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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from ___________ to __________
Commission File Number 001-12505
CORE MATERIALS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1481870
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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
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 March 31, 1997, the latest practicable date, 9,514,783 shares of
the registrant's common shares were issued and outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1
CORE MATERIALS CORPORATION
BALANCE SHEETS
(UNAUDITED)
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
ASSETS
Current Assets:
Cash $ 1,222,778 $ 590,212
Mortgage-backed security investment 3,247,700 3,295,049
Accounts receivable - (less allowance for doubtful
accounts March 31 - $34,736; December 31 - $0) 9,861,990 2,007,963
Inventories:
Work in process 1,130,900 1,585,644
Stores 1,841,500 1,757,055
------------ -------------
Total inventories 2,972,400 3,342,699
Prepaid expenses & other current assets 299,972 344,441
------------ -------------
Total Current Assets 17,604,840 9,580,364
Property, plant and equipment 42,533,225 42,337,970
Accumulated depreciation (17,852,595) (17,269,488)
------------ -------------
Property, plant and equipment - net 24,680,630 25,068,482
Deferred tax asset - net 12,136,414 12,455,000
------------ -------------
TOTAL $54,421,884 $47,103,846
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable $ 5,435,486 $ 372,870
Accrued liabilities:
Compensation & related benefits 1,538,130 827,313
Interest payable on secured note 590,280
Other accrued liabilities 700,448 594,790
------------ -------------
Total current liabilities 8,264,344 1,794,973
Secured note payable 29,514,000 29,514,000
Postretirement benefits liability 483,101 244,000
------------ -------------
TOTAL LIABILITIES 38,261,445 31,552,973
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value 95,148 94,746
Authorized 20,000,000 shares
Outstanding shares March 31 - 9,514,783 shares;,
Outstanding shares December 31 - 9,474,600 shares.
Paid-in capital 15,923,045 15,918,193
Retained earnings (deficit) 142,246 (462,066)
------------ -------------
Total stockholders' equity 16,160,439 15,550,873
------------ -------------
TOTAL $54,421,884 $47,103,846
============ =============
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CORE MATERIALS CORPORATION
STATEMENT OF INCOME FOR THREE MONTHS ENDED MARCH 31, 1997
AND STATEMENT OF REVENUES, DIRECT EXPENSES AND IDENTIFIED CORPORATE EXPENSES
BEFORE INTEREST AND TAXES FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
1997 1996
---- ----
Net Sales:
Navistar $10,460,156 $8,151,924
Yamaha 5,209,844 6,260,690
Other 703,035 188,748
----------- ----------
Total 16,373,035 14,601,362
Cost of sales 12,700,902 12,954,346
Postretirement benefits expense 235,523 210,962
----------- ----------
Total cost of sales 12,936,425 13,165,308
Gross Margin 3,436,610 1,436,054
----------- ----------
Selling, general and administrative expense 1,794,447 1,279,863
Postretirement benefits expense 70,322 89,461
----------- ----------
Total selling, general and administrative expense 1,864,769 1,369,324
----------- ----------
Income before interest and taxes 1,571,841 66,730
Interest income 59,117 NA
Interest expense 606,701 NA
----------- ----------
Income before income taxes 1,024,257 NA
Estimated income taxes 419,945 NA
----------- ----------
Net income $ 604,312 NA
=========== ==========
Net Income Per Common Share $ .06 NA
=========== ==========
Weighted Average Shares Outstanding 9,682,765 NA
=========== ==========
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CORE MATERIALS CORPORATION
STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, 1997
--------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 604,312
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 583,107
Deferred Income Taxes 318,586
Other 5,253
Change in Operating Assets and Liabilities:
Increase in Trade Receivables (7,854,027)
Decrease in Inventories 370,299
Decrease in Prepaid and Other Assets 44,469
Increase in Accounts Payable 5,062,616
Increase in Accrued Liabilities 1,406,755
Increase in Postretirement Benefits Liability 239,101
----------
Net Cash Provided by Operating Activities 780,471
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (195,254)
Payments on Mortgage-backed Security Investment 47,349
----------
Net Cash Used in Investing Activities (147,905)
CASH FLOWS FROM FINANCING ACTIVITIES
NET INCREASE IN CASH 632,566
CASH AT BEGINNING OF PERIOD 590,212
----------
CASH AT END OF PERIOD $1,222,778
==========
CASH PAID FOR:
INTEREST $ 16,421
==========
TAXES
==========
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CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and include all of the
information and disclosures required by generally accepted accounting
principles for interim reporting, which are less than those required for annual
reporting. In the opinion of management, the accompanying unaudited financial
statements contain all adjustments ( all of which are normal and recurring in
nature) necessary to present fairly the financial position of Core Materials
Corporation ("Core Materials") at March 31, 1997 and the results of operations
and cash flows. The notes to the Financial Statements which are contained in
the 1996 Annual Report to Stockholders should be read in conjunction with these
Financial Statements. Certain reclassifications have been made to prior year's
amounts to conform with the classifications of such amounts for 1997.
