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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended . . . . . . . . . . . . . December 31, 1998
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
(Exact name of registrant as specified in its charter)
Delaware 31-1481870
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Manor Park Drive, P.O. Box 28183, Columbus, Ohio 43228 - 0183
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (614) 870-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.01 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 17, 1999, 9,778,680 shares of Core Materials Corporation
common stock were outstanding, and the aggregate market value of the voting and
non-voting common equity held by non-affiliates was $30,558,375.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's 1999 definitive Proxy Statement to be filed with the
Securities and Exchange Commission no later than 120 days after the end of the
registrant's fiscal year are incorporated herein by reference in PART III of
this Form 10-K.
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PART I
ITEM 1. BUSINESS.
On October 8, 1996, RYMAC Mortgage Investment Corporation ("RYMAC")
incorporated Core Materials Corporation ("Core Materials" or the "Company") as a
wholly-owned subsidiary under the laws of the State of Delaware. RYMAC
subsequently merged with and into Core Materials on December 31, 1996. The
discussion in Part I, Item 1 of this Form 10-K provides an overview of the
historical business of RYMAC, RYMAC's decision to incorporate Core Materials,
and the current business of Core Materials as the surviving corporation of the
merger with RYMAC.
HISTORICAL BUSINESS OF RYMAC AND INCORPORATION OF CORE MATERIALS
RYMAC was incorporated in the State of Maryland on July 1, 1988. From
1988 until 1994, RYMAC was primarily engaged in making investments in mortgage
derivative securities and, to a lesser extent, mortgage related investments, all
of which were secured by single-family residential mortgage loans. RYMAC also
generated revenues from other sources, such as interest earnings on certain
investments and sales of certain investments.
Earnings difficulties and an altered mortgage securities market that
emerged between 1992 and 1994 caused RYMAC's Board of Directors in mid-1994 to
determine that it would not pursue its historical line of business and would
investigate alternative opportunities to maximize stockholder value.(1) In this
regard, RYMAC's Board of Directors focused its efforts on finding and evaluating
acquisition candidates.
On September 12, 1996, RYMAC entered into an Asset Purchase Agreement
(the "Asset Purchase Agreement") with Navistar International Transportation
Corp. ("Navistar"), a manufacturer of medium and heavy-duty trucks. The Asset
Purchase Agreement provided for the acquisition of Navistar's Columbus Plastics
operating unit. Columbus Plastics produced fiberglass and plastic component
parts for Navistar's medium and heavy-duty trucks, and for other third party
customers, primarily Yamaha Motor Manufacturing Corporation ("Yamaha").
The Asset Purchase Agreement conditioned Navistar's obligation to sell
Columbus Plastics on the reincorporation of RYMAC in the State of Delaware. In
order to effect the reincorporation, RYMAC incorporated Core Materials as a
wholly-owned subsidiary, under the laws of the State of Delaware, on October 8,
1996. RYMAC subsequently merged with and into Core Materials on December 31,
1996. Core Materials was the surviving corporation in the merger with each
outstanding share of RYMAC common stock being converted into the right to
receive one share of Core Materials common stock.
Immediately following the merger on December 31, 1996, Core Materials
acquired substantially all of the assets and liabilities of Columbus Plastics,
pursuant to the terms of the Asset Purchase Agreement. As consideration,
Navistar received a secured note (the "Secured Note") in an original principal
amount of $25,504,000 subject to adjustment. Navistar also received 4,264,000
shares of newly issued common stock of Core Materials.(2) Following the
acquisition, Core Materials assumed operation of the business previously
conducted by Columbus Plastics.
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(1) RYMAC had maintained a portfolio of assets from its historical business,
selectively selling assets to generate liquidity as market conditions were
appropriate. At the acquisition, Core Materials maintained ownership of one
mortgage-backed security originally purchased by RYMAC.
(2) The principal amount of the Secured Note and the number of shares of common
stock received by Navistar were subject to adjustment pursuant to the terms of
the Asset Purchase Agreement. Effective December 31, 1996, the amount of the
Secured Note was increased to $29,514,000 in order to reflect an increase in the
"net tangible assets" of Columbus Plastics as of the December 31, 1996
acquisition date. In 1997, as a result of a review of the closing balance sheet
and all purchase price adjustments, the Secured Note amount was reduced by
$1,629,000 to reflect an amendment to the closing balance sheet as of the
acquisition date. In addition, Navistar will receive future consideration in the
form of an increase in the principal amount of the Secured Note if Core
Materials achieves earnings results above specified levels during the period
1997 through 1999. Should there be additional future consideration, it will be
accounted for by increasing the amount of the Secured Note, and by reducing the
amount of Core Materials' retained earnings. Based on Core Materials' earnings
for the years ended December 31, 1998 and 1997, the Secured Note was increased
by $4,098,000 and $2,937,000 respectively. See Notes 4, 7 and 12 of the "Notes
to Financial Statements" in Part II, Item 8 of this Form 10-K.
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Based upon 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.
Core Materials, however, 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 Core
Materials' net assets to fair value at December 31, 1996.
BUSINESS OF CORE MATERIALS
Certain statements under this caption of this Annual Report on Form
10-K 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, 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 cost risks or capital
expenditures.
Core Materials operates principally in one business segment, the
production of high quality compression Sheet Molding Composite ("SMC")
fiberglass reinforced plastic products. SMC plastics are part of a larger family
of materials collectively known as "reinforced plastics." Reinforced plastics
are combinations of resins and reinforcing fibers formed through high or low
pressure fabrication techniques.
Reinforced plastics compete largely against metals and have the
strength to function well during prolonged use. Management believes that
reinforced plastic components offer many advantages over metals, including:
o heat resistance
o corrosion resistance
o lighter weight
o lower cost
o greater flexibility in product design
o part consolidation for multiple piece assemblies
o lower initial tooling costs for lower volume applications
o high strength-to-weight ratio
o dent-resistance in comparison to steel or aluminum.
The largest markets for reinforced plastics are transportation
(automotive and truck), recreational vehicles, commercial products and
industrial applications. Core Materials' two major existing customers are
Navistar and Yamaha, which are supplied proprietary SMC products for medium and
heavy-duty trucks and personal watercraft, respectively. In general, product
growth and diversification is achieved in several different ways: (1) resourcing
of existing SMC product from another supplier by an original equipment
manufacturer ("OEM"); (2) obtaining new SMC products through a selection process
in which an OEM solicits bids; and (3) successful marketing of SMC products for
previously non-SMC applications. Core Materials' efforts are currently directed
towards all three arenas.
MAJOR COMPETITORS
Core Materials believes that it is one of the five largest compounders
and molders of SMC product in the United States. Core Materials faces
competition from a number of other molders including, most significantly,
Cambridge Industries, Inc., Budd Plastics Division, Applied Composites, and
Molded Fiber Glass Companies. Core Materials believes
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that recent consolidation within the SMC industry has better positioned the
Company to compete based primarily on manufacturing capability, product quality,
cost and delivery. However, the industry remains highly competitive and some of
Core Materials' competitors have greater financial resources, research and
development facilities and manufacturing and marketing capabilities.
MAJOR CUSTOMERS
Core Materials currently has two major customers, Navistar and Yamaha.
The loss of a significant portion of sales to Navistar or Yamaha would have a
material adverse effect on the business of Core Materials.
RELATIONSHIP WITH NAVISTAR
As a result of its acquisition of Columbus Plastics from Navistar,
Core Materials assumed the long-standing relationship between Columbus Plastics
and Navistar's truck manufacturing operations. As a condition to the
acquisition, Navistar and Core Materials entered into a Comprehensive Supply
Agreement, pursuant to which Core Materials became the primary supplier of
Navistar's original equipment and service requirements for fiberglass reinforced
parts, using the SMC process.
Navistar manufactures and markets medium and heavy-duty trucks,
including school buses, mid-range diesel engines and service parts in North
America and in certain export markets. Navistar delivered 112,800 class 5
through 8 trucks, including school buses, in the United States and Canada during
its fiscal 1998, a 13% increase from the 99,500 units delivered in 1997.
Navistar's combined share of the class 5 through 8 truck market was 28.9% in
1998 and 28.6% in 1997. Navistar has been the leader in combined market share
for class 5 through 8 trucks, including school buses, in the United States and
Canada in each of the last 18 years based on data obtained from the American
Automobile Manufacturer's Association, the Canadian Motor Vehicle Manufacturer's
Association and R.L. Polk & Company.
Core Materials makes products for Navistar's Chatham (Canada) assembly
plant and its Springfield, Ohio assembly and body plants, its Garland, Texas
facility and for a new Navistar facility located in Mexico which opened in 1998.
Core Materials works closely on new product development with Navistar's
engineering and research personnel at Navistar's Fort Wayne, Indiana, Technical
Center. Some of the products sold to Navistar include hoods, air deflectors, air
fairings, fenders, splash panels, engine covers and other components.
The North American truck market in which Navistar competes is highly
competitive and the demand for trucks is subject to considerable volatility as
it moves in response to cycles in the overall business environment and is
particularly sensitive to the industrial sector, which generates a significant
portion of the freight tonnage hauled. Truck demand also depends on general
economic conditions, among other factors. Sales to Navistar amounted to
approximately 79%, 77% and 60% of total sales for the years ended December 31,
1998, 1997 and 1996, respectively.
Core Materials also received support from Navistar through December
31, 1997, in the form of accounting, payroll, and human resources management
functions under a Transitional Services Agreement with Navistar dated December
31, 1996. Such support also continued, to a lessor degree, for the first three
months of 1998. See Note 14 of "Notes to Financial Statements" in Part II, Item
8 of this Form 10-K.
RELATIONSHIP WITH YAMAHA
Core Materials also assumed from Navistar the long-standing
relationship between Columbus Plastics and Yamaha. Core Materials supplies a
significant amount of the SMC products for Yamaha's personal watercraft.
The addition of Yamaha's personal watercraft component business in
1990 represented Columbus Plastics' first major business undertaking outside of
production for Navistar. Products produced for Yamaha include decks, hulls,
engine hatches, bulk heads, and reinforcements. Core Materials (and previously,
Columbus Plastics) has worked closely with Yamaha over the years to improve the
surface quality of Yamaha products and to identify new process control
techniques and improved materials. Demand for products from Yamaha is related to
the level of general economic activity and specifically to the cyclical and
seasonal nature of the personal watercraft industry among other factors.
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Sales to Yamaha amounted to approximately 17%, 21% and 38% of total
sales for the years ended December 31, 1998, 1997 and 1996, respectively.
OTHER CUSTOMERS
Since its acquisition of Columbus Plastics from Navistar, Core
Materials has focused significant efforts on expanding its customer base. During
1998, Core Materials added the following new customers: Caradon Doors and
Windows, Peachtree Division; Case Corporation; Deere & Company; Outboard Marine
Corporation; and New Holland, North America, Inc. In the fourth quarter of 1998,
these customers contributed approximately 5% of total sales for the quarter.
Core Materials expects sales to these and other new customers to continue to
grow in 1999 and beyond.
EXPORT SALES
Core Materials provides products to Navistar's manufacturing and
service locations in Canada and Mexico. Export sales, including sales to Canada,
were approximately $18,358,000, $13,197,000 and $4,800,000 for the years ended
1998, 1997 and 1996, respectively. These export sales dollars represent
approximately 24%, 20%, and 9% of total sales for the years ended 1998, 1997 and
1996, respectively.
PRODUCTS
SMC
Core Materials incorporates a sophisticated computer program that
assists in the compounding of various complex SMC formulations tailored to
customer needs. The system provides for the following:
o Control information during various production processes; and
o Data for statistical batch controls
Core Materials has the capacity to manufacture approximately 45
million pounds of SMC sheet material annually. Core Materials reached this
production capacity, in part, through the installation of an additional SMC
compounding machine, which was brought on line in early 1997. The following
table shows production of SMC for the twelve month periods ended December 31,
1998, 1997, and 1996.
SMC Pounds
Produced
Year (Millions)
---- ----------
1998 ................................ 34
1997 ................................ 28
1996 ................................ 27
MOLDING
Core Materials currently owns or leases 17 presses in its Columbus,
Ohio plant ranging in size from 500 to 4,500 tons. In the first quarter of 1998,
Core Materials opened a second plant located in Gaffney, South Carolina, which
has 7 presses ranging in size from 1,200 to 3,000 tons. Core Materials also has
purchased a used 2,000 ton press and ordered a new 3,000 ton press both of which
will be installed in the Gaffney, South Carolina plant later in 1999.
Large platen, high tonnage presses (greater than 2,000 tons) provide
the ability to compression mold very large, notably configured SMC parts. Core
Materials believes that it possesses in excess of 40% of the large platen, high
tonnage molding capacity in the industry.
