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' ***& %* % * V ^' V- v * s S. \ . \ m . ,* *10> % ** " ..-* --* > .** * " *-" < * '~ ' '' '. vvVVV-> W^V VWVWWSV __ ^ * . * A A ^ A *. .4 A A.. .A. _ .'--n V .'ft * Kleinschmidt Telecommuni cations was the first addition^ ;' to the industrial family of f 1 which Smith-Corona is the ' - ifty original member. Shown on 7 , , this year's cover is the type cylinder that is the heart of ;; ` f v '; .- ; ^' Kleinschmidt's advanced tele-: printers. Individual ham- mers facing each row of lettenfe;^#^@-.fv ' are actuated elertronically ' ' : and the printing action is ac-.'' complished at speed$jup.to- 4,000 words perminute/The j type pictured on the cover is}, manufactured for Klein-'^ ' ^ ` schmidt by the SmitH^Cdroriit Marchant Division at Geneva,;^^^.^' 'i New York. - -r-A- f. All photographs in this Report"^ were made for SCM Corpo- , ration by Howard Sochurek. g * W* ,i: *. :-r .:*:,*$ ;#|5M m-mim - -.*,3 si ###"; * ' I1'.' ^ J^W'.SSbv 'i < '. ''J-/ii-fecr-'vj'v/t:1. v>' ^ -}NijrfAV* vl'- '<*-<r'VJV.y* rwej '; -V 53B SCM Corporation is a broadly diversified manufacturing company serving high technology growth markets for such productsas business equipment, continuous forms, office copiers, telecom munications equipment, paper, chemicals, and coatings and resins. In the consumer market, the Company is a leader in port able typewriters, electric housewares, floor care products, paints, specialty and convenience foods and converted paper products. In virtually all cases, the industries and markets in which SCM operates have in common attributes which make them attractive for capital investment. First, many of their segments are "growth industries," with an annual rate of expansion considerably in excess of accepted indicators of economic growth. Second, they are al I reacting to the impact of technology on traditional products and methods. SCM's place in American industry has been attained by achiev ing technological leadership ingrowth industries. The applica tion of that concept is explained in this Report, compiled for the more than 47,000 shareholders of the Company. Contents Financial Highlights......................... 2 Letter to Shareholders..................... 3 SCM--Today and Tomorrow............. 5 Review of Operations Office Equipment......................... 8 Portable Typewriters..................... 8 Telecommunications...................... 11 Chemicals.......................................11 Paper ................................ 15 Coatings and Resins........................15 Appliances .................................... 18 Food ...............................................18 Products and Markets........................22 Financial Review................................24 Financial Results................. 25 Auditor's Report................................ 29 Ten-Year Summary............................30 Corporate Data....................................32 Worldwide Operations: Inside Back Cover GLD386Q9 2 CL038610 TD OUR SHAREHOLDERS: For SCM Corporation, fiscal 1968 was a year marked by dramatic growth, by changes in the Company's organizationa I framework to consol idate the benefits of that growth, and by con tinued development of the Company's technology base to support further growth in the years ahead. Total sales of SCM products reached another annual record. Sales were $744.8 million, up 6 percentover last year's record $705.2 million. Net income before extraordinary items, however, was $17.8 million, or $2.22 per share, compared to last year's$25.1 million, or $3.01 per share. Extraordinary items of $4.7 million net of taxes, or $.57 per share, were charged to net income, principally covering disposal of the Company's data processing systems operation. The sales improvement was achieved despite a variety of business and eco nomic factors which contributed to the decline in profits. 1968 was a year in which we experienced strikes, higher manufacturing costs, the spe cial non-recurring charge already mentioned, intense price competition in many product lines, occasional dips in consumer buying, new product introduction costs, and higher taxes and interest charges. Each of our five divisions was affected by one or more of these factors. Some of these condi tions are non-recurring in nature; others should respond well to more stable economic conditions in partic ular markets. As for those within the Company's control, diligent correc tive steps are being taken. In any event, it would be wrong to give the impression that these prob lems reflect anything more than an unfortunate concatenation of minor difficulties. Viewed as a whole, 1968 was still a year of accomplishment. The consolidation of the growth ex perienced in recent years has estab lished a base and a conceptual frame work for directing the course SCM will follow in the future. In addition, in creased sales in virtually all product lines continues to be a very encour aging factor. Steps now being taken to improve profit margins in particu lar product lines, if successful, may be expected to result in improved overall earnings. For the longer range, we are hope ful that our vastly expanded and increasingly integrated research ca pabilities in office equipment, elec tronics, chemistry and the graphic arts will give rise to the high-tech nology, proprietary products that will be a key element in the growth of successful companies in the years ahead. In March 1968, the Directors and employees of SCM lost a close friend and inspiring leader. Dr. Edward H. Litchfield, Chairman of the Board from 1956 until his death at 53, was killed in the crash of a private aircraft near Chicago. Although not active in management, he was always deeply interested in the Company as well as the Board. Each of us feels a deep personal loss. I want to express sincere gratitude --both personally and on behalf of your management and the Board of Directors--for the continued support of the shareholders and the consist ent loyal efforts of SCM employees around the world. Emerson E. Mead President September 16,1968 GLD36611 3 A technician conducts an experiment in the course of studying methods of manu facture of micro-circuits at SCM's Advanced Research Center in Switzerland. A high voltage discharge is released in the coating unit to clean a metal substrate by means of ion bombardment. After this, a layer of silicon oxide will be deposited by evapora tion in the high vacuum pro vided within the glass con tainer. Micro-circuits have application to a growing number of SCM products. SCM TODAY AND TOMORROW: TECHNOLOGICAL LEADERSHIP IN GROWTH INDUSTRIES Today as never before, successful business leadership is measured in terms of expanding scale of enterprise --companies must continue to grow or face stagnation. The physical integra tion of our domestic economy and its overseas extensions has challenged industry to achieve rates of growth unparalleled in history, and to do so in an era of very rapid technological change. In business, the essential nature of growth is a process of positioning the enterprise to take advantage of opportunities which foresight and planning indicate will be presented in the future--and repositioning it as required when unplanned-for oppor tunities arise. Rapid and continued growth is often a function of the ability to reposition quickly. In organizing for growth, the short term objective must be to achieve and maintain technological leader ship in those areas of industry which can be expected to grow at rates clearly exceeding that of natural in crease. "Natural" increase is that which may be anticipated by virtue of expanded demand brought about by population increase, rising income levels and so on. The term "growth industry" has come into use for one expanding at a rate substantially greater than mere increase in basic economic indices would suggest. Proprietary products, developed as a result of technological advantage within such industries, serve to move the developing company forward at a faster rate than its competitors. SCM's corporate planning efforts have sought to direct the Company toward technological leadership in growth industries. The impact of technology on industries in which SCM is engaged and an assessment of their growth prospects is briefly outlined in this section of the Report. BUSINESS MACHINES The office equipment industry has experienced phenomenal rates of expansion in recent years. Excluding the significant impact of computers, gross shipments of office equipment in 1967 reached $3.8 billion, and are expected to more than double by 1975. Comparing 1975 estimates to 1966 shipments, office equipment sales will have grown three times faster than gross national product over the decade. Technology has been a major factor in this expansion, and will be even more of a factor in the future. The calculator segment, for example, cur rently estimated at over $200 million a year, is expected to grow at about 6 per cent annually between nowand 1975. The