Form: 10-K405
1
Filename: l93025ae10-k405.txt
CORE MATERIALS CORPORATION FORM 10-K405
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, 2001
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 001-12505
CORE MATERIALS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-1481870
(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 | |
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. |X|
As of March 20, 2002, 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 $12,223,350.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's 2002 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.
PART I
ITEM 1. DEVELOPMENT OF BUSINESS OF CORE MATERIALS.
In October 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.
In September 1996, RYMAC entered into an Asset Purchase Agreement (the
"Asset Purchase Agreement") with Navistar International Transportation Corp.
(now known as International Truck and Engine Corporation, "International"), a
manufacturer of school buses, medium and heavy-duty trucks and mid-range diesel
engines. The Asset Purchase Agreement provided for the acquisition of
International's Columbus Plastics operating unit. Columbus Plastics produced
fiberglass plastic parts for International's medium and heavy-duty trucks, and
for other third party customers, primarily Yamaha Motor Manufacturing
Corporation ("Yamaha").
The Asset Purchase Agreement conditioned International'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. 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,
International received a secured note (the "Secured Note") in an original
principal amount of $25,504,000 subject to adjustment. International also
received 4,264,000 shares of newly issued common stock of Core Materials.1
Following the acquisition, Core Materials assumed operation of the business
previously conducted by Columbus Plastics.
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 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.
In October 2001, Core Materials incorporated Core Composites Corporation
as a wholly owned subsidiary under the laws of the State of Delaware. This
entity was established for the purpose of holding and establishing operations
for Airshield Corporation's assets, which Core Materials acquired on October 16,
2001. Airshield Corporation was a privately held manufacturer and marketer of
fiberglass reinforced plastic parts primarily for the truck and automotive
aftermarket industries. Core Materials purchased substantially all the assets of
Airshield Corporation through the United States Bankruptcy Court as Airshield
Corporation had been operating under Chapter 11 bankruptcy protection since
March 2001.
In conjunction with establishment of operations for the assets acquired
from Airshield Corporation, Core Materials also incorporated two corporations in
Mexico. In October 2001, Core Materials (5% owner) and Core Composites
Corporation (95% owner) incorporated Composites Services de Mexico, S. de R.L.
de C.V. ("Composites Services") and Corecomposites de Mexico, S. de R.L. de C.V.
("Corecomposites") in Matamoros, Mexico. Composites Services was established to
be the employer of all
--------
(1) The principal amount of the Secured Note and the number of shares of common
stock received by International 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, International was to receive consideration in the
form of an increase in the principal amount of the Secured Note if Core
Materials achieved earnings results above specified levels during the period
1997 through 1999. This consideration was to be accounted for by an increase in
the amount of the Secured Note, and a reduction in 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. Core Materials' earnings for the year ended 1999 did
not result in any further increase in the Secured Note.
2
Mexican national employees for Core Materials' operations in Mexico.
Corecomposites was organized to operate under a maquiladora program whereby
substantially all product produced is exported back to Core Composites
Corporation who sells such product to United States based external customers.
DESCRIPTION OF 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 and commercial and industrial product industries, the
general economy, competitive factors, the dependence on four major customers,
the recent efforts of Core Materials to expand its customer base, new
technologies, regulatory requirements, labor relations, the loss or inability to
attract key personnel, the availability of capital, the start up of new
operations in Mexico and management's decisions to pursue new products or
businesses which involve additional costs, risks or capital expenditures.
Core Materials Corporation and its subsidiaries operate in the plastics
market in a family of products known as "reinforced plastics". Reinforced
plastics are combinations of resins and reinforcing fibers (typically glass or
carbon) that are molded to shape. The Columbus, Ohio and Gaffney, South Carolina
facilities produce reinforced plastics by compression molding sheet molding
compound (SMC) in a closed mold process. As a result of the acquisition
discussed above, in 2001 Core Materials established operations in a Matamoros,
Mexico facility, which produces reinforced plastic products by spray-up and
hand-lay-up open mold processes and a vacuum assisted resin infused (VRIM)
closed mold process.
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:
- heat resistance
- corrosion resistance
- lighter weight
- lower cost
- greater flexibility in product design
- part consolidation for multiple piece assemblies
- lower initial tooling costs for lower volume applications
- high strength-to-weight ratio
- 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' four major customers are International, Yamaha,
Lear Corporation ("Lear") and Freightliner, LLC ("Freightliner"), which are
supplied proprietary reinforced plastic products for medium and heavy-duty
trucks, personal watercraft and automobiles. Core Materials also supplies
reinforced plastic products to other truck manufacturers, to automotive
manufacturers and to manufacturers of commercial products. In general, product
growth and diversification are achieved in several different ways: (1)
resourcing of existing reinforced plastic product from another supplier by an
original equipment manufacturer ("OEM"); (2) obtaining new reinforced plastic
products through a selection process in which an OEM solicits bids; and (3)
successful marketing of reinforced plastic products for previously
non-reinforced plastic applications. Core Materials' efforts are currently
directed towards all three areas.
3
MAJOR COMPETITORS
Core Materials believes that it is one of the five largest compounders and
molders of reinforced plastics using the SMC, spray up, hand lay up and VRIM
processes in the United States. Core Materials faces competition from a number
of other molders including, most significantly, Meridian Automotive Systems,
Budd Plastics Division, Venture Industries, Applied Composites, Molded Fiber
Glass Companies, Goldshield, Camoplast and Renee Composites. Core Materials
believes that the Company is well positioned 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, design
engineering and manufacturing and marketing capabilities.
MAJOR CUSTOMERS
Core Materials currently has four major customers, International, Yamaha,
Lear and Freightliner. The loss of a significant portion of sales to
International, Yamaha, Lear or Freightliner would have a material adverse effect
on the business of Core Materials.
RELATIONSHIP WITH INTERNATIONAL
As a result of its acquisition of Columbus Plastics from International,
Core Materials assumed the long-standing relationship between Columbus Plastics
and International's truck manufacturing operations. As a condition to the
acquisition, International and Core Materials entered into a five year
Comprehensive Supply Agreement, pursuant to which Core Materials became the
primary supplier of International's original equipment and service requirements
for fiberglass reinforced parts using the SMC process, effective through
December 31, 2001. This Comprehensive Supply Agreement has not been renewed, and
business with International continues on a purchase order basis, like it
operates with all of its other customers. The purchase orders typically provide
volume commitments for four weeks at prices previously negotiated. Customers can
update their orders on a daily basis for changes in demand that allow them to
run their inventories on a "just-in-time" basis.
International 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. International delivered 82,400 class 5
through 8 trucks, including school buses, in the United States, Mexico and
Canada during its fiscal 2001, representing a 30% decrease from the 118,200
units delivered in 2000 and a 31% decrease from the 119,300 units delivered in
1999. International's combined share of the class 5 through 8 truck market was
26.3% in 2001, 26.9% in 2000, and 25.6% in 1999.
Core Materials makes products for International's Chatham (Canada)
assembly plant, its Springfield, Ohio assembly and body plants, its Garland,
Texas assembly facility, its bus facilities in Conway, Arkansas and Tulsa,
Oklahoma and its Escobedo, Mexico assembly facility. Core Materials works
closely on new product development with International's engineering and research
personnel at International's Fort Wayne, Indiana Technical Center. Some of the
products sold to International include hoods, air deflectors, air fairings,
fenders, splash panels, engine covers and other components.
The North American truck market in which International 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 International amounted to
approximately 53%, 61% and 68% of total sales for 2001, 2000 and 1999,
respectively.
RELATIONSHIP WITH YAMAHA
Core Materials also assumed from International the long-standing supply
relationship between Columbus Plastics and Yamaha. Core Materials has supplied a
significant amount of the SMC products for Yamaha's personal watercraft since
1990.
Products produced for Yamaha include decks, hulls, hull liners, engine
hatches, bulkheads, reinforcements and SMC compound. Core Materials 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.
4
Sales to Yamaha amounted to approximately 19%, 22% and 18% of total sales
for 2001, 2000 and 1999, respectively.
RELATIONSHIP WITH LEAR
Core Materials began a supply relationship with Lear in mid-2000, with
sales to Lear beginning in January 2001. Core Materials supplies seat backs and
seat bottoms to Lear, who produces full seat assemblies for an automotive
original equipment manufacturer.
Sales to Lear amounted to approximately 15% of total sales for 2001.
RELATIONSHIP WITH FREIGHTLINER
As a result of the acquisition of the assets of Airshield Corporation as
discussed above, Core Materials began a supply relationship with Freightliner.
Core Materials produces hoods, air deflectors, air fairings, splash panels and
other components for Freightliner who uses such products on its heavy and medium
duty trucks.
Sales to Freightliner amounted to approximately 2% of total sales in 2001.
However, in 2002 sales are expected to be approximately 11% of total sales due
to the inclusion of these sales for a full year.
OTHER CUSTOMERS
Core Materials also produces products for other truck manufacturers, the
automotive after-market industries and various other customers. In 2001, sales
to these customers individually were all less than 10% of total sales.
EXPORT SALES
Core Materials provides products to International's manufacturing and
service locations in Canada and Mexico. Export sales, including sales to Canada,
were approximately $8,472,000, $14,428,000 and $19,934,000 for the years ended
2001, 2000 and 1999, respectively. These export sales dollars represent
approximately 12%, 17% and 22% of total sales for 2001, 2000 and 1999,
respectively.
FOREIGN OPERATIONS
As a result of the acquisition and the establishment of operations in
Mexico, Core Materials began importing products into the United States as
substantially all product produced in Core Materials' Mexican facility are sold
to customers in the United States. In 2001, the sales of products imported were
approximately 5% of total sales. This percentage is expected to grow to
approximately 20% of total sales in 2002 due to the full year effect of the
operations.
Core Materials owns long-lived assets totaling $164,000 that are located
at the Mexican operations.
PRODUCTS
SMC COMPOUND
SMC compound is a combination of resins, fiberglass, catalysts and fillers
compounded and cured in sheet form. The sheet is then used to manufacture
compression-molded products, as discussed below and on a limited basis sold to
other molders.
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:
- Control information during various production processes; and
5
- Data for statistical batch controls.
Core Materials has the capacity to manufacture approximately 53 million
pounds of SMC sheet material annually. The capacity increased in 1999 as a
result of mix system upgrades and minor process improvements. The following
table shows production of SMC for 2001, 2000 and 1999.
<TABLE>
SMC Pounds
Produced
Year (Millions)
---- ----------
2001 ......................................... 25
2000 ......................................... 36
1999 ......................................... 42
</TABLE>
CLOSED MOLDED PRODUCTS
Core Materials produces reinforced plastic products using both compression
molding and vaccum resin infusion molding process methods of closed molding.
COMPRESSION MOLDING:
Compression molding is a process whereby SMC is molded to form by matched
die steel molds through which a combination of heat and pressure are applied via
a molding press. This process produces high quality, dimensionally consistent
products. This process is typically used for higher volume products, which is
necessary to justify the customers' investment in molds.
Core Materials currently owns or leases 17 compression-molding presses in
its Columbus, Ohio plant ranging in size from 500 to 4,500 tons. Core Materials
also owns or leases 11 presses in its Gaffney, South Carolina plant ranging in
size from 1,000 to 3,000 tons.
Large platen, high tonnage presses (greater than 2,000 tons) provide the
ability to compression mold very large SMC parts. Core Materials believes that
it possesses a significant portion of the large platen, high tonnage molding
capacity in the industry.
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.
