-----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, ScrKE5LRZ8j+rhMMAKRVhH3Vq+cHhLzGsnxymWGo/g4UaM/8RkKqqBASDoAtFNAl zJuCZMta9Mf/h6Tb8Zz45Q== 0001047469-97-003136.txt : 19971110 0001047469-97-003136.hdr.sgml : 19971110 ACCESSION NUMBER: 0001047469-97-003136 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971107 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORE MARK INTERNATIONAL INC CENTRAL INDEX KEY: 0001024726 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISCELLANEOUS NONDURABLE GOODS [5190] IRS NUMBER: 911295550 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-14217 FILM NUMBER: 97710227 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 10-Q 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, 1997 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, 1997, 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, 1996 and September 30, 1997. . . . . . . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Income for the three and nine months ended September 30, 1996 and 1997. . . . . . . . . . . . 5 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1997 . . . . . . . . . . . . . . . 6 Notes to Condensed Consolidated Financial Statements . . . . . . . . 7 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 10 PART II - OTHER INFORMATION Item 1: Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 14 Item 2: Changes in Securities. . . . . . . . . . . . . . . . . . . 14 Item 3: Defaults upon Senior Securities. . . . . . . . . . . . . . 14 Item 4: Submission of Matters to a Vote of Security Holders. . . . 14 Item 5: Other information. . . . . . . . . . . . . . . . . . . . . 15 2 PAGE ---- Item 6: Exhibits and Reports on Form 8-K . . . . . . . . . . . 15 Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3 CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS)
DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------- ------------- (UNAUDITED) ASSETS Current assets: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,769 $ 11,095 Receivables: Trade accounts, less allowance for doubtful accounts of $3,881 and $4,180, respectively . . . . . . . . . . . . . . . . . . . . . 88,715 95,121 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,229 8,627 Inventories, net of LIFO allowance of $12,452 and $15,987, respectively 99,342 93,021 Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . 6,214 7,342 ------------- ------------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . 232,269 215,206 Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,534 55,430 Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . (24,006) (27,217) ------------- ------------- Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . 22,528 28,213 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,792 8,783 Goodwill, net of accumulated amortization of $15,220 and $16,772, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,447 67,020 ------------- ------------- $329,036 $319,222 ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,572 $ 53,274 Cigarette and tobacco taxes payable. . . . . . . . . . . . . . . . . . . 43,912 47,194 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 454 1,090 Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 7,397 7,326 Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . 30,653 26,294 ------------- ------------- Total current liabilities . . . . . . . . . . . . . . . . . . . . . 133,988 135,178 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,463 178,116 Other accrued liabilities and deferred income taxes. . . . . . . . . . . . . 8,585 8,928 ------------- ------------- Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 336,036 322,222 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. . . . . . . . . . . . . . . . . . . . . . . . . . . (28,576) (23,949) Cumulative currency translation adjustments. . . . . . . . . . . . . . . (1,608) (2,235) Additional minimum pension liability . . . . . . . . . . . . . . . . . . (2,992) (2,992) ------------- ------------- Total shareholders' deficit . . . . . . . . . . . . . . . . . . . . (7,000) (3,000) ------------- ------------- $329,036 $319,222 ------------- ------------- ------------- -------------
See Notes to Condensed Consolidated Financial Statements. 4 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, ---------------------- ----------------------- 1996 1997 1996 1997 ---------- ---------- ---------- ---------- Net sales. . . . . . . . . . . . . . . . $ 568,691 $ 647,146 $1,637,266 $1,790,006 Cost of goods sold . . . . . . . . . . . 529,338 600,106 1,518,946 1,656,290 --------- ---------- ---------- ---------- Gross profit . . . . . . . . . . . . 39,353 47,040 118,320 133,716 Operating and administrative expenses. . 32,886 37,765 97,402 110,696 --------- ---------- ---------- ---------- Operating income . . . . . . . . . . 6,467 9,275 20,918 23,020 Interest expense, net. . . . . . . . . . 2,694 4,591 5,665 13,635 Debt refinancing costs . . . . . . . . . 293 340 928 1,123 --------- ---------- ---------- ---------- Income before income taxes and extraordinary item. . . . . . . 