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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, 1999
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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 of (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 6, 1999, the latest practicable date, 9,778,680 shares of
the registrant's common shares were issued and outstanding.
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PART 1 - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
CORE MATERIALS CORPORATION
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
1999 1998 1999 1998
-------------- ------------- -------------- -------------
NET SALES:
Navistar $ 15,925,220 $ 15,923,784 $ 32,164,244 $ 32,025,368
Yamaha 4,145,798 2,670,900 8,312,546 6,790,953
Other 4,165,136 555,072 6,191,079 922,241
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Total Sales 24,236,154 19,149,756 46,667,869 39,738,562
-------------- ------------- -------------- -------------
Cost of Sales 21,115,181 14,765,815 38,954,356 30,912,364
Postretirement benefits expense 276,323 252,455 531,914 486,218
-------------- ------------- -------------- -------------
Total cost of sales 21,391,504 15,018,270 39,486,270 31,398,582
-------------- ------------- -------------- -------------
GROSS MARGIN 2,844,650 4,131,486 7,181,599 8,339,980
-------------- ------------- -------------- -------------
Selling, general and administrative expense 2,155,913 1,986,248 4,144,189 3,949,912
Postretirement benefits expense 37,376 36,029 71,237 70,323
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Total selling, general and
administrative expense 2,193,289 2,022,277 4,215,426 4,020,235
INCOME BEFORE INTEREST AND TAXES 651,361 2,109,209 2,966,173 4,319,745
Interest income 72,096 56,292 161,371 117,514
Interest expense (467,729) (435,447) (875,426) (804,191)
-------------- ------------- -------------- -------------
INCOME BEFORE INCOME TAXES 255,728 1,730,054 2,252,118 3,633,068
Income taxes:
Current 42,057 217,394 370,394 455,414
Deferred 63,814 491,729 561,984 1,033,945
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Total income taxes 105,871 709,123 932,378 1,489,359
-------------- ------------- -------------- -------------
NET INCOME $ 149,857 $ 1,020,931 $ 1,319,740 $ 2,143,709
============== ============= ============== =============
NET INCOME PER COMMON SHARE:
Basic $ 0.02 $ 0.11 $ 0.13 $ 0.22
============== ============= ============== =============
Diluted $ 0.02 $ 0.10 $ 0.13 $ 0.21
============== ============= ============== =============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 9,778,680 9,654,230 9,778,680 9,633,581
============== ============= ============== =============
Diluted 9,843,365 10,126,786 9,862,023 10,079,802
============== ============= ============== =============
See notes to financial statements
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CORE MATERIALS CORPORATION
BALANCE SHEETS
JUNE 30, DECEMBER 31,
1999 1998
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(UNAUDITED)
ASSETS
Cash and cash equivalents $ 3,234,048 $ 3,117,085
Mortgage-backed security investment 1,924,593 2,568,977
Accounts receivable (less allowance for doubtful accounts:
June 30, 1999 - $105,000; December 31, 1998 - $105,000) 19,138,308 17,728,753
Inventories:
Finished and work in process goods 3,885,158 1,592,288
Stores 2,989,492 2,630,993
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Total inventories 6,874,650 4,223,281
Deferred tax asset 928,048 928,048
Prepaid expenses and other current assets 543,870 339,028
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Total current assets 32,643,517 28,905,172
Property, plant and equipment 39,255,363 35,834,613
Accumulated depreciation (12,736,866) (11,754,866)
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Property, plant and equipment - net 26,518,497 24,079,747
Deferred tax asset - net 11,539,273 12,101,257
Other assets 335,894 351,606
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TOTAL $ 71,037,181 $ 65,437,782
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities
Current portion long-term debt $ 295,000 $ 285,000
Accounts payable 12,045,222 7,360,949
Accrued liabilities:
Compensation and related benefits 2,497,990 2,492,006
Interest 82,229 725,827
Other accrued liabilities 2,616,197 2,254,655
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Total current liabilities 17,536,638 13,118,437
Long-term debt 26,855,150 27,005,150
Deferred long-term gain 3,142,603 3,369,380
Postretirement benefits liability 3,331,392 3,093,157
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $0.01 par value, authorized shares - 20,000,000; 97,787 97,787
Outstanding shares: June 30, 1999 - 9,778,680,
December 31, 1998 - 9,778,680
Paid-in capital 19,251,392 19,251,392
Retained earnings (deficit) 822,219 (497,521)
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Total stockholders' equity 20,171,398 18,851,658
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TOTAL $ 71,037,181 $ 65,437,782
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See notes to financial statements.
