<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
--------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from To
--------------------- ------------------
Commission File Number 001-12505
CORE MATERIALS CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1481870
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(State or other jurisdiction (I.R.S. Employer Identification No.)
incorporation or organization)
800 Manor Park Drive, P.O. Box 28183
Columbus, Ohio 43228-0183
- -------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (614) 870-5000
---------------------------
N/A
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] NO [ ]
As of November 11, 1999, the latest practicable date, 9,778,680 shares
of the registrant's common stock were issued and outstanding.
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
CORE MATERIALS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------ -----------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 338,612 $ 3,117,085
Mortgage-backed security investment 1,916,717 2,568,977
Accounts receivable (less allowance for doubtful accounts:
September 30, 1999 - $105,000; December 31, 1998 - $105,000) 22,146,646 17,728,753
Inventories:
Finished and work in process goods 4,617,814 1,592,288
Stores 3,356,288 2,630,993
------------------ -----------------
Total inventories 7,974,102 4,223,281
Deferred tax asset 928,048 928,048
Prepaid expenses and other current assets 586,573 339,028
------------------ -----------------
Total current assets 33,890,698 28,905,172
Property, plant and equipment 40,636,144 35,834,613
Accumulated depreciation (13,066,328) (11,754,866)
------------------ -----------------
Property, plant and equipment - net 27,569,816 24,079,747
Deferred tax asset - net 11,910,464 12,101,257
Other assets 328,039 351,606
------------------ -----------------
TOTAL $ 73,699,017 $ 65,437,782
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities
Current portion long-term debt $ 300,000 $ 285,000
Notes payable banks 2,150,000 -
Accounts payable 14,117,007 7,360,949
Accrued liabilities:
Compensation and related benefits 2,002,357 2,492,006
Interest 482,260 725,827
Other accrued liabilities 1,985,336 2,254,655
------------------ -----------------
Total current liabilities 21,036,960 13,118,437
Long-term debt 26,780,150 27,005,150
Deferred long-term gain 3,029,214 3,369,380
Postretirement benefits liability 3,551,509 3,093,157
------------------ -----------------
TOTAL LIABILITIES 54,397,833 46,586,124
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $0.01 par value, authorized shares - 20,000,000; 97,787 97,787
Outstanding shares: September 30, 1999 - 9,778,680,
December 31, 1998 - 9,778,680
Paid-in capital 19,251,392 19,251,392
Retained earnings (deficit) (47,995) (497,521)
------------------ -----------------
Total stockholders' equity 19,301,184 18,851,658
------------------ -----------------
TOTAL $ 73,699,017 $ 65,437,782
================== =================
</TABLE>
See notes to financial statements.
2
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CORE MATERIALS CORPORATION
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
1999 1998 1999 1998
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES:
Navistar $14,394,252 $13,642,385 $46,558,496 $45,667,753
Yamaha 3,380,926 2,558,273 11,693,472 9,349,226
Other 3,785,744 934,067 9,976,823 1,856,308
-------------- ------------- ------------- -------------
Total Sales 21,560,922 17,134,725 68,228,791 56,873,287
-------------- ------------- ------------- -------------
Cost of Sales 19,994,713 14,003,678 58,949,069 44,916,042
Postretirement benefits expense 259,407 226,950 791,321 713,168
-------------- ------------- ------------- -------------
Total cost of sales 20,254,120 14,230,628 59,740,390 45,629,210
-------------- ------------- ------------- -------------
GROSS MARGIN 1,306,802 2,904,097 8,488,401 11,244,077
-------------- ------------- ------------- -------------
Selling, general and administrative expense 2,347,901 1,732,223 6,492,090 5,682,135
Postretirement benefits expense 38,180 33,490 109,417 103,813
-------------- ------------- ------------- -------------
Total selling, general and
administrative expense 2,386,081 1,765,713 6,601,507 5,785,948
INCOME BEFORE INTEREST AND TAXES (1,079,279) 1,138,384 1,886,894 5,458,129
Interest income 54,021 64,893 215,392 182,407
Interest expense (461,544) (448,021) (1,336,970) (1,252,212)
-------------- ------------- ------------- -------------
INCOME/(LOSS) BEFORE INCOME TAXES (1,486,802) 755,256 765,316 4,388,324
Income taxes:
Current (245,397) 94,465 124,997 549,879
Deferred (371,191) 215,191 190,793 1,249,136
-------------- ------------- ------------- -------------
Total income taxes (616,588) 309,656 315,790 1,799,015
-------------- ------------- ------------- -------------
NET INCOME/(LOSS) $ (870,214) $ 445,600 $ 449,526 $ 2,589,309