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To enhance the surface quality and paint finish of products, Core
Materials uses both in-mold coating and vacuum molding processes. In-mold
coating is a manufacturing process performed by injecting a liquid over the
molded part surface and then applying pressure at elevated temperatures during
an extended molding cycle. The liquid coating serves to fill and/or bridge
surface porosity as well as provide a barrier against solvent penetration during
subsequent top-coating operations. Likewise, vacuum molding is the removal of
air during the molding cycle for the purpose of reducing the amount of surface
porosity. Core Materials believes that it is among the industry leaders in
in-mold coating and vacuum molding applications, based on the size and
complexity of parts molded.
ASSEMBLY, MACHINING AND PAINT
Core Materials has demonstrated manufacturing flexibility that accepts
a range of very low volume, hand assembly and machining work to high volume,
highly automated assembly and machining systems. Robotics are used extensively
for material handling, machining and adhesive applications. In addition to
conventional machining methods, water-jet cutting technology is also used where
appropriate. Two automated guided vehicles are used to transfer high volume
product from the assembly area to the prime paint operation. The prime paint
operation uses an overhead conveyor to transfer product through two paint booths
and bake ovens.
RAW MATERIALS
The principal raw materials used in the compounding of SMC are
polyester resins, fiberglass rovings and filler. Other significant raw materials
include adhesives for assembly of molded components and in-mold coating and
prime paint for preparation of cosmetic surfaces. The use of single-source,
long-term (2 to 5 years) supply contracts assures the Company of competitive
pricing and an adequate supply of all of these raw materials. Additionally, each
raw material has several other supplier alternatives.
BACKLOG
Core Materials relies on production schedules provided by its
customers to plan and implement production. These schedules are provided on a
monthly basis and are considered firm for the current period. Customers can
update these schedules daily for changes in demand that allow them to run their
inventories on a "just-in-time" basis. The ordered backlog was approximately
$6.7 million and $6.9 million at December 31, 1998 and 1997, respectively all of
which Core Materials expects to ship within a year.
CAPACITY CONSTRAINTS
Core Materials and Columbus Plastics have been required to work, from
time to time, a seven day/three shift schedule to meet its customers' production
requirements. See further discussion regarding production capacity at Part I,
Item 2, "Properties" contained elsewhere in this document.
CAPITAL EXPENDITURES AND RESEARCH AND DEVELOPMENT
Capital expenditures totaled approximately $7.0 million, $10.3
million, and $5.1 million for the years ended December 31, 1998, 1997, and 1996,
respectively. Capital expenditures consist of presses and other equipment to
manufacture parts as well as laboratory equipment, storage equipment, computers
and office furniture and fixtures. The 1998 and 1997 amounts also include the
acquisition and construction of the Gaffney, South Carolina plant.
Product development is a continuous process at Core Materials.
Research and development activities focus on developing new SMC formulations and
improving existing products and manufacturing processes.
Core Materials does not maintain a separate research and development
facility but uses its production equipment (compounding machines, molding
presses, and primer system), as necessary, to support these efforts and
cooperates with its customers and its suppliers in its research and development
efforts. Likewise, manpower to direct and advance research and development is
integrated with the existing manufacturing, engineering, production, and quality
organizations. Management
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of Core Materials has estimated that internal costs related to research and
development activities approximate $200,000 per year.
ENVIRONMENTAL COMPLIANCE
Core Materials' manufacturing operations are subject to federal, state
and local environmental laws and regulations which impose limitations on the
discharge of pollutants into the air and water and establish standards for the
treatment, storage and disposal of hazardous waste. Core Materials' policy is to
conduct its business with due regard for the preservation and protection of the
environment. Core Materials' environmental waste management involves the daily
auditing of all satellite hazardous waste accumulation points, weekly audits of
all hazardous waste activities and biennial audits of every authorized
treatment, storage and disposal facility. Core Materials' environmental staff
also trains each new employee on waste management and other environmental issues
as part of an initial orientation process, and annually thereafter.
Core Materials has submitted the information necessary for the
granting of a Title V permit, as required under the Clean Air Act, which is
still pending. In 1989, Columbus Plastics installed a Regenerative Thermal
Oxidizer ("REECO"). The purpose of the REECO system is to destroy volatile
organic compounds from the SMC manufacturing operation and the coating
operation. Both operations have strict federal and state emission limits. The
REECO system allows Core Materials to meet these limits by consistently
achieving about 95% destruction efficiency. Core Materials believes that it is
in compliance with the Resource Conservation and Recovery Act of 1976 ("RCRA")
and the Comprehensive Environmental Response, Compensation, and Liability Act of
1980 ("CERCLA"). Compliance with these environmental laws and regulations has
not had, nor is it currently expected to have, a material effect on the
Company's operations, competitive position or capital expenditures through
fiscal year 1999. The amount of capital expenditures currently expected to be
spent on environmental compliance is not significant.
EMPLOYEES
As of December 31, 1998, Core Materials employed a total of 576
employees, 381 of whom are covered by a collective bargaining agreement with the
International Association of Machinists and Aerospace Workers ("IAM") which
extends to August 1, 2001.
PATENTS, TRADE NAMES AND TRADEMARKS
Core Materials will evaluate, apply for and maintain patents, trade
names and trademarks where it believes that such patents, trade names and
trademarks are reasonably required to protect its rights in its products. Core
Materials does not believe that any single patent, trade name or trademark or
related group of such rights is materially important to its business or its
ability to compete.
SEASONALITY
Core Materials' business is affected annually by the production
schedules of Navistar and Yamaha. Navistar and Yamaha typically shut down their
operations on an annual basis for a period of several weeks during Core
Materials' third quarter. As a result, demand by Navistar and Yamaha for Core
Materials' SMC products drops significantly during the third quarter. Similarly,
demand for Navistar's medium and heavy-duty trucks and Yamaha's personal
watercraft products fluctuates on a cyclical and seasonal basis, causing a
corresponding fluctuation for demand of Core Materials' SMC products.
YEAR 2000 MATTERS
Issues related to the year 2000 systems issues are addressed in Part
II, Item 7, "Management Discussion and Analysis of Financial Condition and
Results of Operations" contained elsewhere in this document.
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ITEM 2. PROPERTIES.
The important physical properties of Core Materials consist of two
plants that are situated, respectively, in Columbus, Ohio and in Gaffney, South
Carolina. Core Materials believes that, through productive use, these facilities
have adequate production capacity to meet current production volume. The
approximate capacity utilization for the molding of production products in the
Core Materials' facilities was 83%, 108%, and 80% in December, 1998, 1997 and
1996, respectively. Capacity increased in 1998 as a result of the opening of the
new facility in South Carolina. Capacity utilization is measured on the basis of
a six day, three-shifts per day operation.
The Columbus, Ohio plant is located at 800 Manor Park Drive on
approximately 28.2 acres of land. The approximate 323,596 square feet of
available floor space at the Columbus, Ohio plant is comprised of the following:
Approximate
Square Feet
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Manufacturing/Warehouse................ 307,447
Office................................. 16,149
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323,596
Core Materials acquired the property at 800 Manor Park Drive as a
result of the Asset Purchase Agreement with Navistar.
The Gaffney, South Carolina plant is located at 24 Commerce Drive,
Meadow Creek Industrial Park on approximately 20.7 acres of land. The
approximate 110,900 square feet of available floor space at the Gaffney, South
Carolina plant is comprised of the following:
Approximate
Square Feet
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Manufacturing/Warehouse................ 105,700
Office................................. 5,200
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110,900
The plant, which can be expanded in the future, began molding and
assembly operations in early 1998.
Both the Columbus, Ohio and Gaffney, South Carolina properties are
subject to liens and security interests as a result of the properties being
pledged because Core Materials pledged the properties as collateral for its debt
as described in Note 7 of the "Notes to Financial Statements" in Part II, Item 8
of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS.
Core Materials is not currently a party, nor is any of its property
subject, to any material pending legal proceedings, other than ordinary, routine
litigation incidental to the business, nor are any such proceedings known by
Core Materials to be contemplated by governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Core Materials submitted no matters to a vote of its security holders
during the fourth quarter of its fiscal year ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is traded on the American Stock Exchange
under the symbol "CME" and began trading on January 2, 1997.
The table below sets forth the high and low sale prices of Core
Materials for each full quarterly period within the two most recent fiscal years
for which such stock was traded, as reported on the American Stock Exchange
Composite Tape.
High Low
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CORE MATERIALS CORPORATION
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First Quarter 1998 6 3/8 3 1/4
Second Quarter 1998 7 4 1/8
Third Quarter 1998 4 7/8 2 9/16
Fourth Quarter 1998 3 5/8 1 3/4
First Quarter 1997 4 1/8 2 1/4
Second Quarter 1997 3 3/4 2 1/2
Third Quarter 1997 4 1/8 3 1/8
Fourth Quarter 1997 5 3 1/2
The Company's common stock was held by 661 holders of record on March
17, 1999.
Core Materials made no payments of cash dividends during the fiscal
years ended December 31, 1998 and 1997. Core Materials currently expects that
its earnings will be retained to finance the growth and development of its
business and does not anticipate paying dividends on its common stock in the
foreseeable future.
Moreover, Core Materials has agreed to prohibitions on its ability to
pay dividends as a result of restrictive covenants contained in the Secured Note
due Navistar. Such prohibitions apply so long as Core Materials owes any amounts
under the Secured Note to Navistar. The prohibitions are discussed further in
Note 7 of the "Notes to Financial Statements."
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are derived from the audited
financial statements of Core Materials and Columbus Plastics. The capital
structure of Core Materials differs significantly from the capital structure of
Columbus Plastics prior to its acquisition by Core Materials. The information
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the financial
statements and related notes included elsewhere in this Annual Report on Form
10-K including, the unaudited combined pro forma financial information.
TWO MONTHS
YEARS ENDED DECEMBER 31, ENDED YEAR ENDED YEAR ENDED
(IN THOUSANDS, ------------------------------- DECEMBER 31, OCTOBER 31, OCTOBER 31,
EXCEPT PER SHARE DATA) 1998 1997 1996(1) 1995(1) 1995(1) 1994(1)
- ----------------------------------- ------- ------- ------- ------------ ----------- -----------
Net sales $77,719 $64,940 $52,467 $ 8,855 $59,505 $44,191
Gross margin 15,488 14,089 5,439 1,329 10,366 8,071
Income before interest and taxes 7,659 6,654 547 544 4,790 2,466
Net income 3,652 2,723 N/A N/A N/A N/A
Net income per common share:
Basic .38 .29 N/A N/A N/A N/A
Diluted .37 .28 N/A N/A N/A N/A
Total assets 65,438 57,540 47,729(2) 33,305 32,591 20,281
Long term debt 27,005 18,822 27,885(2) N/A N/A N/A
Navistar's equity N/A N/A N/A 24,206 20,140 14,489
Stockholders' equity 18,852 16,095 16,176 N/A N/A N/A
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(1) Prior to January 1, 1997, Columbus Plastics provided Navistar's truck
assembly operations with SMC products at standard cost and production
for Navistar accounted for greater than 60% of Columbus Plastics'
output in all periods represented. The remainder was sold to unrelated
third party customers at negotiated prices. Net Income and Net Income
Per Share information has been omitted because Columbus Plastics was
not a separate stand alone division or subsidiary of Navistar and
generally was not accounted for separately prior to the Acquisition.
In addition, Navistar's systems and procedures did not provide
sufficient information to develop a reasonable cost allocation of
income taxes, corporate debt and interest expense.
(2) The December 31, 1996 Secured Note to Navistar was reduced by
$1,629,000 to reflect an amendment to the closing balance sheet as of
the acquisition date. See notes 7 and 12 of the "Notes to Financial
Statements" Part II, Item 8 of this form 10K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain statements under this caption of this Annual Report
on Form 10-K constitute "forward-looking statements" which involve certain risks
and uncertainties. Core Materials' actual results may differ significantly from
those discussed in the forward-looking statements. Factors that may cause such a
difference include, but are not limited to: business conditions in the plastics,
transportation, recreation and consumer products industries, the general
economy, competitive factors, the dependence on 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 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 1996 refer to the historical operations
of Columbus Plastics.
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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, Core Materials
became the primary supplier of Navistar's original equipment and service
requirements for fiberglass reinforced parts using the SMC process. All sales
and gross margin information for 1998 and 1997 reflects the results of the
Comprehensive Supply Agreement.
Prior to January 1, 1997, Columbus Plastics 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 calendar year 1996, included in this Form
10-K, these corporate costs have been allocated using a method management
believes to be reasonable and reflective of those costs had they been incurred
on a stand alone basis.
Net sales for 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 Columbus Plastics' standard costs. In addition,
Columbus Plastics 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 1996 do not reflect investment income or expenses
for interest or income taxes. Thus, the results of 1996 are not readily
comparable to the results of 1998 or 1997.
