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 March 31, 1996
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 May 8, 1996
Common Stock, par value $.01 30,250,000
per share
SMITH CORONA CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 1996
and June 30, 1995 1
Consolidated Statements of Operations - For the
three months and nine months ended
March 31, 1996 and 1995 2
Consolidated Statement of Changes in Stockholders'
Equity - For the nine months ended March 31, 1996 3
Consolidated Statements of Cash Flows - For the
nine months ended March 31, 1996 and 1995 4
Notes to Consolidated Financial Statements 5-14
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 15-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index
SMITH CORONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
(audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 24,400 $ 7,003
Accounts receivable (net of allowance
for doubtful accounts of $1,464 and
$1,484, respectively) 21,431 37,654
Inventories 22,115 54,335
Prepaid expenses and other current
assets 6,362 9,471
Total current assets 74,308 108,463
Property, plant and equipment, net 13,996 22,888
Deferred income taxes 3,406 3,406
Other assets 1,230 1,309
TOTAL $ 92,940 $136,066
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans $ - $ 17,400
Trade payables 3,296 19,807
Accrued liabilities 10,707 35,449
Income taxes payable - 5,791
Total current liabilities 14,003 78,447
Postretirement benefits 12 12,999
Pension liability 833 18,801
Other long-term liabilities 133 5,569
Liabilities subject to compromise 62,703 -
Total liabilities 77,684 115,816
Stockholders' equity:
Common stock-30,250,000 shares issued
and outstanding 303 303
Additional paid-in capital 44,697 44,697
Accumulated deficit (29,744) (24,750)
Total stockholders' equity 15,256 20,250
TOTAL $ 92,940 $136,066
</TABLE>
See accompanying notes to consolidated financial statements.
SMITH CORONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine Months ended
March 31, March 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales $ 20,026 $ 31,384 $89,792 $154,849
Cost of goods sold 18,914 36,249 83,773 133,428
Gross margin 1,112 (4,865) 6,019 21,421
Selling, administrative
and research expenses 7,136 14,177 21,703 37,896
Reorganization costs 2,090 - 8,147 -
Restructuring expense(income) (16,995) - (18,296) -
Other income (441) - (1,537) -
Operating income (loss) 9,322 (19,042) (3,998) (16,475)
Interest expense (income) (4) 166 596 721
Income (loss) from continuing
operations before income
taxes 9,326 (19,208) (4,594) (17,196)
Income taxes (benefit) 255 (7,106) 400 (6,362)
Income (loss) from continuing
operations 9,071 (12,102) (4,994) (10,834)
Discontinued operations (net of
income taxes):
Income from discontinued
operations - - - 385
Gain on disposal of discontinued
operations - - - 8,722
Net income (loss) $ 9,071 ($12,102)($ 4,994) ($1,727)
Earnings per common share-
Income (loss) from continuing
operations $.30 ($.40) ($.17) ($.36)
Discontinued operations (net of
income taxes):
Income from discontinued
operations - - - .01
Gain on disposal of discontinued
operations - . - - .29
Net income (loss) per share $.30 ($.40) ($.17) ($.06)
</TABLE>
See accompanying notes to consolidated financial statements.
SMITH CORONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the nine months ended March 31, 1996
($ 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 - - (4,994) (4,994)
Balance March 31, 1996 $303 $44,697 $(29,744) $15,256
</TABLE>
See accompanying notes to consolidated financial statements.
