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, 2001
--------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from To
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Commission File Number 001-12505
CORE MATERIALS CORPORATION
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(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
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (614) 870-5000
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N/A
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] NO [ ]
As of November 13, 2001, the latest practicable date, 9,778,680 shares
of the registrant's common shares were issued and outstanding.
PART 1 - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
CORE MATERIALS CORPORATION
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 5,041,166 $ 2,712,412
Accounts receivable (less allowance for doubtful accounts:
September 30, 2001 - $669,000; December 31, 2000 - $424,000) 14,374,961 13,221,320
Inventories:
Finished and work in process goods 1,668,574 1,745,653
Stores 1,777,591 1,898,465
------------ ------------
Total inventories 3,446,165 3,644,118
Deferred tax asset 1,245,568 1,245,568
Prepaid expenses and other current assets 932,258 2,410,112
------------ ------------
Total current assets 25,040,118 23,233,530
Property, plant and equipment 42,579,811 41,562,272
Accumulated depreciation (17,051,917) (15,509,218)
------------ ------------
Property, plant and equipment - net 25,527,894 26,053,054
Deferred tax asset - net 11,859,323 11,430,442
Mortgage-backed security investment 1,053,795 1,610,741
Other assets 418,341 457,294
------------ ------------
TOTAL $ 63,899,471 $ 62,785,061
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities
Current portion long-term debt $ 350,000 $ 330,000
Accounts payable 6,546,299 5,266,017
Accrued liabilities:
Compensation and related benefits 1,562,015 1,636,257
Interest 491,346 77,644
Taxes 544,438 654,255
Graduated lease payments 831,950 659,998
Other accrued liabilities 1,058,369 1,068,205
------------ ------------
Total current liabilities 11,384,417 9,692,376
Long-term debt 26,105,150 26,370,150
Interest rate swap 501,971 -
Deferred long-term gain 2,122,105 2,462,271
Postretirement benefits liability 5,085,154 4,621,917
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $0.01 par value, authorized shares - 20,000,000; 97,787 97,787
Outstanding shares: September 30, 2001 and
December 31, 2000 - 9,778,680
Paid-in capital 19,251,392 19,251,392
Accumulated other comprehensive income (loss), net of
income tax effect (331,301) -
Retained earnings (accumulated deficit) (317,204) 289,168
------------ ------------
Total stockholders' equity 18,700,674 19,638,347
------------ ------------
TOTAL $ 63,899,471 $ 62,785,061
============ ============
See notes to financial statements.
2
CORE MATERIALS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
NET SALES:
International $ 7,577,563 $ 11,282,212 $ 27,071,285 $ 42,615,419
Yamaha 1,656,983 3,915,323 10,775,365 13,561,597
Lear 4,507,380 - 7,561,798 -
Other 740,694 3,087,386 5,631,699 11,228,090
------------ ------------ ------------ ------------
Total Sales 14,482,620 18,284,921 51,040,147 67,405,106
------------ ------------ ------------ ------------
Cost of Sales 13,271,717 15,427,790 44,480,846 56,107,937
Postretirement benefits expense 241,640 292,574 763,326 857,004
------------ ------------ ------------ ------------
Total cost of sales 13,513,357 15,720,364 45,244,172 56,964,941
------------ ------------ ------------ ------------
GROSS MARGIN 969,263 2,564,557 5,795,975 10,440,165
------------ ------------ ------------ ------------
Selling, general and administrative expense 1,804,808 2,239,331 5,424,882 7,144,975
Postretirement benefits expense 64,233 43,718 182,572 155,252
------------ ------------ ------------ ------------
Total selling, general and administrative expense 1,869,041 2,283,049 5,607,454 7,300,227
INCOME/(LOSS) BEFORE INTEREST AND TAXES (899,778) 281,508 188,521 3,139,938
Interest income 63,600 99,187 263,614 218,839
Interest expense (504,755) (520,703) (1,486,901) (1,384,399)
------------ ------------ ------------ ------------
INCOME/(LOSS) BEFORE INCOME TAXES (1,340,933) (140,008) (1,034,766) 1,974,378
Income taxes (benefits):
Current (220,537) (23,026) (170,182) 325,552
Deferred (334,610) (34,936) (258,212) 493,638
------------ ------------ ------------ ------------
Total income taxes (benefits) (555,147) (57,962) (428,394) 819,190
------------ ------------ ------------ ------------
NET INCOME/(LOSS) $ (785,786) $ (82,046) $ (606,372) $ 1,155,188
