-----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, UyHWZCU1LJ7md5292l/ALyEReyoT9M3UkO9XGNnsWbNxraorlGntul14lOnUZXkF 6A7/9sR9FYMuKLcGBY55fQ== 0001047469-99-010724.txt : 19990323 0001047469-99-010724.hdr.sgml : 19990323 ACCESSION NUMBER: 0001047469-99-010724 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990322 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-K405 SEC ACT: SEC FILE NUMBER: 333-14217 FILM NUMBER: 99569920 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-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE 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. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of February 28, 1999, all of the Registrant's voting stock was held by affiliates of the Registrant. (See Item 12.) Registrant's Common Stock outstanding at February 28, 1999 was 5,500,000 shares. FORWARD-LOOKING STATEMENTS OR INFORMATION Certain statements contained in this annual report on Form 10-K under the captions "Business" and "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 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 Core-Mark International, Inc. (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. PART I ITEM 1. BUSINESS GENERAL The Company, with net sales of almost $2.5 billion in 1998, 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 Company's principal customers include traditional and petroleum convenience stores, grocery stores, drug stores, mass merchandisers and liquor stores. The Company offers its customers a wide variety of products including cigarettes, candy, snacks, fast food, groceries, health and beauty care products and other general merchandise. The Company's principal markets include the western United States and western Canada. The Company services its United States customers from 15 distribution facilities, seven of which are located in California. In Canada, the Company services its customers from four distribution facilities. HISTORY The Company's origins date back to 1888, when Glaser Bros., a family-owned-and-operated candy and tobacco distribution business, was founded. In late 1994, the Company repurchased the common stock in the Company from its previous ownership. In early 1995, members of senior management and certain lenders acquired equity in a new holding company which held all of the stock of the Company. In August 1996, the Company completed a recapitalization. The Company's equity is now held 75% by Jupiter Partners, L.P. ("Jupiter") and 25% by senior management. INDUSTRY OVERVIEW Wholesale distributors provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from wholesale distributors' broad retail coverage, inventory management and efficient processing of small orders. Wholesale distributors provide convenience retailers access to a broad product line, the ability to place small quantity orders, inventory management and access to trade credit. In addition, large full-service wholesale distributors such as the Company offer retailers the ability to participate in manufacturer-sponsored marketing programs, merchandising and category management services and systems focused on minimizing customers' investment in inventory. 1 The wholesale distribution industry is highly fragmented and historically has consisted of a large number of small, privately-owned businesses and a small number of large, full-service wholesale distributors serving multiple geographic regions. Relative to smaller competitors, large distributors such as the Company benefit from several competitive advantages, including purchasing power, the ability to service chain accounts, economies of scale in sales and operations, the ability to spread fixed corporate costs over a larger revenue base and the resources to invest in management information services ("MIS") and other productivity enhancing technology. These factors have led to a consolidation of the wholesale distribution industry as companies either exit the industry or are acquired by large distributors seeking to further leverage their existing operations. BUSINESS STRATEGY The Company's business strategy is to increase net sales and improve operating margins. To achieve these goals, the Company intends to: (i) increase sales to existing customers, particularly of higher gross margin, non-cigarette products; (ii) add new customer locations in existing markets, particularly along existing routes; (iii) continue to implement distribution productivity enhancement programs; and (iv) make selective acquisitions. INCREASE SALES TO EXISTING CUSTOMERS. Because the Company generally carries many products that its typical retail store customer purchases from other suppliers, a primary element of its growth strategy is to increase sales to existing customers. The Company's typical customer purchases its products from the Company, from manufacturers who distribute directly to retailers, and from a variety of smaller local distributors or jobbers. The Company is particularly focused on becoming the retail customer's primary supplier. The Company attempts to do this by implementing programs designed to eliminate the need for deliveries provided by local distributors and jobbers. Such programs are centered on increasing non-cigarette sales that provide higher gross margins than those associated with the distribution of cigarettes. As part of the effort, the Company provides compensation incentives to its sales force as well as a