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CORE MATERIALS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
RETAINED TOTAL
COMMON STOCK OUTSTANDING PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
----------------- ---------------- ---------------- --------------- ----------------
BALANCE AT JANUARY 1, 1999 9,778,680 $ 97,787 $ 19,251,392 $ (497,521) $ 18,851,658
Net Income 1,319,740 1,319,740
----------------- ---------------- ---------------- --------------- ----------------
BALANCE AT JUNE 30, 1999 9,778,680 $ 97,787 $ 19,251,392 $ 822,219 $ 20,171,398
================= ================ ================ =============== ================
See notes to financial statements.
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CORE MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,319,740 $ 2,143,709
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 997,712 889,387
Deferred income taxes 561,984 1,033,945
Loss on disposal of assets 318
Amortization of gain on sale/leaseback transactions (226,777) (148,180)
Compensation expense on stock awards - 29,215
Change in operating assets and liabilities:
Accounts receivable (1,409,555) (1,056,179)
Inventories (2,651,369) (72,667)
Prepaid and other assets (204,842) (208,469)
Accounts payable 4,684,273 (736,862)
Accrued and other liabilities (276,072) (628,356)
Postretirement benefits liability 238,235 248,898
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NET CASH PROVIDED BY OPERATING ACTIVITIES 3,033,329 1,494,759
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (3,420,750) (5,029,695)
Payments on mortgage-backed security investment 644,384 255,692
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NET CASH USED IN INVESTING ACTIVITIES (2,776,366) (4,774,003)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines-of-credit - 6,419,470
Payments on lines-of-credit - (6,597,120)
Payments of principal on secured note payable - (3,000,000)
Proceeds from issuance of industrial revenue bond - 7,500,000
Payment of principal on industrial revenue bond (140,000) -
Issuance costs for industrial revenue bond - (156,276)
Proceeds from exercise of stock options - 148,820
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NET CASH PROVIDED(USED IN) FINANCING ACTIVITIES (140,000) 4,314,894
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NET INCREASE IN CASH 116,963 1,035,650
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,117,085 100,356
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CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,234,048 $ 1,136,006
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Cash paid for:
Interest (net of amounts capitalized) $ 1,463,992 $ 1,889,111
Income taxes 559,000 375,000
See notes to financial statements.
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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 June 30, 1999, and the results of operations and cash flows. The
"Notes to Financial Statements" which are contained in the 1998 Annual Report to
shareholders should be read in conjunction with these Financial Statements.
Certain reclassifications have been made to prior year's amounts to conform with
the classifications of such amounts for 1999.
Core Materials was formed on October 8, 1996 by RYMAC Mortgage
Investment Corporation ("RYMAC"), as a wholly owned subsidiary, for the purpose
of acquiring substantially all of the assets and assuming certain of the
liabilities of Columbus Plastics Operation ("Columbus Plastics"), an operating
unit of Navistar International Transportation Corp. ("Navistar").
On December 31, 1996, RYMAC merged into its wholly owned subsidiary,
Core Materials, by converting each outstanding common share of RYMAC into the
right to receive one common share of Core Materials, with Core Materials as the
surviving corporation and continuing registrant. Simultaneously, on December 31,
1996, Core Materials purchased substantially all of the assets and assumed
certain liabilities of Columbus Plastics.