In order to make this comparison more meaningful in the discussion
which follows, pro forma financials have been prepared for 1996 (See Note 5 in
the "Notes to Financial Statements" for further information). In the discussion
which follows, all references to and comparisons with the results of 1996
reflect the historical Columbus Plastics' financials. Any dollars and/or
percentages in parentheses reflect references to and comparisons with 1996 pro
forma financial information.
RESULTS OF OPERATIONS
1998 COMPARED WITH 1997
Net sales for 1998 totaled $77,719,000, up 20% from the $64,940,000
reported for 1997. Sales to Navistar increased 23% to $61,471,000 from
$50,011,000 in 1997. The increase in sales to Navistar was primarily the result
of Navistar's increased production of medium and heavy-duty trucks. Sales to
Yamaha decreased in 1998 by 4% to $12,927,000 compared with $13,416,000 in 1997.
The slight decrease in sales to Yamaha is primarily due to the maturing of the
personal watercraft industry.
"Other" sales increased 119% to $3,321,000 from $1,514,000 in 1997.
These additional sales were primarily the result of sales to new customers added
in 1998 including: Case Corporation -- $906,000; Outboard Marine Corporation --
$804,000; and Caradon Doors and Window, Peachtree Division -- $141,000.
Gross margin was 20% of sales in 1998 compared with 22% for 1997. The
decline in gross margin as a percent of sales, 20% versus 22%, is primarily the
result of unfavorable material usage variances, increased overtime costs,
increased usage of production process supplies, changes in product mix, and
startup costs at the Gaffney, South Carolina facility. Also impacting gross
margin was the effect of increased lease expenses associated with a
sale-leaseback transaction. As noted in Note 7 of the "Notes to Financial
Statements", Core Materials sold various items of production equipment and
leased the items back under operating lease agreements. The proceeds of the sale
were primarily used to pay down long term debt. As a
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result of these transactions, Core Materials has recorded higher costs of sales,
due to the lease payments exceeding the related depreciation for the
sales-leaseback equipment, offset by lower interest costs reflected below.
Selling, general and administrative expenses totaled $7,811,000 in
1998, increasing 5% from $7,465,000 in 1997. The increase over the 1997 amounts
is primarily due to the addition of a second plant in Gaffney, South Carolina.
This second plant provides additional capacity to support the production
requirements of current customers and opportunity for growth. The Gaffney plant
began molding and assembly operations in early 1998.
Interest expense for 1998 totaled $1,681,000 decreasing from the
$2,232,000 incurred in 1997. The decrease in interest expense from 1997 is
primarily the result of a reduction in interest costs on the Secured Note
payable to Navistar due to paydowns of principal on the note. See Note 7 of
"Notes to Financial Statements." The decrease in interest expense was partially
offset by increased interest costs due to the $7,500,000 of Industrial Revenue
Bond borrowings used to finance Core Materials' new facility in Gaffney, South
Carolina.
Income tax expense for 1998 was approximately 41.4% 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 allowance 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 1998 are
estimated to be approximately $985,000, which reflects federal alternative
minimum, state and local taxes.
Net income for 1998 was $3,652,000 or $.38 per basic and $.37 per
diluted share, an increase of $929,000 or 34% over the 1997 net income of
$2,723,000 or $.29 per basic and $.28 per diluted share. The 1998 increase over
1997's amounts was primarily the result of increased sales as discussed above.
Core Materials has approximately $21,000,000 of operating tax loss carryforwards
that do not begin to expire until the year 2007. The utilization of operating
tax loss carryforwards for 1998 resulted in an increase in cash flow of
approximately $1,596,000 since the Company's estimated income tax payments were
reduced. The comparable 1997 reduction in income tax payments was $1,455,000.
1997 COMPARED WITH 1996
Net sales for 1997 totaled $64,940,000, up 24% (15%) from the
$52,467,000 ($56,590,000) reported for 1996, historical and (proforma). Sales to
Navistar increased 59% (40%) to $50,011,000 from $31,546,000 ($35,669,000) in
1996. The increase in sales to Navistar was primarily the result of a general
increase in volume of industry sales and sales of certain heavy truck components
which Core Materials began producing in June 1996. Sales to Yamaha decreased in
1997 by 32% to $13,416,000, compared with $19,759,000 in 1996. The decrease in
sales to Yamaha is primarily due to Yamaha's production slowdown as a result of
the maturing of the personal watercraft industry.
"Other" sales increased 30% to $1,514,000 from $1,161,000 in 1996.
These additional sales were primarily the result of increased sales of SMC to an
SMC molder.
Gross margin was 22% of sales in 1997 compared with 10% (17%) for
1996. The increased gross margin as a percent of sales, 22% versus 10%, was
primarily due to the markup (per the Comprehensive Supply Agreement) on sales to
Navistar. The 1997 gross margin as a percent of sales increased over the 1996
pro forma adjusted percentage due to increased sales volumes and due to 1996's
cost of sales including higher than normal repair and maintenance expenses and
unfavorable inventory adjustments. Additionally, Core Materials experienced
increased control of its material related costs.
Selling, general and administrative expenses totaled $7,465,000 in
1997, increasing from $5,242,000 ($6,106,000) in 1996. The increase over the
1996 amounts is primarily due to the Company incurring expenses related to being
a stand alone publicly traded entity, increased depreciation expense and
increased employee related expenses.
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"Other" income totaled $30,000 in 1997 decreasing from $350,000 in
1996. The decrease from the 1996 actual amounts was primarily due to income
generated in 1996 from a special tooling project for one customer.
Interest income for 1997 totaled $234,000 and is primarily
attributable to interest on Core Materials' mortgage-backed security investment.
Interest expense for 1997 totaled $2,232,000, primarily reflecting interest on
the Secured Note payable to Navistar; this expense was offset by $180,000 of
capitalized interest expense relating to property, plant and equipment under
construction. Core Materials had no interest income or interest expense in 1996
since all investing and financing was handled at Navistar's corporate offices.
Income taxes for 1997 were estimated to be approximately 41.5% 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 allowance 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 1997 were estimated to be approximately $478,000 which reflects
federal alternative minimum, state and local taxes.
Net income for 1997 was $2,723,000 or $.28 per diluted share, an
increase of ($1,433,000) or (111%) over the 1996 pro forma net income of
($1,290,000), or ($.13) per diluted share. The 1997 increase over 1996's pro
forma amounts was primarily the result of increased sales and improved margins
as delineated above. Core Materials had approximately $29,000,000 of operating
tax loss carryforwards that do not begin to expire until the year 2007. The
utilization of operating tax loss carryforwards for 1997 resulted in an increase
in cash flow of approximately $1,455,000 since the Company's estimated income
tax payments were reduced. The comparable 1996 pro forma reduction in income tax
payments was ($738,000).
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 in 1998 totaled $2,128,000, resulting
mainly from net income of $3,652,000. Depreciation and amortization of
$1,525,000 and deferred income taxes of $1,596,000, primarily related to Core
Materials $21,000,000 of operating tax loss carry forwards, also contributed
positively to the operating cash flow. Decreasing the operating cash flow was an
increase in accounts receivable of $3,442,000 caused by higher sales and
receivables for tooling projects for new products to be reimbursed by customers.
Investing activities provided $526,000 of net positive cash flow in
1998. Capital expenditures totaled $6,958,000 primarily related to the
acquisition of machinery and equipment, including equipment for Core Materials'
new facility in Gaffney, South Carolina. Offsetting these expenditures were
proceeds from the sale and leaseback of certain machinery and equipment of
$6,829,000 and proceeds of maturities on the Company's mortgage-backed security
investment of $648,000.
Financing activities provided $362,000 of net positive cash flow.
Industrial Revenue Bonds (IRB) in the amount of $7,500,000 were issued upon
completion of Core Materials' new South Carolina facility. Core Materials used
$3,000,000 of the proceeds to pay down principal on the Secured Note payable to
Navistar. All borrowings under lines of credit were also paid off in 1998.
At December 31, 1998, Core Materials had cash on hand of $3,117,000
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, will be sufficient to fund anticipated operating expenses and capital
requirements.
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INCOME TAXES
The balance sheet at December 31, 1998 and 1997 includes a deferred
tax asset of $13,029,000 and $11,625,000, respectively, net of a valuation
allowance of $3,787,000 in 1998 and of $6,787,000 in 1997. The valuation
allowance was reduced from $6,787,000 in 1997 to $3,787,000 in 1998 based upon
an extensive review of future taxable income. This reduction was recorded as an
increase in Paid in Capital in the equity section (see Note 11). The deferred
tax asset is net of a valuation allowance since it is more likely than not that
a portion of the deferred tax asset may not be realized in the future.
The deferred tax asset at December 31, 1998 primarily includes the tax
benefits associated with cumulative net operating and capital tax losses of
approximately $21.2 million and $8.9 million, respectively, temporary
differences between the book and tax basis of Core Materials' property and
equipment of approximately $10.7 million and temporary differences relating to
post-retirement and pension benefits of $3.1 million. The valuation allowance at
December 31, 1998 assumes that it is more likely than not that approximately
$2.2 million of the cumulative net operating losses and all of the cumulative
capital tax losses will not be realized before their expiration date.
Realization of the net deferred tax asset is dependent on the generation of
approximately $21 million of future taxable income from 1999 through 2009.
Taxable income for the years ended December 31, 1998 and 1997 was approximately
$7.6 million and $3.3 million, respectively. Based upon an extensive review of
future taxable income, performed in the fourth quarter of 1998, Core Materials
reduced the valuation allowance related to the net operating loss carryforwards
by $3 million.
Extensive analysis is performed to determine the amount of the
deferred tax asset. Such analysis is based upon the premise that Core Materials
is and will continue as a going concern and that it is more likely than not that
deferred tax benefits will be realized through the generation of future taxable
income. Management reviews all available evidence, both positive and negative,
to assess the long-term earnings potential of Core Materials using a number of
alternatives to evaluate financial results in economic cycles at various
industry volume conditions. Other factors considered are the Company's
long-standing relationship with its two largest customers (Navistar and Yamaha)
and Core Materials recent customer diversification efforts. The projected
availability of taxable income to realize the tax benefits from net operating
loss carryforwards and the reversal of temporary differences before expiration
of these benefits are also considered. Management believes that, with the
combination of available tax planning strategies, the maintenance of its
relationships with Yamaha and Navistar and Navistar's maintenance of significant
market share, earnings are achievable in order to realize the net deferred tax
asset of $13,029,000.
INFLATION
Inflation generally affects Core Materials by increasing the cost of
labor, equipment and raw materials. We believe that, because rates of inflation
have been moderate during the periods presented, inflation has not had a
significant impact on our results of operations.
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 are being 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 their becoming Y2K compliant. Where able, Core Materials
plans to complete the modifications by the end of July, 1999. This date is
significant in that it is the next scheduled vacation plant shutdown date and
some of the modifications must be completed while the Columbus plant is not in
operation. 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 will test the remaining
apparatus by rolling the date before July 1999 to assure the dates will roll
without problems.
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 the
PLC's in both (1) and (2) above. Those manufacturers have provided Y2K
compliance repair procedures many of which cannot be implemented until January
1, 2000; however, Core Materials is currently testing the repair procedures.
This area provides a great deal of risk to Core Materials if all PLC's fail
simultaneously. Core Materials plans to replace those press computers that must
be replaced to obtain Y2K compliance. Press software has been tested and found
to be capable of functioning beyond the year 2000. The manufacturer of the
robotics systems has provided compliance repair procedures similar to that of
the PLC's; Core Materials is in the process of testing these repair procedures.
The paint control and tracking system has been replaced with Y2K compliant
software and hardware. The SMC mix system software and computer will be
replaced/upgraded before mid year 1999.
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. The new system was activated in the Gaffney operation in
September of 1998 and in the Columbus operation in November of 1998. Many
secondary software systems such as the fixed asset system and the maintenance
system have already been replaced. Some secondary systems, posing no risk to
Core Materials or its customers, are also being replaced and/or upgraded with
scheduled completion by the middle of the second quarter of 1999. Most of the
hardware and network infrastructure has been upgraded/replaced with the
remainder due for replacement by the beginning of the second quarter of 1999. In
addition, the payroll systems have been replaced and are Y2K compliant.
FACILITIES AND UTILITIES: Core Materials' major utility suppliers
(gas, electric, water, telephone) have been contacted and, with the exception of
water, have provided information stating that they will be Y2K compliant before
compliance becomes an issue. There are no contingency plans for these suppliers
as alternate utility sources are not available. 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 environmental control system and HVAC system manufacturers
that they are compliant. Core Materials is pursuing documentation from the
manufacturers of its fire and alarm systems to certify Y2K compliance and/or to
direct Core Materials in updating these systems to Y2K compliance.