============== ============= ============= =============
NET INCOME/(LOSS) PER COMMON SHARE:
Basic $ (0.09) $ 0.05 $ 0.05 $ 0.27
============== ============= ============= =============
Diluted $ (0.09) $ 0.05 $ 0.05 $ 0.26
============== ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 9,778,680 9,779,430 9,778,680 9,682,198
============== ============= ============= =============
Diluted 9,778,680 9,944,568 9,834,242 10,034,724
============== ============= ============= =============
</TABLE>
See notes to financial statements
3
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CORE MATERIALS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK OUTSTANDING PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
----------------- ---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1999 9,778,680 $ 97,787 $ 19,251,392 $ (497,521) $ 18,851,658
Net Income 449,526 449,526
----------------- ---------------- ---------------- --------------- ----------------
BALANCE AT SEPTEMBER 30, 1999 9,778,680 $ 97,787 $ 19,251,392 $ (47,995) $ 19,301,184
================= ================ ================ =============== ================
</TABLE>
See notes to financial statements.
4
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CORE MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 449,526 $ 2,589,309
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,496,567 1,288,586
Deferred income taxes 190,793 1,249,136
Loss on disposal of assets 14,995 17,899
Amortization of gain on sale/leaseback transaction (340,166) (222,271)
Compensation expense on stock awards - 42,782
Change in operating assets and liabilities:
Accounts receivable (4,417,893) (1,822,870)
Inventories (3,750,821) (429,411)
Prepaid and other assets (247,545) (298,634)
Accounts payable 6,756,058 (1,693,884)
Accrued and other liabilities (1,002,535) 249,155
Postretirement benefits liability 458,352 414,217
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (392,669) 1,384,014
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (4,978,064) (6,026,586)
Proceeds from sale/leaseback transaction - 5,279,431
Payments on mortgage-backed security investment 652,260 344,057
Proceeds from sale of property and equipment - 7,000
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (4,325,804) (396,098)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines-of-credit 2,150,000 6,919,470
Payments on lines-of-credit - (10,916,590)
Payments of principal on secured note payable - (3,000,000)
Proceeds from issuance of industrial revenue bond - 7,500,000
Payment of principal on industrial revenue bond (210,000) (65,000)
Issuance costs for industrial revenue bond - (159,385)
Proceeds from exercise of stock options - 148,820
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,940,000 427,315
------------- -------------
NET DECREASE IN CASH (2,778,473) 1,415,231
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,117,085 100,356
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 338,612 $ 1,515,587
============= =============
Cash paid for:
Interest (net of amounts capitalized) $ 1,501,024 $ 1,962,207
Income taxes $ 610,000 $ 640,200
</TABLE>
See notes to financial statements.
5
<PAGE> 6
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10Q and include all of the information
and disclosures required by generally accepted accounting principles for interim
reporting, which are less than those required for annual reporting. In the
opinion of management, the accompanying unaudited financial statements contain
all adjustments (all of which are normal and recurring in nature) necessary to
present fairly the financial position of Core Materials Corporation ("Core
Materials") at September 30, 1999, and the results of operations and cash flows.
The "Notes to Financial Statements" which are contained in the 1998 Annual
Report to shareholders should be read in conjunction with these Financial
Statements. Certain reclassifications have been made to prior year's amounts to
conform with the classifications of such amounts for 1999.
Core Materials Corporation ("Core Materials") was formed on October 8,
1996 by RYMAC Mortgage Investment Corporation ("RYMAC"), as a wholly owned
subsidiary, for the purpose of acquiring substantially all of the assets and
assuming certain of the liabilities of Columbus Plastics Operation ("Columbus
Plastics"), an operating unit of Navistar International Transportation Corp.
("Navistar").
On December 31, 1996, RYMAC merged into its wholly owned subsidiary,
Core Materials, by converting each outstanding common share of RYMAC into the
right to receive one common share of Core Materials, with Core Materials as the
surviving corporation and continuing registrant. Simultaneously, on December 31,
1996, Core Materials purchased substantially all of the assets and assumed
certain liabilities of Columbus Plastics.
