-----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, TCnYUcW0l1gVvgwicCJ/TctL4OawGSxb9UInmHocsF2Q8eCgkyOWg6ACZUj42emS /SZUYUSCpNfTEfPKx0ou1Q== 0001024726-99-000004.txt : 19990513 0001024726-99-000004.hdr.sgml : 19990513 ACCESSION NUMBER: 0001024726-99-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990512 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: 10-Q SEC ACT: SEC FILE NUMBER: 333-14217 FILM NUMBER: 99618758 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 10-Q 1 FOR THE QUARTERLY PERIOD ENDING MARCH 31,1999 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 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 333-14217 ============ Core-Mark International, Inc. (Exact name of registrant as specified in its charter) 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: (650) 589-9445 ============ 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. _x_ Yes ___ No At April 30, 1999, Registrant had outstanding 5,500,000 shares of Common Stock. =============================================== Core-Mark International, Inc. and Subsidiaries FORWARD-LOOKING STATEMENTS OR INFORMATION Certain statements contained in this quarterly report on Form 10-Q under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere herein and in the documents incorporated herein by reference are not statements of historical fact but are future-looking or forward-looking statements that may constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of such forward-looking terminology as the words "believes," "expects," "may," "will," "should," or "anticipates" (or the negative of such terms) or other variations thereon or comparable terminology, or because they involve discussions of Core-Mark International, Inc.'s (the "Company's") strategy. Such forward-looking statements are based upon a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. The ability of the Company to achieve the results anticipated in such statements is subject to various risks and uncertainties and other factors which may cause the actual results, level of activity, performance or achievements of the Company or the industry in which it operates to be materially different from any future results, level of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the general state of the economy and business conditions in the United States and Canada; adverse changes in consumer spending; the ability of the Company to implement its business strategy, including the ability to integrate recently acquired businesses into the Company; the ability of the Company to obtain financing; competition; the level of retail sales of cigarettes and other tobacco products; possible effects of legal proceedings against manufacturers and sellers of tobacco products and the effect of government regulations affecting such products. As a result of the foregoing and other factors affecting the Company's business beyond the Company's control, no assurance can be given as to future results, levels of activity, performance or achievements and neither the Company nor any other person assumes responsibility for the accuracy and completeness of these statements.
Page PART I - FINANCIAL INFORMATION Item 1: Financial Statements Condensed Consolidated Balance Sheets as of December 31, 1998 and March 31, 1999........................... ..................... 3 Condensed Consolidated Statements of Income for the three months ended March 31, 1998 and 1999............. ................. 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1999.......................... 5 Notes to Condensed Consolidated Financial Statements................ 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations............... ....................................... 8 Item 3: Quantitative and Qualitative Disclosures About Market Risk................................................................ 12 PART II - OTHER INFORMATION Item 1: Legal Proceedings.................................................. 13 Item 2: Changes in Securities and Use of Proceeds.......................... 14 Item 3: Defaults Upon Senior Securities.................................... 14 Item 4: Submission of Matters to a Vote of Security Holders................ 14 Item 5: Other Information.................................................. 14 Item 6: Exhibits and Reports on Form 8-K.................................... 14 Signature .............................................................. 15
-2- CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In Thousands of Dollars)
December 31, March 31, 1998 1999 --------- --------- Assets (Unaudited) Current assets: Cash .................................................................. $ 24,586 $ 18,843 Receivables: Trade accounts, less allowance for doubtful accounts of $2,761 and $2,670, respectively ......................................... 103,412 100,082 Other ............................................................. 12,578 8,161 Inventories, net of LIFO allowance of $34,332 and $34,432, respectively 112,481 82,046 Prepaid expenses and other ............................................ 6,576 5,864 --------- --------- Total current assets .............................................. 259,633 214,996 Property and equipment ..................................................... 61,332 61,375 Less accumulated depreciation ......................................... (33,283) (33,857) --------- --------- Net property and equipment ............................................ 