<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
--------------
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
- --------------------------------------------------------------------------------
(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
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] NO [ ]
As of June 30, 1997, the latest practicable date, 9,565,282 shares of
the registrant's common shares were issued and outstanding.
1
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PART 1 - FINANCIAL INFORMATION
ITEM 1
CORE MATERIALS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
--------------- -------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 691,899 $ 590,212
Mortgage-backed security investment 3,236,314 3,295,049
Accounts receivable - (less allowance for doubtful
accounts June 30 - $34,736; December 31 - $0) 10,368,900 2,007,963
Inventories:
Work in process 848,958 1,585,644
Stores 1,792,175 1,757,055
------------ ------------
Total inventories 2,641,133 3,342,699
Prepaid expenses & other current assets 24,897 344,441
------------ ------------
Total Current Assets 16,963,143 9,580,364
Property, plant and equipment 44,979,255 42,337,970
Accumulated depreciation (18,337,717) (17,269,488)
------------ ------------
Property, plant and equipment - net 26,641,538 25,068,482
Deferred tax asset - net 11,739,631 12,455,000
------------ ------------
TOTAL $ 55,344,312 $ 47,103,846
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable $ 5,113,063 $ 372,870
Accrued liabilities:
Compensation & related benefits 1,995,353 827,313
Other accrued liabilities 1,076,118 594,790
------------ ------------
Total current liabilities 8,184,534 1,794,973
Secured note payable 29,514,000 29,514,000
Postretirement benefits liability 665,705 244,000
------------ ------------
TOTAL LIABILITIES 38,364,239 31,552,973
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value 95,653 94,746
Authorized 20,000,000 shares
Outstanding shares June 30 - 9,565,282 shares;,
Outstanding shares December 31 - 9,474,600 shares
Paid-in capital 15,975,939 15,918,193
Retained earnings (deficit) 908,481 (462,066)
------------ ------------
Total stockholders' equity 16,980,073 15,550,873
TOTAL $ 55,344,312 $ 47,103,846
============ ============
</TABLE>
See notes to the financial statements
2
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CORE MATERIALS CORPORATION
STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997
AND STATEMENTS OF REVENUES, DIRECT EXPENSES AND IDENTIFIED CORPORATE EXPENSES
BEFORE INTEREST AND TAXES FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales:
Navistar $ 13,640,884 $ 7,845,156 $ 24,101,040 $ 15,997,080
Yamaha 2,792,501 5,345,758 8,002,345 11,606,448
Other 225,865 279,506 928,900 468,254
------------ ------------ ------------ ------------
Total 16,659,250 13,470,420 33,032,285 28,071,782
Cost of sales 12,724,752 12,391,625 25,425,654 25,345,971
Postretirement benefits expense 193,605 207,613 429,128 418,575
------------ ------------ ------------ ------------
Total cost of sales 12,918,357 12,599,238 25,854,782 25,764,546
Gross Margin 3,740,893 871,182 7,177,503 2,307,236
------------ ------------ ------------ ------------
Selling, general and administrative expense 1,845,998 1,203,705 3,640,445 2,483,568
Postretirement benefits expense 54,339 88,041 124,661 177,502
------------ ------------ ------------ ------------
Total selling, general and administrative expense 1,900,337 1,291,746 3,765,106 2,661,070
------------ ------------ ------------ ------------
Income (loss) before interest and taxes 1,840,556 (420,564) 3,412,397 (353,834)
Interest income 59,150 N/A 118,267 N/A
Interest expense 601,004 N/A 1,207,705 N/A
------------ ------------ ------------ ------------
Income before income taxes 1,298,702 N/A 2,322,959 N/A
Estimated income taxes 532,467 N/A 952,412 N/A
------------ ------------ ------------ ------------
Net income $ 766,235 N/A $ 1,370,547 N/A
============ ============ ============ ============
Net Income Per Common Share $ .08 N/A $ .14 N/A
============ ============ ============ ============
Weighted Average Shares Outstanding 9,748,659 N/A 9,715,713 N/A
============ ============ ============ ============
</TABLE>
See notes to the financial statements
3
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CORE MATERIALS CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,370,547
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 1,194,890
Loss on Disposal of Assets 24,052
Deferred Income Taxes 715,369
Other 58,653
Change in Operating Assets and Liabilities:
Increase in Trade Receivables (8,360,937)
Decrease in Inventories 701,566
Decrease in Prepaid and Other Assets 319,544
Increase in Accounts Payable 4,740,193
Increase in Accrued Liabilities 1,649,368
Increase in Postretirement Benefits Liability 421,705
-----------
Net Cash Provided by Operating Activities 2,834,950
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (2,804,498)
Proceeds from Sale of Property and Equipment 12,500
Payments on Mortgage-Backed Security Investment 58,735
-----------
Net Cash Used in Investing Activities (2,733,263)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line-of-credit agreement 3,650,000
Payments on line-of-credit borrowings (3,650,000)
-----------
Net Cash Provided by Financing Activities 0
NET INCREASE IN CASH 101,687
CASH AT BEGINNING OF PERIOD 590,212
-----------
CASH AT END OF PERIOD $ 691,899
===========
CASH PAID FOR:
INTEREST $ 1,205,403
===========
TAXES $ 45,000
===========
</TABLE>
See notes to the financial statements
4
<PAGE> 5
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 10-Q 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 June 30, 1997 and the results of operations and cash flows. The
notes to the Financial Statements, which are contained in the 1996 Annual Report
to Stockholders, 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 1997.
