-----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, Ims9w0p0Nj5tinGz0WvwM+NAXAf1WN+NccL75QSqce1fARg06haTu+9b2aFHtYp9 eopblMvd2GZwh/FMRK/6Bw== 0001024726-00-000004.txt : 20000512 0001024726-00-000004.hdr.sgml : 20000512 ACCESSION NUMBER: 0001024726-00-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000511 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: 626027 BUSINESS ADDRESS: STREET 1: 395 OYSTER POINT BLVD STREET 2: SUITE 415 CITY: SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 6505899445 MAIL ADDRESS: STREET 1: 395 OYSTER POINT BLVD STREET 2: SUITE 415 CITY: SAN FRANCISCO STATE: CA ZIP: 94080 10-Q 1 FOR THE PERIOD ENDING MARCH 31, 2000 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, 2000 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, 2000, 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, 1999 and March 31, 2000......................................................... 3 Condensed Consolidated Statements of Income for the three months ended March 31, 1999 and 2000................................................ 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 2000.......................................... 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..................... 13 Item 3: Defaults Upon Senior Securities............................... 13 Item 4: Submission of Matters to a Vote of Security Holders........... 13 Item 5: Other Information............................................. 13 Item 6: Exhibits and Reports on Form 8-K.............................. 13 Signature .................................................................. 14
-2- CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In Thousands of Dollars)
December 31, March 31, 1999 2000 ------------- ------------- (Unaudited) Assets Current assets: Cash ...................................................................... $ 17,279 $ 19,255 Receivables: Trade accounts, less allowance for doubtful accounts of $2,320 and $2,442, respectively.............................................. 104,983 112,265 Other ................................................................. 15,287 12,635 Inventories, net of LIFO allowance of $40,003 and $40,753, respectively.... 109,139 77,657 Prepaid expenses and other................................................. 5,921 6,342 -------- -------- Total current assets .................................................. 252,609 228,154 Property and equipment ......................................................... 66,696 67,248 Less accumulated depreciation ............................................. (37,277) (37,685) -------- -------- Net property and equipment ................................................ 29,419 29,563 Other assets .................................................................. 5,642 5,684 Goodwill, net of accumulated amortization of $21,458 and $21,978, respectively .............................................................. 62,398 61,877 -------- -------- $350,068 $325,278 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Trade accounts payable..................................................... $ 51,093 $ 57,139 Cigarette and tobacco taxes payable........................................ 59,975 58,375 Income taxes payable....................................................... 3,932 4,979 Deferred income taxes...................................................... 4,851 4,886 Other accrued liabilities.................................................. 31,073 27,725 -------- -------- Total current liabilities.............................................. 150,924 153,104 Long-term debt.................................................................. 165,335 136,414 Other accrued liabilities and deferred income taxes............................. 7,859 8,000 -------- -------- Total liabilities.......................................................... 324,118 297,518 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 Retained earnings.......................................................... 5,123 7,027 Accumulated comprehensive loss: Foreign currency translation adjustments............................... (2,949) (3,043) Minimum pension liability adjustment................................... (2,400) (2,400) -------- -------- Total shareholders' equity............................................. 25,950 27,760 -------- -------- $350,068 $325,278 ======== ========
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, ------------------------ 1999 2000 -------- -------- Net sales ............................................................... $629,452 $722,808 Cost of goods sold ...................................................... 583,882 676,789 -------- -------- Gross profit ....................................................... 45,570 46,019 Operating and administrative expenses ................................... 37,871 39,026 -------- -------- Operating income ................................................... 7,699 6,993 Interest expense, net ................................................... 3,395 3,054 Amortization of debt refinancing costs .................................. 318 318 -------- -------- Income before income taxes ......................................... 3,986 3,621 Income tax expense....................................................... 1,674 1,717 -------- -------- Net income.......................................................... $ 2,312 $ 1,904 ======== ========
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, ------------------------- 1999 2000 -------- -------- CASH PROVIDED BY OPERATING ACTIVITIES: Net income ........................................................... $ 2,312 $ 1,904 Adjustments to reconcile net income to net cash provided by operating activities: LIFO expense........................................................ 100 750 Amortization of goodwill............................................ 521 521 Depreciation and amortization....................................... 1,550 1,556 Amortization of debt refinancing fees............................... 318 318 Deferred income taxes............................................... 317 164 Other adjustments for non-cash and non-operating activities......... 53 (19) Changes in operating assets and liabilities......................... 45,929 27,316 -------- -------- Net cash provided by operating activities ............................... 51,100 32,510 -------- -------- INVESTING ACTIVITIES: Additions to property and equipment ................................ (971) (1,519) -------- -------- Net cash used in investing activities ................................... (971) (1,519) -------- -------- FINANCING ACTIVITIES: Net borrowings (payments) under accounts receivable securitization.. 3,000 (25,000) Net payments under revolving credit agreement ...................... (59,125) (3,921) -------- -------- Net cash used in financing activities ................................... (56,125) (28,921) -------- -------- Effects of changes in foreign exchange rates............................. 253 (94) -------- -------- Increase (decrease) in cash ............................................. (5,743) 1,976 Cash, beginning of period ............................................... 24,586 17,279 -------- -------- CASH, END OF PERIOD...................................................... $ 18,843 $ 19,255 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash payments during the period for: Interest ........................................................... $ 5,534 $ 5,125 Income taxes ....................................................... 63 507
