Document M2pYJRG5maQXaX0B1mxON8gx

(. ontenls I l 'i 11'i to Sinnehnlileis C Datings and Rosins I \pcvviiters and Appliances 1 OOlls C hetnicals R.ipoi Products Business { t|utpnu`nt < )thei 1 in.inci.il Sex lion I in.nu i.tl Rev ievx 1 oi ^ imi Sunuu.m Operating Businesses ()l I iceis and Piiexlois C oi pm.ite Data illsl.li- i>.U k I'!J i " * r ' ii.ij v \ ,Y j Financial Highlights (Ail dollars in millions, except per share data) Years ended June 30 1976 1975 % Increase (Decrease) Operating highlights: Net sales Income before income taxes United States and foreign income taxes Net income Earnings per share: Net income Net income assuming full dilution Additions to property, plant and equipment Depreciation Cash dividends per share $1,331.9 53.7 23.3 30.4 3.30 3.04 38.7 38.2 .675 $1,287.5 42.1 14.2 27.9 3.04 2.83 87.1 33.1 .50 3 28 64 9 9 7 (56) 15 35 At year end Financial position: Working capital Property, plant and equipment, net Total assets Long-term debt Shareholders' equity Statistical data: Number of shareholders Common shares outstanding Number of employees $ 287.9 251.3 740.1 210.4 313.6 44,900 9,162,000 27,100 $ 251.6 258.9 704.1 214.5 289.4 47,500 9,157,000 26,300 14 (3) 5 (2) 8 (5) 3 SCM Corporation is a diversified manufacturing company whose products are sold in consumer, industrial and office markets. SCM's strongest operations are in four basic indus tries: coatings and chemicals, foods, pulp and paper and consumer products. Products for the office and government markets are less important than they once were. About half of SCM's products are recognizable to the consumer. They include Smith-Corona typewriters, Glidden paint, Durkee foods and Proctor-Silex appliances. SCM has 21 operating groups (see page 43 for a list) competing in over 100 product lines. About 27,000 people work in our 72 principal manufacturing locations in the U.S. and around the world. 6LD30875 < To the Shareholders 1976 marked the third consecutive year of record results for SCM Corporation. Net income, earnings per share and sales were again higher than the pre ceding year. This record was continued despite a tur bulent economic period marked by inflation, short ages and the most severe recession in four decades. In fiscal 1976, net income increased 9 per cent to $30.4 million, or $3.30 per share, up from $27,9 mil lion, or $3.04 a share in 1975. We were able to achieve this increase in net income even though our effective tax rate was a more normal 43.4 per cent last year, up from 33.7 per cent in 1975. Sales were slight ly higher than last year's $1.3 billion. Profit margins improved to 2.3 per cent of sales from 2.2 per cent in 1975. A basic objective has been to raise profit mar gins, and they have improved each year since 1970 (except 1975 when they declined only slightly). Here are some highlights of fiscal 1976; Typewriters and Appliances (Smith-Corona and Proctor-Siiex) provided a good example of the reces sion hitting different products at different times. Typewriters were one of the last products to experi ence the economic downturn and one of the first to recover. Appliances, by contrast, suffered an early and steep decline when the recession hit in late 1974 and nine months passed before this business felt the effects of increased consumer spending. For the third consecutive year. Allied Paper was the leading contributor to SCM's profits. Once again, our Jackson, Ala., pulp mill operated at capacity; howev er, Allied's profit was down substantially from 1975's record level in large measure as a result of lower margins in all operations. In the past four years, Durkee Foods has undergone a major turnaround. In 1972 this business was unpro fitable; in 1973 and 1974 it was marginally profitable; and it had operating income of $6.1 million in 1975. Last year Durkee had record operating income of $14.9 million, aided by the second consecutive record year for Consumer Foods. Coatings ami Resins, SCM's largest business, start ed to recover from the recession early in calendar 1976 and showed improvement over fiscal 1975. Chemicals recovery was slow, both in organic prod ucts, due to low demand, and in inorganic products, due to inability to recover increased raw material and energy costs. Continued improvement in market con ditions is expected to result in higher sales and prof its next year. Business Equipment was SCM's only unprofitable line of business last year, although its losses were reduced appreciably from 1975. As a result of changes that have been made over the past two years, we expect that losses will again be reduced in 1977. As the table on page 29 shows, SCM is today a better balanced, and therefore a stronger company, than ever before. Except for Business Equipment, each of our major lines of business contributed to profits about in proportion to size; although paper is cur rently running somewhat higher and chemicals somewhat lower than normal. We continued our close attention to the balance sheet last year. Accounts receivable stayed level though sales were up 3.5 per cent. Even before the recession we had started to reduce inventories, and we were able to maintain them at good levels last year as the economic recovery moved ahead. Total borrowings decreased 7 per cent last year. A $50 million issue of sinking fund debentures was sold in May. We were one of only a very few Baa/ BBB rated industrial companies who have placed debt in the public market since the recession. We think raising this money when we did will prove to have been good judgment. Over the past several years we have, despite the dis locations in the economy, been gradually restructur ing SCM. Most of these changes have been evolu tionary rather than revolutionary, as emphasis is directed away from office machines and toward our GLD30876 basic strengths in specialty chemicals and coatings, foods, paper and consumer appliances. One of our prime objectives is to give strong empha sis to those products where we have a leading posi tion and to concentrate our efforts in specialized seg ments where we do not need across-the-board market prominence. Two businesses we are emphasizing-- chemicals and paper--illustrate this objective. Chemi cals has an overall growth rate twice that of all other manufacturing businesses, and it is highly segment ed. This means that we can develop our specialties without necessarily being required to compete with other companies with major positions in the broader field. We are leaders in metal powders and terpene chemistry, two of the segments we are in position to emphasize. Segmentation is also important in paper: we are the industry leader in lightweight book pub lishing papers, the area we have focused on. I uriher illustration of this emphasis is shown by the allocation of capital. Our chemicals and paper busi nesses each represented 12 per cent of net sales in But in 1977, they are budgeted io consume more than half of our capital budget, 35 per cent for chemicals and 20 per cent for paper. We are expand ing by about 20 per cent the pulp capacity of our Jackson mill,we recently began nevv'exparision of our titanium dioxide facility at Ashtabula, Ohio, and we plan to expand further our titanium dioxide plant at Baltimore. Our organic chemical operations at Jacksonville, Fla. are also being expanded. Continued improvement in operations and a sound and improved cash position made it possible for the regular quarterly cash dividend to be increased twice last year. The two increases raised the quarterly cash dividend to 20 cents a share from 12% cents, and the annual rate to 80 cents from 50 cents. This is the highest dividend rate in SCM's history. Our current policy is to raise the cash dividend by small amounts as often as possible with the objective of paying out J approximately 20 per cent of earnings in the form of cash dividends. I believe SCM will continue the improvement of the past five years. The first half of fiscal 1977 should exceed results of the first half of fiscal 1976, a period which was affected by the recession. If economic trends continue, the second half should also be better than the year-earlier period. We expect record prof its, record dividends and a record level of capital construction in fiscal 1977. Paul H. Elicker August 18, 1976 GL030877 3 Coatings and Resins Glidden Coatings and Resins, the fourth largest paint manufacturer in the U.S., had a good improvement in profits last year, but results were below the record level of 1974. Operating income increased 39 per cent on a 9 per cent increase in sales. This group, SCM's largest business, accounted for 27 per cent of total operating income on 27 per cent of the company's average assets in 1976. Comparable figures for 1975 were 23 per cent of overall operating income on 28 per cent of the average assets. Recovery from the recession in this business began in the first quarter and continued to gain momentum in the second half of fiscal 1976. Physical volume in the last quarter rebounded to the record level of 1973. The $4 billion domestic coatings and resins industry is, in fact, two broad and quite distinct industries: trade sales and chemical coatings. Trade Sales: This is the slightly larger of the two, consisting of sales to home owners, painting contrac tors and the industrial/commercial maintenance mar ket. Overall, Glidden trade sales recovered well last year. Volume and capacity utilization