-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JkqZm3jEOVN/3dkMqUNy1lp6l3at4BMC3UqlaVXBKfXnuxL9zjXc1HZOvClwk3bP q/sCCzuJ6wFYl2u8+BtKPg== 0000912057-97-013616.txt : 19970423 0000912057-97-013616.hdr.sgml : 19970423 ACCESSION NUMBER: 0000912057-97-013616 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970419 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970421 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORE MARK INTERNATIONAL INC CENTRAL INDEX KEY: 0001024726 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISCELLANEOUS NONDURABLE GOODS [5190] IRS NUMBER: 911295550 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 333-14217 FILM NUMBER: 97584196 BUSINESS ADDRESS: STREET 1: 395 OYSTER POINT BLVD STREET 2: SUITE 415 CITY: SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 4155899445 MAIL ADDRESS: STREET 1: 395 OYSTER POINT BLVD STREET 2: SUITE 415 CITY: SAN FRANCISCO STATE: CA ZIP: 94080 8-K/A 1 8-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): April 19, 1997 (February 18, 1997) CORE-MARK INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) ------------ ------------ COMMISSION FILE NUMBER 333-14217 ------------ ------------ DELAWARE 91-1295550 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 395 OYSTER POINT BOULEVARD, SUITE 415 SOUTH SAN FRANCISCO, CA 94080 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 589-9445 ------------ ------------ ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On February 3, 1997, Core-Mark International, Inc. (the "Company") consummated a transaction, pursuant to a Purchase Agreement dated January 31, 1997, to acquire certain assets and the business of two related companies, Melvin Sosnick Company and Capital Cigar Company (collectively "Sosnick" or the "Sosnick Companies"), a wholesale distributor to the convenience retail market in northern California and northern Nevada. Sosnick operates in the same geographic marketplace and provides similar products and services as the Company. The Company is integrating the acquired business into its existing operations and facilities and has hired a majority of Sosnick's former employees (salespeople, warehouse employees and drivers) to support the additional sales volume. The assets acquired included trade accounts receivable, inventories and warehouse equipment that the Company intends to continue to use in its business. The acquisition excluded the assumption of substantially all of the liabilities of Sosnick (such as notes payable, trade accounts payable, commitments to lease warehouse facilities and other liabilities) disclosed in Sosnick's historical financial statements included herein. As a result, the historical financial statements of Sosnick and the pro forma financial information of the Company included herein do not purport to be indicative of the actual financial position or the results of operations of the Company had the acquisition been completed as of the dates indicated herein, nor are they indicative of future operating results or financial position of the Company. The purchase price for the assets and the business totaled $21.9 million, principally based upon book value of the assets. The terms of the acquisition resulted from arms-length negotiations between representatives of Sosnick and the Company. The Company financed the purchase price with borrowings under its existing revolving credit facility. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED The following financial statements are filed with this Report: Page Number ----------- Melvin Sosnick Company 5-22 -------------------------------- Independent Auditors' Report of Seiler and Company Balance Sheet at September 28, 1996 Statement of Loss and Retained Earnings for the 52-53 week period ended September 28, 1996 Statement of Cash Flows for the 52-53 week period ended September 28, 1996 Notes to Financial Statements Capital Cigar Company 23-42 ----------------------------- Independent Auditors' Report of Seiler and Company Balance Sheets as of September 28, 1996 and September 30, 1995 Statements of Income (Loss) and Retained Earnings for the periods ended September 28, 1996 and September 30, 1995 Statements of Cash Flows for the periods ended September 28, 1996 and September 30, 1995 Notes to Financial Statements The Sosnick Companies 43-46 (Interim Period Financial Statements) -------------------------------------- Combined Balance Sheets as of December 28, 1996 and September 28, 1996 Combined Statements of Income (Loss) for the periods ended December 28, 1996 and December 31, 1995 Combined Statements of Cash Flows for the periods ended December 28, 1996 and December 31, 1995 Notes to Financial Statements
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(b) PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma condensed financial statements are filed with this Report: Page Number ----------- Core-Mark International, Inc. and subsidiaries 47-52 -------------------------------------------------------- Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31, 1996 Unaudited Pro Forma Condensed Consolidated Statement of Income for the year ended December 31, 1996 Notes to Unaudited Condensed Consolidated Pro Forma Financial Statements (c) EXHIBITS 2.1 Purchase Agreement dated January 31, 1997 filed as an exhibit to the 53-54 registrant's Current Report on Form 8-K, filed with the Commission on February 18, 1997. 23.1 Consent of Seiler & Company, LLP
3 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of South San Francisco, State of California. CORE-MARK INTERNATIONAL, INC. By /s/ Leo F. Korman ------------------------------------- Leo F. Korman, Senior Vice President and Chief Financial Officer Dated: April 19, 1997 4 MELVIN SOSNICK COMPANY INDEX TO FINANCIAL STATEMENT Page No. -------- INDEPENDENT AUDITORS' REPORT 6 FINANCIAL STATEMENT Balance Sheet 7 Statement of Loss and Retained Earnings 8 Statement of Cash Flows 9 - 10 Notes to Financial Statement 11 - 22 5 Seiler & Company CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors MELVIN SOSNICK COMPANY San Leandro, California Independent Auditors' Report ---------------------------- We have audited the accompanying balance sheet of Melvin Sosnick Company as of September 28, 1996, and the related statements of loss and retained earnings, and cash flows for the 52-53 week period then ended. The financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the balance sheet. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statement referred to above presents fairly, in all material respects, the financial position of Melvin Sosnick Company as of September 28, 1996, and the results of its operations and its cash flows for the 52-53 week period then ended in conformity with generally accepted accounting principles. The accompanying financial statement has been prepared assuming that the Company will continue as a going concern. As discussed in Note 16 to the financial statement, the Company has suffered recurring losses from operations which raises substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 16. The financial statement does not include any adjustments that might result from the outcome of this uncertainty. /s/ Seiler & Company San Francisco, California December 13, 1996 6 MELVIN SOSNICK COMPANY BALANCE SHEET SEPTEMBER 28, 1996 ASSETS ------ CURRENT ASSETS: Cash $ 16,399 Receivables 6,568,680 Due from affiliate 559,452 Merchandise inventory 6,081,109 Cigarette stamp inventory 704,639 Prepaid expenses 199,257 ---------- Total current assets 14,129,536 PROPERTY, PLANT AND EQUIPMENT 3,953,832 INSURANCE PROCEEDS RECEIVABLE 165,864 INTANGIBLE ASSETS 4,000 OTHER ASSETS 506,013 ---------- Total assets $18,759,245 ---------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Checks drawn in excess of available bank balance $ 585,112 Notes payable 6,937,461 Due to affiliate 1,732,434 Accounts payable - trade 3,227,835 Accrued expenses 1,849,442 Taxes payable: Cigarette stamp tax 1,595,816 Other 309,738 ---------- Total current liabilities 16,237,838 ---------- LONG-TERM LIABILITIES: Notes payable 1,216,345 Deposits 61,755 ---------- COMMITMENTS AND CONTINGENCIES Total liabilities 17,515,938 ---------- STOCKHOLDERS' EQUITY: Common stock - par value $100 per share; 10,000 shares authorized, 1,550 shares issued and outstanding 155,000 Additional paid-in capital 158,117 Retained earnings 930,190 ----------- Total stockholders' equity 1,243,307 ---------- Total liabilities and stockholders' equity $18,759,245 ---------- See accompanying notes. 7 MELVIN SOSNICK COMPANY STATEMENT OF LOSS AND RETAINED EARNINGS FOR THE 52-53 WEEK PERIOD ENDED SEPTEMBER 28, 1996
Amount Percent ------ ------- SALES $144,886,318 100.00% COST OF SALES 131,373,692 90.67 ----------- ------- GROSS PROFIT 13,512,626 9.33 ----------- ------- LESS EXPENSES: Officers' salaries 472,276 .33 Warehouse 4,321,704 2.98 Selling 4,720,172 3.26 Delivery 2,385,451 1.65 General and administrative 5,537,779 3.82 ----------- ------- Total expenses 17,437,382 12.04 ----------- ------- LOSS FROM OPERATIONS (3,924,756) (2.71) OTHER INCOME 581,600 .40 ----------- ------- LOSS BEFORE PROVISION FOR TAXES ON INCOME (3,343,156) (2.31) PROVISION FOR TAXES ON INCOME 800 .00 ----------- ------- NET LOSS (3,343,956) (2.31)% -------- RETAINED EARNINGS, BEGINNING OF PERIOD 4,274,146 ----------- RETAINED EARNINGS, END OF PERIOD $ 930,190 -----------
