1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X](MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 1998
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
--------------- --------------------------- ------------
Commission File Number 001-12505
CORE MATERIALS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1481870
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(State or other jurisdiction (I.R.S. Employer Identification No.)
incorporation or organization)
800 Manor Park Drive, P.O. Box 28183
Columbus, Ohio 43228-0183
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (614) 870-5000
--------------
N/A
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X][ X ] NO [ ]
As of March 31,August 7, 1998, the latest practicable date, 9,612,5809,779,680 shares of
the registrant's common shares were issued and outstanding.
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PART 1 - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
CORE MATERIALS CORPORATION
BALANCE SHEET
MARCH 31,JUNE 30, DECEMBER 31,
1998 1997
---------------- -----------------
(UNAUDITED)---- ----
ASSETS (unaudited)
ASSETS
Cash $ 515,7751,136,006 $ 100,356
Mortgage-back security investment 2,972,5012,961,657 3,217,349
Accounts receivable (less allowance for doubtful accounts:
March 31, 1998 - $105,000;June 30, 1998-$105,000; December 31, 1997 - $133,000 16,158,2531997-$133,000) 15,362,280 14,306,101
Inventories:
Work in process 1,546,8421,950,415 1,163,611
Stores 1,804,0461,428,971 2,143,108
----------- ----------------------- ------------
Total inventories 3,350,8883,379,386 3,306,719
Deferred tax asset 455,002 455,002
Prepaid expenses and other current assets 474,823515,528 307,059
----------- ----------------------- ------------
Total current assets 23,927,24223,809,859 21,692,586
Property, plant and equipment 37,959,90939,998,612 34,971,001
Accumulated depreciation (10,730,510)(11,179,719) (10,293,834)
----------- ----------------------- ------------
Property, plant and equipment - net 27,229,39928,818,893 24,677,167
Deferred tax asset - net 10,627,97410,136,245 11,170,190
----------- -----------Other 154,540 --
------------ ------------
TOTAL $61,784,615 $57,539,943
=========== ===========$ 62,919,537 $ 57,539,943
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 9,436,015 $ 8,140,802
Notes payable -- Banks 6,519,470Bank $ 3,819,470 $ 3,997,120
Current portion of long-term debt 270,000 --
Accounts payable 7,403,940 8,140,802
Accrued liabilities:
Compensation and related benefits 1,916,1992,528,677 2,066,488
Interest 396,98548,059 1,149,061
Other accrued liabilities 1,847,5871,787,313 1,776,856
----------- ----------------------- ------------
Total current liabilities 20,116,25615,857,459 17,130,327
Secured note payable 18,821,841Long term debt - less current portion 23,051,841 18,821,841
Deferred long-term gain 2,944,2412,870,151 3,018,331
Postretirement benefits liability 2,669,4552,723,265 2,474,367
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $0.01 par value,
authorizedAuthorized shares - 20,000,000;
96,12697,797 96,133
Outstanding shares: March 31June 30, 1998 - 9,612,5809,779,680
Outstanding shares: December 31, 1997 - 9,613,281
Paid-in capital 16,064,83516,226,232 16,049,861
Retained earnings (deficit) 1,071,8612,092,792 (50,917)
----------- ----------------------- ------------
Total stockholders' equity 17,232,82218,416,821 16,095,077
----------- ----------------------- ------------
TOTAL $61,784,615 $57,539,943
=========== ===========$ 62,919,537 $ 57,539,943
============ ============
See notes to financial statements.