On December 31, 1996 Core Materials purchased substantially all of the
assets of and assumed certain liabilities of Columbus Plastics Operation
("Columbus Plastics"), an operating unit of Navistar International
Transportation Corp. ("Navistar"). Throughout these notes to Financial
Statements, references to Columbus Plastics refer to the operations of Core
Materials prior to the acquisition. The transaction for financial reporting and
accounting purposes have 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 and registrant for both Securities and
Exchange Commission filing purposes and income tax reporting purposes.
Consistent with reverse acquisition accounting treatment Core Materials has
carried forward the historical basis of the acquired assets and assumed
liabilities of Columbus Plastics and has revalued the basis of its net assets to
fair value at December 31, 1996.
Prior to the Acquisition on December 31, 1996, Columbus Plastics was
not a "stand alone" division or subsidiary of Navistar and was not generally
accounted for separately. As a result, the distinct and separate accounts
necessary to present an individual Core Materials income statement for the three
and six months ended June 30, 1996 have not been maintained.
Also prior to the Acquisition, Columbus Plastics did not maintain
corporate treasury, legal, tax, purchasing and other similar corporate support
functions. Corporate general and administrative expenses have not been
previously allocated to Columbus Plastics. For purposes of preparing the Core
Materials financial statements for the three and six months ended June 30, 1996,
certain of these corporate costs, along with other Navistar Truck Group
expenses, were allocated using an allocation method (see Note 4). However,
Navistar's systems and procedures do not provide sufficient information to
develop a reasonable cost allocation for income taxes, corporate debt and
interest expenses.
With respect to cash flows; purchases of inventory, payroll, capital
and other expenditures were funded through the Equity Investment account with
Navistar (see Note 2). Accounts payable to third party vendors and certain
expense accruals were processed and recorded at other Navistar locations.
Remittances from sales to third parties were collected by Navistar and were
accounted for through the Equity Investment account as were sales to Navistar's
truck assembly operations. Accordingly, Columbus Plastics had no operating cash
flows. Therefore, for the six months ended June 30, 1996, changes in the Equity
Investment account are presented in lieu of a Statement of Cash Flows for such
period.
5
<PAGE> 6
2. EQUITY INVESTMENT ACCOUNT
As indicated in note 1 above, prior to the acquisition date of December
31, 1996, cash flows for purchases and sales of inventory, payroll, capital
expenditures, and other expenditures were funded through the intercompany equity
investment account with Navistar. As such a Statement of Cash Flows cannot be
presented for the six months ended June 30, 1996. In lieu of a Statement of Cash
Flows, the following information summarizes the changes in the Equity Investment
account for the six months ended June 30, 1996:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1996
-------------
<S> <C>
Balance - beginning of period $ 24,206,408
Funding of purchases 24,704,273
Net charges from Navistar 7,410,303
Navistar funding of plant expenses and other 1,258,682
Net charges to Navistar (18,976,390)
Collections from third parties (16,614,074)
Loss before interest and taxes (353,834)
------------
Balance - end of period $ 21,635,368
============
</TABLE>
Funding of Purchases -- represents amounts funded by Navistar primarily
for purchases of materials and capital expenditures.
Net Charges From Navistar -- represents amounts charged for payroll and
related expenses, charges for employee health and welfare plans, payments to
union sponsored pension plans and all corporate support services.