Core Materials produces compression Sheet Molding Composite ("SMC")
fiberglass reinforced plastic parts. Core Materials has two principal customers,
Navistar and Yamaha Motor Manufacturing Corporation ("Yamaha").
2. RESTRICTED CASH
Included in cash at June 30, 1999, is $315,892 which is restricted
pursuant to the terms of the Industrial Revenue Bond which was issued in May,
1998. This restriction will be removed as Core Materials incurs qualified
expenditures related to the project for which the bond was issued.
3. COMPREHENSIVE INCOME
Core Materials adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income". Comprehensive income is a
measurement of all changes in stockholders' equity that result from transactions
and other economic events other than transactions with stockholders. Core
Materials does not have any items of comprehensive income other than net income;
therefore, total comprehensive income amounted to $149,857 and $1,020,931 for
the three months ended June 30, 1999 and 1998, respectively, and $1,319,740 and
$2,143,709 for the six months ended June 30, 1999 and 1998, respectively.
4. EARNINGS PER COMMON SHARE
Basic earnings per common share are computed based on the weighted
average number of common shares outstanding during the period. Diluted earnings
per common share are computed similarly but include 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, 1999, weighted average shares
increased for the computation of diluted income per share by 64,685 and 83,343
shares, respectively, due to the effect of stock options. This item had no
effect on net income per share for the three and six months ended June 30, 1999.
In calculating
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net income per share for the three and six months ended June 30, 1998, weighted
average shares increased for the computation of diluted income per share by
472,556 and 446,221 shares, respectively, due to the effect of stock options; as
a result net income per share was reduced by $.01 and $.01, respectively.
5. COMMITMENTS AND CONTINGENCIES
Core Materials has contracted to have three compression molding presses
manufactured in 1999. Per the contract, payments are to be made as various steps
of the manufacturing process are completed; these payments will total
$3,181,800. To date, Core Materials has made payments in the amount of $795,700
leaving a remaining balance of $2,386,100. The contracts are cancelable by Core
Materials only upon written notice and upon payment to the seller of reasonable
and proper cancellation charges. It is the intent of Core Materials to complete
the contracts in full and take possession of the presses.
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PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements under this caption, constitute "forward-looking
statements" which involve certain risks and uncertainties. Core Materials'
actual results may differ significantly from those discussed in the
forward-looking statements. Factors that may cause such a difference include,
but are not limited to: business conditions in the plastics, transportation,
marine, agricultural and consumer products industries, the general economy,
competitive factors, the dependence on two major customers, the recent efforts
of Core Materials to expand its customer base, new technologies, the year 2000
systems issue, regulatory requirements, labor relations, the loss or inability
to attract key personnel, start-up of the Company's South Carolina facility, the
availability of capital and management's decisions to pursue new products or
businesses which involve additional costs, risks or capital expenditures.
OVERVIEW
On December 31, 1996, Core Materials acquired substantially all of the
assets and assumed certain liabilities of Columbus Plastics, a wholly owned
operating unit of Navistar's truck manufacturing division since its formation in
late 1980.
Core Materials manufactures high quality compression SMC fiberglass
reinforced parts. The demand for Core Materials' products is affected by
economic conditions in the United States and Canada. Core Materials'
manufacturing operations have a significant fixed cost component. Accordingly,
during periods of changing demands, the profitability of Core Materials'
operations will change proportionately more than revenues from operations.
At the time of the acquisition of Columbus Plastics, Navistar and Core
Materials entered into a Comprehensive Supply Agreement with an initial term of
five years. Under the terms of the Comprehensive Supply Agreement, Core
Materials became the primary supplier of Navistar's original equipment and
service requirements for fiberglass reinforced parts using the SMC process.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AS COMPARED TO THREE MONTHS ENDED
JUNE 30, 1998
Net sales for the three months ended June 30, 1999, totaled $24,236,000 up
27% from the $19,150,000 reported for the three months ended June 30, 1998.
