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 June 30, 2002
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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 August 13, 2002, 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 AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 6,197,046 $ 3,194,156
Accounts receivable (less allowance for doubtful accounts:
June 30, 2002 - $436,000; December 31, 2001 - $715,000) 14,295,172 11,946,137
Inventories:
Finished and work in process goods 2,176,443 1,679,745
Stores 2,317,643 2,222,250
------------ ------------
Total inventories 4,494,086 3,901,995
Deferred tax asset 1,079,995 1,079,995
Prepaid expenses and other current assets 1,641,146 1,704,262
------------ ------------
Total current assets 27,707,445 21,826,545
Property, plant and equipment
42,986,545 42,759,871
Accumulated depreciation (18,351,419) (17,398,659)
------------ ------------
Property, plant and equipment - net 24,635,126 25,361,212
Deferred tax asset - net 11,436,144 11,692,678
Mortgage-backed security investment 298,155 924,041
Goodwill 1,097,433 1,097,433
Other assets 379,387 405,356
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TOTAL $ 65,553,690 $ 61,307,265
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities
Current portion long-term debt $ 370,000 $ 355,000
Accounts payable 7,051,115 3,756,735
Accrued liabilities:
Compensation and related benefits 2,353,004 3,050,120
Interest 91,479 85,939
Taxes 1,139,295 636,934
Graduated lease payments 1,003,902 889,267
Professional fees 359,462 417,487
Other accrued liabilities 886,091 848,826
------------ ------------
Total current liabilities 13,254,348 10,040,308
Long-term debt 25,825,150 26,015,150
Interest rate swap 474,256 366,826
Deferred long-term gain 1,781,939 2,008,716
Postretirement benefits liability 5,512,256 5,340,164
STOCKHOLDERS' EQUITY:
Common stock - $0.01 par value, authorized shares - 20,000,000; 97,787 97,787
Outstanding shares: June 30, 2002 and December 31, 2001 -
9,778,680
Paid-in capital 19,251,392 19,251,392
Accumulated other comprehensive income (loss), net of income tax effect (313,009) (242,105)
Retained earnings (deficit) (330,429) (1,570,973)
------------ ------------
Total stockholders' equity 18,705,741 17,536,101
------------ ------------
TOTAL $ 65,553,690 $ 61,307,265
============ ============
See notes to consolidated financial statements
2
CORE MATERIALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
NET SALES:
International $ 11,343,819 $ 10,367,570 $ 22,322,280 $ 21,517,926
Yamaha 4,357,232 3,487,594 8,490,282 9,118,382
Lear 1,807,263 2,727,743 4,080,445 3,054,418
Freightliner 2,628,821 -- 4,369,289 --
Paccar 4,236,438 -- 4,526,055 --
Other 2,278,041 1,860,506 3,889,538 5,286,287
------------ ------------ ------------ ------------
Total Sales 26,651,614 18,443,413 47,677,889 38,977,013
------------ ------------ ------------ ------------
Cost of Sales 22,282,646 15,740,647 39,620,710 33,629,339
Postretirement benefits expense 250,084 267,814 506,073 521,686
------------ ------------ ------------ ------------
Total cost of sales 22,532,730 16,008,461 40,126,783 34,151,025
------------ ------------ ------------ ------------
GROSS MARGIN 4,118,884 2,434,952 7,551,106 4,825,988
------------ ------------ ------------ ------------
Selling, general and administrative expense 2,488,786 1,677,933 4,466,775 3,619,352
Postretirement benefits expense 62,521 58,789 122,568 118,339
------------ ------------ ------------ ------------
Total selling, general and administrative 2,551,307 1,736,722 4,589,343 3,737,691
expense
INCOME BEFORE INTEREST AND TAXES 1,567,577 698,230 2,961,763 1,088,297
Interest income 34,905 104,008 70,556 200,014
Interest expense (507,028) (502,313) (1,008,189) (982,146)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,095,454 299,925 2,024,130 306,165
Income taxes:
Current 252,831 49,327 490,526 50,355
Deferred 175,601 74,841 293,060 76,398
------------ ------------ ------------ ------------
Total income taxes 428,432 124,168 783,586 126,753
------------ ------------ ------------ ------------
NET INCOME $ 667,022 $ 175,757 $ 1,240,544 $ 179,412
============ ============ ============ ============
NET INCOME PER COMMON SHARE:
Basic and diluted $ 0.07 $ 0.02 $ 0.13 $ 0.02
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted 9,778,680 9,778,680 9,778,680 9,778,680
============ ============ ============ ============
See notes to consolidated financial statements
3
CORE MATERIALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
COMMON STOCK RETAINED OTHER TOTAL
OUTSTANDING PAID-IN EARNINGS COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) INCOME (LOSS) EQUITY
----------- ----------- ----------- ----------- ------------- -----------
BALANCE AT JANUARY 1, 2002 9,778,680 $ 97,787 $19,251,392 $(1,570,973) $ (242,105) $17,536,101
Net Income 1,240,544 1,240,544
Hedge accounting effect of the (70,904) (70,904)
interest rate swap at June 30,
2002, net of deferred income
tax benefit of $36,526
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT JUNE 30, 2002 9,778,680 $ 97,787 $19,251,392 $ (330,429) $ (313,009) $18,705,741
=========== =========== =========== =========== =========== ===========
See notes to consolidated financial statements.