Navistar Funding of Plant Expenses and Other -- represents amounts
transferred to Columbus Plastics from Navistar as reimbursement for expenses
paid by Columbus Plastics.
Net Charges to Navistar -- represents the intercompany sales and
charges by Columbus Plastics to other Navistar manufacturing plants for the sale
of SMC products.
Collections From Third Parties -- represents amounts collected by
Columbus Plastics on sales to third parties, primarily Yamaha, and collections
on billings for tooling projects.
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<PAGE> 7
3. UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following pro forma combined statements of income for the three and
six months ended June 30, 1996 are presented as if the Acquisition had occurred
as of January 1, 1996. This information is being presented to provide more
comparable income statements for the three and six months ended June 30, 1996.
This pro forma information is not necessarily indicative of the actual results
of operations, which would have occurred had the transaction occurred on such
date or which may occur in the future.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1996
--------------------------------
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------------------
HISTORICAL SUPPLY PRO FORMA
COLUMBUS & SERVICES ADJUSTED
PLASTICS ACQUISITION NOTE AGREEMENT NOTE BALANCE NOTE
-------- ----------- ---- --------- ---- ------- ----
<S> <C> <C> <C> <C>
Net Sales:
Navistar $7,845,156 $1,288,025 (b) $9,133,181
Yamaha 5,345,758 5,345,758
Other 279,506 279,506
------------- --------------- --------------- ----------------
Total 13,470,420 1,288,025 14,758,445
Cost of sales 12,391,625 12,391,625
Postretirement benefits expense 207,613 207,613
------------- --------------- --------------- ----------------
Total cost of sales 12,599,238 12,599,238
Gross Margin 871,182 1,288,025 2,159,207
------------- --------------- --------------- ----------------
Selling, general and administrative 1,203,705 216,000 (d) 1,419,705
expense
Postretirement benefits expense 88,041 88,041
------------- --------------- --------------- ----------------
Total selling, general and 1,291,746 216,000 1,507,746
administrative expense
------------- --------------- --------------- ----------------
Income (loss) before interest and (420,564) (216,000) 1,288,025 651,461
taxes
Interest 57,663 (a) 57,663
income
Interest expense 460,280 (c) 460,280
------------- ---------------- --------------- ----------------
Income (loss) before income taxes $(420,564) $(618,617) $1,288,025 $ 248,844
Estimated income taxes 102,026 (f)
----------------
Net income $ 146,818
================
Net Income Per Share $ 0.02
================
Weighted Average Shares Outstanding 9,654,400 (e)
================
</TABLE>
7
<PAGE> 8
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1996
------------------------------
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------------------
HISTORICAL SUPPLY PRO FORMA
COLUMBUS & SERVICES ADJUSTED
PLASTICS ACQUISITION NOTE AGREEMENT NOTE BALANCE NOTE
-------- ----------- ---- --------- ---- ------- ----
<S> <C> <C> <C> <C>
Net Sales:
Navistar $15,997,080 $2,631,025 (b) $18,628,105
Yamaha 11,606,448 11,606,448
Other 468,254 468,254
------------- --------------- --------------- ----------------
Total 28,071,782 2,631,025 30,702,807
Cost of sales 25,345,971 25,345,971
Postretirement benefits expense 418,575 418,575
------------- --------------- --------------- ----------------
Total cost of sales 25,764,546 25,764,546
Gross Margin 2,307,236 2,631,025 4,938,261
------------- --------------- --------------- ----------------
Selling, general and administrative
expense 2,483,568 432,000 (d) 2,915,568
Postretirement benefits expense 177,502 177,502
------------- --------------- --------------- ----------------
Total selling, general and
administrative expense 2,661,070 432,000 3,093,070
------------- --------------- --------------- ----------------
Income (loss) before interest and
taxes (353,834) (432,000) 2,631,025 1,845,191
Interest 115,326 (a) 115,326
income
Interest expense 920,560 (c) 920,560
------------- ---------------- --------------- ----------------
Income (loss) before income taxes $(353,834) $(1,237,234) $2,631,025 $ 1,039,957
Estimated income taxes 426,382 (f)
----------------
Net income $ 613,575
================
Net Income Per Share $ 0.06
================
Weighted Average Shares Outstanding 9,654,400 (e)
================
</TABLE>
The Unaudited Pro Forma Combined Statement of Income for the three and
six months ended June 30, 1996 has been prepared assuming the proposed
acquisition had occurred on January 1, 1996 and reflects the effects of certain
adjustments to the historical financial statement that resulted from the
acquisition of Columbus Plastics by Core Materials. Columbus Plastics (Core
Materials prior to Dec. 31, 1996) was not a "stand alone" division or subsidiary
of Navistar and was not generally accounted for separately. Navistar's systems
and procedures do not provide sufficient information to develop a reasonable
cost allocation for income taxes and interest expense. Accordingly, historical
net income per share amounts have not been included for the financial
information of Columbus Plastics for the three and six months ended June 30,
1996. A historical statement of income for Core Materials is not included in the
unaudited pro forma combined financial information as the Acquisition was
accounted for using reverse acquisition accounting treatment.