See accompanying notes. 8 MELVIN SOSNICK COMPANY STATEMENT OF CASH FLOWS FOR THE 52-53 WEEK PERIOD ENDED SEPTEMBER 28, 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (3,343,956) Noncash items included in net income: Depreciation 586,529 Amortization 12,945 Rental income 20,996 Loss on sale of fixed assets 17,386 (Increase) decrease in: Receivables 1,389,729 Due from affiliate 129,668 Merchandise inventory 974,158 Cigarette tax stamp inventory (62,089) Prepaid expenses (12,280) Insurance proceeds receivable (16,000) Other assets (153,190) Increase (decrease) in: Accounts payable 1,407,511 Cigarette and tobacco tax payable (821,570) Other taxes payable 207,651 Deposits 37,515 Accrued expenses 1,044,765 ------------ Net cash provided by operating activities 1,419,768 ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of improvements and equipment (706,836) Proceeds from sale of fixed assets 27,875 ------------ Net cash used by investing activities (678,961) ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable 131,583,369 Repayment of notes payable (132,322,980) Due to affiliate 1,732,434 Checks drawn in excess of available bank balance (1,733,872) ------------ Net cash used by financing activities (741,049) ------------ Net decrease in cash (242) CASH AT BEGINNING OF PERIOD 16,641 ------------ CASH AT END OF PERIOD $ 16,399 ------------ See accompanying notes. 9 MELVIN SOSNICK COMPANY STATEMENT OF CASH FLOWS FOR THE 52-53 WEEK PERIOD ENDED SEPTEMBER 28, 1996 SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR INTEREST AND INCOME TAXES: Cash paid during the year for: Income taxes $ 800 --------- Interest $1,187,045 --------- SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: The Company purchased new equipment that was not paid by September 28, 1996. The Company has accrued $349,394 for these assets. See accompanying notes. 10 MELVIN SOSNICK COMPANY NOTES TO FINANCIAL STATEMENT SEPTEMBER 28, 1996 NOTE 1 - ACCOUNTING POLICIES - ---------------------------- A. Business Combination - -------------------------- Effective October 1, 1995, Bercovich Cigar Company, a related entity by common ownership and control, was merged into the Melvin Sosnick Company in a business combination accounted for as a pooling-of-interest. The net assets of Bercovich Cigar Company, a wholesale distributor, were transferred to the Melvin Sosnick Company at their book value, and neither company recognized a gain or loss. The Melvin Sosnick Company issued 350 new shares which increased the common stock value and additional paid-in capital of the Melvin Sosnick Company. Melvin Sosnick's retained earnings were increased by the amount of Bercovich Cigar Company's retained earnings and the common stock of Bercovich Cigar Company was canceled. B. Nature of Business - ------------------------ Melvin Sosnick Company is a corporate wholesale distributor of candies, tobacco, groceries, health and beauty aids and sundries in the Northern California and Los Angeles region. C. Use of Estimates - ---------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. D. Inventories - ----------------- Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories are pledged as security for certain notes payable (Note 7). E. Property, Plant and Equipment - ----------------------------------- Property, plant and equipment are stated at cost. Major improvements that significantly add to the productive capacity or extend the life of an asset are capitalized. Maintenance and repair costs are charged to income currently. Depreciation of property and equipment, and amortization of leasehold improvements, are computed on the straight-line and declining balance methods over the useful lives of the assets which range from three to thirty-nine years. 11 MELVIN SOSNICK COMPANY NOTES TO FINANCIAL STATEMENT SEPTEMBER 28, 1996 NOTE I - ACCOUNTING POLICIES (Continued) - ---------------------------- F. Intangible Assets - ----------------------- The cost of a covenant not to compete is being amortized on the straight-line method over a five-year period. G. Income Taxes - ------------------ The Company has adopted SFAS 109, Accounting for Income Taxes, to account for deferred income taxes. Deferred taxes are computed based on the tax liability or benefit in future years of the reversal of temporary differences in the recognition of income or deduction of expenses between financial and tax reporting purposes. The principal items resulting in the differences are state franchise taxes, depreciation, the accrual of vacation pay, six-months free rent to a warehouse tenant, and the capitalization of certain expenses related to inventory per Internal Revenue Code Section 263A. The net difference between tax expense and taxes currently payable is reflected in the balance sheet as deferred taxes. Deferred tax assets and liabilities are classified as current and noncurrent based on the classification of the related asset or liability for financial reporting purposes, or based on the expected reversal date for deferred taxes that are not related to an asset or liability. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. H. Change in Accounting Period - --------------------------------- The Company elected to adopt a 52-53 week accounting period for financial and tax reporting purposes. The fiscal year will end on the last Saturday of September. 12 MELVIN SOSNICK COMPANY NOTES TO FINANCIAL STATEMENT SEPTEMBER 28, 1996 NOTE 2 - RECEIVABLES - -------------------- Receivables consist of the following: Trade $ 6,052,990 Other 819,389 ---------- Subtotal 6,872,379 Less allowance for doubtful accounts 303,699 ---------- Total $ 6,568,680 ---------- The Company grants credit to customers who are all located in California. Receivables are pledged as security for certain notes payable (Note 7). NOTE 3 - PROPERTY, PLANT AND EQUIPMENT - -------------------------------------- Property, plant and equipment consist of the following: Land $ 157,728 Building 889,219 Furniture, fixtures and equipment 7,394,553 Automotive equipment 115,295 Parking lot 135,554 Building improvements 1,569,485 ---------- Subtotal 10,261,834 Less accumulated depreciation and amortization 6,308,002 ---------- Total $ 3,953,832 ---------- Property, plant and equipment are pledged as security for certain notes payable (Note 7). Depreciation and amortization for the period ended September 28, 1996 was $586,529. NOTE 4 - INSURANCE PROCEEDS RECEIVABLE - --------------------------------------- The Company has entered into a split dollar life insurance agreement with an officer of the Company. This policy has a face amount of $1,000,000. In the event of the officer's death, the Company's share in the proceeds would amount to $165,864. 13 MELVIN SOSNICK COMPANY NOTES TO FINANCIAL STATEMENT SEPTEMBER 28, 1996 NOTE 5 - INTANGIBLE ASSETS - -------------------------- Intangible assets consist of the following: Covenant not to compete $ 60,852 Goodwill 4,000 ------- Subtotal 64,852 Less accumulated amortization 60,852 ------- Total $ 4,000 ------- Amortization expense for the period ended September 28, 1996 was $9,315. NOTE 6 - OTHER ASSETS - --------------------- Other assets consist of the following: Unamortized rent $169,497 Totes (net) 123,565 Deposits 115,165 Noncurrent prepaid expenses 90,154 Investments at cost 7,632 ------- Total $506,013 ------- Rental Income - ------------- Effective March 24, 1995, the Company leased their Santa Clara office/warehouse facility for ten years. This lease provides for six-months free rent, which will be amortized over the lease term in conformity with SFAS 13. It further stipulates that total minimum rental income for the ten year period will be $3,069,232. 14 MELVIN SOSNICK COMPANY NOTES TO FINANCIAL STATEMENT SEPTEMBER 28, 1996 NOTE 7 - NOTES PAYABLE - ---------------------- Notes payable consist of the following: Maturity date Interest rate Amount ------------- ------------- ------ Secured: Line of credit(a) 09/21/97 Prime + 1.5% $6,811,395 Promissory note, affiliate(b) 09/25/02 Prime + 1.5% 854,697 Promissory note(c) 08/15/02 Prime + 1.5% 487,714 --------- Total 8,153,806 Less current portion 6,937,461 --------- Long-term portion $1,216,345 --------- (a) On January 19, 1995, the Company entered into a secured line of credit with the CIT Group. This line was available through January 18, 1997 with an interest rate of prime plus 1.5%. The minimum joint credit amount was $4,000,000 with a maximum credit of $12,000,000. On September 22, 1995, an amendment was signed which extended the line of credit until September 21, 1997, added an affiliated company, and increased the maximum credit to $15,000,000. The amount available is a factor of the receivable and inventory balances. Receivables, inventory, and property and equipment are pledged as security for the line of credit. The Company is required by the CIT security agreement to meet certain loan covenants in order to comply with their loan agreement. The Company is not in compliance with the covenant that requires the financial statements to be provided within ninety (90) days of year end. (b) The Company converted outstanding payables in the amount of $883,031 to Capital Cigar Company into a note payable on September 25, 1995. The terms of the note require 83 monthly payments of $10,512. All unpaid principal and accrued interest is payable at maturity with no prepayment penalties. (c) The Company issued a promissory note in the amount of $569,000 to the CIT Group on September 22, 1995. The terms of the note require 83 monthly payments of $6,774. All unpaid principal and accrued interest are payable at maturity. The note is secured by the CIT loan and security agreement dated January 19, 1995. Interest is calculated by CIT on a monthly basis and charged to the line-of-credit. 