-----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, JTuLamGhlwqdfg6yf0A3WOOebsGXNjPAyimFgElRgoMl9AScXXc2rg78qef7tNxU iJkXEBijznMsM4cTeeYBLA== 0001024726-99-000008.txt : 19991115 0001024726-99-000008.hdr.sgml : 19991115 ACCESSION NUMBER: 0001024726-99-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99749457 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 PERIOD ENDING SEPTEMBER 30, 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 September 30, 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 October 31, 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; increases in federal and state taxes on tobacco products that have the effect of increasing the prices of such 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 September 30, 1999..................................................... 3 Condensed Consolidated Statements of Income for the three and nine months ended September 30, 1998 and 1999...................................... 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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................................................................ 13 PART II - OTHER INFORMATION Item 1: Legal Proceedings............................................. 14 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, September 30, 1998 1999 ------------- ------------- (Unaudited) Assets Current assets: Cash ...................................................................... $ 24,586 $ 12,773 Receivables: Trade accounts, less allowance for doubtful accounts of $2,761 and $2,360, respectively.............................................. 103,412 113,721 Other ................................................................. 12,578 10,411 Inventories, net of LIFO allowance of $34,332 and $40,086, respectively.... 112,481 71,003 Prepaid expenses and other................................................. 6,576 6,029 -------- -------- Total current assets .................................................. 259,633 213,937 Property and equipment ......................................................... 61,332 64,533 Less accumulated depreciation ............................................. (33,283) (36,922) -------- -------- Net property and equipment ................................................ 28,049 27,611 Other assets .................................................................. 7,227 6,109 Goodwill, net of accumulated amortization of $19,375 and $20,937, respectively .............................................................. 64,481 62,919 -------- -------- $359,390 $310,576 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Trade accounts payable..................................................... $ 48,867 $ 52,260 Cigarette and tobacco taxes payable........................................ 45,073 52,984 Income taxes payable....................................................... 2,698 2,874 Deferred income taxes...................................................... 6,992 6,809 Other accrued liabilities.................................................. 34,514 31,011 -------- -------- Total current liabilities.............................................. 138,144 145,938 Long-term debt.................................................................. 208,124 137,649 Other accrued liabilities and deferred income taxes............................. 9,260 10,928 -------- -------- Total liabilities.......................................................... 355,528 294,515 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) (3,889) Accumulated other comprehensive loss: Foreign currency translation adjustments............................... (4,225) (3,214) Minimum pension liability adjustment................................... (3,012) (3,012) -------- -------- Total shareholders' equity............................................. 3,862 16,061 -------- -------- $359,390 $310,576 ======== ========
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 Nine Months Ended September 30, Ended September 30, ----------------------------- ----------------------------- 1998 1999 1998 1999 -------- -------- -------- -------- Net sales............................................ $657,893 $760,909 $1,830,164 $2,097,767 Cost of goods sold................................... 610,325 711,623 1,697,485 1,952,239 -------- -------- -------- -------- Gross profit..................................... 47,568 49,286 132,679 145,528 Operating and administrative expenses................ 38,830 38,722 111,880 115,694 -------- -------- -------- -------- Operating income................................. 8,738 10,564 20,799 29,834 Interest expense, net................................ 3,678 3,094 11,666 9,589 Debt refinancing costs............................... 311 318 1,884 955 -------- -------- -------- -------- Income before income taxes....................... 4,749 7,152 7,249 19,290 Income tax expense................................... 2,183 3,004 3,332 8,102 -------- -------- -------- -------- Net income....................................... $ 2,566 $ 4,148 $ 3,917 $ 11,188 ======== ======== ======== ========
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)