number of value-added services and marketing programs to its customers. These programs include: (i) Tully's to Go (a turnkey food service operation that maximizes profit with minimal labor); (ii) Smart Sets (which helps ensure that retailers display the right product in the right place); (iii) SmartStock-Registered Trademark- (which provides state of the art category management for key, high-volume, high-impulse convenience retail categories); and (iv) Profit Builder (a Company publication which offers manufacturer promotions). ADD NEW CUSTOMER LOCATIONS IN EXISTING MARKETS. The Company also seeks to leverage its existing distribution network by securing additional customers along existing routes. The Company believes it has many opportunities to add additional customers at low marginal distribution costs. The Company continues to focus on a number of new trade channels, including hotel gift shops, military bases, correctional facilities, college bookstores, movie theaters and video rental stores. The Company believes that there is significant opportunity to increase net sales and profitability by adding new customers and maximizing economies of scale. PRODUCTIVITY ENHANCEMENT PROGRAMS. During the past five years, the Company has devoted a significant portion of its capital spending to a variety of productivity enhancement programs. These productivity enhancement programs include: (i) BOSS, a batch order selection system that increases the efficiency and reduces the cost of full-case order fulfillment; (ii) Pick-to-Light, a paperless picking system that reduces the travel time for the selection of less-than-full-case order fulfillment; (iii) Radio Frequency, a hand-held wireless computer technology that eliminates paperwork and updates receiving inventory levels and stocking requirements on a real-time basis; (iv) Checker Automation, an on-line order verification system that has significantly reduced labor costs by automating inspection of order accuracy; and (v) fleet management tools such as Roadshow, a software program that optimizes the routing of customer deliveries. The Company intends to continue to pursue cost reductions by completing the roll-out of some of these and other programs. SELECTIVE ACQUISITIONS. The wholesale distribution industry is highly fragmented and comprised mainly of a large number of small, privately-held businesses. Management believes that the consolidation that has taken place in recent years will continue and that numerous attractive acquisition opportunities will arise. Given the current utilization rates of the Company's existing warehouse and distribution facilities as well as the quality of the Company's in-house MIS capability, management believes that a significant amount of incremental sales can be integrated into the Company's operations without significant additions to fixed costs. 2 PRODUCTS DISTRIBUTED 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. Cigarette net sales constituted approximately 68% of the Company's total net sales in 1998. CIGARETTE PRODUCTS The Company offers substantially all brands of cigarettes from all of the major manufacturers, including national premium labels such as Marlboro, Winston and Player; discount labels such as Viceroy, Basic, GPC and Doral; and deep discount labels such as the Company's private label brand, Best Buy-Registered Trademark-, as well as Best Value and Monarch. FOOD AND NON-FOOD PRODUCTS The Company offers its customers a wide variety of food and non-food products (approximately 37,000 stock keeping units (SKU's)), including candy, snacks, fast food, groceries, non-alcoholic beverages, health and beauty care products and general merchandise. The Company's strategy is to offer its convenience retail store customers a variety of food and non-food products at reasonable prices in flexible quantities. FOOD PRODUCTS. The Company's candy products include such brand name items as Snickers, Hershey Kisses, M&M's, Lifesavers and Dentyne. The Company also offers its own private label Cable Car-Registered Trademark- candy line. The Company's snack products include brand names such as Keebler, Nabisco and Planters. The Company's grocery products include national brand name items ranging from canned vegetables, soups, cereals, baby food, frozen foods, soaps and paper products to pet foods from such manufacturers as Del Monte, Carnation, Kellogg's and Purina. The Company offers a variety of non-alcoholic beverages, including juices, bottled water and sports drinks under brand names such as Tropicana, Veryfine and Gatorade. The Company's fast food products include prepared sandwiches, hot deli foods, slush drinks, hot beverages, pastries and pizza, as well as packaged supplies and paper goods, including brand name items such as Superior Coffee, Tyson chicken, Oscar Mayer meats and Kraft and Heinz condiments. Since 1994, the Company has targeted the fountain, slush, hot beverage (coffee and hot chocolate) and frozen food product categories, which present significant growth opportunities as sales in these product categories are among the fastest growing product offerings of the convenience store industry. NON-FOOD PRODUCTS. General merchandise products range from film, tape, batteries, cigarette lighters and glue to automotive products and include brand names such as Fuji, Kodak, Scotch and Mead Envelope. Health and beauty care products include analgesics, hair