VACUUM RESIN INFUSION MOLDING (VRIM):
This process employs two molds, typically a male and female, similar to
matched die molding. The composite is produced by placing glass mat, chopped
strand or continuous strand fiberglass in the mold cavity in the desired
pattern. The core mold is then fitted to the cavity, and upon a satisfactory
seal, a vacuum is applied. When the proper vacuum is achieved, the resin is
injected into the mold to fill the part. Finally, the part is allowed to cure,
and then it is removed from the mold and trimmed to shape.
Core Materials currently utilizes approximately 100,000 square feet for
this process at the Matamoros, Mexico facility. Fiberglass reinforced products
produced from the VRIM process exhibit a high quality surface on both sides of
the part and excellent part thickness.
OPEN MOLDED PRODUCTS
Core Materials produces reinforced plastic products using both the spray
up and hand lay up methods of open molding.
6
HAND LAYUP:
This process utilizes a shell mold, typically the cavity, where glass
cloth, either chopped strand or continuous strand glass mat, is introduced into
the cavity. Resin is then applied to the cloth and rolled out to achieve a
uniform wet-out from the glass and to remove any trapped air. The part is then
allowed to cure and removed from the mold. After removal, the part typically
undergoes trimming to achieve the net shape desired. Parts that would be
cosmetic in their end use would have a gel coat applied to the mold surface
prior to the layup to improve the surface quality of the finished part. Parts
produced from this process have a smooth outer surface and an unfinished, or
non-smooth, interior surface.
Core Materials utilizes approximately 25,000 square feet for this process
at the Matamoros, Mexico facility. These fiberglass-reinforced products are
typically non-cosmetic components or structural reinforcements that are sold
externally or used internally as components of larger assemblies.
SPRAY LAYUP:
This process utilizes the same type of shell mold, but instead of using
glass cloth to produce the composite part, a chopper/spray system is employed.
Glass yarns and resin feed the chopper/spray gun. The resin coated, chopped
glass, which is approximately one inch in length, is sprayed into the mold to
the desired thickness. The resin coated glass in the mold is then rolled out to
ensure complete wet-out and to remove any trapped air. The part is then allowed
to cure, is removed from the mold and is then trimmed to the desired shape.
Parts that would be used for cosmetic purposes in their end use would typically
have a gel coat applied to the mold surface prior to the resin coated glass
being sprayed into the mold to impove the surface quality of the finished part.
Parts produced from this process have a smooth outer surface and an unfinished,
or non-smooth, interior surface.
Core Materials currently operates ten separate spray-up cells in the
Matamoros, Mexico facility that are capable of producing fiberglass-reinforced
products with and without gelcoat surfaces. Part sizes weigh from a few pounds
to well over a hundred pounds with surface quality tailored for the end use
application.
ASSEMBLY, MACHINING AND PAINT PRODUCTS
Many of the products molded by Core Materials are assembled, machined
and/or prime painted to result in a completed product used by Core Materials'
end-customers.
Core Materials has demonstrated manufacturing flexibility that accepts a
range of low volume, hand assembly and machining work to high volume, highly
automated assembly and machining systems. Robotics are used as deemed productive
for material handling, machining and adhesive applications. In addition to
conventional machining methods, water-jet cutting technology is also used where
appropriate. Core Materials has a prime paint operation in its Columbus, Ohio
facility, which uses an overhead conveyor to transfer product through two paint
booths and bake ovens, that is used for higher volume applications. The Company
also utilizes spot paint booths and batch ovens in its facilities when
warranted. Core Materials contracts with outside parties when customers require
that a finish or a top coat of paint be provided by Core Materials.
RAW MATERIALS
The principal raw materials used in the compounding of SMC and the closed
and open molding processes 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. Many of the raw materials used by Core Materials are petroleum and
energy based products, and therefore, the costs of certain raw materials can
fluctuate based on changes in costs of these underlying commodities. Core
Materials has historically used single source, long term (2-5 years) supply
contracts as a means to attain competitive pricing and an adequate supply of
these raw materials. Recently, Core Materials has experienced price increases
for certain of these materials, which has caused the Company to reevaluate this
strategy and consider alternative suppliers. Each raw material generally has
supplier alternatives, which are being evaluated as the current contracts
expire. Core Materials is regularly evaluating its supplier base for certain
supplies, repair items and componentry to improve its overall purchasing
position as supply of these items is generally available from multiple sources.
7
BACKLOG
Core Materials relies on production schedules provided by its customers to
plan and implement production. These schedules are typically provided on a
weekly basis and are considered firm typically for four weeks. Some 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 $5.6 million and $5.1 million at December 31, 2001 and 2000,
respectively, all of which Core Materials expects to ship within a year.
CAPACITY CONSTRAINTS
In previous years, Core Materials has been required to work an extended
shift and day schedule, up to a seven-day/three shift operation, to meet its
customers' production requirements. Core Materials has used various methods from
overtime to a weekend manpower crew to support the different shift schedules
required.
Based on recent production schedules, the Company has not had difficulty
in providing various shift schedules necessary to meet customer requirements.
See further discussion of machine and facility capacities at "Item 2
Properties" contained elsewhere in this report.
CAPITAL EXPENDITURES AND RESEARCH AND DEVELOPMENT
Capital expenditures totaled approximately $1.3 million, $2.0 million and
$7.4 million for 2001, 2000 and 1999, respectively. Capital expenditures consist
primarily of the purchase of compression molding presses and other equipment to
manufacture parts as well as laboratory equipment, storage equipment, computers
and office furniture and fixtures.
Product development is a continuous process at Core Materials. Research
and development activities focus on developing new SMC formulations, new
reinforced plastic products and improving existing products and manufacturing
processes.
Core Materials does not maintain a separate research and development
organization or facility but uses its production equipment, 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 of Core Materials
has estimated that internal costs related to research and development activities
approximate $225,000 in 2001, $250,000 in 2000 and $200,000 in 1999.
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 regular
auditing of all satellite hazardous waste accumulation points, all hazardous
waste activities and every authorized treatment, storage and disposal facility.
Core Materials' environmental staff also trains employees on waste management
and other environmental issues.
Core Materials believes that its facilities are in compliance with the
applicable federal, state and local environmental laws and regulations.
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 2002. In the
near term, the amount of capital expenditures on environmental compliance is
expected not to be significant.
EMPLOYEES
As of December 31, 2001, Core Materials employed a total of 1,078
employees, which consists of 465 employees in its United States operations and
613 employees in its Mexican operations. Of these 1,078 employees, 285 are
covered by a collective bargaining agreement with the International Association
of Machinists and Aerospace Workers ("IAM"), which extends to August 7, 2004,
and 526 are covered by a collective bargaining agreement with Sindicato de
Jorneleros y Obreros, which extends to January 16, 2003.
8
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 its customers. Core Materials' customers typically shut down their operations
on an annual basis for a period of several weeks during Core Materials' third
quarter. As a result, demand for Core Materials' products drops significantly
during the third quarter. Similarly, demand for medium and heavy-duty trucks,
personal watercraft, and automotive products fluctuate on a cyclical and
seasonal basis, causing a corresponding fluctuation for demand of Core
Materials' products.
ITEM 2. PROPERTIES.
Core Materials owns two production plants in the United States 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' United
States production facilities was 26%, 41%, and 62% in the fourth quarter of
2001, 2000 and 1999, respectively. 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:
<TABLE>
Approximate
Square Feet
-----------
Manufacturing/Warehouse................................ 307,447
Office ................................................ 16,149
-------
323,596
</TABLE>
Core Materials acquired the property at 800 Manor Park Drive as a result
of the Asset Purchase Agreement with International.
9
The Gaffney, South Carolina plant, which was opened in early 1998, 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:
<TABLE>
Approximate
Square Feet
-----------
Manufacturing/Warehouse............................... 105,700
Office ............................................... 5,200
-------
110,900
</TABLE>
Both the Columbus, Ohio and Gaffney, South Carolina properties are subject
to liens and security interests as a result of the properties being pledged by
Core Materials as collateral for its debt as described in Note 6 of the "Notes
to Consolidated Financial Statements" in Part II, Item 8 of this Form 10-K.
In conjunction with the establishment of operations in Mexico, as
discussed above, the Company leases a production plant in Matamoros, Mexico,
located at Ave. Uniones Y Michigan, Matamoros, Tamps. Mexico. The term of the
lease is ten years, with an option to renew for an additional ten years and with
a prenegotiated option to buy the facility at any time within the first seven
years of the lease. The lease is cancelable by Core Materials with six months
notice. The facility consists of approximately 313,000 square feet on
approximately 12 acres. Core Materials' Mexican operation leases approximately
267,700 of the facility, with an option to lease additional space, as follows:
<TABLE>
Approximate
Square Feet
-----------
Manufacturing/Warehouse.............................. 264,100
Office .............................................. 3,600
-------
267,700
</TABLE>
The capacity of production in this facility is not linked directly to
equipment capacities, as in Core Materials other facilities, due to the nature
of the products produced. Capacity of the facility is tied to available floor
space and the availability of personnel. The approximate capacity utilization
for this operation was 50% for the fourth quarter of 2001. Capacity utilization
for the Matamoros' operation is measured on the basis of a five day, two
9.6-hour shifts per day.
ITEM 3. LEGAL PROCEEDINGS.
In late 2001 and early 2002, several lawsuits were filed in Mexico against
Airshield de Mexico, which is a Mexican subsidiary of Airshield Corporation. As
noted above, Core Materials acquired substantially all the assets of Airshield
Corporation in October 2001; however, Core Materials did not purchase the assets
or the stock of Airshield de Mexico. The lawsuits were filed by certain of
Airshield de Mexico's vendors as a result of unpaid debts of Airshield de
Mexico. Through these lawsuits, the vendors have attempted to foreclose on
inventory and equipment owned by Core Materials and located at its Mexico
facility. The total value of these assets at December 31, 2001, was $802,000. To
date, Core Materials has been successful in preventing these foreclosure
attempts. Core Materials is taking various actions through the Mexican legal
system to defend its assets and to prevent future claims. Core Materials'
Mexican legal counsel has advised the Company that it has valid legal position
to support the ownership of these assets; however, as with any case involving
litigation, the outcome of these claims is uncertain.
In July of 2001, a former employee of Core Materials filed a suit in
United States District Court, Southern District of Ohio, Eastern Division,
claiming her employment was terminated as a result of race discrimination. The
plaintiff in this case seeks compensatory and punitive damages, to be
determined at the trial, but not less than $300,000 each plus reinstatement with
back pay and front pay. Core Materials believes that no such discrimination has
occurred and will defend this claim through the appropriate legal systems.
10
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, 2001.
11
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".
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.
<TABLE>
High Low
---- ---
CORE MATERIALS CORPORATION
First Quarter 2001 1.56 0.68
Second Quarter 2001 1.95 0.65
Third Quarter 2001 1.89 0.80
Fourth Quarter 2001 1.90 0.76
First Quarter 2000 2.50 1.44
Second Quarter 2000 2.25 1.13
Third Quarter 2000 2.75 1.75
Fourth Quarter 2000 2.00 0.50
</TABLE>
The Company's common stock was held by 577 holders of record on March 21,
2002.
Core Materials made no payments of cash dividends during 2001 and 2000.
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
International. Such prohibitions apply so long as Core Materials owes any
amounts under the Secured Note to International. The prohibitions are discussed
further in Note 6 of the "Notes to Consolidated Financial Statements" in Part
II, Item 8 of this Form 10-K.
12
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are derived from the audited
consolidated financial statements of Core Materials Corporation. 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.
