a Settlement Agreement with CoStar and DH in connection with
the lawsuit. Pursuant to the Settlement Agreement, the Company
agreed, among other things, to pay CoStar the sum of $55,085 on
each of June 23, 1995, July 31, 1995, August 31, 1995 and
September 29, 1995 and to return certain tooling and equipment to
CoStar, in exchange for, among other things, the release by
CoStar of its claims against the Company.
The Company is also a defendant or plaintiff in various other
legal actions which have arisen in the ordinary course of its
business. It is the opinion of management, based on advice of
counsel with respect to legal matters, that the ultimate
resolution of these matters and the environmental matters
discussed above will not have a material adverse effect on the
Company's financial position or results of operation.
NOTE 4 - INVENTORIES
A summary of inventories, by major classification, is as
follows:
<TABLE>
<CAPTION>
September 30, June 30,
1995 1995
<S> <C> <C>
Raw materials and supplies $ 742 $ 995
Work-in-process 9,909 17,807
Finished goods 35,449 35,533
Total $46,100 $54,335
</TABLE>
NOTE 5 - RESTRUCTURING COSTS
Over the past few years, the Company has faced intense
competition from foreign producers. On May 8, 1995 the Company
announced a major restructuring plan whereby the Company's
typewriter manufacturing will be relocated from its Singapore and
Batam Island, Indonesia facilities to its Mexico facility. This
action will result in the termination of approximately 1,300
workers in Singapore and Batam who will be replaced with
approximately 600 workers in Mexico. This action is expected to
save approximately $10,000 pretax annually primarily through
lower labor costs as well as the greater utilization of the
Mexico facility. The Company expects to cease production in
Singapore and Batam Island, Indonesia by mid-November 1995,
thereafter relocating equipment to Mexico where typewriter
production is expected to commence in the second quarter of
fiscal 1996. The Company has placed its Singapore facility and
the underlying land lease up for sale. The Batam Island facility
lease expires December 26, 1995.
In addition to the relocation of typewriter manufacturing to
Mexico, the Company also eliminated approximately 180 support
positions within research and development, finance, service,
distribution, selling and marketing areas in both its Cortland,
New York and New Canaan, Connecticut locations. Approximately
$10,000 in additional annual pretax savings are expected from
elimination of these support positions. These reductions were
completed by the end of the first quarter of fiscal 1996 and
resulted in a first quarter pension curtailment gain of
approximately $1,524.
The net result of these actions will be to reduce the Company's
May 8, 1995 workforce of approximately 2,500 by approximately
680.
As a result of these actions, the Company recorded a pretax
charge of approximately $14,870 in the fourth quarter of fiscal
1995, of which approximately $1,877 represents primarily non-cash
machinery and equipment asset write-offs, and the remainder
relates to employee severance. Additionally, certain costs,
primarily relating to the move of machinery and equipment,
temporary lease-back of facilities, and renovations, of
approximately $6,000 pretax, will be recognized as charges to
operations as incurred during fiscal year 1996.
The activity in the restructuring accrual is as follows:
<TABLE>
<CAPTION>
Asset
Impair- Other
Severance ments Costs Total
<S> <C> <C> <C> <C>
June 30, 1995 balance $11,494 $1,492 $ 285 $13,271
1996 Activity (1) (297) - - (297)
September 30, 1995
balance $11,197 $1,492 $ 285 $12,974
</TABLE>
(1) Represents cash payments of approximately $43 and non-
cash items of approximately $254 for foreign currency
exchange rate changes.