8
<PAGE> 9
(a) Represents the estimated interest income earned on the
mortgage-backed security at the security's effective interest rate
of 7%.
(b) Represents the additional revenues resulting from pricing sales by
Core Materials to Navistar reflecting the prices specified in the
Comprehensive Supply Agreement, rather than at Core Materials
historical standard cost.
(c) Represents the estimated interest expense on the Secured Note due
to Navistar at 8% per annum less the interest credit for the three
and six months ended June 30, 1996, which represents the
capitalization of interest on the Secured Note relating to
property, plant and equipment under construction; this interest
credit equates to $130,000 and $260,000 for the three and six
months ended June 30, 1996 respectively.
(d) Represents an estimate of the additional administrative expenses to
be incurred by Core Materials as a result of its status as a
stand-alone, publicly owned company rather than an operating unit
of a much larger corporation. Additional costs consist primarily of
broker fees, legal fees, auditing fees, 10-K and 10-Q printing
fees, officers' and directors' fees.
(e) The weighted average number of common shares and common stock
equivalents outstanding used to calculate net income per common
share include the number of shares of Core Materials common stock
outstanding prior to the acquisition, the number of shares issued
to Navistar as consideration for the Acquisition, and the effect of
the exercise of 260,000 dilutive Core Material stock options, using
the treasury stock method.
(f) Represents the estimated income tax expense for Core Materials
based upon a statutory Federal tax rate of 34% and an estimated
Ohio state and local tax rate of 11%. The income tax expense
recorded in the unaudited pro forma combined financial statements
is not necessarily indicative of the cash payments for income taxes
that Core Materials would be required to pay due to Core Materials'
substantial net operating loss carryforwards. Core Materials
expects to only be required to make minimal Federal income tax
payments as mandated, primarily, by the Alternative Minimum Tax
regulations until such time that the loss carryforwards are fully
utilized or expired.
4. CORPORATE ALLOCATIONS
Prior to its acquisition by Core Materials, Columbus Plastics did not
maintain corporate treasury, legal, tax, purchasing and other similar corporate
support functions. Columbus Plastics did record certain budgeted corporate
expenses related primarily to employee benefits, real estate taxes and
insurance. Adjustments to these amounts to reflect actual expenditures were not
recorded by Columbus Plastics but are included in the corporate allocation
amounts noted below. For purposes of preparing the financial information for
Columbus Plastics for the three and six months ended June 30, 1996, certain
corporate costs and credits along with other Navistar Truck Group expenses which
were not budgeted to Columbus Plastics were allocated based upon a variety of
factors which include the size of the Columbus Plastics operation, the number of
Columbus Plastics employees, and the identification of costs specifically
attributable to Columbus Plastics. Management believes that the allocation
method used is reasonable and reflective of Columbus Plastics' proportionate
share of such expenses and is comparable to those that would have been incurred
on a stand-alone basis.
The following summarizes the corporate costs (credits) allocated to
Columbus Plastics which were originally not budgeted or recorded by Columbus
Plastics for the three and six months ended June 30, 1996. The amounts represent
adjustments to the originally recorded expenses or allocations of Navistar
Corporate and Truck Group Marketing and Administrative expenses.