QUALITY SYSTEMS: The primary system used for tracking quality and
internal production documentation has been replaced and according to the
manufacturer is Y2K compliant. The only other quality items believed to be of
concern are the laboratory and testing apparatus. These apparatus are currently
being tested and contingency plans including using outside laboratories for
testing have been developed.
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. 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 general. Additional contingencies include purchasing and
stocking low cost materials as required.
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
most that compliance is eminent. Core Materials will consider another provider
for those items for which compliance will not be met.
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,
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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.
The total cost of the Year 2000 project is estimated at $808,000 and
is being funded through operating cash flows. Of the total project cost,
approximately $524,000 is attributed to new software/hardware which will be
capitalized. The remaining $284,000, 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 $572,000 of costs associated with this
project of which $360,000 was capitalized, relating to the purchase of new
hardware and software and $212,000 of which has been expensed.
The costs of the project and the date on which Core Materials believes
it will complete the Year 2000 modification are based on management's best
estimates. These estimates were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors; however, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, the
assurances of outside companies, and similar uncertainties.
In addition, Core Materials has been and will continue to communicate
with others with whom it does significant business to determine their Year 2000
issues; however, there can be no guarantee that the systems of other companies
on which Core Materials' systems rely will be timely converted, or that a
failure to convert by another company, or a conversion that is incompatible with
the Core Materials' systems, would not have a material adverse affect on Core
Materials.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or obtained for Internal Use." This statement defines whether
or not certain costs related to the development or acquisition of internal use
software should be expensed or capitalized and is effective for fiscal years
beginning after December 15, 1998. Core Materials does not believe that the new
statement will have a material impact on its results of operations, financial
position and cash flows.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," to establish accounting and reporting
requirements for derivative instruments. This standard requires recognition of
all derivative instruments in the statement of financial position as either
assets or liabilities, measured at fair value, and is effective for fiscal years
beginning after June 15, 1999. This statement additionally requires changes in
the fair value of derivatives to be recorded each period in current earnings or
comprehensive income depending on the intended use of the derivatives. Core
Materials is currently assessing the impact of this statement on its results of
operations and financial position.
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ITEM 7A. 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. However, commodity price risk
related to the Company's current commodities is not material as price changes in
commodities are usually passed along to the final customer. The Company 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: 1) Long term debt consisting of an Industrial
Revenue Bond ("IRB") with a balance at December 31, 1998 of $7,370,000. Interest
is variable and is computed weekly; the average interest rate charged for 1998
was 3.6%; 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 this agreement, Core Materials pays a fixed rate of 4.89% to a bank and
receives 76% of the 30 day commercial paper rate. 2) Core Materials also has a
long-term Secured Note with a balance as of December 31, 1998 of $19,920,000 at
a fixed interest rate of 8%. And 3) 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
Core Materials Corporation
Columbus, Ohio
We have audited the accompanying balance sheets of Core Materials
Corporation (the "Company") as of December 31, 1998 and 1997, and the related
statements of income, stockholders' equity, and cash flows for the years ended
December 31, 1998 and 1997, and the statement of revenues, direct expenses and
identified corporate expenses before interest and taxes for the year ended
December 31, 1996. Our audits also included the financial statement schedule
listed in the Index at Item 14. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As explained in Note 2, the Company's 1996 historical operating
results are not necessarily indicative of those which may have resulted had it
been a stand alone company in 1996.
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In our opinion, such financial statements present fairly, in all
material respects, the financial position of Core Materials Corporation as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years ended December 31, 1998 and 1997, and its direct operations and
identified corporate expenses before interest and taxes for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
- ---------------------------
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 16, 1999
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CORE MATERIALS CORPORATION
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND STATEMENT OF REVENUES, DIRECT EXPENSES AND IDENTIFIED CORPORATE EXPENSES
BEFORE INTEREST AND TAXES FOR THE YEAR ENDED DECEMBER 31, 1996
YEAR ENDED DECEMBER 31,
1998 1997 1996
----------- ----------- -----------
NET SALES:
Navistar $61,471,172 $50,010,566 $31,546,315
Yamaha 12,927,328 13,415,548 19,759,033
Other 3,320,644 1,513,844 1,161,461
----------- ----------- -----------
TOTAL SALES 77,719,144 64,939,958 52,466,809
Cost of sales 61,258,735 50,090,742 46,148,086
Postretirement benefits expense 972,452 760,410 879,487
----------- ----------- -----------
TOTAL COST OF SALES 62,231,187 50,851,152 47,027,573
----------- ----------- -----------
GROSS MARGIN 15,487,957 14,088,806 5,439,236
----------- ----------- -----------
Selling, general and administrative expense 7,678,415 7,350,385 5,078,487
Postretirement benefits expense 132,218 114,429 163,307
----------- ----------- -----------
TOTAL SELLING, GENERAL AND 7,810,633 7,464,814 5,241,794
ADMINISTRATIVE EXPENSE
----------- ----------- -----------
Other income (expense) - net (17,900) 30,034 349,604
----------- ----------- -----------
INCOME BEFORE INTEREST AND TAXES 7,659,424 6,654,026 547,046
Interest income 254,920 233,873 N/A
Interest expense (1,681,472) (2,231,575) N/A
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 6,232,872 4,656,324 N/A
Income taxes:
Current 985,280 478,035 N/A
Deferred 1,595,887 1,454,808 N/A
----------- ----------- -----------
Total income taxes 2,581,167 1,932,843 N/A
----------- ----------- -----------
NET INCOME $ 3,651,705 $ 2,723,481 N/A
=========== =========== ===========
NET INCOME PER COMMON SHARE:
BASIC $ 0.38 $ 0.29 N/A
=========== =========== ===========
DILUTED $ 0.37 $ 0.28 N/A
=========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
BASIC 9,706,412 9,555,774 N/A
=========== =========== ===========
DILUTED 9,975,360 9,713,020 N/A
=========== =========== ===========
See notes to financial statements.
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CORE MATERIALS CORPORATION
BALANCE SHEETS
DECEMBER 31,
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,117,085 $ 100,356
Mortgage-backed security investment 2,568,977 3,217,349
Accounts receivable (less allowance for doubtful accounts:
1998 - $105,000 and 1997 - $133,000) 17,728,753 14,286,883
Inventories:
Finished and work in process goods 1,592,288 1,163,611
Stores 2,630,993 2,143,108
------------ ------------
Total inventories 4,223,281 3,306,719
Deferred tax asset 928,048 455,002
Prepaid expenses and other current assets 339,028 326,277
------------ ------------
Total current assets 28,905,172 21,692,586
Property, plant and equipment 35,834,613 34,971,001
Accumulated depreciation (11,754,866) (10,293,834)
------------ ------------
Property, plant and equipment - net 24,079,747 24,677,167
Deferred tax asset - net 12,101,257 11,170,190
Other assets 351,606
------------ ------------
TOTAL $ 65,437,782 $ 57,539,943
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Current portion long-term debt $ 285,000
Notes payable - banks $ 3,997,120
Accounts payable 7,360,949 7,794,403
Accrued liabilities:
Compensation and related benefits 2,492,006 2,066,488
Interest 725,827 1,149,061
Other accrued liabilities 2,254,655 2,123,255
------------ ------------
Total current liabilities 13,118,437 17,130,327
Long-term debt 27,005,150 18,821,841
Deferred long-term gain 3,369,380 3,018,331
Postretirement benefits liability 3,093,157 2,474,367
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $0.01 par value, authorized shares - 20,000,000;
Outstanding shares: 1998 - 9,778,680; 1997 - 9,613,281 97,787 96,133
Paid-in capital 19,251,392 16,049,861
Retained earnings (deficit) (497,521) (50,917)
------------ ------------
Total stockholders' equity 18,851,658 16,095,077
------------ ------------
TOTAL $ 65,437,782 $ 57,539,943
============ ============
See notes to financial statements.
20
21
CORE MATERIALS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK RETAINED TOTAL
OUTSTANDING PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ ------- --------- ------
BALANCE AT JANUARY 1, 1997, RESTATED (NOTE 12) 9,474,600 $94,746 $15,918,193 $ 162,933 $16,175,872
Net Income 2,723,481 2,723,481
Issuance of restricted stock to employees 41,000 410 117,415 117,825
Unearned deferred stock compensation (117,825) (117,825)
Amortization of deferred stock compensation 50,555 50,555
Issuance of stock under stock option plan 100,000 1,000 81,500 82,500
Increase in Secured Note to Navistar (2,937,331) (2,937,331)
Other (2,319) (23) 23
--------- ------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1997 9,613,281 96,133 16,049,861 (50,917) 16,095,077
--------- ------- ----------- ----------- -----------
Net Income 3,651,705 3,651,705
Change in valuation allowance (note 11) 3,000,000 3,000,000
Amortization of deferred stock compensation 54,365 54,365
Issuance of stock under stock option plan 167,600 1,676 147,144 148,820
Increase in Secured Note to Navistar (4,098,309) (4,098,309)
Other (2,201) (22) 22
--------- ------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1998 9,778,680 $97,787 $19,251,392 $ (497,521) $18,851,658
========= ======= =========== =========== ===========
See notes to financial statements.
21
22
CORE MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,651,705 $ 2,723,481
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,525,308 2,074,093
Deferred income taxes 1,595,887 1,454,808
Loss on disposal of assets 17,900 26,715
Amortization of gain on sale/leaseback transactions (338,114) (28,176)
Compensation expense on stock awards 54,365 50,555
Change in operating assets and liabilities:
Accounts receivable (3,441,870) (12,278,920)
Inventories (916,562) 35,980
Prepaid and other assets (220,720) 18,163
Accounts payable (433,454) 7,421,534
Accrued and other liabilities 14,764 3,582,065
Postretirement benefits liability 618,790 600,877
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,127,999 5,681,175
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (6,958,388) (10,340,851)
Proceeds from sale/leaseback transactions 6,829,431 12,000,000
Proceeds from maturities on mortgage-backed security investment 648,372 77,700
Proceeds from sale of property, plant and equipment 7,000 12,500
------------ ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 526,415 1,749,349
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines-of-credit 6,919,470 7,647,120
Payments on lines-of-credit (10,916,590) (3,650,000)
Payments of principal on secured note payable (3,000,000) (12,000,000)
Proceeds from issuance of industrial revenue bond 7,500,000 --
Payment of principal on industrial revenue bond (130,000) --
Issuance costs for industrial revenue bond (159,385) --
Proceeds from exercise of stock options 148,820 82,500
------------ ------------
NET CASH PROVIDED(USED IN) FINANCING ACTIVITIES 362,315 (7,920,380)
------------ ------------
NET INCREASE/(DECREASE) IN CASH 3,016,729 (489,856)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 100,356 590,212
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,117,085 $ 100,356
============ ============
Cash paid for:
Interest (net of amounts capitalized) $ 2,039,713 $ 1,082,514
Income taxes $ 823,200 $ 122,500
Supplemental disclosure of non-cash financing activities:
Increase in Secured Note payable to Navistar $ 4,098,309 $ 2,937,331
Increase in paid-in capital for reversal of NOL
valuation allowance $ 3,000,000
Increase in post-retirement benefits liability $ 1,629,000
See notes to financial statements.
22
23
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS FORMATION AND NATURE OF OPERATIONS
Core Materials Corporation ("Core Materials") was formed on October 8,
1996 by RYMAC Mortgage Investment Corporation ("RYMAC"), as a wholly owned
subsidiary, for the purpose of acquiring substantially all of the assets and
assuming certain of the liabilities of Columbus Plastics Operation ("Columbus
Plastics"), an operating unit of Navistar International Transportation Corp.
("Navistar"). Throughout these Notes to Financial Statements, references to
Columbus Plastics refers to the operations of Core Materials prior to the
acquisition.
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 (the "Acquisition") (see Note 4).
Core Materials is a compounder and compression molder of sheet molding
composites (SMC). Core Materials produces and sells, both SMC compound and
molded products for varied markets, including the automotive and trucking
industries, recreational vehicles and commercial and industrial products.
2. BASIS OF PRESENTATION
Core Materials' year end is December 31. Columbus Plastics' historical
year end was October 31. Effective December 31, 1995, the year end for Columbus
Plastics was changed to conform to the year end of Core Materials, the
continuing legal entity and registrant.
Based upon 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 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 Core
Materials' net assets to fair value at December 31, 1996. The financial
statements for the year ended December 31, 1996 reflect the historical
operations of Columbus Plastics. Note 5 contains the unaudited pro forma
combined statement of income of Core Materials for the year ended December 31,
1996 as if the Acquisition had been consummated as of January 1, 1996.