In July 1992, in order to maintain its leadership as the low-cost
producer in a highly competitive worldwide business, the Board of
Directors approved, and the Company announced, a plan to phase
out the Company's manufacturing operations in Cortland, New York
and relocate them to a new facility in Mexico. As a result of
this decision, during fiscal 1993, the Company provided $16,500
in restructuring charges, of which approximately $3,000 was non-
cash in nature. The Mexican facility was fully operational in
fiscal year 1995 and the anticipated annual savings of
approximately $15,000 were substantially realized. The fiscal
1996 activity in the restructuring accrual is as follows:
<TABLE>
<CAPTION>
Severance Total
<S> <C> <C>
June 30, 1995 balance $50 $50
1996 Activity (50) (50)
September 30, 1995 balance $ - $ -
</TABLE>
NOTE 6 - CASH FLOWS
Aggregate borrowings under the Company's credit facility amounted
to $846,000 and $355,549 for the three months ended September 30,
1995 and 1994, respectively, while aggregate repayments were
$850,200 and $355,051 for the same periods, respectively.
NOTE 7 - BANK LOANS
On April 7, 1995, the Company entered into an Amended and
Restated Revolving Credit Agreement (the "Amended and Restated
Credit Agreement") with two banks (the "Lenders"), the use of
which was generally to satisfy working capital requirements. The
Amended and Restated Credit Agreement provided for extensions of
revolving credit loans and letters of credit, limited to a
percentage of eligible receivables and inventories, in an amount
not to exceed $30,000 up through March 30, 1996; the aggregate
principal amount of such lending commitment reduces to an amount
not in excess of $25,000 from March 31, 1996 through the July 1,
1996 termination date. The Amended and Restated Credit Agreement
was secured by a security interest in the domestic assets of the
Company pursuant to a Security Agreement of even date therewith.
Interest was at variable rates equal to the greater of the prime
rate of interest, the base certificate of deposit rate plus 1.0
percent or the federal funds effective rate plus .5 percent for
any day.
The Amended and Restated Credit Agreement contained certain
covenants, including restrictions on payment of dividends and
limitations on sale of assets, capital expenditures, incurrence
of other debt, liens or guarantees and making of investments,
loans and advances. The primary financial covenants included not
permitting consolidated tangible net worth at the end of any
fiscal quarter to be (a) less than it was as of March 31, 1995
minus $3,000 plus (b) 80.0 percent of consolidated net income for
all full fiscal quarters subsequent to March 31, 1995,
maintaining a ratio of current assets (other than inventories) to
current liabilities (other than loans outstanding under the
Amended and Restated Credit Agreement) of at least 0.9 to 1.0 and
maintaining minimum operating profit levels. As of June 30,
1995, the Company was in technical default of its Amended and
Restated Credit Agreement, however, the loan was paid in full in
July 1995.
On July 10, 1995, the Company entered into a Debtor-In-Possession
Credit Agreement (the "Debtor-In-Possession Credit Agreement")
with its Lenders which was approved by the United States
Bankruptcy Court for the District of Delaware on August 2, 1995.
The proceeds of the Debtor-In-Possession Credit Agreement were
used to repay the amounts outstanding under the Amended and
Restated Credit Agreement. The Debtor-In-Possession Credit
Agreement, as amended, provides for extensions of revolving
credit loans, term loans and letters of credit, limited to a
percentage of eligible receivables and inventories, in an amount
not to exceed $24.0 million through the June 30, 1996 termination
date. Interest is 2 percent over the greatest of the Prime Rate,
Base CD Rate plus 1 percent or Federal Funds Effective Rate plus
.5 percent. Payments of dividends is prohibited by the terms of
the Debtor-In-Possession Credit Agreement, under which the
Company is limited to maximum monthly amounts of inventory and
cash disbursements. Additionally, the Company is restricted to
$500 of capital expenditures in each six month period ended
December 31, 1995 and June 30, 1996. Management believes that it
has adequate flexibility and that such covenants should not
impose undue restrictions on the operations of the Company during
its Bankruptcy Proceedings. The Company is currently in
compliance with the terms of the Debtor-In-Possession Credit
Agreement or has obtained waivers as necessary. The Debtor-In-
Possession Credit Agreement is secured by substantially all of
the Company's assets.