development of microcircuits and improved display devices, together with customer preference for ever more quiet and efficient ma chines, has caused the expansion. SCM has a line of new electronic calculators for introduction this fall. The application of systems man agement and other advanced con cepts of industrial processes, data transmission and product warehous ing and distribution, constantly leads to innovations in office equipment and rapid obsolescence of products that had been successful in the past. While the industry is expected to con tinue to expand, only those companies with substantial resources of technol ogy will remain at the forefront in the manufacture, sale and service of in creasingly complex and-sophisticated product lines. SCM's present status as a major American company is toa large extent a result of its active participation and leadership in office equipment since 1956. The Company's technological competence in the three primary product lines of today--copiers, cal culators and typewriters--has been amply demonstrated over the past several years. Aided now by research and development capabilities in re lated technologies, together with on going internal product development programs, SCM will continue to share in the expansion of the office equip ment industry. TELECOMMUNICATIONS The communications electronics industry, though far smaller than office equipment, is also growing at an accelerating rate. A 242 per cent increase, from $1.3 billion to $4.2 GLD38613 5 Top: This is an experimental pattern recognition system devised to study the logic processes used by the human brain in recognition of twodimensional shapes such as written or printed characters on paper. The system makes use of several technologically advanced concepts including adaptive logic, integrated cir cuitry and fiber optics. The pattern read appears in the read-out matrix as shown in this picture made at SCM's research facility in Switzerland. The microphotograph below shows the surface of an ex perimental paper which de velops an image in a new and unique way under stimulation by electric current. The phe nomena associated with this process may find application in such areas as non-impact printing, facsimile systems and office copying. 6 billion, is projected for the 19661975 decade. Of course, a consider able portion of the manufacturing end of this business consists of "captive" manufactu ring for the companies engaged in message communication. In assessing the growth prospects of this segment of SCM's business, expansion of the business of data handling should also be considered. In this connection, the phenomenal growth in computers (from a handful to 55,000 installations in about 20 years) must be considered. The problems of feeding data into and taking data out of main frame com puters has created an industry ancil lary to computers, but one without which many of the advances the com puter is credited with would not have been achieved. Kleinschmidt's skill in data handling grew out of its capabilities in telecommunications. High-speed page printers, tape perforators and switching equipment are examples of the high-technology products turned out by this Division. Long a prime supplier of military teleprinters and related equipment to the Govern ment, Kleinschmidt Telecommunica tions has kept SCM abreast of and involved in the technology revolution in communications electronics. CHEMICALS SCM's technical strength in chem istry is of increasing importance to many parts of its total business. Or ganic chemicals, an industry esti mated to be growing at a compounded 6 per cent a year in its own right, consists of many segments, some of which grow even faster. It is increasingly apparent, for ex ample, that synthetic flavor oils will eventually replace natural oils In many of the foods, soft drinks, candy, chew ing gum and confectionery items sold today. Synthetic oils have many ad vantages over nature's own product for these applications: They are more stable during processing, have abso lute uniformity and contain none of the impurities and residues of the natural oils. Supply, of course, is not subject to the vagaries of the weather or politics when synthetic oils are used, and this is of key importance to the maintenance of manufacturing and delivery schedules. Synthetic products, based on organic chem istry, are likewise increasingly im portant to ethical drug, vitamin and perfumery products, all fields inwhich Glidden's Organic Chemicals Group has made significant progress. In the foods industry, when the Food Additive Amendment to the Food and Drug Administration Act was passed in 1958, experts expected the new law would require the registra tion of perhaps 300 food additives. Just ten years later, the number of substances in that category has ex ceeded 1,500, and is still growing as chemistry technology transforms the foods industry. An active technical staff In this important area has assured SCM a "ground-floor" posi tion in an expanding industry. World population growth has placed seemingly impossible de mands on food supplies. For example, there will simply not be enough cows to supply as basic a necessity as milk for a world population of 3,000,000,000. The demand for imitation dairy products and highenergy protein foods can only in crease as a result. These a re among product categories being developed at Durkee Foods aided by Glidden Chemistry for SCM in this rapidly growing area. In the field of inorganic chemicals Glidden is a technological leader In powder metallurgy, among other product categories. Metal powders as an Industry group are expected to grow at an accelerating pace as materials with high strength-toweight ratio become of increasing Importance in the automotive and metal-working industries. Automo biles produced in the U.S. typically use 80 to 100 separate parts made of compressed metal powders. Other applications for this new product seem to occur to manufacturers almost daily, with the result that SCM now estimates the total market for metal powders of the type it produces at about $55 million in 1968 and growing at about 10 per cent a year. POLYMERS Polymers, considered by many to be the fastest-growing industry group of all, is expected to grow 8.5 per GLD3861A .` r ' . .. l:~r-M<QrYo909a:<l ^.ny ' *' V>v cent a year to 1975, with total annual sales of close to $600 million by that time. Polymers are substances formed by a chemical process in which many small molecules com bine to form a large molecule. A vast variety of high-performance plastics, synthetic fibers, adhesives and other composites based on polymer research may be expected to transform whole industries in the future. The new Glidden polymer plantat Huron, Ohio will make possible contributions by SCM in this area. The Huron plant now produces sophisticated materials for use in complex coatings and resins for both consumer and industrial application. The rapidly growing adhesives segment also is supplied with poly mers, monomers and latices manu factured at Huron. The increased use of adhesives in structural materia Is of all varieties is a trend that will become even more pro nounced in the future. The total market for this product category is estimated at $144 million and growing at over 5 per cent a year, according to SCM studies. PAPER The paper industry, like chemicals, is a basic industry characterized by certain segments which are growing far more rapidly than others. The business forms industry, for example, is expected to exceed $1 billion in annual sales within the next two years, and to reach $1.8 billion by 1975. This is growth at approximately double the rate of the paper industry as a whole. Continuous forms, increasingly specialized in by Allied Paper, is expected to grow even faster as a product category. Certain other paper products in which SCM has important market positionsalso exceed the overall industry in annual rate of growth. Reprographic paper, such as that used in office copiers, represent a market for some two million tons of paper annually. Together with associated equipment, this output represents a value to the paper industry of over $1 billion. Angual growth in this area has been esti mated at 15 percent, as more than 15 billion sheets of coated paper move through office copiers each year. GRAPHIC ARTS The market for reprographic systems, long a prime area of SCM interest, is expected to continue its dramatic growth of recent years. In this category are information pro cessing, storage and retrieval, transmission, imaging and other aspects of handling data. The Company's technological position has been improved by acquisitions of the past year. Now, in addition to the work being carried forward at the Advanced Research Center in Switzerland, some elements of which are pictured on these pages, newer SCM operations are approach ing the problem from a different angle. Glidden research into resin binders has already proved useful, and the possibility that breakthroughs in organic chemistry