Sales to Navistar increased slightly to $15,925,000 from $15,924,000 for the
three months ended June 30, 1998. Sales to Yamaha increased for the three months
ended June 30, 1999 by 55% to $4,146,000 compared with $2,671,000 for the three
months ended June 30, 1998. The increase in Yamaha sales is primarily due to an
additional product added in 1999.
"Other" sales for the three months ended June 30, 1999 increased 650% to
$4,165,000 from $555,000 for the three months ended June 30, 1998. The increase
in sales was primarily the result of new customers added during 1998 and 1999,
including: New Holland North America, Inc. - $1,607,000; Volvo Trucks North
America, Inc. - $1,390,000; and Caradon Doors and Windows, Peachtree Division -
$534,000.
Gross Margin was 11.7% of sales for the three months ended June 30, 1999
compared with 21.6% for the three months ended June 30, 1998. The decreased
gross margin as a percent of sales from the prior year is primarily due to
inefficiencies associated with both the start-up of new products at both the
Columbus, Ohio and the Gaffney, South Carolina facilities and a labor shortage
at the Columbus facility. The start-up of new products in Columbus and Gaffney
has resulted in higher usage of raw materials, increased scrap and higher labor
costs associated with inefficiencies. In Columbus, Core Materials has
experienced a shortage of plant labor, due to the low unemployment rate in the
Columbus area, necessitating excessive overtime. In addition, the Columbus
facility has experienced unusual repair and maintenance downtime. The
maintenance downtime
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resulted in lost production which exacerbated the overtime costs in order to
catch up with customer delivery expectations. Going forward, management expects
year over year comparisons to be impacted into the fourth quarter. Core
Materials is working through the start-up problems and expects to minimize the
impact of these events over the next quarter or two.
Selling, general and administrative expenses ("SG&A") totaled $2,193,000 for
the three months ended June 30, 1999 increasing from $2,022,000 for the three
months ended June 30, 1998. The increase from 1998 is primarily due to increased
costs associated with obtaining personnel, increased travel associated with
additional customers, increased insurance costs and other costs related to
higher sales and an increased customer base.
Interest income for the three months ended June 30, 1999 totaled $72,000
increasing from the $56,000 for the three months ended June 30, 1998. Interest
expense totaled $468,000 for the three months ended June 30, 1999 increasing
from $435,000 for the three months ended June 30, 1998.
Income taxes for the three months ended June 30, 1999 are estimated to be
approximately 41% of total earnings before taxes. Actual tax payments will be
lower than the recorded expenses as Core Materials has substantial federal tax
loss carryforwards. These loss carryforwards were recorded as a deferred tax
asset, partially offset by a valuation reserve at December 31, 1996 as a part of
the purchase accounting adjustments. As the tax loss carryforwards are utilized
to offset federal income tax payments, Core Materials reduces the deferred tax
asset as opposed to recording a reduction in income tax expense. Actual cash
payments related to the three months ended June 30, 1999 and 1998 are estimated
to be approximately $42,000 and $217,000, respectively, which reflects federal
alternative minimum, state and local taxes.
Net income for the three months ended June 30, 1999 was $150,000 or $.02 per
basic and $.02 per diluted share, a decrease of $871,000 or 85% from the net
income for the three months ended June 30, 1998 of $1,021,000 or $.11 per basic
and $.10 per diluted share.
SIX MONTHS ENDED JUNE 30, 1999 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net sales for the six months ended June 30, 1999, totaled $46,668,000 up 17%
from the $39,739,000 reported for the six months ended June 30, 1998. Sales to
Navistar increased slightly to $32,164.000 from $32,025,000 for the six months
ended June 30, 1998. Sales to Yamaha increased for the six months ended June 30,
1999 by 22% to $8,313,000 compared with $6,791,000 for the six months ended June
30, 1998. The increase in Yamaha sales is primarily due to an additional product
added in 1999.