Prior to the Acquisition, 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
individual Core Materials income statements for the year ended December 31, 1996
have 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 year ended December 31, 1996,
certain of these corporate costs, along with other Navistar Truck Group
expenses, were allocated using an allocation method (see Note 13). However,
Navistar's systems and procedures do not provide sufficient information to
develop a reasonable cost allocation for income taxes, corporate debt and
interest expense. Accordingly, a Statement of Revenues, Direct Expenses and
Identified Corporate Expenses before Interest and Taxes is presented for the
year ended December 31, 1996. This statement includes all Navistar corporate
cost allocations for which a reasonable method of allocating costs to the
operations of Columbus Plastics can be developed.
23
24
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Prior to the Acquisition, 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 an
Equity Investment account as were sales to Navistar's truck assembly operations.
Accordingly, Columbus Plastics had no operating cash flows and a statement of
cash flows is not presented for the year ended December 31, 1996. Note 8 to the
financial statements presents a reconciliation of the Navistar Equity Investment
account for the year ended December 31, 1996.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
REVENUE RECOGNITION - Revenue from product sales is recognized at the
time products are shipped. Effective January 1, 1997, sales to Navistar are
recorded at the prices stipulated in the Comprehensive Supply Agreement between
Core Materials and Navistar (the "Supply Agreement") (see Note 14), which
approximate fair value. Prior to 1997, Core Materials recorded sales to
Navistar's manufacturing plants at its standard cost at date of shipment.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. Cash is held primarily in one bank.
MORTGAGE-BACKED SECURITY - Pursuant to reverse acquisition accounting,
the mortgage-backed security is recorded at its fair value at December 31, 1996,
which is the cost basis to Core Materials. The security which matures in
November 2025, is considered held to maturity, and is carried at cost. Core
Materials has the intent and ability to hold this security to maturity.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out), or market.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
recorded at cost. Depreciation is provided on a straight line method over the
estimated useful lives of the assets. The carrying amount of long-lived assets
is evaluated annually to determine if adjustment to the depreciation period or
to the unamortized balance is warranted. Such evaluation is based principally on
the expected utilization of the long-lived assets.
Ranges of estimated useful lives for computing depreciation are as
follows:
Land improvements 20 years
Building and improvements 20-50 years
Machinery and equipment 3-25 years
Tools, dies and patterns 3-5 years
Depreciation expense was $1,510,000, $2,074,000 and $1,847,000 for
1998, 1997 and 1996, respectively.
In 1998 and 1997, approximately $189,000 and $180,000 of interest
costs were capitalized. Prior to December 31, 1996, Core Materials did not
record capitalized interest on construction in progress as interest expense was
not allocated by Navistar to Columbus Plastics.
24
25
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SELF-INSURANCE --Core Materials is self-insured with respect to
medical and dental claims and workers' compensation claims. Core Materials has
recorded an estimated liability for self-insured medical and dental claims
incurred and worker's compensation claims incurred but not reported at the
December 31, 1998 and 1997 of $350,000 and $469,000, respectively. As part of
the Asset Purchase Agreement, Navistar assumed the liability for these items at
December 31, 1996.
INCOME TAXES - Core Materials accounts for income taxes using the
liability method to calculate deferred income taxes which requires the
recognition of future tax benefits, measured by enacted tax rates, attributable
to deductible temporary differences between the financial statement basis and
income tax basis of assets and liabilities and net operating loss carry forwards
to the extent realization is more likely than not.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Core Materials' financial
instruments consist of a mortgage backed security investment, long term debt,
accounts receivable, accrued liabilities and accounts payable. The carrying
amount of the financial instruments approximated their fair value.
CONCENTRATION OF CREDIT RISK - Core Materials has significant
transactions with two customers, Navistar and Yamaha, that comprised 96%, 98%
and 98% of total sales in 1998, 1997 and 1996 and 87% and 95% of the accounts
receivable balances at December 31, 1998 and 1997. Core Materials performs
ongoing credit evaluations of its customers' financial condition. Core Materials
maintains reserves for potential bad debt losses, and such bad debt losses have
been historically within Core Materials' expectations.
EARNINGS PER COMMON SHARE - Basic earnings per common share is
computed based on the weighted average number of common shares outstanding
during the period. Diluted earnings per common share is computed similarly but
includes the effect of the assumed exercise of dilutive stock options under the
treasury stock method. For 1996, earnings per share is not presented as Columbus
Plastics was not a stand alone division or subsidiary of Navistar and was
generally not accounted for separately.
RESTRICTED CASH - Included in cash at December 31, 1998 is $309,602
which is restricted pursuant to the terms of the Industrial Revenue Bond (see
Note 7). This restriction will be removed as Core Materials incurs qualified
expenditures related to the project for which the bond was issued.
RECLASSIFICATIONS - Reclassifications have been made to prior years'
amounts to conform with the classifications of such amounts for 1998.
Additionally, the Company has recorded reclassifications between the December
31, 1996 secured note payable and the postretirement benefits liability
including the related deferred tax asset impact (see Note 12).
NEW ACCOUNTING PRONOUNCEMENTS - In March 1998, the American Institute
of Certified Public Accountants issued Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or obtained for Internal Use." This
statement defines whether or not certain costs related to the development or
acquisition of internal use software should be expensed or capitalized and is
effective for fiscal years beginning after December 15, 1998. The Company does
not believe that the new statement will have a material impact on its results of
operations and financial position.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," to establish accounting and reporting
requirements for derivative instruments. This standard requires recognition of
all derivative instruments in the statement of financial position as either
assets or liabilities, measured at fair value, and is effective for fiscal years
beginning after June 15, 1999. This statement additionally requires changes in
the fair value of derivatives to be recorded each period in current earnings or
comprehensive income depending on the intended use of the derivatives. Core
Materials is currently assessing the impact of this statement on its results of
operations, financial position and cash flows.
25
26
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
4. ACQUISITION
On December 31, 1996 Core Materials acquired substantially all of the
assets and assumed certain liabilities of Columbus Plastics for (1) a
$27,885,000 (as adjusted, see Note 12) Secured Note due Navistar, subject to
adjustment, and (2) 4,264,000 shares of Core Materials common stock,
representing approximately 45% of the total number of shares of Core Materials'
common stock then issued and outstanding.
In connection with the Acquisition, Core Materials is required to pay
Navistar future consideration in the form of an increase in the Secured Note
based upon a multiple of the amount by which Core Materials' earnings before
interest and taxes (EBIT), as defined in the Asset Purchase Agreement, exceeds
established thresholds over the three year period 1997 to 1999. The future
consideration will be based upon a multiple of the defined EBIT as follows:
o 1997: If EBIT exceeds $6,512,000, then future consideration
will be the excess multiplied by 5.55.
o 1998: If EBIT exceeds $6,512,000, then the future
consideration will be the product of the 1998 excess EBIT
less the 1997 excess EBIT multiplied by 4.50.
o 1999: If EBIT exceeds $6,512,000, then the future
consideration will be the product of the 1999 excess EBIT
less the 1998 excess EBIT multiplied by 2.75.
The maximum increase in the Secured Note, as a result of future
consideration, is limited to $24,496,000. Such increases will be accounted for
by reducing Core Materials' retained earnings and will increase the amount of
the balloon payment due in November 2006. For the year ended December 31, 1998,
Core Materials EBIT, as defined in the Asset Purchase Agreement, exceeded the
established threshold by $1,440,000. The 1997 excess EBIT was $529,000, which
when deducted from the $1,440,000 results in a net excess for 1998 of $911,000.
This excess resulted in additional consideration due to Navistar of $4,098,000
for 1998. The 1997 excess resulted in additional consideration due to Navistar
of $2,937,000.
Based upon 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.
Consistent with reverse acquisition accounting treatment, the purchase price
should be determined as the fair value of the consideration paid or received
whichever is more clearly evident. Because RYMAC's stock was thinly traded and
supported a company with no operations (prior to the Acquisition), the fair
value of RYMAC's then outstanding common stock was not appropriate to determine
the Acquisition purchase price. Instead the purchase price was determined based
upon the fair value of the consideration received (Core Materials' assets and
liabilities) by Columbus Plastics. The purchase price was approximately $16.0
million, calculated as follows, and excludes any future consideration to be paid
if certain earnings thresholds are met:
Cash $ 584,351
Mortgage-backed assets 3,295,049
Other assets 122,935
Deferred tax asset, net 12,455,000
Accrued expenses (492,649)
-----------
$15,964,686
===========
Transaction costs incurred by the acquirer in connection with the
acquisition of a company without operating substance should be treated similar
to that of an offering of equity securities as a reduction of paid-in capital.
Since the recording of Navistar's transaction costs at Core Materials would
result in no net impact to Core Materials' balance sheet, Navistar's transaction
costs are excluded from the purchase price.
26
27
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
5. PRO FORMA COMBINED FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma combined statement of income for the
year ended December 31, 1996 is presented as if the Acquisition had occurred as
of January 1, 1996. This pro forma information is not necessarily indicative of
the actual results of operations which would have occurred had the transactions
occurred on this date or which may occur in the future.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
TWELVE MONTHS ENDED DECEMBER 31, 1996
PRO FORMA ADJUSTMENTS
---------------------------------------
HISTORICAL SUPPLY & PROFORMA
COLUMBUS SERVICES ADJUSTED
PLASTICS ACQUISITION NOTE AGREEMENT NOTE BALANCE NOTE
----------- ----------- ---- ---------- ---- ----------- ----
Net Sales:
Navistar $31,546,315 $4,123,000 (b) $35,669,315
Yamaha 19,759,033 19,759,033
Other 1,161,461 1,161,461
----------- ---------- -----------
Total 52,466,809 4,123,000 56,589,809
Cost of sales 46,148,086 46,148,086
Postretirement benefits expense 879,487 879,487
----------- -----------
Total cost of sales 47,027,573 47,027,573
----------- ---------- -----------
Gross margin 5,439,236 4,123,000 9,562,236
----------- ---------- -----------
Selling, general and administrative expense 5,078,487 $ 864,000 (d) 5,942,487
Postretirement benefits expense 163,307 163,307
----------- ----------- -----------
Total selling, general and administrative expense 5,241,794 864,000 6,105,794
----------- ----------- -----------
Other income 349,604 349,604
----------- ----------- ---------- -----------
Income before interest and taxes 547,046 (864,000) 4,123,000 3,806,046
Interest income 230,650 (a) 230,650
Interest expense (1,841,120) (c) (1,841,120)
----------- ----------- ---------- -----------
Income before income taxes $ 547,046 $(2,474,470) $4,123,000 2,195,576
Estimated income taxes 905,895 (f)
-----------
Net income $ 1,289,681
-----------
Net income per share:
Basic $ .14
===========
Diluted $ .13
===========
Weighted average shares outstanding:
Basic 9,474,583 (e)
===========
Diluted 9,580,693 (e)
===========
27
28
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The Unaudited Proforma Combined Statement of Income reflects the
effects of certain adjustments to the historical financial statements that
result from the acquisition of Columbus Plastics by Core Materials. Columbus
Plastics 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 common
share amounts have not been included for the financial information for Columbus
Plastics. A historical statement of income for Core Materials is not included in
the unaudited proforma 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 $520,000 for the twelve months ended December 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' salaries and
directors' fees.
(e) The weighted average number of common shares outstanding
used to calculate basic and diluted net income per common
share include the number of shares of Core Materials' common
stock outstanding prior to the acquisition and the number of
shares issued to Navistar as consideration for the
Acquisition. The diluted weighted average shares outstanding
also includes the effect of the assumed exercise of 260,000
dilutive Core Materials' 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 proforma
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.
28
29
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December
31:
1998 1997
------------ ------------
Land and land improvements $ 2,136,959 $ 2,024,566
Buildings 16,349,245 11,635,593
Machinery and equipment 15,871,858 11,319,771
Tools, dies and patterns 460,802 334,761
Construction in progress 1,015,749 9,656,310
------------ ------------
Total 35,834,613 34,971,001
Less accumulated depreciation (11,754,866) (10,293,834)
------------ ------------
Property, plant and equipment - net $ 24,079,747 $ 24,677,167
============ ============
Construction in progress at December 31, 1997, primarily relates to
the construction and equipping of a new 110,900-square-foot facility in Gaffney,
South Carolina to expand Core Materials' molding and assembly capacities.
Construction in progress at December 31, 1998 primarily relates to the purchase
and installation of equipment at Core Materials' Columbus, Ohio and Gaffney,
South Carolina facilities. At December 31, 1998, commitments for capital
expenditures in progress were $1,850,000.
In December 1997, August 1998, and December 1998, Core Materials
entered into sale-leaseback arrangements with a financial institution, whereby
it sold certain equipment and leased such back under operating lease
arrangements (see Note 7).