for the year were adversely affected by the general lag in residen tial and other construction, the planned withdrawal from Woolco leased department operations and the liquidation of W. T. Grant, for whom we had man ufactured private brand paint for 60 years. The loss due to the bankruptcy was modest. "Spred" is our main line of consumer paint. Late last year, Glidden introduced Spred Latex Gloss, a new house paint that combines the advantages of a latex paint {ease of application and clean up) with a gloss finish. Most latex house paints dry with a flat finish. Consumer reaction to this new paint has been good. Chemical Coatings: The second broad segment of the coatings and resins industry is made up of a wide variety of specialized finishes used on such products as automobiles, appliances, furniture, metal contain ers, construction materials and many others. Begin ning in December, Glidden's chemical coatings had a strong recovery from the prior year. Wood finishes did well, especially in the second half because of good demand from the household remodeling mar ket. The moderate gain in housing starts also helped. Last year's annual report noted good progress in the development and marketing of water-soluble chemi cal coatings. The new coatings do not require the installation of expensive pollution-control equip ment needed to remove hydrocarbons emitted during the drying process. During the last half of 1976, we shipped our first commercial quantities of these new coatings for use on beverage containers. Substantial quantities have already been shipped and success fully used as coil coatings, fabricated metal finishes and as sealers on hardboard. In 1976, production of powder coatings began at our facility at Huron, Ohio, site of Glidden's newest and one of the industry's most modern paint manufactur ing plants. These new coatings have great promise for industrial users in terms of pollution control (no solvent), lower energy consumption and, in some cases, lower cost of application. tIn millions) 1976 1975 1974 1973 1972 Net sales S363 0 S332 S S312 0 S259 1 $229.2 Operating income S 19.3 S 13 9 S 22 9 S 18 3 S 172 Return on net sales 5.3o 4 2o 7 3' 7. i >.. 7 5o Average assets Return on average assets SI 97.1 SI 86 1 SI 74 2 Si 44 4 SI 21.6 9.8vc 7 5:`. 1 3 t 12 77- 14 An extensive distribution network is vital to serve the retail and painter-maintenance markets effectively. Products for these markets are made at JO of Glid den's 14 plants in the U.S. and Canada (including the Huron, O. plant shown here). Glidden's distribu tion system includes 218 company-operated branches, 56 leased departments and more than 6,000 dealers. Gl308 78 International: Glidden has 13 coatings and resins pjants in 10 countries outside the U.S. These accounted for 33 per cent of group sales and had increased profits last year. The rate of improvement differed widely from country to country, depending on how fast each economy recovered from the reces sion. Operations in Canada recovered from the pre vious year's modest decline. Our subsidiaries in Mexico, Panama and Ecuador had record profits for the second consecutive yean Tmtas Ypiranga, our Brazilian subsidiary, had a sub stantial decline in profits from the record level of 1975. Brazil was buffeted by an inflation rate in excess of 40 per cent, a severe recession and a sub stantial devaluation of its currency last year, in an effort to combat inflation, the government imposed strict regulations on the importation of raw materials. Despite Brazil's current problems, we are optimistic about its future. Although the growth rate dropped to 4 per cent in 1975, in the last five years Brazil's growth rate has been 9 to 10 per cent. Brazil's GNP is the largest in Latin America. We are constructing a new plant near Sao Paulo, designed primarily for production of chemical coatings. This plant will sup plement our facility in Rio de Janeiro and will serve the rapidly-growing market in southern Brazil. Our coatings business in West Germany and Italy improved last year. Businesses in both countries have been slow to recover from the recession. Outlook: The improvement in most Coatings and Resins operations that began last year should contin ue into 1977, particularly in the U.S. and Canada. Trade sales and chemical coatings will benefit from the expected improvement in industrial production, residential and commercial construction, as well as increased retail sales and consumer spending. At our Huron, 0. chemical coatings facility, the ingredients of powder coatings are mixed, heated, dispersed and extruded in one operation. After being cooled, the hardened material is ground to powder which is applied electrostatically to metal products suck as office furniture, boat trailers and external parts for lawn mowers. GL030880 Typewriters and Appliances Smith-C orona typewriters and I'roctor-Silex appli ances together more than doubled operating income on a 19 per cent increase in sales last year after hav ing been severely affected by the recession in 1975. I his group accounted for 19 per cent of SCM's overall operating income on 18 per cent of the com pany's average assets last year. Comparable figures for 1975 were II per cent of the operating income on 17 per cent of the average assets. Sales started to improve early last year as consumer spending began to recover from a substantial decline during the recession. Typewriters: We estimate industry unit sales of port able typewriters in the U.S. increased over 8 per cent last year, still well below the unit sales of calendar 1970, for example. Smith-Corona unit sales were higher with almost all of the increase in full-featured models. Our leading market position improved slightly in both the U.S. and Canada. Profits were close to 1974's record level. Consumer acceptance of the Coronaniatic cartridge ribbon since Smith-Corona introduced this new con cept over three years ago has been gratifying. Sales of Coronamatic cartridges have reflected the growing population of Coronamatic cartridge typewriters. Smith-Corona strives to maintain its leadership posi tion through constant innovation. l ast January at Danbury, Conn., we opened a research and develop ment center for advanced engineering of portable typewriters. Engineering for existing products will continue to be carried out at our Cortland, N.Y. man ufacturing facilities. Distribution was expanded last year for the "Plectra," our mid-priced portable electric typewriter intro duced in 1975. Almost all Smith-Corona channels of distribution now handle this line. "Electras" are manufactured for worldwide consump tion at our three-year-old plant in Singapore. During the year the first planned expansion of this facility was completed. Smith-Corona typewriters are manufactured in Canada and the United Kingdom as well as in the United States. .Appliances: Proctor-Silex showed improved results but was still not profitable in 1976. Demand was strong last year for our " boaster Oven/Plus/' a deluxe toaster oven that features broiling, baking and a pop-up toaster. Production is being expanded. Irons also had a good year following several years of declining sales. An increase in the popularity of clothing made from cotton is a prime reason for new growth in the market for steam irons. Conventional toasters continued to be our most important profit producer and our number one market position a as maintained. "Coffee Magic/' our automatic drip coffeemaker, did not attain the market penetration we anticipated due to production problems last year. The problems were corrected by January and efforts are underway to make up for lost time. New versions of "Coffee Magic" were introduced last year. si iV:Q .nCO'ne ' o 'i no: s.oes .40 cisses 1976 9 974 1973 1972 S? 1 G 0 S i d 1 1 SiB? 7 SI 81 8 S 1 4 0 S 6 \t 3 ;Gfi S 16 5 S 12 1 6D V sy h '< '< n . n s-?/6 sng / 3 :(j 3 4 11 0" f, >t 0 S104 8 .1 1 9, Procter-Silex's Toaster Oven/Plus is ike only toaster oven that broils, bakes and has a pop-up toaster. All these features make Toaster Oven/Plus a versatile and energy-saving appliance. Manufactured at our Altoona, Pa., facility, every toaster oven is "toast tested" before final inspection and shipping. GLD3068? During the yeai we continued io concentrate our efforts on a relatively small number of products in which we have 01 hope to have a good opportunity to acquire satisfactory market shares. As an example, last year we stopped manufacturing blenders, a prod uct line in which om position was unsatisfactory. International: Smith-Corona's lightweight typewrit ers are produced at West Bromwich, l.ngland, and sales of this model in world markets were helped by last year's decline in the value of the British pound. The "Plectra/' a moderately priced electric portable will be oui main product in international markets, it was introduced last year in Pngland, Trance and the Benelux countiies and has been well received. Proctor-Silex has no overseas manufacturing facili ties. l ast year, wc established our own direct sales force in the II.K. This organization is responsible for sales in the 11.K., l.uropc and oilier overseas markets. Sales and profits in Canada were up substantially. "Coffee Magic" was introduced there arid did well. Outlook: Industry sales of portable typewriters are expected to increase next year. Smith-Corona expects a strong year with profits at or near record