4
CORE MATERIALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,240,544 $ 179,412
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,006,194 1,073,081
Deferred income taxes 293,060 76,398
Loss on disposal of assets -- 33,203
Amortization of gain on sale/leaseback transactions (226,777) (226,777)
Loss/(gain) on translation of foreign currency financial statements (34,704) --
Change in operating assets and liabilities:
Accounts receivable (2,349,035) (932,179)
Inventories (592,091) (317,746)
Prepaid and other assets 63,116 1,710,027
Accounts payable 3,294,380 2,970,618
Accrued and other liabilities (95,340) 955,009
Postretirement benefits liability 172,092 211,776
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,771,439 5,732,822
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (219,435) (922,909)
Proceeds from sale of property and equipment -- 19,800
Proceeds from maturities on mortgage-backed security investment 625,886 260,196
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 406,451 (642,913)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of principal on industrial revenue bond (175,000) (160,000)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (175,000) (160,000)
NET INCREASE IN CASH 3,002,890 4,929,909
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,194,156 2,712,412
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,197,046 $ 7,642,321
=========== ===========
Cash paid for:
Interest (net of amounts capitalized) $ 958,319 $ 116,580
=========== ===========
Income taxes (refund) $ (15,095) $ 60,456
=========== ===========
See notes to consolidated financial statements.
5
CORE MATERIALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PRESENTATION
The accompanying unaudited consolidated 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 consolidated 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 and its subsidiaries ("Core
Materials") at June 30, 2002, and the results of its operations and cash flows.
The "Notes to Consolidated Financial Statements", which are contained in the
2001 Annual Report to Shareholders, should be read in conjunction with these
unaudited Consolidated Financial Statements.
Core Materials Corporation and its subsidiaries operate in the plastics
market in a family of products known as "reinforced plastics". Reinforced
plastics are combinations of resins and reinforcing fibers (typically glass or
carbon) that are molded to shape. The Columbus, Ohio and Gaffney, South Carolina
facilities produce reinforced plastics by compression molding sheet molding
compound (SMC) in a closed mold process. The Matamoros, Mexico facility produces
reinforced plastic products by spray-up and hand-lay-up open mold processes and
vacuum assisted resin infused (VRIM) closed mold process.
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 six months ended June 30, 2002 and 2001, 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. COMPREHENSIVE INCOME
Comprehensive income represents net income plus the results of certain
non-stockholders' equity changes not reflected in the Statement of Income. The
components of comprehensive income, net of tax, are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income $ 667,022 $ 175,757 $ 1,240,544 $ 179,412
Hedge accounting effect of the interest rate swap, net
of tax effect of $64,104 benefit and $30,932 expense
for the three months ending June 30, respectively; and
$36,526 and $64,913 tax benefit for the six months
ending June 30, respectively (124,437) 60,045 (70,904) (126,007)
----------- ----------- ----------- -----------
Comprehensive income $ 542,585 $ 235,802 $ 1,169,640 $ 53,405
=========== =========== =========== ===========
6
4. ACQUISITION OF AIRSHIELD CORPORATION ASSETS
On October 16, 2001, 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 was 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 has continued
operations from Airshield's former manufacturing facility in Matamoros, Mexico.