Nine Months Ended September 30, ---------------------------------------- 1998 1999 -------- -------- CASH PROVIDED BY OPERATING ACTIVITIES: Net income ..................................................................... $ 3,917 $ 11,188 Adjustments to reconcile net income to net cash provided by operating activities: LIFO expense............................................................... 5,481 5,754 Depreciation and amortization.............................................. 4,686 4,804 Amortization of goodwill................................................... 1,561 1,562 Amortization of debt refinancing fees...................................... 1,884 955 Deferred income taxes...................................................... (245) 1,499 Changes in operating assets and liabilities................................ 3,502 35,877 -------- -------- Net cash provided by operating activities ...................................... 20,786 61,639 -------- -------- INVESTING ACTIVITIES: Additions to property and equipment ....................................... (3,932) (3,988) -------- -------- Net cash used in investing activities .......................................... (3,932) (3,988) -------- -------- FINANCING ACTIVITIES: Net payments under revolving credit agreement.............................. (88,530) (56,475) Net proceeds (payments) under securitization of accounts receivable........ 72,000 (14,000) Debt refinancing fees...................................................... (1,541) -- -------- -------- Net cash used in financing activities .......................................... (18,071) (70,475) -------- -------- Effects of changes in foreign exchange rates.................................... (1,176) 1,011 -------- -------- Decrease in cash ............................................................... (2,393) (11,813) Cash, beginning of period ...................................................... 15,281 24,586 -------- -------- CASH, END OF PERIOD............................................................. $ 12,888 $ 12,773 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash payments during the period for: Interest .................................................................. $ 13,588 $ 11,591 Income taxes .............................................................. 2,019 6,399
See Notes to Condensed Consolidated Financial Statements. -5- Notes to Condensed Consolidated Financial Statements Nine Months Ended September 30, 1999 (Unaudited) 1. Basis of Presentation The condensed consolidated balance sheet as of September 30, 1999, the condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 1998 and 1999, and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 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 September 30, 1999 with respect to the interim financial statements, and the results of its operations and cash flows for the interim periods ended September 30, 1998 and 1999, 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 $1.4 million and $5.5 million for the three months ended September 30, 1998 and 1999, respectively, and $5.5 million and $5.8 million for the nine months ended September 30, 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 on cigarettes included in the Company's net sales and cost of goods sold were $123.4 million and $155.0 million for the three months ended September 30, 1998 and 1999, respectively and $352.0 million and $430.1 million for the nine months ended September 30, 1998 and 1999, respectively. 4. Comprehensive Income The Company's total comprehensive income was $1.7 million and $4.1 million for the three months ended September 30, 1998 and 1999, respectively, and $2.7 million and $12.2 million for the nine months ended September 30, 1998 and 1999, respectively, which reflects net income and foreign currency translation adjustments. -6- Notes to Condensed Consolidated Financial Statements (cont.) 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 and nine-month periods ended September 30, and segment assets as of December 31, 1998 and September 30, 1999 are set forth below (dollars in thousands):
Three Months Nine Months Ended September 30, Ended September 30, ------------------ ------------------ 1998 1999 1998 1999 -------- -------- -------- -------- Net sales from external customers............................. $657,893 $760,909 $1,830,164 $2,097,767 Segment pretax operating income (1).......................... $ 5,979 $ 7,886 $ 12,949 $ 21,848 Less: Goodwill and other unallocated amortization ............ 659 569 1,971 1,695 Interest expense: unallocated and other................. 260 (153) 1,845 (92) Amortization of debt refinancing costs ................. 311 318 1,884 955 -------- -------- -------- -------- Consolidated income before income taxes....................... $ 4,749 $ 7,152 $ 7,249 $ 19,290 ======== ======== ======== ========
Assets December 31, September 30, 1998 1999 -------- -------- Segment assets................................................ $341,583 $301,550 Add: Corporate and other...................................... 17,807 9,026 -------- -------- Consolidated assets........................................... $359,390 $310,576 ======== ========
--------------------- (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 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. For the nine months ended September 30, 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 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, but, on April 26, 1999, the Supreme Court granted certiorari to review the decision of the Court of Appeals. Briefing on the case has been completed, and oral argument before the Supreme Court has been set for December 1, 1999. 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 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 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. Congress did not include funding for the $20 million that the President requested to pursue this litigation, and the President included this funding omission among the reasons for his veto of the Justice Department appropriations bill on October 26, 1999. 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, and thus will not 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 38% of carton sales during the nine months ended September 30, 1999. The major U.S. cigarette manufacturers raised the wholesale price of cigarettes by $1.80 per carton, effective August 30, 1999. 