15 MELVIN SOSNICK COMPANY NOTES TO FINANCIAL STATEMENT SEPTEMBER 28, 1996 NOTE 7 - NOTES PAYABLE (Continued) - ---------------------- Maturities of notes payable for each of the next five years are as follows: 1997 $6,937,461 1998 130,633 1999 135,665 2000 141,210 2001 147,321 Interest expense for the period ended September 28, 1996 was $1,187,045. NOTE 8 - ACCRUED EXPENSES - ------------------------- Accrued expenses consist of the following: General and administrative expenses $1,088,464 Accrued vacation and PTO 411,584 Equipment purchases 349,394 --------- Total $1,849,442 --------- During the year, the Company changed its policy for providing vacation and sick pay for nonunion employees. Previously, employees were only entitled to unused vacation upon termination. Under the new policy, employees are entitled to unused vacation, sick pay, and other floating holidays. For accrued sick time, or PTO (paid time off), the policy was retroactive to each employee's service date with a maximum cap for unused sick days. NOTE 9 - COMMITMENTS AND CONTINGENCIES - -------------------------------------- Leases - ------ The following is a summary of noncancellable operating leases: Description Minimum Renewal of property annual rent Expiration-date option ----------- ----------- --------------- ------- Office/warehouse facility (1) $180,000 December 31, 2000 No Fresno facility (1) 42,000 June 30, 1999 No Pleasanton office (2) 94,045 January 31, 1999 No Ontario office/warehouse 7,239 December 31, 1996 No Delivery trucks 130,151 Various Various Autos 8,242 Various Yes Equipment 24,114 Various Various 16 MELVIN SOSNICK COMPANY NOTES TO FINANCIAL STATEMENT SEPTEMBER 28, 1996 NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued) - -------------------------------------- (1) Leases are with partnerships owned by a majority of the stockholders of the Company. (2) Effective October 1, 1995, the Company modified an existing sublease agreement whereby 25% of the lease obligation would be paid by Capital Cigar Company. The above minimum rental represents the Company's 75% portion. On June 17, 1996, the Company subleased the Pleasanton office. The lease expires on January 31, 1999 which is the expiration of the Company's lease obligation. The agreement calls for monthly rental payments of $11,273 that began in July 1996. The minimum future sublease income is $135,276. Noncapitalized lease commitments extending for one year or more, primarily involving real and personal property, will require the following future payments: Real Personal Year property property Total ---- -------- -------- ----- 1997 $323,284 $162,506 $ 485,790 1998 317,577 140,178 457,755 1999 243,359 81,757 325,116 2000 45,000 1,721 46,721 2001 -0- -0- -0- -------- -------- ---------- Total $929,220 $386,162 $1,315,382 -------- -------- ---------- Rental expense for the period ended September 28, 1996 was $733,743. The Company is currently renting an annex adjacent to the San Leandro warehouse on a month-to-month basis. The monthly rental fee is $1,893. Co-insurance - ------------ At September 28, 1996, the Company was underinsured at its Fresno warehouse. The current insurance policy covers personal property up to $375,000. The estimated personal property at the Fresno warehouse is $2,000,000. 17 MELVIN SOSNICK COMPANY NOTES TO FINANCIAL STATEMENT SEPTEMBER 28, 1996 NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued) - -------------------------------------- Litigation - ---------- The Company and its joint affiliates are named as defendants in a lawsuit filed by an independent consultant for breach of contract and fraud alleging damages in the amount of $400,000. Per legal counsel, it is not possible at this time to predict the possible outcome nor damages. Management has reviewed the litigation with legal counsel and intends to defend this matter vigorously. The Company is involved in legal actions arising in the ordinary course of business. In the opinion of management, the Company has adequate legal defenses or insurance coverage with respect to each of these actions and does not believe that they will materially affect the Company's results of operations or financial position. Employment Agreement - -------------------- The Company has employment contracts with two officers calling for a base salary plus an annual incentive bonus based on specified levels of income. No bonus payments were made for the period ended September 28, 1996. NOTE 10 - PENSION PLANS AND 401(k) - ---------------------------------- Defined Benefit Plan - -------------------- The Company has trusteed noncontributory pension and welfare plans covering employees whose wages and benefits are determined by union contracts. Certain nonunion employees of the Company are covered by the pension plan of Melvin Sosnick Company and Capital Cigar Company. The consultant for the plan has determined that the plan was overfunded for tax purposes at December 31, 1995. The following pension information was provided by the actuarial company and includes amounts for both companies. The Company sponsors a defined benefit pension plan that covers all nonunion employees. The plan provides benefits to be paid to eligible employees at retirement based upon years of service with the Company and compensation rates near retirement. Contributions to the plan reflect benefits attributed to employees' service to date, as well as services expected to be earned in the future. Plan assets consist primarily of cash equivalent accounts, interest bearing bonds, government securities, pooled mutual funds and equities. 18 MELVIN SOSNICK COMPANY NOTES TO FINANCIAL STATEMENT SEPTEMBER 28, 1996 NOTE 10 - PENSION PLANS AND 401(k) (Continued) - ---------------------------------- The following sets forth the funded status of the plan at December 31, 1995. The funded status as of September 28, 1996 is not currently available. Actuarial present value of benefit obligations: Vested benefits $(2,074,791) Nonvested benefits (50,992) ---------- Accumulated benefit obligation (2,125,783) Effect of anticipated future compensation levels and other events (4,394) Projected benefit obligation (2,130,177) Fair value of assets held in plan 4,187,925 ---------- Excess of plan assets over projected benefit obligation 2,057,748 Items not yet recognized in earnings: Unamortized prior service cost - Remaining net unrecognized (gain) (2,314,361) Remaining unrecognized net transition (gain) (30,106) Pension liability included in the balance sheet - ---------- (Accrued) Pension Cost $ (286,719) ---------- The weighted average discount rate used to measure the projected benefit obligation is 8.5%, the rate of increase in future compensation levels is 3.5%, and the expected long-term rate of return on assets is 8.5%. The Company uses the straight-line method of amortization for unrecognized gains and losses. The above accrued pension cost has not been reflected in these financial statements due to the fact that the amount allocable to Melvin Sosnick Company cannot be determined by the actuary at the time of this statement. 401(k) - ------ During the year, the Company adopted a IRC 401(k) plan covering substantially all eligible nonunion employees. Under the provisions of the plan, eligible employees may defer up to 15% of their compensation. The Plan provides for 10% matching Company contributions up to 8% of the employee contribution. Employees must complete one year of service and attain age 21 before they are eligible to participate. Participants may enter the plan in May or November immediately following the completion of the age and service requirement. The Company contributed $6,702 for the period ended September 28, 1996. 19 MELVIN SOSNICK COMPANY NOTES TO FINANCIAL STATEMENT SEPTEMBER 28, 1996 NOTE 10 - PENSION PLANS (Continued) - ----------------------- 401(k) (Continued) - ----- As of September 28, 1996, the Company had not received a determination letter from the Internal Revenue Service that the Plan was approved. NOTE 11 - INCOME TAXES - ---------------------- The Company's total deferred tax assets, deferred tax liabilities, and deferred tax asset valuation allowances at September 28, 1996 are as follows: Total deferred tax assets $ 1,158,569 Less valuation allowance (1,158,569) ----------- Net deferred tax asset $ -0- ----------- For federal tax purposes, the Company has approximately $5,900,000 of net operating loss carry forward as of September 28, 1996, of which approximately $89,000 expires in 2001 and approximately $5,811,000 expires in 2010. At September 28, 1996, the Company has approximately $6,500,000 in net operating loss carryforward for alternative minimum tax. For state purposes, the Company has approximately $3,100,000 of net operating loss carryforward as of September 28, 1996 of which $49,000 expires in 1999, and $3,051,000 in 2000. NOTE 12 - AFFILIATED COMPANIES - ------------------------------ Melvin Sosnick Company is affiliated with Capital Cigar Company. Both companies are incorporated in California. The stock in both companies is owned, in different percentages, by related family members. The above companies sell merchandise to each other at their cost. The amounts sold through affiliated companies is less than one percent of sales. As of September 28, 1996, Capital Cigar Company was indebted to Melvin Sosnick Company for $559,452 related to general operating expenses and purchases made by Melvin Sosnick Company on behalf of Capital Cigar Company. Melvin Sosnick Company was indebted to Capital Cigar Company for $1,732,434 related to cash borrowing for operations. 20 MELVIN SOSNICK COMPANY NOTES TO FINANCIAL STATEMENT SEPTEMBER 28, 1996 NOTE 13 - CONCENTRATIONS - ------------------------ Substantial Vendor Purchases - ---------------------------- Purchases from two major suppliers totaled approximately $54,000,000 or 41.3% of total purchases for the period ended September 28, 1996. Substantial Customer Sales - -------------------------- Sales to one major customer totaled approximately $24,000,000 or 16.6% of total sales for the period ended September 28, 1996. Substantial Product Sales - ------------------------- Sales of cigarettes and other tobacco products totaled approximately $80,000,000 or 55.4% of total sales for the period ended September 28, 1996. Union Employees - --------------- The Company employs approximately 120 union employees. The current collective bargaining agreement is due for renegotiation on April 1, 1997. Management anticipates that a new contract will be signed prior to the expiration of the current agreement. NOTE 14 - STOCK OPTION PLAN - --------------------------- Pursuant to Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation (FAS 123), the Company has elected not to adopt the statement but follow the rules under APB 25. The Company will comply with the disclosures as required under the statement. On January 1, 1989, the Company approved the adoption of a stock option plan, whereby options were granted to a key employee to purchase up to 158 shares of common stock at a price which varies with the exercise date. The current exercise price per share is $4,839. Options may be exercised any number of times by the optionee during the option period for an amount of shares not less than 28. The option period expires on the earlier of six months and one day following the death of the optionee or six months and one day following the termination of the optionee's employment. No options were exercised as of September 28, 1996. 