<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 September 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 September 30, 1997, the latest practicable date, 9,564,681 shares
of the registrant's common shares were issued and outstanding.
1
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
ITEM 1
CORE MATERIALS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 1,281,411 $ 590,212
Mortgage-backed security investment 3,226,327 3,295,049
Accounts receivable - (less allowance for doubtful
accounts September,30 - $35,136; December,31 - $0) 11,833,090 2,007,963
Inventories:
Work in process 854,743 1,585,644
Stores 2,230,021 1,757,055
------------ ------------
Total inventories 3,084,764 3,342,699
Prepaid expenses & other current assets 411,375 344,440
------------ ------------
Total Current Assets 19,836,967 9,580,363
Property, plant and equipment 48,677,432 42,337,970
Accumulated depreciation (18,853,910) (17,269,489)
------------ ------------
Property, plant and equipment - net 29,823,522 25,068,481
Deferred tax asset - net 11,528,422 12,455,000
------------ ------------
TOTAL $ 61,188,911 $ 47,103,844
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable $ 6,981,431 $ 372,869
Notes payable 2,347,120
Accrued liabilities:
Compensation & related benefits 2,467,873 827,313
Interest payable 613,927
Other accrued liabilities 1,081,155 594,790
------------ ------------
Total current liabilities 13,491,506 1,794,972
Secured note payable 29,514,000 29,514,000
Postretirement benefits liability 805,512 244,000
------------ ------------
TOTAL LIABILITIES 43,811,018 31,552,972
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value 95,647 94,746
Authorized 20,000,000 shares
Outstanding shares September, 30 - 9,564,681 shares
Outstanding shares December, 31 - 9,474,600 shares
Paid-in capital 15,991,806 15,918,193
Retained earnings (deficit) 1,290,440 (462,067)
------------ ------------
Total stockholders' equity 17,377,893 15,550,872
TOTAL $ 61,188,911 $ 47,103,844
============ ============
</TABLE>
See notes to the financial statements
2
<PAGE> 3
<TABLE>
<CAPTION>
CORE MATERIALS CORPORATION
STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
AND STATEMENTS OF REVENUES, DIRECT EXPENSES AND IDENTIFIED CORPORATE EXPENSES
BEFORE INTEREST AND TAXES FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales:
Navistar $ 11,573,614 $ 6,978,354 $ 35,674,654 $ 22,975,434
Yamaha 1,774,635 3,608,583 9,776,980 15,215,031
Other 331,784 259,653 1,260,684 727,907
------------ ------------ ------------ ------------
Total 13,680,033 10,846,590 46,712,318 38,918,372
Cost of sales 10,581,245 9,246,688 36,006,899 34,592,659
Postretirement benefits expense 166,772 177,348 595,900 595,923
------------ ------------ ------------ ------------
Total cost of sales 10,748,017 9,424,036 36,602,799 35,188,582
Gross Margin 2,932,016 1,422,554 10,109,519 3,729,790
------------ ------------ ------------ ------------
Selling, general and administrative expense 1,753,379 1,305,540 5,393,824 3,789,108
Postretirement benefits expense 41,604 66,933 166,265 244,435
------------ ------------ ------------ ------------
Total selling, general and administrative expense 1,794,983 1,372,473 5,560,089 4,033,543
------------ ------------ ------------ ------------
Income (loss) before interest and taxes 1,137,033 50,081 4,549,430 (303,753)
Interest income 57,954 N/A 176,221 N/A
Interest expense 547,596 N/A 1,755,301 N/A
------------ ------------ ------------ ------------
Income before income taxes 647,391 N/A 2,970,350 N/A
Estimated income taxes 265,431 N/A 1,217,843 N/A
------------ ------------ ------------ ------------
Net income $ 381,960 N/A $ 1,752,507 N/A
============ ============ ============ ============
Net Income Per Common Share $ .04 N/A $ .18 N/A
============ ============ ============ ============
Weighted Average Shares Outstanding 9,889,653 N/A 9,773,693 N/A
============ ============ ============ ============
</TABLE>
See notes to the financial statements
3
<PAGE> 4
CORE MATERIALS CORPORATION
STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net Income $ 1,752,507
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 1,711,083
Loss on Disposal of Assets 24,052
Deferred Income Taxes 926,578
Change in Operating Assets and Liabilities:
Increase in Trade Receivables (9,825,127)
Decrease in Inventories 257,935
Decrease in Prepaid and Other Assets (66,935)
Increase in Accounts Payable 6,608,562
Increase in Accrued Liabilities 2,740,852
Increase in Postretirement Benefits Liability 561,512
-----------
Net Cash Provided by Operating Activities 4,691,019
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (6,502,676)
Proceeds from Sale of Property and Equipment 12,500