SMITH CORONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
<TABLE>
<CAPTION>
Nine months ended
March 31,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 4,994) ($1,727)
Adjustments to reconcile net loss to
net cash provided by (used in)
continuing operating activities:
Discontinued operations - (9,107)
Depreciation and amortization 4,402 4,972
(Gain) loss on disposition of
property, plant equipment (16,196) 772
Deferred income taxes - (8,914)
Inventory provisions 4,243 -
Other noncash items (1,587) -
Changes in assets and liabilities:
Accounts receivable 16,223 13,305
Inventories 28,297 (728)
Prepaid expenses and
other current assets 115 521
Other assets 48 395
Trade payables (6,101) (9,826)
Accrued liabilities and income taxes
payable (14,192) (520)
Postretirement benefits and pension
liability 845 (1,632)
Other long-term liabilities (80) 320
Net cash provided by (used in)
continuing operations 11,023 (12,169)
Net cash provided by discontinued
operations - 679
Net cash provided by (used in)
operating activities 11,023 (11,490)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of discontinued
operations - 27,500
Proceeds from the sale of property,
plant and equipment 24,003 -
Capital expenditures (229) (3,068)
Net cash provided by investing activities 23,774 24,432
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank loans (repayments), net (17,400) (9,002)
Dividends paid - (3,781)
Net cash used in financing activities (17,400) (12,783)
Increase in cash and cash equivalents 17,397 159
Cash and cash equivalents:
Beginning of period 7,003 6,472
End of period $24,400 $ 6,631
</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; 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; has an
accumulated deficit at March 31, 1996; 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 March 31, 1996 and June
30, 1995, respectively, that are expected to be compromised under
any plan of reorganization consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
<S> <C> <C>
Trade payables $10,409 $11,760
Accrued liabilities 11,028 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 5,356 5,569
Total(1) $62,703 $70,970
</TABLE>
(1) Excludes a net intercompany payable in the amount of $28,097
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 $8,147 for the nine months ended March
31, 1996. These charges primarily include professional fees
incurred during the nine month period.
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. On November 20, 1995 the Company announced that it had
terminated the agreement because Empire Capital Corporation did
not fulfill certain contractual requirements necessary to
complete the transaction. Since that time, the Company has
continued discussions with other parties interested in the
purchase of the Company as well as those interested in strategic
alliances.
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 removed from the
consolidated financial statements as of August 2, 1995 and the
Company has recorded in other expense an estimated loss on
liquidation of approximately $415 and $291 in the first and third
quarters, respectively, of fiscal 1996. The Company has
established a distributor relationship and is currently exploring
other 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 March 31,
1996 and June 30, 1995, the Company had recorded approximately
$4,077 and $4,203, respectively, related to environmental matters
and the amount at March 31, 1996 is included in liabilities
subject to compromise. 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 and the record of decision has been
finalized. On March 31, 1993, the Company executed a final
consent order with the DEC for the implementation of a remedial
program for the site. Design, construction and start-
up activities related to the selected remedial program are
underway. 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
Cooper 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 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>
March 31, June 30,
1996 1995
<S> <C> <C>
Raw materials and work-in-process $ 7,027 $18,802
Finished goods 15,088 35,533
Total $22,115 $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 would be relocated from its Singapore
and Batam Island, Indonesia facilities to its Mexico facility.
This action resulted in the termination of approximately 1,300
workers in Singapore and Batam. Original expectations were to
replace these workers with approximately 600 workers in Mexico
which would have resulted in approximately $10,000 pretax annual
savings, primarily through lower labor costs as well as the
greater utilization of the Mexico facility. However, due to
lower than expected volumes, the need for replacement workers was
not warranted. The Company ceased production in Singapore and
Batam Island, Indonesia in November 1995, and relocated equipment
to Mexico where typewriter production commenced in December 1995.
The Company sold certain of its Singapore machinery and equipment
for proceeds of approximately $2,333. Additionally, the Company
sold its Singapore facility and the underlying land lease on
February 8, 1996 for net proceeds of approximately $20,281. The
sale of the facility resulted in a third quarter pretax gain of
approximately $16,995. In April 1996, the Company received a
refund of approximately $760 for fees paid in connection with the
sale of the facility which will result in an additional fourth
quarter gain on the sale.
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.
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 $2,000 pretax (originally expected to be
approximately $6,000 pretax), will be recognized as charges to
operations as incurred during fiscal year 1996. For the nine
months ended March 31, 1996, the Company has recorded
approximately $1,600 of these costs.
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
Fiscal 1996 Activity(1) (6,787) (1,460) 478 (7,769)
March 31, 1996
balance $ 4,707 $ 32 $ 763 $ 5,502
</TABLE>
(1) Represents cash payments for severance of approximately
$6,286 and non-cash items for foreign currency exchange rate
changes, severance provision adjustments and writeoff of
property, plant and equipment. The increase in other costs
represents expected future cash payouts for final
liquidation of Singapore operations.
The remaining March 31, 1996 severance amount of $4,707 is
included in liabilities subject to compromise.