levels. The recovery in Proctor-Silex operations that began last year is expected to gain momentum in 1977. A special feature of the. Corommatic typewriter is the double-walled plastic carrying case that protects U. The Mow molding machine at our Cortland, N. Y. manufacturing plant produces a significant portion of cases. We will have the capacity io produce all our own Mow-molded cases sometime during 1977. G*-030885 11 Foods Purkee Foods, SCM's second largest business, had record profits last year. Operating income more than doubled on a 7 per cent decrease in sales (a reflec tion of lower material prices). This group accounted for 21 per cent of SCM's overall operating income on 16 per cent of the company's average assets. Compar able figures for 1975 were 10 per cent of operating income on 16 per cent of the company's average assets. Industrial Foods: This business, a major manufactur er of edible oils, shortening systems and food addi tives, is the largest part of Purkee Foods, accounting for about half of total food sales last year. Industrial Foods performed much better last year than in 1975. Unit sales volume increased 20 per cent, reflecting stronger consumer demand and the impact of new products. Manufacturers of cakes, cookies and candy, for example, are important Durkee customers, and last year bought more of these products than they did during 1975. Volume improved for specialty products that require special manufacturing techniques. One such product is B-12K, a fluid shortening system for bread that contains both shortening and conditioners in liquid form. The B-12K system offers bakers an efficient alternative to solid shortening. With crude domestic and foreign vegetable oils declining in price during the year, demand improved. We continued to benefit from increased efficiency in our oil refineries with lower processing costs resulting both from cost reductions and from increased volume. We currently refineas much oil in our two refineries at Joliet, III. and l ouisville, Ky. as we did at four locations five years ago. Food Service: This business, which accounted for about a quarter of Purkee sales, had a solid profit last year after operating at a loss for 1975. Food Ser vice markets its products, which include shortening, oils, spices, frozen dough, frozen hors d'oeuvres, pre portioned frozen fish and pre-plated meals, to restau rants, fast-food chains, bakeries, hospitals, schools and contract feeders. Among the most important customers for our frying oils are fast-food franchises. Their ability to keep prices down, plus increased consumer spending last year, encouraged more people to eat out, and this led to increased demand for our products. Our small frozen dough business had a sizeable gain in volume last year. Production increased 36 per cent last year, and we are now operating near capacity in our new plant in Thorofare, N.J. The product line was expanded last year, and we are now selling fro zen dough to supermarkets that use it in their in store bakery operations. This new market has large potential and will become an important one for us. Dolphin Seafood made an important contribution to profits last year as a result of the enthusiastic industry reception of its new "Batter-Fri" fish prod uct. Under a patented process Dolphin produces fil- (in millions) Net sales Optraiing income Return on net sales Average assets Return on average assets 1976 1975 1974 1973 1972 $320 3 $343 0 $289.2 $215 5 S211 4 3 M.9 $ 6 1 $ 4 $ 2 S (2 9) 4 7ao i 8\> 1 .1*0 - S116 3 Si08 6 SH0 5 S 97 0 S100.3 1 7 8Aj 5 6 4'' , 2*o - A 5,000 gallon centrifuge is important equipment at Durkee foods' refinery at Joliet, 111. This refinery, our newest and most modem, processes a wide range of edible oik. Complex manufacturing techniques pro duce emulsifiers, shortening systems and additives sold to leading food manufacturers. Gl D3 08 86 GLD30&87 Jet-Iikc cuts of fish which are dipped in a unique tcmpma-slylc Durkee hatter and then fio/en. Dol phin's production facilities are being expanded and additional capacity should he available in fiscal 1977. Consumer I oods: 1 Ids group accounts for more than a quarlei of Dutkec sales and had its second consec utive ycai of record profits last year. Durkce Con sumer I oods is the second leading processor and marketer of spices in the ILS. and the largest importer of Spanish green olives. It markets a wide variety of specially foods including dry sauce and gravy mixes, extracts, canned potato snacks, canned french fried onions, dehydrated and boiled onions, barbecue sauce, frozen hors d'oeuvres, coconut and other snack and convenience foods. Operations were aided by stability in the price of imported raw materials and general improvement in the economy. The increase in disposable income resulted in better volume for certain luxury items last year, such as Durkec's frozen hors d'oeuvres. The group was aided by a return to "basic" cooking, uti lizing spices and seasonings. Coconut was an impor tant contributor to profits last year. We introduced several extensions of existing brands, including new "oven bag" and seasoning mixes. However, the major reason for Durkcc's volume increase is better repre sentation in both new and existing areas of distribution. O.utjook: Durkee foods should continue to improve during fiscal 1977.1 he three parts of this business should benefit from the anticipated growth in She economy. In particular, spices. Dolphin Seafood, fro zen doughs, and the specialty products segment of industrial I oods, including confectionery coatings and fluid shortening systems should ail be strong. Durkee Consumer Foods markets a wide variety of specialty foods. French fried potato sticks, sold under the O & C label, are made at our plant at Wolcott, N.Y. The Wolcott facility uses 25 million pounds of potatoes a year. This packaging machine fills 72,000 foil bags a day. 15 GL 030869 Chemicals Glidden Chemicals' operating income increased 5 per cent last year on a 28 per cent gain in sales. This group accounted for 14 per cent of SCM's operating income on 21 per cent of the company's average assets. Comparable figures for 1975 were 16 per cent of oper ating income on 17 per cent of the average assets. Pigment: This operation produces titanium dioxide, a white pigment sold to the paint, paper, rubber and plastics industries for use as a whitener and opacifier, other pigments and fine particle silica. Titan ium dioxide sales are the major part of the business. Demand for titanium dioxide closely follows the general economy. Sales picked up late in fiscal 1975 and continued to gain strength last year. Titanium dioxide is produced by either the sulfate or the newer chloride process. We operate chloride plants at Baltimore and Ashtabula, Ohio, and a sul fate plant at Baltimore. Production reached a record level at our Baltimore chloride plant but poor demand in the first half required us to operate the sulfate plant at less than capacity during that period. Our Ashtabula plant was in full operation through out the year. Demand for titanium dioxide recovered at a slower pace overseas than in the U.S. The Pigment group's performance was helped by two price increases last year, even though the higher prices did not fully offset continued escalation in the cost of energy and raw materials. Plans were approved last year for major expansion of the Ashtabula plant that will increase annual capaci ty 40 per cent. This incremental increase in capacity, will be much less costly than a complete new plant. The expanded capacity will be available in fiscal 1978. We expect to follow it with a similar incremen tal expansion of the Baltimore chloride plant. Substantial progress was made last year toward bringing our Baltimore sulfate operation in compli ance with environmental regulations. When this work is completed, this plant will be among the most pollution free sulfate plants in the world, although compliance has added appreciably to our production costs. We believe that ail domestic and foreign pro ducers will eventually have to meet these standards, thus negating the competitive edge some non complying domestic producers and all foreign pro ducers presently have. Sales and profits of our other pigments products were excellent last year. Organic Chemicals: Our Jacksonville, Fla., plant con verts crude sulfate turpentine, a by-product of the kraft pulp industry, into basic terpene products, such as pine oil and camphene, and high-technology fine chemicals for use in perfumes, flavors, and as vita min and pharmaceutical intermediates. At Port St. Joe, Ha., Sylvachem, our joint venture with St. Regis Paper Company, is an important pro- SCM's Organic Chemicals Group is the world's leader in lerpene chemistry and the largest refiner of crude sulfate turpentine. With the capacity to handle over 100,000 tons of crude tall oil and 12 million gallons of crude sulfate turpentine, this group produces a wide range of intermediates and fine chemicals. (In millions'! Net sales Operating mceme Return on net sales Average assets Return or! average assets '9 76 t /5 1973 1972 V`':0 31 ' 0 7 3103 6 S 84 6 S 1 ' ) 0 3 -1 r> 3 10 a s f>.5 S 3 1 o .. n . 9 a1'- 5 3% 3 7 S l -1 3 -i Sit > 5 $ SI .4 S 78 9 S 73.0 G 7 . ;{. 13 3". 