9
<PAGE> 10
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1996 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Cost of sales
Cost of Sales - subtotal $(134,334) $(270,305)
Postretirement benefits - Cost of sales 4,208 8,484
--------- ---------
Total cost of sales $(130,126) $(261,821)
========= =========
Selling, general and administrative expense
SG&A - subtotal $ 105,223 $ 210,054
Postretirement benefits - SG&A 1,784 3,597
--------- ---------
Total selling, general and administrative expense $ 107,007 $ 213,651
========= =========
</TABLE>
5. RELATED PARTIES
In connection with the acquisition, Core Materials and Navistar entered
into a Supply Agreement and a Transitional Services Agreement (the "Services
Agreement"). Under the terms of the Supply Agreement, for a period of five years
commencing December 31, 1996, 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 Sheet Molding Composite
process as they then existed or as they may be improved or modified. On a pro
forma basis, pursuant to the terms of the Supply Agreement, Core Materials would
have charged Navistar for sales of its products approximately $9,133,000 and
$18,628,000 for the three and six months ended June 30, 1996 respectively. Under
the terms of the Services Agreement, Navistar will provide financial reporting,
accounting, computer services and office support services to Core Materials for
a period of one year at fees based upon actual hours incurred by Navistar in
providing such services and purchases. For the three and six months ended June
30, 1997, charges for these services totaled $44,713 and $93,213 respectively.
At June 30, 1997, the total amount due from Navistar under the Supply Agreement
was $9,753,539; this amount is included in accounts receivable. The total amount
due to Navistar, under the Services Agreement was $28,715 at June 30, 1997; this
amount is included in accounts payable. The interest due Navistar on the secured
note through June of $1,187,119 was paid on June 30, 1997.
6. STOCK OPTIONS AND EQUITY INCENTIVE PLAN
On May 29, 1997, the shareholders approved the Core Materials
Corporation - Long Term Incentive Plan. The plan allows for granting of
non-qualified stock options, incentive stock options, director options, stock
appreciation rights, restricted stock, performance shares, performance units and
other incentive awards up to an aggregate 1.5 million awards, each award
representing a right to buy a share of Core Materials' common stock. Through
June 30, 1997, the Board of Directors granted 731,000 options to certain
executive officers, directors and employees of Core Materials at prices ranging
from $2.75 to $2.81 per share.
10
<PAGE> 11
7. NEW ACCOUNTING STANDARDS
Stock-Based Compensation: - In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock Based Compensation". The Statement defines a "new
fair value" method of accounting for stock based compensation plans but also
allows a company to retain the "intrinsic value" approach prescribed by
Accounting Principles Board Opinion ("APB") No. 25 with certain disclosures. The
Company accounts for its stock-based compensation plans in accordance with the
intrinsic value method prescribed by APB No. 25. However, in accordance with
(SFAS) No. 123, the Company will disclose the pro forma impact on net income and
earnings per share had compensation cost been recorded using the fair value
method in its 1997 Annual Report.
Earnings per Share: - In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, "Earnings per Share", which the Company
must adopt in its quarter ended December 31, 1997. SFAS No. 128 requires the
presentation of both basic and diluted earnings per share. Basic earnings per
share presents net income available to common shareholders on a per share basis
based only upon the number of common shares outstanding without consideration of
dilutive securities. Diluted earnings per share represents the same information
after giving effect to all dilutive securities. The pro forma earnings per share
of the Company for the three and six months ended June 30, 1997 under the new
presentation requirements prescribed in SFAS No. 128 would be:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1997 SIX MONTHS ENDED JUNE 30, 1997
<S> <C> <C>
Basic earnings per share $.08 $.14
Diluted earnings per share $.08 $.14
</TABLE>
11
<PAGE> 12
PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CORE MATERIALS
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, heavy truck and
personal watercraft industries, the general economy, competitive factors
including the dependence on two major customers, new technologies, regulatory
requirements, labor relations, the loss or inability to attract key personnel,
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. Accordingly, any references to the
operating results of Core Materials for the three and six months ended June 30,
1996 refer to the historical operations of Columbus Plastics.
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.
Pursuant to the Asset Purchase Agreement, 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. All sales and gross margin information for
the three and six months ended June 30, 1997 reflects the results of the
Comprehensive Supply Agreement.
Prior to January 1, 1997, Core Materials had not been a stand alone
operating entity. As such, Navistar had provided substantial management support
in the form of treasury, legal, tax, information systems and other similar
corporate support functions. Corporate general and administrative expenses have
not been previously allocated to Core Materials. For purposes of preparing the
income statement of Core Materials for the three and six months ended June 30,
1996 for this 10-Q, these corporate costs have been allocated using a method
management believes to be reasonable and reflective of those costs that would
have been incurred as a stand alone basis.