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CORE MATERIALS CORPORATION
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
-----------------------------------------SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------- -------------------------------
1998 1997 ---------------- -----------------1998 1997
---- ---- ---- ----
NET SALES:
Navistar $16,101,584 $10,460,156$ 15,923,784 $ 13,640,884 $ 32,025,368 $ 24,101,040
Yamaha 4,120,053 5,209,8442,670,900 2,792,501 6,790,953 8,002,345
Other 367,169 703,035
----------- -----------555,072 225,865 922,241 928,900
------------ ------------ ------------ ------------
Total Sales 20,588,806 16,373,035
----------- -----------19,149,756 16,659,250 39,738,562 33,032,285
------------ ------------ ------------ ------------
Cost of Sales 16,146,549 12,700,90214,765,815 12,724,752 30,912,364 25,425,654
Postretirement benefits expense 233,763 235,523
----------- -----------252,455 193,605 486,218 429,128
------------ ------------ ------------ ------------
Total cost of sales 16,380,312 12,936,425
----------- -----------15,018,270 12,918,357 31,398,582 25,854,782
------------ ------------ ------------ ------------
GROSS MARGIN 4,208,494 3,436,610
----------- -----------4,131,486 3,740,893 8,339,980 7,177,503
------------ ------------ ------------ ------------
Selling, general and administrative expense 1,963,346 1,794,4471,986,248 1,822,765 3,949,594 3,617,212
Postretirement benefits expense 34,294 70,322
----------- -----------36,029 54,339 70,323 124,661
------------ ------------ ------------ ------------
Total selling, general and 2,022,277 1,877,104 4,019,917 3,741,873
administrative expense
1,997,640 1,864,769
Other income (expense)expense
-- (23,233) (318) -
----------- -----------(23,233)
------------ ------------ ------------ ------------
INCOME BEFORE INTEREST AND TAXES 2,210,536 1,571,8412,109,209 1,840,556 4,319,745 3,412,397
Interest income 61,222 59,11756,292 59,150 117,514 118,267
Interest expense (368,744) (606,701)
----------- -----------(435,447) (601,004) (804,191) (1,207,705)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,903,014 1,024,2571,730,054 1,298,702 3,633,068 2,322,959
Income taxes:
Current 238,020 101,359217,394 135,684 455,414 237,043
Deferred 542,216 318,586
----------- -----------491,729 396,783 1,033,945 715,369
------------ ------------ ------------ ------------
Total income taxes 780,236 419,945
----------- -----------709,123 532,467 1,489,359 952,412
------------ ------------ ------------ ------------
NET INCOME $ 1,122,7781,020,931 $ 604,312
=========== ===========766,235 $ 2,143,709 $ 1,370,547
============ ============ ============ ============
NET INCOME PER COMMON SHARE:
Basic $ 0.120.11 $ 0.06
=========== ===========0.08 $ 0.22 $ 0.14
============ ============ ============ ============
Diluted $ 0.110.10 $ 0.06
=========== ===========0.08 $ 0.21 $ 0.14
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 9,612,930 9,494,683
=========== ===========9,654,230 9,565,116 9,633,581 9,529,900
============ ============ ============ ============
Diluted 10,032,816 9,605,651
=========== ===========10,126,786 9,672,989 10,079,802 9,639,320
============ ============ ============ ============
See notes to financial statements
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CORE MATERIALS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
TOTAL
COMMON STOCK OUTSTANDING PAID-IN RETAINED SHAREHOLDERSSTOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------------- ---------------- ---------------- --------------- -------------------- ------ ------- -------- ------
BALANCE AT DECEMBER 31, 1997JANUARY 1, 1998 9,613,281 $96,133$ 96,133 $16,049,861 $ (50,917) $16,095,077
Net Income 1,122,778 1,122,7782,143,709 2,143,709
Amortization of deferred
stock compensation 14,967 14,96729,215 29,215
Issuance of stock under
stock option plans 167,600 1,676 147,144 148,820
Other (701) (7) 7 0 0
--------- ------- ----------- ---------- -----------(1,201) (12) 12
========= ======== =========== =========== ===========
BALANCE AT MARCH 31,JUNE 30, 1998 9,612,580 $96,126 $16,064,835 $1,071,861 $17,232,8229,779,680 $ 97,797 $16,226,232 $ 2,092,792 $18,416,821
========= =============== =========== ===================== ===========
See notes to financial statements.
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CORE MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS THREESIX MONTHS ENDED
ENDED
MARCH 31,JUNE 30
-----------------------------------
1998 MARCH 31, 1997
----------------------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $1 ,122,778 $ 604,3122,143,709 $ 1,370,547
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 438,442 583,107887,651 1,194,890
Deferred income taxes 542,216 318,5861,033,945 715,369
Loss on disposal of assets 318 -24,052
Amortization of gain on sale/leaseback transaction (74,090) -(148,180)
Compensation expense on stock awards 14,967 5,25329,215 21,153
Change in operating assets and liabilities:
Increase in accounts receivable (1,852,152) (7,854,027)(1,056,179) (8,360,937)
(Increase)/decrease in inventories (44,169) 370,299(72,667) 701,566
(Increase)/decrease in prepaid and other assets (167,764) 44,469
Increase(129,133) 319,544
(Decrease)/increase in accounts payable 1,295,213 5,062,616
Increase/(decrease)(736,862) 4,740,193
(Decrease)/increase in accrued and other (628,356) 1,649,368
liabilities (831,634) 1,406,755
Increase in postretirement benefits liability 195,088 239,101248,898 421,705
----------- ---------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 639,213 780,4711,572,359 2,797,450
----------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,990,992) (195,254)(5,029,695) (2,804,498)
Payments on mortgage-backed security investment 244,848 47,349255,692 58,735
Proceeds from sale of property and equipment -- 12,500
----------- ---------------------
NET CASH USED BY INVESTING ACTIVITIES (2,746,144) (147,905)(4,774,003) (2,733,263)
----------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line-of-credit 2,522,350 -6,419,470 3,650,000
Payments on line-of-credit (6,597,120) (3,650,000)
Payments on secured note payable (3,000,000) --
Proceeds from industrial revenue bonds 7,500,000 --
Issuance costs for industrial revenue bonds (233,876) --
Proceeds from exercise of stock options 148,820 37,500
----------- ---------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,522,350 -4,237,294 37,500
----------- ---------------------
NET INCREASE IN CASH 415,419 632,5661,035,650 101,687
CASH AT BEGINNING OF PERIOD 100,356 590,212
----------- ---------------------
CASH AT END OF PERIOD $ 515,775 $1,222,7781,136,006 $ 691,899
=========== =====================
CASH PAID FOR:
Interest $1, 120,819 $ 16,4211,889,111 $ 1,205,403
=========== =====================
Income Taxes $ 228,000 -375,000 $ 45,000
=========== =====================
See notes to financial statements.
