UNITED STATES
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 September 30, 1998
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.)
839 Route 13 South, Cortland, New York 13045
(Address of principal executive offices) (Zip Code)
(607) 753-6011
(Registrant's telephone number, including area code)
Indicate by check mark whether 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
(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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
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 5, 1998
Common Stock, par value $.001 2,983,372
per share
SMITH CORONA CORPORATION AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1998 and June 30, 1998 1
Consolidated Statements of Operations - For the
three months ended September 30, 1998
and 1997 2
Consolidated Statement of Changes in Stockholders'
Equity - For the three months ended
September 30, 1998 3
Condensed Consolidated Statements of Cash Flows -
For the three months ended September 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5-8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 5. Other Events 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
SMITH CORONA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands)
<TABLE>
<S> <C> <C>
September 30, June 30,
1998 1998
ASSETS (unaudited) (audited)
Current assets:
Cash and cash equivalents $ 6,257 $15,293
Accounts receivable (net of allowance
for doubtful accounts of $654 and
$638, respectively) 9,301 9,492
Inventories 17,979 15,399
Prepaid expenses and other current
assets 3,636 3,090
Total current assets 37,173 43,274
Property, plant and equipment, net 4,328 6,511
Other assets 2,188 302
TOTAL $43,689 $50,087
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables $ 5,269 $ 6,025
Accrued liabilities 8,814 8,204
Taxes payable 3,033 3,138
Total current liabilities 17,116 17,367
Pension liability 4,807 4,827
Postretirement benefits 3,383 3,846
Other long-term liabilities 3,782 4,007
Total liabilities 29,088 30,047
Stockholders' equity:
Common stock-3,141,654 shares
issued and outstanding 3 3
Additional paid-in capital 55,510 55,512
Deferred compensation (92) (326)
Accumulated deficit (40,820) (35,149)
Total stockholders' equity 14,601 20,040
TOTAL $43,689 $50,087
</TABLE>
See accompanying notes to consolidated financial statements.
SMITH CORONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share amounts)
<TABLE>
<S> <C> <C>
Three months ended
September 30,
1998 1997
(unaudited)
Net sales $11,114 $14,792
Cost of goods sold 10,049 11,541
Gross margin 1,065 3,251
Selling, general and
administrative expenses 5,523 4,792
Restructuring expense 1,183 -
Reorganization costs - 61
Other income - (100)
Operating loss (5,641) (1,502)
Interest income (7) (194)
Loss before income taxes (5,634) (1,308)
Income taxes 37 151
Net loss $(5,671) $(1,459)
Net loss per common share -
basic and diluted $ (1.90) $ (.55)
</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, 1998
($ in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C>
Additional
Common Paid-In Deferred Accumulated
(unaudited) Stock Capital Compensation Deficit Total
Balance June 30, 1998 $ 3 $55,512 $(326) $(35,149) $20,040
Net loss - - - (5,671) (5,671)
Deferred compensation - (2) 2 - -
Amortization of deferred
compensation - - 232 - 232
Balance September 30, 1998 $ 3 $55,510 $ (92) $(40,820) $14,601
</TABLE>
See accompanying notes to consolidated financial statements.
SMITH CORONA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
<TABLE>
<S> <C> <C>
Three months ended
September 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited)
Net loss $(5,671) $(1,459)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 682 785
Gain on disposition of
property, plant and equipment - (97)
Other noncash items - 4
Changes in assets and liabilities:
Accounts receivable 191 5
Inventories (2,578) 1,419
Prepaid expenses and
other current assets (546) (2,016)
Other assets 81 (94)
Trade payables (756) 533
Accrued liabilities and taxes
payable 505 (855)
Postretirement benefits and pension
liability (483) (463)
Other long-term liabilities (225) -
Net cash used in
operating activities (8,800) (2,238)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of property,
plant and equipment - 100
Capital expenditures (236) (831)
Net cash used in
investing activities (236) (731)
Decrease in cash
and cash equivalents (9,036) (2,969)
Cash and cash equivalents:
Beginning of period 15,293 21,985
End of period $ 6,257 $19,016
</TABLE>
See accompanying notes to consolidated financial statements.
SMITH CORONA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
($ and shares in thousands, except per share amounts)
NOTE 1 - 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
(the "Company") 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, 1998 as
contained in the Company's Annual Report on Form 10-K.