============ ============ ============ ============
NET INCOME/(LOSS) PER COMMON SHARE:
Basic $ (0.08) $ (0.01) $ (0.06) $ 0.12
============ ============ ============ ============
Diluted $ (0.08) $ (0.01) $ (0.06) $ 0.12
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 9,778,680 9,778,680 9,778,680 9,778,680
============ ============ ============ ============
Diluted 9,778,680 9,778,680 9,778,680 9,778,680
============ ============ ============ ============
See notes to financial statements
3
CORE MATERIALS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
RETAINED ACCUMULATED
COMMON STOCK OUTSTANDING EARNINGS OTHER TOTAL
PAID-IN (ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) INCOME (LOSS) EQUITY
------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2001 9,778,680 $ 97,787 $ 19,251,392 $289,168 $ - $ 19,638,347
To record the initial fair market (104,762) (104,762)
value of the interest rate swap, net
of deferred income tax benefit of
$53,968.
To record the hedge accounting effect (226,539) (226,539)
of the interest rate swap at September
30, 2001, net of deferred income tax
benefit of $170,670.
Net Income/(loss) (606,372) (606,372)
------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2001 9,778,680 $97,787 $ 19,251,392 $(317,204) $ (331,301) $ 18,700,674
==========================================================================================
See notes to financial statements.
4
CORE MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ (606,372) $ 1,155,188
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 1,609,369 1,774,775
Deferred income taxes (benefit) (258,211) 493,638
Loss/(gain) on disposal of assets 33,203 (14,588)
Amortization of gain on sale/leaseback transactions (340,166) (340,166)
Change in operating assets and liabilities:
Accounts receivable (1,153,641) 4,418,373
Inventories 197,953 2,013,190
Prepaid and other assets 1,477,854 (410,306)
Accounts payable 1,280,281 (4,687,133)
Accrued and other liabilities 391,759 1,048,156
Postretirement benefits liability 463,237 461,120
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,095,266 5,912,247
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,098,258) (2,730,272)
Proceeds from sale of property and equipment 19,800 -
Proceeds from maturities on mortgage-backed security investment 556,946 290,795
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (521,512) (2,439,477)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of principal on industrial revenue bond (245,000) (225,000)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (245,000) (225,000)
NET INCREASE IN CASH 2,328,754 3,247,770
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,712,412 1,128,868
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,041,166 $ 4,376,638
=========== ===========
Cash paid for:
Interest (net of amounts capitalized) $ 1,007,080 $ 1,727,285
=========== ===========
Income taxes (refund) $ 72,456 $ (84,666)
=========== ===========
See notes to financial statements.
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 10Q and include all of the information
and disclosures required by accounting principles generally accepted in the
United States of America 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, 2001, and the
results of operations and cash flows. The "Notes to Financial Statements", which
are contained in the 2000 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 to the classifications of such amounts
for 2001.
Core Materials operates in the plastics market, specifically in the
production of high quality compression Sheet Molding Composite ("SMC")
fiberglass reinforced plastics. Core Materials produces and sells both SMC
compound and molded products for varied markets including medium and heavy duty
trucks, automotive, recreational vehicles and other commercial products.
2. 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 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, 2001 and 2000, stock
options had no effect on the weighted average shares for the computation of
diluted income per share and consequently basic and diluted net income per share
were the same.
3. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (FAS 133)
When Core Materials Corporation enters into variable rate obligations
or purchases variable rate interest bearing assets, it considers the potential
effect of interest rate fluctuations on such instruments. In order to minimize
the effects of interest rate fluctuations on its operations, the Company may
enter into interest rate management arrangements.