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
Fiscal 1996 Activity (50) (50)
March 31, 1996 balance $ - $ -
</TABLE>
NOTE 6 - CASH FLOWS
Aggregate borrowings under the Company's credit facility amounted
to $1,330,700 and $594,008 for the nine months ended March 31,
1996 and 1995, respectively, while aggregate repayments were
$1,348,100 and $603,010 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 (i)
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, (ii)
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
(iii) 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 Nine months ended
March 31, 1995 March 31, 1995
<S> <C> <C>
Net sales $ - $5,774
Income from operations
before income taxes - 612
Income taxes - 227
Net income from operations - 385
Gain on disposal of assets
(Net of tax benefit of $285) - 8,722
Net income $ - $9,107
</TABLE>
NOTE 9 - DIVIDENDS
On May 4, 1995 the Board of Directors elected to omit the
dividend. The dividend declared in the first and second quarters
of fiscal 1995 was $.05 and $.025 per share of common stock,
respectively.
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 March 31, 1996,
and consolidated statements of operations and cash flows for the
nine 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 $ 51,322 $ 22,986 $ - $ 74,308
Property, plant
and equipment 12,264 1,732 - 13,996
Other assets 81,859 16,635 (93,858) 4,636
Total assets $145,445 $41,353 $(93,858) $ 92,940
Other current
liabilities 12,079 1,924 - 14,003
Intercompany with
affiliates 28,097 (28,097) - -
Other long-term
liabilities 978 - - 978
Liabilities subject
to compromise 62,703 - - 62,703
Stockholders' equity 41,588 67,526 (93,858) 15,256
Total liabilities and
stockholders' equity $145,445 $41,353 $(93,858) $ 92,940
</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 $ 69,605 $20,187 $ - $ 89,792
Net sales to affiliates 9,294 21,637 (30,931) -
Cost of goods sold 68,449 15,324 - 83,773
Cost of goods sold to
affiliates 7,912 23,019 (30,931) -
Gross margin 2,538 3,481 - 6,019
Selling, administrative
and research expenses 16,105 5,598 - 21,703
Restructuring income (1,524) (16,772) - (18,296)
Reorganization costs 8,147 - - 8,147
Other expense (income) (2,997) 1,460 - (1,537)
Operating income (loss) (17,193) 13,195 - (3,998)
Interest expense 596 - - 596
Income (loss) from
operations before
income tax (17,789) 13,195 - (4,594)
Income taxes (benefit) 435 (35) - 400
Net income (loss) $(18,224) $ 13,230 $ - $(4,994)
</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 income (loss) $(18,224) $13,230 $ - $(4,994)
Adjustments to
reconcile net income
(loss) to net cash
used in continuing
operating activities:
Noncash items and
changes in
operating assets
and liabilities 45,207 (29,190) - 16,017
Net cash flow provided
by (used in) operating
activities 26,983 (15,960) - 11,023
Cash flows from
investing activities:
Proceeds from sale of
property, plant and
equipment 1,389 22,614 - 24,003
Capital expenditures (160) (69) - (229)
Net cash provided by
investing activities 1,229 22,545 - 23,774
Cash flows from
financing activities:
Bank loans
(repayments), net (17,400) - - (17,400)
Net cash used in
financing activities (17,400) - - (17,400)
Increase in cash and
cash equivalents 10,812 6,585 - 17,397
Cash and cash
equivalents at
beginning of year 3,027 3,976 - 7,003
Cash and cash
equivalents at
end of year $ 13,839 $10,561 $ - $24,400
</TABLE>
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 removed from the
consolidated financial statements as of August 2, 1995 and the
Company has recorded in other expense an estimated loss on
liquidation of approximately $.4 million and $.3 million in the
first and third quarters, respectively, of fiscal 1996. The
Company has established a distributor relationship and is
currently exploring other 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 of $20.0 million for the quarter ended March 31, 1996
decreased 36.2 percent from last year's third quarter net sales
of $31.4 million primarily due to lower volumes.
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 $1.1 million
as compared with $2.7 million a year ago.