In the second quarter of the year ended June 30, 1998, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). Accordingly, the three months ended September 30, 1997 has
been restated to reflect basic and diluted loss per share. (See Note 4).
NOTE 2 - CONTINGENCIES
Certain aspects of the Company's past handling and/or disposal of hazardous
substances have been the subject of investigation by federal and state
regulatory authorities, or have been the subject of lawsuits filed by such
authorities or by private parties. At September 30, 1998 and June 30,
1998, the Company had recorded liabilities of approximately $1,876 and
$1,889, respectively, related primarily to remediation and monitoring of
environmental sites. Because of the uncertainties associated with
assessing environmental matters, the related ultimate liabilities are not
presently determinable. However, based on facts presently known,
management does not believe that these investigations, 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 was the owner and operator of manufacturing facilities in
Groton, New York (the "Groton Site") and Cortlandville, New York (the
"Cortlandville Site") and together, (the "Owner/Operator Sites"). The
Company's liability, if any, at the Owner/Operator Sites stems from
groundwater contamination at the Cortlandville Site and soil contamination
at the Groton Site. The remediation program at the Cortlandville Site
consists of round-the-clock pumping and filtering. The soil venting with a
soil infiltration injection system for the Groton Site remediation is now
reduced to periodic soil and water sampling. A decommissioning plan for
the Groton Site has been approved and decommissioning activities have
commenced. To the Company's knowledge, the only future costs that will be
associated with remediation of those sites are for operation, maintenance,
monitoring, shutdown, and post-shutdown of the systems. The Company
believes that it has set aside adequate reserves for the payment of
expenses for the ongoing remediation programs at the Groton and
Cortlandville Sites.
The Company is also a defendant or plaintiff in various other legal actions
that have arisen in the ordinary course of its business. It is the opinion
of management 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.
The ultimate determination of taxes payable is pending the outcome of
certain legal entity reconfigurations within the Company's worldwide
structure. Management believes that the amount accrued is sufficient to
cover any liability which may be determined.
NOTE 3 - INVENTORIES
A summary of inventories, by major classification and net of reserves, is
as follows:
<TABLE>
<S> <C> <C>
September 30, June 30,
1998 1998
Raw materials and work-in-process $ - $ 91
Finished goods 17,979 15,308
Total $17,979 $15,399
</TABLE>
NOTE 4 - LOSS PER SHARE
The following tables reconcile the numerators and denominators of the basic
and diluted loss per share for the net loss presented in the Consolidated
Statements of Operations:
<TABLE>
<S> <C> <C> <C>
Three months ended September 30, 1998
Loss Shares Per-Share
(Numerator) (Denominator) Amount
Basic Loss per Share
Net loss $(5,671) 2,983 $(1.90)
Effect of dilutive securities
Warrants (a) (a)
Stock Options (b) (b)
Restricted Stock - (c)
Diluted Loss per Share
Net loss $(5,671) 2,983 $(1.90)
Three months ended September 30, 1997
Loss Shares Per-Share
(Numerator) (Denominator) Amount
Basic Loss per Share
Net loss $(1,459) 2,677 $(.55)
Effect of dilutive securities
Warrants (a) (a)
Restricted Stock - (c)
Diluted Loss per Share
Net loss $(1,459) 2,677 $(.55)
</TABLE>
(a) Warrants to purchase 1,512,073 shares at September 30, 1998 and
1,512,423 at September 30, 1997 of common stock at $8.50 per share were
outstanding but were not included in the computation of diluted earnings
per share because the exercise price was greater than the market price of
the common shares.
(b) Options to purchase 142,735 shares of common stock at $6.13 per share
were outstanding but were not included in the computation of diluted
earnings per share because the option price was greater than the average
market price of the common shares.
(c) Restricted Stock of 158,282 shares at September 30, 1998 and 95,143
shares at September 30, 1997 would have anti-dilutive effect in the
computation. Subsequent to September 30, 1998 restricted stock of 167,549
shares were issued.
NOTE 5 - RESTRUCTURING
The Company continues to evaluate its strategy and focus and the
deployment of its resources to profitably take advantage of
opportunities. As a result of this evaluation, management believes,
among other things, that the Company needs to continue transitioning
its administrative cost structure from that of a manufacturing company
to one of a sales and marketing based distributor.