28,049 27,518 Other assets ............................................................... 7,227 6,747 Goodwill, net of accumulated amortization of $19,375 and $19,896, respectively .......................................................... 64,481 63,960 --------- --------- $ 359,390 $ 313,221 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Trade accounts payable ................................................ $ 48,867 $ 49,814 Cigarette and tobacco taxes payable ................................... 45,073 53,515 Income taxes payable .................................................. 2,698 3,984 Deferred income taxes ................................................. 6,992 6,941 Other accrued liabilities ............................................. 34,514 30,880 --------- --------- Total current liabilities ......................................... 138,144 145,134 Long-term debt ............................................................. 208,124 151,999 Other accrued liabilities and deferred income taxes ........................ 9,260 9,557 --------- --------- Total liabilities ..................................................... 355,528 306,690 Commitments and contingencies: Shareholders' equity: Common stock; $.01 par value; 10,000,000 shares authorized; 5,500,000 shares issued and outstanding ........................... 55 55 Additional paid-in capital ............................................ 26,121 26,121 Accumulated deficit ................................................... (15,077) (12,765) Accumulated other comprehensive loss: Foreign currency translation adjustments .......................... (4,225) (3,868) Minimum pension liability adjustment .............................. (3,012) (3,012) --------- --------- Total shareholders' equity ........................................ 3,862 6,531 --------- --------- $359,390 $313,221 ======== ========
See Notes to Condensed Consolidated Financial Statements. -3- CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Income (In Thousands of Dollars) (Unaudited)
Three Months Ended March 31, ------------------------------ 1998 1999 ----------- ----------- Net sales ..................................... $ 563,220 $ 629,452 Cost of goods sold ............................ 522,533 583,882 --------- --------- Gross profit ............................. 40,687 45,570 Operating and administrative expenses ......... 36,037 37,871 --------- --------- Operating income ......................... 4,650 7,699 Interest expense, net ......................... 4,296 3,395 Amortization of debt refinancing costs ........ 374 318 --------- --------- Income (loss) before income taxes ....... (20) 3,986 Income tax expense (benefit) .................. (9) 1,674 --------- --------- Net income (loss) ........................ $ (11) $ 2,312 ========= =========
See Notes to Condensed Consolidated Financial Statements. -4- CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In Thousands of Dollars) (Unaudited)
Three Months Ended March 31, ---------------------------------------- 1998 1999 ------------- ------------- CASH PROVIDED BY OPERATING ACTIVITIES: Net income (loss)...................................................................$ (11) $ 2,312 Adjustments to reconcile net income (loss) to net cash provided by operating activities: LIFO expense................................................................... 800 100 Amortization of goodwill....................................................... 520 521 Depreciation and amortization.................................................. 1,573 1,550 Amortization of debt refinancing fees.......................................... 374 318 Deferred income taxes.......................................................... 13 317 Other adjustments for non-cash and non-operating activities.................... (125) 53 Changes in operating assets and liabilities ................................... 28,532 45,929 ------------- ------------- Net cash provided by operating activities .......................................... 31,676 51,100 ------------- ------------- INVESTING ACTIVITIES: Additions to property and equipment ........................................... (1,402) (971) ------------- ------------- Net cash used in investing activities .............................................. (1,402) (971) ------------- ------------- FINANCING ACTIVITIES: Net borrowings under accounts receivable securitization ....................... - 3,000 Net payments under revolving credit agreement ................................. (32,194) (59,125) ------------- ------------- Net cash used in financing activities .............................................. (32,194) (56,125) ------------- ------------- Effects of changes in foreign exchange rates........................................ 403 253 ------------- ------------- Decrease in cash ................................................................... (1,517) (5,743) Cash, beginning of period .......................................................... 15,281 24,586 ------------- ------------- CASH, END OF PERIOD................................................................. $ 13,764 $ 18,843 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash payments (refunds) during the period for: Interest ...................................................................... $6,243 $5,534 Income taxes .................................................................. (1,712) 63