<TABLE>
YEARS ENDED DECEMBER 31,
(IN THOUSANDS,
EXCEPT PER SHARE DATA) 2001 2000 1999 1998 1997
--------------------------------------- -------- -------- -------- -------- --------
Net sales $ 68,365 $ 83,545 $ 90,604 $ 77,719 $ 64,940
Gross margin 7,831 11,915 10,863 15,488 14,089
Income/(loss) before interest and taxes (108) 2,862 1,720 7,659 6,654
Net income/(loss) (1,860) 715 71 3,652 2,723
Net income/(loss) per common share:
Basic (.19) .07 .01 .38 .29
Diluted (.19) .07 .01 .37 .28
Total assets 61,307 62,785 67,982 65,328 57,540
Long term debt 26,015 26,370 26,700 27,005 18,822
Stockholders' equity 17,536 19,638 18,923 18,852 16,095
</TABLE>
13
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 commercial and industrial product industries, the
general economy, competitive factors, the dependence on four major customers,
the recent efforts of Core Materials to expand its customer base, new
technologies, regulatory requirements, labor relations, the loss or inability to
attract key personnel, the availability of capital, the start up of new
operations in Mexico and management's decisions to pursue new products or
businesses which involve additional costs, risks or capital expenditures.
OVERVIEW
Core Materials has historically been a compounder and compression molder
of sheet molding composites (SMC) fiberglass reinforced plastic products. In
October 2001, Core Materials acquired certain assets of Airshield Corporation,
see note 3 of notes to the financial statements. As a result of this
acquisition, Core Materials expanded its fiberglass molding capabilities to
include the spray up, hand lay up and vacuum assisted resin infusion molding
processes. The acquisition was accounted for under the purchase accounting
method and accordingly the effects of the acquisition are included in the
results of operations and financial condition of Core Materials from the date of
the acquisition and forward. All references to Core Materials herein refer to
the consolidated operations of Core Materials and its subsidiaries unless noted
otherwise. 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. Core Materials
presently has four major customers, International Truck and Engine Corporation
("International"), Yamaha Motor Manufacturing Corporation ("Yamaha"), Lear
Corporation ("Lear") and Freightliner LLC ("Freightliner"), which account for
approximately 90% of the Company's sales in 2001 and 83% in 2000. The demand for
Core Materials' products is affected by the volume of purchases from its
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 may change
proportionately more than revenues from operations.
On December 31, 1996, Core Materials acquired substantially all of the
assets and assumed certain liabilities of Columbus Plastics, a wholly owned
operating unit of International's truck manufacturing division since its
formation in late 1980. At the time of the acquisition of Columbus Plastics,
International and Core Materials entered into a Comprehensive Supply Agreement,
which expired on December 31, 2001. Under the terms of the Comprehensive Supply
Agreement, Core Materials became the primary supplier of International's
original equipment and service requirements for fiberglass reinforced parts
using the SMC process. At this time, there are no plans to renew this agreement.
Upon expiration of the Supply Agreement, Core Materials began supplying products
to International on a purchase order basis, like it operates with all of its
other customers. The purchase orders typically provide volume commitments for
four weeks at prices previously negotiated. Customers can update their orders on
a daily basis for changes in demand that allow them to run their inventories on
a "just-in-time" basis.
RESULTS OF OPERATIONS
2001 COMPARED WITH 2000
Net sales for 2001 totaled $68,365,000, down approximately 18% from the
$83,545,000 reported for 2000. Sales to International totaled $36,381,000, an
approximate 29% decrease from the 2000 amount of $51,379,000. The primary reason
for the decrease was lower demand from International resulting from an industry
wide general decline in truck orders due to the soft general economy during
2001. Sales to Yamaha of components for personal watercraft decreased in 2001 by
27% to $13,160,000 compared with $18,039,000 in 2000. The decrease in sales to
Yamaha is primarily due to the negative impact general economic conditions have
had on the demand for personal watercraft. Sales to Lear for 2001 totaled
$10,246,000. The Lear product consists of components that Lear assembles into
seat bottoms and backs for a sports utility/pick-up truck recently introduced by
an automotive original equipment manufacturer. Core Materials began selling
these products in the first quarter of 2001. Sales to Freightliner, as a
14
result of the acquisition noted above, for 2001 totaled $1,598,000. Products
sold to Freightliner include hoods, air deflectors, air fairings, splash panels
and other components for the production of its heavy and medium duty trucks.
Sales to other customers decreased approximately 51% to $6,979,000 from
$14,127,000 in 2000. This decrease was primarily the result of decreased sales
to Case/New Holland of $5,229,000 as a result of Case/New Holland moving
production of their products to another supplier in May 2001. Also adding to the
decrease was the discontinuance of the Company's business relationship with
Caradon Doors and Windows, Peachtree Division, in July 2000. Sales to Peachtree
totaled $1,259,000 in 2000. Offsetting a portion of the decrease were sales
brought on from the acquisition noted above to other various customers of
$600,000 from the acquisition date through the end of the year.
Gross Margin was 11.5% of sales in 2001 compared to 14.3% of sales in
2000. The decrease in gross margin was primarily due to fixed costs associated
with excess capacity, production inefficiencies associated with reduced order
flow, and new product start-ups, mostly affecting the Columbus plant. However,
improved productivity and a better product mix resulted in gross margin
improvement in the Gaffney plant compared to last year. The Company also
experienced increasing employee benefit costs, mainly due to an increase in
employee health insurance costs. Gross margins from the newly established
operations resulting from the acquisition noted above were in line with the
Company's other operations.
Selling, general and administrative expenses totaled $7,939,000 in 2001,
which was less than the $9,053,000 incurred in 2000. The year 2001 saw a
reduction of the salary workforce in the Columbus and Gaffney facilities
resulting in a $222,000 cost savings; however, increasing benefit costs, mainly
due to employee health care costs, partially offset this. The Company also
implemented a cost containment plan that resulted in total cost reductions of
$990,000 in the areas of supplies, outside and professional services, travel and
other miscellaneous expenses.
Interest expense totaled $1,999,000 for 2001 increasing slightly from
$1,970,000 in 2000. The increase in interest expense from 2000 was primarily the
result of a decrease in interest capitalized on capital projects due to lower
capital expenditures. Interest rates experienced by the Company with respect to
the industrial revenue bond (see note 6) were favorable; however, due to the
interest rate swap the Company entered into, the interest rate is essentially
fixed for this debt instrument.
Tax expense for 2001 was approximately 3% of total loss before taxes.
Income tax expense primarily consists of $646,000 of expense related to Core
Materials increasing the valuation allowance for its net operating loss
carryforwards primarily offset by the tax benefit of the current year's
operating loss.
Net loss for 2001 was $(1,860,000) or $(.19) per basic and diluted share,
representing a decrease of $2,575,000 over the 2000 net income of $715,000 or
$.07 per basic and diluted share.
2000 COMPARED WITH 1999
Net sales for 2000 totaled $83,545,000, down approximately 8% from the
$90,604,000 reported for 1999. Sales to International totaled $51,379,000, a 17%
decrease from the 1999 amount of $61,867,000. The primary reason for the
decrease was lower demand from International resulting from an industry wide
general decline in truck orders. Sales to Yamaha increased in 2000 by 13% to
$18,039,000 compared with $15,929,000 in 1999. The increase in sales to Yamaha
is primarily due to an overall increase in demand from Yamaha for Core
Materials' product.
Sales to other customers increased approximately 10% to $14,127,000 from
$12,808,000 in 1999. This increase was primarily the result of increased sales
to Case/New Holland of $2,951,000 as a result of increased volumes and new
products. Subsequent to year-end, Core Materials was notified by Case/New
Holland of their intent to move production of their products to another supplier
by May 2001. These increases were partially offset by a decrease in sales to
Volvo Trucks North America, Inc. of $1,513,000 due to declining truck volumes,
and a decrease in sales to Caradon Doors and Windows, Peachtree Division of
$454,000 due to the ending of this business relationship.
Gross Margin was 14% of sales in 2000 compared to 12% of sales in 1999.
The increase in gross margin was primarily due to decreased production costs
resulting from improved labor utilization, operational improvements and improved
operating supplies control. Additionally, 1999 included higher repair and
maintenance costs due to two major machine breakdowns and costs associated with
the start up of several new customer products. These events did not occur to
this degree in 2000.
15
Selling, general and administrative expenses totaled $9,053,000 in 2000,
which was slightly less than the $9,143,000 incurred in 1999. The year 2000 saw
a reorganization and strengthening of the salary workforce. Even with the
changes, labor costs stayed relatively flat to 1999 levels, increasing less than
$100,000. In 1999, $800,000 in outside service and professional fee expenses was
incurred for non-recurring items. The Company did see a reduction of $561,000 in
this area in 2000, with the difference being mainly attributable to recruiting
fees and contract employee costs for the reorganization of the salary workforce.
In 2000, the Company also experienced higher benefit costs mainly due to an
increase in employee health insurance costs and higher travel expenses due to
the start up of new products.
Interest expense totaled $1,970,000 for 2000 increasing from $1,850,000 in
1999. The increase in interest expense from 1999 was the result of an increase
in interest cost on the Secured Note payable to International resulting from the
note payable balance increasing in April 1999 and due to a $139,000 decrease in
interest capitalized on capital projects due to lower capital expenditures.
These amounts were partially offset by a reduction in interest costs related to
the revolving line of credit, as no borrowings were necessary on the line in
2000.
Income tax expense for 2000 was approximately 42% of total earnings before
taxes. Actual tax payments were 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. Cash tax expense for 2000 was
estimated to be $231,000.
Net income for 2000 was $715,000 or $.07 per basic and diluted share,
representing an increase of $644,000 over the 1999 net income of $71,000 or $.01
per basic and diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Core Materials' primary cash requirements are for operating expenses and
capital expenditures. These cash requirements have historically been met through
a combination of cash flow from operations, equipment leasing, issuance of
Industrial Revenue Bonds and bank lines of credit.
Cash provided by operations in 2001 totaled $3,360,000. Net loss reduced
operating cash flows by $1,860,000. Depreciation and amortization added
$2,049,000 of positive cash flow. A decrease in accounts receivable contributed
$3,312,000; the decrease in accounts receivable was primarily the result of the
collection of past due receivables. Also adding positive cash flow was the
reduction of prepaid and other assets of $806,000 due to the collection of a
$1,584,000 receivable relating to a sale-leaseback transaction, which occurred
at the end of 2000. This was partially offset by increased prepaid insurance
costs. Decreasing the operating cash flow was a decrease in accounts payable of
$1,509,000, which was primarily due to timing effects.
Investing activities reduced cash flows by $2,548,000 in 2001. Capital
expenditures totaled $1,301,000, which was primarily related to the acquisition
of machinery and equipment. Also decreasing investing cash flows was the
purchase of the assets of Airshield Corporation for $1,953,000. Offsetting these
expenditures were proceeds from maturities on the Company's mortgage-backed
security investment of $687,000. At December 31, 2001, commitments for capital
expenditures totaled $32,000.