In connection with this strategic initiative, the Company announced a
restructuring plan on September 28, 1998 and recorded a related pre-tax
and post-tax charge of $1,183 in the quarter ended September 30, 1998.
The substantial portion of this charge relates to the severance cost
associated with the termination of approximately 130 positions, primarily
at the Company's Cortland, New York corporate headquarters. The affected
employees have been identified and notified. To a much lesser extent the
restructuring charge also includes provisions related to a planned sale
of the furnishings and equipment located at the corporate headquarters.
In connection with the restructuring, the Company plans to sell the
building in Cortland, New York and relocate its corporate headquarters to
more efficient facilities. The Cortland headquarters building is being
actively marketed and management believes the remaining net book value of
the building will be fully recovered upon the sale. The related net book
value has been reclassified to other assets on the September 30, 1998
balance sheet.
Management believes that the workforce reductions, relocation to more
efficient facilities and the continued efforts to reduce certain targeted
costs such as advertising and new product development will reduce expenses
by approximately $9,000 annually.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The forward-looking comments in this Management's Discussion and Analysis
of Results of Operations and Financial Condition are estimates by the
Company's management of future performance and are subject to a variety of
risks and uncertainties that could cause actual results to differ from
management's current expectations.
Results of Operations
Net sales of $11.1 million for the quarter ended September 30, 1998
decreased 24.9 percent from last year's first quarter net sales of $14.8
million, primarily due to lower volumes. Unit sales of typewriters and
related accessories and supplies are lower than a year ago, both
domestically and internationally, as a result of a shrinking market and a
continuing difficult and competitive environment. The lower volumes are
partially offset by newly sourced product net sales of $1.7 million.
The Company's plan to diversify and expand its product line continues.
Efforts are focused on forging new and expanding existing alliances with
companies that provide technologically advanced products for the small
office and home office environment but presently do not have a substantial
United States market penetration, and are intent on building or increasing
market penetration by selling their products under the well-known "Smith
Corona" name. Management believes that the Company is positioned to
leverage the strength of its brand name with business products that combine
functionality and contemporary design. The Company intends to rely on its
existing distribution network to become a vendor of technologically
advanced products for the small office and home office. Additionally, the
Company is exploring synergistic opportunities in related markets that will
provide new and expand existing channels of distribution including non-
retail channels. The Company believes that the small office and home
office market, globally, represents growth opportunities. The Company
intends to maintain its core business of distributing its current product
line of typewriters and related supplies and accessories to satisfy
continuing worldwide demand for the products. The success of the Company
depends, in part, on its ability to source, market and sell new products.
Gross margin, as a percentage of net sales, was 9.6 percent for the first
quarter ended September 30, 1998, as compared to 22.0 percent for the
comparable period last year. Sales in the three months ended September 30,
1998 included the clearing out of low-end telephony products inventory that
resulted in a negative impact on gross margins. In the fourth quarter of
the Company's 1998 fiscal year competitors began reducing market prices for
the low-end telephony and facsimile products. These sharp price declines
resulted in the Company having to reduce its low-end telephony and
facsimile product pricing and record related inventory writedowns.
Additionally, the first quarter ended September 30, 1998 was adversely
impacted by a charge of approximately $.6 million for inventory related
provisions.
Selling, general and administrative expenses for the three months ended
September 30, 1998 were $5.5 million compared to $4.8 million last year.
The increase in spending over the prior year was primarily associated with
employee-related costs.
The Company continues to evaluate its strategy and focus and the
deployment of its resources to profitably take advantage of
opportunities. As a result of this evaluation, management believes,
among other things, that the Company needs to continue transitioning
its administrative cost structure from that of a manufacturing company
to one of a sales and marketing based distributor.
In connection with this strategic initiative, the Company announced a
restructuring plan on September 28, 1998 and recorded a related pre-tax
and post-tax charge of $1.2 million in the quarter ended September 30 1998.
The substantial portion of this charge relates to the severance
cost associated with the termination of approximately 130 positions,
primarily at the Company's Cortland, New York corporate headquarters.
The affected employees have been identified and notified. To a much
lesser extent the restructuring charge also includes provisions related
to a planned sale of the furnishings and equipment located at the
corporate headquarters.