NOTE 8 - DISCONTINUED OPERATIONS
On November 4, 1994 the Company sold substantially all of the
assets and liabilities of Histacount Corporation, a wholly-owned
subsidiary, for $14,500. The after-tax gain on the sale includes
utilization of a capital tax-loss carry-forward. On July 5, 1994
the Company sold substantially all of the assets and liabilities
of SCM Office Supplies, Inc., a wholly-owned subsidiary, for
$13,000. The proceeds from the two sales were used to reduce the
Company's debt. Accordingly, the prior year income statement
reflects Histacount Corporation's operating results as
discontinued operations.
Summary operating results of discontinued operations are as
follows:
<TABLE>
<CAPTION>
Three months ended
September 30, 1994
<S> <C>
Net sales $ 4,027
Income before income taxes 430
Income taxes 160
Net income from operations $ 270
</TABLE>
NOTE 9 - DIVIDENDS
On May 4, 1995 the Board of Directors elected to omit the
dividend until operating results improve. The dividend in the
first quarter of fiscal 1995 was $.05 per share of common stock.
NOTE 10 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following proforma financial information shows the
effects of adoption of Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy
Code," and separates the consolidated balance sheets as of
September 30, 1995, and consolidated statements of operations and
cash flows for the three months then ended, of those entities
that are included in the Bankruptcy Proceedings and those that
are not.
Condensed Consolidating Balance Sheets
<TABLE>
<CAPTION>
Non-
Debtor-In Debtor-In
Possession Possession Elimin- Consol-
Entities Entities ations idated
<S> <C> <C> <C> <C>
Current assets $ 64,991 $ 31,775 $ - $ 96,766
Property, plant
and equipment 12,508 8,940 - 21,448
Other assets 81,869 16,676 (93,858) 4,687
Total assets $159,368 $57,391 $(93,858) $122,901
Bank loans $ 13,200 $ - $ - $ 13,200
Other current
liabilities 12,975 13,800 - 26,775
Intercompany with
affiliates 8,948 (8,948) - -
Other long-term
liabilities 449 - - 449
Liabilities subject
to compromise 67,656 - - 67,656
Stockholders' equity 56,140 52,539 (93,858) 14,821
Total liabilities and
stockholders' equity $159,368 $57,391 $(93,858) $122,901
</TABLE>
Condensed Consolidating Statements of Operations
<TABLE>
<CAPTION>
Non-
Debtor-In Debtor-In
Possession Possession Elimin- Consol-
Entities Entities ations idated
<S> <C> <C> <C> <C>
Net sales $ 26,101 $ 7,362 $ - $ 33,463
Net sales to affiliates 4,427 11,549 (15,976) -
Cost of goods sold 22,409 7,051 - 29,460
Cost of goods sold to
affiliates 3,827 12,149 (15,976) -
Gross margin 4,292 (289) - 4,003
Selling, administrative
and research expenses 5,210 1,545 - 6,755
Restructuring income (1,524) - - (1,524)
Reorganization costs 3,209 - - 3,209
Other expense 415 - - 415
Operating loss (3,018) (1,834) - (4,852)
Interest expense 402 - - 402
Loss from operations
before income tax (3,420) (1,834) - (5,254)
Income taxes (benefit) 251 (76) - 175
Net loss $ (3,671) $ (1,758) $ - $(5,429)
</TABLE>
Condensed Consolidating Statements of Cash Flows
<TABLE>
<CAPTION>
Non-
Debtor-In Debtor-In
Possession Possession Elimin- Consol-
Entities Entities ations idated
<S> <C> <C> <C> <C>
Cash Flows from
operating activities:
Net loss $(3,671) $(1,758) $ - $(5,429)
Adjustments to
reconcile net loss
to net cash used in
continuing operating
activities:
Noncash items and
changes in
operating assets
and liabilities 6,028 (1,098) - 4,930
Net Cash flow used in
operating activities 2,357 (2,856) - (499)
Cash flows from
investing activities:
Capital expenditures (42) (26) - (68)
Net cash used in
investing activities (42) (26) - (68)
Cash flows from
financing activities:
Bank loans
(repayments), net (4,200) - - (4,200)
Net cash Used in
financing activities (4,200) - - (4,200)
Increase (decrease)
in cash and cash
equivalents (1,885) (2,882) - (4,767)
Cash and cash
equivalents at
beginning of year 3,027 3,976 - 7,003
Cash and cash
equivalents at
end of year $ 1,142 $1,094 $ - $ 2,236
</TABLE>
NOTE 11 - SUBSEQUENT EVENT
In October 1995, the Company completed a transaction to purchase a building
previously used as warehousing space located in Cortland, New York and to