Payments on Mortgage-Backed Security Investment 68,722
-----------
Net Cash Used in Investing Activities (6,421,454)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line-of-credit 5,997,120
Payments on line-of-credit (3,650,000)
Proceeds from the issuance of common stock 74,514
-----------
Net Cash Provided by Financing Activities 2,421,634
NET INCREASE IN CASH 691,199
CASH AT BEGINNING OF PERIOD 590,212
-----------
CASH AT END OF PERIOD $ 1,281,411
===========
CASH PAID FOR:
INTEREST $ 1,141,374
===========
TAXES $ 50,000
===========
</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 September 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 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 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 30, 1996. In lieu of a Statement
of Cash Flows, the following information summarizes the changes in the Equity
Investment account for the nine months ended September 30, 1996:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, 1996
------------------
<S> <C>
Balance - beginning of period $ 24,206,408
Funding of purchases 33,068,187
Net charges from Navistar 11,262,314
Navistar funding of plant expenses and other 1,819,343
Net charges to Navistar (27,457,153)
Collections from third parties (21,188,883)
Loss before interest and taxes (303,753)
------------
Balance - end of period $ 21,406,463
============
</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.
6
<PAGE> 7
3. UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following pro forma combined statements of income for the three and
nine months ended September 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 nine months ended September
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 SEPTEMBER 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> <C> <C> <C>
Net Sales:
Navistar $6,978,354 $1,090,039 (b) $8,068,393
Yamaha 3,608,583 3,608,583
Other 259,653 259,653
------------- --------------- --------------- ----------------
Total 10,846,590 1,090,039 11,936,629
Cost of sales 9,246,688 9,246,688
Postretirement benefits expense 177,348 177,348
------------- --------------- --------------- ----------------
Total cost of sales 9,424,036 9,424,036
Gross Margin 1,422,554 1,090,039 2,512,593
------------- --------------- --------------- ----------------
Selling, general and administrative
expense 1,305,540 216,000 (d) 1,521,540
Postretirement benefits expense 66,933 66,933
------------- --------------- --------------- ----------------
Total selling, general and
administrative expense 1,372,473 216,000 1,588,473
------------- --------------- --------------- ----------------
Income (loss) before interest and
taxes 50,081 (216,000) 1,090,039 924,120
Interest income 57,663 (a) 57,663
Interest expense 460,280 (c) 460,280
------------- ---------------- --------------- ----------------
Income (loss) before income taxes $ 50,081 $(618,617) $1,090,039 $ 521,503
Estimated income taxes 213,816 (f)
----------------
Net income $ 307,687
================
Net Income Per Share $ 0.03
================
Weighted Average Shares Outstanding 9,654,400 (e)
================
</TABLE>
7
<PAGE> 8
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 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> <C> <C> <C>
Net Sales:
Navistar $22,975,434 $3,721,064 (b) $26,696,498
Yamaha 15,215,031 15,215,031
Other 727,907 727,907
----------- -------------- -------------- ----------------
Total 38,918,372 3,721,064 42,639,436
Cost of sales 34,592,659 34,592,659
Postretirement benefits expense 595,923 595,923
----------- -------------- -------------- ----------------
Total cost of sales 35,188,582 35,188,582
Gross Margin 3,729,790 3,721,064 7,450,854
----------- -------------- -------------- ----------------
Selling, general and administrative
expense 3,789,108 648,000 (d) 4,437,108
Postretirement benefits expense 244,435 244,435
----------- -------------- -------------- ----------------
Total selling, general and
administrative expense 4,033,543 648,000 4,681,543
----------- -------------- -------------- ----------------
Income (loss) before interest and
taxes (303,753) (648,000) 3,721,064 2,769,311
Interest income 172,989 (a) 172,989
Interest expense 1,380,840 (c) 1,380,840
----------- ---------------- --------------- ----------------
Income (loss) before income taxes $(303,753) $(1,855,851) $3,721,064 $ 1,561,460
Estimated income taxes 640,198 (f)
----------------
Net income $ 921,262
================
Net Income Per Share $ 0.10
================
Weighted Average Shares Outstanding 9,654,400 (e)
================
</TABLE>
The Unaudited Pro Forma Combined Statement of Income for the three and