Core Materials produces compression Sheet Molding Composite ("SMC")
fiberglass reinforced plastic parts. Core Materials has two principal customers,
Navistar and Yamaha Motor Manufacturing Corporation ("Yamaha").
2. RESTRICTED CASH
Included in cash at September 30, 1999, is $319,176 which is restricted
pursuant to the terms of the Industrial Revenue Bond which was issued in May,
1998. This restriction will be removed as Core Materials incurs qualified
expenditures related to the project for which the bond was issued.
3. COMPREHENSIVE INCOME
Core Materials adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income". Comprehensive income is a
measurement of all changes in stockholders' equity that result from transactions
and other economic events other than transactions with stockholders. Core
Materials does not have any items of comprehensive income other than net
income/(loss); therefore, total comprehensive income/(loss) amounted to
$(870,214) and $445,600 for the three months ended September 30, 1999 and 1998,
respectively; total comprehensive income amounted to $449,526 and $2,589,309 for
the nine months ended September 30, 1999 and 1998, respectively.
4. EARNINGS PER COMMON SHARE
Basic earnings per common share are computed based on the weighted
average number of common shares outstanding during the period. Diluted earnings
per common share are computed similarly but include
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the effect of the exercise of stock options under the treasury stock method. In
calculating net income per share for the three and nine months ended September
30, 1999, weighted average shares increased for the computation of diluted
income per share by 0 and 55,562 shares, respectively, due to the effect of
stock options. This item had no effect on net income per share for the three and
nine months ended September 30, 1999. In calculating net income per share for
the three and nine months ended September 30, 1998, weighted average shares
increased for the computation of diluted income per share by 165,138 and 352,526
shares, respectively, due to the effect of stock options; as a result net income
per share was reduced by $.0 and $.01, respectively.
5. COMMITMENTS AND CONTINGENCIES
Core Materials has contracted to have three compression molding presses
manufactured in 1999. Per the contract, payments are to be made as various steps
of the manufacturing process are completed; these payments will total
$3,181,800. In addition, Core Materials has contracted to buy a used press which
will require a total payment of $425,000. As of September 30, 1999, Core
Materials has made payments in the amount of $795,700 leaving a remaining
balance of $2,811,100. The contracts are cancelable by Core Materials only upon
written notice and upon payment to the Seller of reasonable and proper
cancellation charges. It is the intent of Core Materials to complete the
contracts in full and take possession of the presses.
7
<PAGE> 8
PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements under this caption, constitute "forward-looking
statements" which involve certain risks and uncertainties. Core Materials'
actual results may differ significantly from those discussed in the
forward-looking statements. Factors that may cause such a difference include,
but are not limited to: business conditions in the plastics, transportation,
marine, agricultural and consumer products industries, the general economy,
competitive factors, the dependence on two major customers, the recent efforts
of Core Materials to expand its customer base, new technologies, the year 2000
systems issue, regulatory requirements, labor relations, the loss or inability
to attract key personnel, start-up of the Company's South Carolina facility, the
availability of capital and management's decisions to pursue new products or
businesses which involve additional costs, risks or capital expenditures.
OVERVIEW
On December 31, 1996, Core Materials acquired substantially 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.
Core Materials manufactures high quality compression SMC fiberglass
reinforced parts. The demand for Core Materials' products is affected by
economic conditions in the United States and Canada. Core Materials'
manufacturing operations have a significant fixed cost component. Accordingly,
during periods of changing demands, the profitability of Core Materials'
operations will change proportionately more than revenues from operations.
At the time of the acquisition of Columbus Plastics, Navistar and Core
Materials entered into a Comprehensive Supply Agreement with an initial term of
five years. Under the terms of the Comprehensive Supply Agreement, Core
Materials became the primary supplier of Navistar's original equipment and
service requirements for fiberglass reinforced parts using the SMC process.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales for the three months ended September 30, 1999, totaled $21,561,000
up 26% from the $17,135,000 reported for the three months ended September 30,
1998. Sales to Navistar increased 6% to $14,394,000 from $13,642,000 for the
three months ended September 30, 1998. Sales to Yamaha increased for the three
months ended September 30, 1999 by 32% to $3,381,000 compared with $2,558,000
for the three months ended September 30, 1998. The increase in Yamaha sales for
the quarter is primarily due a leveling of production by Yamaha over the 1999
year; this change in methodology results in increased sales over the relatively
slow third quarter of 1998; additional product added in 1999 and an overall
increase in demand from Yamaha for Core Materials' product also contributed to
the increased sales.