may provide an entirely new approach to repro graphics must not be discounted. Allied Paper, in addition to being a leading supplier of reprographic papers, also has conducted promis ing research in the area. The acquisition of the Phoenixville, Pennsylvania Specialty Coating operation provides a laboratory atmosphere for testing new concepts in paper coating even while producing a significant proportion of SCM's coated-paper requirements. These new research and technical assets are increasingly integrated with existing capabilities in electron ics, electro-optics, electro-mechanics and copier research activities within the Smith-Corona Marchant Division. That Division's proven manufacturing and marketing organization makes it clear that SCM has the opportunity to continue its contributions to this industry. THE PRIME OBJECTIVE It has been demonstrated that every SCM Division commands re spect as a technological and market ing leader in the important growth industries SCM has chosen to enter. To achieve and develop this stature has been SCM's prime objective for a dozen years, and will remain our objective In the future. GLD38615 7 REVIEW OF OPERATIONS Office Equipment Office equipment, as an industry category, continued its remarkable expansion in 1968. While much of this growth was accounted for by increased sales and installations of main frame computers, peripherals and related softwares, the non computer-related aspects are ex pected to continue to expand at an equally satisfactory rate. Buyer's de termination to improve office proce dures, increase efficiency, and reduce costs will continue to provide support for business equipment generally. SCM activities in office equipment consist primarily of Smith-Corona Marchant Division operations in office copiers and supplies, office type writers, and desk calculators. OFFICE COPIERS AND SUPPLIES Placements of Coronastat copiers showed continued improvement in 1968 over 1967, but higher manu facturing and marketing costs, plus the deferred profitability of machines placed on Copy Service plans, com bined to hold down profits. Two new desk-top copiers, Model 66 and Model 88, were introduced in the second quarter and have met with gratifying acceptance in the mar ket place. SCM retained its position in the desk-top copier line despite greatly increased competition from a growing number of companies. In October 1967, SCM began man ufacturing its own zinc oxide-coated paper designed for use in Coronastat copiers. The new plant in eastern Pennsylvania will supply a substantial portion of SCM's overall coated paper requirements at a lower cost. There has been a marked improvement in weight and other characteristics of SCM's coated paper. Copy paper prices have continued under heavy pressure as competing paper suppliers attempt to establish themselves in this profitable and growing market. OFFICE TYPEWRITERS Smith-Corona introduced an allnew office electric typewriter in the first quarter, the Secretarial 315, 8 which was well-received by cost and quality conscious businesses. Pro duction has been somewhat delayed so that the full market potential of which the Secretarial 315 is capable has not yet been achieved. Changes in the traditional market structure for office typewriters, which will ben efit particularly this machine and SCM's250, have been reflected in a thorough realignment of our office typewriter marketing program. CALCULATORS The calculator segment of the office equipment industry has ex panded severalfold in recent years. At the same time, this segment re flects the impact of modern tech nology as electro-mechanical rotary calculators give way to printing cal culators and electronic models. The opportunity presented to com panies with well-established distribu tion and service organizations is clear. However, from a manufacturing standpoint, the new products require an engineering approach entirely new to the field. To focus Company efforts in this highly complex industry, Marchant Electronics was formed within the Smith-Corona Marchant Division. Marchant Electronics is energetically pursuing advanced developments in the calculator art and will provide assistance to other Divisions using electronic techniques. Scheduled for introduction about the time of publication of this Report is the Model 120, an electronic print ing calculator at a new low price for a machine with its features and flex ibility for desk-top computing. This new calculator reflects SCM's deter mination to keep Marchant Calcula tors the standard of the industry. Portable Typewriters SCM is the nation's leading producer of portable typewriters. Consumer preference for Smith-Corona por tables continued in 1968 as SCM ma chines achieved both higher salesand an increased share of the domestic market. Late in the fiscal year SmithCorona introduced the 210 Automatic Portable, an all-electric portable with a power carriage return, power spac ing and other new features. In recognition of the increased sales The small picture made at Marchant Electronics in Oak land, California shews a beam-lead semi-conductor device in a thick film circuit. The circuit, here enlarged 450 times, is being prepared for use in a new lino of elec tronic calculators In the early development stage. The large picture shows technology of a somewhat different cate gory--automation. The ma chine shown produces one of a great many typewriter subassemblies, untouched by an operator. In this case, the automated machine goes through assembling opera tions at 23 stations id turns out finished assemblies at the rate of 45 per minute. GLD38616  H t # GL038618 The facing page shows an other aspect of the Kleinschmidt Teleprinter, a code wheel for identifying the particular type character on the cylinder shown on the cover as it passes the print positions. Only when the light pulse from within the code wheel "opens the gate," by activating the photo-electric diodes, can the printing func tion be actuated. of portables by non-specialized deal ers such as department stores, a shift in marketing strategy was undertaken during the year. For the first time, almost 40 per cent of all dealers will be able to provide across the counter a complete line of SmithCorona portables. Sales should be significantly expanded as a result of this new marketing concept. Principal consumer products are portable typewriters and light duty adding machines, sold mainly for student, home, and small office use. ADDING MACHINES SCM markets a highly successful adding machine for home and busi ness use under the Figurematic brand. These adding machines, which are increasingly popular as a gift and premium item, are natural product companions to portable typewriters. Figurematic sales and profits were significantly improved in 1968. Telecommunications SCM expects the communications equipment industry to maintain its recent high rate growth. Industry sales are expected to triple between 1965 and 1975, reaching 4.2 billion by 1975. Computer remote terminals and associated support equipment will be a significant factor in this expansion. Kleinschmidt Telecommunications Division of SCM has demonstrated the technological capability to assume leadership in this growth industry. Kleinschmidt produces page printers, tape perforators, automatic switching equipment and related products. Although the bulk of its output is currently sold for military applications, the proportion sold to commercial users is increasing. The commercial market for Kleinschmidt systems and compo nents results from the proliferation of computer installations. Kleinschmidt's 311 Data Printer, for ex am pie, designed to fit directly into any telecommunication system, provides speeds of up to four times as fast as most other teleprinters and has shown great reliability even under extreme operating conditions. Kleinschmidt printers have already been established in the transporta tion industry. Airlines use them in connection with ticket reservation systems, for example, while the Federal Aviation Administration uses similar Kleinschmidt equipment to keep track of aircraft in air traffic control centers. A significant new product applica tion for the 311 Data Printer this year has been for rapid printout of re gional weather forecasts. The user is able to supply his client at more than 100 installations with more complete and up-to-the-minute weather forecasts because of the 31 l's greater printing speed. Kleinschmidt's latest innovation, the mobile-mounted Telescripter printer, has been the object of in creasing interest, especially by police departments around the country. The Telescripter printer can be plugged into any two-way radio and presents mobile units such as police and fire vehicles, railroad equipment, trucks, taxicabs, and doctors'and sales men's cars with a totally reliable printed message, even when the operator is not In his vehicle. The Division's operational plan callsfor expansion in present markets as a prelude to exploring new ones. With a constantly growing number of