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 September 30, 1999 Compared to Three Months Ended September 30, 1998 NET SALES. Net sales for the three months ended September 30, 1999 were $760.9 million, an increase of $103.0 million or 15.7% 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 September 30, 1999 were $530.6 million, an increase of $93.6 million or 21.4% 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 September 30, 1999 were 21.0 million cartons, a decrease of 2.0 million cartons or 8.9% from the same period of 1998. The decrease in the Company's carton sales -9- occurred primarily in California, and was due to a number of factors. In both 1998, and in 1999, the competition from 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. However, in October 1999, the California legislature passed and the governor signed, bill SB702, which will make it illegal to affix state tax stamps to grey market cigarettes. If enforced by the state of California, this bill could result in an improvement in the Company's California cigarette volume. For the three months ended September 30, 1999, cigarette carton sales in the United States, outside of California, were substantially the same as in the comparable period of 1998. Net sales of food and non-food products for the three months ended September 30, 1999 were $230.3 million, an increase of $9.4 million or 4.3% over the same period in 1998. GROSS PROFIT. Gross profit for the three months ended September 30, 1999 was $49.3 million, an increase of $1.7 million or 3.6% over the same period in 1998. The increase was primarily due to the higher level of sales in both the cigarette and food and non-food categories. The gross profit margin for the three months ended September 30, 1999 decreased to 6.5% of net sales as compared to 7.2% of net sales for the comparable period in 1998. However, the decline in overall gross profit margin was primarily due to the sharp increase in the wholesale cost of cigarettes over the past year. Gross margins on cigarettes are significantly lower then the margins on food and non-food products, and the much faster growth in cigarette revenues caused the reduction in margins. During the period, while cigarette gross profit margins declined slightly, gross profit per carton increased, and the gross profit margins on food and non-food products remained virtually unchanged. OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative expenses for the three months ended September 30, 1999 were $38.7 million, a decrease of $0.1 million or 0.3% over the same period in 1998. As a percent of net sales, expenses for the three months ended September 30, 1999 decreased to 5.1% of net sales as compared to 5.9% of net sales for the same period in 1998. 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, and a slight decline in warehouse and distribution costs. OPERATING INCOME. As a result of the foregoing factors, operating income for the three months ended September 30, 1999 was $10.6 million, an increase of $1.8 million or 20.9% compared to the same period in 1998. As a percentage of net sales, operating income for the three months ended September 30, 1999 was 1.4%, as compared to 1.3% for the same period in 1998. NET INTEREST EXPENSE. Net interest expense for the three months ended September 30, 1999 was $3.1 million, a decrease of $0.6 million or 15.9% compared to 1998. The net decrease resulted from a decrease in the Company's average debt levels. DEBT REFINANCING COSTS. Debt refinancing costs for the three months ended September 30, 1999 were $0.3 million, and remained constant compared to the same period in 1998. Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30, 1998 NET SALES. Net sales for the nine months ended September 30, 1999 were $2,097.8 million, an increase of $267.6 million or 14.6% over the comparable period in 1998. The increase in net sales was due to an increase in net sales of cigarettes and food and non-food products in 1999 compared to 1998. Net sales of cigarettes for the nine months ended September 30, 1999 were $1,455.5 million, an increase of $235.2 million or 19.3% over the prior year. 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 along to the Company's customers. The Company's total cigarette unit sales for the nine months ended September 30, 1999 were 58.6 million cartons, a decrease of 7.3 million cartons or 11.1% from the comparable period in 1998. The decrease in the Company's carton sales occurred primarily in California, and was due to a number of factors. In both 1998, and in 1999, the competition from grey market cigarettes continued to be intense in California. However, in October 1999, the California legislature passed and the governor signed, bill SB702, which will make it illegal to affix state tax stamps to grey market cigarettes. If enforced by the state of California, this bill could -10- result in an improvement in the Company's California cigarette volume. For the nine months ended September 30, 1999, cigarette carton sales in the United States, outside of California, were substantially the same as in the comparable period of 1998. Net sales of food and non-food products for the nine months ended September 30, 1999 were $642.3 million, an increase of $32.4 million or 5.3% over the comparable period in 1998. GROSS PROFIT. Gross profit for the nine months ended September 30, 1999 was $145.5 million, an increase of $12.8 million or 9.7% from the comparable period in 1998. The increase was primarily due to sales increases in the cigarette and food and non-food categories. The gross profit margin for the nine months ended September 30, 1999 decreased slightly to 6.9% of net sales as compared to 7.3% of net sales for the first nine months of 1998. However, the decline in overall gross profit margin was primarily due to the sharp increase in the wholesale cost of cigarettes over the past year. Gross margins on cigarettes are significantly lower then the margins on food and non-food products, and the much faster growth in cigarette revenues caused the reduction in margins. During the period, both cigarette gross profit margins, and gross profit per carton increased, while the gross profit margins on food and non-food products remained virtually unchanged. OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative expenses for the nine months ended September 30, 1999 were $115.7 million, an increase of $3.8 million or 3.4% over the comparable period in 1998. However, such expenses for the nine months ended September 30, 1999 decreased to 5.5% of net sales as compared to 6.1% for the comparable period in 1998. 