nine months ended September 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 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 nine months ended September 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 nine months ended September 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 $390,000 for the three and nine
months ended September 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 nine months ended September 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 nine months ended September 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Cost of sales
Cost of Sales - subtotal $(118,704) $(389,009)
Postretirement benefits - Cost of sales 3,595 12,079
--------- ---------
Total cost of sales $(115,109) $(376,930)
========= =========
Selling, general and administrative expense
SG&A - subtotal $ 107,964 $ 318,018
Postretirement benefits - SG&A 1,357 4,954
--------- ---------
Total selling, general and administrative expense $ 109,321 $ 322,972
========= =========
</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 $8,068,000 and
$26,696,000 for the three and nine months ended September 30, 1996 respectively.
Under the terms of the Services Agreement, Navistar will provide, as needed,
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. For the three and nine months
ended September 30, 1997, charges for these services totaled $43,390 and
$136,603 respectively. At September 30, 1997, the total amount due from Navistar
under the Supply Agreement was $9,540,645; this amount is included in accounts
receivable. The total amount due to Navistar, under the Services Agreement was
$44,957 at September 30, 1997; this amount is included in accounts payable. The
interest due Navistar on the secured note is $603,397 at September 30, 1997 and
interest expense on the note due was $603,397 and $1,790,516 for the three and
nine months ended September 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
September 30, 1997, options totaling 750,000 have been granted and are
outstanding; these options were granted to certain executive officers, directors
and employees of Core Materials at prices ranging from $2.75 to $3.53 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 nine months ended September 30, 1997 under the
new presentation requirements prescribed in SFAS No. 128 would be:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
<S> <C> <C>
Basic earnings per share $.04 $.18
Diluted earnings per share $.04 $.18
</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, transportation,
recreation and consumer products 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, 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. Accordingly, any references to the
operating results of Core Materials for the three and nine months ended
September 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 nine months ended September 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 had
not been previously allocated to Core Materials. For purposes of preparing the
income statement of Core Materials for the three and nine months ended September
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 on a stand alone basis.
12
<PAGE> 13
Net sales for the three and nine months ended September 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 nine months ended
September 30, 1996 do not reflect investment income or expenses for interest or
income taxes. Thus, the results of the three and nine months ended September 30,
1996 are not readily comparable to the results of the three and nine months
ended September 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 nine months
ended September 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 nine months ended September 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 SEPTEMBER 30, 1997 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Net sales for the three months ended September 30, 1997, totaled $13,680,000
up 26% (15%) from the $10,847,000 ($11,937,000) reported for the three months
ended September 30, 1996. Sales to Navistar increased 66% (43%) to $11,574,000
from $6,978,000 ($8,068,000) for the three months ended September 30, 1996. The
increase in sales to Navistar was primarily the result of a general increase in
volume of sales. Sales to Yamaha decreased for the three months ended September
30, 1997 by 51% to $1,775,000 compared with $3,609,000 for the three months
ended September 30, 1996. This decrease is due to Yamaha's production slowdown
in 1997 for purposes of inventory leveling and model change over.
"Other" sales increased 28% to $332,000 from $260,000 for the three months
ended September 30, 1996. This increase in sales was primarily the result of
increased sales of sheet molding composite to SMC molding companies.