The following (unaudited) pro forma consolidated results of operations
have been prepared as if the acquisition of substantially all of the assets of
Airshield Corporation had occurred at the beginning of 2001.
Quarter Ended Year to Date
June 30, 2001 June 30, 2001
------------- ------------
Net sales $ 21,244,232 $ 44,129,508
============= ============
Net income (loss) $ (238,038) $ (648,177)
============= ============
Net income (loss) per share-
basic and diluted $ (0.02) $ (0.07)
============= ============
The pro forma information is presented for informational purposes only
and is not necessarily indicative of the results of operations that actually
would have been achieved had the acquisition been consummated as of that time,
nor is it intended to be a projection of future results. The effects of the
acquisition have been included in the consolidated statement of income since the
acquisition date.
5. 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. The
acquisition of substantially all of the assets of Airshield Corporation, which
took place on October 16, 2001, was accounted for under SFAS No. 141.
Effective January 1, 2002, the Company adopted 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. Due to the adoption of SFAS No.
142, the Company does not amortize goodwill. The total net book value of
goodwill at June 30, 2002 was $1,097,433, and there was no goodwill recorded at
June 30, 2001.
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." The adoption of this
statement, as of January 1, 2002, did not have an impact on the Company's
consolidated financial statements.
6. RECLASSIFICATION OF PRIOR YEAR INFORMATION
In the current year, the Company has classified completed tooling
projects as revenue and cost of goods sold in the statement of income.
Previously, the Company classified the net effect of tooling projects as a
miscellaneous gain (loss) in selling, general and administrative expenses.
Tooling projects are and have been accounted for under the completed contracts
method. For comparative purposes, amounts in prior years have been reclassified
to conform to current year presentations. Second quarter 2001 tooling revenue
was $985,000 and the associated cost of goods sold $960,000. For the six months
ending June 30, 2001 tooling revenue amounted to $2,419,000 and the applicable
costs of goods sold was $2,420,000.
7
This change in classification had no effect on previously reported net income,
cash flow or stockholders' equity.
7. SUBSEQUENT EVENTS
On August 2, 2002, Core Materials Corporation filed a definitive proxy
statement with the Securities and Exchange Commission seeking approval from its
stockholders of record on July 29, 2002, to change the name of Core Materials
Corporation to Core Molding Technologies, Inc. A special stockholders' meeting
will take place on August 28, 2002, to determine if the Company's stockholders
will approve the name change.
In September 2002, the Company anticipates changing its ticker symbol
on the American Stock Exchange from "CME" to "CMT". This change is taking place
because another corporation has offered to purchase the rights to use "CME" from
the Company for $500,000 and other promotional considerations.
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,
recreation and commercial product industries, the general economy, competitive
factors, the dependence on a few 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 new operations in Mexico and
management's decisions to pursue new products or businesses which involve
additional costs, risks or capital expenditures.
OVERVIEW
Core Materials is a compounder of sheet molding composite ("SMC") and
molder of fiberglass reinforced plastics. The Company produces high quality
fiberglass reinforced molded products and SMC materials for varied markets,
including medium and heavy-duty trucks, automobiles, personal watercraft and
other commercial products. The demand for Core Materials' products is affected
by economic conditions in the United States, Canada and Mexico. 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.
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. Columbus Plastics was a compounder and compression
molder of SMC. In October 2001, Core Materials acquired certain assets of
Airshield Corporation. As a result of this acquisition, Core Materials expanded
its fiberglass molding capabilities to include the spray up, hand-lay-up and
vacuum assisted resin infusion molding processes ("VRIM"). The acquisition was
accounted for under the purchase accounting method and accordingly the effects
of the acquisition are included in the results of operations and financial
condition of Core Materials from the date of the acquisition and forward.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 AS COMPARED TO THREE MONTHS
ENDED JUNE 30, 2001
Net sales for the three months ended June 30, 2002, totaled $26,652,000
representing an approximate 45% increase from the $18,443,000 reported for the
three months ended June 30, 2001. Sales to International increased to
$11,344,000 from $10,368,000 for the three months ended June 30, 2002. The
primary reason for the increase was due to additional business with
International that was obtained as a result of the October 2001 acquisition,
noted above. Sales to Yamaha increased for the three months ended June 30, 2002
to $4,357,000 compared with $3,488,000 for the three months ended June 30, 2001.