care, cosmetics, hosiery, dental products and lotions, from manufacturers of brand names such as Crest, Tylenol, Johnson & Johnson Band-Aid, Vicks, Gillette and Jergens. The Company's broad assortment of tobacco products includes imported and domestic cigars, smokeless tobacco (snuff), chewing tobacco, smoking tobacco and smoking accessories. CUSTOMERS The Company's current customer base is comprised of a wide range of retailers, including traditional and petroleum convenience stores, grocery stores, drug stores, mass-merchandisers and liquor stores. The Company also provides services to hotel gift shops, military bases, correctional facilities, college bookstores, movie theaters and video rental stores. In 1998, the Company's largest customer accounted for 3.6% of net sales, and the Company's ten largest customers accounted for approximately 27% of net sales. As a result of its size and geographic coverage, the Company supplies a number of regional and national chain corporations and, therefore, is able to distribute products to all or substantially all of such customers' individual store locations in the Company's market area. The Company strives to offer its customers greater flexibility, service and value than other distributors. The Company's willingness to work with retailers to arrive at a suitable delivery time, thereby allowing the store owner to schedule its labor requirements effectively, is an important facet of this flexibility. The Company believes that its ability to provide fully integrated technological services (electronic data interchange (EDI) services, store automation integration, data exchange, consultative services, retail price management systems and UPC control), bar-coded shelf labels to assist in effective shelf space management, timely communication of manufacturer price change information, seasonal and holiday special product/promotional offerings and salesperson assistance in order preparation are also important to the retailer in its selection of the Company as its supplier. 3 SUPPLIERS AND MANUFACTURERS The Company purchases products for resale to its customers from approximately 2,500 suppliers and manufacturers located throughout the United States and Canada. Although the Company purchases cigarette and tobacco products from all major United States and Canadian manufacturers, approximately 30%, 13%, 10% and 8% of the Company's net sales in 1998 were derived from products purchased by the Company from Philip Morris, R.J. Reynolds, Imperial Tobacco and Brown & Williamson, respectively. No other supplier's products represented more than 10% of net sales. In addition, Philip Morris manufactures the Company's private label Best Buy-Registered Trademark- cigarettes. The loss of or a major change in the Company's relationships with any of these manufacturers or in any of their structured incentive programs could have a material adverse effect on the Company's business and financial results. The Company generally has no long-term purchase agreements (other than for Best Buy-Registered Trademark- products) and buys substantially all its products as needed. CIGARETTE PRODUCTS The Company controls major purchases of cigarettes centrally in order to minimize inventory levels. Daily replenishment of cigarette inventory and brand selection is controlled by the local division based on demands of the local market. The U.S. cigarette manufacturers charge all wholesale customers the same price for national brand cigarettes regardless of volume purchased. However, cigarette manufacturers do offer certain structured incentive programs (including Philip Morris' Masters Program and R.J. Reynolds' Partners Program) to wholesalers instead of the routine allowances associated with non-cigarette products. These programs are based upon, among other things, purchasing volume and often include performance-based criteria related to the quality of the Company's efforts to keep certain brands and volumes of cigarettes on the retail shelves. FOOD PRODUCTS Food products (other than frozen foods) are purchased directly from manufacturers by buyers in each of the Company's distribution facilities. Management believes that decentralized purchasing of food products results in higher service levels, improved product availability tailored to individual markets and reduced inventory investment. Although each division has individual buyers, the Company negotiates corporate pricing where possible to maximize purchasing power. In February 1996, the Company established its Artic Cascade division, a consolidated frozen warehouse which purchases frozen foods for all of the Company's United States divisions. By consolidating the frozen food purchases, the Company is able to obtain such products at lower cost. Buying in one location also allows the Company to offer a wide selection of quality products to retailers at more competitive prices. NON-FOOD PRODUCTS The majority of the Company's non-food products, other than cigarettes and tobacco products (primarily health and beauty care products and general merchandise), are purchased by Allied Merchandising Industry ("AMI"), one of the Company's operating divisions that specializes in these categories. This specialization seeks to ensure a better selection and more competitive wholesale costs and enables the Company to reduce its overall general merchandise and health and beauty care inventory levels. Tobacco products, other