3,480 4,344 14,325 8,262 Income tax expense . . . . . . . . . . . 1,645 2,068 6,274 3,635 --------- ---------- ---------- ---------- Income before extraordinary item . . 1,835 2,276 8,051 4,627 Extraordinary item, net of tax (Note 2). (1,830) --- (1,830) --- --------- ---------- ---------- ---------- Net income . . . . . . . . . . . . . $ 5 $ 2,276 $ 6,221 $ 4,627 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See Notes to Condensed Consolidated Financial Statements. 5 CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 1996 1997 -------- -------- CASH PROVIDED BY OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,221 $4,627 Adjustments to reconcile net income to net cash provided by operating activities: LIFO expense . . . . . . . . . . . . . . . . . . . . . . . . . . 1,360 3,535 Amortization of goodwill . . . . . . . . . . . . . . . . . . . . 1,484 1,552 Extraordinary loss on early extinguishment of debt (Note 2). . . 1,830 --- Depreciation and amortization. . . . . . . . . . . . . . . . . . 3,461 4,172 Amortization of debt refinancing fees. . . . . . . . . . . . . . 928 1,123 Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . (510) 227 Other adjustments for non-cash and non-operating activities. . . 85 350 Changes in operating assets and liabilities, net of acquisitions 28,809 15,159 -------- -------- Net cash provided by operating activities . . . . . . . . . . . . . 43,668 30,745 -------- -------- INVESTING ACTIVITIES: Net assets of acquired businesses . . . . . . . . . . . . . . . --- (21,361) Additions to property and equipment . . . . . . . . . . . . . . (3,983) (8,547) Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64) --- -------- -------- Net cash used in investing activities . . . . . . . . . . . . . . . (4,047) (29,908) -------- -------- FINANCING ACTIVITIES: Issuance of senior subordinated notes. . . . . . . . . . . . . . 75,000 --- Net payments under revolving credit agreement. . . . . . . . . . (13,259) (15,347) Debt refinancing and issuance costs. . . . . . . . . . . . . . . (7,474) --- Net proceeds from sale of common stock . . . . . . . . . . . . . 39,075 --- Purchase of common stock . . . . . . . . . . . . . . . . . . . . (141,250) --- -------- -------- Net cash used in financing activities . . . . . . . . . . . . . . . (47,908) (15,347) -------- -------- Effects of changes in foreign exchange rates . . . . . . . . . . . . 234 (164) -------- -------- Decrease in cash . . . . . . . . . . . . . . . . . . . . . . . . . . (8,053) (14,674) Cash, beginning of period. . . . . . . . . . . . . . . . . . . . . . 24,447 25,769 -------- -------- CASH, END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . $16,394 $11,095 -------- -------- -------- -------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash payments during the period for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,270 $15,645 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 5,565 2,779
See Notes to Condensed Consolidated Financial Statements. 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) 1. BASIS OF PRESENTATION The condensed consolidated balance sheet as of September 30, 1997, the condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 1996 and 1997, and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 1996 and 1997, 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, 1997 (subject to year-end adjustments) and 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, 1996, 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, 1996 ("1996 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, 1996 balance sheet and the interim financial statements included herein. 2. RECAPITALIZATION On August 7, 1996, the Company completed a recapitalization (the "Recapitalization") which resulted in the purchase of newly issued common stock of the Company by Jupiter Partners L.P. ("Jupiter") for $41.3 million in cash, the redemption of all of the common stock held by three financial institutions and a portion of the common stock held by six members of senior management ("Senior Management") for $135.0 million in cash and $6.3 million initial value of subordinated notes due 2004. Pursuant to the stock subscription agreement between the Company and Jupiter, the Company paid an affiliate of Jupiter a transaction fee of $2.2 million on August 7, 1996. Upon completion of the Recapitalization, Jupiter and Senior Management owned 75% and 25%, respectively, of the outstanding common stock of the Company. Jupiter also purchased from the Company an $18.8 million subordinated note due 2004. Both of these subordinated notes were repaid prior to September 30, 1996, as discussed in Note 3. In connection with the Recapitalization, the Company entered into a credit facility with a group of banks, which provides for aggregate borrowings of up to $210.0 million, consisting of: (i) a $35.0 million term loan (the "Term Loan"), which was repaid as discussed in Note 3, and (ii) a revolving credit facility (the "Revolving Credit Facility"), under which borrowings in the amount of up to $175.0 million are available (subject to compliance