12
<PAGE> 13
Net sales for the three and six months ended June 30, 1996 do not
reflect the additional revenue that would have been generated had the
Comprehensive Supply Agreement been in effect at that time. Prior to the
Comprehensive Supply Agreement, all sales to Navistar facilities were accounted
for at Core Materials' ("Columbus Plastics Operations") standard costs. In
addition, Core Materials did not incur certain expenses related to being a stand
alone publicly traded entity, such as executive salary costs and legal and
accounting fees. Finally, the results for the three and six months ended June
30, 1996 do not reflect investment income or expenses for interest or income
taxes. Thus, the results of the three and six months ended June 30, 1996 are not
readily comparable to the results of the three and six months ended June 30,
1997.
In order to make this comparison more meaningful in the discussion which
follows, pro forma financials have been prepared for the three and six months
ended June 30, 1996 (See Note 3 in the "Notes to Financial Statements" for
further information). In the discussion which follows, all references to and
comparisons with the results of the three and six months ended June 30, 1996
reflect the historical Columbus Plastics, 1996 financials. Any dollars and/or
percentages in parentheses reflect references to and comparisons with 1996 pro
forma financial information.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Net sales for the three months ended June 30, 1997, totaled $16,659,000 up
24% (13%) from the $13,470,000 ($14,758,000) reported for the three months ended
June 30, 1996. Sales to Navistar increased 74% (49%) to $13,641,000 from
$7,845,000 ($9,133,000) for the three months ended June 30, 1996. The increase
in sales to Navistar was primarily the result of sales of certain heavy truck
components which Core Materials began producing in June 1996 and a general
increase in volume of sales. Sales to Yamaha decreased for the three months
ended June 30, 1997 by 48% to $2,793,000 compared with $5,346,000 for the three
months ended June 30, 1996. This decrease is due to Yamaha's production slowdown
in the three months ended June 30, 1997 for purposes of inventory leveling and
model change over.
"Other" sales decreased 19% to $226,000 from $280,000 for the three months
ended June 30, 1996. This reduction in sales was primarily the result of
decreased sales of molded parts to General Motors (Electric Vehicle Parts)
offset in part by increased sales of sheet molding composite to SMC molding
companies.
Gross margin was 22% of sales for the three months ended June 30, 1997
compared with 6% (15%) for the three months ended June 30, 1996. The increased
gross margin as a percent of sales, 6% to 22%, is primarily due to the markup
(per the Comprehensive Supply Agreement) on sales to Navistar. The increase in
the 1997 gross margin as a percent of sales over the 1996 pro forma adjusted
percentage is primarily due to increased sales volumes, increased capacity
utilization, and the fact that 1996's cost of sales included higher than normal
repair and maintenance expenses and unfavorable inventory adjustments.
Additionally, Core Materials has experienced improved efficiencies in the usage
of operating supplies in the three months ended June 30, 1997.
Selling, general and administrative expenses (SG&A) totaled $1,900,000 for
the three months ended June 30, 1997 increasing from $1,292,000 ($1,508,000) for
the three months ended June 30, 1996. The increase over the 1996 amounts is
primarily due to the Company incurring expenses related to being a stand alone
publicly traded entity, increased depreciation expense and expenses for
training, consultants and search firms.
Interest income for the three months ended June 1997 totaled $59,000 and is
primarily attributable to interest on Core Materials' mortgage-backed security
investment. The Company had no interest income for the three months ended June
30, 1996.
13
<PAGE> 14
Interest expense for the three months ended June 30, 1997 totaled $601,000.
The interest expense is primarily the result of $597,000 in interest paid to
Navistar on the $29,514,000 Secured Note. The Company had no interest expense in
the three months ended June 30, 1996 since all financing was handled at
Navistar's Corporate Offices.
Income taxes for the three months ended June 30, 1997 are estimated to be
approximately 41% of total earnings before taxes. Actual tax payments will be
substantially lower than the recorded expenses because 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 taxes payable for the three months ended June 30,
1997 are estimated to be approximately $136,000 which reflects federal
alternative minimum, state and local taxes.
SIX MONTHS ENDED JUNE 30, 1997 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Net sales for the six months ended June 30, 1997, totaled $33,032,000 up 18%
(8%) from the $28,072,000 ($30,703,000) reported for the six months ended June
30, 1996. Sales to Navistar increased 51% (29%) to $24,101,000 from $15,997,000
($18,628,000) for the six months ended June 30, 1996. Sales increased to
Navistar for the same reasons as explained above. Sales to Yamaha decreased for
the six months ended June 30, 1997 by 31% to $8,002,000 compared with
$11,606,000 for the six months ended June 30, 1996. The decrease in sales to
Yamaha is due primarily to Yamaha's production slowdown which commenced in May
1997 for purposes of inventory leveling and model change over; in addition,
Yamaha's sales for the six months ended June 30, 1996 were higher than normal as
a result of Yamaha's anticipation of increased demand.