7 0% 4.3% GLD30891 ducer.of products refined from crude tall oil, mainly fatty.acids nd rosins used as raw materials for a wide range of industrial products. Profits last year were down substantially from the record level of 1975. This business felt the impact of the worldwide recession late, and was late recovering from it. Product demand started to slump toward the end of fiscal 1975, and the softness continued for most of 1976. Decreased industrial and consumer demand for vita mins, flavors and fragrances resulted in a sharp drop in worldwide prices of organic chemical products, and of the natural essential oils with which they compete. By year end, however, prices worldwide had firmed, and demand increased. We currently are more than midway through a threeyear multi-million dollar program to expand our Jacksonville facilities. We have already substantially increased our fine chemical production capacity; for example, in 1975, we brought on-stream the world's only terpene-based synthetic /-menthol plant. It has since been expanded twice and ran at capacity all year. When our expansion program is completed we will have attained further increases in capacity with most of it devoted to technically unique processes. Pernco Products: This group is a leading producer of ceramic frit from which porcelain enamel and ceram ic glazes are made for use in the manufacture of household appliances, dinnerware and building materials such as ceramic tiles. Pernco had a strong improvement in profit last year as many of its important markets recovered from the recession. Increased consumer spending resulted in an improved year for appliance makers. Also, the modest increase in new housing starts translated into increased demand for ceramic tile. Pernco sales were also bolstered by the.introduction of new products, including a line of metallurgical glasses. We contin ue to experience difficulty obtaining prices high enough to offset higher raw material and energy cost, as well as the added expense of full compliance with environmental controls. Metals: A broad variety of metal powders produced by this group is employed to form bearings, bush ings, gears, and many other high volume, close toler ance small parts for automobiles, appliances, and other durable goods as well as in specialized applica tions in the chemical and electronic industries. Metals had a significant increase in profits over fiscal 1975 as markets for the group's products, having been in a decline, began to recover at the end of 1975. The group experienced steady improvement throughout the year as production volume continued to increase and capacity utilization returned to more normal levels. Outlook: All segments of Chemicals should have improved performance next year as the economic recovery continues. Organic Chemicals, the part most severely affected last year, should have a good year based on year end demand and firmer prices. Produc tion of titanium dioxide will increase as our Bal timore sulfate operation is expected to operate at capacity for the entire year. Higher production rates and stronger prices are also expected in both titanium dioxide operations. Our plant at Ashtabula, O., uses modem technology to produce titanium dioxide by the chloride process. This is a complicated procedure involving vapor phase oxidation of titanium tetrachloride. The chloride pro cess produces titanium dioxide, with a more perfect crystalline structure than the older sulfate process, which is still in wide use. GL D30fi9p GL 0308 94 Products hird consecutive year. Paper Products was st contributor to SCM's operating profit. Ugh profits were, as expected, down from Cord level. Allied Paper, nevertheless, out- the overall pulp and paper industry for d year in a row. Operating income declined nt while sales were about even with those of ied accounted for 33 per cent of SCM's erating profit on 9 per cent of the cornsets, compared to 67 per cent of operating 9 per cent of overall assets in the prior year. sion had a major impact on the pulp and ustry during the last half of fiscal 1975 and alf of fiscal 1976. Improvement began midugh last year, but it was uneven. Certain the industry, pulp, for example, had firmer n paper. Operating rates, weak in some `he beginning of the year, had recovered ally by year end. Business forms felt the the recession about six months later than the industry and at year end, was still below former levels, ces softened somewhat during the year, but expected. These stronger-than-anticipated ulted from a prolonged strike in Canada moved a large supply of pulp from the mare fact that a substantial inventory of pulp ndinavian countries was not placed on the pr the first time we were successful in our of selling more than half of our market er term contracts. This had the effect of protecting us to some degree from market volatility as contract prices have proved more stable than the spot market. In anticipation of continued strong demand for pulp, a program has been initialed to increase the effi ciency of the Jackson mill by better balancing of various pieces of equipment used in making pulp. This $15 million project, which should be completed late next year, will increase the mill's capacity by about 20 per cent. In the past few years, natural gas supplies to indus trial users in the southeast like the Jackson mill have been sharply cut back. We are forced to substitute higher-cost fuel oil when gas is not available. To minimize purchases of oil, we are generating increased amounts of energy from by-product fuel produced in the pulping process. Under study is a project to further increase the capacity and efficiency of equipment used to generate steam by burning bark and wood waste. Paper: Demand for paper began to fall off during the last half of fiscal 1975, and remained weak through the first half of last year. Lower demand caused deterioration in prices, and lower profit margins. Recovery began during the spring and at year end margins were the best they have been since the recession. However, operations for the year as a whole declined from the previous year. Business Forms: This business, com posed of Allied/ Hgry Business Systems and Walton Printing, manufactures stock as well as continuous ackson, Ala. pulp mill can produce 175,000 Ip per year. Pari of the mill's output is used 's own needs, and the remainder is sold to in the US. and overseas. A first step in ig process is moving logs to a slasher deck are sawed into sections prior to being and reduced to chips. (in millions.) Net sates Operating income Return on net sales Average assets Return on average assets ! 5 /rj 1975 1974 1973 1972 / S'65 7 SI4! ? S 102.5 S 86.1 s ?3 y ? 40 6 S ?4 5 S 7.8 S 4 2 U8 .. 24 5- 1 7 4*o 7.6o 4 9c S 05 9 3 CO C S 52.7 S 39 2 S 36.2 36 o 6 7 7 -.. -'G 5*0 19.96 11.7\ GID30895 forms used in computer data processing equipment and other specific forms and systems at five plants in the United States. Last year the industry suffered the first decline in unit volume since the proliferation of data process ing computers began in the 1950's. This decline began in the fourth quarter of fiscal 1975 and contin ued last year. As a result, sales and profits from Allied's forms were substantially lower last year. The industry's growth rate is expected to return to historic levels, but there are no signs of an early recov ery. Recent industry additions to capacity are acting as a deterrent to the rapid recovery of profit margins. Histacount sells specialized forms, stationery and related items by catalog to the medical, legal, accounting and other professions. Profits were up substantially to record levels last year. Office and Stationery Group: This group manufac tures and distributes a broad line of paper products used at home and in schools and offices. Over the past two years, the Office and Stationery Group has expanded its sales force and distribution network and has become a major supplier in the eastern and midwestern markets with the broadest line and leading market share in most of its products. This group increased both its sales, and share of market last year despite generally weak industry-wide conditions. Outlook: Fiscal 3977 should be another good year for Allied. Our pulp operation should continue to operate at a high level of capacity, and the markets for our paper products should improve. The forms business, however, will continue under price pres sure, reflecting excess capacity. Allied is the nation's largest producer of high-quality, light-weight hook publishing papers. Last year; eight of the ten "best sellers" in the Bible, dictionary and reference book category were printed almost exclu sively on Allied Paper. Our paper-making machines are at Jackson, Ala. and Kalamazoo, Mich. GL 030896 iss Equipment Equipment was unprofitable last year, losses were substantially less than in 1975. y years of cash investment, last year Busipment generated in excess of 530 million "ations and reduction of assets. A significant loss is a result of special expenses, indud*rox lawsuit, reduction of the depreciable lain paper copiers held for lease and a -of a portion of those copiers. This business for 7 per cent of SCM's average assets last ared to 11 per cent in 1975. oducts: SCM copier sales and lease operae U.S. have undergone a major streamlin- am designed to reduce losses. This program h lower administrative, sales and research opment expenses--were responsible for the results. 