concurrently sell the building and land on which the building is located to a
third party purchaser. The net proceeds of approximately $1,300 were used to
paydown the bank loan and represent a fiscal year 1996 second quarter gain.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
With the Company experiencing sales declines and operating
losses, having extended payments to trade vendors, and needing
additional financing to meet operating requirements and fund the
restructuring program, the Company filed a voluntary petition
for reorganization under Chapter 11 of the Bankruptcy Code in
the United States Bankruptcy Court for the District of Delaware
on July 5, 1995. Prior to August 18, 1995, the bankruptcy
proceedings did not include any of the subsidiaries of the
Company. On August 18, 1995, SCM Office Supplies, Inc., SCC LI
Corp. (formerly Histacount Corporation) and Hulse Manufacturing
Company, all wholly-owned nonoperating subsidiaries of the
Company filed Chapter 11 petitions.
An administrator was appointed on August 2, 1995 for the
Company's wholly-owned subsidiary in Australia. The
Administrator was appointed as Liquidator on August 29, 1995.
Due to the liquidation, the Australian subsidiary's assets,
liabilities and operating results were not included in the
consolidated financial statements as of September 30, 1995 and
the Company has recorded in other expense an estimated loss on
liquidation of approximately $.4 million. The Company is
currently exploring potential distributor relationships in its
Australian market for the purpose of maintaining its
distribution capacity.
On November 4, 1994 the Company sold substantially all the
assets and liabilities of Histacount Corporation. Accordingly,
the consolidated statement of operations for fiscal year 1995
reflects their operating results as discontinued operations.
The following discussion of results of operations and financial
condition is presented for continuing operations only.
Results of Operations
Net sales declined 44.3 percent to $33.5 million in the first
quarter ended September 30, 1995 compared to the same period in
fiscal 1995. Approximately 87 percent of the decrease related
to lower volumes with the balance related to pricing reductions.
Typewriters and personal word processor volumes are sharply
lower than a year ago, both domestically and internationally, as
a result of a continuing difficult competitive environment. The
Company believes that the market for typewriters and personal
word processors is declining along with its share of that
market. New product net sales for the quarter were $2.8 million
as compared with $2.5 million a year ago.
Gross margin as a percentage of net sales was 12.0 percent for
the first quarter of fiscal year 1996, as compared to 21.6
percent last year. The fiscal year 1996 gross margin decline
was the result of lower volumes and price reductions.
Selling, administrative and research expenses decreased by $4.5
million which reflects the impact of fiscal 1995 restructuring
actions. As a percent of sales, selling, administrative and
research expenses increased to 20.2 percent from 18.7 percent,
primarily due to the decrease in sales revenue.
The Company recorded reorganization costs for its Bankruptcy
Proceedings aggregating $3.2 million for the first quarter of
fiscal year 1996. These charges include professional fees
incurred during the first quarter. There were no such items
during the first quarter of fiscal year 1995.
Restructuring income represents a pension plan curtailment gain
resulting from the restructuring action announced in May 1995.
The provision for income taxes for the quarter ended September
30, 1995 relates principally to foreign sourced income. As a
result of the Bankruptcy Proceedings and the short-term outlook,
deferred tax assets, which resulted from first quarter fiscal
year 1996 operating losses, have been fully offset by valuation
allowances.
Financial Condition
The Company's primary source of liquidity and capital resources,
on both a short- and long-term basis, are cash flows generated
from operations and borrowing under its Debtor-In-Possession
Credit Agreement.