In the third quarter the Company had a gross margin as a
percentage of net sales of 5.6 percent reducing the gross margin
to 6.7 percent for the nine months ended March 31, 1996, as
compared to (15.5) percent and 13.8 percent, for the comparable
periods last year. In addition to volume declines noted above,
gross margin was also adversely impacted by a second quarter
charge of approximately $4.4 million for inventory-
related provisions.
Selling, administrative and research expenses for the three and
nine months ended March 31, 1996 decreased $7.0 million and
$16.2 million, respectively, from the comparable prior periods
last year. The decline reflects the impact of fiscal 1995
restructuring actions, reduced advertising spending and
professional fees charged to reorganization costs during the
bankruptcy proceedings. Additionally, costs associated with the
restructuring action of approximately $1.6 million primarily
related to the shut-down of Singapore manufacturing operations,
are included in selling, general and research expenses.
The Company recorded reorganization costs for its Bankruptcy
Proceedings aggregating $2.1 million and $8.1 million for the
three and nine months, respectively. These charges primarily
included professional fees incurred and interest income earned
on domestic cash balances during the nine months of fiscal 1996.
There were no such items during the first nine months of fiscal
1995.
Restructuring expense (income) primarily represents a pension
plan curtailment gain of approximately $1.5 million and a gain
on the sale of the Singapore facility and underlying land lease
of approximately $17.0 million. In April 1996, the Company
received a refund of approximately $.8 million for fees paid in
connection with the sale which will result in an additional
fourth quarter gain on the sale.
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 $1.4 million were
used to paydown the bank loan. This sale resulted in a fiscal
year 1996 second quarter gain of approximately $1.3 million
included in other income and expense. Additionally, other
income and expense for the third quarter includes a gain of
approximately $.7 million from an insurance settlement.
The Company fully repaid its bank loans in January 1996.
Interest earned on domestic cash balances is included in
reorganization costs while interest earned on international cash
balances is included in interest expense (income) on the
statement of operations.
The provision for income taxes for the three and nine months
ended March 31, 1996 relates principally to foreign-
sourced income. As a result of the Bankruptcy Proceedings and
the short-term outlook, deferred tax assets, which resulted from
year-to-date fiscal 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 Company intends to enter into
discussions to extend the Debtor-In-Possession Credit Agreement.
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. In January
1996, the Company fully repaid its bank loans.
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. On November 20, 1995 the Company announced that
it had terminated the agreement to sell because Empire Capital
Corporation did not fulfill certain contractual requirements
necessary to complete the transaction. Since that time, the
Company has continued discussions with other parties interested
in the purchase of the Company as well as those interested in
strategic alliances.
As represented in the consolidated statement of cash flows for
the nine months ended March 31, 1996, the Company's operating
activities provided $11.0 million of cash, primarily the result
of a decrease in inventories and accounts receivable offset by a
decrease in accounts payable and accrued liabilities. The
reduction in inventories of $28.3 million reflects the Company's
continued focus on controlling inventory levels. Accounts
receivable declined $16.2 million and is attributable to the
reduction in sales levels. Trade payables and accrued
liabilities decreased $20.3 million primarily as a result of the
wind-down of Singapore operations including related severance
payments.
The Company had no material commitments for capital expenditures
at March 31, 1996. 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 March 31, 1996, no contracts were outstanding.
While the Company believes it has adequate cash and 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 working capital requirements and generating sufficient cash
from operations to meet obligations. There can be no guarantee
that any or all of the 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
None.
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
May 14, 1996
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
EX-27 Financial Data Schedule (electronically
filed only)
<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> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 24400
<SECURITIES> 0
<RECEIVABLES> 22895
<ALLOWANCES> 1464
<INVENTORY> 22115
<CURRENT-ASSETS> 74308
<PP&E> 13996
<DEPRECIATION> 0
<TOTAL-ASSETS> 92940
<CURRENT-LIABILITIES> 14003
<BONDS> 0
<COMMON> 303
0
0
<OTHER-SE> 14953
<TOTAL-LIABILITY-AND-EQUITY> 92940
<SALES> 89792
<TOTAL-REVENUES> 89792
<CGS> 83773
<TOTAL-COSTS> 83773
<OTHER-EXPENSES> (11686)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 596
<INCOME-PRETAX> (4594)
<INCOME-TAX> 400
<INCOME-CONTINUING> (4994)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4994)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> 0
</TABLE>