In conjunction with its variable rate Industrial Revenue Bond, Core
Materials entered into an interest rate swap agreement, which was designated as
a cash flow hedging instrument, with a commercial bank in June 1998. Under this
agreement, Core Materials pays a fixed rate of 4.89% to the bank and receives
76% of the 30-day commercial paper rate. The difference paid or received varies
as short-term interest rates change and is accrued and recognized as an
adjustment to interest expense. The swap term matches the payment schedule on
the IRB with final maturity in April 2013. While Core Materials is exposed to
credit loss on its interest rate swap in the event of non-performance by the
counterparty to the swap, management believes such non-performance is unlikely
to occur given the financial resources of the counterparty. The effectiveness of
the swap is assessed at each financial reporting date by comparing the
commercial paper rate of the swap to the benchmark rate underlying the variable
rate of the Industrial Revenue Bond.
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and Hedging Activities, on
January 1, 2001. At January 1, 2001, the Company recorded the fair value of its
interest rate swap agreement of $159,000 as a long-term liability and $105,000
(net of deferred income tax benefit of $54,000) to accumulated other
comprehensive income (loss).
6
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents net income (loss) plus the
results of certain non-shareowners' equity changes not reflected in the
Statement of Income. The components of comprehensive income (loss), net of tax,
are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
---------------------------------- ---------------------------------
2001 2000 2001 2000
---------------- -------------- -------------- ---------------
Net income/(loss) $ (785,786) $ (82,046) $ (606,372) $1,155,188
Cumulative effect of change in accounting principle - - (104,762) -
(SFAS No. 133) on other comprehensive income
Hedge accounting effect of interest rate swap (205,294) - (226,539) -
---------------- -------------- -------------- ---------------
Comprehensive income (loss) $ (991,080) $ (82,046) $ (937,673) $1,155,188
================ ============== ============== ===============
5. ACQUISITION OF AIRSHIELD CORPORATION
On October 16, 2001, Core Composites Corporation, a wholly owned
subsidiary of Core Materials Corporation, purchased substantially all of the
assets, consisting primarily of inventory, accounts receivable and manufacturing
equipment, of Airshield Corporation, a privately held manufacturer of fiberglass
reinforced plastic parts for the truck and automotive-aftermarket industries.
Airshield is based in Brownsville, Texas, with manufacturing operations in
Matamoros, Mexico. Airshield had been operating under Chapter 11 bankruptcy
protection since March 2001. Core Materials Corporation plans to continue the
operations of Airshield Corporation from Airshield's former manufacturing
facility in Matamoros, Mexico.
The purchase price for the acquisition of substantially all of the
assets of Airshield Corporation was $1,794,000. In addition, Core Materials or
its subsidiaries will assume certain liabilities related to the transfer of
employees from Airshield's Mexican subsidiary to Core Materials' new Mexican
subsidiary. These liabilities along with transaction costs and certain
contingencies are expected to total an additional $1,900,000. The acquisition is
expected to be financed from the cash reserves of Core Materials Corporation
7
PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements under this caption constitute "forward-looking
statements" which involve certain risks and uncertainties. Core Materials'
actual results may differ significantly from those discussed in the
forward-looking statements. Factors that may cause such a difference include,
but are not limited to: business conditions in the plastics, transportation,
recreation and consumer products industries, the general economy, competitive
factors, the dependence on three major customers, the recent efforts of Core
Materials to expand its customer base, new technologies, regulatory
requirements, labor relations, the loss or inability to attract key personnel,
the availability of capital, the start-up of operations in Mexico, 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 International'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 may change proportionately more than revenues from operations.