"Other" sales for the three months ended September 30, 1999 increased 305% to
$3,786,000 from $934,000 for the three months ended September 30, 1998. The
increase in sales was primarily the result of new customers added during 1998
and 1999, including: New Holland North America, Inc. - $1,231,000; Volvo Trucks
North America, Inc. - $1,264,000; and Caradon Doors and Windows, Peachtree
Division - $608,000.
Gross Margin was 6.1% of sales for the three months ended September 30, 1999
compared with 16.9% for the three months ended September 30, 1998. The decreased
gross margin as a percent of sales from the prior year is primarily due to
increased production costs resulting from higher usage of raw materials,
increased
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<PAGE> 9
scrap, higher labor costs and inventory write-offs associated with the annual
physical inventory. The startup of new products, increased production levels
associated with inventory bank builds and a labor shortage in Columbus,
necessitating excessive overtime, contributed most significantly to the
increased production costs.
Selling, general and administrative expenses ("SG&A") totaled $2,386,000 for
the three months ended September 30, 1999 increasing from $1,766,000 for the
three months ended September 30, 1998. The increase from 1998 is primarily due
to increased costs associated with obtaining added personnel, increased travel
associated with additional customers, increased insurance costs, increased real
estate and property taxes and other costs related to higher sales and an
increased customer base. Also contributing to the increased costs were
approximately $300,000 of expenses incurred to support further growth
initiatives. Included were costs associated with evaluating additional facility
locations, products and processes and personnel recruiting costs incurred to
strengthen the organization.
Interest income for the three months ended September 30, 1999 totaled
$54,000 decreasing from the $65,000 for the three months ended September 30,
1998. Interest expense totaled $462,000 for the three months ended September 30,
1999 increasing from $448,000 for the three months ended September 30, 1998.
Income taxes/(benefit) for the three months ended September 30, 1999 are
estimated to be approximately 41% of total earnings before taxes.
Net income/(loss) for the three months ended September 30, 1999 was
$(870,000) or $(.09) per basic and per diluted share, a decrease of $1,316,000
from the net income for the three months ended September 30, 1998 of $446,000 or
$.05 per basic and diluted share.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales for the nine months ended September 30, 1999, totaled $68,229,000
up 20% from the $56,873,000 reported for the nine months ended September 30,
1998. Sales to Navistar increased 2% to $46,558,000 from $45,668,000 for the
nine months ended September 30, 1998. Sales to Yamaha increased by 25% to
$11,693,000 compared with $9,349,000 for the nine months ended September 30,
1998. The increase in Yamaha sales over 1998 is primarily due to additional
product added in 1999 and a general increase in demand from Yamaha for Core
Materials' product.
"Other" sales for the nine months ended September 30, 1999, increased 438%
to $9,977,000 from $1,856,000 for the nine months ended September 30, 1998. The
increase in sales was primarily the result of new customers during 1998 and
1999, including: New Holland North America, Inc. - $3,330,000; Volvo Trucks
North America, Inc. - $2,862,000; and Caradon Doors and Windows, Peachtree
Division - $1,274,000.
Gross margin was 12.4% of sales for the nine months ended September 30, 1999
compared with 19.8% for the nine months ended September 30, 1998. The decreased
gross margin as a percent of sales is primarily due to the reasons noted above
for the three months as well as unusual repair and maintenance expenses and
downtime which was experienced in the second quarter.
SG&A totaled $6,602,000 for the nine months ended September 30, 1999
increasing from $5,786,000 for the nine months ended September 30, 1998. The
increase over the 1998 amounts is primarily due to the reasons noted above for
the three months.
Interest income for the nine months ended September 30, 1999 totaled
$215,000 as compared with the $182,000 for the nine months ended September 30,
1998. Interest expense totaled $1,337,000 for the nine months ended September
30, 1999 increasing from $1,252,000 for the nine months ended September 30,
1998. The increase in interest expense from 1998 is primarily the result of a
decrease in interest capitalized related to capital projects under construction.
During the first quarter of 1998, interest expense was being capitalized related
to the construction of the Gaffney, South Carolina manufacturing facility.