See Notes to Condensed Consolidated Financial Statements. -5- Notes to Condensed Consolidated Financial Statements Three Months Ended March 31, 1999 (Unaudited) 1. Basis of Presentation The condensed consolidated balance sheet as of March 31, 1999 and the condensed consolidated statements of income and of cash flows for the three-month periods ended March 31, 1998 and 1999, have been prepared by Core-Mark International, Inc. (the "Company"). In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company at March 31, 1999 with respect to the interim financial statements, and of the results of its operations and cash flows for the interim periods then ended, have been included. The results of operations for the interim periods are not necessarily indicative of the operating results for the full year. The condensed consolidated balance sheet as of December 31, 1998, is derived from the audited financial statements but does not include all disclosures required by generally accepted accounting principles. The notes accompanying the consolidated financial statements of the Company included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 ("1998 Form 10-K") include a description of the Company's significant accounting policies and additional information pertinent to an understanding of both the December 31, 1998 balance sheet and the interim financial statements included herein. 2. Inventories The condensed consolidated financial statements have been prepared using the LIFO method of accounting for inventories. The use of the LIFO method resulted in an increase in cost of goods sold and a corresponding decrease in inventories of $800,000 and $100,000 for the three months ended March 31, 1998 and 1999, respectively. Interim LIFO calculations are based on management's estimates of year-end inventory levels and inflation rates for the year. 3. Excise Taxes State and provincial excise taxes paid by the Company on cigarettes were $112.2 million and $128.8 million for the three months ended March 31, 1998 and 1999, respectively. These amounts are included in net sales and cost of goods sold for the periods indicated. 4. Comprehensive Income The Company's total comprehensive income was $463,000 and $2,669,000 for the three months ended March 31, 1998 and 1999 respectively, which included other comprehensive income related to foreign currency translation adjustments. 5. Segment Information Management has determined that the only reportable segment of the Company is its wholesale distribution segment, based on the level at which executive management reviews the results of operations in order to make decisions regarding performance assessment and resource allocation. There has been no change in the segment reported or the basis of measurement of segment profit or loss from that which was reported in the Company's 1998 Form 10-K. Wholesale distribution segment information for the three-month periods ended March 31 is set forth below (dollars in thousands):
1998 1999 ---- ---- Net sales from external customers............................. $563,220 $629,452 Segment pre-tax operating income (1).......................... 2,053 4,884
----------------- (1) Represents operating income, including allocated interest expense, but excluding amortization of goodwill and debt refinancing costs, and income taxes. -6- 5. Segment Information (Cont.) Segment assets as of December 31,1998 and March 31, 1999 are set forth below (dollars in thousands):
1998 1999 ---- ---- Segment Assets .......................................................... $341,583 $302,401 A reconciliation of the segment information reported above to the consolidated financial statements is as follows (dollars in thousands):
INCOME (LOSS) BEFORE INCOME TAXES
1998 1999 ---- ---- Segment information .......................................... $ 2,053 $ 4,884 Less: Goodwill and other unallocated amortization ............ 654 562 Interest expense: unallocated and other............... 1,045 18 Amortization of debt refinancing costs ............... 374 318 ------- ------- Consolidated total............................................ $ (20) $ 3,986 ======= ======= INTEREST EXPENSE 1998 1999 ---- ---- Segment information........................................... $ 3,251 $ 3,377 Add: Unallocated and other.................................... 1,045 18 ------- ------- Consolidated total............................................ $ 4,296 $ 3,395 ======= ======= ASSETS 1998 1999 ---- ---- Segment Information .......................................... $341,583 $302,401 Add: Corporate and other ..................................... 17,807 10,820 ------- ------- Consolidated total ........................................... $359,390 $313,221 ======= =======