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CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10Q and include all of the information
and disclosures required by generally accepted accounting principles for interim
reporting, which are less than those required for annual reporting. In the
opinion of management, the accompanying unaudited financial statements contain
all adjustments (all of which are normal and recurring in nature) necessary to
present fairly the financial position of Core Materials Corporation ("Core
Materials") at March 31,June 30, 1998, and the results of its operations and its cash
flows. The "Notes to Financial Statements" which are contained in the 1997
Annual Report to shareholders should be read in conjunction with these Financial
Statements. Certain reclassifications have been made to prior year's amounts to
conform with the classifications of such amounts for 1998.
Core Materials Corporation ("Core Materials") was formed on October 8,
1996 by RYMAC Mortgage Investment Corporation ("RYMAC"), as a wholly owned
subsidiary, for the purpose of acquiring substantially all of the assets and
assuming certain of the liabilities of Columbus Plastics Operation ("Columbus
Plastics"), an operating unit of Navistar International Transportation Corp.
("Navistar").
On December 31, 1996, RYMAC merged into its wholly owned subsidiary,
Core Materials, by converting each outstanding common share of RYMAC into the
right to receive one common share of Core Materials, with Core Materials as the
surviving corporation and continuing registrant. Simultaneously, on December 31,
1996, Core Materials purchased substantially all of the assets and assumed
certain liabilities of Columbus Plastics (the "Acquisition").Plastics.
Core Materials produces compression Sheet Molding Composite ("SMC")
fiberglass reinforced plastic parts. Core Materials has two principal customers,
Navistar and Yamaha Motor Manufacturing Corporation ("Yamaha").
2. RESTRICTED CASH
Included in cash at June 30, 1998, is $401,770 which is restricted
pursuant to the terms of the Industrial Revenue Bond noted below. This
restriction will be removed as Core Materials incurs qualified expenditures
related to the project for which the bond was issued.
3. LONG-TERM DEBT
In May, 1998, Core Materials borrowed $7,500,000 through the issuance
of an Industrial Revenue Bond ("IRB"). The IRB bears interest at a weekly
adjustable rate and matures in April, 2013. Principal is payable beginning in
July, 1998. Total principal maturities by year are: 1998 - $130,000; 1999 -
$285,000; 2000 - $305,000; 2001 - $330,000; 2002 - $355,000; 2003 - $390,000;
and thereafter - $5,705,000.
In conjunction with the IRB, in June 1998, Core Materials entered
into an interest rate swap agreement with a commercial bank. This agreement
effectively converts the variable rate IRB to fixed interest debt. Under this
agreement, Core Materials will pay a fixed rate of 4.89% to the bank and will
receive 76% of the 30 day commercial paper rate. The difference to be paid
or received varies as short-term interest rates change and is accrued and
recognized as an adjustment to interest expense. The swap term matches the
payment schedule on the IRB with final maturity in April 2013. While Core
Materials is exposed to credit loss on its interest rate swap in the event of
non-performance by the counterparty to the swap management believes such
non-performance is unlikely to occur given the financial resources of the
counterparty.
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As security for the for the IRB, Core Materials obtained a letter of
credit in the amount of $7,726,028, from a commercial bank. The letter of credit
can only be used to pay principal and interest on the IRB. Any borrowings made
under the letter of credit bear interest at the bank's prime rate and is secured
by a lien and security interest in all of Core Materials' business assets. The
letter of credit expires in April, 2003.