21 MELVIN SOSNICK COMPANY NOTES TO FINANCIAL STATEMENT SEPTEMBER 28, 1996 NOTE 15 - SUBSEQUENT EVENTS - --------------------------- Sale of Business - ---------------- Subsequent to year-end, the Company entered into an agreement to sell the majority of its assets to Core-Mark International (CMI). As part of the agreement, CMI will acquire 100% of the fully collectible trade accounts receivable, 100% of the fully salable inventory, and all of the fixed assets, excluding leasehold improvements and capitalized software. The purchase price for the acquisition of these assets would be the net book value plus an additional amount. The proposed effective date of this agreement is January 31, 1997. The Company plans to cease operations as of such date. Warehouse Closure - ----------------- Subsequent to the balance sheet date and before the financial statements were issued, the Company announced plans to close its Fresno warehouse. The Company expects to incur approximately $50,000 of out-of-pocket expenses related to employee severance, dismantlement of the warehouse, transportation of inventory, and other miscellaneous costs. The total financial impact due to losses on the retirement and sale of fixed assets are not determinable as of the report date. In addition, management has not estimated the annual savings, but expects significant cost reductions in the following period. NOTE 16 - GOING CONCERN - ----------------------- These statements are presented on the basis that the Company is a going concern. Going concern contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. The accompanying financial statements show a loss from operations of $3,924,756. Losses have been significant over the past few years, and current liabilities exceed current assets by $2,108,302. Management has initiated plans to consolidate operations and reduce overhead costs. 22 CAPITAL CIGAR COMPANY INDEX TO FINANCIAL STATEMENTS Page No. -------- INDEPENDENT AUDITORS' REPORT 24 - 25 FINANCIAL STATEMENTS Balance Sheets 26 - 27 Statements of Income (Loss) and Retained Earnings 28 Statements of Cash Flows 29 - 30 Notes to Financial Statements 31 - 42 23 Seiler & Company CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors CAPITAL CIGAR COMPANY San Leandro, California Independent Auditors' Report ---------------------------- We have audited the accompanying balance sheet of Capital Cigar Company as of September 28, 1996, and the related statements of income (loss) and retained earnings, and cash flows for the 52-53 week period then ended. The financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the balance sheet. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statement referred to above presents fairly, in all material respects, the financial position of Capital Cigar Company as of September 28, 1996, and the results of its operations and its cash flows for the 52-53 week period then ended in conformity with generally accepted accounting principles. The September 30, 1995 financial statement was reviewed by us, and our opinion thereon dated November 30, 1995, stated that we were not aware of any material modifications that should be made to that statement for it to be in conformity with generally accepted accounting principles. However, a review is substantially less in scope than an audit and does not provide a basis for the expression of an opinion on the financial statement taken as a whole. 24 To the Board of Directors CAPITAL CIGAR COMPANY Page Two The accompanying financial statement has been prepared assuming that the Company will continue as a going concern. As discussed in Note 20 to the financial statement, the Company has suffered recurring losses from operations which raises substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 20. The financial statement does not include any adjustments that might result from the outcome of this uncertainty. /s/ Seiler & Company San Francisco, California December 26, 1996 25 CAPITAL CIGAR COMPANY BALANCE SHEETS SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995 ASSETS ------ 1996 1995 ---- ---- CURRENT ASSETS: Cash $ 16,068 $ 103,749 Receivables 3,345,343 3,514,651 Note receivable, affiliate 44,780 34,098 Due from affiliate l,732,434 -0- Merchandise inventory 2,565,067 2,748,380 Cigarette stamp inventory 398,678 214,581 Prepaid expenses 22,349 41,248 Insurance proceeds receivable 314,500 -0- --------- --------- Total current assets 8,439,219 6,656,707 NOTE RECEIVABLE, AFFILIATE 809,918 848,933 PROPERTY AND EQUIPMENT 430,090 523,542 INSURANCE PROCEEDS RECEIVABLE -0- 297,500 INTANGIBLE ASSETS 21,800 23,750 OTHER ASSETS 313,377 64,897 INVESTMENTS 14,306 7,025 --------- --------- Total assets $10,028,710 $8,422,354 ---------- --------- See accompanying notes. 26 CAPITAL CIGAR COMPANY BALANCE SHEETS SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995 LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ 1996 1995 ---- ---- CURRENT LIABILITIES: Checks drawn in excess of available bank balance $ 659,803 $ 709,132 Note payable 2,604,955 619,587 Accounts payable - trade 1,642,406 1,333,872 Due to affiliate 559,452 689,120 Accrued expenses 287,230 269,741 Taxes payable: Cigarette stamp tax 1,241,030 1,090,509 Other 164,971 119,382 ---------- --------- Total current liabilities 7,159,847 4,831,343 ---------- --------- COMMITMENTS AND CONTINGENCIES Total liabilities 7,159,847 4,831,343 ---------- --------- STOCKHOLDERS' EQUITY: Common stock - par value $100 per share; 10,000 shares authorized, 800 shares issued and outstanding 80,000 80,000 Retained earnings 2,788,863 3,511,011 ---------- --------- Total stockholders' equity 2,868,863 3,591,011 ---------- --------- Total liabilities and stockholders' equity $10,028,710 $8,422,354 ---------- --------- See accompanying notes. 27 CAPITAL CIGAR COMPANY STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS FOR THE PERIODS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995 1996 1995 ---------------- ---------------- Amount Percent Amount Percent ------ ------- ------ ------- SALES $63,602,322 100.00% $63,234,920 100.00% COST OF SALES 58,013,415 91.21 58,160,431 91.98 ---------- ----- ---------- ----- GROSS PROFIT 5,588,907 8.79 5,074,489 8.02 LESS EXPENSES: Warehouse 1,317,240 2.07 1,431,676 2.26 Selling 1,783,296 2.80 1,756,463 2.78 Delivery 1,075,932 1.69 1,128,997 1.79 General and administrative 2,426,088 3.82 2,100,245 3.32 ---------- ----- ---------- ----- Total expenses 6,602,556 10.38 6,417,381 10.15 ---------- ----- ---------- ----- LOSS FROM OPERATIONS (1,013,649) (1.59) (1,342,892) (2.13) OTHER INCOME 292,301 .46 223,491 .35 ---------- ----- ---------- ----- INCOME (LOSS) BEFORE PROVISION FOR TAXES (721,348) (1.13) (1,119,401) (1.78) PROVISION (CREDIT) FOR TAXES ON INCOME 800 (.00) (61,428) (.10) ---------- ----- ---------- ----- NET INCOME (LOSS) (722,148) (1.13) (1,057,973) (1.68) ----- ----- RETAINED EARNINGS, BEGINNING OF PERIOD 3,511,011 4,568,984 ---------- ---------- RETAINED EARNINGS, END OF PERIOD $ 2,788,863 $ 3,511,011 ---------- ---------- See accompanying notes. 28 CAPITAL CIGAR COMPANY STATEMENTS OF CASH FLOWS FOR THE PERIODS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995 1996 1995 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(722,148) $(1,057,973) Noncash items included in net income: Depreciation 108,851 145,985 Amortization 3,353 1,950 Deferred income taxes -0- 15,166 (Gain) loss on sale of fixed assets 585 (13,134) (Increase) decrease in: Receivables 169,308 25,482 Merchandise inventory 183,313 (145,902) Cigarette tax stamp inventory (184,097) (33,716) Prepaid expense 18,899 11,187 Insurance proceeds receivable (17,000) (25,500) Other assets (249,883) (54,000) Investments (7,281) (7,025) Increase (decrease) in: Accounts payable 308,534 1,064,958 Other payables 17,489 (7,983) Cigarette stamp tax payable 150,521 285,601 Other taxes payable 45,589 (18,974) ---------- --------- Net cash provided (used) by operating activities (173,967) 186,122 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of improvements and equipment (22,484) (18,515) Proceeds from sale of fixed assets 6,500 29,872 Note receivable, affiliate 28,333 (883,031) Due from affiliate (1,732,434) -0- ---------- --------- Net cash (used) by investing activities (1,720,085) (871,674) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable 61,826,606 4,836,383 Repayment of notes payable (59,841,238) (5,816,796) Due to affiliate (129,668) 689,120 Checks drawn in excess of available bank balance (49,329) 709,132 ---------- --------- Net cash provided by financing activities 1,806,371 417,839 ---------- --------- Net decrease in cash (87,681) (267,713) CASH AT BEGINNING OF PERIOD 103,749 371,462 ---------- --------- CASH AT END OF PERIOD $ 16,068 $ 103,749 ---------- --------- See accompanying notes. 29 CAPITAL CIGAR COMPANY STATEMENTS OF CASH FLOWS FOR THE PERIODS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995 SUPPLEMENTAL DISCLOSURE: 1996 1995 ---- ---- Cash paid during the period for: Income taxes $ 800 $ -0- ----------- ------------ Interest expense $ 236,548 $ 56,362 ----------- ------------ See accompanying notes. 