33 direct copier branches were sold to inde dealers. Copier Products continues direct of coated paper and plain paper copiers `r products to large national accounts and to iness users through 34 branches in 31 cities, roducts assets were substantially reduced e year. At year end, for example, total assets siness Equipment division were $32 miln from $70 million at June 30, 1975. The r toner plant in Hazelton, Pa. and the t to Allied Paper of the coated paper ring facility at Phoenixville, Pa., were in the asset reduction program. These .will be purchased by the Copier Products m the new operators of these facilities. 1976 1976 1974 1973 1972 5107.1 Si 22 0 SI 24 6 S1060 S1104 ome SO3.2) SOS 2) S(M 3) SC 4 ?) S( 3 3) -t sales -els --~ S 53 6 S 71.4 s 57 9 S 5? 6 S 74 8 -erage assets We continued to press our suit against Xerox Cor poration filed in July, 1973. The suit charges Xerox with unlawful monopolization of the plain paper copying business. The Federal Court in New Haven lias set June t>, 1977 as the trial date. International: International operations are somewhat larger than domestic. Foreign operations, centered in Western Europe and Latin America, were better than 1975 when they had been adversely affected by the worldwide recession. Operations improved at a better rate than our domestic business. These improved results were due in part to stringent cost reduction programs similar to those instituted in the U.S. We also sold our copier branches in Finland and Sweden last year, but we will continue to sell copiers and copier supplies to these businesses as we are doing with domestic branches that are now inde pendent businesses. Outlook: Business Equipment is expected to remain unprofitable next year, but losses should be consid erably less than in fiscal 1976. Our analyses indicate that an adequate concentration of Model 6740 plain paper copiers, supplemented by an extensive popula tion of zinc oxide machines, should be able to make money if concentrated in major metropolitan areas. As this program is completed we will continue to review the worldwide business and reassess our position within it. The Model 6740 is a high-speed, plain paper copier that can produce 67 copies a minute in 40 different paper sizes. Last year the Business Equipment divi sion continued the program begun in 7975 of concen trating placements of 6740's in urban markets where skilled sales and service personnel provide quick attention to customer needs. GLD30fe9b Other Included in this category are Proctor & Schwartz, Kleinschmidt and two special engineering develop ment projects. The engineering development work (on optical character recognition and a slide copier) was discontinued during the year. Operating income increased 36 per cent on an 18 per cent decline in vales. This represented 4 per cent of SCM's operating income and 2 per cent of the company's average assets. This compares with 4 per cent of operating income on 2 per cent of the company's average assets in 1975. Proctor & Schwartz: This group is the world's fore most manufacturer of industrial drying machinery used in the food, chemical, tobacco and textile indus tries. It is a growing factor in the market for industri al baking equipment. Proctor dryers tend to be huge and complex and frequently constitute major capital investments for users. Proctor also makes film stenters, machines that stretch and shape film for use in such products as photographic and X-ray film, magnetic tapes and packaging material. Proctor & Schwartz plants are at Lexington, N.C., Philadelphia and Glasgow, Scotland. Sales and engi neering are in both Philadelphia and Glasgow. Proctor & Schwartz had its third consecutive year of record profits even though sales declined last year. The downturn in sales came as backlogs from the capital goods market Proctor & Schwartz participates in declined in a delayed reaction to the recession. Kleinschmidt: Headquartered in Deerfield, III., this group designs and manufactures telecommunications equipment for military and commercial markets. For the past several years, Kleinschmidt has been devel oping a new generation high-speed telecommunica tions terminal for the United States Army Electronics Command. A large contract, on which Kleinschmidt bid, was awarded to another company after the dose of fiscal 1976. Kleinschmidt continued working to increase its com mercial business last year. It has the capability to supply businesses with specialty software items needed to solve specific problems--data handling for railroad transportation systems, for example. Outlook: Proctor & Schwartz' domestic business began to improve in November, 1975, (although sales abroad continued weak) and this upturn has contin ued at a modest rate. International markets have been slower to recover from the recession. We expect prof its for fiscal 1977 to be about even with last year. Longer term profit performance is excellent based on the favorable outlook for the capital goods markets. Kleinschmidt was profitable last year, and it is expected to continue this performance in fiscal 1977. It plans to continue to expand its non-governmental work while also bidding on government contracts when it is practical to do so. in m n .'>risi S'-fOr. Operating income Return on net sa'SS Average assets AVmn on average assets 19 7 6 a.'3 6 3 30 '0 5',. j.13 2 ?? 7V 1979 S.v. 3 ? ?? A 3' $5G 1 37 1974 1973 S30 6 S24 8 sa S( 2> v1 -i 31 3 o S'`i 8 n9 1972 S26.5 S .4 l 5co $18.3 2 0. Proctor & Schwartz is known the world over as a leading maker of conveyor dryers, Proctor dryers are of modular construction which allows them to satisfy a variety of special needs. This synthetic fiber dryer is being built for a plant in Iran. , GfD30900 Sates, Operating Income GLP30902 Net Sales, Operating Income and Average Assets by Lines of Business < In millions) Net Sales Operating Income \verage Assets 't ears ended June 30 Coatings and Kesins Typewriters and Appliances Toods C hemicals 1'aper Products Business Equipment Other I liminations Iota! Coatings and Kesins Typewriters and Appliances Foods Chemicals Paper Products Business Equipment Other Total Coatings and Resins Typewriters and Appliances Foods Chemicals Paper Products Business Equipment Other Iota! 197t 19 7 5 074 1973 1972 S 3o3.0 2lo.O 320.3 155.9 161.7 107.1 28.6 S 332.8 181.1 343.0 122.2 165.7 122.0 34.9 S 312.0 203.1 289.2 l io.7 141.J 124.0 30.o $ 250. { 182.7 215.5 103.o 102.5 lOo.O 24.8 S 229.2 181.8 211.4 84.o 8o. I 110.4 26.5 l,3?2.t> 1,301.7 1 ,217.3 (20.7) (14.2) ((3-1) 094.2 03.9) 930.0 (12.2) S 1,331.9 $1,287.5 SI ,202.2 S 980.3 $ 917.8 5 19.3 S 13.9 s 22.9 s 14.0 6.9 16.8 14.9 6.1 .4 10.0 9.5 10.8 23.9 40.6 24.5 (13.2) (18.2) (0.3) 3.0 2.2 .8 18.3 $ 16.5 > 5.5 7.8 (4.2) (2) 17.2 12.1 (2.9) 3.1 4.2 (3.3) .4 S 71.9 S 61.0 $ 61.9 5 43.9 $ 30.8 S 197.1 $ 186.1 s 174.2 $ 144.4 $ 121.6 127.6 116.7 109.4 107.0 104.8 116.3 108.6 110.5 97.0 100.3 148.4 116.5 81.4 78.9 73.0 65.9 60.0 52.7 39.2 36.2 53.6 71.4 57.9 52.6 74.8 13.2 16.1 13.0 14.8 18.3 $ 722.1 $ o75.4 s 599.7 S 533.9 $ 529.0 GLO 30903 Financial Review 'lies: Net sales were 51.33 billion in the year ended June 30, 1976, a 3.5 per cent increase over fiscal 1975 sales of SI.29 billion. The major contributors to the increase in net sales were the Chemicals, Typewriters and Appliances, and Coatings and Resins lines of business. The largest percentage sales gains were reg istered by Chemicals, particularly titanium dioxide which benefited from improved volume as a result of new plant capacity. Typewriters and Appliances showed improved unit volume due primarily to the recovery from the depressed market conditions of the prior year particularly in the portable typewriter, toaster oven and iron product lines. Coatings and Resins sales improvement reflected an increased share of the consumer and chemical coating markets. Paper Products continued to increase volume but, due to pulp prices being off from the record levels of fiscal 1975, sales revenue was about even with the prior year. Sales decreases were registered by Foods and Business Equipment. In Foods, higher volume was offset by commodity price declines in edible oils. Business Equipment sales decreased as a result of the copier marketing realignment and branch dealerization programs initiated in fiscal 1975. In fiscal 1975, sales were up 7 percent over 1974 because of price increases and strong demand for Foodsand Paper Products, particularly in the first half of the year. In the second half, the sales increases were lessened by the recession and the resultant reduction in consumer spending. Operating Income: Operating income for fiscal 1976 was S71.9 million, an increase of 18.0 per cent over last year's operating income of 561.0 million. Improved performance was recorded in each line of business except Paper Prod ucts. Toods registered the largest gain in operating income. Improved margins resulted from continued expansion in distribution of specialty consumer food items and increased volume and manufacturing effi ciencies in edible oils. Operating income of Type writers and Appliances increased as a result of recov ery from the prior year's depressed market conditions and an improvement in foreign manufacturing operations. Coatings and Resins profit also reflects recovery from the recession as well as the elimina tion in 1975 of two unprofitable manufacturing facil ities. In Chemicals, the slight increase in profitability resulted from increased sales clue to capacity expan sion, partially offset