The increase in Yamaha sales is primarily the result of the introduction of
Yamaha's new four-cycle personal watercraft. The Company also saw additions to
sales due to new business with Freightliner and Paccar. Sales to Freightliner
amounted to $2,629,000 for the three months ended June 30, 2002. These sales
were the result of the October 2001 acquisition, noted above. Sales to Paccar
amounted to $4,236,000 for the three months ended June 30, 2002. Sales to Paccar
were generated primarily from the completion of tooling projects for new
business that the Company has acquired. Sales to Lear Corporation decreased to
$1,807,000 for the three months ended June 30, 2002 compared to sales of
$2,728,000 for the three months ended June 30, 2001. The primary reason for this
decrease was due to reductions in selling prices for Lear products.
9
Sales to other customers for the three months ended June 30, 2002, increased
approximately 22% to $2,278,000 from $1,861,000 for the three months ended June
30, 2001. The increase was primarily due to sales of $363,000 to other customers
obtained from the acquisition noted above.
For the three months ended June 30, 2002, tooling sales amounted to
$5,209,000, as compared to $989,000 for the three months ended June 30, 2001.
Tooling sales accounted for 19.5% of total sales revenue for the three months
ended June 30, 2002. This amount was 5.4% for the three months ended June 30,
2001. Tooling projects are sporadic in nature and do not represent a recurring
trend.
Gross margin was 15.5% of sales for the three months ended June 30, 2002,
compared with 13.2% for the three months ended June 30, 2001. The increase in
gross margin as a percent of sales, from the prior year, is primarily due to
improvements in material, labor efficiency and repair and maintenance costs at
the Company's Columbus, Ohio facility. Gross margins from the newly established
operations resulting from the acquisition noted above were generally in line
with the Company's historical business. Partially offsetting the increase in
gross margin were the price reductions for the Lear product as noted above,
which is produced at the Company's Gaffney, South Carolina facility. Also,
completed tooling projects for the quarter ended June 30, 2002, had a slightly
dilutive effect on gross margin percentage.
Selling, general and administrative expenses ("SG&A") totaled $2,551,000 for
the three months ended June 30, 2002, increasing from $1,737,000 for the three
months ended June 30, 2001. The increase from 2001 was primarily due to the
additional costs added as a result of the new Mexican operation.
Interest expense totaled $507,000 for the three months ended June 30, 2002,
increasing slightly from $502,000 for the three months ended June 30, 2001.
Interest rates experienced by the Company with respect to the industrial revenue
bond were favorable; however, due to the interest rate swap the Company entered
into, the interest rate is essentially fixed for this debt instrument. Interest
income totaled $35,000 for the three months ended June 30, 2002, decreasing from
$104,000 for the three months ended June 30, 2001 primarily due to a decrease in
funds available for investment and the decrease in the interest rate for that
investment.
Income taxes for the three months ended June 30, 2002, are estimated to be
approximately 39% 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 related
to income earned for the three months ended June 30, 2002, are estimated to be
approximately $253,000 which reflects federal alternative minimum, state and
local taxes.
Net income for the three months ended June 30, 2002, was $667,000 or $.07
per basic and diluted share, an increase of $491,000 over the net income for the
three months ended June 30, 2001, of $176,000 or $.02 per basic and diluted
share.
SIX MONTHS ENDED JUNE 30, 2002 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Net sales for the six months ended June 30, 2002, totaled $47,678,000
representing an approximate 22.3% increase from the $38,977,000 reported for the
six months ended June 30, 2001. Sales to International increased slightly to
$22,322,000 from $21,518,000 for the six months ended June 30, 2002. The primary
reason for the increase was due to additional business with International that
was obtained as a result of the October 2001 acquisition, noted above. Sales to
Lear increased to $4,080,000 for the six months ended June 30, 2002 from
$3,054,000 for the same period a year ago. The primary reason for the increase
was due to the product for Lear being introduced in early 2001 with initial
sales volumes being relatively low. This increase is partially offset by
reductions in selling prices as noted above. The Company also saw additions to
sales due to new business to Freightliner and Paccar. This increase was due to
the reasons noted above for the three months ended June 30, 2002. Sales to
Yamaha decreased slightly for the six months ended June 30, 2002 to $8,490,000
compared with $9,118,000 for the six months ended June 30, 2001. The decrease in
Yamaha sales is primarily due to the negative impact general economic conditions
have had on the demand for personal watercraft.