On December 31, 1996 Core Materials purchased substantially all of the
assets of and assumed certain liabilities of Columbus Plastics Operation
("Columbus Plastics"), an operating unit of Navistar International
Transportation Corp. ("Navistar"). Throughout these notes to Financial
Statements, references to Columbus Plastics refers to the operations of Core
Materials prior to the acquisition. The transaction for financial reporting and
accounting purposes has been accounted for as a reverse acquisition whereby
Columbus Plastics is deemed to have acquired Core Materials. However, Core
Materials is the continuing legal entity and registrant for both Securities and
Exchange Commission filing purposes and income tax reporting purposes.
Consistent with reverse acquisition accounting treatment Core Materials has
carried forward the historical basis of the acquired assets and assumed
liabilities of Columbus Plastics and has revalued the basis of its net assets
to fair value at December 31, 1996.
Prior to the Acquisition on December 31, 1996, Columbus Plastics was
not a "stand alone" division or subsidiary of Navistar and was not generally
accounted for separately. As a result, the distinct and separate accounts
necessary to present an individual Core Materials income statement for the
quarter ended March 31, 1996 has not been maintained.
Also prior to the Acquisition, Columbus Plastics did not maintain
corporate treasury, legal, tax, purchasing and other similar corporate support
functions. Corporate general and administrative expenses have not been
previously allocated to Columbus Plastics. For purposes of preparing the Core
Materials financial statements for the three months ended March 31, 1996,
certain of these corporate costs, along with other Navistar Truck Group
expenses, were allocated using an allocation method (see Note 4). However,
Navistar's systems and procedures do not provide sufficient information to
develop a reasonable cost allocation for income taxes, corporate debt and
interest expenses.
With respect to cash flows; purchases of inventory, payroll, capital
and other expenditures were funded through the Equity Investment account with
Navistar. Accounts payable to third party vendors and certain expense accruals
were processed and recorded at other Navistar locations. Remittances from sales
to third parties were collected by Navistar and were accounted for through the
Equity Investment account as were sales to Navistar's truck assembly
operations. Accordingly, Columbus Plastics had no operating cash flows.
Therefore, for the three months ended March 31, 1996, changes in the Equity
Investment account are presented in lieu of a Statement of Cash Flows for such
period (see Note 2).
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2. EQUITY INVESTMENT ACCOUNT
As indicated in note 1 above, prior to the acquisition date of
December 31, 1996, cash flows for purchases and sales of inventory, payroll,
capital expenditures, and other expenditures were funded through the
intercompany equity investment account with Navistar. As such a Statement of
Cash Flows cannot be presented for the three months ended March 31, 1996. In
lieu of a Statement of Cash Flows, the following information summarizes the
changes in the Equity Investment account for the three months ended March 31,
1996:
THREE MONTHS
ENDED
MARCH 31, 1996
--------------
Balance - beginning of period $24,206,408
Funding of purchases 14,141,650
Net charges from Navistar 3,730,444
Navistar funding of plant expenses and other 666,297
Net charges to Navistar (10,287,078)
Collections from third parties (10,397,537)
Income before interest and taxes 66,730
-----------
Balance - end of period $22,126,914
===========
Funding of Purchases -- represents amounts funded by Navistar
primarily for purchases of materials and capital expenditures.