by a reduction in demand for organic chemicals, especially in foreign markets where economic recovery lias been slower than that of the United States. Paper Products, off from the record level of 1975, experienced reduced demand in business forms and some industry-wide price deterioration in pulp. Business Equipment results improved appreciably over last year. Such results include, as part of our continuous business evalua tion, increased depreciation and the write-off of a portion of plain paper copiers, as well as increased costs of SCM's antitrust suit against Xerox Corporation. Manufacturing costs decreased slightly as a per cent of sales reflecting the benefit of volume improve ment over the prior year. Selling and administrative expenses incre.v.ed over prior years due principally to higher operating levels and inflationary pressures. Depreciation expense was 538.2 million in 1976, up 53.1 million over the 1975 level of $33.1 million, due to accelerated copier depredation and a higher depre ciation base resulting from recent capital expenditures. In 1975, operating income of St* 1.0 million was about the same as in 1974 as the impact of the recession was offset by price increases and cost reduction pro grams implemented during the year. 1'aper Products recorded the most significant gains due principally to favorable industry conditions and record plant operating levels. Foods improved substantially from 1974 due to a less volatile raw material market and an expanded distribution of specialty consumer food items. Coatings and Resins and T\ poivriters and Appliances were below l74 due to inflationary cost GLD30904 increases and sharply reduced consumer spending. Business Equipment losses exceeded those of 1974 due to lower copier usage rates, high support costs of the Model 6740 and costs associated with the copier marketing realignment and the closing of plain paper copier development facilities. Net Income: Net income was $30.4 million, a 9.0 per cent increase over the fiscal 1975 level of $27.9 million. Income before taxes increased 27.6 per cent to S53.7 million due to improved operations and a decline in interest expense. Interest expense decreased 8.4 per cent as a result of an overall decrease in borrowings and lower interest rates. The U.S. and foreign effective tax rate of 43.4 per cent, up from the low fiscal 3975 rate of 33.7 per cent, is more in line with SCM's historical rate. U.S. and foreign income taxes were $23.3 million in fiscal 1976, compared to $14.2 million in fiscal 1975. The U.S. and foreign tax rate in fiscal 1975 reflected the benefit of high investment tax credit, DISC export sales and the liquidation of a foreign investment. Capital Program: Capital expenditures were approximately $39 million, down from $87 million a year earlier. The fiscal 1976 expenditures were for capacity expansion, new prod ucts, cost reduction and enviionmental improve ments. The fiscal 1975 expenditures included $32 million for new capacity in Chemicals, primarily for the manufacture of titanium dioxide, and $24 million for copiers held for lease. Financial Position: Working capital increased $3o.2 million and SCM's current ratio improved from 2.5 at June 30, 1975 to 2.0 at June 30, ls`)7o. Inventories increased $2o.3 mil lion or 12.3 per cent. C urrent liabilities increased $14.0 million as a result of higher operating levels and tire increase in income tax liabilities, partially offset by decreases in short-term borrowings. In May, 1976 SCM issued $50 million of sinking fund debentures. A portion of the proceeds was used to repay other borrowings, including the amount outstanding under the Revolving Credit and Term Loan Agreement, which was subsequently cancelled. The balance of the proceeds, $35 million, which is currently invested in short-term securities, is avail able for general corporate purposes. During fiscal 1976, total debt decreased $17.4 million to $225.0 million, principally due to improved cash flow. At June 30, 1976 total debt, short and long term, was 41.8 per cent of total debt plus equity as compared to 45.6 per cent at June 30, 1975. Return on Capital: SCM's return on average equity was about 10 per cent in fiscal 1976 and 1975. Total capital, equity plus interest bearing debt, increased 1.3 per cent to $538.6 million in fiscal 1976. Return on total capital, net income plus after tax interest divided by total capital, was 7.3 per cent in 1976 and 7.3 percent in 1975. Dividend and Common Stock Data: SCM declared dividends of $.675 per share in 1976 and $.50 per share in 1975, reflecting increases in the quarterly dividend from $.125 to $.175 per share in the second quarter and from $.375 to $.20 per share in the fourth quarter. Fiscal Price/Earnings Ratio Quarter 1976 1975 New York Stock Exchange Price 3976 1975 High Low High Low High Low High Low First Second Third Fourth 43 53 74 73 3 2 13% 10V4 13% 8% 3 2 12 Vi 10 11% 8 Vi 4 3 18% 31% 14% 9 4 4 38% 14% 13% 11% GLD30905 'Jen Year Statistical Summary (All dollars in millions. except pci share amounts) Years ended June 30 1976 Summary of Operations Net sales Cost of sales S 1,331.9 968.2 Cross profit Selling, administrative and research expenses 363.7 291.8 Operating income Interest expense, net Other (iiKome) expense, net 71.9 17.4 .8 income before income taxes and extraordinary items United States and foreign income taxes 53.7 23.3 Income before extraordinary items extraordinary items net of tax 30.4 - Net income (loss) $ 30.4 tamings per share: Income before extraordinary items $ 3.30 Net income (loss) S 3.30 Net income (loss) assuming full dilution $ 3.04 Per Common Share Cash dividends Book value S .675 34.23 1 inancia! Position Working capital Property, plant and equipment, net 1 otal assets Long-term debt Shareholders' equity S 287.9 251.3 740.1 210.4 313.6 Other Statistics Depreciation expense Income before extraordinary items: Return on net sales Return on average assets Return on average equity 1 ong-term debt to long-term debt phis cquitx Number of employees S 38.2 2.3% 4.2% 10.1% 40.1% 27,100 1975 $ 1,287.5 956.0 330. 269.0 61.0 18.9 -- 42.1 14.2 27.9 - S 27.9 $ 3.04 S 3.04 S> 2.83 $ .50 3I.oO fj> 25l.t> 258.9 704.1 214.5 289.4 $ 33.1 2.2% 4.1% 10.0%42.6C. 26,300 Seethe Financial Review (pp. 30-31} and the Notes to F inancia! Statements (pp. 38-42) for CLD30906 1974 $1,202.2 87fc>. 1 02o.l 264.2 61.9 13.1 1.0 47.8 20.2 27.6 - $ 27.o J9J3 $980.3 709.0 271.3 227.4 43.9 12.0 .6 31.3 13.0 18.3 $ 18.3 1972 $917.8 671.9 245.9 215.1 30.8 13.5 (-3) 17.6 7.3 10.3 (10.2) $ .1 1971 $875.1 638.0 237.1 208.2 28.9 16.1 (-3) 13.1 6.0 7.1 (9.3) $ (2.2) 1970 $854.5 618.7 235.8 213.8 22.0 15.4 (1.3) 7.9 1.5 6.4 (4.5) $ 1.9 1969 $807.6 571-2 236.4 186.1 50.3 11.9 (1.0) 39.4 18.8 20.6 -- $ 20.6 1968 $744.8 532.3 212.5 170.8 41.7 11.8 (-9) 30.8 13.0 17.8 (4.7) $ 13.1 $ 3.02 $ 3.02 $ 2.81 $ .425 29.00 $ 232.0 207.2 646.7 152.9 2oo. I $ 30.3 2.3%4.6,' 10 9\ 36.5%. 29,t>00 $ 2.00 $ 2.00 $ 1.91 $ .10 2o.47 $22.9 187.4 552.7 149.4 242.3 $ 27.2 1.9%, 3.4% 7.8%. 38. 1% 29,400 $ 1.13 $ .02 $ .02 $24.57 $224.3 176.8 515.1 162.0 224.9 $ 23.8 1.1 % 2.0% 4.6% 41.9% 28,300 $ .77 $ (.24) S (.24) $24.56 $230.7 184.1 542.9 178.4 224.7 $ 22.4 .8% 1.3% 3.1% 44.3%' 28,600 $ .71 $ .21 $ .21 $ .60 24.81 $234.0 197.1 578.1 192.9 226.8 $ 21.8 .8% 1.2% 2.8% 46.0% 31,100 $ 2.37 $ 2.37 $ 2.24 $ .60 25.54 $231.8 168.3 524.2 170.6 226.6 $ 19.4 2.6% 4.1% 9.5% 43.0%' 33,500 $ 2.13 $ 1.58 $ 1.54 $ .60 24.24 $221.7 148.2 470.0 161.1 209.2 $ 17.8 2.4% 3.9% 9.2% 43.5% 33,200 Management's Discussion and Analysis of the Summary of Operations. 6 LD 3090 7 1967 $705.2 499.1 206.1 157.4 48.7 5.7 (-6) 43.6 18.5 25.1 - $ 25.1 $ 2.90 $ 2.90 $ 2.79 $ .40 22.24 $207.1 138.1 451.4 98.1 177.4 $ 15.4 3.6% 6.0%. 12.8%' 35.6% 33,100 Statement of Consolidated income (In thousands, except pet share a mounts) Years ended June 30 Net salt1'. C ost of sales Cross profit Selling, administrative and research expenses Operating income Interest expense, net Other (income) expense, net Income oefore income taxes United States and foreign income taxes Net income Larnings per share: Net income Net income assuming full dilution 1976 $1,331,897 968,179 363,718 291,816 71,902 17,398 823 53,681 23,286 $ 30,395 $ 3.30 $ 3.04 1975 $1,287,454 956,550 330,904 269,898 61,00o 18,992 (55) 42,069 14,183 $ 27,88o $ 3.04 $ 2.83 Statement of Consolidated Retained Earnings (In thousands, except per share amounts) Years ended june 30 Balance, beginning of year Net income Cash dividends (per share--$.675, 1970; $.50, T75) Balance, end of year See accompanying notes to financial statements. lQ7o & 132,244 30,395 (o,J82) $ 15e>,457 IO75 $ 108,937 27,88e (4,579) $ 132,244 GLD30908 Statement of Changes in Consolidated financial Position (In thousands) Sources: Applications: Changes in Working Capital: Years ended June 30 Operations: Net income hems not requiring working capital: Depreciation Other, net Working capital provided by operations Issuance of long-term debt Disposals of property, plant and equipment Total Additions to property, plant and equipment Reduction of long-term debt Cash dividends Other changes in non-current items Increase in working capital Total Current assets: Cash and marketable securities Accounts receivable, net Inventories Deferred income taxes Prepaid expenses lolal Current liabilities: Loans payable Accounts payable Accrued liabilities United States and foreign income taxes Long-term debt payments due within one year I ota! Increase in working capital See accompanying notes to financial statements. 