Gross margin was 21% of sales for the three months ended September 30, 1997
compared with 13% (21%) for the three months ended September 30, 1996. The
increased gross margin as a percent of sales, 13% to 21%, is primarily due to
the markup (per the Comprehensive Supply Agreement) on sales to Navistar.
Selling, general and administrative expenses (SG&A) totaled $1,795,000 for
the three months ended September 30, 1997 increasing from $1,372,000
($1,588,000) for the three months ended September 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
increased employee related expenses.
Interest income for the three months ended September 1997 totaled $58,000
and is primarily attributable to interest on Core Materials' mortgage-backed
security investment. The Company had no interest income for the three months
ended September 30, 1996.
Interest expense for the three months ended September 30, 1997 totaled
$548,000. The interest expense is primarily the result of $603,000 in interest
payable to Navistar on the $29,514,000 Secured Note; this expense was offset by
$66,000 of capitalized interest relating to property, plant and equipment under
construction. The Company had no interest expense in the three months ended
September 30, 1996 since all financing was handled at Navistar's Corporate
Offices.
13
<PAGE> 14
Income taxes for the three months ended September 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 September
30, 1997 are estimated to be approximately $54,000 which reflects federal
alternative minimum, state and local taxes.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Net sales for the nine months ended September 30, 1997, totaled $46,712,000
up 20% (10%) from the $38,918,000 ($42,639,000) reported for the nine months
ended September 30, 1996. Sales to Navistar increased 55% (34%) to $35,675,000
from $22,975,000 ($26,696,000) for the nine months ended September 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 nine months ended
September 30, 1997 by 36% to $9,777,000 compared with $15,215,000 for the nine
months ended September 30, 1996. The decrease in sales to Yamaha is due
primarily to Yamaha's production slowdown as discussed above; in addition,
Yamaha's sales for the first half of 1996 were higher than normal as a result of
Yamaha's anticipation of increased demand.
"Other" sales increased 73% to $1,261,000 from $728,000 in the nine months
ended September 30, 1996 for the same reasons as explained above.
Gross margin was 22% of sales for the nine months ended September 30, 1997
compared with 10% (17%) for the nine months ended September 30, 1996. The
increased gross margin as a percent of sales, 10% 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 due to increased sales volumes and due to 1996's cost of
sales including higher than normal repair and maintenance expenses and
unfavorable inventory adjustments. Additionally, Core Materials has experienced
improved efficiencies in the usage of operating supplies, improved labor
performance and increased control of material related costs.
Selling, general and administrative expenses (SG&A) totaled $5,560,000 for
the nine months ended September 30, 1997 increasing from $4,034,000 ($4,682,000)
for the nine months ended September 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 nine months ended September 1997 totaled $176,000
and is primarily attributable to interest on Core Materials' mortgage-backed
security investment. Interest expense for the nine months ended September 30,
1997 totaled $1,755,000, primarily reflecting interest on the Secured Note held
by Navistar. This expense was offset by $66,000 of capitalized interest. The
Company had no interest income nor interest expense in the nine months ended
September 30, 1996 since all financing was handled at Navistar's Corporate
Offices.
Income taxes for the nine months ended September 30, 1997 are estimated to
be approximately 41% of total earnings before taxes. Actual taxes payable for
the nine months ended September 30, 1997 are estimated to be approximately
$291,000 which reflects federal alternative minimum, state and local taxes.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
Net working capital as of September 30, 1997 decreased $1,440,000 over the
working capital at December 31, 1996. The primary reason for the decrease in
working capital is the use of $2,347,000 of short term notes payable to finance
the construction of the Company's new facility in Gaffney, South Carolina; see
further discussion below. Accounts receivable increased by $9,825,000 and
accounts payable increased by $6,609,000 from the December 31, 1996 amounts. 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
September 30, 1997 accounts receivable includes Navistar receivables for sales
under the Comprehensive Supply Agreement. The September 30, 1997 accounts
payables include expenditures to support normal production. Property additions
of $6,339,000 primarily relate to the acquisition of land, building and
machinery and equipment for the above mentioned Gaffney facility.