Net Charges From Navistar -- represents amounts charged for payroll
and related expenses, charges for employee health and welfare plans, payments
to union sponsored pension plans and all corporate support services.
Navistar Funding of Plant Expenses -- represents amounts transferred
to Columbus Plastics from Navistar as reimbursement for expenses paid by
Columbus Plastics.
Net Charges to Navistar -- represents the intercompany sales and
charges by Columbus Plastics to other Navistar manufacturing plants for the
sale of SMC products.
Collections From Third Parties -- represents amounts collected by
Columbus Plastics on sales to third parties, primarily Yamaha, and collections
on billings for tooling projects.
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3. UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following pro forma combined statement of income for the three
months ended March 31, 1996 is presented as if the Acquisition had occurred as
of December 31, 1995. This information is being presented to provide a more
comparable income statement for the three months ended March 31, 1996. This pro
forma information is not necessarily indicative of the actual results of
operations which would have occurred had the transaction occurred on such date
on which may occur in the future.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1996
PRO FORMA ADJUSTMENTS
--------------------------------------------
HISTORICAL SUPPLY PRO FORMA
COLUMBUS & SERVICES ADJUSTED
PLASTICS ACQUISITION NOTE AGREEMENT NOTE BALANCE NOTE
-------- ----------- ---- --------- ---- ------- ----
Net Sales:
Navistar $8,151,924 $1,343,000 (b) $9,494,924
Yamaha 6,260,690 6,260,690
Other 188,748 188,748
---------- --------- ---------- ----------
Total 14,601,362 1,343,000 15,944,362
Cost of sales 12,954,346 12,954,346
Postretirement benefits expense 210,962 210,962
---------- --------- ---------- ----------
Total cost of sales 13,165,308 13,165,308
Gross Margin 1,436,054 1,343,000 2,779,054
---------- --------- ---------- ----------
Selling, general and administrative 1,279,863 216,000 (d) 1,495,863
expense
Postretirement benefits expense 89,461 89,461
---------- --------- ---------- ----------
Total selling, general and 1,369,324 216,000 1,585,324
administrative expense ---------- --------- ---------- ----------
Income before interest and taxes 66,730 (216,000) 1,343,000 1,193,730
Interest income 57,663 (a) 57,663
Interest expense 460,280 (c) 460,280
Income before income taxes $ 66,730 $(618,617) $1,343,000 $ 791,113
Estimated income taxes 324,356 (f)
----------
Net income $ 466,757
==========
Net Income Per Share $ 0.05
==========
Weighted Average Shares Outstanding 9,654,400 (e)
==========
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The Unaudited Pro Forma Combined Statement of Income for the three
months ended March 31, 1996 has been prepared assuming the proposed acquisition
had occurred on December 31, 1995 and reflects the effects of certain
adjustments to the historical financial statement that resulted from the
acquisition of Columbus Plastics by Core Materials. Columbus Plastics (Core
Materials prior to Dec. 31, 1996) was not a "stand alone" division or
subsidiary of Navistar and was not generally accounted for separately.
Navistar's systems and procedures do not provide sufficient information to
develop a reasonable cost allocation for income taxes and interest expense.
Accordingly, historical net income per share amounts have not been included for
the financial information for Columbus Plastics for the three months ended
March 31, 1996. A historical statement of income for Core Materials is not
included in the unaudited pro forma combined financial information as the
Acquisition was accounted for using reverse acquisition accounting treatment.
(a) Represents the estimated interest income to be earned on the
mortgage-backed security at the security's effective interest rate
of 7%.
(b) Represents the additional revenues resulting from pricing sales by
Core Materials to Navistar reflecting the prices specified in the
Comprehensive Supply Agreement, rather than at Core Materials
historical standard cost.
(c) Represents the estimated interest expense on the Secured Note due
to Navistar at 8% per annum less the interest credit of $130,000
for the three months ended March 31, 1996, which represents the
capitalization of interest on the Secured Note relating to
property, plant and equipment under construction.