"Other" sales for the six months ended June 30, 1999, increased 571% to
$6,191,000 from $922,000 for the six months ended June 30, 1998. The increase in
sales was primarily the result of new customers during 1998 and 1999, including:
New Holland North America, Inc. - $2,099,000; Case Corporation - $260,000;
Outboard Marine Corporation - $613,000; Volvo Trucks North America, Inc. -
$1,598,000; and Caradon Doors and Windows, Peachtree Division - $666,000.
Gross margin was 15% of sales for the six months ended June 30, 1999
compared with 21% for the six months ended June 30, 1998. The decreased gross
margin as a percent of sales is primarily due to the reasons noted above for the
three months.
SG&A totaled $4,215,000 for the six months ended June 30, 1999 increasing
from $4,020,000 for the six months ended June 30, 1998. The increase over the
1998 amounts is primarily due to the reasons noted above for the three months.
Interest income for the six months ended June 30, 1999 totaled $161,000 as
compared with the $118,000 for the six months ended June 30, 1998. Interest
expense totaled $875,000 for the six months ended June 30, 1998 increasing from
$804,000 for the six months ended June 30, 1998. The increase in interest
expense from 1999 is primarily the result of a decrease in interest capitalized
related to capital projects under construction. During the first quarter of
1998, interest expense was being capitalized related to the construction of the
Gaffney, South Carolina manufacturing facility.
Income taxes for the six months ended June 30, 1999 are estimated to be
approximately 41% of total earnings before taxes. Actual cash payments related
to the six months ended June 30, 1999 and 1998 are
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estimated to be approximately $370,000 and $455,000, respectively, which
reflects federal alternative minimum, state and local taxes.
Net income for the six months ended June 30, 1999 was $1,320,000 or $.13 per
basic and $.13 per diluted share, a decrease of $824,000 or 38% from the net
income for the six months ended June 30, 1998 of $2,144,000 or $.22 per basic
and $.21 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Core Materials' primary cash requirements are for operating expenses
and capital expenditures. These cash requirements have historically been met
through a combination of cash flows from operations, equipment leasing, issuance
of Industrial Revenue Bonds and bank lines of credit.
Cash provided by operations for the six months ended June 30, 1999
totaled $3,033,000. Net income contributed $1,320,000 with depreciation and
amortization adding another $998,000. An increase in accounts payable
contributed $4,684,000; this increase was primarily the result of increased
purchases of materials to support the inventory banks for certain customers,
increased capital spending and timing effects. Deferred income taxes of
$562,000, primarily related to Core Materials $19,900,000 of operating tax loss
carry forwards, also contributed positively to the operating cash flow.
Decreasing the operating cash flows was an increase in inventory of $2,651,000
associated with higher production requirements. Also decreasing the operating
cash flows was an increase in accounts receivable of $1,410,000 primarily caused
by higher sales.
Investing activities reduced cash flows by $2,776,000 for the six
months ended June 30, 1999. Capital expenditures totaled $3,421,000 primarily
related to the acquisition of machinery and equipment. Offsetting these
expenditures were proceeds from maturities on Core Materials' mortgage-backed
security investment of $644,000.
Financing activities reduced cash flow by $140,000 due to principal
repayment on the Industrial Revenue Bond which was issued in 1998.
At June 30, 1999, Core Materials had cash on hand of $3,234,000, of
which $316,000 is restricted, and an available line of credit of $7,500,000.
Management believes that these sources, along with internally generated funds
from operations and future bank financing, are sufficient to fund current
planned operating expenses and capital requirements.