1976 & 30,395 38,168 9,313 77,876 53,236 4,022 $135,134 $ 38,702 57,319 6,182 (3,291) 36,222 $135,134 $ 24,068 1,694 26,338 (4,432) 2,548 50,216 8,042 (5,671) (11,531) (10,077) 5,243 (13,994) $ 36,222 GLO30909 1975 $ 27,886 33,055 2,117 63,058 72,741 2,442 $138,241 $ 87,139 11,175 4,579 15,684 19,664 $138,241 $ 14,369 (19,360) 681 (7,223) 1,402 (10,131) 14,693 10,408 (720) 9,556 (4,142) 29,795 $ 19,664 Consolidated Balance Sheet Assets (In thousands) June 30 C urrent assets: Cash Marketable securities (at cost which approximates market value) Accounts receivable Less allowance for doubtful accounts In ventories: Raw materials and work in process Finished goods Deferred income taxes Prepaid expenses Total current assets Property, plant and equipment, at cost: Land and buildings Machinery and other equipment Less accumulated depreciation Other assets Total 1976 S 9,407 35,676 178,900 7,542 171,358 117,347 123,025 240,372 2,205 6,981 465,993 141,655 376,626 518,281 266,989 251,292 22,805 $740,090 1975 $ 15,358 5,65 1 176,757 7,093 169,664 705,734 108,300 214,034 6,637 4,433 415,777 134,685 373,146 507,831 248,952 258,879 29,422 $704,078 See accompanying notes to financial statements. CLD30910 36 Liabilities* and Shareholders' I.cjuity (In thousands) June 30 C urrent liabilities: Loans payable Accounts payable Accrued liabilities United States and foreign income taxes Long-:*, rm debt payments due within one year Total current liabilities Long-term debt Deferred income taxes Other liabilities Shareholders' equity: C ommon stock Additional paid-in capital Retained earnings `I otal shareholders' equity l ota! 1976 $ 12,508 60,979 89,449 13,100 2,104 178,140 210,389 12,751 25,167 248,307 45,809 111,377 156,457 313,643 $740,090 1975 $ 20,550 55,308 77,918 3,023 7,347 164,146 . 214,472 11,58* 24,495 250,553 45,784 111,35) 132,244 289,379 $704,078 See accompanying notes to financial statements GL030911 ?7 Notes to Financial Statements Accounting Policies: Principles of Consolidation:'! he consolidated finan cial statements include the accounts of ail whollyowned and majority-owned subsidiaries. Investments of 20 per cent or more in minority-owned affiliates and joint ventures arc adjusted to recognize SCM's share of their income or losses. Inventories: Inventories are general!)' priced at the lower of average cost or market, except for invento ries of pulp, paper, and the raw material content of edible oils which are priced at the lower of last-in, first-out (LIFO) cost or market. Property, Plant and Equipment: Depreciation is pro vided on a straight-line basis at rates based on esti mated useful lives. At the time properties are retired or disposed of, the property and related accumulated depreciation accounts are relieved of the applicable amounts, and any profit or loss is included in operating income. Maintenance and Repairs: Routine maintenance and repairs are charged against operations as incurred. Expenditures that materially increase capacities or extend useful lives are capitalized. Income Taxes: Income taxes are provided for in the year transactions affect net income regardless of when such transactions are recognized for tax puiposes. The tax effect of timing differences is account ed for as deferred taxes. Provision is also made for income taxes on undistributed earnings of foreign subsidiaries not considered to be permanently invest ed. Investment tax credits are included as reductions of income tax expense in the year such credits become deductible. Retirement Plans: SCM has several retirement plans that provide pensions foi substantially all of its employees. Pension plan provisions include normal cost, interest on unfunded piioi service liabilities, and amortization of actuarial gains or losses includ ing prior service costs arising from plan amend ments. Contributions to pension funds are made when actuarial computations prescribe such funding. Earnings Per Share: Net income per share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding. Net income per share assuming full dilution is computed based on the assumption that convertible debt obli gations were converted and dilutive outstanding stock options were exercised as of the beginning of the fiscal year. Retirement Plans: Pension expense, including interest on unfunded prior service liabilities and, in 1976 a provision for vested benefits, was approximately $15,000,000 for the year ended June 30, 1976 and $13,000,000 for the year ended June 30,1975. At June 30, 1976 and 1975, unfunded prior service liabilities approximated $88,000,000 and $86,000,000; and the actuarial value of vested benefits exceeded the total of the trust fund assets and the consolidated balance sheet accrual by approximately $30,000,000 and $29,000,000. Inventories: As of June 30, 1976, approximately 17 per cent of SCM's total inventories were priced on the LIFO method. Had all inventories currently on LIFO been priced on a FIFO basis, inventories would have been approxi mately $11,400,000 higher at June 30, 1976 and $21,300,000 higher at June 30, 1975. Other Assets: As of June 30, 1976 and 1975 other assets includes unexpended proceeds of environmental improvement revenue bonds of $7,700,000 and $13,100,000; invest ments in unconsolidated affiliates and joint ventures of $4,500,000 and $4,100,000; and deferred debt expense, goodwill and other intangibles of $4,500,000 and $5,500,000. 38 GL0 3091? Research and Development: Research and development cost recorded as expense was $14,000,000 and $19,000,000 for the years ended June 30, 1976 and 1975, respectively. Income Taxes: (In thousands) Years ended June 30 1976 1975 United States and foreign income taxes consist of: Current United States Foreign Investment credit Total current $14,210 5,363 11,884) 17,689 $10,271 4,331 (2,645) U,957 Deferred United States Foreign Total deferred Total income tax expense 5,144 453 5,597 $23,286 2,562 (336) 2,226 $14,183 Reconciliation of effective tax rate: Statutory tax rate 48.0% Investment credit (3.5) DISC benefit (.9) Other, net (.2) Effective tax rate 43.4% 48.0% (6.3) (4.7) 0-3) 33.7% State income taxes, included in selling, administra tive and research expenses, were $1,900,000 for the year ended June 30, 1976 and $800,000 for the year ended June 30,1975. At June 30, 1976, provision for income taxes has not been made on $47,000,000 of undistributed earnings of subsidiaries and joint ventures since these earn ings are considered to be permanently invested. Foreign Subsidiaries and Foreign Exchange: The effect of subsidiary operations outside the Unit ed States and its possessions on consolidated net sales, net income and net assets for the years ended June 30, 1976 and 1975 was: (In thousands) 1976 1975 Net sales Net income (loss) $213,078 2,463 $197,706 (3,099) Net assets 80,816 78,055 At June 30, 1976, SCM adopted the requirements of Statement No. 8 of the Financial Accounting Stan dards Board relating to the translation of foreign cur rency amounts. The effect of this change on opening retained earnings and on net income of any one prior period is immaterial. Net foreign exchange losses charged against operations were $1,800,000 in fiscal 1976 and $1,400,000 in fiscal 1975. Deferred taxes result from timing differences relative to: Inventory valuations Foreign operations Depreciation Pension expense Other, net Total deferred taxes $ 1,023 2,466 1,446 (691) 1,353 $ 5,597 $ 111 (879) 1,585 (758) 2,167 $ 2,226 GLD30913 Long-Term Debt; (In thousands) June 30 3976 5Vi% sinking fund debentures due 1978-3983 5 9,050 5%% sinking fund debentures due 3978-3987 13,892 714% sinking fund debentures due 3978-3988 14,873 9l4% sinking fund debentures due 1978-1990 2,750 10% sinking fund debentures due 1982-3996 50,000 Bank credit agreement due 1982 - 8%% note (Industrial Reve nue Bonds) due 1991-2000 17,000 Lease obligation (6% Environmental Improve ment Revenue Bonds, due 3984-1993) 10,000 Other loans from 5% to 10% 11,051 5!/2% convertible subordinated debentures due 1978-1988 39,773 5*4% convertible subordinated debentures due 1979-3989 15,000 Total long-term debt $210,389 1975 $ 30,473 34,920 15,887 31,500 41,000 17,000 10,000 17,208 41,484 15,000 $214,472 Approximate long-term debt maturities, including the current portion of long-term debt, during the next five years will be; 3977-$2,104,000, 1978$7,039,000,1979-$! 