4. COMPREHENSIVE INCOME
The CompanyCore Materials adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income". Comprehensive income is a
measurement of all changes in stockholders' equity that result from transactions
and other economic events other than transactions with stockholders. The CompanyCore
Materials does not have any items of comprehensive income other than net income;
therefore, total comprehensive income amounted to $1,122,778$1,020,931 and $604,312$766,235 for
March 31,the three months ended June 30, 1998 and 1997, respectively; total comprehensive
income amounted to $2,143,709 and $1,370,547 for the six months ended June 30,
1998 and 1997, respectively.
3.5. NEW ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement revises
standards for disclosures about pension and other postretirement benefit plans
which will require adoption no later than December 31, 1998. This standard
expands or modifies disclosure and, accordingly, will have no impact on the
Company'sCore
Materials' reported financial position, results of operations and cash flows.
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4.6. EARNINGS PER COMMON SHARE
The CompanyCore Materials presents earnings per common share in accordance with
SFAS No. 128, "Earnings per Share." Under SFAS No. 128, basic earnings per
common share are computed based on the weighted average number of common shares
outstanding during the period. Diluted earnings per common share are computed
similarly but includesinclude the effect of the exercise of stock options under the
treasury stock method. In calculating net income per share for the three and six
months ended March 31,June 30, 1998, weighted average shares increased for the
computation of diluted income per share by 419,886472,556 and 446,221 shares,
respectively, due to the effect of stock options, whichoptions; this effect reduced net income
per share by $0.01 and $0.01 for the three and six months ended June 30, 1998,
respectively. In calculating net income per share for the three and six months
ended March 31,June 30, 1997, weighted average shares increased for the computation of
diluted income per share by 110,968107,873 and 109,420, respectively, due to the
effect of stock options, which had no appreciable effect on net income per
share.
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PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements under this caption, constitute "forward-looking
statements" which involve certain risks and uncertainties. Core Materials'
actual results may differ significantly from those discussed in the
forward-looking statements. Factors that may cause such a difference include,
but are not limited to: business conditions in the plastics, transportation,
recreation and consumer products industries, the general economy, competitive
factors, the dependence on two major customers, new technologies, the year 2000
systems issue, start-up of the Company's South Carolina facility, regulatory
requirements, labor relations, the loss or inability to attract key personnel,
construction delays, the availability of capital and management's decisions to
pursue new products or businesses which involve additional cost risks or capital
expenditures.
OVERVIEW
On December 31, 1996, Core Materials acquired all of the assets and
assumed certain liabilities of Columbus Plastics, a wholly owned operating unit
of Navistar's truck manufacturing division since its formation in late 1980.
Based on the terms of the acquisition, the transaction for financial reporting
and accounting purposes has been accounted for as a reverse acquisition whereby
Columbus Plastics is deemed to have acquired Core Materials. However, Core
Materials is the continuing legal entity.
Core Materials manufactures high quality compression SMC fiberglass
reinforced parts. Core Materials has two major customers, Navistar and Yamaha.
The demand for Core Materials' products is affected by the volume of purchases
from these two customers, whose orders are primarily affected by economic
conditions in the United States and Canada. Core Materials' manufacturing
operations have a significant fixed cost component. Accordingly, during periods
of changing demands, the profitability of Core Materials' operations will change
proportionately more than revenues from operations.
At the time of the acquisition of Columbus Plastics, Navistar and Core
Materials entered into a Comprehensive Supply Agreement with an initial term of
five years. Under the terms of the Comprehensive Supply Agreement, Navistar
agreed to purchase from Core Materials, and Core Materials agreed to sell to
Navistar at negotiated prices, which approximate fair value, all of Navistar's
original equipment and service requirements for fiberglass reinforced parts
using the SMC process for components then being manufactured by Core Materials
and detailed in the Comprehensive Supply Agreement.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,JUNE 30, 1998 AS COMPARED TO THREE MONTHS ENDED MARCH 31,JUNE 30,
1997
Net sales for the three months ended March 31,June 30, 1998, totaled $20,589,000$19,150,000 up
26%15% from the $16,373,000$16,659,000 reported for the three months ended March 31,June 30, 1997.
Sales to Navistar increased 54%17% to $16,102,000$15,924,000 from $10,460,000$13,641,000 for the three
months ended March 31,June 30, 1997. The increase in sales to Navistar was the result of
an increase in Navistar's sales of medium and heavy trucks. Sales to Yamaha
decreased for the three months ended March 31,June 30, 1998 by 21%4% to $4,120,000$2,671,000 compared
with $5,210,000$2,793,000 for the three months ended March 31,June 30, 1997. The minimal decrease
in sales to Yamaha is primarily due to Yamaha's production slowdown as a result
of the maturing of the personal watercraft market.