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<PAGE> 10
Income taxes for the nine months ended September 30, 1999 are estimated to
be approximately 41% of total earnings before taxes. Actual tax payments will be
lower than the recorded expenses as Core Materials has substantial federal tax
loss carryforwards. These loss carryforwards were recorded as a deferred tax
asset, partially offset by a valuation reserve at December 31, 1996 as a part of
the purchase accounting adjustments. As the tax loss carryforwards are utilized
to offset federal income tax payments, Core Materials reduces the deferred tax
asset as opposed to recording a reduction in income tax expense. Actual cash
payments related to the nine months ended September 30, 1999 and 1998 are
estimated to be approximately $125,000 and $550,000, respectively, which
reflects federal alternative minimum, state and local taxes.
Net income for the nine months ended September 30, 1999 was $450,000 or $.05
per basic and $.05 per diluted share, a decrease of $2,139,000 or 83% from the
net income for the nine months ended September 30, 1998 of $2,589,000 or $.27
per basic and $.26 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Core Materials' primary cash requirements are for operating expenses
and capital expenditures. These cash requirements have historically been met
through a combination of cash flows from operations, equipment leasing, issuance
of Industrial Revenue Bonds and bank lines of credit.
Cash used by operations for the nine months ended September 30, 1999
totaled $393,000. Net income contributed $450,000 with depreciation and
amortization adding another $1,497,000. An increase in accounts payable
contributed $6,756,000; this increase was primarily the result of increased
purchases of materials to support the inventory banks for certain customers,
capital spending and timing effects. Deferred income taxes of $191,000,
primarily related to Core Materials' approximately $20,000,000 of operating tax
loss carry forwards, also contributed positively to the operating cash flow.
Decreasing the operating cash flows was an increase in inventory of $3,751,000
associated with bank builds and higher production requirements. Also decreasing
the operating cash flows was an increase in accounts receivable of $4,418,000
primarily caused by higher sales and slower collections.
Investing activities reduced cash flows by $4,326,000 for the nine
months ended September 30, 1999. Capital expenditures totaled $4,978,000
primarily related to the acquisition of machinery and equipment. Offsetting
these expenditures were proceeds from maturities on Core Materials'
mortgage-backed security investment of $652,000.
Financing activities increased cash flow by $1,940,000. Core Materials
borrowed $2,150,000 on the line of credit in order to temporarily fund
operations; this need was due, in part, to Navistar's annual two week shutdown
in July which adversely affects cash flows. Principal repayment on the
Industrial Revenue Bond which was issued in 1998 also required a cash flow of
$210,000.
Core Materials had cash on hand, at September 30, 1999, of $339,000, of
which $319,000 is restricted, and a remaining available line of credit of
$5,350,000. Core Materials was in violation of two of its financial debt
covenants associated with the line of credit, the letter of credit securing the
industrial revenue bond and certain equipment leases at September 30, 1999. Core
Materials has received a waiver of these covenants for this period. If future
violations occur, Core Materials' liquidity and ability to obtain further
financing to fund future operating and capital requirements could be negatively
impacted.
YEAR 2000 READINESS STATEMENT
Core Materials believes it has identified all of its significant
software and hardware applications that will require modification to ensure Year
2000 ("Y2K") compliance. Internal and external resources have been used to make
the required modifications to both computer systems and internal operations
related apparatus. In addition, Core Materials is working with its suppliers and
customers to aid in becoming Y2K compliant. Where able, Core Materials has
completed the modifications. In some cases, compliance cannot be achieved until
January 1, 2000. On this date, a resetting of the internal clocks on some
electronic devices is required. In these cases, Core Materials has tested its
processes for rolling/resetting the clocks.
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<PAGE> 11
Core Materials has grouped its exposure into 6 major categories of
items: (1) Production Equipment, (2) Information Technology, (3) Facilities and
Utilities, (4) Quality Systems, (5) Suppliers and Customers, and (6) General
Business Items.
The status of each is as follows:
PRODUCTION EQUIPMENT: Production equipment concerns can be grouped into
the following areas: (1) Press Programmable Logic Units ("PLC's"), (2) Other
Non-Press Related PLC's, (3) Press Computers, (4) Press Software, (5) Robotics,
(6) Paint Control and Tracking Systems, and (7) SMC mix system software and
computer. Core Materials has contacted the manufacturers of critical production
equipment to determine Y2K compliance. In addition, Core Materials has utilized
an independent engineering firm to assist in achieving Y2K compliance. This firm
has performed a wall-to-wall inventory of production equipment and software.