See Notes to Condensed Consolidated Financial Statements. -5- Notes to Condensed Consolidated Financial Statements Three Months Ended March 31, 2000 (Unaudited) 1. BASIS OF PRESENTATION The condensed consolidated balance sheet as of March 31, 2000 and the condensed consolidated statements of income and of cash flows for the three-month periods ended March 31, 1999 and 2000 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, 2000 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, 1999, 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, 1999 ("1999 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, 1999 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 $100,000 and $750,000 for the three months ended March 31, 1999 and 2000, 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 on cigarettes included in sales and cost of goods sold were $128.8 million and $144.2 million for the three months ended March 31, 1999 and 2000, respectively. 4. COMPREHENSIVE INCOME The Company's total comprehensive income was $2,669,000 and $1,810,000 for the three months ended March 31, 1999 and 2000 respectively, which included other comprehensive income related to foreign currency translation adjustments. -6- 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 1999 Form 10-K. Wholesale distribution segment information for the three-month periods ended March 31 and asset information as of December 31, 1999 and March 31, 2000 is set forth below (dollars in thousands):
Three Months Ended March 31, ------------------------- 1999 2000 -------- -------- Net sales from external customers............................. $629,452 $722,808 Segment pre tax operating income (1) ......................... $ 4,884 $ 4,411 Less: Goodwill and other unallocated amortization ............ 562 588 Interest expense: unallocated and other............... 18 (116) Amortization of debt refinancing costs ............... 318 318 -------- -------- Consolidated income before income taxes....................... $ 3,986 $ 3,621 ======== ========
ASSETS December 31, March 31, 1999 2000 -------- -------- Segment information........................................... $338,038 $313,359 Add: Corporate and other...................................... 12,030 11,919 -------- -------- Consolidated assets........................................... $350,068 $325,278 ======== ========
________________________________________________________________________________ (1) Represents operating income, including allocated interest expense, but excluding amortization of goodwill and debt refinancing costs, and income taxes. -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 Proceedings - - Regulatory and Legislative Matters" included in the Company's 1999 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, 2000, approximately 72%, 19% and 9% 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 face 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 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 to 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, the FDA's petition for review was granted by the Supreme Court, and on March 21, 2000, the Supreme Court ruled 5-4 that the FDA did not have authority to regulate tobacco products. In response to the Supreme Court ruling, legislation has recently been introduced in Congress that would grant authority to the FDA to regulate tobacco products. One cigarette manufacturer expressed interest in such legislation but the remaining companies have stated their opposition. It is unclear whether legislation giving FDA authority to regulate tobacco products will pass during the year 2000. 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. 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. -8- 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, athletic events or other events in which a significant 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 an adults-only facility; distribute or sell cigarettes in pack sizes of less than 20; or lobby state legislatures on certain anti-tobacco initiatives (such as limitations on youth access to vending machines). Many of these provisions took effect in November 1998 and most of the remaining provisions took effect by April 23, 1999. The Company is unable to assess the long- term 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 not have a material adverse effect on the Company's business and financial position. 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 manufacturers 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. On September 22, 1999, the U.S. Department of Justice filed "an action to recover health care costs paid for and furnished...by the federal government for lung cancer, heart disease, emphysema and other tobacco-related illnesses caused by the fraudulent and tortious conduct of..." the major tobacco manufacturers. The defendant companies announced that they would fight the litigation, and on December 27, 1999 moved to dismiss the government's complaint. The government opposed the motion to dismiss on February 25, 2000, the defendant companies replied to the government's opposition on March 27, 2000, and the court's decision is pending. If the Justice Department prevails in the litigation, or if the litigation is settled, there can be no assurance that the litigation will not result in increased cigarette prices and/or a material reduction of the consumption of tobacco products in the United States; such circumstances could have a material adverse affect on the Company's business and financial position. 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 42% of carton sales during the three months ended March 31, 2000. The major U.S. cigarette manufacturers raised the wholesale price of cigarettes by $1.80 per carton, effective August 30, 1999, and $1.30 per carton, effective January 17, 2000. The Company believes that price and tax increases of the magnitude recently experienced, as well as increases which occur in the future (see "-Impact of Tobacco Taxes"), 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. 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, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999 NET SALES. Net sales for the three months ended March 31, 2000 were $722.8 million, an increase of $93.4 million or 14.8% over the same period in 1999. 