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"Other" sales for the three months ended March 31,June 30, 1998, decreased 48%increased 146% to
$367,000$555,000 from $703,000$226,000 for the three months ended March 31,June 30, 1997. The reductionincrease in
other sales was primarily the result of reduced sales to General Motorsa new customer, Case
Corporation, a leading manufacturer of agricultural equipment; in May 1998, Core
Materials began manufacturing SMC tractor roof assemblies for electric car components and some reduction in the sales of sheet molding
composite to SMC molding companies.Case Corporation's
Racine, Wisconsin facility.
Gross marginMargin was 20%21.6% of sales for the three months ended March 31,June 30, 1998
compared with 21%22.5% for the three months ended March 31,June 30, 1997. The decreasedThis decline in
margins is primarily the result of changes in product mix and increased usage of
production process supplies. Also impacting gross margin as a percentwas the effect of
sales, 21% to 20%, is primarily due to the increase inincreased lease expenses on production equipment. Inassociated with the December 1997 sale leaseback
transaction. As previously noted, Core Materials entered
into a sale-leaseback arrangement with a financial institution. Equipment
consisting primarilysold various items of
SMC presses with a book value of $8,619,000 was sold for
$12,000,000production equipment and leased the items back under a 10 yearan operating lease
agreement. The proceeds fromof this transactionsale were used to reducepay down long term debt. As a
portionresult of this transaction, Core Materials has recorded higher costs of sales,
due to the classification of the principal on the Secured
Note payable due to Navistar.operating leases, offset by lower interest
costs reflected below.
Selling, general and administrative expenses (SG&A)("SG&A") totaled $1,998,000$2,022,000 for
the three months ended March 31,June 30, 1998 increasing from $1,865,000$1,877,000 for the three
months ended March 31,June 30, 1997. The increase over the 1997 amounts is primarily due
to the addition of a second plant in Gaffney, South Carolina. This second plant
provides additional capacity to support the production requirements of current
customers and opportunity for growth. The Gaffney plant began molding and
assembly operations in early 1998.
Interest income for the three months ended March 31,June 30, 1998 totaled $61,000
increasing$56,000
decreasing slightly from the $59,000 for the three months ended March 31,June 30, 1997.
Interest expense totaled $369,000$435,000 for the three months ended March 31,June 30, 1998
decreasing from $607,000$601,000 for the three months ended March 31,June 30, 1997. The decrease
in interest expense from 1997 is primarily the result of a $213,000 reduction in interest
costs on the Secured Note payable to Navistar resultingdue to the $12,000,000 of proceeds
from the principalsale-leaseback transaction, noted above, being used to pay down discussed above and a $125,000 increase in interest capitalized related to
capital projects under constructionthis
debt. This decrease was partially offset by a $100,000 increaseincreased interest costs on
borrowings used to finance Core Materials' new facility in interest on the revolving line of credit.Gaffney, South
Carolina.
Income taxes for the three months ended March 31,June 30, 1998 are estimated to be
approximately 41% of total earnings before taxes. Actual tax payments will be
substantially
lower than the recorded expenses as Core Materials has substantial federal tax
loss carryforwards. These loss carryforwards were recorded as a deferred tax
asset, partially offset by a valuation reserve at December 31, 1996 as a part of
the purchase accounting adjustments. As the tax loss carryforwards are utilized
to offset federal income tax payments, Core Materials reduces the deferred tax
asset as opposed to recording a reduction in income tax expense. Actual cash
payments related to the three months ended March 31,June 30, 1998 are estimated to be
approximately $238,000$217,000 which reflects federal alternative minimum, state and
local taxes.
Net income for the three months ended March 31,June 30, 1998 was $1,123,000$1,021,000 or $.12$.11
per basic and $.11$.10 per diluted share, an increase of $519,000$255,000 or 86%33% over the
net income for the three months ended March 31,June 30, 1997 of $604,000$766,000 or $.06$.08 per
basic and diluted share. The increase in net income was primarily the result of
increased sales as detailed above.
SIX MONTHS ENDED JUNE 30, 1998 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net sales for the six months ended June 30, 1998, totaled $39,739,000 up 20%
from the $33,032,000 reported for the six months ended June 30, 1997. Sales to
Navistar increased 33% to $32,025,000 from $24,101,000 for the six months ended
June 30, 1997. The increase in sales to Navistar was the result of an increase
in Navistar's sales of medium and heavy trucks. Sales to Yamaha decreased for
the six months ended June 30, 1998 by 15% to $6,791,000 compared with $8,002,000
for the six months ended June 30, 1997. The decrease in sales to Yamaha is
primarily due to Yamaha's production slowdown as a result of the maturing of the
personal watercraft market.