The Bankruptcy Proceedings restrict the Company's ability to
provide direct financial support outside of the normal course of
business to its international subsidiaries without the approval
of the Bankruptcy Court. Furthermore, certain actions,
including actions outside of the normal course of business, must
be approved by the Bankruptcy Court.
On July 10, 1995, the Company entered into a Debtor-In-
Possession Credit Agreement (the "Debtor-In-Possession Credit
Agreement") with two banks (the "Lenders") which was approved by
the Bankruptcy Court on August 2, 1995. The Debtor-In-
Possession Credit Agreement paid-off the Amended and Restated
Credit Agreement (described below). The Debtor-In-Possession
Credit Agreement, as amended, provides for extensions of
revolving credit loans, term loans and letters of credit,
limited to a percentage of eligible receivables and inventories,
in an amount not to exceed $24.0 million through the June 30,
1996 termination date. The Debtor-In-Possession Credit
Agreement provides for a security interest in substantially all
of the Company's assets and imposes certain restrictive
covenants. Management believes that it has adequate flexibility
under the Debtor-In-Possession Credit Agreement and that such
covenants should not impose undue restrictions on the operations
of the Company during its Bankruptcy Proceedings. The Company
is currently in compliance with the terms of the Debtor-In-
Possession Credit Agreement or has obtained waivers as
necessary.
On April 7, 1995, the Company entered into an Amended and
Restated Revolving Credit Agreement (the "Amended and Restated
Credit Agreement") with the Lenders. The Amended and Restated
Credit Agreement provided for extensions of revolving credit
loans and letters of credit, limited to a percentage of eligible
receivables and inventories, in an amount not to exceed $30.0
million up through March 30, 1996; the aggregate principal
amount of such lending commitment decreased to an amount not in
excess of $25.0 million from March 31, 1996 through the July 1,
1996 termination date. The Amended and Restated Credit
Agreement was secured by a security interest in the domestic
assets of the Company pursuant to a Security Agreement of even
date therewith. On June 9, 1995, the Company announced that it
was in technical default of the Amended and Restated Credit
Agreement due to the restructuring charge announced May 8, 1995.
Due to the Bankruptcy Proceedings, substantially all claims
against the Company prior to July 5, 1995 (and prior to August
18, 1995 for the three nonoperating subsidiaries added to the
Bankruptcy Proceedings) are subject to the automatic stay
provisions under the Bankruptcy Code while the Company continues
business operations as a debtor-in-possession. Pre-petition
claims may arise from the determination by the Bankruptcy Court
of allowed claims for contingencies and other disputed amounts.
At the Company's request, the Bankruptcy Court established a bar
date of October 31, 1995 for pre-petition claims against the
Company. A bar date is the date by which claims against the
Company must be filed if the claimants wish to receive any
distribution in the Bankruptcy Proceedings. The Company has
given notice to all known actual or potential claimants subject
to the bar date of their need to file a proof of claim with the
Bankruptcy Court. The Company will reconcile claims that differ
from the Company's records, and any differences that cannot be
resolved by negotiated agreement between the Company and the
claimant will be resolved by the Bankruptcy Court. Accordingly,
allowed claims may arise which are not currently reflected in
the Company's financial statements and recorded claims are
subject to change. The ultimate amount of and settlement terms
for such liabilities are subject to a plan of reorganization
which is subject to approval by the Bankruptcy Court and,
accordingly, are not presently determinable.
On October 24, 1995, the Company announced that it had reached
an agreement to sell its ongoing business to a group led by
Empire Capital Corporation, an investment company based in
Southport, CT. The proposed sale, which is subject to higher
and better offers in accordance with the Bankruptcy Code, forms
the foundation of Smith Corona's plan of reorganization. The
plan calls for secured creditors to be paid in full and general
unsecured creditors to be paid a substantial percentage of their
allowed claims in cash. The plan provides no consideration to
the Company's current stockholders. Smith Corona's plan of
reorganization and disclosure statement were filed on October
24, 1995 in the U.S. Bankruptcy Court for the District of
Delaware.