computers on-line, the burden on communications circuits is increasing rapidly. These problems Kleinschmidt equipment is designed to help solve. Chemicals Glidden's specialized chemical oper ations represent a growing percent age of SOM's total business. Included In those operations are organic chem icals, of which the most Important are synthetic flavor oils, fragrances, and other terpene-based chemicals. The balance is represented by a va riety of inorganic chemical products and materials. In the latter group are colors and pigments and certain building materials. ORGANIC CHEMICALS The Glidden-Durkee Division's Organic Chemicals Group is situated in Jacksonville, Florida. Originally devoted to production of "wood naval stores" (pine tar, pitch, pine oils and GLD38619 11 the like), the facility now produces a wide variety of terpene-based inter mediate and fine chemical products. A satellite plant, located in Port St. Joe, Florida and run almost entirely by computer from Jacksonville, produces tall oil derivatives. To some extent, results for this Group are related to raw material costs. In recent periods, shortages of raw materials have affected costs adversely while higher prices for finished products were not possible in most cases because of competitive factors. Continued introduction of new products with good potential is expected to continue to diminish the impact of raw material costs. New product development pro ceeds at a rapid rate in this high technology area of SCM's business; a significant percentageoftheGroup's sales is derived from products devel oped in the past five years, and most of these new productsare proprietary. Holding the greatest promise for rapid growth in organic chemicals is the expanding line of synthetic flavor and fragrance chemicals and syn thetic substances for use in ethical drug and vitamin manufacture. INORGANIC CHEMICALS Strikes in two facilities of Glidden's Pigments and Color Group affected the Group's earnings in fiscal 1968. Titanium dioxide and other inorganic pigments continued in high demand throughout the year.Jrowever.------- Of key importance to the future of this Group is the decision to expand titanium dioxide manufacture by con struction of a chloride-process plant. Currently, Ti02, a superior white pigment for use in the paint, paper, rubber and plastics industries, is pro duced by the Group by the sulfate process. The new highly automated plant will cost approximately $20 million and will increase production by 50 per cent. Glidden's Ceramics Group pro duces ceramic glazes and porcelain enamels for application as metal coatings and decorative tile finishes. This aspect of SCM's business--as is true of paints and specialty coatings --is related to the home construction industry, for which long-term pros pects for growth are good. 12 The small picture shows a distillation column for ana lyzing terpene substances at Glidden-Durkee's Organic Chemicals Group in Jackson ville, Florida. The process aids in identifying the com ponents of the raw material. The large photograph shows the exterior of the plant, the largest refinery of crude sul phate turpentine in the world. Through the use of modem organic chemical techniques, the crude tur pentine is refined into more than 50 basic products rang ing from synthetic flavor oils and perfume essences to pine oils and solvents. GLD38620 GLD38621 SCM's Allied Paper Division produces over 450 tons of pulp daily at its Southern Mill in Jackson, Alabama. The bulk of this output is put to use In one of Allied's four paper mills. This photograph of stacked pulp was taken in Kalamazoo, Michigan. Pulps of different grades and qualities are carefully blended in huge vats for the produc tion of a variety of paper products. GL038622 T Results of Glidden's powdered metals operation were substantially improved over last year. Part of the increase was due to the increased demand for copper powders resulting from the protracted copper strike (the strike did not otherwise affect SCM operations). The Metals Group ex pects to maintain and improve its position in the ever-expanding market for powdered metals. New grades of powdered iron were introduced by the Group during the year which have proved particularly useful in automobiles and home ap pliances. These powders, formed by compression and finished into solid masses at high temperature, provide economies in many manufacturing applications and greater strength and durability over machined parts. Although present industry capacity is somewhat more than adequate, demand is expected to increase 200 per cent over the next five years. Pulp, Paper and Paper Products Allied Paper Corporation became a part of SCM at the end of 1967. Allied is an integrated paper manufacturer and converter whose products range from pulp to greeting cards. There are five aspects of Allied's operations: Southern Mill Division, Kalamazoo Paper Mill Division, Allied/Egry Business Systems, Penrite Division, and Gates Paper, operating as a sales organization. As is true in other SCM Divisions, Allied Paper has concentrated on developments in the most rapidly growing parts of the industry. While the industry as a whole will grow at about the average rate for the econ omy in general, consumable office and educational supplies (pads, note books, pencils and the like) should grow more than three times faster. Similarly, the business forms indus try is expected to grow at twice the all-industry rate, and continuous forms for computer application some what faster still. PULP OPERATIONS Allied's Southern Mill Division in Jackson, Alabama is a modem in dustrial complex which produces 200 tons of fine paper and over 450 tons of pulp daily. Allied uses the bulkof its pulp output at its own paper mills and sells the small re mainder on the open market. Reflect ing conditions in the industry gener ally, resulting from a reduction in the rate of annual consumption increase and an unusual amount of expansion of production capacity, earnings in pulp and paper operations were reduced in fiscal 1968. Increasing integration in pulpoperations, and careful attention to the control and technical aspects of the pulping process, has enabled Allied to achieve quality standards in pulp that are the foundation of its fine paper and converting production. ALLIED/EGRY BUSINESS SYSTEMS Allied's subsidiary, Allied/Egry, is among the nation's largest producers of business forms, a converted paper product with excellent prospects for growth. As the volume of data proc essing increases, the need for business forms and particularly continuous forms, rises directly. To serve this growing market most efficiently, Allied/Egry has strategi cally located distribution centers and coordinated marketing functions in volving direct sales, associated dis tributors, and government sales. Business forms, a rapidly growing aspect of the paper industry, is in a transitional phase. This is reflected in competitive factors which affected SCM's business forms operations in 1968. Newly installed, higher-speed production equipment and expanded marketing programs should improve the competitive situation in coming periods. PAPER The market for fine quality book papers has also been expanding, re flecting in part increased education expenditures by Americans. Federal aid to education programs, for ex ample, have been a great stimulus to the book trade. There is also a vastly increased demand for books of all kinds as Americans fill more leisure hours by reading. Allied Paper has produced book paper for over half a century and is the recognized leader in the special lightweight paper used in diction aries, encyclopedias and Bibles. But even though books currently repre sent the most important market for these papers, the integration and plant expansion recently completed has made possible the production of other fine quality printing papers. Using a newly installed, advanced blade coater of substantial capacity. Allied is now supplying lightweight paper of superior print quality and texture. Higher postage rates for magazine publishers and direct mail advertisers will make Allied's proven abilities in lightweight papers even more important in the years ahead. A dictionary to be published in 1969 will use a specially developed light weight paper by Allied. Allied is also a leading manufac turer of electrostatic copier paper base stock. Before its association with SCM, Allied had already con ducted research into the art of elec trostatic, dielectric and other copy ing processes. The addition of Allied's effort to the reprographics research and development of other Divisions is being pursued. PAPER CONVERTING Educational and office consumable supplies are manufactured by the Penrite Division, the fourth principal part of Allied Paper. This js another rapidly expanding segment of the paper industry, both because of increased numbers of students and vastly larger numbers of white-collar workers in America. Agrowing line of stationer's supplies is marketed by Gates