"Other" sales for the six months ended June 30, 1998, decreased 1% to
$922,000 from $929,000 for the six months ended June 30, 1997. The reduction in
sales was primarily the result of reduced sales to General Motors for electric
car components and a reduction in the sales of sheet molding composite to SMC
molding companies; these reductions were almost totally offset by increased
sales to Case Corporation.
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Gross margin was 21% of sales for the six months ended June 30, 1998
compared with 21.7% for the six months ended June 30, 1997. The decreased gross
margin as a percent of sales, 21.7% to 21%, is primarily due to the reasons
noted above for the three months.
SG&A totaled $4,020,000 for the six months ended June 30, 1998 increasing
from $3,742,000 for the six months ended June 30, 1997. The increase over the
1997 amounts is primarily due to the addition of a second plant in Gaffney,
South Carolina as explained above.
Interest income for the six months ended June 30, 1998 totaled $118,000 as
compared with the $118,000 for the six months ended June 30, 1997. Interest
expense totaled $804,000 for the six months ended June 30, 1998 decreasing from
$1,208,000 for the six months ended June 30, 1997. The decrease in interest
expense from 1997 is the result of the reasons noted above for the three months
and the effect of an increase in interest capitalized related to capital
projects under construction.
Income taxes for the six months ended June 30, 1998 are estimated to be
approximately 41% of total earnings before taxes. Actual cash payments related
to the six months ended June 30, 1998 are estimated to be approximately $455,000
which reflects federal alternative minimum, state and local taxes.
Net income for the six months ended June 30, 1998 was $2,144,000 or $.22 per
basic and $.21 per diluted share, an increase of $773,000 or 56% over the net
income for the six months ended June 30, 1997 of $1,371,000 or $.14 per basic
and diluted share. The increase in net income was primarily the result of
increased sales as detailed above.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital at March 31,June 30, 1998 decreased $751,000increased $3,390,000 from the working
capital at December 31, 1997. The primary reason for the decrease in working
capital is the increase in short term notes of $2,522,000, representing
borrowings on the Company's revolving line of credit which has been used as an
interim financing resource to fund the construction of the Company's new
facility in South Carolina and certain other capital projects. Accounts receivable increased by $1,852,000$1,056,000 and
accounts payable increaseddecreased by $1,295,000$737,000 from the December 31, 1997 levels. The
primary cause for both the receivables
and payables increase is the increase in sales volume for
the first quartersix months ended June 30, 1998. Accounts payable decreased as a result of 1998.a
reduction in payables related to capital expenditures. The reduction in interest
payable of $752,000$1,101,000 is primarily the result of interest paid to Navistar in Januaryon
June 30, 1998, for interest accrued 9
10
through the lastfirst half of 19971998 on the
Secured Note payable. Property additions of $2,989,000$5,030,000 primarily relate to the
acquisition of equipment for the Gaffney, South Carolina facility.
In the fourth quarter of 1997, Core Materials entered into a comprehensive
financing arrangement with a financial institution. Under this arrangement, the
financingfinancial institution committed to provide Core Materials the following credit
facilities: 1.) a $7,500,000 variable rate revolving line of credit; 2.) a
$12,000,000 sale-leaseback arrangement on certain machinery and equipment; 3.) a
$7,500,000
letter of credit to support the issuance of an Industrial Revenue Bond, and 4.)
$5,500,000 for equipment leases.
In December 1997, Core Materials closed on the line of credit which is being
used for working capital purposes and to temporarily fund capital expenditures
related to the Company's South Carolina expansion. Also in December, the Company
entered into the sale-leaseback agreement, the proceeds of which were used to
pay down the Secured Note payable to Navistar.
TheIn May 1998, Core Materials borrowed $7,500,000 through the issuance of an
Industrial Revenue BondBond. The proceeds from this credit facility were used to pay
down Core Materials' line of credit, which was being used to temporarily finance
the new facility in South Carolina and to pay down the secured note payable to
Navistar.
The equipment leases ($5,500,000 referred to above) will also be used to
provide permanent financing for Core Materials' new facility and equipment in
South Carolina. The Company expectsSubsequent to close on these facilitiesthe end of the quarter, in the second quarterAugust of 1998, Core
Materials closed on $5,300,000 of the proceeds of which will primarily be used to pay down existing debt
under the revolver and Secured Note.equipment leases.