30 CAPITAL CIGAR COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 28, 1996 NOTE 1 - ACCOUNTING POLICIES - ---------------------------- A. Nature of Business - --------------------- Capital Cigar Company is a corporate wholesale distributor of candies, tobacco, groceries, health and beauty aids and sundries in and around the surrounding regions of Sacramento, California and Reno, Nevada. B. Use of Estimates - ------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. C. Inventories - -------------- Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories are pledged as security for certain notes payable (Note 9). D. Property and Equipment - ------------------------- Property and equipment are stated at cost. Major improvements that significantly add to the productive capacity or extend the life of an asset are capitalized. Maintenance and repair costs are charged to income currently. Depreciation of property and equipment, and amortization of leasehold improvements, are computed on the straight-line and declining balance methods over the useful lives of the assets which range from three to thirty-one and one-half years. E. Intangible Assets - --------------------- The cost of a covenant not to compete is being amortized over a period of twenty years on the straight-line method. 31 CAPITAL CIGAR COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 28, 1996 F. Income Taxes - --------------- The Company has adopted SFAS 109, Accounting for Income Taxes, to account for deferred income taxes. Deferred taxes are computed based on the tax liability or benefit in future years of the reversal of temporary differences in the recognition of income or deduction of expenses between financial and tax reporting purposes. The principal items resulting in the differences are state franchise taxes, depreciation, the accrual of vacation pay, six-months free rent to a warehouse tenant, and the capitalization of certain expenses related to inventory per Internal Revenue Code Section 263A. The net difference between tax expense and taxes currently payable is reflected in the balance sheet as deferred taxes. Deferred tax assets and liabilities are classified as current and noncurrent based on the classification of the related asset or liability for financial reporting purposes, or based on the expected reversal date for deferred taxes that are not related to an asset or liability. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. G. Change in Accounting Period - ------------------------------ The Company elected to adopt a 52-53 week accounting period for financial and tax reporting purposes. The fiscal year will end on the last Saturday of September. NOTE 2 - RECEIVABLES - -------------------- Receivables consist of the following: 1996 1995 ---- ---- Trade $3,102,969 $3,474,774 Legal reimbursements 40,702 -0- Miscellaneous 272,887 86,399 ---------- ---------- Subtotal 3,416,558 3,561,173 Less allowance for doubtful accounts 71,215 46,522 ---------- ---------- Total $3,345,343 $3,514,651 ---------- ---------- 32 CAPITAL CIGAR COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 28, 1996 NOTE 2 - RECEIVABLES (Continued) - -------------------- The Company grants credit to customers, substantially all of whom are located in the Sacramento, California and Reno, Nevada areas. Receivables are pledged as security for certain notes payable (Note 9). NOTE 3 - NOTE RECEIVABLE, AFFILIATE - ----------------------------------- Note receivable, affiliate consists of the following: Maturity Interest date rate 1996 1995 --------- -------- ---- ---- Melvin Sosnick Prime Company 10/25/02 + 1.50% $ 854,698 $ 883,031 -------- --------- Total 854,698 883,031 Less current portion 44,780 34,098 -------- --------- Long-term portion $ 809,918 $ 848,933 -------- --------- The Company converted outstanding receivables from Melvin Sosnick Company into a note receivable on September 25, 1995. The terms of the note require 83 monthly payments of $10,512. All unpaid principal and accrued interest is payable at maturity with no prepayment penalties. NOTE 4 - PROPERTY AND EQUIPMENT - ------------------------------- Property and equipment consist of the following: 1996 1995 ---- ---- Furniture, fixtures and equipment $1,665,969 $1,646,827 Automotive equipment 565,889 604,487 Leasehold improvements 214,678 212,152 Signs 9,510 9,510 --------- --------- Subtotal 2,456,046 2,472,976 Less accumulated depreciation and amortization 2,025,956 1,949,434 --------- --------- Total $ 430,090 $ 523,542 --------- --------- Depreciation and amortization charged to earnings were $108,851 and $145,985 in 1996 and 1995, respectively. Property and equipment are pledged as security for certain notes payable (Note 9). 33 CAPITAL CIGAR COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 28, 1996 NOTE 5 - INSURANCE PROCEEDS RECEIVABLE - -------------------------------------- The Company has entered into a split dollar life insurance agreement with an officer of the Company. This policy has a face amount of $1,000,000. In the event of the officer's death, the Company's share in the proceeds would amount to $314,500 and $297,500 for September 28, 1996 and September 30, 1995, respectively. During the year, the officer died, and the Company was entitled to receive the proceeds of all payments. As of September 28, 1996, none of the proceeds had been received. After the balance sheet date, the Company received two-thirds of its premium paid, or $209,666 plus interest. One-third of the policy has not been received, but the Company expects to collect the amounts plus interest in the following period. NOTE 6 - INTANGIBLE ASSETS - -------------------------- Intangible assets consist of the following: 1996 1995 ---- ---- Covenant not to compete $ 39,000 $ 39,000 Goodwill 1,000 1,000 ------- ------- Subtotal 40,000 40,000 Less accumulated amortization 18,200 16,250 ------- ------- Total $ 21,800 $ 23,750 ------- ------- Amortization charged to earnings for both 1996 and 1995 was $1,950. NOTE 7 - OTHER ASSETS - --------------------- Other assets consist of the following: 1996 1995 ---- ---- Certified Grocers Agreement (Note 8) $254,000 $54,000 Totes (net) 49,097 -0- Club membership initiation fee 9,500 9,500 Telephone equipment lease -0- l,397 Other deposits 780 -0- ------- ------ Total $313,377 $64,897 ------- ------ 34 CAPITAL CIGAR COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 28, 1996 NOTE 8 - INVESTMENTS - -------------------- The Company entered into an agreement to purchase 100 shares of Class A common stock of Certified Grocers of California Ltd. on December 22, 1994. The investment is recorded at cost which is $14,306 at September 28, 1996. In addition, the agreement requires a $254,000 deposit. NOTE 9 - NOTE PAYABLE - --------------------- Note payable consists of the following: Maturity Interest date rate 1996 1995 -------- -------- ---- ---- Secured: Prime + Line of credit 09/21/97 + 1.25% $2,604,955 $619,587 --------- ------- On September 22, 1995, the Company and its affiliated company entered into a joint secured line of credit with the CIT Group. This joint line is available through September 21, 1997 with an interest rate of prime plus 1.25%. The minimum joint credit amount is $4,000,000 with a maximum credit of $15,000,000. The amount available is a factor of the receivable and inventory balances. Receivables, inventory, and property and equipment are pledged as security for the line of credit. The Company is required by the CIT security agreement to meet certain loan covenants in order to comply with their loan agreement. The Company is not in compliance with the covenant that requires the financial statements to be provided within ninety (90) days of year end. 35 CAPITAL CIGAR COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 28, 1996 NOTE 10 - ACCRUED EXPENSES - -------------------------- Accrued expenses consist of the following: 1996 1995 ---- ---- General and administrative expenses $164,400 $231,742 Accrued vacation and PTO 122,830 37,999 ------- ------- Total $287,230 $269,741 ------- ------- During the year, the Company changed its policy for providing vacation and sick pay for nonunion employees. Previously, employees were only entitled to unused vacation upon termination. Under the new policy, employees are entitled to unused vacation, sick pay, and other floating holidays. For accrued sick time, or PTO (paid time off), the policy was retroactive to each employee's service date with a maximum cap for unused sick days. NOTE 11- LEASES - --------------- The following is a summary of noncancellable operating leases: Minimum annual Expiration Renewal rent date option -------------- ---------- ------- Office/warehouse facility (1) $123,600 June 30, 2004 No Warehouse facility/Sparks 21,600 May 31, 1999 No Delivery trucks 19,946 Various Yes Autos 2,903 Various No (1) The lease is with a partnership owned by a majority of the stockholders of the Company. For noncapitalized leases, primarily involving real and personal property, commitments under noncancellable leases extending for one year or more will require the following future payments: 36 CAPITAL CIGAR COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 28, 1996 NOTE 11- LEASES (Continued) - --------------- Real Personal Period ending property property Total ------------- -------- -------- -------- 1997 $145,200 $ 23,349 $168,549 1998 145,200 19,946 165,146 1999 138,000 4,987 142,987 2000 123,600 -0- 123,600 2001 123,600 -0- 123,600 -------- -------- -------- Total $675,600 $ 48,282 $723,882 -------- -------- -------- Rent charged to earnings was $351,852 and $366,945 in 1996 and 1995, respectively. NOTE 12 - COMMITMENTS AND CONTINGENCIES. - --------------------------------------- Litigation - ---------- The Company and its joint affiliates are named as defendants in a lawsuit filed by an independent consultant for breach of contract and fraud alleging damages in the amount of $400,000. Per legal counsel, it is not possible at this time to predict the possible outcome nor damages. Management has reviewed the litigation with legal counsel and intends to defend this matter vigorously. The Company is involved in legal actions arising in the ordinary course of business. In the opinion of management, the Company has adequate legal defenses or insurance coverage with respect to each of these actions and does not believe that they will materially affect the Company's results of operations or financial position. Employment Agreement - -------------------- The Company has employment contracts with two officers calling for a base salary plus an annual incentive bonus based on specified levels of income. No bonus payments were made for the period ended September 28, 1996. 