In connection with the restructuring, the Company plans to sell the
building in Cortland, New York and relocate its corporate headquarters to
more efficient facilities. The Cortland headquarters building is being
actively marketed and management believes the remaining net book value of
the building will be fully recovered upon the sale. The related net book
value has been reclassified to other assets on the September 30, 1998
balance sheet.
Management believes that the workforce reductions, relocation to more
efficient facilities and the continued efforts to reduce certain targeted
costs such as advertising and new product development will reduce expenses
by approximately $9.0 million annually.
The Company's products and major operating systems are year 2000 compliant.
The Company is in the process of gathering information concerning the year
2000 compliance status of its suppliers. In the event that any of the
Company's significant suppliers do not successfully and timely achieve year
2000 compliance, the Company's business could be adversely affected. Any
significant disruption of the Company's ability to communicate
electronically with its business partners could negatively impact the
Company's business.
Financial Condition
The Company's primary source of liquidity and capital resources, on both a
short- and long-term basis, is cash balances and available borrowing
capacity.
During the three months ended September 30, 1998, the Company's operating
activities used $8.8 million of cash, primarily as a result of the net loss
for the first quarter and the increase in inventories. Inventories
increased $2.6 million primarily as a result of sourcing constraints
related to typewriters and supplies and accessories.
Capital expenditures for the three months ended September 30, 1998 were $.2
million and are primarily related to new product tooling. The Company had
no material commitments for additional capital expenditures at September
30, 1998.
The Company believes that its cash and borrowing capabilities will be
sufficient to meet its operating cash and capital expenditure requirements
in the foreseeable future.
PART II - Other Information
Item 1. Legal Proceedings.
Information required by this item is incorporated by reference from "Note 2
Contingencies" and in the Notes to the Consolidated Financial Statements
appearing in this Form 10-Q Quarterly Report.
Item 5. Other Events
On November 4, 1998, the Company announced the appointment of John A.
Bermingham to the post of President and Chief Executive Officer. Mr.
Bermingham will also serve as a Director of the Company. Mr. Bermingham,
54, replaced Peter N. Parts, who assumed the senior management post in
July. Mr. Parts will retain his position as Chairman of the Board.
Mr. Bermingham has a 25-year career in consumer electronics management and
corporate revitalization. He served as president and chief executive of
Rolodex Corporation and achieved that company's turnaround. He also served
as chief executive of AT&T Smart Cards Systems and Solutions and as a
senior officer for AT&T's New Business Ventures division. Mr. Bermingham
was a long standing officer of Sony Corporation of America, rising from
vice president of sales and marketing to executive vice president of Sony's
Electronics Group.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
Two Current Reports on Form 8-K were filed with the Commission
during the first quarter of the Company's 1999 fiscal year.
1.) The July 20, 1998 Form 8-K Current Report disclosed under Item 5 that
Peter Parts Chairman of the Board of Directors assumed the post of President
and Chief Executive Officer replacing W. Michael Driscoll who retired as the
Company's President and Chief Executive Officer. Additionally, effective
July 22, 1998 Ronald F. Stengel resigned as Director of the Company.
2.) The September 30, 1998 Form 8-K Current Report disclosed under Item 5 a
change in the Company's certifying accountant to KPMG Peat Marwick LLP from
Deloitte & Touche LLP.
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, 1998
By: /s/ Martin D. Wilson
Martin D. Wilson
Senior Vice President
Chief Financial Officer
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit No. Description
EX-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>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 6257
<SECURITIES> 0
<RECEIVABLES> 9955
<ALLOWANCES> 654
<INVENTORY> 17979
<CURRENT-ASSETS> 37173
<PP&E> 38654
<DEPRECIATION> 34326
<TOTAL-ASSETS> 43689
<CURRENT-LIABILITIES> 17116
<BONDS> 0
<COMMON> 3
0
0
<OTHER-SE> 14598
<TOTAL-LIABILITY-AND-EQUITY> 43689
<SALES> 11114
<TOTAL-REVENUES> 11114
<CGS> 10049
<TOTAL-COSTS> 10049
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (7)
<INCOME-PRETAX> (5634)
<INCOME-TAX> 37
<INCOME-CONTINUING> (5671)
<DISCONTINUED> 0
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<EPS-PRIMARY> (1.90)
<EPS-DILUTED> (1.90)
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