At the time of the acquisition of Columbus Plastics, International and
Core Materials entered into a Comprehensive Supply Agreement, which expires on
December 31, 2001. Under the terms of the Comprehensive Supply Agreement, Core
Materials became the primary supplier of International's original equipment and
service requirements for fiberglass reinforced parts using the SMC process. At
this time, there are no plans to renew this agreement. If the agreement expires
without an extension, Core Materials will supply products to International on a
purchase order basis, like it operates with all of its other customers. The
purchase orders typically provide volume commitments for four weeks at prices
previously negotiated. Customers can update their orders on a daily basis for
changes in demand that allow them to run their inventories on a "just-in-time"
basis.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
Net sales for the three months ended September 30, 2001, totaled $14,483,000
representing an approximate 21% decrease from the $18,285,000 reported for the
three months ended September 30, 2000. Sales to International decreased to
$7,578,000 from $11,282,000 for the three months ended September 30, 2000. The
primary reason for the decrease was lower demand from International resulting
from an industry wide general decline in truck orders. Sales to Yamaha decreased
for the three months ended September 30, 2001 to $1,657,000 compared with
$3,915,000 for the three months ended September 30, 2000. The decrease in Yamaha
sales is primarily the result of lower demand due to the seasonal nature of the
personal watercraft industry and also due to the weaker general economic
conditions, which has resulted in lower sales by Yamaha to end-users. Sales to
Lear Corporation for the three months ended September 30, 2001, totaled
$4,507,000. The Lear products consist of SMC components that Lear assembles into
seat bottoms and backs
8
for a new sports utility/pick-up truck recently introduced by an automotive
original equipment manufacturer. The Company began selling these products to
Lear in the first quarter of 2001.
Sales to other customers for the three months ended September 30, 2001,
decreased 76% to $741,000 from $3,087,000 for the three months ended September
30, 2000. The decrease was primarily due to the Company's discontinuance of its
business relationship with Case/New Holland in the second quarter of 2001. Sales
to Case/New Holland totaled $18,000 compared to $2,120,000 for the three months
ended September 30, 2000. Sales levels were also down to Volvo Trucks North
America and other various customers.
Gross Margin was 6.7% of sales for the three months ended September 30,
2001, compared with 14.0% for the three months ended September 30, 2000. The
decrease in gross margin as a percent of sales, from the prior year, is
primarily due to fixed costs associated with excess capacity, production
inefficiencies associated with reduced order flow, and new product start-ups,
mostly affecting the Columbus plant. However, improved productivity and a better
product mix resulted in gross margin improvement in the Gaffney plant compared
to last year.
Selling, general and administrative expenses ("SG&A") totaled $1,869,000 for
the three months ended September 30, 2001, decreasing from $2,283,000 for the
three months ended September 30, 2000. The decrease from 2000 was due to lower
salary costs, primarily due to a reduction in personnel, and due to reductions
in supplies, outside services, travel and other expenses resulting from cost
containment activities and declining volumes.
Interest expense totaled $505,000 for the three months ended September 30,
2001, decreasing from $521,000 for the three months ended September 30, 2000.
The decrease in interest expense from 2000 is primarily due to principal
paydowns on the Company's Industrial Revenue Bond. Interest income totaled
$64,000 for the three months ended September 30, 2001, decreasing from $99,000
for the three months ended September 30, 2000 due to lower interest rates for
invested funds.
Income taxes/(benefit) for the three months ended September 30, 2001, 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. 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. Projected
future income tax payments/(benefits) related to income earned for the three
months ended September 30, 2001, are estimated to be approximately ($221,000),
which reflects federal alternative minimum, state and local taxes.
Net income/(loss) for the three months ended September 30, 2001, was
($786,000), or ($.08) per basic and diluted share, a decrease of $704,000 over
the net loss for the three months ended September 30, 2000, of ($82,000), or
($.01) per basic and diluted share.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AS COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
Net sales for the nine months ended September 30, 2001, totaled $51,040,000
representing an approximate 24% decrease from the $67,405,000 reported for the
nine months ended September 30, 2000. Sales to International decreased to
$27,071,000 from $42,615,000 for the nine months ended September 30, 2000. The
primary reason for the decrease was lower demand from International resulting
from an industry wide general decline in truck orders. Sales to Yamaha decreased
for the nine months ended September 30, 2001 to $10,775,000 compared with
$13,562,000 for the nine months ended September 30, 2000. The decrease in Yamaha
sales is primarily due to the general economic conditions and its impact on the
personal watercraft industry as noted above. Sales to Lear Corporation for the
nine months ended September 30, 2001, totaled $7,562,000.