YEAR 2000 READINESS STATEMENT
Core Materials believes it has identified all of its significant
software and hardware applications that will require modification to ensure Year
2000 ("Y2K") compliance. Internal and external resources have been used to make
the required modifications to both computer systems and internal operations
related apparatus. In addition, Core Materials is working with its suppliers and
customers to aid in becoming Y2K compliant. Where able, Core Materials plans to
complete the modifications by the middle of September 1999. Previously, Core
Materials stated these modifications would occur in July 1999. The change in
date is due to combining the Y2K upgrades of the SMC mix system with other
capital improvements, unrelated to the Y2K upgrades, planned for the system. The
decision to combine these two projects was made to minimize the amount of down
time the system will incur during improvement and upgrade activities. In some
cases, compliance cannot be achieved until January 1, 2000. On this date, a
resetting of the internal clocks on some electronic devices is required. In
these cases, Core Materials has tested and proved its processes for
rolling/resetting the clocks.
Core Materials has grouped its exposure into 6 major categories of
items: (1) Production Equipment, (2) Information Technology, (3) Facilities and
Utilities, (4) Quality Systems, (5) Suppliers and Customers, and (6) General
Business Items.
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The status of each is as follows:
PRODUCTION EQUIPMENT: Production equipment concerns can be grouped into
the following areas: (1) Press Programmable Logic Units ("PLC's"), (2) Other
Non-Press Related PLC's, (3) Press Computers, (4) Press Software, (5) Robotics,
(6) Paint Control and Tracking Systems, and (7) SMC mix system software and
computer. Core Materials has contacted the manufacturers of critical production
equipment to determine Y2K compliance. In addition, Core Materials is utilizing
an independent engineering firm to assist in achieving Y2K compliance. This firm
has performed a wall-to-wall inventory of production equipment and software.
This firm has researched all items on the inventory to determine the items
represented by suppliers as compliant and has contacted outside equipment
suppliers to determine potential fixes in areas of non-compliance. Finally, this
firm has performed sample testing on both compliant and non-compliant equipment
developing repair processes where required. Core Materials, with the assistance
of the engineering firm, is working on repair procedures and contingency plans
for those items identified as non-compliant. Many of the repair procedures
provided by the equipment manufacturers cannot be implemented until January 1,
2000; however, Core Materials has tested the repair procedures and feels that
they are adequate to assure Y2K compliance. Core Materials plans to replace
those press computers that must be replaced to obtain Y2K compliance. Press
software has been tested successfully. The paint control and tracking system has
been replaced with software and hardware that has been represented by the
manufacturers to be Y2K compliant. The SMC mix system computer has been replaced
with equipment warranted/tested to be Y2K compliant and the software will be
replaced/upgraded by the middle of September 1999. It should be noted that the
SMC Mix System Y2K upgrade itself does not require this length of time; however,
other upgrades that are a part of CMC's overall capital improvement program do
require extended lead times. CMC has determined that performing both the Y2K and
other upgrades simultaneously is the best solution to support the overall
business plan. Core Materials would be subjected to a great deal of risk if the
items above were to fail.
INFORMATION TECHNOLOGY: Core Materials has used the Y2K problem as a
catalyst to perform a complete replacement of all of its operations and
financial systems. A new integrated software package was activated in the
Gaffney operation in September of 1998 and in the Columbus operation in November
of 1998. This software package covers Core Materials' primary accounting and
operations reporting systems. Many secondary software systems such as the fixed
asset system and the maintenance system were previously replaced. Some secondary
systems, posing no risk to Core Materials or its customers, have also been
upgraded/replaced. As of April 1999, the hardware and network infrastructure has
been upgraded/replaced. In addition, the payroll systems have been replaced. All
replaced systems have been represented by the manufacturers to be Y2K compliant.
Core Materials has also successfully performed testing procedures on all systems
to confirm compliance. If the systems should fail, Core Materials would have a
very difficult time processing its financial activities on a timely basis.
FACILITIES AND UTILITIES: Core Materials' major utility suppliers (gas,
electric, water, telephone) have been contacted and have provided information
stating that they will be Y2K compliant before compliance becomes an issue.