This firm has researched all items on the inventory to determine the items
represented by suppliers as compliant and has contacted outside equipment
suppliers to determine potential fixes in areas of non-compliance. Finally, this
firm has performed sample testing on both compliant and non-compliant equipment
developing repair processes where required. Contingency plans for those items
identified as non-compliant are currently being worked on. Many of the repair
procedures provided by the equipment manufacturers cannot be implemented until
January 1, 2000; however, Core Materials has tested the repair procedures and
feels that they are adequate to assure Y2K compliance. Core Materials plans to
replace those press computers that must be replaced to obtain Y2K compliance.
Press software has been tested and found to be capable of functioning beyond the
year 2000. The paint control and tracking system has been replaced with software
and hardware that has been represented by the manufacturers to be Y2K compliant.
The SMC mix system computer and software has been replaced. Core Materials would
be subjected to a great deal of risk if the items above were to fail.
INFORMATION TECHNOLOGY: Core Materials has used the Y2K problem as a
catalyst to perform a complete replacement of many of its operations and
financial systems. A new integrated software package was activated in the
Gaffney operation in September of 1998 and in the Columbus operation in November
of 1998. This software package covers Core Materials' primary accounting and
operations reporting systems. Many secondary software systems such as the fixed
asset system and the maintenance system were previously replaced. Some secondary
systems, posing no risk to Core Materials or its customers, have also been
upgraded/replaced. As of April 1999, the hardware and network infrastructure has
been upgraded/replaced. In addition, the payroll systems have been replaced and
all replaced systems have been represented by the manufacturers to be Y2K
compliant. Core Materials has also performed certain testing procedures to
confirm compliance. If the systems should fail, Core Materials would have a very
difficult time processing its financial activities on a timely basis.
FACILITIES AND UTILITIES: Core Materials' major utility suppliers (gas,
electric, water, telephone) have been contacted and have provided information
stating that they will be Y2K compliant before compliance becomes an issue.
Though contingencies do not exist for long term systemic outages, contingencies
are being developed for the more likely scenarios of intermittent disruptions in
service. If a continued or catastrophic failure with these utility suppliers
occurs, the continuing operations of Core Materials would be in serious
jeopardy. Other areas of lesser concern include fire and alarm, and
environmental control systems. Core Materials has received verification from the
manufacturers that each of these systems is compliant.
QUALITY SYSTEMS: The primary system used for tracking quality and
internal production documentation has been replaced and has been represented by
the manufacturers to be Y2K compliant. The only other quality items believed to
be of concern are the laboratory and testing apparatus. These apparatus are
believed to be compliant with many being tested and contingency plans have been
developed in case of a disruption in service.
SUPPLIERS AND CUSTOMERS: Substantially all of Core Materials'
significant current suppliers and customers have been contacted and are
currently responding with their Y2K compliance status. Most responses have been
noncommittal as to Y2K readiness. Navistar, Core Materials' largest customer,
has provided documentation indicating that they have been working on compliance
since 1995 and that they are putting forth their "best efforts to insure that
their critical systems and processes will not affect their supply of product."
Yamaha, Core Materials' second largest customer, has not yet formally responded.
Such contact will continue to be made for subsequently added suppliers and
customers. Alternate suppliers are being identified for those companies that
have expressed a problem with compliance. Additional contingencies
11
<PAGE> 12
include purchasing and stocking low cost materials as required. It is likely
that Core Materials will not have backups for some key suppliers.
GENERAL BUSINESS ITEMS: General business items include items such as
banking, insurance, pension plans, and 401K programs. Core Materials has made
contact with the suppliers of these services and has received confirmation from
all that compliance is imminent.
CONTINGENCY PLAN: Core Materials recognizes that the actual outcome of
its Y2K efforts may differ from that discussed above. As a result, Core
Materials is reviewing other potential outcomes in an attempt to mitigate the
negative effects on Core Materials' ability to effectively and efficiently
function as a business. In the event that the solutions identified above are not
effective, Core Materials would employ other resources, such as underutilized
equipment, manual processes, and outside services to complete the required
tasks. It is unlikely that with such alternative resources Core Materials would
be able to deliver the full level of goods and services required by its
customers.