9
Sales to other customers for the nine months ended September 30, 2001,
decreased to $5,632,000 from $11,228,000 for the nine months ended September 30,
2000. The decrease in sales was primarily the result of the discontinuance of
the business relationship with Case/New Holland in the second quarter of 2001.
Sales to Case/New Holland totaled $3,188,000 compared to $6,376,000 for the nine
months ended September 30, 2000. Also adding to the decrease was the
discontinuance of the Company's business relationship with Caradon Doors and
Windows, Peachtree Division, in 2000. Sales to Peachtree totaled $1,258,000 for
the nine months ended September 30, 2000. Sales levels were also down to Volvo
Trucks North America and other various customers.
Gross margin was 11.4% of sales for the nine months ended September 30,
2001, compared with 15.5% for the nine months ended September 30, 2000. The
decline in gross margin percentage is primarily due to the reasons noted above
for the three months.
SG&A totaled $5,607,000 for the nine months ended September 30, 2001,
decreasing from $7,300,000 for the nine months ended September 30, 2000. The
decrease from the 2000 amount is primarily due to the reasons noted above for
the three months.
Interest expense totaled $1,487,000 for the nine months ended September 30,
2001, increasing from $1,384,000 for the nine months ended September 30, 2000,
primarily due to having less capitalized interest in 2001. Interest income
totaled $264,000 for the nine months ended September 30, 2001, increasing from
$219,000 for the nine months ended September 30, 2000, due to increased funds
available for investment.
Income taxes/(benefit) for the nine months ended September 30, 2001, 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. 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. Projected
future income tax payments/(benefits) related to income earned for the nine
months ended September 30, 2001, are estimated to be approximately ($170,000),
which reflects federal alternative minimum, state and local taxes.
Net income/(loss) for the nine months ended September 30, 2001, was
($606,000), or ($.06) per basic and diluted share, a decrease of $1,761,000
compared to the net income for the nine months ended September 30, 2000, of
$1,155,000, or $.12 per basic and diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Core Materials primary cash requirements are for operating expenses
and capital expenditures; however, in October 2001, the Company acquired
substantially all of the assets of Airshield Corporation for $1,794,000 using
funds from the Company's cash reserve. These cash requirements have historically
been met through a combination of cash flow from operations, equipment leasing,
issuance of Industrial Revenue Bonds and bank lines of credit.
Cash provided by operations for the nine months ended September 30,
2001, totaled $3,095,000. Net loss reduced operating cash flows by $606,000.
Depreciation and amortization increased cash flow by $1,609,000. Also adding
positive operating cash flows was an increase in accounts payable of $1,280,000,
primarily related to timing effects. Providing an additional increase to cash
flows was a decrease in prepaid and other assets of $1,478,000 due to the
collection of the outstanding receivable relating to the sale-leaseback
transaction, which occurred at the end of 2000. In addition, accrued and other
liabilities added $392,000 in positive cash flow, which was primarily due to an
increase in the accrual for interest charges on the long-term debt to
International. Decreasing the operating cash flow was an increase in accounts
receivable of $1,154,000, which was primarily due to new business started with
Lear Corporation.
Investing activities negatively affected cash flow by $522,000 for the
nine months ended September 30, 2001. Capital expenditures totaled $1,098,000
primarily related to the acquisition of machinery and equipment. Offsetting
these expenditures were proceeds from maturities on Core Materials'
mortgage-backed security investment of $557,000.
10
Financing activities reduced cash flow by $245,000 due to principal
repayments on the $7,500,000 Industrial Revenue Bond that was issued in 1998.