Though contingencies do not exist for long term systemic outages, contingencies
are being developed for the more likely scenarios of intermittent disruptions in
service. If a continued or catastrophic failure with these utility suppliers
occurs, the continuing operations of Core Materials would be in serious
jeopardy. Other areas of lesser concern include fire and alarm, and
environmental control systems. Core Materials has received verification from the
manufacturers that each of these systems is compliant.
QUALITY SYSTEMS: The primary system used for tracking quality and
internal production documentation has been replaced and has been represented by
the manufacturers to be Y2K compliant. The only other quality items believed to
be of concern are the laboratory and testing apparatus. These apparatus are
believed to be compliant with critical systems being tested and contingency
plans have been developed in case of a disruption in service.
SUPPLIERS AND CUSTOMERS: Substantially all of Core Materials'
significant current suppliers and customers have been contacted and are
currently responding with their Y2K compliance status. Most responses have been
noncommittal as to Y2K readiness. Navistar, Core Materials' largest customer,
has provided documentation indicating that they have been working on compliance
since 1995 and that they are putting forth their "best efforts to insure that
their critical systems and processes will not affect their supply of product."
Yamaha, Core Materials' second largest customer, has not yet formally responded.
Such contact will continue to be made for all subsequently added suppliers and
customers. Alternate suppliers are being identified for those companies that
have expressed a problem with compliance and for key suppliers in
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general. Additional contingencies include purchasing and stocking low cost
materials as required. It is likely that Core Materials will not have backups
for some suppliers.
GENERAL BUSINESS ITEMS: General business items include items such as
banking, insurance, pension plans, and 401K programs. Core Materials has made
contact with the suppliers of these services and has received confirmation from
all that compliance is imminent.
CONTINGENCY PLAN: Core Materials recognizes that the actual outcome of
its Y2K efforts may differ from that discussed above. As a result, Core
Materials is reviewing other potential outcomes in an attempt to mitigate the
negative effects on Core Materials' ability to effectively and efficiently
function as a business. In the event that the solutions identified above are not
effective, Core Materials would employ other resources, such as underutilized
equipment, manual processes, and outside services to complete the required
tasks. It is unlikely that with such alternative resources Core Materials would
be able to deliver the full level of goods and services required by its
customers.
Worst case scenarios would include failure of most or all of the
equipment, failure of energy suppliers to deliver gas or electricity, and/or
failure of suppliers (including alternate suppliers) to provide production
materials. While Core Materials feels that the probability of these scenarios is
low, the realization of such scenarios would have a serious detrimental effect
on Core Materials' operations, liquidity and financial condition. In such a
worst case scenario, Core Materials would be heavily dependent on the ability of
the vendors/suppliers to resolve their own Y2K issues. The overall impact of
such a worst case scenario would be dependent on the length of time before the
problems are resolved.
Other less severe, but more likely scenarios are being reviewed. On a
priority and risk basis, contingency plans are being developed and tested. These
contingency plans include the steps necessary to protect and continue
operations, the key events to trigger implementation and the person or persons
responsible for execution of the plan.
COSTS OF Y2K: The total cost of the Y2K project is estimated at
$805,000 and is being funded through operating cash flows. Of the total project
cost, approximately $505,000 is attributed to new software/hardware which will
be capitalized. The remaining $300,000, which will be expensed as incurred, is
not expected to have a material effect on the results of operations. To date,
Core Materials has incurred approximately $660,000 of costs associated with this
project of which $419,000 was capitalized, relating to the purchase of new
hardware and software and $241,000 of which has been expensed.
The costs of the project and the date on which Core Materials believes
it will complete the Y2K modification are based on management's best estimates.
These estimates were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors; however, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, the
assurances of outside companies, and similar uncertainties.