37 CAPITAL CIGAR COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 28, 1996 NOTE 13 - PENSION PLANS AND 401(k) - ---------------------------------- Defined Benefit Plan - -------------------- The Company has trusteed noncontributory pension and welfare plans covering employees whose wages and benefits are determined by union contracts. Certain nonunion employees of the Company are covered by the pension plan of Melvin Sosnick Company and Capital Cigar Company. The consultant for the plan has determined that the plan was overfunded for tax purposes at December 31, 1995. The following pension information was provided by the actuarial company and includes amounts for both companies. The Company sponsors a defined benefit pension plan that covers all nonunion employees. The plan provides benefits to be paid to eligible employees at retirement based upon years of service with the Company and compensation rates near retirement. Contributions to the plan reflect benefits attributed to employees' service to date, as well as services expected to be earned in the future. Plan assets consist primarily of cash equivalent accounts, interest bearing bonds, government securities, pooled mutual funds and equities. The following sets forth the funded status of the plan at December 31, 1995. The funded status as of September 28, 1996 is not currently available. Actuarial present value of benefit obligations: Vested benefits $(2,074,791) Nonvested benefits (50,992) ---------- Accumulated benefit obligation (2,125,783) Effect of anticipated future compensation levels and other events (4,394) Projected benefit obligation (2,130,177) Fair value of assets held in plan 4,187,925 ---------- Excess of plan assets over projected benefit obligation 2,057,748 Items not yet recognized in earnings: Unamortized prior service cost -0- Remaining net unrecognized (gain) (2,314,361) Remaining unrecognized net transition (gain) (30,106) Pension liability included in the balance sheet -0- ---------- (Accrued) Pension Cost $ (286,719) ---------- 38 CAPITAL CIGAR COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 28, 1996 NOTE 13 - PENSION PLANS AND 401 (k) (Continued) - ----------------------------------- The weighted average discount rate used to measure the projected benefit obligation is 8.5%, the rate of increase in future compensation levels is 3.5%, and the expected long-term rate of return on assets is 8.5%. The Company uses the straight-line method of amortization for unrecognized gains and losses. The above accrued pension cost has not been reflected in these financial statements due to the fact that the amount allocable to Capital Cigar Company cannot be determined by the actuary at the time of this statement. 401 (k) - ------- During the year, the Company adopted a IRC 401(k) plan covering substantially all eligible nonunion employees. Under the provisions of the plan, eligible employees may defer up to 15% of their compensation. The Plan provides for 10% matching Company contributions up to 8% of the employee contribution. Employees must complete one year of service and attain age 21 before they are eligible to participate. Participants may enter the plan in May or November immediately following the completion of the age and service requirement. The Company contributed $3,239 for the period ended September 28, 1996. As of September 28, 1996, the Company had not received a determination letter from the Internal Revenue Service that the Plan was approved. NOTE 14 - INCOME TAXES - ---------------------- Income tax (benefit) consists of the following components: 1996 1995 ---- ---- Current $800 $800 Deferred -0- 15,166 Tax benefit of applying net operating loss to reduce prior period's taxable income -0- (77,394) ---- -------- Total income tax (benefit) expense $800 $(61,428) ---- -------- 39 CAPITAL CIGAR COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 28, 1996 NOTE 14 - INCOME TAXES (Continued) - ---------------------- The Company's total deferred tax assets, deferred tax liabilities, and deferred tax asset valuation allowances at September 28, 1996 and September 30, 1995 are as follows: 1996 1995 ---- ---- Total deferred tax assets $188,094 $ 63,786 Less valuation allowance (188,094) (63,786) -------- -------- Net deferred tax asset $ -0- $ -0- -------- -------- For federal tax purposes, the Company has approximately $1,400,000 of net operating loss carryforward as of September 28, 1996, which expires in 2010. At September 28, 1996, the Company has approximately $1,400,000 in net operating loss carryforward for alternative minimum tax. For state tax purposes, the Company has approximately $800,000 of net operating loss carryforward as of September 28, 1996 of which $564,000 expires in 1999 and $236,000 expires in 2000. NOTE 15 - AFFILIATED COMPANIES - ------------------------------ Capital Cigar Company is affiliated with Melvin Sosnick Company. Both companies are incorporated in California. The stock in both companies is owned, in different percentages, by family members. The above companies sell merchandise to each other at their cost. The amounts sold through affiliated companies is less than one percent of sales. In April 1991, the companies formed a corporate marketing group. Marketing expenses are paid by Melvin Sosnick Company and are reimbursed by Capital Cigar Company. Corporate marketing expenses were $442,549 and $423,052 for the periods ended September 28, 1996 and September 30, 1995, respectively. As of September 28, 1996, Capital Cigar Company was indebted to Melvin Sosnick Company for $559,452 related to general operating expenses and purchases made by Melvin Sosnick Company on behalf of Capital Cigar Company. Melvin Sosnick Company was indebted to Capital Cigar Company for $1,732,434 related to cash borrowing for operations. 40 CAPITAL CIGAR COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 28, 1996 NOTE 16 - CONCENTRATIONS - ------------------------ Substantial Vendor Purchases - ---------------------------- Purchases from two major suppliers totaled $27,440,279 or 47.2% of total purchases for the period ended September 28, 1996 and $25,663,341 or 44.0% of total purchases for the period ended September 30, 1995. Substantial Customer Sales - -------------------------- Sales to one major customer totaled approximately $10,100,000 or 15.9% of total sales for the period ended September 28, 1996 and $10,900,000 or 17.3% of total sales for the period ended September 30, 1995. Substantial Product Sales - ------------------------- Sales of cigarettes and other tobacco products totaled approximately $39,500,000 or 62.15% of total sales for the period ended September 28, 1996 and $38,900,000 or 61.58% of total sales for the period ended September 30, 1995. Union Employees - --------------- The Company employs approximately 50 union employees. The current collective bargaining agreement is due for renegotiation on April 1, 1997. Management anticipates that a new contract will be signed prior to the expiration of the current agreement. NOTE 17 - STOCK OPTION PLAN - --------------------------- Pursuant to Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation (FAS 123), the Company has elected not to adopt the statement but follow the rules under APB 25. The Company will comply with the disclosures as required under the statement. On January 1, 1989, the Company approved the adoption of a stock option plan, whereby options were granted to a key employee to purchase up to 149 shares of common stock at a price which varies with the exercise date. The current exercise price per share is $4,688. Options may be exercised any number of times by the optionee during the option period for an amount of shares not less than 28. The option period expires on the earlier of six months and one day following the death of the optionee or six months and one day following the termination of the optionee's employment. No options were exercised as of September 28, 1996. 41 CAPITAL CIGAR COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 28, 1996 NOTE 18 - RECLASSIFICATIONS - --------------------------- Certain amounts on the 1995 balance sheet and statement of loss have been reclassified to conform with current year's presentation. NOTE 19 - SUBSEQUENT EVENT - -------------------------- Subsequent to year-end, the Company entered into an agreement to sell the majority of its assets to Core-Mark International (CMI). As part of the agreement, CMI will acquire 100% of the fully collectible trade accounts receivable, 100% of the fully salable inventory, and all of the fixed assets, excluding leasehold improvements and capitalized software. The purchase price for the acquisition of these assets would be the net book value plus an additional amount. The proposed effective date of this agreement is January 31, 1997. The Company plans to cease operations as of such date. NOTE 20 - GOING CONCERN - ----------------------- These statements are presented on the basis that the Company is a going concern. Going concern contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. The accompanying financial statements show a loss from the combined results of operations of $1,013,649. Losses have been significant over the past few years. Management has initiated plans to consolidate operations and reduce overhead costs. 42 THE SOSNICK COMPANIES COMBINED BALANCE SHEETS (in thousands) September December 28, 1996 28, 1996 (Unaudited) ------------ ------------ ASSETS CURRENT ASSETS Cash . . . . . . . . . . . . . . . . . . . . . $ 32 $ 32 Trade receivables, net . . . . . . . . . . . . 9,914 11,193 Inventories, net . . . . . . . . . . . . . . . 9,750 9,597 Prepaid expenses and other current assets . . 536 376 ------------ ------------ Total current assets . . . . . . . . . . . . 