Financing activities reduced cash flows by $330,000 for the principal
repayment on the Industrial Revenue Bond, which was issued in 1998
At December 31, 2001, Core Materials had cash on hand of $3,194,000 and an
available line of credit of $7,500,000, which is scheduled to mature on May 1,
2002. As of December 31, 2001, Core Materials was in violation of all three of
its financial debt covenants for the Line of Credit and letter of credit
securing the industrial revenue bond and certain equipment leases. The covenants
relate to maintaining certain financial ratios. Core Materials has received
waivers for the covenants as of December 31, 2001 and a written commitment from
the bank to waive these covenants each quarter through the quarter ended
September 30, 2002, if Core Materials operates in compliance with financial
projections for fiscal year 2002 and does not experience any material adverse
change to its financial condition. Management expects Core Materials to meet the
projections for 2002. However, if performance should fall below these
projections or if a material adverse change in the financial position of the
Company should occur, Core
16
Materials' liquidity and ability to obtain further financing to fund future
operating and capital requirements could be negatively impacted.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
on-going basis, management evaluates its estimates and judgments, including
those related to accounts receivable, inventories, post retirement benefits, and
income taxes. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Accounts receivable allowances:
Management maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required. Management also records estimates for customer returns and discounts
offered to customers. Should customer returns and discounts fluctuate from the
estimated amounts, additional allowances may be required.
Inventories:
Management identifies slow moving or obsolete inventories and estimates
appropriate loss provisions related to these inventories. Historically, these
loss provisions have not been significant. Should actual results differ from
these estimates, additional provisions may be required.
Post retirement benefits:
Management records an accrual for post retirement costs associated with
the Company sponsored health care plan. Should actual results differ from the
assumptions used to determine the reserves, additional provisions may be
required.
Income taxes:
Management records a valuation allowance to reduce its deferred tax assets
to the amount that it believes is more likely than not to be realized. The
Company has considered future taxable income in assessing the need for the
valuation allowance and recorded as valuation allowance (Note 10 to the
consolidated financial statements), The valuation reserve will be adjusted as
the Company determines the actual amount of deferred tax assets that will be
realized.
INCOME TAXES
The balance sheet at December 31, 2001 and 2000 includes a deferred tax
asset of $12,773,000 and $12,676,000, net of a valuation allowance of $1,425,000
in 2001 and $2,160,000 in 2000. 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, 2001, primarily includes the tax
benefits associated with cumulative net operating losses of approximately
$20,511,000, temporary differences between the book and tax basis of Core
Materials' property and equipment of approximately $10,909,000 and temporary
differences relating to post-retirement and pension benefits of $6,638,000. The
valuation allowance at December 31, 2001, assumes that it is more likely than
not that approximately $4,200,000 of the cumulative net operating losses will
not be realized before their expiration date. This reserve was increased in 2001
by approximately $646,000 as a result of the Company reevaluating the expected
utilization of the net operating loss carryforwards in relation to the extended
downturn in the truck market and other economic and internal operating factors.
Taxable income/(loss) for 2001 and 2000 was approximately $(2,030,000) and
$1,859,000, respectively.
In addition to the above, Core Materials had $4,100,000 of capital loss
carryforwards that expired in 2001 without being utilized as anticipated. The
$4.1 million of capital loss carryforwards had been previously fully reserved in
the valuation allowance. The $1,381,000 in the valuation allowance for the
capital loss carryforwards was written off in 2001 against the expired tax
asset.
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 (International 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 and the maintenance of its
relationships with its key customers, earnings are achievable in order to
realize the net deferred tax asset of $12,773,000.
INFLATION
Inflation generally affects Core Materials by increasing the cost of
labor, equipment and raw materials. Many of the raw materials used by Core
Materials are petroleum and energy based products, and therefore, the costs of
certain raw materials can fluctuate based on changes in costs of these
underlying commodities. Management believes that, because rates of inflation
have been moderate during the periods presented, inflation has not had a
significant impact on our results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations". This statement improves the transparency of the accounting and
reporting for business combinations by requiring that all business combinations
be accounted for under a single method - the purchase method. This Statement is
effective for all business combinations initiated after June 30, 2001. The
acquisition of substantially all of the assets of Airshield Corporation was
accounted for under SFAS No. 141.
17
On June 29, 2001, the FASB issued SFAS No.142, "Goodwill and Other
Intangible Assets". This statement applies to intangibles and goodwill acquired
after June 30, 2001, as well as goodwill and intangibles previously acquired.
Under this statement goodwill as well as other intangibles determined to have an
infinite life will no longer be amortized; however these assets will be reviewed
for impairment on a periodic basis. This statement is effective for the Company
for the first quarter in the fiscal year ended December 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Because SFAS No. 121 did
not address the accounting for a segment of a business accounted for as a
discontinued operation under Opinion 30, two accounting models existed for
long-lived assets to be disposed of. The Board decided to establish a single
accounting model, based on the framework established in Statement 121, for
long-lived assets to be disposed of by sale. This Statement is effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years.
The Company has assessed the impact of SFAS No. 142 and 144 and has
determined that the adoption of these two pronouncements will not have a
material effect on its results of operations and its financial position.
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. The Company does not hold any material
market risk sensitive instruments for trading purposes.
Core Materials has the following five items that are sensitive to a change
in interest rates: (1) Long term debt consisting of an Industrial Revenue Bond
("IRB") with a balance at December 31, 2001, of $6,450,000. Interest is variable
and is computed weekly. The average interest rate charged for 2001 was 3.0% and
the maximum interest rate that may be charged at any time over the life of the
IRB is 10%. In order to minimize the effect of the interest rate fluctuation,
Core Materials has entered an interest swap arrangement under which Core
Materials pays a fixed rate of 4.89% to a bank and receives 76% of the 30-day
commercial paper rate; (2) Long-term Secured Note Payable with a balance as of
December 31, 2001 of $19,920,000 at a fixed interest rate of 8%; (3) 7%
mortgage-backed security investment, which matures in November 2025. Such
security is recorded at cost and is considered held to maturity as Core
Materials has the intent and ability to hold such security to maturity; (4)
Revolving line of credit, which bears interest at LIBOR plus three and
one-quarter percent or prime plus one-quarter percent; and (5) Foreign currency
purchases in which Core Materials purchases Mexican pesos with United States
dollars to meet certain obligations that arise due to the facility located in
Mexico.
Assuming a hypothetical 20% change in short-term interest rates in both
2001 and 2000, interest expense would not change significantly, as the interest
rate swap agreement would generally offset the impact.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
Core Materials Corporation and Subsidiaries
Columbus, Ohio
We have audited the accompanying consolidated balance sheets of Core
Materials Corporation and Subsidiaries (the "Company") as of December 31, 2001
and 2000, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2001. Our audits also included the consolidated financial statement
schedules listed in the Index at Item 14. These consolidated financial
statements and the consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements and the consolidated financial
statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Core Materials Corporation and
its subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
---------------------------------
DELOITTE & TOUCHE LLP
Columbus, Ohio
March 15, 2002
19
CORE MATERIALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001,
2000 AND 1999
<TABLE>
YEAR ENDED DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
NET SALES:
International $ 36,380,921 $ 51,379,348 $ 61,867,135
Yamaha 13,160,114 18,039,427 15,929,190
Lear 10,246,079 -- --
Other 8,577,590 14,126,584 12,807,943
------------ ------------ ------------
TOTAL SALES 68,364,704 83,545,359 90,604,268
Cost of sales 59,456,119 70,481,198 78,542,103
Postretirement benefits expense 1,077,547 1,148,822 1,198,709
------------ ------------ ------------
TOTAL COST OF SALES 60,533,666 71,630,020 79,740,812
------------ ------------ ------------
GROSS MARGIN 7,831,038 11,915,339 10,863,456
------------ ------------ ------------
Selling, general and administrative expense 7,675,594 8,854,633 8,992,917
Postretirement benefits expense 263,454 198,857 150,113
------------ ------------ ------------
TOTAL SELLING, GENERAL AND ADMINISTRATIVE
EXPENSE 7,939,048 9,053,490 9,143,030
------------ ------------ ------------
INCOME/(LOSS) BEFORE INTEREST AND TAXES (108,010) 2,861,849 1,720,426
Interest income 305,453 339,512 258,620
Interest expense (1,999,159) (1,970,378) (1,850,068)
------------ ------------ ------------
INCOME/(LOSS) BEFORE INCOME TAXES (1,801,716) 1,230,983 128,978
Income taxes:
Current (benefit) 30,367 231,051 (11,074)
Deferred 28,058 284,581 68,714
------------ ------------ ------------
TOTAL INCOME TAXES 58,425 515,632 57,640
------------ ------------ ------------
NET INCOME/(LOSS) $ (1,860,141) $ 715,351 $ 71,338
============ ============ ============
NET INCOME/(LOSS) PER COMMON SHARE:
BASIC AND DILUTED $ (0.19) $ 0.07 $ 0.01
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 9,778,680 9,778,680 9,778,680
============ ============ ============
DILUTED 9,778,680 9,778,680 9,820,352
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
20
CORE MATERIALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,194,156 $ 2,712,412
Accounts receivable (less allowance for doubtful accounts:
2001 - $715,000 and 2000 - $424,000) 11,946,137 13,221,320
Inventories:
Finished and work in process goods 1,679,745 1,745,653
Stores 2,222,250 1,898,465
------------ ------------
Total inventories 3,901,995 3,644,118
------------ ------------
Deferred tax asset 1,079,995 1,245,568
Prepaid expenses and other current assets 1,704,262 2,410,112
------------ ------------
Total current assets 21,826,545 23,233,530
Property, plant and equipment 42,759,871 41,562,272
Accumulated depreciation (17,398,659) (15,509,218)
------------ ------------
Property, plant and equipment - net 25,361,212 26,053,054
Deferred tax asset - net 11,692,678 11,430,442
Mortgage-backed security investment 924,041 1,610,741
Goodwill 1,097,433 --
Other assets 405,356 457,294
------------ ------------
TOTAL $ 61,307,265 $ 62,785,061
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Current portion long-term debt $ 355,000 $ 330,000
Accounts payable 3,756,735 5,266,017
Accrued liabilities:
Compensation and related benefits 3,050,120 1,636,257
Interest 85,939 77,644
Taxes 636,934 654,255
Graduated lease payments 889,267 659,998
Professional fees 417,487 380,000
Other accrued liabilities 848,826 688,205
------------ ------------
Total current liabilities 10,040,308 9,692,376
Long-term debt 26,015,150 26,370,150
Interest Rate Swap 366,826 --
Deferred long-term gain 2,008,716 2,462,271
Postretirement benefits liability 5,340,164 4,621,917
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $0.01 par value, authorized shares - 20,000,000;
Outstanding shares: 2001 and 2000 - 9,778,680 97,787 97,787
Paid-in capital 19,251,392 19,251,392
Accumulated other comprehensive loss, net of income tax benefit (242,105)
Retained earnings (accumulated deficit) (1,570,973) 289,168
------------ ------------
Total stockholders' equity 17,536,101 19,638,347
------------ ------------
TOTAL $ 61,307,265 $ 62,785,061
============ ============
</TABLE>
See notes to consolidated financial statements.
21
CORE MATERIALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
ACCUMULATED
COMMON STOCK RETAINED OTHER TOTAL
OUTSTANDING PAID-IN EARNINGS COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) LOSS EQUITY
------ ------ ------- --------- ---- ------
BALANCE AT JANUARY 1, 1999 9,778,680 $ 97,787 $ 19,251,392 $ (497,521) $ 18,851,658
Net Income 71,338 71,338
------------ ------------ ------------ -----------------------------------------------
BALANCE AT DECEMBER 31, 1999 9,778,680 97,787 19,251,392 (426,183) 18,922,996
------------ ------------ ------------ -----------------------------------------------
Net Income 715,351 715,351
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2000 9,778,680 97,787 19,251,392 289,168 19,638,347
------------ ------------ ------------ ------------ ------------ ------------
NET LOSS (1,860,141) (1,860,141)
To record the initial fair
market value of the interest
rate swap, net of deferred
income tax benefit of $53,968 $ (104,762) (104,762)
Hedge accounting effect of the
interest rate swap at December
31, 2001, net of deferred tax
benefit of $70,753 (137,343) (137,343)
------------ ------------ ------------ -----------------------------------------------
BALANCE AT DECEMBER 31, 2001 9,778,680 $ 97,787 $ 19,251,392 $ (1,570,973 $ (242,105) $ 17,536,101
============ ============ ============ ===============================================
</TABLE>
See notes to consolidated financial statements.