7. DEBT AND LEASES
Long term debt consists of the following at December 31:
1998 1997
----------- -----------
Secured Note Payable due to Navistar, interest at 8%, payable
semi-annually, principal due November 2006, secured by a
subordinated lien and security interest in all Core Materials'
assets. $19,920,150 $18,821,841
Industrial Revenue Bond, interest adjustable weekly (1998
average 3.6%), payable quarterly, principal due in variable
quarterly installments through April, 2013, secured by a
$7,592,000 bank letter of credit. 7,370,000
----------- -----------
Total 27,290,150 18,821,841
Less current portion 285,000
----------- -----------
Long-term debt $27,005,150 $18,821,841
=========== ===========
29
30
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SECURED NOTE PAYABLE
In connection with the acquisition, Core Materials is also required to
pay Navistar future consideration in the form of an increase in the principal
amount of the Secured Note if Core Materials achieves earnings before interest
and taxes in excess of established thresholds during the period of 1997 through
1999 (see Note 4).
Contingent principal payments under the secured note are due as
follows:
a) Within ninety days after the end of each fiscal year of
Core Materials during the term of the Secured Note, Core
Materials shall pay principal in an amount equal to the
amount, if any, by which the total cash and cash equivalents
of Core Materials, as of the end of such fiscal year,
exceeds $3,000,000, as long as there is no outstanding
balance on the revolving line of credit and Core Materials
is in compliance with all loan covenants; and
b) In the event Core Materials obtains, from time to time,
any refinancing loan (as defined by the terms of the Secured
Note), Core Materials shall promptly, upon obtaining such
loan, pay principal in an amount equal to the proceeds of
such loan.
Total cash and cash equivalents of Core Materials as of December 31,
1998 were $3,117,085. However, Navistar agreed to waive any principal payment on
the excess over $3,000,000 at December 31, 1998. Based upon the financial
position of Core Materials at December 31, 1998, and the waiver, the Secured
Note is classified as long-term on the balance sheet.
In December 1997, a refinancing arrangement was entered into with a
financial institution whereby Core Materials received $12,000,000 from a
sale/leaseback transaction. The proceeds from this transaction were used to
repay principal on the Secured Note due to Navistar.
In May 1998, Core Materials borrowed $7,500,000 through the issuance
of an Industrial Revenue Bond. Core Materials used $3,000,000 of these proceeds
to repay principal on the Secured Note due to Navistar.
During 1997, the final purchase price adjustments under the Asset
Purchase Agreement were reviewed by Core Materials and Navistar management. As a
result of this review, it was agreed that Core Materials would assume an
additional $1,629,000 of accumulated benefits obligations relating to
postretirement benefits at December 31, 1996 and reduce the Secured Note payable
to Navistar by the same amount and amend the December 31, 1996 closing balance
sheet of Columbus Plastics to reflect the reclassification of these two
long-term liabilities (see Note 12).
In addition, based on Core Materials' earnings for the years ended
December 31, 1998 and 1997, the Secured Note was increased by approximately
$4,098,000 and $2,937,000, respectively, in accordance with the provisions of
the Asset Purchase Agreement (see Note 4).
The provisions of the Secured Note prohibit the declaration or payment
of cash dividends, the repurchase or retirement of capital stock, as well as the
pledge of any of Core Materials' assets or revenue as a security lien to a third
party, except as approved by Navistar, as long as the Secured Note is
outstanding.
30
31
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
LINE OF CREDIT
At December 31, 1998, Core Materials had available a $7,500,000
variable rate revolving line of credit. This facility, which matures on November
30, 1999, is secured by a first priority lien and security interest in all Core
Materials' business assets. The line of credit bears interest at LIBOR plus two
percent or prime as elected by Core Materials. There was no total outstanding
balance under this facility at December 31, 1998. The total outstanding balance
under these facilities at December 31, 1997 was $3,997,120 at a weighted average
interest rate of 8.37%.
INDUSTRIAL REVENUE BOND
In May, 1998, Core Materials borrowed $7,500,000 through the issuance
of an Industrial Revenue Bond ("IRB"). The IRB bears interest at a weekly
adjustable rate and matures in April, 2013. The maximum interest rate that may
be charged at any time over the life of the IRB is 10%. Principal is payable
beginning in July, 1998. Total principal maturities by year are: 1999 -
$285,000; 2000 - $305,000; 2001 - $330,000; 2002 - $355,000; 2003 - $390,000;
and thereafter - $5,705,000.
In conjunction with the IRB, in June, 1998, Core Materials entered
into an interest rate swap agreement with a commercial bank. This agreement
effectively converts the variable rate IRB to fixed interest debt. Under this
agreement, Core Materials pays a fixed rate of 4.89% to the bank and receives
76% of the 30 day commercial paper rate. The difference paid or received varies
as short-term interest rates change and is accrued and recognized as an
adjustment to interest expense. The swap term matches the payment schedule on
the IRB with final maturity in April 2013. While Core Materials is exposed to
credit loss on its interest rate swap in the event of non-performance by the
counterparty to the swap, management believes such non-performance is unlikely
to occur given the financial resources of the counterparty.
As security for the IRB, Core Materials obtained a letter of credit in
the amount of $7,592,000 from a commercial bank. The letter of credit can only
be used to pay principal and interest on the IRB. Any borrowings made under the
letter of credit bear interest at the bank's prime rate and are secured by a
lien and security interest in all of Core Materials' business assets. The letter
of credit expires in April, 2003 but may be extended for an additional one year
period in April of each year.
LEASES
In December 1997, Core Materials entered into a sale-leaseback
arrangement with a financial institution. Equipment, consisting primarily of SMC
presses, with a net book value of approximately $8,619,000, was sold for
$12,000,000 and leased back under a 10 year lease agreement. The lease agreement
meets the criteria to be accounted for as an operating lease. Core Materials
recorded a deferred gain of approximately $3,381,000 on the transaction which is
being amortized over the life of the lease. The current portion of the deferred
gain, approximately $338,000, is recorded in other accrued liabilities. For the
year ended December 31, 1998, Core Materials recognized into income
approximately $338,000 of the deferred gain. Proceeds from the sale-leaseback of
$12,000,000 were used to reduce a portion of the principal on the Secured Note
payable due to Navistar.
In August 1998, Core Materials entered into sale-leaseback
arrangements with a financial institution. Equipment, consisting primarily of
SMC presses and a waterjet, was sold for its net book value of $5,279,000 and
leased back under a 10 year lease agreement. No gain or loss resulted from the
transaction. The lease agreement meets the criteria to be accounted for as an
operating lease.
In December 1998, Core Materials entered into an additional
sale-leaseback arrangement with a financial institution. Equipment consisting of
two SMC presses, with a net book value of $742,000 were sold for $1,550,000 and
then leased back under a 7 year lease agreement. The lease agreement meets the
criteria to be accounted for as an operating lease. Core Materials recorded a
deferred gain of approximately $808,000 on the transaction which will be
amortized over the life of the
31
32
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
lease. The current portion of the deferred gain, approximately $115,000, is
recorded in other accrued liabilities. Core Materials will begin recognizing
this deferred gain into income in January, 1999.
Core Materials also leases certain other equipment under operating
leases with original lease terms of 2 to 10 years. Total rental expense was
$2,462,000, $701,000 and $563,000 for 1998, 1997 and 1996, respectively.
The future minimum lease payments under non-cancelable operating
leases that have lease terms in excess of one year are as follows:
1999 $ 2,545,000
2000 2,545,000
2001 2,375,000
2002 2,387,000
2003 2,731,000
Thereafter 10,977,000
-----------
Total minimum lease payments $23,560,000
===========
8. EQUITY INVESTMENT ACCOUNT
Prior to January 1, 1997, cash flows for purchases of inventory,
payroll, capital expenditures, and other expenditures were funded through the
intercompany Equity Investment account with Navistar. Accordingly, Columbus
Plastics had no operating cash flows and a statement of cash flows is not
presented for the year ended December 31, 1996. In lieu of a statement of cash
flows, the following summarizes the changes in the Equity Investment account for
the year ended December 31, 1996.
Balance - beginning of year $ 24,206,408
Funding of purchases 45,922,756
Net charges from Navistar 19,695,932
Navistar funding of plant expenses and other 2,777,608
Net charges to Navistar (36,030,151)
Collections from third parties (27,781,025)
Income before interest and taxes 547,046
Push down of post-retirement benefits liabilities from Navistar (1,757,490)
Issuance of Core Materials common stock (27,581,084)
------------
Balance - end of year $ --
============
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.
32
33
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Navistar Funding of Plant Expenses and Other - 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.
Push Down of Post-Retirement Benefits Liabilities From Navistar -
represents the push down from Navistar to Core Materials of the projected
post-retirement benefit obligations which were assumed by Core Materials. See
Note 12 for further discussion of the post-retirement benefit obligation.
Issuance of Core Materials Common Stock - reverse acquisition
accounting treatment requires that the retained earnings carried forward to Core
Materials as of December 31, should consist of Columbus Plastics' Equity
Investment account, less an amount equivalent to the par value of Core
Materials' common stock owned by Navistar. This item represents the transfer of
the Equity Investment account to common stock and retained earnings.
9. EQUITY
ANTI-TAKEOVER MEASURES
Core Materials' Certificate of Incorporation and By-laws contain
certain provisions designed to discourage specific types of transactions
involving an actual or threatened change of control of Core Materials. These
provisions, which are designed to make it more difficult to change majority
control of the Board of Directors without its consent, include the following:
Removal of Directors - This provision provides that a
director of Core Materials may be removed with or without
cause only upon the vote of the holders of at least 80% of
the voting power of the outstanding shares of capital stock
entitled to vote generally in the election of directors.
Supermajority Approval - This provision requires that a
merger and certain other transactions (as outlined in the
Certificate of Incorporation) be approved by the affirmative
vote of the holders of at least 66 2/3% of the then
outstanding shares of Core Materials' common stock. Such
affirmative vote is required notwithstanding the fact that
no vote may be required, or that a lesser percentage may be
specified by law.
Amendments - This provision requires that any amendment to
the provisions relating to the removal of directors be
approved by the holders of at least 80% of the then
outstanding shares of voting stock, and any amendment to
provisions requiring the approval of the holders of at least
66 2/3% of the then outstanding shares of voting stock be
approved by the holders of at least 66 2/3% of the then
outstanding shares of voting stock.
RESTRICTIONS ON TRANSFER
Core Materials' Certificate of Incorporation also contains a provision
(the "Prohibited Transfer Provision") designed to help assure the continued
availability of Core Materials' substantial net operating loss and capital loss
carryforwards by seeking to prevent an "ownership change" as defined under
current Treasury Department income tax regulations. Under the Prohibited
Transfer Provision, if a stockholder transfers or agrees to transfer stock, the
transfer will be prohibited and void to the extent that it would cause the
transferee to hold a "Prohibited Ownership Percentage" (as defined in Core
Materials'
33
34
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Certificate of Incorporation, but generally, means direct and indirect ownership
of 4.5% or more of the Company's common stock) or if the transfer would result
in the transferee's ownership increasing if the transferee had held a Prohibited
Ownership Percentage within the three prior years or if the transferee's
ownership percentage already exceeds the Prohibited Ownership Percentage under
applicable Federal income tax rules. The Prohibited Transfer Provision does not
prevent transfers of stock between persons who do not hold a Prohibited
Ownership Percentage.
RESTRICTED COMMON STOCK
In 1997, Core Materials issued, in total, 41,000 shares of common
stock, par value $0.01 per share, to 410 employees (which constituted all of its
employees at the time of grant with the exception of certain executive
employees). The Company received no consideration for the issued shares. The
shares were issued as an incentive for its employees to remain with the Company
and were subject to forfeiture to the Company if an employee left prior to
December 31, 1998. During this period, the shares could not be transferred. As
of December 31, 1998, 45 of these employees terminated service with Core
Materials and, therefore, the 4,500 shares were forfeited and retired. The
market value of the remaining shares at the dates of grant totaled $105,000
which was recognized as compensation expense of $54,000 in 1998 and $51,000 in
1997.
PREFERRED STOCK
Core Materials has authorized 10,000,000 shares of preferred stock
(par value: $0.01) of which none is issued.
10. INCENTIVE STOCK PLANS
STOCK OPTIONS
The Company has a Long Term Equity Incentive Plan (the "Plan"), as
approved by the shareholders in May, 1997, that allows for grants to directors
and key employees 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 of 1.5
million awards, each representing a right to buy a share of Core Materials'
common stock. The Plan expires on the earlier of December 31, 2006, or the date
the maximum number of available awards under the plan have been granted.
During 1998 and 1997, the Company granted non-qualified stock options
and incentive stock options to directors and certain employees. The options have
vesting schedules of five or ten years from the date of grant, are not
exercisable after ten years from the date of grant, and were granted at prices
which equaled or exceeded the fair market value of Core Materials' common stock
at the date of grant.