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 nine months ended September 30, 1999 was $29.8 million, an increase of $9.0 million or 43.4% compared to the comparable period in 1998. As a percentage of net sales, operating income for the nine months ended September 30, 1999 was 1.4%, as compared to 1.1% for the comparable period in 1998. NET INTEREST EXPENSE. Net interest expense for the nine months ended September 30, 1999 was $9.6 million, a decrease of $2.1 million or 17.8% compared to 1998. The net decrease resulted from a decrease in the Company's average debt levels and a decline in the average borrowing rates primarily as a result of the accounts receivable securitization program, which was effective April 1, 1998. DEBT REFINANCING COSTS. Debt refinancing costs for the nine months ended September 30, 1999 were $1.0 million, a decrease of $0.9 million or 49.3% over the comparable period in 1998. The decrease is a result of the write-off of a portion of unamortized costs relating to the modification of the revolving credit facility, which occurred in April 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. The Company's debt obligations totaled $137.6 million at September 30, 1999, a decrease of $70.5 million or 33.9% 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 which resulted from the increase in net cash provided from operating activities experienced in 1999. 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 higher at interim periods than at the end of any fiscal year. The Company made capital expenditures of $4.0 million for the nine months ended September 30, 1999. For the remainder of 1999, the Company estimates it will spend approximately $2 to $3 million for capital requirements, principally consisting of warehouse and other equipment. -11- 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. For the nine months ended September 30, 1999, such taxes on cigarettes represented approximately 26% 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 and also 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 $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. In 1999, the Clinton Administration proposed as part of its budget for Fiscal Year 2000 that the excise tax on cigarettes be increased by 55 cents per pack (in addition to the increases already scheduled for 2000 and 2002), in order to avoid using the social security trust fund surplus to finance unrelated federal spending. On October 19, 1999, the House of Representatives defeated tax legislation that included this increase. 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. 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 or state of completion of each phase and the expected date or state of completion 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 are required 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 Company has completed the assessment, modification or conversion and testing of the Company's systems for year 2000 compliance. The systems that were assessed, modified or converted for year 2000 compliance included the Company's computer programs, certain building infrastructure components (including elevators, alarm systems and certain HVAC systems), and certain data collection and transmission devices. Additionally, 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 were assessed for year 2000 compliance. The third party assessment process has also been completed. Procedures have been undertaken by third parties to remediate their non-compliant systems, 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. 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, possible monetary losses from canceled future business and lawsuits for breach of contract with these customers. The -12- Company has developed contingency plans for various business disruptions, which include procedures to mitigate the effect of year 2000 non-compliance issues. The contingency plans 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. The Company utilized internal resources to assess, modify or convert and test for year 2000 compliance. The total cost for the assessment, modification or conversion and testing of the Company's systems was approximately $1.1 million, all of which have been incurred. 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 funded through operating cash flows. The costs associated with year 2000 compliance are based on management's estimates, which were derived using numerous assumptions of resources, and other factors. 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 2001. 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. 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. -13- PART II - OTHER INFORMATION Item 1: Legal Proceedings None 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 November 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 9-MOS DEC-31-1999 SEP-30-1999 12,773 0 126,492 2,360 71,003 213,937 64,533 36,922 310,576 145,938 137,649 0 0 55 16,006 310,576 2,097,767 2,097,767 1,952,239 115,694 955 0 9,589 19,290 8,102 11,188 0 0 0 11,188 0 0
-----END PRIVACY-ENHANCED MESSAGE-----