10
11
Management believes that internally generated funds from operations, along
with the current and future financings discussed above, will be sufficient to
fund anticipated capital requirements.
YEAR 2000 MATTERS
Core Materials has identified all significant applications that will
require modification to ensure Year 2000 compliance. Internal and external
resources are being used to make the required modifications and test Year 2000
compliance. The Company plans to complete the modifications and testing process
of all significant applications by MayAugust 1999, which is prior to any
anticipated impact on its operating systems.
The date on which Core Materials believes it will complete the Year
2000 modifications is based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
In addition, Core Materials will communicate with others with whom it
does significant business to determine its Year 2000 compliance readiness and
the extent to which the Company is vulnerable to any third-party Year 2000
issues. However, there can be no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse affect on the Company.
10
11
MANAGEMENT'S OUTLOOK
The Company will continuehas continued to focus significant efforts on serving its
current customers and obtaining new
business for both its Ohio and South Carolina operations. Recently, these efforts have resultedIn May 1998, Core
Materials announced a business relationship with Case Corporation for the
manufacture of tractor roof assemblies. In July 1998, this relationship was
expanded with the addition of combine roof assemblies which will go into
production late in the third quarter of 1998.
Also in July 1998, Core Materials established a new relationship with
Case Corporation ("Case"), a leading manufacturer of agricultural
equipment. In April 1998,John Deere. Core Materials began manufacturing SMC tractor roofwill produce hood assemblies for Case's Racine, Wisconsin facility. Core Materials expectsa new tractor model
scheduled to expand this relationship to other Case products.enter production in mid 1999.
The addition of Case Corporation and John Deere, along with the
previously announced addition of residential door products for Caradon Doors
and Windows Inc.'s,Inc's, Peachtree division, represent important steps towardscontinue to support Core Material's
objective of obtaining new customers and diversifying its product base.
Core Materials' management is pleased with the results of the first
quarter. For the balance of the year, management anticipates that the Company's
year over year results will be less favorable than achieved in the first
quarter. This is primarily due to the effects of normal seasonality and
cyclicality experienced in sales to Navistar and Yamaha along with the
additional costs expected to be incurred from the start up of the Company's new
facility in South Carolina.
11
12
PART I - FINANCIAL INFORMATION
ItemITEM 3
Quantitative and Qualitative Disclosures About Market Risk
The disclosures required under this Part I, Item 3 are omitted pursuant to
the General Instructions to Item 305 at Regulation S-K, because this Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 1998, does not
contain financial statements for fiscal years ended after June 15, 1998.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
11
1312
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No submissionAt the Annual Meeting of matters to a votethe Stockholders of security holders
occurredCore Materials
Corporation held on May 28, 1998 the following issues were
voted upon with the indicated results:
A. ELECTION OF DIRECTORS: SHARES VOTED FOR SHARES WITHHELD
James F. Crowley 8,922,223 74,683
Ralph O. Hellmold 8,928,123 68,783
Thomas M. Hough 8,928,123 68,783
Malcolm M. Prine 8,928,123 68,783
James L. Simonton 8,928,123 68,783
The above elected directors constitute the full acting
Board of Directors for Core Materials Corporation; all
terms expire at the three months ended March1999 annual meeting of stockholders of
the Company.
B. RATIFICATION OF DELOITTE AND TOUCHE, LLP AS AUDITORS FOR
THE YEAR ENDING DECEMBER 31, 1998.1998:
SHARES VOTED FOR SHARES AGAINST SHARES ABSTAINING
8,944,565 31,350 20,991
C. WITH RESPECT TO APPROVAL OF THE COMPANY'S EMPLOYEE STOCK
PURCHASE PLAN:
SHARES VOTED FOR SHARES AGAINST SHARES ABSTAINING
8,638,717 302,613 55,576
ITEM 5. OTHER INFORMATION
NoneAs discussed in the Company's Proxy Statement for the 1998
Annual Meeting of Stockholders, any qualified stockholder of
the Company who intends to submit a proposal to the Company at
the 1999 Annual Meeting of Stockholders (the "1999 Annual
Meeting") must submit such proposal to the Company not later
than December 28, 1998 to be considered for inclusion in the
Company's Proxy Statement and form of Proxy (the "Proxy
Materials") relating to that meeting. If a stockholder intends
to present a proposal at the 1999 Annual Meeting of
Stockholders, but has not sought the inclusion of such
proposal in the Company's Proxy Materials, such proposal must
be received by the Company prior to March 13, 1999 or the
Company's management proxies for the 1999 Annual Meeting will
be entitled to use their discretionary voting authority should
such proposal then be raised, without any discussion of the
matter in the Company's Proxy Materials.