-7- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with Management's Discussion and Analysis and the discussion under the heading "Legal Proceeding - Regulatory and Legislative Matters" included in the Company's 1998 Form 10-K. General The Company is one of the largest broad-line, full-service wholesale distributors of packaged consumer products to the convenience retail industry in western North America. The products distributed by the Company include cigarettes, food products such as candy, fast food, snacks, groceries and non-alcoholic beverages, and non-food products such as film, batteries and other sundries, health and beauty care products and tobacco products other than cigarettes. In the quarter ended March 31, 1999, approximately 69%, 21% and 10% of the Company's net sales were derived from cigarettes, food products and non-food products, respectively. Tobacco Industry Business Environment Manufacturers and distributors of cigarettes and other tobacco products are currently facing a number of significant issues that affect the business environment in which they operate including proposed additional governmental regulation; actual and proposed excise tax increases (see "Impact of Tobacco Taxes" below); increased litigation involving health and other effects of cigarette smoking and other uses of tobacco; and potential litigation by the U.S. Department of Justice to recover federal Medicare costs allegedly connected to smoking. In August 1996, the United States Food and Drug Administration (the "FDA") determined that it had jurisdiction over cigarettes and smokeless tobacco products and issued regulations restricting the sale, distribution and advertising of cigarette and smokeless tobacco products, especially to minors. The FDA regulations are significant not only because of their substance, but also because the FDA has determined that it has jurisdiction over cigarettes and smokeless tobacco as "combination products having both a drug component, including nicotine, and device components." The regulations regulate such products as "devices". In April 1997 the U.S. District Court for the Middle District of North Carolina held that the FDA could impose restrictions on access and labeling of tobacco products, but did not have authority to restrict the promotion and advertisement of such products. The court stayed implementation of the FDA regulations except for those establishing a federal minimum age of 18 for the sale of tobacco products and requiring proof of age for anyone under the age of 27. On August 14, 1998, however, the United States Court of Appeals for the Fourth Circuit reversed the decision of the District Court, finding that the FDA lacked statutory authority to regulate tobacco products altogether. The FDA's petitions for rehearing and rehearing en banc by the Fourth Circuit were denied, but, on April 26, 1999 the Supreme Court granted certiorari to review the decision of the Court of Appeals. A date for arguments on the case has not yet been set. In June 1997, a so called "national settlement" of many of these issues was proposed following negotiations among major U.S. tobacco manufacturers, state attorneys general, representatives of the public health community and attorneys representing plaintiffs in certain smoking and health litigation. The national settlement required implementation by federal legislation, however, and such legislation was considered but not passed by the Congress in 1998. Similar federal legislation has not been introduced to date in 1999. In light of failure of the national settlement legislation, in November 1998 the four largest U.S. cigarette manufacturers and the attorneys general of 46 states, five territories, and the District of Columbia agreed to a settlement of approximately $400 billion for public health-care costs allegedly connected to smoking. The settlement - which takes effect in each settling jurisdiction when the courts in each such jurisdiction enter a final consent decree and any appeals of such decree are disposed of or become time-barred - allows for payment of the agreed sum by the cigarette manufacturers over 25 years, settles the state and territory health-care claims against the tobacco industry and imposes a number of new marketing, advertising, sales and other restrictions on tobacco products. As a direct result of this settlement, the major cigarette manufacturers raised the wholesale price of cigarettes by $4.50 per carton, effective November 24, 1998, bringing the total per-carton price increase in the United States in 1998 to $6.35. Included in the terms of the settlement are conditions that tobacco companies participating in the settlement may not: target youth in the advertising, promotion or marketing of tobacco products; use tobacco brand names to sponsor concerts, athletics events or other events in which a significant -8- percentage of the audience is under 18 years of age; advertise products in conspicuous places outdoors (such as billboards) or on transit vehicles; merchandise a tobacco brand name through the marketing, distribution or sale of apparel or other merchandise; provide free samples of tobacco products in any area except on adults-only facility; distribute or sell cigarettes in pack sizes of less than 20; or lobby state legislatures on certain anti-tobacco initatives (such as limitations on youth access to vending machines). Many of these provisions took effect in November 1998; most of the remaining provisions will take effect by April 23, 1999. The Company is unable to assess the effects that this agreement will have on the sale of the Company's products; there can be no assurance that these new restrictions will not result in a material reduction of the consumption of tobacco products in the United States and thus will have not a material adverse effect on the Company's business and financial position. In early 1999, the President of the United States requested the Department of Justice to review whether the United States can recover various expenditures for medical costs incurred by smokers or former smokers which were paid or reimbursed by the federal government. To date, the Justice Department has not taken any action to do so, but there can be no assurance that the federal government will not