20,232 21,198 Property and equipment, net . . . . . . . . . . . 4,384 4,216 Other assets . . . . . . . . . . . . . . . . . . . 999 922 Intangible assets, net . . . . . . . . . . . . . . 26 25 ------------ ------------ $ 25,641 $ 26,361 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable . . . . . . . . . . . . $ 6,115 $ 6,485 Cigarette and tobacco taxes payable. . . . . . 2,837 2,353 Notes payable . . . . . . . . . . . . . . . . 9,498 12,247 Other accrued liabilities. . . . . . . . . . . 2,611 2,055 ------------ ------------ Total current liabilities. . . . . . . . . . 21,061 23,140 Long-term debt . . . . . . . . . . . . . . . . . . 406 386 Other accrued liabilities and deferred income taxes 62 62 ------------ ------------ Total liabilities. . . . . . . . . . . . . . . 21,529 23,588 Commitments and contingencies SHAREHOLDERS' EQUITY Common stock . . . . . . . . . . . . . . . . . . . 235 235 Additional paid-in capital . . . . . . . . . . . . 158 158 Retained earnings . . . . . . . . . . . . . . . . 3,719 2,380 ------------ ------------ Total shareholders' equity . . . . . . . . . . 4,112 2,773 ------------ ------------ $ 25,641 $ 26,361 ------------ ------------ See Notes to Combined Financial Statements. 43 THE SOSNICK COMPANIES COMBINED STATEMENTS OF INCOME (Unaudited) (in thousands) Three Months 13 Weeks Ended Ended December December 31, 1995 28, 1996 ------------ ------------ Net sales . . . . . . . . . . . . . . . . . . . . $ 50,504 $ 44,048 Cost of goods sold . . . . . . . . . . . . . . . . 45,741 39,969 ------------ ------------ Gross profit . . . . . . . . . . . . . . . . . 4,763 4,079 Operating and administrative expenses . . . . . . 5,950 5,605 ------------ ------------ Operating loss . . . . . . . . . . . . . . . . (1,187) (1,526) Other income . . . . . . . . . . . . . . . . . . . 227 191 ------------ ------------ Loss before income taxes . . . . . . . . . . . (960) (1,335) Income tax expense . . . . . . . . . . . . . . . . -- -- ------------ ------------ Net loss . . . . . . . . . . . . . . . . . . . $ (960) $ (1,335) ------------ ------------ See Notes to Combined Financial Statements. 44 THE SOSNICK COMPANIES COMBINED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months 13 Weeks Ended Ended December December 31, 1995 28, 1996 ------------ ------------ NET CASH USED BY OPERATING ACTIVITIES . . . . . . $ (3,711) $ (2,729) ------------ ------------ INVESTING ACTIVITIES Purchase of improvements and equipment . . . . (21) -- ------------ ------------ Net cash used in investing activities . . . . . . (21) -- ------------ ------------ FINANCING ACTIVITIES Net borrowings under notes payable . . . . . . 3,641 2,729 ------------ ------------ Net cash used in financing activities . . . . . . 3,641 2,729 ------------ ------------ Net change in cash . . . . . . . . . . . . . . (91) -- CASH, BEGINNING OF PERIOD . . . . . . . . . . . . 120 32 ------------ ------------ CASH, END OF PERIOD . . . . . . . . . . . . . . . $ 29 $ 32 ------------ ------------ See Notes to Combined Financial Statements. 45 THE SOSNICK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS FOR THE THIRTEEN WEEKS ENDED DECEMBER 28, 1996 1. Basis of Presentation Effective September 29, 1996, the shareholders of Melvin Sosnick Company and Capital Cigar Company (collectively the "Sosnick Companies") commenced plans to merge the two companies into one legal entity. As a result, the interim financial statements were prepared on a combined basis, with significant intercompany transactions eliminated. The results of operations for the interim periods are not necessarily indicative of the operating results for the full year. The condensed balance sheet as of September 28, 1996, is prepared on a combined basis (due to the merger previously described) and derived from the audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The notes accompanying the financial statements included in this Report on Form 8-K/A include accounting policies and additional information pertinent to an understanding of both the December 28, 1996 balance sheet and the interim financial statements included herein. Effective with the fiscal year ending September 28, 1996, the Sosnick Companies elected to adopt a 52 - 53 week accounting period for financial and tax reporting purposes. The fiscal year ended on the last Saturday of September. As a result of the timing of this decision, the interim condensed income statement for the period ended December 31, 1995 is a three-month period as compared to the period ended December 28, 1996, which is a thirteen-week period. 2. Subsequent Event Effective February 3, 1997, the Sosnick Companies sold the majority of its assets and business to Core-Mark International, Inc. Pursuant to the sale, Core-Mark International, Inc. acquired all of the fully collectible trade accounts receivable, all of the fully salable inventory, and certain fixed assets (excluding real estate, leasehold improvements and capitalized software). The purchase price for the acquisition of these assets was net book value plus an additional amount. 46 CORE-MARK INTERNATIONAL, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 The following Unaudited Pro Forma Condensed Consolidated Financial Statements of Core-Mark International, Inc. (the "Company") have been derived from the historical financial statements of the Company and of the Sosnick Companies included elsewhere herein and have been prepared by the application of pro forma adjustments giving effect to the acquisition by the Company of certain assets and the business of Sosnick as if such acquisition had occurred (i) on December 31, 1996, in the case of the Unaudited Pro Forma Condensed Consolidated Balance Sheet of the Company as of December 31, 1996 and (ii) on January 1, 1996, in the case of the Unaudited Pro Forma Condensed Consolidated Statement of Income for the year ended December 31, 1996. The Sosnick acquisition has been accounted for using the purchase method of accounting. Accordingly, assets acquired and liabilities assumed will be recorded at their estimated fair values. Although the Company has made preliminary estimates of such amounts, these estimates are subject to further refinement. The Unaudited Pro Forma Condensed Consolidated Financial Statements should be read in conjunction with the historical audited financial statements and related notes thereto of the Company, as included in Form 10-K, and the Sosnick Companies, which are included herein. These Unaudited Pro Forma Condensed Financial Statements do not purport to be indicative of the actual financial position or the results of operations of the Company that would have been achieved had the acquisition been completed on the date or for the period indicated, nor are they indicative of future operating results or financial position of the Company. The Unaudited Pro Forma Condensed Consolidated Statement of Income does not reflect the effect of certain anticipated expense reductions that management believes may be realized following the Sosnick acquisition. These expense reductions are expected to occur during the integration of the acquired business into the Company's existing operations and facilities and will result principally from reductions in the number of employees and elimination of certain duplicative facility operating costs. Management expects the integration process to be complete by the end of the fiscal year. 47
CORE-MARK INTERNATIONAL, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET DECEMBER 31, 1996 (in thousands) Historical Historical Sosnick Core-Mark Pro Forma Companies Int'l. Inc. Adjustments Total ------------ ------------ --------------- -------------- ASSETS CURRENT ASSETS Cash . . . . . . . . . . . . . . . . . . . . . . . $ 32 $ 25,769 $ (32) (1) $ 25,769 Trade receivables, net . . . . . . . . . . . . . . 11,193 100,944 (677) (1) 111,460 Inventories, net . . . . . . . . . . . . . . . . . 9,597 99,342 -- 108,939 Prepaid expenses and other current assets . . . . 376 6,214 (376) (1) 6,214 ---------- ------------ --------- ------------ Total current assets . . . . . . . . . . . . . . 21,198 232,269 (1,085) 252,382 Property and equipment, net . . . . . . . . . . . . . 4,216 22,528 (2,924) (1) 23,820 Other assets . . . . . . . . . . . . . . . . . . . . . 922 9,792 (697) (1) 10,017 Intangible assets, net . . . . . . . . . . . . . . . . 25 64,447 4,100 (1) 68,572 ---------- ------------ --------- ------------ 26,361 329,036 (606) 354,791 ---------- ------------ --------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable . . . . . . . . . . . . . . 6,485 51,572 (6,485) (1) 51,572 Cigarette and tobacco taxes payable. . . . . . . . 2,353 43,912 (2,353) (1) 43,912 Notes payable . . . . . . . . . . . . . . . . . . 12,247 -- (12,247) (1) -- Other accrued liabilities. . . . . . . . . . . . . 2,055 38,504 3,057 (1) 43,616 ---------- ------------ --------- ------------ Total current liabilities. . . . . . . . . . . . 23,140 133,988 (18,028) 139,100 Long-term debt . . . . . . . . . . . . . . . . . . . . 386 193,463 20,257 (1) 214,106 Other accrued liabilities and deferred income taxes. . 62 8,585 (62) (1) 8,585 ---------- ------------ ---------- ------------ Total liabilities. . . . . . . . . . . . . . . . . 23,588 336,036 2,167 361,791 Commitments and contingencies SHAREHOLDERS' EQUITY Common stock . . . . . . . . . . . . . . . . . . . . . 235 55 (235) (1) 55 Additional paid-in capital . . . . . . . . . . . . . . 158 26,121 (158) (1) 26,121 Retained earnings (accumulated deficit) . . . . . . . 2,380 (28,576) (2,380) (1) (28,576) Cumulative currency translation adjustment . . . . . . -- (1,608) -- (1,608) Additional minimum pension liability . . . . . . . . . -- (2,992) -- (2,992) ---------- ------------ --------- ------------ Total shareholders' equity (deficit) . . . . . . . 2,773 (7,000) (2,773) (7,000) ---------- ------------ --------- ------------ $ 26,361 $ 329,036 $ (606) $ 354,791 ---------- ------------ --------- ------------ See Notes to Unaudited Condensed Consolidated Pro Forma Financial Statements.