0,510,000, 1980-$9,670,000, 1981-$9,388,000. Under the most restrictive provisions of the inden tures related to long-term debt, retained earnings of $43,000,000 was available at June 30, 1976 for decla ration of cash dividends. On May 19, 3976 5CM issued $50,000,000 sinking fund debentures due 1996. A portion of the proceeds was used to pay the balance of the bank credit agreement (Revolving Credit and Term Loan Agree ment dated March 20, 1975), which agreement was cancelled subsequent to June 30, 1976, and the bal ance of such proceeds are available for general cor porate purposes. Credit Lines and Compensating Balances: The maximum short-term borrowing outstanding at any month end during the year was $18,000,000 at July 31, 1975. SCM's total unsecured short-term cred it lines at June 30, 1976 were $25,000,000 of which $12,500,000 was outstanding. Subsequent to June 30, 1976, SCM obtained an additional $40,000,000 of unsecured short-term credit lines. The average short term borrowing outstanding during the fiscal year was $13,000,000 and the average interest rate was 13." per cent calculated by dividing total interest by the average amount outstanding. The average interest rate at June 30, 1976 for short-term borrowings, which are principal])' foreign, was 12.5 per cent with out giving effect to compensating balances. GLD30914 40 5CM has informally agreed to maintain compensat ing balances, generally based on 10 per cent of unused credit lines and 20 per cent of borrowings, on the domestic unsecured credit lines. At any given date, cash is not restricted by compensating balance agreements. Capital Stock: The authorized stock consists of 500,000 shares of preferred stock, par value $50 each and 15,000,000 shares of common stock, par value $5 each. A sum mary of shares of common stock outstanding and reserved as of June 30, 1976 and 1975 was: ______________________________________________________________________ Outstanding 1976 9,161,885 Reserved for issuance under stock option plans 452,400 1975 9,156,885 457,622 Reserved for issuance upon conversion of-- 5V!2% subordinated debentures due 1978-1988 855,158 891,946 5Vi% subordinated debentures due 1979-1989 ..................................................................................................... 322,234 322,234 -- During 1976 options to purchase 28,000 shares of common stock were granted; options for 28,171 exercised contributing $25,000 to Common Stock and $26,625 to Additional Paid-In Capital. In 1975, options for 400 shares were exercised. At June 30, 197e, options for 356,517 shares were outstanding. Leases: Annual rental expense, reduced by related income of $1,100,000 and $1,500,000, amounted to $26,600,000 and $24,600,000, of which $5,200,000 and $6,000,000 related to financing leases, for the years ended June 30,1976 and 1975, respectively. Future minimum rental commitments at June 30, 1976 under all non-cancellable leases, reduced by related sublease income of $4,200,000, are as follows: (In thousands) Year Financing Leases Real Property Personal Property NonFinancing Leases 1977 1978 3979 1980 1981 $ 1,000 1,000 1,000 500 500 $ 4,000 3,000 3,000 2,500 2,500 $ 11,000 9,500 9,000 8,000 7,000 1977-1981 3982-1986 3987-1991 1992-1996 Remainder Total 4,000 3,000 2,500 1,000 1,500 $12,000 15,000 44,500 4,500 22,000 2,500 13,500 3,500 7,000 -- 2,000 -------------- ------- ------ ------ - $25,500 $89,000 Minimum rental commitments under non-financing leases arc principally related to real property. If all non-capitalized financing leases were capital ized, the effect on net income would he immaterial. GLD30915 4 Quarterly Results (Unaudited) Unaudited financial results by quarter for fiscal years ended June 30,1976 and 3975 are summarized (In thousands, except per share amounts) Earnings Per SI Fiscal Quarter 1976 First Second Third Fourth Net Sales $ 337,166 329,071 329,765 355,895 Operating Income $36,372 17,964 13,338 24,428 Net Income $ 6,694 8,068 5,488 10,145 Net Income $ .73 .88 .60 3.09 Full Total $1,331,897 $71,902 $30,395 $3.30 1975 First Second Third Fourth $ 340,273 336,985 287,063 323,133 $22,773 21,836 8,486 7,911 $30,072 9,083 2,747 5,986 $3.30 .99 .30 .65 T otal $1,287,454 $61,006 $27,886 $3.04 The 3976 third quarter includes $2.0 million, or $.22 per share, the after tax effect of the decision to write off a portion of plain paper copiers. In addition, the 1976 results include approximately $1.3 million or $.14 per share, the after tax effect of reducing the depreciable lives of plain paper copiers. The 1975 third and fourth quarter tax provis million and $(1.7) million, reflected a chang annual effective tax rate and, in the fourth the benefit arising from a decision to liquid foreign investment. Auditors' Opinion The Shareholders SUM Corporation: !Ye have examined the consolidated balance sheet of SC M Corporation and subsidiary companies as 30, 197e* and 1975 and the related statements of income, retained earnings, and changes in financial for the years then ended. Our examination was made in accordance with generally accepted auditing thirds, and accordingly included such tests of the accounting records and such other auditing procedu considered necessary in the circumstances. In our opinion, such consolidated financial statements present fairly the financial position of the com' June 30, I97c and 3975 and the results of their operations and the changes in their financial position sears then ended, in conlormity with generally accepted accounting principles applied on a consistent \ew York, New York August 18, 197e> 42 GLD30936 Operating Businesses Allied Paper Division 2030 Portage Street, Kalamazoo, Mich. 49003 Ernest J. Klimczak, President John P. Feeley, Senior Vice President Southern Mill Group (Jackson, Ala.) Ralph V. Zepp, Vice President-Resident Manager Kalamazoo Paper Mill Group E.J. Gilman, Vice President-Manufacturing; John Nisbet, Vice President-Sales Office and Stationery Group (Marion, Ind.) W.R. Gates, President Allied/Egry Group (Dayton, O.) G.W. Underwood, President Walton Printing Group (Buena Park, Cal.) R.L. Walton, President Histacount, Inc. (Melville, N.Y.) Joseph Gebbia, President Specialty Coatings Group (Phoenixville, Pa.) Business Equipment Division 299 Park Avenue, New York, N.Y. 10037 William L. Rodich, President Copier Products Group International Group, Francis D. DeMaio, Vice President Consumer Products Division 299 Park Avenue, New York, N.Y. 10017 George F. Burns, President Smith-Corona Group Paul J. Uebbing, Vice President Proctor-Silex Group (Philadelphia, Pa.) Harry Hill, Vice President Glidden-Durkee Division 900 Union Commerce Building, Cleveland O. 44115 Paul W. Neidhardt, President Robert E. Dorfmeyer, Vice President and Assistant to the President John H. Lathe, Jr., Vice President and Assistant to the President Robert L. Lozon, Vice President-Inorganic Chemicals Coatings and Resins Group William D. KinseJl, Jr., Vice President Industrial Foods Group Adrian J. Lathe, Vice President Food Service Group W.A. Hagen, Vice President Consumer Foods Group William A. Miller, Vice President Pigment Group (Baltimore, Md.) Peter C. Firing, Vice President Metals Group W.E. Jones, Vice President Pemco Products Group (Baltimore, Md.) William A. Hubbard, Vice President Organic Chemicals Group (Jacksonville, Fla.) R.P.T. Young, Vice President Proctor & Schwartz Group (Philadelphia, Pa.) J.R. Johnson, Vice President Kleinschmidt Division Lake Cook Road, Deerfield, 111. 60015 Harry S. Gaples, President Officers and Directors Directors and Principal Occupation Robert O. Bass, President Borg-Warner Corporation John T. Booth, Executive Vice President, Blyth Eastman Dillon & Co. George F. Burns, Vice President of SCM; President, Consumer Products Division Lewis H. Durland, Chairman, First National Bank and Trust Company of Ithaca, New York Paul H. Eiickcr*, President and Chief Executive of SCM George E. Hall*, Senior Vice PresidentAdministration of SCM George D. Kennedy, Executive Vice President, International Minerals & Chemical Corporation Wallace W. Knox*, Senior Partner, Knox, Ricksen, Snook, Anthony & Robbins Paul W. Neidhardt*, Senior Vice President of SCM; President, Glidden-Durkee Division Crocker Nevin*, Investment Banker, Drexel Burnham & Co., Inc. William W. Quinn, President, Quinn Associates, management consultants E. Everett Smith, of counsel, McKinscy & Company * Member of Executive Committee Corporate Officers Paul H. Elicker, President and Chief Executive George E. Hall, Senior Vice PresidentAdministration; Secretary Paul V\r. Neidhardt, Senior Vice President; President, Glidden-Durkee Division James Balph, Vice President George F. Burns, Vice President; President, Consumer Products Division William V. Cawley, Vice President and Treasurer Herbert H. Egli, Vice PresidentFinance and Controller Victor E. Feuerherd, Vice President Ernest J. Klimczak, Vice President; President, Allied Paper, Inc, Robert L. Lozon, Vice President William L. Rodich, Vice President; President, Business Equipment Division Richard Sexton, Vice President and General Counsel Gerard F. Stoddard, Vice President GLP3P928 a < <n[xnute Data ! lansfoi A^i-nls M.niiu* Midland Hank-Now York, ! 10 Broadway, Now York, Now Vik Hank of .Amor it..1 National Trust tk S.n ini'.** \i.- v'1 Montgomery Si i net, San I ram ivi t>. C alii. *i n >.t ; i. t'ty.Miars M m uiaituiois I lanover 1 rust C'ompan\ , i New Muk I'la/a, Now \oik, Now \ork t(\\M ! n :! .1 C alifot Mia Hank, - ' i l.twtliniiH- Mi oot. San ! tancisco, ( a) il<n n ia I 10-\ t j'oiaL' 1 ioadijuai lor s .1 ' j\nk Avenue, Now 'i mk, N^W A or k !00 17 l oh pl.otH': (212) ;>2-2700 \ i" it I Moot ini; I l-o \nnual mooli no, ol `dim eSoldei s \s i 1! In hold .0 ' '0 a.111. mi ( k 1: dvi 7S, f l*~i . in liio \ n di (mi in in .*. ilio Miisomn ol Modem \it, 11 \\<. si >>id Mioot. Now Aork, New 'toil, 1001 11>j m J0-K II'. I <i! m 10 - K Annual Ut |U >i! to 'So M > u r ;! :o-- and 1 !uru;e ( ornnt (.!( >n fm ide1* tu'.oa .Jd .!n i.d ; 1 mat inn and will So available iti 1 k ioS. i \ ` :t:N ti'i'nil ma\ So uktainod free of i k iw.e opm i v. j;iost lu tlio ( ui {inrato (. omnuinii a! inio. ! k ^.u 1 nu nl C n.Mium Shales 1 m Jed nn tho Now \ or k and I'.u it u S|. u !. 1 \ > h.mo.es Sn kor s% mlm! "SC M"). BBS. SCM Corporation 299 Park Avenue New York, N.Y. 10017 GLD309?0