with a borrowing base) for working capital and general corporate purposes. Under the Revolving Credit Facility the Company has the option to borrow under Eurodollar Rate Advances, which bear interest at 2.5% above the bank's Eurodollar Rate, or Base Rate Advances which bear interest at 1.5% above the bank's Base Rate. The bank's Base Rate and Eurodollar Rate was 8.25% and 5.41%, respectively, at September 30, 1996. There is a commitment fee of 0.5% on the unused portion of the Revolving Credit Facility. Simultaneously with the closing of the stock purchase and the redemptions, the Company fully repaid the outstanding debt under a previous credit facility. The early extinguishment of the previously existing debt resulted in a one-time extraordinary charge to income to write-off unamortized debt refinancing costs of $1.8 million which is net of a $1.2 million income tax benefit. 3. NOTE OFFERING On September 27, 1996, the Company issued $75.0 million of 11 3/8% Senior Subordinated Notes (the "Notes") which mature on September 15, 2003, the proceeds of which were used to repay in full the subordinated notes and Term Loan discussed in Note 2. 7 4. 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 $0.6 million and $2.5 million for the three months ended September 30, 1996 and 1997, respectively, and $1.4 million and $3.5 million for the nine months ended September 30, 1996 and 1997, respectively. Interim LIFO calculations are based on management's estimates of year-end inventory levels and inflation rates for the year. 5. EXCISE TAXES State and provincial excise taxes paid by the Company on cigarettes were $123.3 million and $136.5 million for the three months ended September 30, 1996 and 1997, respectively, and $361.1 million and $379.9 million for the nine months ended September 30, 1996 and 1997, respectively. These amounts are included in net sales and cost of goods sold for the periods indicated. 6. ACQUISITION OF THE SOSNICK COMPANIES On February 3, 1997, the Company consummated a transaction, pursuant to a Purchase Agreement dated January 31, 1997, to acquire certain assets and the business of two related companies, Melvin Sosnick Company and Capital Cigar Company (collectively "Sosnick" or the "Sosnick Companies"), a wholesale distributor to the convenience retail market in northern California and northern Nevada. The assets acquired included trade accounts receivable, inventories and warehouse equipment that the Company intends to continue to use in its business. The acquisition excluded the assumption of substantially all of the liabilities of Sosnick (such as notes payable, trade accounts payable, commitments to lease warehouse facilities and other liabilities). The acquisition has been accounted for using the purchase method of accounting. The purchase price for the assets and the business totaled $21.4 million and has been allocated as follows (in thousands): Accounts receivable, net $ 8,613 Inventory, net 8,224 Property and equipment 1,265 Goodwill 4,125 Other assets 225 Liabilities assumed (247) Other liabilities incurred in connection with the acquisition (844) --------- Total purchase price $21,361 --------- --------- The excess of the purchase price over the fair value of assets acquired and liabilities assumed was $4.1 million and has been recorded as goodwill, which will be amortized on a straight-line basis over a period of 40 years. The acquisition was primarily financed by borrowings under the Company's existing revolving credit facility. The total amount of incremental borrowings required to acquire Sosnick at closing was $18.4 million. The remaining purchase price was due and payable in installments during the first ninety days subsequent to closing in varying amounts specified in the purchase agreement, of which $1.3 million was paid in the first quarter of 1997 and $1.6 million was paid in the second quarter of 1997. Based on certain contractual provisions, the total purchase price was reduced by approximately $0.5 million during the second quarter of 1997, reflecting a decrease in the total assets acquired. 8 6. ACQUISITION OF THE SOSNICK COMPANIES (CON'T.) The Company's net sales for the three and nine-month periods ended September 30, 1996 would have been $630 million and $1,819 million, respectively, if the acquisition had occurred as of January 1, 1996. The Company's net sales for the nine month-period ended September 30, 1997 would have been $1,805 million, if the acquisition had occurred as of January 1, 1997. The Company's net sales for the three-month period ended September 30, 1997 includes Sosnick sales for the entire period. The impact of the acquisition on net income before the effect of the extraordinary item would not have been material for the three or nine-month periods ended September 30, 1996 and 1997. 9 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 included in the Company's 1996 Form 10-K. GENERAL The Company is a broad-line, full-service wholesale distributor of packaged consumer products to the convenience retail industry in 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. RESULTS OF OPERATIONS The following table sets forth certain operating results as a percentage of net sales for the periods indicated:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------ ------------------ 1996 1997 1996 1997 ------- ------- ------- ------- Net sales. . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% Cost of goods sold . . . . . . . . . . 93.1 92.7 92.8 92.5 ------- ------- ------- ------- Gross profit . . . . . . . . . . . . . 6.9 7.3 7.2 7.5 Operating & administrative expenses. . 5.8 5.8 5.9 6.2 ------- ------- ------- ------- Operating income . . . . . . . . . . . 1.1% 1.5% 1.3% 1.3% ------- ------- ------- ------- ------- ------- ------- -------