Worst case scenarios would include failure of most or all of the
equipment, failure of energy suppliers to deliver gas or electricity, and/or
failure of suppliers (including alternate suppliers) to provide production
materials. While Core Materials feels that the probability of these scenarios is
low, the realization of such scenarios would have a serious detrimental effect
on Core Materials' operations, liquidity and financial condition. In such a
worst case scenario, Core Materials would be heavily dependent on the ability of
the vendors/suppliers to resolve their own Y2K issues. The overall impact of
such a worst case scenario would be dependent on the length of time before the
problems are resolved.
Other less severe, but more likely scenarios are being reviewed. On a
priority and risk basis, contingency plans are being developed and tested. These
contingency plans include the steps necessary to protect and continue
operations, the key events to trigger implementation and the person or persons
responsible for execution of the plan.
COSTS OF Y2K: The total cost of the Year 2000 project is estimated at
$750,000 and is being funded through operating cash flows. Of the total project
cost, approximately $500,000 is attributed to new software/hardware which will
be capitalized. The remaining $250,000, which will be expensed as incurred, is
not expected to have a material effect on the results of operations. To date,
Core Materials has incurred approximately $662,000 of costs associated with this
project of which $421,000 was capitalized, relating to the purchase of new
hardware and software and $241,000 of which has been expensed.
The costs of the project and the date on which Core Materials believes
it will complete the Year 2000 modification are based on management's best
estimates. These estimates were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors; however, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, the
assurances of outside companies, and similar uncertainties.
In addition, Core Materials has been and will continue to communicate
with others with whom it does significant business to determine their Year 2000
issues; however, there can be no guarantee that the systems of other companies
on which Core Materials' systems rely will be timely converted, or that a
failure to convert by another company, or a conversion that is incompatible with
the Core Materials' systems, would not have a material adverse affect on Core
Materials.
12
<PAGE> 13
PART I - FINANCIAL INFORMATION
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Core Materials' primary market risk results from fluctuations in
interest rates. Core Materials is also exposed to changes in the price of
commodities used in its manufacturing operations. Core Materials does not hold
any material market risk sensitive instruments for trading purposes.
Core Materials has the following three items that are market rate
sensitive for interest rates:
o Core Materials has long-term debt consisting of Industrial
Revenue Bonds with an aggregate outstanding principal balance
at September 30, 1999 of $7,160,000.00. Such bonds mature on
April 1, 2013 and bear interest at a variable rate, adjusted
weekly, subject to a maximum interest rate of 10% per annum.
During the nine months ended September 30, 1999 the average
interest rate payable on these bonds was 3.4%. In order to
minimize the effect of interest rate fluctuations, Core
Materials has entered into an interest rate swap agreement
pursuant to which Core Materials pays a fixed rate of 4.89% to
a bank and receives, in return, a rate equal to 76% of the
30-day commercial paper rate.
o Core Materials has a long-term secured note that as of
September 30, 1999 had an outstanding principal balance of
$19,920,000. Such note matures on November 2006 and bears
interest at a fixed rate of 8% per annum.
o Core Materials has a 7% mortgage-backed security investment,
which matures in November, 2025. Such security is considered
held to maturity as Core Materials has the intent and ability
to hold such security to maturity.