commence litigation against the tobacco manufacturers or as to the outcome of any such litigation. Effective January 1, 1999, the State of California increased the state excise tax on cigarettes by $5.00 per carton. California is the Company's largest market, representing approximately 37% of carton sales during the three months ended March 31, 1999. The Company believes that price and tax increases of the magnitude recently experienced will have a negative impact on overall industry unit sales and will negatively affect the Company's sales of tobacco products. The Company does not believe that it is able to quantify the impact of these higher prices and taxes on future sales of cigarettes and other tobacco products. Manufacturer price increases will also increase the Company's debt and interest expense levels. The Company believes that it has adequate financing arrangements in place at the present time to finance the additional working capital requirements of the most recent manufacturer price increases. However, depending upon future levels of manufacturer price increases, or if the terms or amounts of state and provincial excise taxes were adversely changed, the Company may be required to seek additional financing in order to meet future higher working capital requirements. Over the past decade, various state and local governments have imposed significant regulatory restrictions on tobacco products, including sampling and advertising bans or restrictions, packaging regulations and prohibitions on smoking in restaurants, office buildings and public places. With a limited number of exceptions, the state Medicaid litigation settlement prohibits the participating tobacco manufactureres from challenging any restriction relating to tobacco control enacted prior to June 1, 1998. Additional state and local legislative and regulatory actions are being considered and are likely to be promulgated in the future. The Company is unable to assess the future effects that these various proposals may have on the sale of the Company's products. The Company's business strategy has included, and continues to include, increasing sales of higher margin, non-tobacco products, a strategy which is intended to lessen the impact of potential future declines in unit sales and profitability of its tobacco distribution business. THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 NET SALES. Net sales for the three months ended March 31, 1999 were $629.5 million, an increase of $66.2 million or 11.8% over the same period in 1998. The increase in net sales was primarily due to an increase in net sales of cigarettes, as well as increased sales of food and non-food products in 1999 compared to 1998. Net sales of cigarettes for the three months ended March 31, 1999 were $435.3 million, an increase of $60.2 million or 16.0% over the same period in 1998. The increase in net sales of cigarettes was principally due to increases in manufacturers' list prices as well as the $5.00 per carton increase in California state excise taxes which became effective January 1, 1999, all of which have been passed on to the Company's customers in the form of higher prices. The Company's total cigarette unit sales for the three months ended March 31, 1999 were 17.8 million cartons, a decrease of 3.3 million cartons or 15.6% from the same period of 1998. Cigarette carton sales in the U.S. declined by 3.2 million cartons or 17.9% compared to the same period in 1998. The decrease in the Company's carton sales occurred primarily in California, and was due to a number of factors. Consumers in California purchased large quantities of cigarettes in December 1998, in advance of the increase in state excise taxes which became effective January 1, 1999. This hurt the Company's sales of cigarettes in the first three months of 1999. Additionally, the competition from so called "grey market" cigarettes continued to be intense in California. Grey market cigarettes are cigarettes produced by the major tobacco companies, and intended for export only, but which are reintroduced into the domestic market by unauthorized distributors at prices substantially lower then domestic cigarettes. For the three months ended March 31, 1999, cigarette carton sales in the United States, outside of California, were substantially the same in 1999 as in the comparable period of 1998. -9- Net sales of food and non-food products for the three months ended March 31, 1999 were $194.1 million, an increase of $6.0 million or 3.2% over the same period in 1998. GROSS PROFIT. Gross profit for the three months ended March 31, 1999 was $45.6 million, an increase of $4.9 million or 12.0% over the same period in 1998. The increase was primarily due to sales increases in both the cigarette and food and non-food categories. The gross profit margin for the three months ended March 31, 1999 increased slightly to 7.24% of net sales as compared to 7.22% of net sales for the comparable period in 1998. Both cigarette and food and non-food categories experienced slight increases in gross profit margin. For the three months ended March 31, 1999, the Company recognized LIFO expense of $0.1 million compared to $0.8 million for comparable period in 1998. The decrease in LIFO expense for the three months ended March 31, 1999, was primarily the result of a cigarette price increase that occurred during the three months ended March 31, 1998, whereas no such increase occurred in 1999. OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative expenses for the three months ended March 31, 1999 were $37.9 million, an increase of $1.8 million or 5.1% over the same period in 1998. However, such expenses for the three months ended March 31, 1999 decreased to 6.0% of net sales as compared to 6.4% for the same period in 1998. The decline in operating expenses as a percent of net sales is primarily due to the increased net sales resulting from cigarette price increases which occurred primarily in the last quarter of 1998. OPERATING INCOME. As a result of the foregoing factors, operating income for the three months ended March 31, 1999 was $7.7 million, an increase of $3.0 million or 65.6% compared to the same period in 1998. As a percentage of net sales, operating income for the three months ended March 31, 1999 was 1.2%, as compared to 0.8% for the same period in 1998. NET INTEREST EXPENSE. Net interest expense for the three months ended March 31, 1999 was $3.4 million, a decrease of $0.9 million or 21.0% compared to 1998. The net decrease resulted from a decrease in the Company's average debt levels and a decline in the average borrowing rate as a result of the implementation of the accounts receivable securitization program, which was effective April 1, 1998. Liquidity and Capital Resources The Company's liquidity requirements arise primarily from the funding of its working capital needs, capital expenditure programs and debt service requirements with respect to its credit facilities. The Company has no mandatory reductions of principal on its Revolving Credit Facility, its Accounts Receivable Facility or its $75 million Senior Subordinated Notes prior to their final maturities in 2003. The Company has historically financed its operations through internally generated funds and borrowings under its credit facilities. In November 1998, the four largest U.S. cigarette manufacturers and the state attorneys general of 46 states agreed to a multi-billion dollar settlement over public health costs connected to smoking (see "Tobacco Industry Business Environment"). As a direct result of this settlement, the cigarette manufacturers raised the wholesale price of cigarettes by $4.50 per carton, effective November 24, 1998, in order to cover initial costs of the settlement. This manufacturer price increase resulted in an increase in inventories and trade accounts receivable for the Company, and correspondingly higher debt and interest levels. The Company believes that it will be able to adequately finance the corresponding increase in working capital requirements relating to its existing business under its current credit facilities. At current levels of business activity, the Company has substantial excess borrowing capacity under its current credit facilities. However, if manufacturers' price increases or federal excise tax increases (over and above currently enacted increases) continued to sharply escalate, or if payment terms for state and provincial taxes were adversely changed, the Company might be required to seek additional financing in order to meet such higher working capital requirements. The Company's debt obligations totaled $152.0 million at March 31, 1999, a decrease of $56.1 million or 27.0% from $208.1 million at December 31, 1998. The net decrease in outstanding debt is primarily due to decreased borrowings needed to finance working capital funding requirements. Debt requirements are generally the highest at December 31, when the Company historically carries higher inventory. The Company's principal sources of liquidity are net cash provided by operating activities and its credit facilities. At year end the Company typically carries higher inventories which are then liquidated in future periods. Therefore, net cash provided by operating activities is typically lower at the end of any fiscal year compared to interim periods. -10- The Company made capital expenditures of $1.0 million in the first quarter of 1999. For the remainder of 1999, the Company estimates it will spend approximately $6 to $7 million for capital requirements, principally consisting of warehouse and other equipment. Impact of Tobacco Taxes State and Canadian provincial tobacco taxes represent a significant portion of the Company's net sales and cost of goods sold attributable to cigarettes and other tobacco products. In the first quarter of 1999, such taxes on cigarettes represented approximately 26% of cigarette net sales in the U.S. and 46% in Canada. In general, such taxes have been increasing, and many states and Canadian provinces are currently weighing proposals for higher excise taxes on cigarettes and other tobacco products. Effective January 1, 1999, the State of California increased excise taxes on cigarettes by $5.00 per carton as well as increased taxes on cigars and other tobacco products. Under current law, almost all state and Canandian provincial taxes are payable by the Company under credit terms which, on the average, exceed the credit terms the Company has approved for its customers to pay for products which include such taxes. This practice has benefited the Company's cash flow. If the Company were required to pay such taxes at the time such obligation was incurred without the benefit of credit terms, the Company would incur a substantial permanent increase in its working capital requirements and might be required to seek additional financing in order to meet such higher working capital requirements. Consistent with industry practices, the Company has secured a