(d) Represents an estimate of the additional administrative expenses
to be incurred by Core Materials as a result of its status as a
stand-alone, publicly owned company rather than an operating unit
of a much larger corporation. Additional costs consist primarily
of broker fees, legal fees, auditing fees, 10-K and 10-Q printing
fees, officers' and directors' fees.
(e) The weighted average number of common shares and common stock
equivalents outstanding used to calculate net income per common
share include the number of shares of Core Materials common stock
outstanding prior to the acquisition, the number of shares issued
to Navistar as consideration for the Acquisition, and the effect
of the exercise of 260,000 dilutive Core Material stock options,
using the treasury stock method.
(f) Represents the estimated income tax expense for Core Materials
based upon a statutory Federal tax rate of 34% and an estimated
Ohio state and local tax rate of 11%. The income tax expense
recorded in the unaudited pro forma combined financial statements
is not necessarily indicative of the cash payments for income
taxes that Core Materials would be required to pay due to Core
Materials' substantial net operating loss carryforwards. Core
Materials expects to only be required to make minimal Federal
income tax payments as mandated, primarily, by the Alternative
Minimum Tax regulations until such time that the loss
carryforwards are fully utilized or expired.
4. CORPORATE ALLOCATIONS
Prior to its acquisition by Core Materials, Columbus Plastics did not
maintain corporate treasury, legal, tax, purchasing and other similar corporate
support functions. Columbus Plastics did record certain budgeted corporate
expenses related primarily to employee benefits, real estate taxes and
insurance. Adjustments to these amounts to reflect actual expenditures were not
recorded by Columbus Plastics but are included in the corporate allocation
amounts noted below. For purposes of preparing the financial information for
Columbus Plastics for the three months ended March 31, 1996, certain corporate
costs
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and credits along with other Navistar Truck Group expenses which were not
budgeted to Columbus Plastics were allocated based upon a variety of factors
which include the size of the Columbus Plastics operation, the number of
Columbus Plastics employees, and the identification of costs specifically
attributable to Columbus Plastics. Management believes that the allocation
method used is reasonable and reflective of Columbus Plastics' proportionate
share of such expenses and is comparable to those that would have been incurred
on a stand-alone basis.
The following summarizes the corporate costs (credits) allocated to
Columbus Plastics which were originally not budgeted or recorded by Columbus
Plastics for the three months ended March 31, 1996. The amounts represent
adjustments to the originally recorded expenses or allocations of Navistar
Corporate and Truck Group Marketing and Administrative expenses.
THREE MONTHS
ENDED
MARCH 31, 1996
--------------
Cost of sales
Cost of Sales - subtotal $(135,971)
Postretirement benefits - Cost of sales 4,276
---------
Total cost of sales $(131,965)
=========
Selling, general and administrative expense
SG&A - subtotal $ 104,831
Postretirement benefits - SG&A 1,813
----------
Total selling, general and administrative expense $ 106,644
==========
5. RELATED PARTIES
In connection with the acquisition, Core Materials and Navistar
entered into a Supply Agreement and a Transitional Services Agreement ( the
"Services Agreement"). Under the terms of the Supply Agreement, for a period of
five years commencing December 31, 1996, Navistar agreed to purchase from Core
Materials, and Core Materials agreed to sell to Navistar at negotiated prices,
which approximate fair value, all of Navistar's original equipment and service
requirements for Fiberglass Reinforced Parts using the Sheet Molding Composite
process as they currently exist or as they may be improved or modified. On a
pro forma basis, pursuant to the terms of the Supply Agreement, Core Materials
would have charged Navistar for sales of its products approximately $9,500,000
for the three months ended March 31, 1996. Under the terms of the Services
Agreement, Navistar will provide financial reporting, accounting, computer
services and office support services to Core Materials for a period of one year
at fees based upon actual hours incurred by Navistar in providing such services
and purchases. For the three months ended March 31, 1997, charges for these
services totaled $48,500. At March 31, 1997, the total amounts due from
Navistar under the Supply Agreement was $6,852,644; this amount is included in
accounts receivable. The total amounts due to Navistar under the Services
Agreement was $32,992 at March 31, 1997; this amount is included in accounts
payable. The interest due Navistar on the secured note is $590,280 at March 31,
1997.