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 finalizing
permanent financing facilities for the $13,000,000 Gaffney expansion and a
permanent working capital line will be available to fund Core Materials' working
capital requirements. In the interim, management has entered into a $3 million
temporary working capital facility utilizing the mortgage-backed security as
collateral for borrowings under the facility. In September 1997, $2.3 million
was borrowed under the temporary line of credit to finance a portion of the
Gaffney expansion. 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.
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 loan facility which 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
Core Material's management is pleased with the results of the third quarter.
As anticipated and previously reported, the results for the third quarter were
less than the earnings reported in the first two quarters. This decline is
attributed to lower sales caused by Navistar's annual vacation shutdown and
inventory leveling at Yamaha. However, higher than expected post shutdown sales
to Navistar and increased sales to Yamaha late in the quarter resulted in
earnings which exceeded management's original expectations.
With the effects of the Navistar vacation shutdown and the Yamaha inventory
leveling behind, management is optimistic about the results of the Company for
fourth quarter and full year. The Company also continues to focus significant
effort on obtaining new business for both its Columbus, Ohio facility and
15
<PAGE> 16
its new facility being constructed in Gaffney, South Carolina which will begin
molding and assembly operations in early 1998.
16
<PAGE> 17
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 submission of matters to a vote of security holders
occurred for the three months ended September 30, 1997.
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:
A Form 8-K was filed on September 12, 1997. Under Item 5 of
the form, "Other Events", Core Materials announced the
purchase of a building shell and land in Gaffney, South
Carolina for purposes of expansion of the Company's molding
and assembly operations.
17
<PAGE> 18
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: November 12, 1997 By:
----------------- ---------------------------------
Kenneth M. Schmell
General Manager and
Acting Chief Executive Officer
Date: November 12, 1997 By:
----------------- ----------------------------------
Kevin L. Barnett
Vice President, Treasurer and
Chief Financial Officer
18
<PAGE> 1
EXHIBIT 11
CORE MATERIALS CORPORATION
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
------------------ ------------------
<S> <C> <C>
PRIMARY:
Weighted average
Common Shares Outstanding 9,565,282 9,541,694
Common Equivalent Shares - Stock Options 324,371(1) 231,999(1)
--------- ---------
Common Shares and Common Stock
Equivalent Shares Outstanding 9,889,653 9,773,693
========= =========
NET INCOME $381,960 $1,752,507
======== ==========
NET INCOME PER SHARE $ .04 $ .18
======== ==========
FULLY DILUTED:
Weighted Average
Common Shares Outstanding 9,565,282 9,541,694
Common Equivalent Shares - Stock Options 324,371(1) 258,044(1)
--------- ----------
Common Shares and Common
Equivalent Shares Outstanding 9,889,653 9,799,738
========= ==========
NET INCOME $ 381,960 $1,752,507
========= ==========
NET INCOME PER SHARE $ .04 $ .18
========= ==========
</TABLE>
(1) Calculated under the Treasury Stock Method using the average price or
period-end market price of Core Materials stock, as applicable.
19
<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 SEPTEMBER
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,281,411
<SECURITIES> 3,226,327
<RECEIVABLES> 11,833,090
<ALLOWANCES> 35,136
<INVENTORY> 3,084,764
<CURRENT-ASSETS> 19,836,967
<PP&E> 48,677,432
<DEPRECIATION> 18,853,910
<TOTAL-ASSETS> 61,188,911
<CURRENT-LIABILITIES> 13,491,506
<BONDS> 29,514,000
0
0
<COMMON> 95,647
<OTHER-SE> 17,282,246
<TOTAL-LIABILITY-AND-EQUITY> 61,188,911
<SALES> 46,712,318
<TOTAL-REVENUES> 46,712,318
<CGS> 36,602,799
<TOTAL-COSTS> 42,162,888
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,755,301
<INCOME-PRETAX> 2,970,350
<INCOME-TAX> 1,217,843
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,752,507
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