As represented in the consolidated statement of cash flows for
the quarter ended September 30, 1995, the Company's operating
activities used $.5 million of cash, primarily the result of the
losses from operations and vendor requirements for advance
payment of goods offset by a decrease in inventories. The
reduction in inventories of $8.2 million reflects the Company's
continued focus on controlling inventory levels. Accrued
liabilities increased approximately $1.7 million primarily due
to the accrual of reorganization costs. Trade payables
decreased $4.0 million primarily as a result of the wind-down of
Singapore operations.
The Company had no material commitments for capital expenditures
at September 30, 1995. Under the provisions of the Debtor-In-
Possession Credit Agreement, the Company is restricted to $.5
million of capital expenditures in each six month period ended
December 31, 1995 and June 30, 1996.
From time to time the Company enters into foreign exchange
contracts to reduce its exposure to foreign currency rate
changes. As of September 30, 1995, no contracts were
outstanding.
In October 1995, the Company completed a transaction to purchase
a building previously used as warehousing space located in
Cortland, New York and to concurrently sell the building and
land on which the building is located to a third party
purchaser. The net proceeds of approximately $1.3 million were
used to paydown the bank loan and represent a fiscal year 1996
second quarter gain.
While the Company believes it has adequate financing to operate
in bankruptcy for a reasonable period of time, its ability to
successfully continue operations is dependent upon, among other
things, confirmation of a plan of reorganization that will
enable the Company to emerge from bankruptcy proceedings,
obtaining adequate post-confirmation financing to fund
restructuring and working capital requirements, successfully
implementing the restructuring program, and generating
sufficient cash from operations and financing sources to meet
obligations. There can be no guarantee that any or all above
noted actions will be accomplished.
PART II - Other Information
Item 1. Legal Proceedings.
Information required by this item is incorporated by
reference from "Note 3 - Contingencies" in the Notes
to Consolidated Financial Statements appearing on
page 7 of this Form 10-Q Quarterly Report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
One Current Report on Form 8-K was filed with the
Commission during the first quarter of the Company's 1996 fiscal
year.
1. The Form 8-K Current Report dated July 20,
1995 stated that Smith Corona Corporation commenced a case under
Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware on July 5,
1995 under Item 3.
Also, the Company reported on such date
under Item 5 of Form 8-K, the retention of R.F. Stengel & Co.,
Inc. to advise the Company. The Current Report also disclosed
the appointment of Ronald F. Stengel as Interim President, Chief
Executive Officer and a Director of the Company, Thomas A.
Cawley as a Director and John A. Piontkowski as Senior Vice
President, Chief Financial Officer and Treasurer.
Finally, the July 20, 1995 Current Report
announced, under Item 5, the approval by the Bankruptcy Court of
a $24 million post-petition financing package between the
Company and its lenders.
SIGNATURES
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.
SMITH CORONA CORPORATION
November 13, 1995
By: /s/ John A. Piontkowski
John A. Piontkowski
Senior Vice President,
Chief Financial Officer and
Treasurer (Principal Financial
Officer)
By: /s/ Martin D. Wilson
Martin D. Wilson
Controller (Principal
Accounting Officer)
EXHIBIT INDEX
Exhibit
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SMITH
CORONA CORPORATION CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO OF
THIS FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1995
<CASH> 2236
<SECURITIES> 0
<RECEIVABLES> 38928
<ALLOWANCES> 1820
<INVENTORY> 46100
<CURRENT-ASSETS> 96766
<PP&E> 21448
<DEPRECIATION> 0
<TOTAL-ASSETS> 122901
<CURRENT-LIABILITIES> 39975
<BONDS> 0
<COMMON> 303
0
0
<OTHER-SE> 14518
<TOTAL-LIABILITY-AND-EQUITY> 122901
<SALES> 33463
<TOTAL-REVENUES> 33463
<CGS> 29460
<TOTAL-COSTS> 29460
<OTHER-EXPENSES> 2100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 402
<INCOME-PRETAX> (5254)
<INCOME-TAX> 175
<INCOME-CONTINUING> (5429)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5429)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> 0
</TABLE>