Sales to other customers for the six months ended June 30, 2002, decreased
to $3,890,000 from $5,286,000 for the six months ended June 30, 2001. The
decrease in sales was primarily the result of the Company discontinuing its
business relationship with Case/New Holland. Sales to Case/New Holland were
$3,170,000 for the six months ended June 30, 2001. Partially offsetting these
amounts were sales to other customers obtained from the acquisition noted above.
For the six months ended June 30, 2002, tooling sales amounted to
$5,939,000, as compared to $2,425,000 for the six months ended June 30, 2001.
Tooling sales accounted for 12.5% of total sales revenue for the six months
ended June 30, 2002. This amount was 6.2% for the six months ended June 30,
2001. Tooling projects are sporadic in nature and do not represent a recurring
trend.
Gross margin was 15.8% of sales for the six months ended June 30, 2002,
compared with 12.4% for the six months ended June 30, 2001. The increase in
gross margin, as a percent of sales from the prior year, was due to a
combination of many factors including improved labor utilization, improved
manufacturing processes leading to a reduction of scrap costs, reduced energy
costs and repairs and maintenance costs at the
10
Company's Columbus, Ohio facility. Gross margins from the newly established
operations resulting from the acquisition noted above were generally in line
with the Company's historical business. Partially offsetting the increase in
gross margin were the price reductions for the Lear product as noted above,
which is produced at the Company's Gaffney, South Carolina facility. Also,
completed tooling projects for the six months ended June 30, 2002, had a
slightly dilutive effect on gross margin percentage.
SG&A totaled $4,589,000 for the six months ended June 30, 2002, increasing
from $3,738,000 for the six months ended June 30, 2001. The increase from the
2001 amount is primarily due to the reasons noted above for the three months.
Interest expense totaled $1,008,000 for the six months ended June 30, 2002,
increasing slightly from $982,000 for the six months ended June 30, 2001, for
the reason noted above. Interest income totaled $71,000 for the six months
ended June 30, 2002, decreasing from $200,000 for the six months ended June 30,
2001 for the reason noted above.
Income taxes for the six months ended June 30, 2002, are estimated to be
approximately 39% 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 related
to income earned for the six months ended June 30, 2002, are estimated to be
approximately $491,000 which reflects federal alternative minimum, state and
local taxes.
Net income for the six months ended June 30, 2002, was $1,241,000 or $.13
per basic and diluted share, an increase of $1,062,000 compared to the net
income for the six months ended June 30, 2001, of $179,000 or $.02 per basic and
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 flow from operations, equipment leasing, issuance
of Industrial Revenue Bonds and bank lines of credit.
Cash provided by operations for the six months ended June 30, 2002,
totaled $2,771,000. Net income contributed $1,241,000 with depreciation and
amortization adding another $1,006,000. Adding positive operating cash flows was
an increase in accounts payable of $3,294,000, primarily related to timing
effects. Decreasing the operating cash flow was an increase in accounts
receivable of $2,349,000, which was primarily due to increased sales volumes in
the first half of 2002. Also decreasing operating cash flows was an increase in
inventory of $592,000 due to production ramp up for new product launches.
Investing activities positively affected cash flow by $406,000 for the
six months ended June 30, 2002. Proceeds from maturities on Core Materials'
mortgage-backed security investment totaled $626,000. Partially offsetting these
proceeds were capital expenditures of $219,000 primarily related to the
acquisition of machinery and equipment.
Financing activities reduced cash flow by $175,000 due to principal
repayments on the $7,500,000 Industrial Revenue Bond that was issued in 1998.
At June 30, 2002, Core Materials had cash on hand of $6,197,000 and an
available line of credit of $7,500,000. As of June 30, 2002, Core Materials was
in violation of two of its three 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.
Core Materials has received a written commitment from the bank to waive these
covenants each quarter through the quarter ended September 30, 2002, if Core
Materials operates in compliance with financial projections for fiscal year 2002
and does not experience any material adverse change to its financial condition.