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1996 NET SALES. Net sales for the three months ended September 30, 1997 were $647.1 million, an increase of $78.4 million or 13.8% compared to the same period in 1996. The increase in net sales was due to increases in net sales of cigarettes and food and non-food products during the period and the Sosnick acquisition (which contributed approximately $37 million in sales in the 1997 period). Net sales of cigarettes for the three months ended September 30, 1997 were $430.1 million, an increase of $41.7 million or 10.7% compared to the same period in 1996. The increase in net sales of cigarettes was principally due to the acquisition of the Sosnick Companies (which contributed approximately $20 million in cigarette net sales in the 1997 period) and an increase in cigarette prices. The Company's total cigarette unit sales for the three months ended September 30, 1997 were 24.6 million cartons, an increase of 1.4 million cartons or 5.8% compared to the same period in 1996. The increase was due to the Sosnick acquisition (which contributed approximately 1.3 million in unit sales in the 1997 period), and slight increases in unit volumes in the U.S. and Canada. 10 Net sales of food and non-food products for the three months ended September 30, 1997 were $217.1 million, an increase of $36.8 million or 20.4% compared to the same period in 1996. The increase was primarily due to the Company's continued focus on increasing food and non-food product sales and to the Sosnick acquisition (which contributed approximately $17 million in net sales in the 1997 period). The increase occurred primarily in candy sales, which grew $10.9 million or 18.9%, fast food sales, which increased $8.3 million or 47.1%, and snack sales, which were higher by $4.7 million or 44.8%. GROSS PROFIT. Gross profit for the three months ended September 30, 1997 was $47.0 million, an increase of $7.7 million or 19.5% compared to the same period in 1996. The improvement in gross profit and gross profit margin was primarily due to increased gross profits from continued sales growth in the food and non-food product categories (which carry significantly higher margins than cigarettes) and the Sosnick acquisition. For the three months ended September 30, 1997, the Company recognized LIFO expense of $2.5 million compared to $0.6 million for the same period in 1996, as a result of wholesale price increases in the third quarter of 1997 of approximately $0.70 per carton by several cigarette manufacturers. The increase in the cost of goods sold was largely offset by higher operating profits in the quarter related to such price increases. OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative expenses for the three months ended September 30, 1997 were $37.8 million, an increase of $4.9 million or 14.8% compared to 1996. However, such expenses for the three months ended September 30, 1997 and 1996 remained constant at 5.8% of net sales. OPERATING INCOME. As a result of the foregoing factors, operating income for the three months ended September 30, 1997 was $9.3 million, an increase of $2.8 million or 43.4% as compared to the same period in 1996. As a percentage of net sales, operating income for the three months ended September 30, 1997 was 1.5%, as compared to 1.1% for the same period in 1996. NET INTEREST EXPENSE. Net interest expense for the three months ended September 30, 1997 was $4.6 million, an increase of $1.9 million or 70.4% compared to the same period in 1996. This increase resulted from an increase in average debt levels and the Company's average interest rate primarily due to the recapitalization and senior subordinated note offering which occurred in the third quarter of 1996, as well as the additional debt incurred to finance the Sosnick acquisition. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 NET SALES. Net sales for the nine months ended September 30, 1997 were $1,790.0 million, an increase of $152.7 million or 9.3% compared to the same period in 1996. The increase in net sales was principally due to the Sosnick acquisition (which contributed approximately $104 million in sales in the 1997 period). Excluding the impact of the Sosnick acquisition, the increase in net sales was due to higher net sales of food and non-food products. Net sales of cigarettes for the nine months ended September 30, 1997 were $1,194.2 million, an increase of $61.2 million or 5.4% compared to the same period in 1996. The increase in net sales of cigarettes was principally due to the acquisition of the Sosnick Companies (which contributed approximately $56 million in cigarette net sales in the 1997 period) and an increase in cigarette prices offset by a general decline in cigarette unit volume (excluding Sosnick unit volume). The Company's total cigarette unit sales for the nine months ended September 30, 1997 were 69.4 million cartons, an increase of 0.7 million cartons or 1.1% compared to the same period in 1996. The Sosnick acquisition contributed approximately 3.6 million in unit sales in the 1997 period, offsetting declines in unit volumes in the U.S. and Canada of approximately 2.7 and 0.2 million cartons, respectively. Unit declines are primarily the result of lower cigarette sales by the Company's customer base, and the termination of some high volume, marginally profitable cigarette business. Net sales of food and non-food products for the nine months ended September 30, 1997 were $595.8 million, an increase of $91.6 million or 18.2% compared to the same period in 1996. The increase was primarily due to the Company's continued focus on increasing food and non-food product sales and to the Sosnick acquisition (which contributed approximately $48 million in net sales in the 1997 period). The increase occurred primarily in candy sales, which increased $23.5 million or 14.0%, fast food sales, which grew $21.2 million or 45.5%, and snack sales, which were higher by $11.8 million or 40.6%. 11 GROSS PROFIT. Gross profit for the nine months ended September 30, 1997 was $133.7 million, an increase of $15.4 million or 13.0% compared to 1996. The improvement was primarily due to increased gross profits from continued sales growth in the food and non-food product categories and the Sosnick acquisition. The gross profit margin for the nine months ended September 30, 1997 increased to 7.5% of net sales as compared to 7.2% of net sales for the same period in 1996. This increase is principally due to food and non-food sales (which carry significantly higher margins than cigarettes) constituting 33.3% of the Company's total net sales for the nine months ended September 30, 1997 compared to 30.8% for the same period in 1996. For the nine months ended September 30, 1997, the Company recognized LIFO expense of $3.5 million compared to $1.4 million for the same period in 1996. This increase in LIFO expense was primarily due to several increases in domestic cigarette wholesale prices totaling approximately $1.20 per carton during the period (compared to $0.40 per carton in the comparable 1996 period), and which was more than offset by higher profits during the same periods related to such price increases. OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative expenses for the nine months ended September 30, 1997 were $110.7 million, an increase of $13.3 million or 13.6% compared to 1996. Such expenses for the nine months ended September 30, 1997 increased to 6.2% of net sales as compared to 5.9% for the same period in 1996. The increase reflects approximately $2.4 million (0.1% of net sales) of one-time duplicative facility costs as a result of the Sosnick acquisition, higher levels of staffing during the initial integration process and other integration costs associated with the acquisition. The remaining increase in expenses as a percentage of sales is primarily attributable to the decline in cigarette volumes and the slightly higher handling costs associated with the increased sales growth of the higher margin food and non-food product categories. OPERATING INCOME. As a result of the foregoing factors, operating income for the nine months ended September 30, 1997 was $23.0 million, an increase of $2.1 million or 10.0% as compared to the same period in 1996. As a percentage of net sales, operating income for the nine months ended September 30, 1997 and 1996 remained constant at 1.3%. NET INTEREST EXPENSE. Net interest expense for the nine months ended September 30, 1997 was $13.6 million, an increase of $8.0 million or 140.7% compared to the same period in 1996. This increase resulted from an increase in average debt levels and the Company's average interest rate primarily due to the recapitalization and senior subordinated note offering which occurred in the third quarter of 1996, as well as additional debt incurred to finance the Sosnick acquisition. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity needs arise primarily from the funding of its working capital needs, capital expenditure programs, and debt service requirements with respect to its revolving credit facility and senior subordinated notes. The Company has no mandatory payments of principal on its senior subordinated notes prior to their final maturity on September 15, 2003, and has no mandatory payments of principal scheduled under its revolving credit facility, which matures June 30, 2001. The Company has historically financed its operations through internally generated funds and borrowings under its credit facilities. The Company's debt obligations totaled $178.1 million at September 30, 1997, a decrease of $15.4 million from $193.5 million at December 31, 1996. The net decrease in outstanding debt is primarily due to decreased borrowings used to finance working capital funding requirements. The Company's principal sources of liquidity are net cash provided by operating activities and its revolving credit facility. 