22
CORE MATERIALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
YEAR ENDED DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ (1,860,141) $ 715,351 $ 71,338
Adjustments to reconcile net income/(loss) to net cash provided by
operating activities:
Depreciation and amortization 2,049,330 2,121,221 1,899,395
Deferred income taxes 28,058 284,581 68,714
Loss/(gain) on disposal of assets 42,458 (11,376) 14,995
Amortization of gain on sale/leaseback transactions (453,555) (453,555) (453,555)
Change in operating assets and liabilities:
Accounts receivable 3,312,104 6,493,234 (2,095,979)
Inventories 135,019 1,798,459 (1,219,296)
Prepaid expenses and other assets 805,850 (2,225,985) 38,545
Accounts payable (1,509,283) (5,801,650) 3,706,719
Accrued and other liabilities 91,589 (74,549) (1,191,402)
Postretirement benefits liability 718,247 721,981 806,779
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,359,676 3,567,712 1,646,253
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,301,432) (1,977,722) (7,384,864)
Proceeds from sale/leaseback transactions 3,375,712
Acquisition of Airshield assets (1,953,000)
Proceeds from maturities on mortgage-backed security investment 686,700 298,554 659,682
Proceeds from sale of property, plant and equipment 19,800
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (2,547,932) (1,679,168) (3,349,470)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line-of-credit 7,250,000
Payments on line-of-credit (7,250,000)
Payment of principal on industrial revenue bond (330,000) (305,000) (285,000)
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (330,000) (305,000) (285,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 481,744 1,583,544 (1,988,217)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,712,412 1,128,868 3,117,085
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,194,156 $ 2,712,412 $ 1,128,868
============ ============ ============
Cash paid for:
Interest (net of amounts capitalized) $ 1,902,044 $ 2,690,141 $ 1,579,549
============ ============ ============
Income taxes (refund) $ 186,000 (84,666) $ 610,000
============ ============ ============
Supplemental disclosure of non-cash financing activities:
Sale leaseback receivable 1,584,000
============
</TABLE>
See notes to consolidated financial statements.
23
CORE MATERIALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS FORMATION AND NATURE OF OPERATIONS
Core Materials Corporation ("Core Materials") was formed in 1996 for the
purpose of acquiring substantially all the assets and assuming certain of the
liabilities of Columbus Plastics Operation ("Columbus Plastics"), an operating
unit of Navistar International Transportation Corp. (now known as International
Truck and Engine Corporation, "International"). In October 2001 Core Materials
acquired certain assets of Airshield Corporation, see note 3. As a result of
this acquisition, Core Materials expanded its fiberglass molding capabilities to
include the spray up, hand lay up and vacuum assisted resin infused molding
processes.
Core Materials operates in one business segment as a compounder of sheet
molding composites (SMC) and molder of fiberglass reinforced plastics. Core
Materials produces and sells both SMC compound and molded products for varied
markets, including medium and heavy-duty trucks, automotive, recreational
vehicles and commercial and industrial products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of all subsidiaries after elimination of all
material intercompany accounts, transactions and profits.
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosures 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 and title transfers. Allowances for returned products and
other credits are estimated and recorded as revenue is recognized.
CASH AND CASH EQUIVALENTS - Core Materials 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 - The security that 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.
<TABLE>
Ranges of estimated useful lives for computing depreciation are as follows:
Land improvements 20 years
Building and improvements 20-40 years
Machinery and equipment 3-15 years
Tools, dies and patterns 3-5 years
</TABLE>
Depreciation expense was $2,010,000, $2,094,000 and $1,868,000 for 2001,
2000, and 1999.
In 2001, 2000 and 1999, approximately $37,000, $50,000 and $72,000 of
interest costs were capitalized in property, plant and equipment.
24
CORE MATERIALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LONG-LIVED ASSETS - Long-lived assets consist primarily of property and
equipment and goodwill. The recoverability of long-lived assets is evaluated at
the operating unit level by an analysis of operating results and consideration
of other significant events or changes in the business environment. If an
operating unit has indications of impairment, such as current operating losses,
the Company will evaluate whether impairment exists for property and equipment
on the basis of undiscounted expected future cash flows from operations before
interest for the remaining amortization period. For goodwill, the Company will
evaluate whether impairment exists on the basis of discounted expected future
cash flows from operations before interest. If impairment exists, the carrying
amount of the long-lived assets is reduced to its estimated fair value, less any
costs associated with the final settlement. As of December 31, 2001 and December
31, 2000, there was no impairment of the Company's long-lived assets.
GOODWILL - Goodwill represents the excess purchase price over the fair
value of the net assets acquired from Airshield Corporation. Goodwill is
amortized on a straight-line basis over twenty years.
SELF-INSURANCE - Core Materials is self-insured with respect to most of
its 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 December
31, 2001 and 2000 of $625,000 and $438,000, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Core Materials' financial
instruments consist of a mortgage backed security investment, long term debt, an
interest rate swap, accounts receivable, accrued liabilities and accounts
payable. The carrying amount of these financial instruments approximated their
fair value. The fair value of the Company's interest rate swap at December 31,
2001, was a liability of $367,000.
CONCENTRATION OF CREDIT RISK - Core Materials has significant transactions
with three customers, International, Yamaha Motor Manufacturing Corporation and
Lear Corporation, which comprised 87%, 83% and 86% of total sales in 2001, 2000
and 1999 and 81% and 70% of the accounts receivable balances at December 31,
2001 and 2000. 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 the Core
Materials' expectations. Export sales, including sales to Canada, for products
provided to International's manufacturing and service locations totaled 12%, 21%
and 22% of total sales for 2001, 2000 and 1999, respectively.
EARNINGS/(LOSS) PER COMMON SHARE - Basic earnings/(loss) per common share
is computed based on the weighted average number of common shares outstanding
during the period. Diluted earnings/(loss) per common share are computed
similarly but include the effect of the assumed exercise of dilutive stock
options under the treasury stock method.
RECLASSIFICATIONS - Reclassifications have been made to prior years'
amounts to conform to the classifications of such amounts for 2001.
RESEARCH AND DEVELOPMENT - Research and Development costs, which are
expensed as incurred, totaled approximately $225,000 in 2001 and $250,000 in
2000 and $200,000 in 1999.
NEW ACCOUNTING PRONOUNCEMENTS - On June 29, 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations". This statement improves the
transparency of the accounting and reporting for business combinations by
requiring that all business combinations be accounted for under a single method
- the purchase method. This Statement is effective for all business combinations
initiated after June 30, 2001. The acquisition of substantially all of the
assets of Airshield Corporation (see Note 3) was accounted for under SFAS No.
141.
On June 29, 2001, the FASB issued SFAS No.142, "Goodwill and Other
Intangible Assets". This statement applies to intangibles and goodwill acquired
after June 30, 2001, as well as goodwill and intangibles previously acquired.
Under this statement goodwill as well as other intangibles determined to have an
infinite life will no longer be amortized; however these assets will be reviewed
for impairment on a periodic basis. This statement is effective for the Company
for the first quarter in the fiscal year ended December 2002.
25
CORE MATERIALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Because SFAS No. 121 did
not address the accounting for a segment of a business accounted for as a
discontinued operation under Opinion 30, two accounting models existed for
long-lived assets to be disposed of. The Board decided to establish a single
accounting model, based on the framework established in Statement 121, for
long-lived assets to be disposed of by sale. This Statement is effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years.
The Company has assessed the impact of SFAS No. 142 and 144 and has
determined that the adoption of these two pronouncements will not have a
material effect on its results of operations and its financial position.
FOREIGN CURRENCY ADJUSTMENTS - In conjunction with the Company's
acquisition of certain assets of Airshield Corporation (see Note 3), the
Company's has established operations in Mexico. The functional currency for the
Mexican operations is the United States dollar. All foreign currency asset and
liability amounts are remeasured into United States dollars at end-of-period
exchange rates except for inventories, prepaid expenses and property plant and
equipment, which are remeasured at historical rates. Income statement accounts
are translated at average rates for the year. Gains and losses resulting from
translation of foreign currency financial statements into United States dollars
and gains and losses resulting from foreign currency transactions are included
in current results of operations. Aggregate foreign currency translation and
transaction losses included in operations totaled $9,598 in 2001.
3. ACQUISITION OF AIRSHIELD CORPORATION ASSETS
On October 16, 2001, Core Materials Corporation purchased substantially
all of the assets, consisting primarily of inventory, accounts receivable and
manufacturing equipment, of Airshield Corporation, a privately held manufacturer
of fiberglass reinforced plastic parts for the truck and automotive-aftermarket
industries. Airshield is based in Brownsville, Texas, with manufacturing
operations in Matamoros, Mexico. Airshield had been operating under Chapter 11
bankruptcy protection since March 2001. Core Materials Corporation has continued
operations from Airshield's former manufacturing facility in Matamoros, Mexico.
The purchase price for the acquisition of substantially all of the assets
of Airshield Corporation was $1,953,000. In addition, Core Materials or its
subsidiaries assumed certain liabilities related to the transfer of employees
from Airshield's Mexican subsidiary to Core Materials' new Mexican subsidiary.
The acquisition was financed from the cash reserves of Core Materials
Corporation.
26
CORE MATERIALS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The following table presents the allocation of the acquisition cost,
including professional fees and other related acquisition costs, to the assets
acquired and liabilities assumed:
<TABLE>
Inventory $ 392,896
Accounts Receivable 2,036,921
Property, plant and equipment 166,375
Goodwill 1,097,433
----------
Total Assets 3,693,625
==========
Payroll liabilities assumed 1,700,194
Other current liabilities 40,431
----------
Total Liabilities 1,740,625
==========
Total acquisition cost $1,953,000
==========
</TABLE>
The allocation of the purchase price is based on preliminary data and
could change when final valuation information is obtained.
The following (unaudited) pro forma consolidated results of operations
have been prepared as if the acquisition of substantially all the assets of
Airshield Corporation had occurred at the beginning of the year presented.
<TABLE>
Year Ended Year Ended
December 31, 2001 December 31, 2000
----------------- -----------------
Net sales $ 79,722,678 $ 99,982,679
============ ============
Net loss $ (3,280,948) $ (1,330,195)
============ ============
Net loss per share -
basic and diluted $ (0.34) $ (0.14)
============ ============
</TABLE>
The pro forma information is presented for informational purposes only and
is not necessarily indicative of the results of operations that actually would
have been achieved had the acquisition been consummated as of that time, nor is
it intended to be a projection of future results. The effects of the acquisition
have been included in the consolidated statement of operations since the
acquisition date.
4. FOREIGN OPERATIONS
In conjunction with the Company's acquisition of substantially all the
assets of Airshield Corporation on October 16, 2001(see Note 3), Core Materials
established manufacturing operations in Mexico (under the Maquiladora program).
The Mexican operation is a captive manufacturing facility of Core Materials.