Paper. Construction papers, in 30 bright colors, are also provided for sale to artists, advertisers and schools. In a related converted prod uct area, Allied introduced a line of contemporary greeting cards fordistribution through franchised dealers in 1968. Coatings and Resins The coatings industry is a large and important segment of American in dustry with over $2 billion in sales annually. Although its size precludes large percentage increases each year, resourceful firms, utilizing new tech nology, are able to grow rapidly within the industry. SCM's Coatings and Resins Group GLD38623 15 Both the domestic and for eign automotive industries are prime markets for electrocoating materials. This pho tograph made near Tokyo shows a truck body manu factured by Nissan Diesel Industries Ltd. The vehicle, having emerged from the electrocoating bath, is under going a baking operation in which the coating is dried. Glidden pioneered in the de velopment of electrocoating, a process in which coatings may be applied with absolute uniformity even to the most inaccessible crevices and niches. The lower picture on this page shows a metalescent paint, later to be used in electrocoating operations, being mixed in an experi mental coating laboratory in Chicago. SCM's San Francisco Coat ings and Resins plant is viewed (upside down and backwards) through a new clear resin developed by Glidden research. Resins this clear, the product of years of research, are expected to have particular applicability in casting resins for architec tural materials. experienced very substantial sales growth and profit improvement in 1968. Most of the increase came from successful introduction of new and advanced products, marketing and distribution efficiencies, and continued emphasis on manufactur ing cost reductions. Apart from its size and degree of competition, the coatings industry is remarkable for the rapidity of change it continues to see. Both the new demands imposed on protective coatings (resistance to corrosion and abrasion and ease and speed of appli cation) and the complex chemicals developed to meet these needs have made the industry a full-fledged member of the organic chemicals industry. Typical of new products is a floor coating that will withstand a bath of 30 per cent sulfuric acid, and a long-molecule latex-based interior house paint that can be applied in one coat that dries in half an hour. Resins for these products and many others are manufactured by polymeri zation techniques. Complex additives and vehicles and a variety of special pigments are required in the manu facture of modern coatings, using highly advanced process control techniques. Synthetic and modified natural resins are an important part of the technology of coatings manufacture. SCM's Glidden-Durkee Division pro vides its own resios for this purpose in a new polymer plant, as well as in processing units located within coatings plants. The new polymer plant, located at Huron, Ohio also produces co-polymers, specialty monomers and latices. One leading scientist has predicted that these substances will in time become the basic structural materials of our civi lization. This promise is reflected in recent growth In this industry. Sales of Glidden coatings and resins consist primarily of industrial sales to manufacturers who apply. Glidden coatings to coil stock, metal products, can linings, etc.; trade sales direct to the homeowner, professional painters and painting contractors; and Macco Adhesives, which pro duces a variety of products for the building and construction industry. GLD38625 i17 Research has played a significant role in Glidden's success in the coat ings and resins industry. This re search will continue under optimum conditions with the completion this fall of the new Research Center at Strongsville, Ohio. The facility will house 250 scientists, technicians, and other employees. Designed with separate wings for Foods and Coat ings and Resins activities, the new facility will aid substantially in the maintenance of the Glidden and Durkee names as synonymous with technology. New product introductions by Glidden in 1968 include NewSpred Satin, the first major improvement in latex-based paint since Glidden invented it; a new line of exterior house paints; and several new stateof-the-art products in the industrial coatings category. Macco Adhesives finds its markets primarily in the construction industry. The long-term outlook for new hous ing must be regarded as bright in view of continued increases in popu lation growth, family formation rate and disposable personal income. The current decline in the rate of housing starts is expected to last through fiscal 1969 and is primarily a result of economic conditions in that industry. Appliances Sales by the total housewares industry are estimated at well over $12 billion annually. SCM activities are concen trated in a segment of the industry with a particularly high rate of growth: small electric housewares with cur rent annual sales of over $2 billion. Application of technology in the appliance industry has taken two primary forms: development of new, proprietary products and manufactur ing efficiencies. In the first category, Proctor-Si lex's innovation, the "Life long" appliance, received favorable attention from department store and appliance dealers as well as con sumers. In the second category, 1968 was a year in which further perfection of mass production methods reduced costs and improved profit margins. SCM, through Proctor-Silex, has specialized in toasters, coffee-makers, irons and ironing tables. Through 18 Shetland Floor Care Products, a part of the Proctor-Silex Division, SCM produces a wide range of products in the $500 million floor care industry. 1968 results for Proctor-Silex ap pliances continued the favorable trends established in earlier periods. National distribution of "Lifelong" irons, toasters and coffee-makers-- Appliances made up of easily as sembled, readily obtainable parts-- was completed during the year. The new design virtually assures the end of repair shop service for these appliances. The "Lifelong" feature Is credited by Proctor-Silex as the prime factor behind doubling its share of the market for electric percolators. Proctor will introduce this fall a full line of "push button" blenders which should result in a substantial volume increase in the next year. PROCTOR & SCHWARTZ Proctor & Schwartz, a part of Proc tor-Silex, was affected in the year by continued pressures against capital investment. Proctor & Schwartz pro vides systems controlled, continuous process equipment for the food, chem icals, textile and tobacco industries. Proctor is a Iso among the world's leading manufacturers of processing machines for the rapidly growing nonwoven fabric and Indoor-outdoor carpeting industries. The impact of technological change is particularly pronounced in continuous process equipment. Changes in processing techniques and the development of new products will require more and more of the type equipment that Proctor & Schwartz manufactures. Foods The foods industry is the largest business in America. Total sales in 1967 reached $96.5 billion and will easily exceed $100 billion in calendar 1968. Rising levels of disposable personal income make it possible for Americans to eat better at less cost in terms of the percentage of income spent on food. Spending on food is expected to account for 17.3 per cent of disposable personal in come in 1968, compared with 20 per cent as recently as a decade ago. A corollary trend to rising income levels is the desire for the elimination of as much home food preparation as possible. This has led and will continue to lead to a demand for packaged convenience foods and food services that make it possible for the modern homemaker to serve flavorful meals that are quick and easy to prepare. SCM, through Durkee Foods, serves the food industry in three ways. Pro portioned and pre-processed entree items along with sauces, cooking oils and packaged snacks are sold to restaurants, institutions and other elements of the food service business. Consumer foods and spices are sold directly to the consumer through food stores across the country. In dustrial food products are sold to food processors such as the baking and confectionery industry, margar ine manufacturersand manufacturers of dairy product substitutes. FOOD SERVICE Food service is the part of the food industry growing most rapidly today. More than one out of every four meals served in the United States are pre pared and served away from home-- In restaurants, drive-ins, schools, institutions, hospitals and the like. The number is expected to become one In three by 1975, resulting in annual food service sales in excess of $30 billion. . Of key importance to the future of food service industry Is the in creasing qualify and acceptability of pre-processed meals. Pre-processed meals served by airlines and other in-transit feeders have received wide passengeracceptance a nd are becom ing the standard. Dietary