In October, 1998, the Board of Directors of Core Materials voted to
grant a total of 125,000 incentive stock options to certain employees of Core
Materials at $3.50 per share which exceeded the fair market value of the stock
on the date of grant. These options replaced incentive stock options at prices
ranging from $3.69 to $5.13 per share that were previously granted to these
employees and were forfeited as a condition of this grant.
At the time of the merger of RYMAC into Core Materials, each
outstanding option to purchase shares of RYMAC's common stock granted under any
of RYMAC's previous stock option plans was deemed amended to constitute an
option to acquire, at the same price per share, the same number of shares of
Core Materials' common stock.
34
35
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1996, there were 260,000 outstanding options under the
old RYMAC plan, each to purchase one share of Core Materials' common stock at
prices ranging from $0.75 to $1.50, all of which were exercisable. All of the
options are held by former executive officers and a former director of RYMAC. As
of December 31, 1998, all 260,000 options had been exercised.
The Company accounts for its stock option plans in accordance with APB
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for all stock option plans been determined consistent with the
SFAS No. 123, "Accounting for Stock Based Compensation," the Company's pro forma
1998 net income and earnings per common share would have been $3,463,018 and
$.36 per basic and $.35 diluted share, respectively. For 1997, pro forma net
income and earnings per common share would have been $2,657,418 and $.28 per
basic share or $.27 per diluted share. The pro forma amounts are not
representative of the effects on reported net earnings or earnings per common
share for future years.
The weighted average fair value of options granted during 1998 and
1997 were $3.31 and $1.93. The fair value of the options granted were estimated
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions: risk free interest rate of 6%, no expected dividend
yield, expected lives of 8 and 10 years and expected volatility of 80% for 1998
and 52% for 1997.
The following summarizes all stock option activity for the years ended
December 31:
1998 1997
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- --------
Options outstanding at beginning of year 940,000 $2.48 260,000 $0.81
Granted 432,500 4.24 796,000 2.82
Exercised (167,600) 0.89 (100,000) 0.83
Forfeited (248,100) 3.19 (16,000) 2.77
-------- ----- -------- -----
Options outstanding at end of year 956,800 $3.19 940,000 $2.48
======== ===== ======== =====
Exercisable at December 31 154,350 $2.80 221,850 $1.34
======== ===== ======== =====
Options available for grant 535,600 720,000
======== ========
The following table summarizes information about stock options outstanding and
exercisable as of December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER OF AVERAGE CONTRACTUAL LIFE NUMBER OF AVERAGE
EXERCISE PRICES OPTIONS EXERCISE PRICE (YEARS) OPTIONS EXERCISE PRICE
--------- -------------- ---------------- --------- --------------
$2.75 589,300 $2.75 8.3 144,900 $2.75
$3.47 to $3.81 297,500 3.61 9.4 9,450 3.61
$5.13 70,000 5.13 9.4
------- ----- ------- -----
956,800 $3.19 154,350 $2.80
======= ===== ======= =====
35
36
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
11. INCOME TAXES
Components of the provision for income taxes are as follows:
1998 1997
---------- ----------
Current:
Federal $ 76,000 $ 66,000
State and local 909,000 412,000
---------- ----------
985,000 478,000
Deferred :
Federal 1,817,000 1,346,000
State and local (221,000) 109,000
---------- ----------
1,596,000 1,455,000
---------- ----------
Provision for income taxes $2,581,000 $1,933,000
========== ==========
No income tax expense was recorded in the financial statements for the
year ended December 31, 1996, as Navistar's systems and procedures did not
provide sufficient information to develop a reasonable allocation of income tax
expense to Columbus Plastics. The Federal deferred tax expense does not
represent cash payment of income taxes and was primarily generated by the
utilization of net operating loss (NOL) carry forwards and the increase of
temporary differences, and will not require future cash payments.
A reconciliation of the income tax provision based on the federal
statutory income tax rate of 34% to the Company's income tax provision for the
year ended December 31 is as follows:
1998 1997
----------- -----------
Provision at federal statutory rate $ 2,119,000 $ 1,583,000
State and local tax expense, net of federal benefit 454,000 339,000
Non-deductible expenses 8,000 11,000
----------- -----------
Provision for income taxes $ 2,581,000 $ 1,933,000
=========== ===========
Deferred tax assets (liabilities) consist of the following at December
31:
1998 1997
----------- -----------
Current Asset:
Accrued liabilities $ 895,000 $ 406,000
Other, net 33,000 49,000
----------- -----------
Total current asset 928,000 455,000
Non-current asset (liability):
Property, plant and equipment 4,397,000 4,465,000
Net operating loss carryforwards 7,210,000 9,798,000
Capital loss carryforwards 3,017,000 3,017,000
Postretirement benefits 1,297,000 1,066,000
Other, net (33,000) (389,000)
----------- -----------
Total non-current asset 15,888,000 17,957,000
----------- -----------
Total deferred tax asset 16,816,000 18,412,000
Less valuation allowance (3,787,000) (6,787,000)
----------- -----------
Total deferred tax asset - net $13,029,000 $11,625,000
=========== ===========
36
37
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
A valuation allowance has been provided for those net operating loss
(NOL) carryforwards and temporary differences which are estimated to expire
before they are utilized. A full allowance has been provided against the
approximately $8.9 million of capital loss carryforwards, because the capital
loss carryforwards are estimated to expire before they are utilized ($4.1
million expire in 1999 and $4.8 million expire in 2001). At December 31, 1998,
Core Materials had approximately $21,206,000 million of NOL carryforwards
available to offset future taxable income. Based upon an extensive review of
future taxable income which was completed during the fourth quarter of 1998, the
deferred tax valuation allowance was reduced by $3.0 million. This reduction was
recorded as an increase in Paid in Capital, in the equity section. Recording the
reduction in the valuation allowance as an increase in Paid in Capital was due
to the fact that the original valuation allowance was recorded as a reduction to
Paid in Capital at December 31, 1996, date of inception, due to reverse
acquisition accounting treatment.
Core Materials' NOL carryforwards expire as follows:
2007 $ 5,774,000
2008 10,823,000
2009 3,614,000
2010 638,000
2011 357,000
-----------
Total $21,206,000
===========
12. POSTRETIREMENT BENEFITS
Core Materials provides postretirement benefits to substantially all
of its employees. Costs associated with postretirement benefits include pension
expense, postretirement health care and life insurance expense and expense
related to contributions to two 401(k) defined contribution plans. In addition,
Core Materials also participates in a multi-employer defined benefit plan for
its union represented employees. Prior to the Acquisition, Core Materials'
employees were participants in various Navistar sponsored pension and
postretirement plans. Navistar allocated postretirement benefit costs to
Columbus Plastics based upon the number of Columbus Plastics' participants and
their respective demographic data.
The Navistar pension plan for non-represented employees was
non-contributory and both benefits and years of service were frozen as of the
date of the Acquisition. In connection with the Acquisition, Navistar retained
responsibility for the vested benefits as of December 31, 1996 and Core
Materials agreed to reimburse Navistar for early retirement subsidies for
certain employees. The accumulated benefit obligation, which equals the
projected benefit obligation and net liability is $159,000 at December 31, 1998
and $147,000 at December 31, 1997, respectively.
All of Core Materials' union employees are covered under a
multi-employer defined benefit pension plan administered under a collective
bargaining agreement. This plan is not administered by Core Materials and
contributions are determined in accordance with provisions in the negotiated
labor contract. Pursuant to the terms of the Asset Purchase Agreement, Navistar
withdrew from the multi-employer plan, and, simultaneously, Core Materials took
over Navistar's former responsibilities in regards to the multi-employer plan.
Management has been advised by the multi-employer plan's actuary that Navistar's
withdrawal from the plan will not result in a withdrawal liability.
The postretirement plan provides healthcare and life insurance for
certain employees upon their retirement along with their spouses and certain
dependents and calls for cost sharing between Core Materials, Navistar and the
participants in the form of premiums, co-payments and deductibles. Core
Materials and Navistar share the cost of benefits for certain employees,
pursuant to the Asset Purchase Agreement, using a formula that allocates the
cost based upon the respective portion of time that the employee was an active
service participant after the Acquisition to the period of active service prior
to the Acquisition. During 1997, Core Materials and Navistar management reviewed
all purchase price adjustments including the initial allocation of the Columbus
Plastics December 31, 1996 accumulated postretirement benefit obligation.
37
38
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
As a result of this review, Core Materials and Navistar agreed that Core
Materials would assume an additional $1,629,000 of accumulated benefit
obligations as of December 31, 1996 and Navistar would amend the December 31,
1996 closing balance sheet of Columbus Plastics to reflect this increase in
benefit obligation resulting in an equal reduction in the Core Materials Secured
Note to Navistar. The reclassification of $1,629,000 between the two long-term
liabilities has been recorded to the December 31, 1996 balance sheet to reflect
the final purchase price allocation and to present the two years on a
comparative basis. In addition, the deferred tax asset related to the additional
accumulated benefit obligation has also been recorded in the December 31, 1996
balance sheet as an increase in retained earnings consistent with reverse
acquisition accounting.
The funded status of the Company's postretirement benefits plans as of December
31, 1998 and 1997 and a reconciliation with the amounts recognized in the
balance sheets are provided below:
POST RETIREMENT BENEFITS
-----------------------------
1998 1997
----------- -----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 2,438,000 $ 1,629,000
Service cost 388,000 307,000
Interest cost 171,000 130,000
Unrecognized loss 277,000 372,000
----------- -----------
Benefit obligation at end of year $ 3,274,000 $ 2,438,000
----------- -----------
Funded status $(3,274,000) $(2,438,000)
Unrecognized net loss 639,000 372,000
----------- -----------
Net liability $(2,635,000) $(2,066,000)
=========== ===========
Plan assets -- --
=========== ===========
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate 6.50% 8.00%
38
39
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The components of expense for all of Core Materials' postretirement
benefits plans are as follows:
1998 1997 1996
---------- -------- ----------
Pension Expense:
Interest cost $ 12,000 $ 10,000
Corporate allocation $ 229,000
---------- -------- ----------
12,000 10,000 229,000
---------- -------- ----------
Defined contribution plan
contributions 196,000 161,000 --
---------- -------- ----------
Multi-employer plan
contributions 328,000 267,000 276,000
---------- -------- ----------
Health and Life Insurance:
Service cost 388,000 307,000
Interest cost 171,000 130,000
Amortization of net loss 10,000
Corporate allocation 538,000
---------- -------- ----------
Net periodic benefit cost 569,000 437,000 538,000
---------- -------- ----------
Total postretirement benefits expense $1,105,000 $875,000 $1,043,000
========== ======== ==========
The weighted average rate of increase in the per capita cost of
covered health care benefits is projected to be 7.0%. The rate is projected to
decrease gradually to 5 % by the year 2004 and remain at that level thereafter.
The comparable assumptions for the prior year were 8% and 5%.
The effect of changing the health care cost trend rate by
one-percentage point for each future year is as follows:
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost components $127,000 $ (98,000)
Effect on postretirement benefit obligation 300,000 (254,000)
39
40
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
13. 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 certain corporate costs 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.
Corporate costs (credits) were allocated to Columbus Plastics in 1996
which were not budgeted and recorded by Columbus Plastics. The amounts represent
adjustments to the budgeted expenses or allocations of Navistar Corporate and
Truck Group Marketing and Administrative expenses. For the year ended December
31, 1996, cost of goods sold was decreased by $465,000 and selling, general and
administrative expense was increased by $434,000.
14. 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 rolling
five year period 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. However, no minimum quantities of annual production of products or
minimum purchase quantities are set forth or implied in the Supply Agreement,
and no penalties will be imposed on Navistar for volumes of products actually
ordered by Navistar below those quantities forecasted.
Under the terms of the Services Agreement, Navistar provided certain
accounting, computer services, and office support services to Core Materials and
procured insurance on Core Materials' behalf. Core Materials expensed $13,000
for these services in 1998. These 1998 service charges related to the first
three months of 1998 and ceased after that time. No balance existed in accounts
payable for these services as of December 31, 1998. Core Materials expensed
$183,000 for these services in 1997 of which $46,000 had not been paid as of
December 31, 1997 and was included in accounts payable. Sales to Navistar were
$61,471,000 in 1998 and $50,011,000, in 1997, of which $10,960,000 and
$10,529,000 had not been received as of December 31, 1998 and 1997 and was
included in accounts receivable. Receivables as of December 31, 1998 also
include an additional $2,024,000 for tooling costs owed by Navistar. Core
Materials expensed $1,340,000 in 1998 and $2,322,000 in 1997, for interest
expense on the Secured Note of which $647,000 and $1,135,000 had not been paid
as of December 31, 1998 and 1997 and was included in accrued liabilities.