Essentially all sales of the Mexican operation are made to United States
customers in United States dollars, which totaled $3,532,000 in 2001. Expenses
are incurred in the United States dollar and the Mexican peso. Expenses incurred
in pesos include labor, utilities, supplies and materials from the acquisition
date through December 31, 2001, and amounted to approximately 51% of sales from
the acquisition date to December 31, 2001. Core Materials owns long-lived assets
that are geographically located at the Mexican operation, which total $164,000
at December 31, 2001. Core Materials' manufacturing operation in Mexico is
subject to various political, economic, and other risks and uncertainties
inherent to Mexico. Among other risks, Core Materials' Mexican operation is
subject to domestic and international customs and tariffs, changing taxation
policies and governmental regulations.
27
CORE MATERIALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
2001 2000
------------ ------------
Land and land improvements $ 2,150,606 $ 2,150,606
Buildings 17,319,654 17,175,453
Machinery and equipment 19,954,637 18,187,937
Tools, dies and patterns 566,814 642,852
Additions in progress 2,768,160 3,405,424
------------ ------------
Total 42,759,871 41,562,272
Less accumulated depreciation (17,398,659) (15,509,218)
------------ ------------
Property, plant and equipment - net $ 25,361,212 $ 26,053,054
============ ============
</TABLE>
Additions in progress at December 31, 2001 and 2000 primarily relate to
the purchase and installation of equipment at Core Materials' operating
facilities. At December 31, 2001 and 2000, commitments for capital expenditures
in progress were $32,000 and $618,000, respectively.
Core Materials has entered into various sale-leaseback arrangements with a
financial institution, whereby it sold certain equipment and leased such back
under operating lease arrangements (see Note 6).
6. DEBT AND LEASES
Long-term debt consists of the following at December 31:
<TABLE>
2001 2000
------------ ------------
Secured Note Payable due to International, interest
at 8%, payable semi-annually, principal due
December 2006, secured by a subordinated lien and
security interest in all Core Materials' assets $ 19,920,150 $ 19,920,150
Industrial Revenue Bond, interest adjustable weekly (2001
average 3.0%; 2000 average 4.4%), payable quarterly,
principal due in variable quarterly installments through
April, 2013, secured by a bank letter of credit with
a balance of $6,644,000 as of December 31, 2001 6,450,000 6,780,000
------------ ------------
Total 26,370,150 26,700,150
Less current portion (355,000) (330,000)
------------ ------------
Long-term debt $ 26,015,150 $ 26,370,150
============ ============
</TABLE>
28
CORE MATERIALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SECURED NOTE PAYABLE
Under the terms of the secured note payable to International, Core Materials may
be required to make payments on the principal of the note if either of the
following two conditions exists:
a) Within ninety (90) days after the end of each fiscal year of Core
Materials during the term of the Secured Note, Core Materials is to
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 obtained, from time to time, any
refinancing loan (as defined by the terms of the Secured Note), Core
Materials is to 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, 2001
were $3,194,156. Because the Company was in violation of all three of its debt
covenants, no principal payment will be made to International. Based upon the
financial position of Core Materials at December 31, 2001, the entire Secured
Note is classified as long-term on the balance sheet.
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 International, as long as the Secured Note is
outstanding.
LINE OF CREDIT
At December 31, 2001, Core Materials had available a $7,500,000 variable
rate bank revolving line of credit scheduled to mature on May 1, 2002. The line
of credit bears interest at LIBOR plus three and one-quarter percent or prime
plus one-quarter percent. The line of credit is secured by a first priority lien
and security interest in all Core Materials' business assets. There was no
outstanding balance under this facility at any time during the years ended
December 31, 2001 and 2000.
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%. Total remaining principal maturities
by year are: 2002 - $355,000; 2003 - $390,000; 2004 - $420,000; 2005 - $450,000;
2006 - $490,000 and thereafter - $4,345,000.
As security for the IRB, Core Materials obtained a letter of credit from a
commercial bank, which has a balance of $6,644,000 as of December 31, 2001. 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 2004 but may be extended
for an additional one-year period in April of each year.
INTEREST RATE SWAP
When Core Materials Corporation enters into variable rate obligations or
purchases variable rate interest bearing assets, it considers the potential
effect of interest rate fluctuations on such instruments. In order to minimize
the effects of interest rate fluctuations on its operations, the Company may
enter into interest rate management arrangements.
29
CORE MATERIALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In conjunction with its variable rate Industrial Revenue Bond, Core
Materials entered into an interest rate swap agreement, which was designated as
a cash flow hedging instrument, with a commercial bank in June 1998. Under this
agreement, Core Materials pays a fixed rate of 4.89% to the bank and receives
76% of the 30-day commercial paper rate. The difference paid or received varies
as short-term interest rates change and is accrued and recognized as an
adjustment to interest expense. The swap term matches the payment schedule on
the IRB with final maturity in April 2013. While Core Materials is exposed to
credit loss on its interest rate swap in the event of non-performance by the
counterparty to the swap, management believes such non-performance is unlikely
to occur given the financial resources of the counterparty. The effectiveness of
the swap is assessed at each financial reporting date by comparing the
commercial paper rate of the swap to the benchmark rate underlying the variable
rate of the Industrial Revenue Bond.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
133, Accounting for Derivative Instruments and Hedging Activities, on January 1,
2001. At January 1, 2001, Core Materials recorded the fair value of its interest
rate swap agreement of $159,000 as a long-term liability and $105,000 (net of
deferred income tax benefit of $54,000) to accumulated other comprehensive
income (loss). During 2001, Core Materials recorded an additional liability of
$208,000 to adjust the interest rate swap to fair value at December 31, 2001.
LEASES
In December 1999, Core Materials entered into sale-leaseback
arrangements with a financial institution. An SMC press was sold for its net
book value of $1,922,000 and leased back under a 10-year operating lease
agreement. In addition, equipment consisting of two SMC presses and a dust
collection system was sold for their net book values of $1,454,000 and leased
back under a 7-year operating lease agreement. No gain or loss resulted from
these transactions.
In December 2000, Core Materials entered into a sale-leaseback arrangement
with a financial institution. An SMC press was sold for its net book value of
$1,584,000 and leased back under a 10-year operating lease agreement. No gain or
loss resulted from this transaction. Core Materials did not receive the proceeds
until January 2001, and accordingly, the $1,584,000 was recorded in other assets
as a non-trade receivable.
As a result of earlier sale-leaseback transactions, Core Materials
recognized into income in 2001, 2000 and 1999 approximately $454,000 of deferred
gains. At December 31, 2001 and 2000, Core Materials' deferred gains from
leasing transactions totaled $2,462,000 and $2,916,000, respectively. The
current portion of the deferred gains was $454,000 at December 31, 2001 and 2000
and was included in accrued liabilities.
In October 2001, in conjunction with the acquisition discussed at Note 3,
Core Materials' Mexican subsidiary entered into a 10-year lease agreement for a
manufacturing facility in Matamoros, Mexico. The Company leases 266,717 square
feet of a 313,221 square feet facility, with an option to lease the entire
facility. The Company has an option to purchase the facility at any time during
the first seven years at a prenegotiated price. The Company may cancel the lease
upon giving six months notice to the lessor. Annual rent on the facility is
determined based on the number of square feet rented multiplied by the following
factors: year one and two equals $0.24 per square foot; year three equals $0.28
per square foot; year four equals $0.30 per square foot; and years five through
ten will be based on the previous year's monthly rental rate plus a percentage
increase or decrease based on the Consumer Price Index.
Core Materials also leases a warehouse facility in Brownsville, Texas. The
lease term of this facility is three years and provides for monthly rental
payments of $7,560. This lease is cancelable with sixty days written notice.
Core Materials also leases certain other equipment under operating leases
with original lease terms of 2 to 10 years.
Total rental expense was $3,757,000, $3,301,000 and $2,776,000 for 2001,
2000 and 1999.
30
CORE MATERIALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The future minimum lease payments under non-cancelable operating leases
that have lease terms in excess of one year are as follows:
<TABLE>
2002 $ 3,114,000
2003 3,464,000
2004 3,546,000
2005 3,546,000
2006 3,254,000
Thereafter 4,466,000
-----------
Total minimum lease payments $21,390,000
===========
</TABLE>
BANK COVENANTS
Core Materials is subject to formal debt covenants with regards to its
Line of Credit and letter of credit securing the industrial revenue bond and
certain equipment leases.
As of December 31, 2001, Core Materials was in violation of all three of
its financial debt covenants for the Line of Credit and letter of credit
securing the industrial revenue bond and certain equipment leases. The covenants
relate to maintaining certain financial ratios. Core Materials has received
waivers for the covenants as of December 31, 2001 and a written commitment from
the bank to waive these covenants each quarter through the quarter ended
September 30, 2002, if Core Materials operates in compliance with financial
projections for fiscal year 2002 and does not experience any material adverse
change to its financial condition. Core Materials has operated in compliance
with the projections for the months of January and February 2002 and expects to
meet the projections for the remainder of the year.
7. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents net income (loss) plus the results
of certain non-shareowners' equity changes not reflected in the Consolidated
Statement of Operations. The components of comprehensive income (loss), net of
tax, are as follows:
<TABLE>
2001 2000 1999
----------- ----------- -----------
Net income/(loss) $(1,860,141) $ 715,351 $ 71,338
Cumulative effect of change in accounting principle (104,762) -- --
(SFAS No. 133) on other comprehensive income
Hedge accounting effect of interest rate swap (137,343) -- --
----------- ----------- -----------
Comprehensive income (loss) $(2,102,246) $ 715,351 $ 71,338
=========== =========== ===========
</TABLE>
31
CORE MATERIALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. 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 provisions related
to removal of Directors, the approval of a merger and certain other transactions
as outlined in the Certificate of Incorporation and any amendments to these
provisions:
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 (see Note 10) 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' 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.
PREFERRED STOCK
Core Materials has authorized 10,000,000 shares of preferred stock (par
value: $0.01) of which none is issued.
32
CORE MATERIALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. INCENTIVE STOCK PLANS
STOCK OPTIONS
The Company has a Long Term Equity Incentive Plan (the "Plan"), as
originally approved by the shareholders in May 1997, and as amended in May 2000
to increase the number of shares authorized for issuance, 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 3.0 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 2001, 2000 and 1999, the Company granted stock options under the
plan. The options have vesting schedules of five or nine and one-half 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.
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
2001 net loss and loss per common share would have been $(2,083,355) and $(.21)
per basic and diluted share. For 2000, pro forma net income and earnings per
common share would have been $640,877 and $.07 per basic and diluted share. For
1999, pro forma net loss and loss per common share would have been $(131,363)
and $(.01) per basic and diluted share. The pro forma amounts are not
representative of the effects on reported net earnings or earnings per common
share for future years and exclude the pro forma effect of the Mexican
acquisition (see Note 3).
The weighted average fair value of options granted during 2001, 2000 and
1999 were $1.17, $1.84 and $2.21, respectively. 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
5%, no expected dividend yield, expected lives of 8 and 9 years and expected
volatility of 87% for 2001, 104% for 2000 and 80% for 1999.