48
CORE-MARK INTERNATIONAL, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 (in thousands) Historical Historical Sosnick Core-Mark Pro Forma Companies Int'l. Inc. Adjustments Total ------------ ----------- ----------- ---------- Net sales...................................... $196,145 $2,175,367 $37,893 (1) $2,409,405 Cost of goods sold............................. 177,728 2,017,654 37,539 (1) 2,232,921 -------- ---------- --------- ---------- Gross profit.............................. 18,417 157,713 354 176,484 Operating and administrative expenses.......... 23,694 130,493 (5,184)(2) 159 (3) (292)(4) (1,451)(5) 147,419 -------- ---------- --------- ---------- Operating income (loss)................... (5,277) 27,220 7,122 29,065 Interest expense, net.......................... -- 9,916 1,507 (5) 11,423 Debt refinancing and issuance costs............ -- 1,319 -- 1,319 Other income................................... 839 -- (354)(1) (485)(6) -- -------- ---------- --------- ---------- Income (loss) before income taxes......... (4,438) 15,985 4,776 16,323 Income tax expense ........................... 2 6,941 118 (7) 7,061 -------- ---------- --------- ---------- Income (loss) from continuing operations.. $ (4,440) $ 9,044 $ 4,658 $ 9,262 -------- ---------- --------- ---------- See Notes to Unaudited Condensed Consolidated Pro Forma Financial Statements.
49 CORE-MARK INTERNATIONAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 (in thousands) PRO FORMA BALANCE SHEET ADJUSTMENT 1. The purchase price of the Sosnick acquisition would have been allocated as follows if the transaction had occurred on December 31, 1996:
Total purchase price to be allocated $24,665 Historical book value of the Sosnick Companies 2,773 Adjusted for assets not acquired, net of liabilities not assumed: Cash (32) Accounts receivable, other than trade accounts (677) Prepaid expenses (376) Net property and equipment, other than vehicles and warehouse equipment (2,418) Intangible and other assets (947) Notes payable 12,247 All other current liabilities, net of $247 assumed 10,647 Long-term debt and other long-term liabilities 448 ------ Net assets acquired 21,665 Excess of purchase price over book value of net assets acquired, allocated as follows: Goodwill (intangible assets) 4,125 Covenant not to compete (other assets) 225 Write-down of net property and equipment acquired to fair value (506) Liabilities incurred directly related to acquisition (844) ----- Total excess purchase price $ 3,000 ------- -------
The acquisition was primarily financed under the Company's existing revolving credit facility. The total amount of borrowings would have been $20,643, with the remaining $4,022 due and payable in installments during the first ninety days subsequent to closing in varying amounts specified pursuant to the purchase agreement. The Company may be obligated to make certain payments to Sosnick's shareholders, based on net sales associated with former customers of Sosnick. Such payments, when determinable, will be allocated to goodwill. The Company would not have been required to make any such payments on a pro forma basis for the year ended December 31, 1996. 50 PRO FORMA INCOME STATEMENT ADJUSTMENTS
The Sosnick Companies' most recent fiscal years ended September 28, 1996. Therefore, for purposes of the pro forma income statement, the Sosnick income statement was brought up to within 93 days of the Company's fiscal year by adding the December 28, 1996 interim period to the fiscal year-end and subtracting the December 31, 1995 interim period. 1. The pro forma adjustment to sales and cost of sales reflect the following: To conform Sosnick's historical financial statements to the Company's with respect to the classification of cigarette excise taxes (increase to sales)........................ $37,893 To conform Sosnick's historical financial statements to the Company's with respect to the classification of rebate income earned on products sold (reclassify from other income to cost of goods sold)........................................................... (354) ---------- Total increase to cost of sales......................................................... $37,539 ---------- ---------- 2. The pro forma adjustment to operating expenses reflects the elimination of expense included in historical statements of Sosnick related to the following: Compensation expense of former Sosnick employees not hired by the Company as of the acquisition date..................................................................... 3,769 Facilities expense (rent, telephone, depreciation and others) associated with locations owned and leased by Sosnick and not acquired or assumed by the Company in conjunction with the acquisition.............................................................................. 1,128 Insurance expense associated with Sosnick insurance policies canceled or not assumed by the Company in conjunction with the acquisition, net of incremental expense to increase coverage under the Company's policies.................................................... 287 ---------- Total......................................................................................... $ 5,184 ---------- ---------- 3. The pro forma adjustment represents the amortization of goodwill and the non-compete agreement associated with the acquisition, over lives of 40 and 4 years, respectively. 4. The pro forma adjustment represents a net reduction of depreciation expense as follows: Historical Sosnick depreciation on assets not acquired by the Company........................ $ 528 Depreciation expense on property and equipment acquired, based on fair value after allocation of purchase price............................................................ (236) ---------- Net reduction................................................................................. $ 292 ---------- ----------
51
5. The pro forma adjustment represents a net increase in interest expense as follows: Interest expense for the increase in the Company's revolving credit agreement to finance the acquisition............................................................................ $ 1,507 Elimination of interest expense included in operating and administrative expenses in the historical statements of Sosnick related to the historical Sosnick debt that was not assumed in the acquisition............................................................... (1,451) 6. The pro forma adjustment represents elimination of other income included in the historical statements of Sosnick, comprised principally of rental income on Sosnick properties not acquired by the Company in conjunction with the acquisition. 7. The pro forma adjustment represents the tax effect, at the Company's statutory rate, on the incremental income before taxes (calculated by comparing the pro forma income before tax to the Company's historical income before tax).
52 EX-23.1 2 EXHIBIT 23.1 Seiler & Company, LLP CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Core-Mark International, Inc. We consent to the inclusion of our unqualified report dated December 13, 1996, with respect to the balance sheet of Melvin Sosnick Company as of September 28, 1996 and the related statement of earnings, stockholders' equity, and cash flows, which report appears in the Form 8-K of Core-Mark International, Inc. dated April 19, 1997. Our report dated December 13, 1996, contains an explanatory paragraph that states that the Company has suffered recurring losses from operations and has a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of that uncertainty. /s/ Seiler & Company, LLP San Francisco, California April 17, 1997 53 Seiler & Company, LLP CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Core-Mark International, Inc. We consent to the inclusion of our unqualified report dated December 26, 1996, with respect to the balance sheet of Capital Cigar Company as of September 28, 1996 and the related statement of earnings, stockholders' equity, and cash flows, which report appears in the Form 8-K of Core-Mark International, Inc. dated April 19, 1997. Our report dated December 26, 1996, contains an explanatory paragraph that states that the Company has suffered recurring losses from operations, which raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of that uncertainty. /s/ Seiler & Company, LLP San Francisco, California April 17, 1997 54 -----END PRIVACY-ENHANCED MESSAGE-----