At September 30, 2001, Core Materials had cash on hand of $5,041,000
and an available line of credit of $7,500,000. As of September 30, 2001, Core
Materials was in violation of all three of its financial debt covenants for its
line of credit, its letter of credit securing the Industrial Revenue Bond and
certain equipment leases. The covenants relate to maintaining certain financial
ratios. On November 7, 2001, Core Materials received a written commitment from
the bank to waive these covenants for the quarter ended September 30, 2001. The
Company has also projected itself to be in violation of these covenants for the
quarter ended December 31, 2001, and has provided this information to the bank.
The bank has agreed to waive the covenants for this time period as long as the
Company operates in compliance with these financial projections. However, if
performance should fall below these projections or if a material adverse change
in the financial position of the Company should occur, Core Materials' liquidity
and ability to obtain further financing to fund future operating and capital
requirements could be negatively impacted.
NEW ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations". This statement improves the transparency of the accounting and
reporting for business combinations by requiring that all business combinations
be accounted for under a single method - the purchase method. This Statement is
effective for all business combinations initiated after June 30, 2001.
On June 29, 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". This statement applies to intangibles and goodwill acquired
after June 30, 2001, as well as goodwill and intangibles previously acquired.
Under this statement goodwill as well as other intangibles determined to have an
infinite life will no longer be amortized; however these assets will be reviewed
for impairment on a periodic basis. This statement is effective for the Company
for the first quarter in the fiscal year ended December 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Under this Statement
obligations that meet the definition of a liability will be recognized
consistently with the retirement of the associated tangible long-lived assets.
This Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Because SFAS No. 121 did
not address the accounting for a segment of a business accounted for as a
discontinued operation under Opinion 30, two accounting models existed for
long-lived assets to be disposed of. The Board decided to establish a single
accounting model, based on the framework established in Statement 121, for
long-lived assets to be disposed of by sale. This Statement is effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years.
The Company is currently assessing the impact of SFAS No. 141, 142, 143
and 144. At this time, the Company has yet to determine the effect of these
pronouncements on its results of operations and its financial position.
11
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. The Company does not hold any
material market risk sensitive instruments for trading purposes.
Core Materials has the following four items that are sensitive to a
change in interest rates: (1) Long-term debt consisting of an Industrial Revenue
Bond ("IRB") with a balance at September 30, 2001, of $6,535,000. Interest is
variable and is computed weekly; the average interest rate charged for the nine
months ended September 30, 2001, was 3.30%, and the maximum interest rate that
may be charged at any time over the life of the IRB is 10%. In order to minimize
the effect of the interest rate fluctuation, Core Materials has entered into an
interest rate swap arrangement related to the IRB under which Core Materials
pays a fixed rate of 4.89% to a bank and receives 76% of the 30 day commercial
paper rate; (2) Long-term Secured Note Payable with a balance as of September
30, 2001, of $19,920,000 at a fixed interest rate of 8%; (3) 7% mortgage-backed
security which matures in November 2025. Such security is recorded at cost and
is considered held to maturity as Core Materials has the intent and ability to
hold such security to maturity; and (4) Revolving line of credit, which bears
interest at LIBOR plus three and one-quarter percent or prime plus one-quarter
percent as elected by Core Materials.
Assuming a hypothetical 20% change in short-term interest rates in both
the nine month period ended September 30, 2001 and 2000, interest expense would
not change significantly, as the interest rate swap agreement would generally
offset the impact.
12
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
None
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
13
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 14, 2001 By: /s/ James L. Simonton
----------------- ----------------------------------------
James L. Simonton
President, Chief Executive Officer and
Director
Date: November 14, 2001 By: /s/ Kevin L. Barnett
----------------- ----------------------------------------
Kevin L. Barnett
Vice President, Treasurer, Secretary, and
Chief Financial Officer
14
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
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
Between Core Materials Corporation and RYMAC Report on Form 10-K for the
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 State Statement on Form S-8
of Delaware on October 8, 1996 (Registration No. 333-29203)
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)
15
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
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
(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.
16