Assuming a hypothetical 20% change in short-term interest rates,
interest expense would not change significantly, as the interest rate swap
agreement would generally offset the impact.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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, 1999.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
See Index to Exhibits
REPORTS ON FORM 8-K:
None
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act 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 15, 1999 By: /s/ Kenneth M. Schmell
------------------ -------------------------------
Kenneth M. Schmell
Executive Vice President and
Chief Operating Officer
Date: November 15, 1999 By: /s/ Kevin L. Barnett
------------------ -------------------------------
Kevin L. Barnett
Vice President, Treasurer,
Secretary, and
Chief Financial Officer
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
<S> <C> <C>
2(a)(1) Asset Purchase Agreement Incorporated by reference to
Dated as of September 12, 1996, Exhibit 2-A to Registration
as amended October 31, 1996, Statement on Form S-4
between Navistar International Transportation (Registration No. 333-15809)
Corporation and RYMAC Mortgage Investment
Corporation(1)
2(a)(2) Second Amendment to Asset Purchase Incorporated by reference to
Agreement dated December 16, 1996(1) Exhibit 2.1.1 to Annual
Report on Form 10-K for the
year-ended December 31, 1996
2(b)(1) Agreement and Plan of Merger dated as of Incorporated by reference to
November 1, 1996, between Core Materials Exhibit 2-B to Registration
Corporation and RYMAC Mortgage Investment Statement on Form S-4
Corporation (Registration No. 333-15809)
2(b)(2) First Amendment to Agreement and Plan Incorporated by Reference to
of Merger dated as of December 27, 1996 Exhibit 2(b)(2) to Annual Report
Between Core Materials Corporation and on Form 10-K for the
RYMAC Mortgage Investment Corporation year ended December 31, 1997
3(a)(1) Certificate of Incorporation of Incorporated by reference to
Core Materials Corporation Exhibit 4(a) to Registration
as filed with the Secretary of Statement on Form S-8
State of Delaware on October (Registration No. 333-29203)
8, 1996
3(a)(2) Certificate of Amendment of Incorporated by reference to
Certificate of Incorporation Exhibit 4(b) to Registration
of Core Materials Corporation Statement on Form S-8
as filed with the Secretary of State (Registration No. 333-29203)
of Delaware on November 6, 1996
3(a)(3) Certificate of Incorporation of Core Incorporated by reference to
Materials Corporation, reflecting Exhibit 4(c) to Registration
amendments through November 6, Statement on Form S-8
1996 [for purposes of compliance (Registration No. 333-29203)
with Securities and Exchange
Commission filing requirements only]
3(b) By-Laws of Core Materials Corporation Incorporated by reference to
Exhibit 3-C to Registration
Statement on Form S-4
(Registration No. 333-15809)
4(a)(1) Certificate of Incorporation of Core Materials Incorporated by reference to
Corporation as filed with the Secretary of State Exhibit 4(a) to Registration
of Delaware on October 8, 1996 Statement on Form S-8
(Registration No. 333-29203)
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
<S> <C> <C>
4(a)(2) Certificate of Amendment of Certificate Incorporated by reference to
of Incorporation of Core Materials Exhibit 4(b) to Registration
Corporation as filed with the Secretary of Statement on Form S-8
State of Delaware on November 6, 1996 (Registration No. 333-29203)
4(a)(3) Certificate of Incorporation of Core Materials Incorporated by reference to
Corporation, reflecting amendments through Exhibit 4(c) to Registration
November 6, 1996 [for purposes of compliance Statement on Form S-8
with Securities and Exchange Commission (Registration No. 333-29203)
filing requirements only]
4(b) By-Laws of Core Materials Corporation Incorporated by reference to
Exhibit 3-C to Registration
Statement on Form S-4
(Registration No. 333-15809)
11 Computation of Net Income per Share Exhibit 11 omitted because
the required information is
included in Notes to
Financial Statement
27 Financial Data Schedule Filed herein
</TABLE>
(1) The Asset Purchase Agreement, as filed with the Securities and Exchange
Commission at Exhibit 2-A to Registration Statement on Form S-4 (Registration
No. 333-15809), omits the exhibits (including, the Buyer Note, Special Warranty
Deed, Supply Agreement, Registration Rights Agreement and Transition Services
Agreement, identified in the Asset Purchase Agreement) and schedules (including,
those identified in Sections 1, 3, 4, 5, 6, 8 and 30 of the Asset Purchase
Agreement). Core Materials Corporation will provide any omitted exhibit or
schedule to the Securities and Exchange Commission upon request.
17
<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, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 338,612
<SECURITIES> 1,916,717
<RECEIVABLES> 22,146,646
<ALLOWANCES> 105,000
<INVENTORY> 7,974,102
<CURRENT-ASSETS> 33,890,698
<PP&E> 40,636,144
<DEPRECIATION> 13,066,328
<TOTAL-ASSETS> 73,699,017
<CURRENT-LIABILITIES> 21,036,960
<BONDS> 26,780,150
0
0
<COMMON> 97,787
<OTHER-SE> 19,203,397
<TOTAL-LIABILITY-AND-EQUITY> 73,699,017
<SALES> 68,228,791
<TOTAL-REVENUES> 68,228,791
<CGS> 59,740,390
<TOTAL-COSTS> 59,740,390
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,336,970
<INCOME-PRETAX> 765,316
<INCOME-TAX> 315,790
<INCOME-CONTINUING> 449,526
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 449,526
<EPS-BASIC> .05
<EPS-DILUTED> .05
</TABLE>