kitchens in modern hospitals are designed completely around this concept. Durkee uses the latest techniques of food preparation to produce portion controlled, pre-processed entree items that are as tasty as if cooked to order by a master chef. Added to the convenience and economy of pre-processing, this good taste will provide the basis for a growing dominance of the overall food market by the food service segment. INDUSTRIAL FOODS The largest of the three Durkee operations is in industrial foods. The GLD38626 Technology has made SCM's Proctor-Silex Division a uniquely efficient producer of small electric home appli ances. Highly automated manufacturing processes, represented by this final test line for electric toasters, are one demonstration of the efficiency of Proctor-Silex manufacturing operations. But technological ability not withstanding, there is just one way to make sure a toaster will work--put a piece of bread in it and see that it pops up at exactly the right time to give the goldenbrown color that customers are looking for. GLD38627 19 developing technology of food chem istry in the past two decades has had a substantial impact on food process ing and nowhere is this more strik ingly evident than in the refining and processing of edible oils. Chemistry has become basic to the industry over that period and Durkee scientists have been at the forefront of the develop ment effort. The result has been the creation of a wide range of completely new industrial food products and innovations in consumer foods now considered commonplace: artificial creamers, whipped toppings, lowcalorie desserts, and confectionery coatings are but a few of the betterknown products. In this aspect of the food business, vegetable oils such as soybean and cottonseed oils are subjected to many of the processes common to petro leum refining, including catalytic reforming, fractional distilling, hydro genation and similar processes. The resulting substances, with the addi tion of chemicals and with additional processing, form the basis of an expanding variety of processed foods. 1968 was a particularly good year for the Industrial Foods Group as sig nificant progress was made in increas ing the portion of its oil through-put converted into more exotic products, many exclusive with Durkee. Other industrial food products are based on spices,_natural_and synthetic flavors and other natural products, prepared or formulated to meet particular re quirements of food processors. CONSUMER PRODUCTS Continued improvement in manu facturing and marketing techniques, and increased sales of Durkee spices reflecting these techniques combined to make 1968 an improved year for Durkee Foods. In addition to spices packaged for the consumer, Durkee's well known 0 & C brand French Fried Onion Rings and Durkee sauces and gravy mixes continued to develop a strong consumer franchise. Of these, sauces and mixes in particular show technology at work. Both product groups are the result of flavor chem istry and edible oils research con ducted within the Glidden-Durkee Division. 20 Another thing for which no technology has yet devised a satisfactory substitute is the human hand. The manu facturing process forthese frozen hors d'oeuvres from the Kitchens of Gretchen Grant is almost totally auto mated. But the machine has yet to be devised that can give these hors d'oeuvres the extra non-uniform twirl that seems to make each one an individual taste experience. This spotless kitchen is at Maplewood, New Jersey. GLD38628 GL038629 MARKETS Office Equipment and Related Consumer Products Telecommunications Equipment Organic and Inorganic Chemicals Pulp and Paper Products Coatings and Resins Household Appliances Industrial Process Equipment Foods TRADE NAMES /Jill* i! *Vf t ' - 'f i'f ! iii 1 ; 11M111 lit*. 22 GLD38630 fWW"' PRODUCTS BBS Italics indicates all or a significant portion of the output is marketed directly to consumers. GLD38631 23 FINANCIAL REVIEW Sales: Total net sales were $744.8 million, up 6% over last year's $705.2 million. Of the Company's five Divisions, all except Kleinschmidt were above last year. The other four Divisions each had about the same percentage in crease in sales. Among individual product lines showing sizeable in creases were office copiers and Proctor-Silex appliances. Earnings: Net income after taxes, but before extraordinary items, was $17.8 mil lion, a decrease of 29% from last year's $25.1 million. As stated in the President's Letter to Shareholders, the decrease was general and due to a variety of causes. All of the Company's five Divisions operated on a profitable basis during the year. Glidden-Durkee Division profits were ahead of last year, but profits of the other Divisions were lower. Increased cost pressure and some dips in demand were experi enced in office equipment and port able typewriters. Government backlog in the Kleinschmidt Division de creased, and Allied Paper experi enced cost and price pressures com mon to the paper industry during the year. The Shetland operation, ac quired last year, had a high cost of operation. On the other hand, the food business performed very well, and coatings and resins also had a good year. Results for the Pigments & Color Group were affected by strikes of 46 and 24 days in the titanium dioxide and cadmium color plants respectively. Overall manufacturing costs and other expenses were slightly higher as a percentage of sales, and Interest expense was substantially higher. Of the increase in interest expense, about half was due to the costs associated with the acquisition of the shares of The Glidden Company (see below), a portion of which are non-recurring, and the balance was due to increased 24 working capital borrowing and higher interest rates. SCM's tax rate on ordinary income was 42.4%, about the same as last year. This rate results partly from lower taxes on foreign and certain other earnings, but principally from $1.3 million of investment tax credit. From the beginning, the Company has elected the `'flow-through" method of recognizing the investment tax credit. Extraordinary Items: During the year a number of actions were taken to discontinue unprofit able or marginal operations. The prin cipal step was the discontinuance in January, 1968 of the Company's Data Processing Operations. In addition, an extraordinary credit arose from the conformance of Allied Paper account ing to SCM's practice in valuing in ventories. In accordance with current accounting practice, these extraor dinary items are deducted in arriving at net income but are shown sep arately and net of their tax effect. Earnings Per Share: Net income before extraordinary . items was $2.22 per share, a decrease of 26% from the preceding year's $3.01 per share, based on 8,282,000 average shares outstanding this year and 7,841,000 average shares out standing fiscal 1967. Average shares outstanding are computed on the basis of the present capitalization, with retroactive adjustments for pool ings of interests, stock dividends, and shares issued in retiring tempo rary financing of Glidden shares acquired. A part of this recapitalization in volved the issuance of convertible debentures. If these were all con verted and all outstanding employee stock options exercised, net income per share would be reduced from $1.65 to $1.62. Dividends: The cash dividend rate was in creased 50% in the first quarter of the year to an annual dividend rate of 60$ a share. In addition, our policy of stock dividends was continued with the issuance early in the year of a 3% stock dividend. Return on Investment Operations generate almost $4 in sales for every $1 of shareholder equity invested in the business. This is a relatively high utilization of assets. However, profit return on these sales dollars was low, and, as a result, the return after taxes from operations on average shareholder Investment was 9%, a somewhat lower figure than we should be achieving. Increase in working capital was less than in the previous year and was in line with sales increases. During the current year the Company moved into new Corporate head quarters in New York City. In August, we purchased an important new plant in eastern Pennsylvania equipped to coat copy paper for Coronastat copiers. Also during the year the Company disclosed plans for three future major plant programs: a tita nium dioxide plant utilizing the new chloride process, a new edible oil refinery, and relocation and expan sion of certain of our appliance manufacture. Recapitalization: At the beginning of the year the Company purchased 30% of the shares of The Glidden Company from a shareholder who had acquired them earlier through a tender offer. The shares were purchased with the pro ceeds of temporary financing, due in one year. SCM Corporation then issued shares of its common stock for the remaining shares of The Glidden Company In a merger treated as a pooling of interests. The tem porary financing and some other short-term borrowings were retired through the sale of 589,880 shares of common stock in November 1967, $41,489,300 of convertible sub ordinated debentures and $20 million of sinking fund debentures in May 1968. The issuance of these securi ties was partof the program of merger with The Glidden Company. On December 31,1967 the Com pany acquired the assets of Allied Paper Corporation in a pooling of in terests. GL038632 SCM CORPORATION STATEMENT OF CONSOLIDATED INCOME Net Sales................................................................ Costs and expenses: Cost of sales..................................................... Selling, administrative, and research expenses Interest expense--net ................................... Income before income taxes................................. United States and foreign income taxes............... Income before extraordinary items........................ Extraordinary items................................................. Net Income.............................................................. Earnings per share: Income before extraordinary items.................. Extraordinary items.......................................... Net income....................................................... Years Ended June 30, 1968 June 30, 1967 $744,758,000 $705,160,000 532,291,000 169,828,000 11,819,000 713,938,000 30,820,000 13,061,000 17,759,000 4,700,000 $ 13,059,000 499,132,000 156,656,000 5,746,000 661,534,000 43,626,000 18,550,000 25,076,000 $ 25,076,000 $2.22 .57 $1.65 $3.01 $3.01 SCM CORPORATION STATEMENT OF CONSOLIDATED SOURCE AND APPPLLIICCATION OF FUNDS Source of funds: Net income.............................................................. Depreciation and depletion................................... Provision for deferred income taxes...................... Amortization of deferred charges and intangibles . Cash flow from operations........................ Net increase from issuance of long-term debt.... Sale of common stock............................................ Stock issued for net assets of companies acquired Total............................................................ Application of funds: Net capital expenditures........................................ Reduction of long-term debt................................. Cash dividends........................................................ Other applications, net.......................................... Increase in working capital................................... Total............................................................ See accompanying notes to financial statements. $ 13,059,000 17,807,000 383,000 236,000 31,485,000 3,512,000 23,834,000 $ 58,831,000 $ 27,818,000 8,437,000 4,763,000 3,163,000 14.650,000 $ 58,831,000 $ 25,076,000 15,384,000 2,703,000 431,000 43,594,000 40,667,000 993,000 5,578,000 $ 90,832,000 $ 36,116,000 4,382,000 8,782,000 1,140,000 40,412,000 $ 90,832,000 GLD38633 I 25 SCM CORPORATION CONSOLIDATED BALANCE SHEET Assets Current assets: Cash.......................................... Marketable securities--at cost Accounts receivable--net Inventories ............................... Prepaid taxes and expenses . . Total current assets . Property, plant and equipment--net Other assets.................................... Total.................................... Liabilities and Shareholders'Equity Current liabilities: Loans payable to banks................................... Accounts payable and accrued liabilities United States and foreign income taxes......... Deferred revenue on maintenance agreements Long-term debt payments due within one year Total current liabilities............................... Deferred income taxes............................................ Temporary financing of Glidden shares acquired . Long-term debt........................................................ Shareholders'equity............................................... Total............................................................ See accompanying notes to financiat statements. June 30,1968 June 30, 1967 $ 13,725,000 601,000 109.531.000 182.687.000 4,038,000 310.582.000 148.152.000 11,275,000 $470,009,000 $ 14,640,000 2.971.000 102.615.000 181.280.000 4.159.000 305.665.000 138.141.000 7.596.000 $451,402,000 $ 18,613,000 56.783.000 902,000 5.951.000 6.615.000 88.864.000 10.796.000 161.115.000 209.234.000 $470,009,000 $ 23,631,000 58.389.000 8.756.000 5.588.000 2.233.000 98.597.000 10.413.000 66.867.000 98.124.000 177,401,000 $451,402,000 26 GLD38634 BBS DETAILS DF BALANCE SHEET ITEM5 Accounts receivable: Due from customers........................................................................................ Less allowance for doubtful accounts.............................................................. Net accounts receivable........................................................................... June 30,1968 $112,381,000 2,850,000 $109,531,000 June 30, 1967 $105,431,000 2,816,000 $102,615,000 Inventories, at the lower of current cost or market: Raw materials and work in process.................................................................. Finished goods .................................................. ............... ............................. Total inventories........................................................................................ $ 77,126,000 105,561,000 $182,687,000 $ 83,236,000 98,044,000 $181,280,000 Property, plant and equipment: Cost: Land and mineral deposits......................................................................... Buildings ................................................................................................... Machinery andother equipment . . .......................................................... Total cost............................................................................................. Less accumulated depreciationand depletion............................................... Net....................................................................................................... $ 9,284,000 70,458,000 204,576,000 284,318,000 136,166,000 $148,152,000 - $ 9,392,000 67,596,000 183.301.000 260.289.000 122.148.000 $138,141,000 Long-term debt: 5%% sinking fund debentures due 1972-1987.............................................. 5Vi% sinking fund debentures due 1969-1983 .............................................. 7Vi% sinking fund debentures due 1973-1988 .............................................. Bank term loans due 1969-1978 interest at prime rate plus a fraction......... Notes payable to insurance companies due 1969-1979 ................................. Other loans........................................................................................................ 5V2% convertible subordinated debentures due 1978-1988 ....................... Total long-term debt.................................................................................. $ 20,000,000 22,500,000 20,000,000 41,000,000 10,125,000 6,001,000 41,489,000 $161,115,000 $ 20,000,000 23.995.000 28,000,000 11.375.000 14.754.000 $ 98,124,000 GLD38635 27 NOTES TO FINANCIAL STATEMENTS Principles of Consolidation The consolidated financial statements include the results of operations of all wholly owned operating subsidiaries. In December, 1967 Allied Paper Cor poration was combined into SCM in ex change for 606,754 shares of SCM com mon stock. This transaction has been treated as a pooling of interests and the 1967 financial statements have been re stated to include Allied. U.S. Income Taxes The Company is contesting deficiencies in income taxes asserted against Allied Paper of approximately $4,600,000. No provision has been made in the financial statements for such additional taxes since management and tax counsel be lieve that it is impracticable to estimate the amount of such additional taxes which may be paid. Further, manage ment believes that any additional taxes would not have a material effect on SCM's financial position and would have no effect on the results of operations for subsequent years. Long-Term Debt During the next five years long-term debt maturities will be: 1969, $6,615,000; 1970, $11,269,000; 1971, $12,966,000; 1972, $14,370,000; 1973, $14,973,000. Under the most restrictive provisions of the loan agreements, at June 30, 1968, $10,000,000 of retained earnings was available for cash dividends. Capital Stock The authorized capital stock of the Com pany consists of 500,000 shares of pre ferred stock, par value $50 each and 15,000,000 shares of common stock par value $5 each. At June 30, 1968 8,297,204 shares of common stock were issued and out standing, 397,707 shares were reserved for issuance under the Company's stock option plans, and 855,450 shares of common stock were reserved for issu ance upon conversion of the subordi nated debentures. Allied Paper Corporation stock options outstanding at the merger date were converted into options to purchase SCM common stock and no additional options may be granted under the Allied plan. During the year options to purchase 119,549 shares were granted, options