bond to guarantee its tax obligations to those states and provinces requiring such a surety (a majority of states in the Company's operating areas). The U.S. federal excise tax on cigarettes is currently $2.40 per carton of cigarettes. The federal excise tax is scheduled to increase by $1.00 per carton of cigarettes starting in the year 2000 and by an additional $.50 per carton of cigarettes in 2002. Unlike the state and provincial taxes described above, U.S. federal excise taxes on cigarettes are paid by the cigarette manufacturers and passed through to the Company as a component of the cost of cigarettes. Such increases in U.S. federal taxes will increase the Company's working capital requirements by increasing the balances of its inventories and accounts receivable. The President as well as various members of Congress have suggested additional excise taxes on cigarette and tobacco products, either as part of the proposed legislative resolution of various issues affecting the U.S. tobacco industry discussed above or to finance unrelated federal spending. Impact of Year 2000 Compliance Issues In accordance with the safe harbor provisions of the Private Securities Act of 1995, the Company notes that certain statements contained in the following discussion concerning year 2000 compliance issues are forward-looking in nature and are subject to many risks and uncertainties. These forward-looking statements include such matters as the Company's projected state of readiness, the Company's projected cost of remediation, the expected date of completion of each phase and the expected completion date of contingency plans. Such statements also constitute "year 2000 readiness disclosure" within the meaning of the year 2000 Information and Readiness Disclosure Act. The Company relies upon various information technology and non-information technology systems that the Company is currently in the process of assessing and modifying or converting to be year 2000 compliant. Year 2000 compliance indicates that computer software, hardware and embedded processors are able to correctly process the year 2000 date parameter. The systems being assessed for year 2000 compliance include the Company's computer programs, certain building infrastructure components (including elevators, alarm systems and certain HVAC systems), certain data collection and transmission devices and the systems of customers, vendors and other constituents with whom the Company has material relationships that could have an impact on the Company's operations. Non-compliance could result in a disruption of the business, which could have a material impact on the Company's results of operations, financial position and/or cash flows. The most reasonable and likely result of non-compliance would be the Company's inability to utilize its computer systems to process daily transactions, which could result in increased operating costs and delayed shipments to customers, and as a result, the possible monetary losses from canceled future business and lawsuits for breach of contract with these customers. The Company is currently in the process of developing contingency plans for various business disruptions, which will include procedures to mitigate the effect of year 2000 non-compliance issues. The contingency plans will include procedures for alternate processing of daily transactions in the event of an inability to use the Company's computer systems, as well as procedures for transmitting and receiving data from third parties with non-compliant systems. -11- The assessment phase of the Company's systems was complete as of March 31, 1999. The Company has completed modification or conversion and testing of approximately 95% of the Company's systems as of March 31, 1999. The Company presently believes that the modification or conversion of existing systems will be completed in the second quarter of 1999. The Company has initiated formal communications with customers, vendors and other constituents with whom the Company has material relationships, to determine the extent to which the Company is vulnerable to those third parties' failure to become year 2000 compliant. The Company presently believes that the third party assessment process will be completed by June 30, 1999 and was approximately 95% complete as of March 31, 1999. However, there can be no assurance that the systems of other companies will be modified or converted on time, which could have an adverse effect on the Company's operations. The Company has utilized and will continue to utilize internal resources to modify or convert and test for year 2000 compliance. The estimated total cost for the assessment, modification or converting and testing of the Company's systems is approximately $1.1 million. These costs represent approximately 44% of the fiscal 1999 information technology department budgeted expenses and are comprised of $0.1 million for assessment and $1.0 million for software modification or conversion. As a result of the year 2000 compliance effort, the Company believes that no information technology projects have been deferred that will have a material impact on the Company's operations. All of the costs related to year 2000 compliance have been expensed as incurred, and have been and are expected to be, funded through operating cash flows. The Company has incurred approximately $1.1 million of costs as of March 31, 1999 which were comprised of $1 million for assessment and $1.0 million for software modification or conversion. The costs associated with year 2000 compliance are based on management's estimates, which were derived using numerous assumptions of future events, including the cost and continued availability of certain resources, and other factors. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. New Accounting Standards In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which standardizes the accounting for derivatives, requiring recognition as either assets or liabilities on the balance sheet and measurement at fair value. The Company plans to adopt this statement for fiscal 1999. The Company has not yet determined the effect adoption of this statement will have on the Company's consolidated financial position, results of operations or cash flows. In March 1998, the American Institute of Certified Public Accountants issued Statement of Opinion ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP provides guidance on accounting for the costs of computer software developed or obtained for internal use. This SOP requires that entities capitalize certain internal-use software costs once certain criteria are met. Currently, the Company generally expenses the costs of developing or obtaining internal-use software as incurred. The Company is currently evaluating SOP 98-1, but does not expect it to have a material impact on its consolidated financial statements. This SOP is effective for the Company's financial statements for the year ended December 31, 1999. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company believes there has been no material change in its exposure to market risk from that discussed in the Company's 1998 Consolidated Financial Statements. -12- PART II - OTHER INFORMATION ITEM 1. Legal Proceedings As previously reported, in October 1996, a subsidiary of the Company was named as a defendant in a class action lawsuit filed in state court in New Mexico. The other defendants include the principal U.S. tobacco manufactures as well as other distributors. The case is brought on behalf of a putative class of smokers who reside in New Mexico, each of whom is allegedly nicotine dependent. The suit seeks, on behalf of the class, compensatory damages, punitive damages and equitable relief, including medical monitoring of the class members. The Company was dismissed from this suit on January 6, 1999. As previously reported, in January 1998, the Company was served with a summons and First Amended Complaint in an action brought by Operating Engineers Local 12 Health and Welfare Trust (on behalf of itself and all others similarly situated), now part of a coordinated proceeding pending in the Superior Court for San Diego County, against the principal tobacco manufacturers, the Company and other distributors and retailers of tobacco products. The compliant seeks, inter alia, compensatory and punitive damages, restition for monies expended by the Trust for health care of its members who have used tobacco products, and forms of injuctive relief. From April 1998 through the date of this filing, the Company was named as a defendant in 24 additional similar actions brought by various union health and welfare trusts, coordinated into a single proceeding now pending in the Superior Court for San Diego County, against major tobacco manufacturers as well as other distributors. The complaints seek, inter alia, compensatory and punitive damages, restitution for monies expended by the trusts for health care of its members who have used tobacco products, and forms of injunctive relief. As previously reported, in November 1998, the Company was served with a summons and complaint in an action brought by the Pechanga Band of Luiseno Mission Indians, which is now part of the coordinated proceedings involved in the union health and welfare trust cases noted above. In May 1999 this complaint was ammended and the name of the case is now U Tu Utu Gwaitu Paiute Tribe, et. al.. The complaint seeks, inter alia, compensatory and punitive damages, restitution for monies expended by the tribe for health care of its members who have used tobacco products, and forms of injunctive relief. The Company does not believe that these actions will have a material adverse effect on the Company's financial condition. The Company has been indemnified with respect to certain claims alleged in each of the above actions. In addition, the Company is a party to other lawsuits incurred in the ordinary course of its business. The Company believes it is adequately insured with respect to such lawsuits or that such lawsuits will not result in losses material to its consolidated financial position or results of operations. -13- Item 2: Changes in Securities and Use of Proceeds Not applicable Item 3: Defaults Upon Senior Securities Not applicable Item 4: Submission of Matters to a Vote of Security Holders Not applicable Item 5: Other Information Not applicable Item 6: Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K: None. -14- 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, California, on May 12, 1999. CORE-MARK INTERNATIONAL, INC. By /s/ Leo F. Korman ----------------------------------- Leo F. Korman, Senior Vice President and Chief Financial Officer -15- EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 MAR-31-1999 18,843 0 110,913 2,670 82,046 214,996 61,375 33,857 313,221 145,134 151,999 0 0 55 6,476 313,221 629,452 629,452 583,882 37,871 318 0 3,395 3,986 1,674 2,312 0 0 0 2,312 0 0
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