"Other" sales increased 98% to $929,000 from $468,000 in the six months
ended June 30, 1996. This increase in sales was primarily the result of
increased sales of sheet molding composite to SMC molding companies.
Gross margin was 22% of sales for the six months ended June 30, 1997
compared with 8% (16%) for the six months ended June 30, 1996. The increased
gross margin as a percent of sales, 8% to 22%, is primarily due to the markup
(per the Comprehensive Supply Agreement) on sales to Navistar. The 1997 gross
margin as a percent of sales increased over the 1996 pro forma adjusted
percentage for the same reasons as explained above.
Selling, general and administrative expenses (SG&A) totaled $3,765,000 for
the six months ended June 30, 1997 increasing from $2,661,000 ($3,093,000) for
the six months ended June 30, 1996. The increase over the 1996 actual amounts is
primarily due to the Company incurring expenses related to being a stand alone
publicly traded entity and other expenses as explained above.
Interest income for the six months ended June 1997 totaled $118,000 and is
primarily attributable to interest on Core Materials' mortgage-backed security
investment. Interest expense for the six months ended June 30, 1997 totaled
$1,208,000, which was primarily paid to Navistar. The Company had no interest
income nor interest expense in the six months ended June 30, 1996 since all
financing was handled at Navistar's Corporate Offices.
Income taxes for the six months ended June 30, 1997 are estimated to be
approximately 41% of total earnings before taxes. Actual taxes payable for the
six months ended June 30, 1997 are estimated to be approximately $237,000 which
reflects federal alternative minimum, state and local taxes.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
Net working capital as of June 30, 1997 increased $993,000 over the working
capital at December 31, 1996. Accounts receivable increased by $8,361,000 and
accounts payable increased by $4,740,000 from the December 31, 1996 levels. The
primary causes for both the receivables and payables increase is the purchase
agreement between Core Materials and Navistar. As of December 31, 1996, the
effective date of the purchase, there were no receivables on the books for
Navistar as a customer. Additionally as part of the agreement, Navistar assumed
a majority of the accounts payable that existed on December 31, 1996. The June
30, 1997 accounts receivable includes Navistar receivables for sales under the
Comprehensive Supply Agreement. The June 30, 1997 accounts payables include
expenditures to support normal production. Property additions of $2,804,000
primarily relate to the acquisition of machinery and equipment.
Historically, Core Materials' working capital and investment needs have been
financed by Navistar through the intercompany equity investment account and
through the sale of products to Yamaha. Subsequent to the closing, Core
Materials has independently funded all of its working capital and investment
capital requirements. Funds necessary to meet its working capital and investment
needs are currently being financed through the following sources: 1) the
comprehensive Supply Agreement between Navistar and Core Materials, while in
effect, requires that Navistar obtain all of its SMC plastic requirements for
components currently being manufactured by Core Materials, as detailed in the
Comprehensive Supply Agreement, from Core Materials at negotiated prices which
approximate fair value; 2) the Company has substantial net operating losses
("NOLs") that will be available to offset future taxable income of Core
Materials ( the utilization of these NOLs will substantially reduce any federal
income tax liability payments); and 3) Core Materials is currently negotiating
to obtain a permanent working capital line of credit with a commercial bank
which will be available to fund Core Materials' working capital requirements. In
January 1997, management entered a $3 million temporary working capital facility
with a commercial bank utilizing the mortgage-backed security as collateral for
borrowings under the facility. In June 1997, $2.15 million was borrowed from a
commercial bank for purposes of funding purchases of machinery and equipment.
This borrowing was repaid and there was no outstanding balance as of June 30,
1997. Internally generated funds together with proceeds from the use of this
working capital facility have provided sufficient operating liquidity for Core
Materials. The Comprehensive Supply Agreement with Navistar provides for payment
terms for shipments to Navistar which are customary in the SMC manufacturing
industry. Core Materials has been receiving regular payments on its receivables
from Navistar after an initial period prescribed by the Comprehensive Supply
Agreement.
Management believes that internally generated funds from operations, along
with funds from bank financing, will be sufficient to fund anticipated capital
requirements.