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6. STOCK OPTIONS AND EQUITY INCENTIVE PLAN
Subsequent to year-end, the Board of Directors of Core Materials
authorized the adoption of the Core Materials Corporation - Long Term Incentive
Plan, subject to the approval of holders of a majority of the Core Materials'
common stock outstanding. The plan allows for granting of non-qualified stock
options, incentive stock options, director options, stock appreciation rights,
restricted stock, performance shares, performance units and other incentive
awards up to an aggregate 1.5 million awards, each award representing a right
to buy a share of Core Materials' common stock. Effective April 16, 1997 the
Board of Directors granted 696,000 options at $2.75 per share to certain
executive officers, directors and employees of Core Materials subject to
stockholder approval of the plan.
7. NEW ACCOUNTING STANDARDS
Stock-Based Compensation: - In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock Based Compensation". The Statement defines a "new
fair value" method of accounting for stock based compensation plans but also
allows a company to retain the "intrinsic value" approach prescribed by
Accounting Principles Board Opinion ("APB") No. 25 with certain disclosures.
The Company accounts for its stock-based compensation plans in accordance with
the intrinsic value method prescribed by APB No. 25. However, in accordance
with (SFAS) No. 123, the Company will disclose the pro forma impact on net
income and earnings per share had compensation cost been recorded using the
fair value method in its 1997 Annual Report.
Earnings per Share: - In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, "Earnings per Share", which the Company
must adopt in its quarter ended December 31, 1997. SFAS No. 128 requires the
presentation of both basic and diluted earnings per share. Basic earnings per
share presents net income available to common shareholders on a per share basis
based only upon the number of common shares outstanding without consideration
of dilutive securities. Diluted earnings per share represents the same
information after giving effect to all dilutive securities. The pro forma
earnings per share of the Company for the quarter ended March 31, 1997 under
the new presentation requirements prescribed in SFAS No. 128 would be:
Basic earnings per share $.06
Diluted earnings per share $.06
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PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CORE MATERIALS
Certain statements under this caption constitute "forward-looking
statements" which involve certain risks and uncertainties. Core Materials'
actual results may differ significantly from those discussed in the
forward-looking statements. Factors that may cause such a difference include,
but are not limited to: business conditions in the plastics industries, heavy
truck and personal watercraft industries, the general economy, competitive
factors including the dependence on two major customers' new technologies,
regulatory requirements, labor relations, the loss or inability to attract key
personnel, the availability of capital and management's decisions to pursue new
products or businesses which involve additional cost risks or capital
expenditures.
OVERVIEW
On December 31, 1996, Core Materials acquired all of the assets and
assumed certain liabilities of Columbus Plastics, a wholly owned operating unit
of Navistar's truck manufacturing division since its formation in late 1980.
Based on the terms of the acquisition, the transaction for financial reporting
and accounting purposes has been accounted for as a reverse acquisition whereby
Columbus Plastics is deemed to have acquired Core Materials. However, Core
Materials is the continuing legal entity. Accordingly, any references to the
operating results of Core Materials for the first quarter of 1996 refer to the
historical operations of Columbus Plastics.
Core Materials manufactures high quality compression SMC fiberglass
reinforced parts. Core Materials has two major customers, Navistar and Yamaha.
The demand for Core materials products is affected by the volume of purchases
from these two customers, whose orders are primarily affected by economic
conditions in the United States and Canada. Core Materials' manufacturing
operations have a significant fixed cost component. Accordingly, during periods
of changing demands, the profitability of Core Materials' operations will
change proportionately more than revenues from operations.
Pursuant to the Asset Purchase Agreement, Navistar and Core Materials
entered into a Comprehensive Supply Agreement with an initial term of five
years. Under the terms of the Comprehensive Supply Agreement, Navistar agreed
to purchase from Core Materials, and Core Materials agreed to sell to Navistar
at negotiated prices, which approximate fair value, all of Navistar's original
equipment and service requirements for fiberglass reinforced parts using the
SMC process for components currently being manufactured by Core Materials and
detailed in the Comprehensive Supply Agreement. All sales and gross margin
information for the first quarter of 1997 reflect the results of the
Comprehensive Supply Agreement.