In addition, Core Materials has been and will continue to communicate
with others with whom it does significant business to determine their Y2K
issues; however, there can be no guarantee that the systems of other companies
on which Core Materials' systems rely will be timely converted, or that a
failure to convert by another company, or a conversion that is incompatible with
the Core Materials' systems, would not have a material adverse effect on Core
Materials.
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PART I - FINANCIAL INFORMATION
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Core Materials' primary market risk results from fluctuations in
interest rates. Core Materials is also exposed to changes in the price of
commodities used in its manufacturing operations. Core Materials does not hold
any material market risk sensitive instruments for trading purposes.
Core Materials has the following three items that are market rate
sensitive for interest rates. First, Core Materials has long-term debt
consisting of an Industrial Revenue Bond with a balance at June 30, 1999 of
$7,230,000. Interest is variable and is computed weekly; the average interest
rate charged for the six months ended June 30, 1999 was 3.3%; the maximum
interest rate that may be charged at any time over the life of the Industrial
Revenue Bond is 10%. In order to minimize the effect of the interest rate
fluctuation, Core Materials has entered into an interest rate swap agreement.
Under this agreement, Core Materials pays a fixed rate of 4.89% to a bank and
receives 76% of the 30 day commercial paper rate. Core Materials also has a
long-term Secured Note with a balance as of June 30, 1999 of $19,920,000 at a
fixed interest rate of 8%. Finally, Core Materials has a 7% mortgage-backed
security investment, which matures in November 2025, and such security is
recorded at cost. The security is considered held to maturity as Core Materials
has the intent and ability to hold such security to maturity.
Assuming a hypothetical 20% change in short-term interest rates,
interest expense would not change significantly, as the interest rate swap
agreement would generally offset the impact.
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14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the shareholders of
Core Materials Corporation held May 18, 1999 the following
issues were voted upon with the indicated results:
A. ELECTION OF DIRECTORS: SHARES VOTED FOR SHARES WITHHELD
James F. Crowley 9,107,222 41,122
Ralph O. Hellmold 9,107,222 41,122
Thomas M. Hough 9,107,222 41,122
Malcolm M. Prine 9,101,422 46,922
James L. Simonton 9,107,222 41,122
The above elected directors constitute the full acting
Board of Directors for Core Materials ; all terms expire at
the 2000 annual meeting of stockholders of Core Materials.
B. RATIFICATION OF DELOITTE AND TOUCHE, LLP AS AUDITORS FOR
THE YEAR ENDING DECEMBER 31, 1999:
SHARES VOTED FOR SHARES AGAINST SHARES ABSTAINING
9,115,369 8,800 24,175
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
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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 13, 1999 By: /s/ Kenneth M. Schmell
--------------- --------------------------------
Kenneth M. Schmell
Executive Vice President and
Chief Operating Officer
Date: August 13, 1999 By: /s/ Kevin L. Barnett
------------------ --------------------------------
Kevin L. Barnett
Vice President, Treasurer,
Secretary, and
Chief Financial Officer
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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, 19961 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 Report on Form 10-K for the
RYMAC Mortgage Investment Corporation year ended December 31, 1997
3(a)(1) Certificate of Incorporation of Incorporated by reference to
Core Materials Corporation Exhibit 4(a) to Registration
as filed with the Secretary of 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)
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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
27 Financial Data Schedule Filed herein
(1) The Asset Purchase Agreement, as filed with the Securities and Exchange
Commission at Exhibit 2-A to Registration Statement on Form S-4
(Registration No. 333-15809), omits the exhibits (including, the Buyer Note,
Special Warranty Deed, Supply Agreement, Registration Rights Agreement and
Transition Services Agreement, identified in the Asset Purchase Agreement)
and schedules (including, those identified in Sections 1, 3, 4, 5, 6, 8 and
30 of the Asset Purchase Agreement. Core Materials Corporation will provide
any omitted exhibit or schedule to the Securities and Exchange Commission
upon request.
17