Management is also negotiating a permanent working capital facility and a
term loan facility(ies) which will be supported by Core Materials' machinery,
equipment and real estate. Funding from such term loan(s) will be utilized to
reduce the Navistar Secured Note Payable (Navistar's remaining note balance will
likely become subordinate in regard to both collateral and repayment to any term
financing concluded).
MANAGEMENT'S OUTLOOK
As reported in the first quarter's 10-Q, the annual Navistar vacation
shutdown as well as inventory leveling at Yamaha will affect the third quarter.
However, management remains optimistic regarding the Company's results for the
full year. The Company continues to focus significant effort on obtaining new
business and is currently considering second facility opportunities.
15
<PAGE> 16
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
At the annual meeting of the shareholders of Core Materials
Corporation held May 29, 1997, the following issues were voted
upon with the indicated results:
<TABLE>
<S> <C>
A. ELECTION OF DIRECTORS: SHARES VOTED FOR SHARES AGAINST
Richard R. Conte 8,695,258 364,811
Ralph O. Hellmold 8,863,152 196,917
Thomas M. Hough 8,861,228 198,841
Malcolm M. Prine 8,705,278 354,791
Thomas E. Rigsby 8,863,778 196,291
</TABLE>
The above elected directors constitute the full acting
Board of Directors for Core Materials Corporation; all
terms expire at the 1998 annual meeting of stockholders.
<TABLE>
<S> <C>
B. RATIFICATION OF DELOITTE AND TOUCHE, LLP AS AUDITORS FOR THE YEAR ENDING DECEMBER 31, 1997:
SHARES VOTED FOR SHARES AGAINST SHARES ABSTAINING
9,000,550 23,568 35,951
C. WITH RESPECT TO APPROVAL OF THE CORE MATERIALS LONG-TERM EQUITY INCENTIVE PLAN:
SHARES VOTED FOR SHARES AGAINST SHARES ABSTAINING BROKER NON-VOTES
5,955,054 495,819 90,322 2,518,874
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
11. Computation of Earnings per share
27. Financial Data Schedule
REPORTS ON FORM 8-K:
None
16
<PAGE> 17
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: August 8, 1997 By:
------------------ -------------------
Kenneth M. Schmell
General Manager and
Acting Chief Executive Officer
Date: August 8, 1997 By: -------------------
------------------ Kevin L. Barnett
Vice President, Treasurer and
Chief Financial Officer
17
<PAGE> 1
Exhibit 11
CORE MATERIALS CORPORATION
COMPUTATION OF EARNINGS PER SHARE
---------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, 1997 JUNE 30, 1997
------------- -------------
<S> <C> <C>
PRIMARY:
Weighted Average
Common Shares Outstanding 9,565,115 9,529,900
Common Equivalent Shares - Stock Options 183,544(1) 185,813(1)
---------- ----------
Common Shares and Common
Equivalent Shares Outstanding 9,748,659 9,715,713
========== ==========
NET INCOME $ 766,235 $1,370,547
========== ==========
NET INCOME PER SHARE $ .08 $ .14
========== ==========
FULLY DILUTED:
Weighted Average
Common Shares Outstanding 9,565,115 9,529,900
Common Equivalent Shares - Stock Options 247,693(1) 224,881(1)
---------- ----------
Common Shares and Common
Equivalent Shares Outstanding 9,812,808 9,754,781
========== ==========
NET INCOME $ 766,235 $1,370,547
========== ==========
NET INCOME PER SHARE $ .08 $ .14
========== ==========
<FN>
(1) Calculated under the Treasury Stock Method using the average price or
period-end market price of Core Materials stock, as applicable.
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AND STATEMENT OF INCOME FOR THE PERIOD ENDED JUNE 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 691,899
<SECURITIES> 3,236,314
<RECEIVABLES> 10,368,900
<ALLOWANCES> 34,736
<INVENTORY> 2,641,133
<CURRENT-ASSETS> 16,963,143
<PP&E> 44,979,255
<DEPRECIATION> 18,337,717
<TOTAL-ASSETS> 55,344,312
<CURRENT-LIABILITIES> 8,184,534
<BONDS> 0
0
0
<COMMON> 95,653
<OTHER-SE> 16,884,420
<TOTAL-LIABILITY-AND-EQUITY> 55,344,312
<SALES> 33,032,285
<TOTAL-REVENUES> 33,032,285
<CGS> 25,854,782
<TOTAL-COSTS> 29,619,888
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,207,705
<INCOME-PRETAX> 2,322,959
<INCOME-TAX> 952,412
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,370,547
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