for 39,310 shares were exercised and options for 21,673 shares were can celled. At June 30, 1968 options for 336,877 shares were outstanding. Op tions granted prior to January 1, 1964 were at 95% of the fair market value of the stock on dates granted; all other op tions were granted at the fair market value on the dates granted. Extraordinary Items The sale of the Company's data systems operations in January 1968 resulted in an after tax loss of $4,750,000 ($.57 per share). The Company also disposed of certain other assets which resulted in a net after tax loss of $700,000 ($.09 per share). Allied Paper formerly used the LIFO method for determining costs of certain inventories. To conform to the SCM prac tice of using current costs, the Company changed to the FIFO method of deter mining cost. The after tax effect of re valuing opening inventories on this basis increased net income by $750,000 ($.09 per share). Earnings Per Share Earnings per share assuming the con version of debentures and exercise of outstanding options, with related adjust ment for interest net of tax, were: .. Income before 1968 1967 -------- -------- extraordinary items $2.12 $2.81 Extraordinary items .50 -- Net income $1.62 $2.81 Retirement Plans The Company has several pension plans covering substantially all of its em ployees. During the year the actuarial cost method and actuarial assumptions used to determine pension cost under the Glidden plan, which continued in effect after the merger with SCM in 1967, were changed to conform to the method and assumptions used in the SCM plans. In addition a change was made in the method of recognizing unrealized appre ciation in the value of investments in the pension funds. Primarily due to these changes, no pension provision was re quired in 1968 under current accounting practice. Had the changes not been made, net income would have been lower by $300,000 ($.04 per share). There are no unfunded vested benefits as of June 30,1968. Commitments At June 30,1968 the Company's annual rental for real property under leases ex piring after June 30,1971 was approxi mately $8,000,000. These leases have varying expiration dates through 2017. This obligation will decrease by about $2,000,000 by 1975 and by an addi tional $2,000,000 by 1985. 28 GLD3 8636 BBB SCM CORPORATION STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY, Year Ended June 30, 1968 Common Stock Additional Paid-in Capital Retained Earnings Total Shareholders' Equity Balance at beginning of year, as restated . .. . Net income ................................. Cash dividends ................................. Stock dividends................................................. Sale of common stock under option plans . . . . Costs in connection with pooling.................... Sale of common stock on exercise of rights, less costs........... Balance at end of year.................................... See accompanying notes to financial statements. $37,309,000 $ 70,547,000 1,031,000 197,000 9,779,000 768,000 (297,000) 2,949,000 19,920,000 $41,486,000 $100,717,000 $69,545,000 13,059,000 (4,763,000) (10,810,000) $177,401,000 13,059,000 (4,763,000) 965,000 (297,000) 22,869,000 $67,031,000 $209,234,000 AUDITORS REPORT To the Stockholders SCM Corporation Haskins & Sells Certified Public Accountants Two Broadway New York, N.Y. 10004 We have examined the financial statements of SCM Corporation and its subsidiaries for the year ended June 30, 1968. Our examination was made in accordance with generally ac cepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the accompanying consolidated balance sheet and the statements of con solidated income and consolidated shareholders' equity present fairly the financial position of the companies at June 30, 1968 and the results of their operations for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year, and the accompanying statement of consolidated source and application of funds presents fairly the information shown therein. August 19, 1968 Haskins & Sells GL038637 29 SCM CORPORATION TEN YEAR STATISTICAL SUMMARY All dollar amounts presented in thousands, except figures Inrnme Net sales............................................. Income before income taxes............. U.S. and foreign income taxes............. Income before extraordinary items . . . . Extraordinary items, net of tax............. Net income............................................. Dividends on common stock............... Income reinvested ............................... Depreciation and depletion.................. 1968 $744,758 30,820 13,061 17,759 (4,700) 13,059 4,763 8,296 17,807 Per Common Share Income before extraordinary items ... Net income............................................. SCM cash dividends............................. Stock dividends .................................... Cash flow from operations.................... Book value............................................. $ 2.22 1.65 .60 3% 3.87 25.22 Financial Pn^itinn Working capital...................................... Property, plant and equipment--net . . Total assets ........................................... $221,718 148,152 470,009 Other Statistics Net capital expenditures...................... Return from operations on equity......... Return from operations on net sales . . . Current ratio........................................... Number of employees........................... Number of shareholders...................... Average common shares outstanding . . $ 27,818 8.5% 2.4% 3.50 33,200 47,500 8,282,000 1967 $705,160 43,626 18,550 25,076 -- 25,076 8,479 16,294 15,384 $ 3.01 3.01 .40 3% 5.41 23.13 $207,068 138,141 451,402 $ 36,116 14.1% 3.6% 3.10 33,100 45,600 7,841,000 1966 $644,787 40,408 18,956 21,452 1,207 22,659 7,666 14,474 12,835 $ 2.68 2.83 .30 2Vi% 4.92 26.60 $165,245 108,680 382,329 $ 22,435 9.8% 3.3% 2.84 31,300 47,000 7,455,000 1965 $558,393 29,431 14,070 15,361 403 15,764 5,547 8,934 11,821 $ 2.04 2.10 5% 4.47 25.52 $143,484 107,727 331,223 $ 14,701 7.7% 2.8% 3.03 29,900 42,500 6,391,000 30 GL038638 jiven on a per share basis. All amounts restated for poolings of interests, except dividends. 1964 $470,633 22,921 11,140 11,781 -- 11,781 4,920 5,624 11,484 1963 $453,126 20,066 9,188 10,878 -- 10,878 4,663 5,335 12,042 1962 $429,315 20,416 9,524 10,892 912 11,804 7,592 3,794 10,795 1961 $392,970 12,737 6,513 6,224 (85) 6,139 4,622 1,316 11,989 1960 $366,128 16,108 6,830 9,278 351 9,629 4,719 4,881 10,699 $ 1.53 1.53 3% 3.71 25.53 $ 1.45 1.45 3% 3.71 24.64 $ 1.53 1.68 2% 3.69 24.00 .82 .81 2.60 23.01 1.33 1.38 _ 3.13 23.17 $138,389 104,028 319,261 $134,885 103,909 301,084 $115,434 107,652 293,800 $114,497 102,213 280,354 $110,885 107,703 273,991 $ 11,631 6.2% 2.5% 3.08 25,900 37,500 5,207,000 $ 6,876 6.0% 2.4% 3.51 24,900 37,200 6,193,000 $ 16,235 6.6% 2.5% 2.83 24,200 41,400 6,173,000 $ 6,198 4.1% 1.6% 2.97 22,900 37,700 6,149,000 $ 20,572 6.0% 2.5% 3.26 22,200 38,600 6,141,000 1959 $353,330 16,416 8,601 7,815 295 8,110 6,158 1,913 9,847 1.10 1.15 2.77 22.69 $112,453 97,824 254,793 $ 14,412 5.2% 2.2% 3.90 21,500 36,800 6,062,000 GLD3B639 ! 31 BBS CORPORATE DATA Directors Emerson E. Mead, Chairman* Richard C. Bond John T. Booth George F. Burns Lewis H. Durland Paul H. Elicker* George E. Hall Ward D, Harrison Wallace W. Knox Paul W. Neidhardt Crocker Nevin Walter M. Schwartz, Jr. Elwyn L. Smith* James M. Symes* George S. Warner William I. Myers, Emeritus* Member of Executive Committee Corporate Officers Emerson E. Mead President G. Robert Boiler Vice President-Corporate Development George F. Burns Vice President; President, Smith-Corona Marchant Division Emilio J. Cadamagnani Vice President; President, Kleinschmidt Telecommunications Division William V. Cawley Treasurer Paul H. Elicker Vice President-Finance Donald E. Erskine Vice President-Controller George E. Hall Vice President and General Counsel; Secretary Ward D. Harrison Vice President; Chairman, Allied Paper, Incorporated Richard B. Le Vino Vice President-Research Paul W. Neidhardt Vice President; President, Glidden-Durkee Division Walter M. Schwartz, Jr. Vice President; President, ProctorSilex Division Robert W. Holmes Vice President John E. Wilson Vice President Transfer Agents Marine Midland Grace Trust Company of New York 140 Broadway, New York, New York 10015 Bank of America National Trust & Savings Association 300 Montgomery Street, San Francisco, California 94104 Registrars Manufacturers Hanover Trust Company One Whitehall Street, New York, New York 10015 United California Bank 95 Hawthorne Street, San Francisco, California 94105 Corporate Headquarters 299 Park Avenue, New York, New York 10017 Telephone: 212-752-2700 Annual Meeting The Annual Meeting of Shareholders will be held at 9:30 a.m. on October 17,1968, at the Company's Plant, 3901 Hawkins Point Road, Baltimore, Maryland. Ttw text of this report on printed In the U.SA. on Laurel Dull--Basis lOOtb stock, manufactured by Allied Paper. 32 GLD38640 GLD38641 SCM Corporation 299 Park Avenue New York, N.Y. 10017 GL 038642