The following summarizes all stock option activity for the years ended
December 31:
<TABLE>
2001 2000 1999
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE NUMBER AVERAGE NUMBER AVERAGE
NUMBER OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ---------- ---------- ---------- ---------- ----------
Outstanding -- beginning of year 1,168,000 $ 3.10 1,038,100 $ 3.19 956,800 $ 3.19
Granted 32,000 2.75 467,500 2.75 122,500 3.20
Forfeited (51,000) 2.89 (337,600) 2.88 (41,200) 3.28
---------- ---------- ---------- ---------- ---------- ----------
Outstanding - end of year 1,149,000 $ 3.10 1,168,000 $ 3.10 1,038,100 $ 3.19
========== ========== ========== ========== ========== ==========
Exercisable at December 31 506,250 $ 3.15 313,350 $ 3.19 286,700 $ 3.03
========== ========== ========== ========== ========== ==========
Options available for grant 1,843,400 1,824,400 454,300
========== ========== ==========
</TABLE>
33
CORE MATERIALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about stock options outstanding and
exercisable as of December 31, 2001:
<TABLE>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -----------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE CONTRACTUAL AVERAGE
RANGE OF NUMBER OF EXERCISE LIFE NUMBER OF EXERCISE
EXERCISE PRICES OPTIONS PRICE IN YEARS OPTIONS PRICE
--------------- ------------- -------------- ------------ -------------
$2.75 794,000 $ 2.75 7.0 344,500 $ 2.75
$3.40 to $3.81 285,000 3.69 6.6 119,700 3.63
$5.13 70,000 5.13 6.4 42,000 5.13
--------- ------ ------- ------
1,149,000 $ 3.10 506,250 $ 3.15
========= ====== ======= ======
</TABLE>
10. INCOME TAXES
Components of the provision (credit) for income taxes are as follows:
<TABLE>
2001 2000 1999
--------- --------- --------
Current:
Federal $ 24,000 $ 27,000 $(48,000)
State and local 6,000 204,000 37,000
--------- --------- --------
30,000 231,000 (11,000)
Deferred:
Federal (655,000) 351,000 90,000
State and local 37,000 (66,000) (21,000)
Increase in valuation allowance for
net operating loss carryforward 646,000 -- --
--------- --------- --------
28,000 285,000 69,000
--------- --------- --------
Provision for income taxes $ 58,000 $ 516,000 $ 58,000
========= ========= ========
</TABLE>
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:
<TABLE>
2001 2000 1999
--------- --------- ---------
Provision at federal statutory rate $(613,000) $ 419,000 $ 44,000
State and local tax expense, net of federal benefit 17,000 91,000 10,000
Increase in valuation allowance for net operating
loss carryforward 646,000 -- --
Non-deductible expenses 8,000 6,000 4,000
--------- --------- ---------
Provision for income taxes $ 58,000 $ 516,000 $ 58,000
========= ========= =========
</TABLE>
34
CORE MATERIALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Deferred tax assets (liabilities) consist of the following at December 31:
<TABLE>
2001 2000
------------ ------------
Current Asset:
Accrued liabilities $ 974,000 $ 933,000
Other, net 106,000 313,000
------------ ------------
Total current asset 1,080,000 1,246,000
Non-current asset:
Property, plant and equipment 3,709,000 3,963,000
Net operating loss carryforwards 6,974,000 6,265,000
Capital loss carryforwards -- 1,381,000
Postretirement benefits 2,257,000 2,080,000
Interest rate swap 125,000 --
Other, net 53,000 (99,000)
------------ ------------
Total non-current asset 13,118,000 13,590,000
------------ ------------
Total deferred tax asset 14,198,000 14,836,000
Less valuation allowance (1,425,000) (2,160,000)
------------ ------------
Total deferred tax asset - net $ 12,773,000 $ 12,676,000
============ ============
</TABLE>
At December 31, 2001, Core Materials had approximately $20.5 million of
NOL carryforwards available to offset future taxable income. A valuation
allowance has been provided for those NOL carryforwards and temporary
differences, which are estimated to expire before they are utilized. The
valuation allowance at December 31, 2001, assumes that it is more likely than
not that approximately $4,200,000 of the cumulative net operating losses will
not be realized before their expiration date. This reserve was increased in 2001
by approximately $646,000 as a result of the Company reevaluating the expected
utilization of the net operating loss carryforwards in relation to the extended
downturn in the truck market and other economic and internal operating factors.
Core Materials intends to reinvest the undistributed earnings of Core Composites
Corporation.
Core Materials' NOL carryforwards expire as follows:
<TABLE>
2007 $ 3,049,000
2008 10,823,000
2009 3,614,000
2010 638,000
2011 357,000
2016 2,030,000
-----------
Total $20,511,000
===========
</TABLE>
35
CORE MATERIALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. POSTRETIREMENT BENEFITS
Core Materials provides postretirement benefits to substantially all of
its United States 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 United States union represented employees. All of Core
Materials' United States 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.
Prior to the acquisition of Columbus Plastics, certain of Core Materials'
employees were participants in various International sponsored pension and
postretirement plans. The International 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,
International retained responsibility for the vested benefits as of December 31,
1996 and Core Materials agreed to reimburse International for early retirement
subsidies for certain employees. The accumulated benefit obligation, which
equals the projected benefit obligation and net liability, is $203,000 at
December 31, 2001 and $188,000 at December 31, 2000.
The postretirement health and life insurance plan provides healthcare and
life insurance for certain employees upon their retirement, along with their
spouses and certain dependents and requires cost sharing between Core Materials,
International and the participants in the form of premiums, co-payments and
deductibles. Core Materials and International share the cost of benefits for
certain employees, pursuant to the Asset Purchase Agreement between RYMAC and
International, 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.
36
CORE MATERIALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The funded status of the Company's postretirement health and life insurance
benefits plan as of December 31, 2001 and 2000 and a reconciliation with the
amounts recognized in the consolidated balance sheets are provided below:
<TABLE>
POST RETIREMENT BENEFITS
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 4,678,000 $ 4,020,000 $ 3,274,000
Service cost 385,000 367,000 448,000
Interest cost 351,000 301,000 233,000
Unrecognized loss/(gain) 111,000 (10,000) 65,000
Benefits Paid (54,000) -- --
------------ ------------ ------------
BENEFIT OBLIGATION AT END OF YEAR $ 5,471,000 $ 4,678,000 $ 4,020,000
------------ ------------ ------------
Unfunded status $ (5,471,000) $ (4,678,000) $ (4,020,000)
Unrecognized net loss 704,000 614,000 662,000
------------ ------------ ------------
Net liability $ (4,767,000) $ (4,064,000) $ (3,358,000)
============ ============ ============
PLAN ASSETS -- -- --
============ ============ ============
</TABLE>
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
<TABLE>
Discount rate 7.25% 7.50% 7.50%
</TABLE>
The components of expense for all of Core Materials' postretirement
benefits plans are as follows:
<TABLE>
2001 2000 1999
---------- ---------- ----------
Pension Expense:
Interest cost $ 15,000 $ 15,000 $ 14,000
Defined contribution plan
contributions 329,000 296,000 288,000
Multi-employer plan
contributions 240,000 331,000 322,000
---------- ---------- ----------
Total Pension Expense 584,000 642,000 624,000
---------- ---------- ----------
Health and Life Insurance:
Service cost 385,000 367,000 448,000
Interest cost 351,000 301,000 233,000
Amortization of net loss 21,000 38,000 44,000
---------- ---------- ----------
Net periodic benefit cost 757,000 706,000 725,000
---------- ---------- ----------
Total postretirement benefits
expense $1,341,000 $1,348,000 $1,349,000
========== ========== ==========
</TABLE>
The weighted average rate of increase in the per capita cost of covered
health care benefits is projected to be 9.65%. The rate is projected to decrease
gradually to 5% by the year 2005 and remain at that level thereafter. The
comparable assumptions for the prior year were 9.65% and 5%.
37
CORE MATERIALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The effect of changing the health care cost trend rate by one-percentage point
for each future year is as follows:
<TABLE>
1- PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost components $ 166,026 $(129,053)
Effect on postretirement benefit obligation 718,076 (608,929)
</TABLE>
12. RELATED PARTIES
In connection with the acquisition of Columbus Plastics, Core Materials
and International entered into a Supply Agreement. Under the terms of the Supply
Agreement, International agreed to purchase from Core Materials, and Core
Materials agreed to sell to International at negotiated prices, which
approximate fair value, all of International's original equipment and service
requirements for Fiberglass Reinforced Parts using the Sheet Molding Composite
process as they then existed or as they may be improved or modified. As of
December 31, 2001, the contract expired and has not been renewed, and business
with International continues on a purchase order basis, like business with all
of Core Materials' other customers. The purchase orders typically provide volume
commitments for four weeks at prices previously negotiated. Customers can update
their orders on a daily basis for changes in demand that allow them to run their
inventories on a "just-in-time" basis.
Sales to International were $36,381,000 in 2001, $51,379,000 in 2000 and
$61,867,000 in 1999, of which $6,147,000 and $6,353,000 had not been received as
of December 31, 2001 and 2000 and were included in accounts receivable.
Receivables as of December 31, 2001 and 2000 also include an additional $875,000
and $764,000, respectively, for tooling costs owed by International. Accounts
payable included $211,000 and $151,000, respectively as of December 31, 2001 and
2000 for product returns, returnable container deposits, material purchases from
International and rework charges. Core Materials expensed $1,625,000 in 2001,
$1,611,000 in 2000 and $1,516,000 in 1999, for interest expense on the Secured
Note. There was no outstanding liability for accrued interest at December 31,
2001 or December 31, 2000.
13. LABOR CONCENTRATION
As of December 31, 2001, Core Materials employed a total of 1,078
employees, which consists of 465 employees in its U.S. operations and 613
employees in its Mexican operations. Of these 1,078 employees, 285 are covered
by a collective bargaining agreement with the International Association of
Machinists and Aerospace Workers ("IAM"), which extends to August 7, 2004, and
526 are covered by a collective bargaining agreement with Sindicato de
Jorneleros y Obreros, which extends to January 16, 2003.
14. COMMITMENTS AND CONTINGENCIES
In late 2001 and early 2002, several lawsuits were filed in Mexico against
Airshield de Mexico, which is a Mexican subsidiary of Airshield Corporation. As
noted above, Core Materials acquired substantially all the assets of Airshield
Corporation in October 2001; however, Core Materials did not purchase the assets
or the stock of Airshield de Mexico. The lawsuits were filed by certain of
Airshield de Mexico's vendors as a result of unpaid debts of Airshield de
Mexico. Through these lawsuits, the vendors have attempted to foreclose on
inventory and equipment owned by Core Materials and located at its Mexico
facility. The total value of these assets at December 31, 2001, was $802,000. To
date, Core Materials has been successful in preventing these foreclosure
attempts. Core Materials is taking various actions through the Mexican legal
system to defend its assets and to prevent future claims. Core Materials'
Mexican legal counsel has advised the Company that it has valid legal position
to support the ownership of these assets; however, as with any case involving
litigation, the outcome of these claims is uncertain.
In July of 2001, a former employee of Core Materials filed a suit in
United States District Court, Southern District of Ohio, Eastern Division,
claiming her employment was terminated as a result of race discrimination. Core
Materials believes that no such discrimination has occurred and will defend this
claim through the appropriate legal systems.
38
CORE MATERIALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for the years ended December 31, 2001 and 2000.