15. LABOR CONCENTRATION
At December 31, 1998, Core Materials employed a total of 576
employees, 381 of whom, at its Columbus, Ohio facility, are covered by a
collective bargaining agreement with the International Association of Machinists
and Aerospace Workers ("IAM") which extends to August 1, 2001.
40
41
CORE MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for the years ended December 31, 1998 and 1997.
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL YEAR
----------- ----------- ----------- ----------- ----------
DECEMBER 31, 1998:
Net sales $20,588,806 $19,149,756 $17,134,725 $20,845,857 $77,719,144
Gross margin 4,208,494 4,131,486 2,904,097 4,243,880 15,487,957
Income before interest and taxes 2,210,536 2,109,209 1,138,384 2,201,295 7,659,424
Net income 1,122,778 1,020,931 445,600 1,062,396 3,651,705
Net income per common share:
Basic $ .12 $ .11 $ .05 $ .11 $.38 (1)
Diluted $ .11 $ .10 $ .05 $ .11 $ .37
DECEMBER 31, 1997:
Net sales $16,373,035 $16,659,250 $13,680,033 $18,227,640 $64,939,958
Gross margin 3,436,610 3,740,893 2,932,016 3,979,287 14,088,806
Income before interest and taxes 1,571,841 1,840,556 1,137,033 2,104.596 6,654,026
Net income 604,312 766,235 381,960 970,974 2,723,481
Net income per common share:
Basic $ .06 $ .08 $ .04 $ .10 $.29 (1)
Diluted $ .06 $ .08 $ .04 $ .10 $ .28
(1) Sum of the quarters do not add up to total year due to rounding.
******
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Part III, Item 10 is incorporated by
reference from Core Materials' definitive proxy statement for its annual meeting
of stockholders to be held on or about May 18,1999, which is expected to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A of
the Securities Exchange Act of 1934 within 120 days after the end of the fiscal
year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Part III, Item 11 is incorporated by
reference from Core Materials' definitive proxy statement for its annual meeting
of stockholders to be held on or about May 18, 1999, which is expected to be
filed with the
41
42
Securities and Exchange Commission pursuant to Regulation 14A of the Securities
Exchange Act of 1934 within 120 days after the end of the fiscal year covered by
this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Part III, Item 12 is incorporated by
reference from Core Materials' definitive proxy statement for its annual meeting
of stockholders to be held on or about May 18, 1999, which is expected to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A of
the Securities Exchange Act of 1934 within 120 days after the end of the fiscal
year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Part III, Item 13 is incorporated by reference
from Core Materials' definitive proxy statement for its annual meeting of
stockholders to be held on or about May 19, 1999, which is expected to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A of the
Securities Exchange Act of 1934 within 120 days after the end of the fiscal year
covered by this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
---------------------------------------
(1) FINANCIAL STATEMENTS
--------------------
The following financial statements are included in Part II,
Item 8 of this Form 10-K:
Independent Auditors' Report
Statements of Income for the Years Ended December 31, 1998
and 1997 and Statement of Revenues, Direct Expenses and
Identified Corporate Expenses Before Interest and Taxes for
the Year Ended December 31, 1996
Balance Sheets as of December 31, 1998 and 1997
Statements of Stockholders' Equity for the Years Ended
December 31, 1998 and 1997
Statements of Cash Flows for the Years Ended December 31,
1998 and 1997
Notes to Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
-----------------------------
The following financial statement schedule is filed with
this Annual Report on Form 10-K: Schedule II - Valuation and
Qualifying Accounts and Reserves
All other schedules are omitted because of the absence of
the conditions under which they are required.
(3) EXHIBITS
--------
See Index to Exhibits filed with this Annual Report on Form
10K.
42
43
(b) REPORTS ON FORM 8-K
-------------------
The Company filed no reports on Form 8-K for the fourth quarter of the
Company's fiscal year ended December 31, 1998.
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44
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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
By /s/ Kenneth M. Schmell
--------------------------------------
Kenneth M. Schmell
Executive Vice President and Chief
Operating Officer
Date: March 26, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
/s/ Kenneth M. Schmell Executive Vice President and March 26, 1999
- ------------------------------- Chief Operating Officer
Kenneth M. Schmell
/s/ Kevin L. Barnett Vice President, Secretary, March 26, 1999
- ------------------------------- Treasurer and Chief Financial
Kevin L. Barnett Officer
/s/ Gerald L. Voirol Controller and Assistant March 26, 1999
- ------------------------------- Secretary
Gerald L. Voirol
* Director March 26, 1999
- -------------------------------
James F. Crowley
* Director March 26, 1999
- -------------------------------
Ralph O. Hellmold
* Director March 26, 1999
- -------------------------------
Thomas M. Hough
* Director March 26, 1999
- -------------------------------
Malcolm M. Prine
* Director March 26, 1999
- -------------------------------
James L. Simonton
*By /s/ Kevin L. Barnett Attorney-In-Fact March 26, 1999
-------------------------
Kevin L. Barnett
44
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CORE MATERIALS CORPORATION
SCHEDULE II
Valuation and qualifying accounts and reserves for the years ended December 31,
1998 and 1997.
Reserves deducted from asset to which it applies - allowance for doubtful
accounts.
Additions
------------------------
Balance at Charged to Charged to
Beginning Costs & Other Deductions Balance At
of Year Expenses Accounts (A) End of Year
---------- ---------- ---------- ---------- -----------
Year Ended December 31, 1998 $133,000 $28,000 $105,000
Year Ended December 31, 1997 -- $140,000 -- $ 7,000 $133,000
(A) Amount represents uncollectable accounts written off.
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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 and RYMAC(1) (Registration No. 333-15809)
2(a)(2) Second Amendment to Asset Incorporated by reference to
Purchase Agreement dated Exhibit 2.1.1 to Annual
December 16, 1996(1) Report on Form 10-K for the
year-ended December 31, 1996
2(b)(1) Agreement and Plan of Merger Incorporated by reference to
dated as of November 1, 1996, Exhibit 2-B to Registration
between Core Materials and Statement on Form S-4
RYMAC (Registration No. 333-15809)
2(b)(2) First Amendment to Agreement Incorporated by reference to
and Plan of Merger dated as of Exhibit 2(b)(2) to Annual
December 27, 1996 between Report on Form 10-K for the
Core Materials and RYMAC year ended December 31, 1997
3(a)(1) Certificate of Incorporation of Incorporated by reference to
Core Materials Corporation Exhibit 4(a) to Registration
as filed with the Secretary of Statement on Form S-8,
State of Delaware on October 8, (Registration No. 333-29203)
1996
3(a)(2) Certificate of Amendment of Incorporated by reference to
Certificate of Incorporation Exhibit 4(b) to Registration
of Core Materials Corporation Statement on Form S-8
as filed with the Secretary of (Registration No. 333-29203)
State of Delaware on November 6,
1996
3(a)(3) Certificate of Incorporation of Incorporated by reference to
Core Materials Corporation, Exhibit 4(c) to Registration
reflecting amendments through Statement on Form S-8
November 6, 1996 [for purposes of (Registration No. 333-29203)
compliance with Securities and
Exchange Commission filing
requirements only]
47
3(b) By-Laws of Core Materials Incorporated by reference to
Corporation Exhibit 3-C to Registration
Statement on Form S-4
(Registration No. 333-15809)
4(a)(1) Certificate of Incorporation of Incorporated by reference to
Core Materials Corporation Exhibit 4(a) to Registration
as filed with the Secretary of Statement on Form S-8
State of Delaware on October 8, (Registration No. 333-29203)
1996
4(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 (Registration No. 333-29203)
State of Delaware on November 6,
1996
4(a)(3) Certificate of Incorporation of Incorporated by reference to
Core Materials Corporation, Exhibit 4(c) to Registration
reflecting amendments through Statement on Form S-8
November 6, 1996 [for purposes of (Registration No. 333-29203)
compliance with Securities and
Exchange Commission filing
requirements only]
4(b) By-Laws of Core Materials Incorporated by reference to
Corporation Exhibit 3-C to Registration
Statement on Form S-4
(Registration No. 333-15809)
10(a)(1) Core Materials Corporation Incorporated by reference to
Secured Promissory Note, dated Exhibit 10.1 to Annual
December 31, 1996, to Navistar Report on Form 10-K for the
International Transportation Corp. year-ended December 31, 1996
10(a)(2) Amendment No. 1 to Secured Incorporated by reference to
Promissory Note, dated Exhibit 10.1.1 to Annual
December 31, 1996, to Navistar Report on Form 10-K for the
International Transportation Corp. year-ended December 31, 1996
47
48
10(a)(3) Amendment No. 2 to Secured Filed Herein
Promissory Note, dated April 6,
1998 to Navistar International
Transportation Corp.
10(b) Comprehensive Supply Agreement, Incorporated by reference to
dated December 31, 1996, by and Exhibit 10.2 to Annual
between Navistar International Report on Form 10-K for the
Transportation Corp. and Core year-ended December 31, 1996
Materials Corporation
10(c) Transitional Services Agreement, Incorporated by reference to
dated December 31, 1996, by and Exhibit 10.3 to Annual
between Navistar International Report on Form 10-K for the
Transportation Corp. and Core year-ended December 31, 1996
Materials Corporation
10(d) Registration Rights Agreement, Incorporated by reference to
dated December 31, 1996, by and Exhibit 10.4 to Annual
between Navistar International Report on Form 10-K for the
Transportation Corp. and various year-ended December 31, 1996
other persons who become parties
pursuant to the agreement
10(e) Loan Agreement, dated December 3, Incorporated by reference to
1997, by and between Core Exhibit 10(e) to Annual
Materials Corporation and Key Report on Form 10-K for the
Bank National Association year ended December 31, 1997
10(f) Master Equipment Lease Incorporated by reference to
Agreement(2) by and between Exhibit 10(f) to Annual
KeyCorp Leasing, a division of Report on Form 10-K for the
Key Corporate Capital, Inc. and year ended December 31, 1997
Core Materials Corporation
10(g) Loan Agreement, dated April 1, Incorporated by reference to
1998, by and between South Exhibit 10(a)(1) to
Carolina Jobs - Economic Quarterly Report on Form
Development Authority and Core 10-Q for the quarter ended
Materials Corporation June 30, 1998
10(h) Reimbursement Agreement, dated Incorporated by reference to
April 1, 1998, by and between Exhibit 10(a)(2) to
Core Materials Corporation and Quarterly Report on Form
Key Bank National Association 10-Q for the quarter ended
June 30, 1998
48
49
10(i) Core Materials Corporation Incorporated by reference to
Employee Stock Purchase Plan Exhibit 4(c) to Registration
Statement on Form S-8
(Registration No. 333-60909)
10(j) Letter Agreement Regarding Terms Filed Herein
and Conditions of Interest Rate
Swap Agreement between KeyBank
National Association and Core
Materials Corporation
10(k) Long Term Equity Incentive Plan(3) Incorporated by reference to
Exhibit 4(e) to Registration
Statement on Form S-8
(Registration No. 333-29203)
10(l) 1995 Stock Option Plan(3) Incorporated by reference to
Exhibit 10.6 to Annual
Report on Form 10-K for the
year-ended December 31, 1996
10(m) 1998 Informal Cash Profit Sharing Filed Herein
Plan(3)
10(n) Letter Agreement Regarding Incorporated by reference to
Severance Pay to Richard R. Exhibit 10.7 to Annual
Conte(3) Report on Form 10-K for the
year-ended December 31, 1996
10(o) Letter Agreement with Hellmold Incorporated by reference to
Associates, Inc. dated November 1, Exhibit 10.8 to Annual
1995, as amended April 10, 1996 Report on Form 10-K for the
and July 18, 1996(3) year-ended December 31, 1996
10(p) Oral Compensation Agreement with Incorporated by reference to
Malcolm M. Prine(3) Exhibit 10.9 to Annual
Report on Form 10-K for the
year-ended December 31, 1996
49
50
11 Computation of Net Income per Exhibit 11 is omitted
Share because the required
information is included in
the Notes to Financial
Statements in Part II, Item
8 of this Annual Report on
Form 10-K
23 Consent of Independent Auditors Filed Herein
24 Powers of Attorney Filed Herein
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.
(2) The Master Equipment Lease, incorporated by reference in the Exhibits to
this Annual Report on Form 10-K, omits certain schedules (including, addendum to
the schedules) which separately identify equipment subject to the Master
Equipment Lease and certain additional terms applicable to the lease of such
equipment. New schedules may be added under the terms of the Master Equipment
Lease from time to time and existing schedules may change. Core Materials
Corporation will provide any omitted schedule to the Securities and Exchange
Commission upon request.
(3) Indicates management contracts or compensatory plans that are required to be
filed as an exhibit to this Annual Report on Form 10-K.
50