Prior to January 1, 1997, Core Materials had not been a stand alone
operating entity. As such, Navistar had provided substantial management support
in the form of treasury, legal, tax, information systems and other similar
corporate support functions. Corporate general and administrative expenses have
not been previously allocated to Core Materials. For purposes of preparing the
income statement of Core Materials for the three months ended March 31, 1996
for this 10-Q, these corporate costs have been allocated using a method
management believes to be reasonable and reflective of those costs that would
have been incurred on as a stand alone basis.
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Net sales for the first quarter of 1996 do not reflect the additional
revenue that would have been generated had the Comprehensive Supply Agreement
been in effect at that time. Prior to the Comprehensive Supply Agreement, all
sales to Navistar facilities were accounted for at Core Materials' ("Columbus
Plastics Operations") standard costs. In addition, Core Materials did not incur
certain expenses related to being a stand alone publicly traded entity, such as
executive salary costs and legal and accounting fees. Finally, the results for
the three months ended March 31, 1996 do not reflect investment income or
expenses for interest or income taxes. Thus, the first quarter financial
results of 1996 are not readably comparable to the first quarter results of
1997.
In order to make this comparison more meaningful in the discussion which
follows, pro forma financials have been prepared for the three months ended
March 31, 1996 (See Note 3 in the "Notes to Financial Statements" for further
information). In the discussion which follows, all references to and
comparisons with first quarter 1996 results reflect the historical Columbus
Plastics, 1996 financials. Any dollars and/or percentages in parentheses
reflect references to and comparisons with 1996 pro forma financial
information.
RESULTS OF OPERATIONS
Net sales for the first quarter of 1997, totaled $16,373,000 up 12% (3%)
from the $14,601,000 ($15,944,000) reported for the first quarter of 1996.
Sales to Navistar increased 28% (10%) to $10,460,000 from $8,152,000
($9,495,000) in the first quarter of 1996. The increase in sales to Navistar
was primarily the result of sales of certain heavy truck components which Core
Materials began producing in June 1996. Sales to Yamaha decreased in the first
quarter of 1997 by 17% to $5,210,000 compared with $6,261,000 for the first
quarter of 1996. The decrease in sales to Yamaha is due to the first quarter's
sales for 1996 being higher than normal as a result of Yamaha's anticipation of
increased demand.
"Other" sales increased 272% to $703,000 from $189,000 in first quarter
1996. These additional sales were primarily the result of increased sales of
molded parts to General Motors (Electric Vehicle Parts) and sales of sheet
molding composite to an SMC molder.
Gross margin was 21% of sales for the first quarter of 1997 compared with
10% (17%) for the first quarter of 1996. The increased gross margin as a
percent of sales, 10% to 21%, is primarily due to the markup (per the
Comprehensive Supply Agreement) on sales to Navistar. The increase in the 1997
gross margin as a percent of sales over the 1996 pro forma adjusted percentage
is primarily due to 1996's cost of sales including higher than normal repair
and maintenance expenses and unfavorable inventory adjustments. Additionally,
Core Materials has experienced improved efficiencies in manpower performance
and operating supplies in the first quarter of 1997.
Selling, general and administrative expenses (SG&A) totaled $1,865,000 for
the first quarter of 1997 increasing from $1,369,000 ($1,585,000) for the first
quarter of 1996. The increase over the 1996 actual amounts is primarily due to
the Company incurring expenses related to being a stand alone publicly traded
entity, increased depreciation expense and expenses for consultants and search
firms.
Interest income for the first quarter of 1997 totaled $59,000 and is
primarily attributable to interest on Core Materials' mortgage-backed security
investment. The Company had no interest income in the first quarter of 1996
since all investments were handled at Navistar's Corporate Offices.
Interest expense for the first quarter of 1997 totaled $607,000. The
interest expense is primarily the result of $590,000 in interest payable to
Navistar on the $29,514,000 Secured Note. The Company had no interest expense
in the first quarter of 1996 since all financing was handled at Navistar's
Corporate Offices.