Core Materials has operated in compliance with the financial projections for the
three months ended June 30, 2002, and the bank has waived the covenants for this
period. Management expects Core Materials to meet these projections for the
remainder of 2002. However, if performance should fall below these projections
or if a material adverse change in the financial position of Core Materials
should occur, Core Materials' liquidity and ability to obtain further financing
to fund future operating and capital requirements could be negatively impacted.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these consolidated financial statements
11
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
on-going basis, management evaluates its estimates and judgments, including
those related to accounts receivable, inventories, post retirement benefits, and
income taxes. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Accounts receivable allowances:
Management maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. Management also records estimates for customer
returns and discounts offered to customers. Should customer returns and
discounts fluctuate from the estimated amounts, additional allowances may be
required.
Inventories:
In some cases, the Company purchases raw materials and components at
anticipated production levels. Management identifies slow moving or obsolete
inventories and estimates appropriate loss provisions related to these
inventories. Historically, these loss provisions have not been significant.
Should actual results differ from these estimates, additional provisions may be
required.
Post retirement benefits:
Management records an accrual for post retirement costs associated with
the Company sponsored health care plan. Should actual results differ from the
assumptions, particularly related to future health care costs, used to determine
the reserves, additional provisions may be required.
Income taxes:
Management records a valuation allowance to reduce its deferred tax
assets to the amount that it believes is more likely than not to be realized.
The Company has considered future taxable income in assessing the need for the
valuation allowance and recorded a valuation allowance (see Note 10 to the
consolidated financial statements for the year ended December 31, 2001, included
in the 2001 Annual Report to Shareholders). The ability to realize deferred tax
assets depends on the generation of sufficient taxable income. The valuation
reserve will be adjusted as the Company determines the actual amount of deferred
tax assets that will be realized.
12
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 five 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 June 30, 2002, of $6,275,000. Interest is
variable and is computed weekly; the average interest rate charged for the six
months ended June 30, 2002, was 1.64%, 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 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 June 30, 2002, 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; (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; and (5) Foreign currency purchases in which Core
Materials purchases Mexican pesos with United States dollars to meet certain
obligations that arise due to the facility located in Mexico.
Assuming a hypothetical 20% change in short-term interest rates in both
the six month period ended June 30, 2002 and 2001, interest expense would not
change significantly, as the interest rate swap agreement would generally offset
the impact.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material changes in the two legal proceedings reported in
Form 10-K for the year ending December 31, 2001.
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
At the annual meeting of the shareholders of Core Materials
Corporation held May 15, 2002, the following issues were voted
upon with the indicated results:
A. ELECTION OF DIRECTORS: SHARES VOTED FOR SHARES VOTED AGAINST
Thomas R. Cellitti 8,647,074 56,511
James F. Crowley 8,561,374 142,211
Ralph O. Hellmold 8,560,748 142,837
Thomas M. Hough 8,561,374 142,211
Malcolm M. Prine 8,560,074 143,511
James L. Simonton 8,647,074 56,511
The above elected directors constitute the full acting
Board of Directors for Core Materials Corporation; all
terms expire at the 2003 annual meeting of stockholders of
the Company.
B. RATIFICATION OF THE 2002 EMPLOYEE STOCK PURCHASE PLAN:
SHARES VOTED FOR SHARES AGAINST SHARES ABSTAINING
8,438,780 244,465 20,340
C. RATIFICATION OF DELOITTE AND TOUCHE, LLP AS AUDITORS FOR THE
YEAR ENDING DECEMBER 31, 2002:
SHARES VOTED FOR SHARES AGAINST SHARES ABSTAINING
8,651,447 34,163 17,975
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
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: August 14, 2002 By: /s/ James L. Simonton
--------------- ------------------------------
James L. Simonton
President, Chief Executive
Officer and Director
Date: August 14, 2002 By: /s/ Herman F. Dick, Jr.
------------------ ------------------------------
Herman F. Dick, Jr.
Treasurer and Chief
Financial Officer
15
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.a.2 to Annual
Report on Form 10-K for the
year-ended December 31, 2001
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 Report on Form 10-K for the
RYMAC Mortgage Investment Corporation year ended December 31, 1997
2(c)(1) Asset Purchase Agreement dated as of October Incorporated by reference to
10, 2001, between Core Materials Corporation Exhibit 1 to Form 8K filed
and Airshield Corporation October 31, 2001
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)
16
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
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)
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.