12
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
See Index to Exhibits
REPORTS ON FORM 8-K:
None
1213
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORE MATERIALS CORPORATION
Date: MayAugust 14,1998 By: /s/ KENNETH M. SCHMELL
-------------- ------------------------------
Kenneth M. Schmell
Executive Vice President and
Chief Operating Officer
Date: August 14, 1998 By: ________________________________
------------ Kenneth M. Schmell
General Manager and
Acting Chief Executive Officer
Date: May 14, 1998 By: ________________________________
------------/s/ KEVIN L. BARNETT
--------------- -------------------------------
Kevin L. Barnett
Vice President, Secretary, Treasurer
and Chief Financial Officer
1314
15
INDEX TO EXHIBITS
Exhibit No. Description Location
----------- ----------- --------
3(a)(1) Certificates
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
3(a)(1) Certificate of Incorporation of Incorporated by
Core Materials Corporation reference to Exhibit
as filed with the Secretary of State 4(a) to Registration
of Delaware on October 8, 1996 Statement on Form
S-8 (Registration
No. 333-29203)
3(a)(2) Certificate of Amendment of Incorporated by
Certificate of Incorporation reference to Exhibit
of Core Materials Corporation 4(b) to Registration
as filed with the Secretary of State Statement on Form
of Delaware on November 6, 1996 S-8 (Registration
No. 333-29203)
3(a)(3) Certificate of Incorporation of Core Incorporated by
Materials Corporation, reflecting reference to Exhibit
amendments through November 6, 4(c) to Registration
1996 [for purposes of compliance Statement on Form
with Securities and Exchange S-8 (Registration
Commission filing requirements only] No. 333-29203)
3(b) By-Laws of Core Materials Incorporated by
Corporation reference to Exhibit
3-C to Registration
Statement on Form
S-4 (Registration
No. 333-15809)
4(a)(1) Certificate of Amendment of Incorporated by
Certificate of Incorporation reference to Exhibit
of Core Materials Corporation 4(b) to Registration
as filed with the Secretary of State Statement on Form
of Delaware on November 6, 1996 S-8 (Registration
No. 333-29203)
3(a)(3) Certificate of Incorporation of Core Incorporated by
Materials Corporation, reflecting reference to Exhibit
amendments through November 6, 4(c) to Registration
1996 [for purposes of compliance Statement on Form
with Securities and Exchange S-8 (Registration
Commission filing requirements only] No. 333-29203)
3(b) By-Laws of Core Materials Incorporated by
Corporation reference to Exhibit
3(c) to Registration
Statement on Form
S-4 (Registration
No. 333-15809)
4(a)(1) Certificates of Incorporation of Incorporated by
Core Materials Corporation reference to Exhibit
as filed with the Secretary of State 4(a) to Registration
of Delaware on October 8, 1996 Statement on Form
S-8 (Registration
No. 333-29203)
4(a)(2) Certificate of Amendment of Incorporated by
Certificate of Incorporation reference to Exhibit
of Core Materials Corporation 4(b) to Registration
as filed with the Secretary of State Statement on Form
of Delaware on November 6, 1996 S-8 (Registration
No. 333-29203)
4(a)(3) Certificate of Incorporation of Core Incorporated by
Materials Corporation, reflecting reference to Exhibit
amendments through November 6, 4(c) to Registration
1996 [for purposes of compliance Statement on Form
with Securities and Exchange S-8 (Registration
Commission filing requirements only] No. 333-29203)
15
16
4(b) By-Laws of Core Materials Incorporated by
Corporation reference to Exhibit
3(c) to Registration
Statement on Form
S-4 (Registration
No. 333-15809)
11 Computation of Net Income Per Share Exhibit 11 omitted
because required
information is
included in Notes to
Financial Statement.
27 Financial Data Schedule Filed Herein
4(b) By-Laws of Core Materials Incorporated by
Corporation reference to Exhibit
3-C to Registration
Statement on Form
S-4 (Registration
No. 333-15809)
10(a)(1) Loan Agreement Filed herein
10(a)(2) Reimbursement Agreement Filed herein
10(a)(3) Core Materials Corporation Incorporated by
Employee Stock Purchase Plan reference from
Exhibit 4(e)
from Registration
Statement on
Form S-8 (Registration
No. 333-60909)
11 Computation of Net Income per Share Exhibit 11 omitted
because required
information is
included in Notes to
Financial Statement
27 Financial Data Schedule Filed herein
16