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 2000 compared to 1999. -9- Net sales of cigarettes for the three months ended March 31, 2000 were $519.9 million, an increase of $84.5 million or 19.4% over the same period in 1999. The increase in net sales of cigarettes was principally due to increases in manufacturers' list prices, which have been passed on to the Company's customers in the form of higher prices and an increase in carton sales. The Company's total cigarette unit sales for the three months ended March 31, 2000 were 19.2 million cartons, an increase of 1.4 million cartons or 8.1% from the same period of 1999. Cigarette carton sales in the U.S. increased by 1.3 million cartons or 9.2% compared to the same period in 1999. The increase 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 had a negative impact on the Company's sales of cigarettes in the first three months of 1999. Additionally, the competition from so called grey market cigarettes appears to have lessened with the passage of California bill SB702. This bill, passed in October 1999 made it illegal to affix state tax stamps to grey market cigarettes. For the three months ended March 31, 2000, cigarette carton sales in the United States, outside of California, were substantially the same in 2000 as in the comparable period of 1999. Net sales of food and non-food products for the three months ended March 31, 2000 were $202.9 million, an increase of $8.8 million or 4.6% over the same period in 1999. GROSS PROFIT. Gross profit for the three months ended March 31, 2000 was $46.0 million, an increase of $0.4 million or 1.0% over the same period in 1999. The gross profit margin for the three months ended March 31, 2000 decreased to 6.4% of net sales as compared to 7.2% of net sales for the comparable period in 1999. The decline in overall gross profit margin was primarily due to the increase in the wholesale cost of cigarettes over the past year. Gross margins on cigarettes are significantly lower than the margins on food and non-food products, and the much faster growth in cigarette revenues caused the overall reduction in margins. For the three months ended March 31, 2000, the Company recognized LIFO expense of $0.8 million compared to $0.1 million for the comparable period in 1999. The increase in LIFO expense for the three months ended March 31, 2000, was primarily the result of a cigarette price increase that occurred in the first quarter of 2000, whereas no such increase occurred in the first quarter of 1999. OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative expenses for the three months ended March 31, 2000 were $39.0 million, an increase of $1.2 million or 3.1% over the same period in 1999. However, such expenses for the three months ended March 31, 2000 decreased to 5.4% of net sales as compared to 6.0% for the same period in 1999. The decline in operating expenses as a percent of net sales is primarily due to the higher level of cigarette net sales resulting from cigarette price increases. OPERATING INCOME. As a result of the foregoing factors, operating income for the three months ended March 31, 2000 was $7.0 million, a decrease of $0.7 million or 9.2% as compared to the same period in 1999. As a percentage of net sales, operating income for the three months ended March 31, 2000 was 1.0%, as compared to 1.2% for the same period in 1999. NET INTEREST EXPENSE. Net interest expense for the three months ended March 31, 2000 was $3.1 million, a decrease of $0.3 million or 10.0% compared to 1999, which resulted from a decrease in the Company's average debt levels. 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. The Company's debt obligations totaled $136.4 million at March 31, 2000, a decrease of $28.9 million or 17.5% from $165.3 million at December 31, 1999. The net decrease in outstanding debt is primarily due to decreased borrowings needed to finance working capital funding requirements which resulted from the increase in net cash provided from operating activities experienced in 2000. Debt requirements are generally the highest at December 31, when the Company historically carries higher inventory. -10- 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 higher at interim periods than at the end of any fiscal year. The Company made capital expenditures of $1.5 million in the first quarter of 2000. For the remainder of 2000, the Company estimates it will spend approximately $5 to $6 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 2000, such taxes on cigarettes represented approximately 24% of cigarette net sales in the U.S. and 45% 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 Canadian 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 $3.40 per carton of cigarettes, including a $1.00 per carton increase, which was effective January 1, 2000. Legislation was enacted that will raise the federal excise tax by an additional $.50 per carton of cigarettes in 2002. In its fiscal 2001 budget, the Administration proposed accelerating the scheduled increase for 2002 to take effect October 1, 2000. Congress has not considered the proposed acceleration to this date and is not scheduled to do so until the summer of 2000. 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 has 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. While the Company is unaware of additional legislation that might further increase the federal excise tax on cigarettes, there can be no assurance that similar proposals will not be considered in the future. NEW ACCOUNTING STANDARDS In 1998, the Financial Accounting Standards Board (FASB) issued SFAS 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. As amended in June 1999 by SFAS No. 137, this statement is effective for all fiscal years beginning after June 15, 2000 and is not to be applied retrospectively to financial statements for prior periods. 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. -11- 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 1999 Consolidated Financial Statements. -12- PART II - OTHER INFORMATION Item 1: Legal Proceedings As previously reported, in November 1999, the Company was named in two separate law suits filed in State Court in New Mexico by two individual plaintiffs. The other defendants include the principal U.S. tobacco manufacturers, as well as other distributors. The complaints seek compensatory and punitive damages or injuries allegedly caused by the use of tobacco products. 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. 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. -13- 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 11, 2000. CORE-MARK INTERNATIONAL, INC. By /s/ Leo F. Korman ___________________________________ Leo F. Korman, Senior Vice President and Chief Financial Officer -14- EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-2000 MAR-31-2000 19,255 0 127,342 2,442 77,657 228,154 67,248 37,685 325,278 153,104 136,414 0 0 55 27,705 325,278 722,808 722,808 676,789 39,026 318 0 3,054 3,621 1,717 1,904 0 0 0 1,904 0 0
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