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Income taxes for the first quarter of 1997 are estimated to be
approximately 41% of total earnings before taxes. Actual tax payments will be
substantially 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 for the first quarter 1997 are
estimated to be approximately $101,000 which reflects federal alternative
minimum, state and local taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital as of March 31, 1997 increased $1,555,000 over the
working capital at December 31, 1996. Accounts receivable increased by
$7,854,000 and accounts payable increased by $5,063,000 from the December 31,
1996 levels. The primary causes for both the receivables and payables increase
is the purchase agreement between Core Materials and Navistar. As of December
31, 1996, the effective date of the purchase, there were no receivables on the
books for Navistar as a customer. Additionally as part of the agreement,
Navistar assumed a majority of the accounts payables that existed on December
31, 1996. The March 31, 1997 accounts receivables includes Navistar receivables
for sales under the Comprehensive Supply Agreement. The March 31, 1997 accounts
payables includes expenditures to support normal production. Property additions
of $195,000 primarily relate to the acquisition of machinery and equipment.
Historically, Core Materials' working capital and investment needs have
been financed by Navistar through the intercompany equity investment account
and through the sale of products to Yamaha. Subsequent to the closing, Core
Materials has independently funded all of its working capital and investment
capital requirements. Funds necessary to meet its working capital and
investment needs are currently being financed through the following sources: 1)
the Comprehensive Supply Agreement between Navistar and Core Materials, while
in effect, requires that Navistar obtain all of its SMC plastic requirements
for components currently being manufactured by Core Materials, as detailed in
the Comprehensive Supply Agreement, from Core Materials at negotiated prices
which approximate fair value; 2) the Company has substantial net operating
losses ("NOLs") that will be available to offset future taxable income of Core
Materials (the utilization of these NOLs will substantially reduce any federal
income tax liability payments); and 3) Core Materials is currently negotiating
to obtain a permanent working capital line of credit with a commercial bank
which will be available to fund Core Materials' working capital requirements.
In January 1997, management entered a $3 million temporary working capital
facility with a commercial bank utilizing the mortgage-backed security as
collateral for borrowings under the facility. This facility was repaid and
there was no outstanding balance at the end of the quarter. Internally
generated funds together with proceeds from the use of this working capital
facility have provided sufficient operating liquidity for Core Materials. The
Comprehensive Supply Agreement with Navistar provides for payment terms for
shipments to Navistar which are customary in the SMC manufacturing industry.
Core Materials has been receiving regular payments on its receivables from
Navistar after an initial period prescribed by the Comprehensive Supply
Agreement.
Based upon 1) the terms of its sales arrangements with its customers,
particularly Navistar and Yamaha, 2) forecasted cash flows from operations and
3) utilization of NOLs, management believes that internally generated funds
from operations will be sufficient to fund anticipated capital requirements.
Management is also negotiating a permanent working capital facility and a
term loan facility(ies) which will be supported by Core Materials' machinery,
equipment and real estate. The working capital facility will provide liquidity
in periods of fluctuating sales activity and in instances of production
slowdowns. Funding from such term loan(s) will be utilized to reduce the
Navistar Secured Note Payable
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(Navistar's remaining note balance will likely become subordinate in regard to
both collateral and repayment to any term financing concluded).
MANAGEMENT'S OUTLOOK
While encouraged by the first quarter's performance, management is also
aware that results for the third quarter of this year may be affected by the
annual Navistar vacation shutdown (July), as well as an inventory leveling
production slowdown regarding Yamaha parts. As such, the company continues its
priority efforts towards attracting new business and remains optimistic
regarding full year 1997 results.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
11. Computation of Earnings per share
27. Financial Data Schedule
REPORTS ON FORM 8-K:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORE MATERIALS CORPORATION
Date May 15, 1997 By: /s/ Kenneth M. Schmell
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Kenneth M. Schmell
General Manager and
Acting Chief Executive Officer
Date May 15, 1997 By: /s/ Kevin L. Barnett
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Kevin L. Barnett
Vice President, Treasurer and
Chief Financial Officer
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