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. However, at September 30, 1997, the Company's inventory levels were higher than at September 30, 1996 due primarily to the Sosnick acquisition, and a temporary increase in cigarette inventories. As a result, net cash provided by operating activities was significantly lower for the nine months ended September 30, 1997 as compared to the same period in 1996. 12 As discussed in Note 6 "Acquisition of the Sosnick Companies" to the Condensed Consolidated Financial Statements, on February 3, 1997, the Company acquired certain assets and the business of the Sosnick Companies. The assets acquired included trade accounts receivable, inventories, and warehouse equipment that the Company is using in its business. The aggregate purchase price for the assets and business acquired was $21.4 million. The excess of the purchase price over the fair value of the assets acquired was $4.1 million and has been reflected as goodwill. The acquisition was primarily financed by borrowings under the Company's existing revolving credit facility. The total amount of incremental borrowings required to acquire Sosnick at closing was $18.4 million. The remaining purchase price was due and payable in installments during the first ninety days subsequent to closing in varying amounts specified in the purchase agreement, of which $3.0 million was paid in the first nine months of 1997. The Company made capital expenditures of $8.5 million for the nine months ended September 30, 1997. For the remainder of 1997, the Company estimates it will spend approximately $1 to $2 million for capital requirements, principally consisting of warehouse facilities and equipment. These expenditures are expected to be funded out of net cash provided by operating activities and the Company's revolving credit facility. 13 PART II - OTHER INFORMATION Item 1: Legal Proceedings In May 1996, the Court of Appeals for the Fifth Circuit decertified a federal class action purportedly brought on behalf of all cigarette smokers in the United States. Following the decertification, lawyers for the class brought state class action lawsuits in a number of states, with the objective of filing such lawsuits in all fifty states, the District of Columbia and Puerto Rico. Several of these state lawsuits name cigarette distributors such as the Company as defendants. In October of 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 manufacturers 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. In February, March and April 1997, a subsidiary of the Company was served with three complaints filed by individual plaintiffs in the District Court of Nueces County, Texas. The other defendants in the lawsuits include certain U.S. tobacco manufacturers. The complaints seek compensatory and punitive damages for injuries allegedly caused by the use of tobacco products. As of September 30, 1997, these actions have been dismissed by the District Court. In May 1997, a subsidiary of the Company was named as a defendant in an action brought by the Attorney General of New Mexico in an action filed in State Court in Santa Fe, New Mexico. The other defendants include the principal U.S. tobacco manufacturers as well as other distributors. The Attorney General alleges, among other things, that the defendants realized significant profits from the manufacture, distribution, and sale of tobacco products, and that these activities have caused residents of New Mexico to suffer illnesses and diseases. The State of New Mexico seeks both monetary damages and a permanent injunction to require defendants to fund public education and smoking cessation programs. 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 Not applicable Item 3: Defaults Upon Senior Securities Not applicable Item 4: Submission of Matters to a Vote of Security Holders Not applicable 14 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: No reports were filed on Form 8-K during the third quarter of 1997. 15 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. CORE-MARK INTERNATIONAL, INC. (Registrant) Date: November 7, 1997 By: /s/ Leo F. Korman ----------------------------------- --------------------------- Leo F. Korman, Senior Vice President and Chief Financial Officer (Principal Accounting Officer and duly authorized officer) 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1997 SEP-30-1997 11,095 0 103,748 4,180 93,021 215,206 55,430 27,217 319,222 135,178 178,116 0 0 55 (3,055) 319,222 1,790,006 1,790,006 1,656,290 110,696 0 0 13,635 8,262 3,635 4,627 0 0 0 4,627 0 0
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