<TABLE>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL YEAR
----------- ----------- ----------- ----------- ----------
2001:
Net sales $19,099,285 $17,458,242 $ 14,482,620 $ 17,324,557 $ 68,364,704
Gross margin 2,417,309 2,409,401 969,263 2,035,065 7,831,038
Income (loss) before interest and
taxes 390,067 698,230 (899,778) (296,529) (108,010)
Net income (loss) 3,656 175,757 (785,786) (1,253,768) (1,860,141)
Net income (loss) per common share:
Basic and diluted $ .00 $ .02 $ (.08) $ (.13) $ (.19)
2000:
Net sales $25,912,656 $23,207,529 $ 18,284,921 $ 16,140,253 $ 83,545,359
Gross margin 4,468,488 3,407,120 2,564,557 1,475,174 11,915,339
Income (loss) before interest and
taxes 1,792,914 1,065,516 281,508 (278,089) 2,861,849
Net income (loss) 822,063 415,171 (82,046) (439,837) 715,351
Net income (loss) per common share:
Basic and diluted $ .08 $ .04 $ (.01) $ (.04) $ .07
</TABLE>
No cash dividends were paid during 2001 and 2000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable
39
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 15, 2002, 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 15, 2002, 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 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 15, 2002, 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 15, 2002, 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 consolidated financial statements are included in Part
II, Item 8 of this Form 10-K:
Independent Auditors' Report
Consolidated Statements of Operations for the Years
Ended December 31, 2001, 2000 and 1999
Consolidated Balance Sheets as of December 31, 2001 and
2000
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
40
(2) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule is filed
with this Annual Report on Form 10-K:
Schedule II - Valuation and Qualifying Accounts and Reserves
for the years ended December 31, 2001, 2000 and 1999
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.
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on October 31, 2001, pertaining to
the acquisition of substantially all the assets of Airshield Corporation
by the Company's wholly owned subsidiary, Core Composites Corporation. An
amendment to the Form 8-K was also filed on December 28, 2001,containing
the pro forma financial statements pertaining to the acquisition.
41
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/ James L. Simonton
-------------------------------------
James L. Simonton
President and Chief Executive Officer
Date: March 28, 2002
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:
<TABLE>
/s/ James L. Simonton President, Chief Executive Officer April 1, 2002
------------------------------------- and Director
James L. Simonton
/s/ Kevin L. Barnett Vice President, Secretary, Treasurer and April 1, 2002
------------------------------------- Chief Financial Officer
Kevin L. Barnett
* Director April 1, 2002
-------------------------------------
James F. Crowley
* Director April 1, 2002
-------------------------------------
Ralph O. Hellmold
* Director April 1, 2002
-------------------------------------
Thomas M. Hough
* Director April 1, 2002
-------------------------------------
Malcolm M. Prine
* Director April 1, 2002
-------------------------------------
Thomas R. Cellitti
*By Kevin L. Barnett Attorney-In-Fact April 1, 2002
----------------------------------
Kevin L. Barnett
</TABLE>
42
CORE MATERIALS CORPORATION AND SUBSIDIARIES
SCHEDULE II
Consolidated valuation and qualifying accounts and reserves for the years ended
December 31, 2001, 2000 and 1999.
Reserves deducted from asset to which it applies - allowance for doubtful
accounts.
<TABLE>
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, 2001 $ 424,000 $ 454,000 $ 163,000 $ 715,000
Year Ended December 31, 2000 $ 431,000 $ 91,000 $ 98,000 $ 424,000
Year Ended December 31, 1999 $ 215,000 $ 216,000 $ 431,000
</TABLE>
(A) Amount represents uncollectible accounts written off.
Reserves deducted from asset to which it applies - deferred income tax valuation
allowance.
<TABLE>
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, 2001 $2,160,000 $ 646,000 $1,381,000 $1,425,000
Year Ended December 31, 2000 $2,160,000 $2,160,000
Year Ended December 31, 1999 $3,787,000 $1,627,000 $2,160,000
</TABLE>
(A) Amounts represent reserves for capital loss carryforward that expired
in 2001 and 1999, respectively.
43
INDEX TO EXHIBITS
<TABLE>
Exhibit No. Description Location
----------- ----------- --------
2(a)(1) Asset Purchase Agreement Incorporated by
dated as of September 12, 1996, reference to Exhibit
as amended October 31, 1996, 2-A to Registration
between Navistar and RYMAC(1) Statement on Form S-4
(Registration
No. 333-15809)
2(a)(2) Second Amendment to Asset Purchase Filed herein
Agreement dated December 16, 1996(1)
2(b)(1) Agreement and Plan of Merger Incorporated by
dated as of November 1, 1996, reference to Exhibit
between Core Materials and 2-B to Registration
RYMAC Statement on Form
S-4 (Registration
No. 333-15809)
2(b)(2) First Amendment to Agreement and Incorporated by
Plan of Merger dated as of reference to Exhibit
December 27, 1996 between 2(b)(2) to Annual Report on
Core Materials and RYMAC Form 10-K for the year
ended December 31, 1997
2(c)(1) Asset Purchase Agreement dated as Incorporated by
of October 10, 2001, between reference to Exhibit 1 to
Core Materials Corporation and Form 8K filed
Airshield Corporation October 31, 2001
3(a)(1) Certificate of Incorporation of Incorporated by
Core Materials Corporation reference to Exhibit
as filed with the Secretary of State 4(a) to Registration
of Delaware on October 8, 1996 Statement on Form
S-8, (Registration
No. 333-29203)
3(a)(2) Certificate of Amendment of Incorporated by
Certificate of Incorporation reference to Exhibit
of Core Materials Corporation 4(b) to Registration
as filed with the Secretary of State Statement on Form
of Delaware on November 6, 1996 S-8 (Registration
No. 333-29203)
</TABLE>
44
<TABLE>
Exhibit No. Description Location
----------- ----------- --------
3(a)(3) Certificate of Incorporation of Core Incorporated by
Materials Corporation, reflecting reference to Exhibit 4(c)
amendments through November 6, to Registration
1996 [for purposes of compliance Statement on Form S-8
with Securities and Exchange (Registration No.
Commission filing requirements only] 333-29203)
3(b) By-Laws of Core Materials Incorporated by
Corporation reference to Exhibit
3-C to Registration
Statement on Form
S-4 (Registration
No. 333-15809)
4(a)(1) Certificate of Incorporation of Incorporated by
Core Materials Corporation reference to Exhibit
as filed with the Secretary of State 4(a) to Registration
of Delaware on October 8, 1996 Statement on Form
S-8 (Registration
No. 333-29203)
4(a)(2) Certificate of Amendment of Incorporated by
Certificate of Incorporation reference to Exhibit
of Core Materials Corporation 4(b) to Registration
as filed with the Secretary of State Statement on Form
of Delaware on November 6, 1996 S-8 (Registration
No. 333-29203)
4(a)(3) Certificate of Incorporation of Core Incorporated by
Materials Corporation, reflecting reference to
amendments through November 6, Exhibit 4(c) to
1996 [for purposes of compliance Registration Statement
with Securities and Exchange on Form S-8
Commission filing requirements only] (Registration
No. 333-29203)
4(b) By-Laws of Core Materials Incorporated by
Corporation reference to Exhibit
3-C to Registration
Statement on Form
S-4 (Registration
No. 333-15809)
10(a)(1) Core Materials Corporation Filed herein
Secured Promissory Note, dated
December 31, 1996, to Navistar
International Transportation Corp.
</TABLE>
45
<TABLE>
Exhibit No. Description Location
----------- ----------- --------
10(a)(2) Amendment No. 1 to Secured Filed Herein
Promissory Note, dated
December 31, 1996, to Navistar
International Transportation Corp.
10(a)(3) Amendment No. 2 to Secured Incorporated by
Promissory Note, dated April 6, 1998 reference to Exhibit
to Navistar International Transportation 10(a)(3) to Annual
Corp. Report on Form 10-K
for the year-ended
December 31, 1998
10(a)(4) Amendment No. 3 to Secured Incorporated by
Promissory Note, dated April 20, 1999 reference to Exhibit
to Navistar International Transportation 10(a)(4) to Annual
Corp. Report on Form 10-K
for the year-ended
December 31, 1998
10(b) Comprehensive Supply Agreement, Filed herein
dated December 31, 1996, by and between
Navistar International Transportation
Corp. and Core Materials Corporation
10(d) Registration Rights Agreement, dated Filed herein
December 31, 1996, by and between
Navistar International Transportation
Corp. and various other persons who
become parties pursuant to the agreement
10(e) Loan Agreement, dated December 3, Incorporated by reference
1997, by and between Core Materials to Exhibit 10(e) to Annual
Corporation and Key Bank National Report on Form 10-K for
Association the year ended December 31,
1997
10(e)(1) Amendment, dated March 29, 2001, to Incorporated by reference
the Loan Agreement dated December 3, 1997 to Exhibit 10(e)(1) to
by and between Core Materials Corporation Annual Report on Form 10-K
and Key Bank National Association for the year ended December, 31
2000
</TABLE>
46
<TABLE>
Exhibit No. Description Location
----------- ----------- --------
10(f) Master Equipment Lease Agreement(2) Incorporated by
by and between KeyCorp Leasing, reference to Exhibit 10(f)
a division of Key Corporate to Annual Report on Form
Capital, Inc. and Core Materials 10-K for the year ended
Corporation December 31, 1997
10(f)(1) Amendment, dated March 29, 2001, to Incorporated by reference
Master Equipment Lease Agreement(2) by to Exhibit 10(f)(1) to
and between KeyCorp Leasing, Annual Report on Form
a division of Key Corporate 10-K for the year ended
Capital, Inc. and Core Materials December 31, 2000
Corporation
10(g) Loan Agreement, dated April 1, Incorporated by
1998, by and between South Carolina reference to Exhibit
Jobs - Economic Development Authority 10(a)(1) to Quarterly
and Core Materials Corporation Report on Form 10-Q
for the quarter ended
June 30, 1998
10(h) Reimbursement Agreement, dated Incorporated by
April 1, 1998, by and between Core reference to Exhibit
Materials Corporation and Key Bank 10(a)(2) to Quarterly
National Association Report on Form 10-Q
for the quarter ended
June 30, 1998
10(h)(1) Amendment, dated March 29, 2001, to Incorporated by reference
Reimbursement Agreement, dated to Exhibit 10(h)(1) to
April 1, 1998, by and between Core Annual Report on Form
Materials Corporation and Key Bank 10-K for the year ended
National Association December 31, 2000
10(i) Core Materials Corporation Incorporated by
Employee Stock Purchase Plan reference to Exhibit
4(c) to Registration
Statement on Form S-8
(Registration No. 333-60909)
10(j) Letter Agreement Regarding Terms and Incorporated by
Conditions of Interest Rate Swap reference to Exhibit 10(j)
Agreement between KeyBank National to Annual Report on Form
Association and Core Materials Corporation 10-K for the year-ended
December 31,1998
</TABLE>
47
<TABLE>
Exhibit No. Description Location
----------- ----------- --------
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) Filed herein
10(m) 2000-2001 Informal Cash Incorporated by reference
Profit Sharing Plan(3) to Exhibit 10(m) on Form
10-K for the year ended
December 31, 2000
10(n) Letter Agreement with Hellmold Incorporated by
Associates, Inc. dated November 1, 1995, reference to Exhibit
as amended April 10, 1996 10.8 to Annual Report
and July 18, 1996(3) on Form 10-K for the
year-ended December
31, 1996
10(o) Compensation Agreement with Incorporated by reference
Malcolm M. Prine(3) to Exhibit 10(o) to Annual
Report on Form 10-K for
the year ended December 31,
2000
11 Computation of Net Income per Share Exhibit 11 is omitted
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 Deloitte & Touche LLP Filed Herein
24 Powers of Attorney Filed Herein
</TABLE>
(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.
48
(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.
49