than cigarettes, are purchased directly from the manufacturers by each of the divisions. DISTRIBUTION The Company maintains 19 distribution facilities, of which 15 are located in the western United States and four are located in western Canada. These distribution facilities include two consolidating warehouse operations, AMI and Artic Cascade. Each distribution facility is outfitted with modern equipment (including freezers and coolers as required) for receiving, stocking, order selection and loading a large volume of customer orders on trucks for delivery. Each facility provides warehouse, distribution, sales and support functions for its geographic area under the supervision of a division manager. In addition, the Company believes that the majority of its distribution facilities have the capacity to absorb significant future growth in net sales. The Company's trucking system includes straight trucks and tractors (primarily leased by the Company) and trailers (primarily owned by the Company). The Company's standard is to maintain its transportation fleet to an average age of five 4 years or less. The Company employs a state-of-the-art, computerized truck routing system to efficiently construct delivery routes. COMPETITION The convenience retail distribution business is comprised of one national distributor in the United States (McLane, a subsidiary of Wal-Mart) and several national distributors in Canada, a number of large, multi-regional competitors (participants with a presence in several contiguous regional markets) and a large number of small, privately-owned businesses that compete in one or two markets. Multi-regionals include the Company in the west, GSC Enterprises in the south and southeast, H.T. Hackney in the southeast, and Eby-Brown Company in the midwest. Relative to smaller competitors, multi-regional distributors such as the Company benefit from several competitive advantages including greater purchasing power, the ability to service chain accounts, scale cost advantages in sales and warehouse operations, the ability to spread fixed corporate costs over a larger revenue base and the resources to invest in both MIS and productivity enhancing technology. These factors have led to a consolidation of the industry as small competitors exit the industry and some larger convenience retail distributors seek acquisitions to increase the utilization of their existing operations. The Company also competes with wholesale clubs and certain retail stores whose sales are primarily cigarettes, characterized by high volumes and very aggressive pricing. These competitors have become a factor in the industry within recent years, particularly in California markets. The wholesale clubs have been aggressive in their pricing of cigarettes and candy, and wholesalers have been forced to reduce margins to compete in densely populated markets with a large number of wholesale clubs. Wholesale clubs require the convenience store owner to take the time to travel, to shop at their location, pay cash and choose from a very limited selection. They also provide none of the merchandising support that the Company routinely offers. Consequently, national chains do not routinely purchase product at the wholesale clubs. The principal competitive factors in the Company's business include price, customer order fill rates, trade credit and the level and quality of value-added services offered. Management believes the Company competes effectively by offering a full product line, flexible delivery schedules, competitive prices, high levels of customer service and an efficient distribution network. EMPLOYEES As of December 31, 1998, the Company had 2,389 employees. The Company is a party to local collective bargaining agreements with the International Brotherhood of Teamsters covering clerical, warehouse and transportation personnel at its facilities in Hayward, California, and covering warehouse and transportation personnel in Las Vegas, Nevada. The Company is party to a collective bargaining agreement with United Food Commercial Workers covering warehouse and transportation personnel in Calgary, Alberta. The Company is a party to a collective bargaining agreement with Industrial Wood and Allied Workers of Canada covering warehouse personnel in Victoria, British Columbia. The agreements covering employees in Hayward and Las Vegas expire on January 15, 2000 and March 31, 1999, respectively. The agreement covering employees in Calgary expires on August 31, 2001. The agreement covering employees in Victoria expires on April 5, 1999. These agreements cover an aggregate of less than 10% of the Company's employees. Management believes that the Company's relations with its employees are good. ITEM 2. PROPERTIES The Company does not own any real property. The principal executive offices of the Company are located in South San Francisco, California, and consist of approximately 22,000 square feet of leased office space. In addition, the Company leases approximately 24,000 square feet in Vancouver, British Columbia for its Canadian regional corporate, tax and management information systems departments and 11 small offices for use by sales personnel in certain parts of the United States and Canada. The Company also leases its 19 distribution facilities, 15 of which are located in the western United States and four in western Canada. Each distribution facility is equipped with modern equipment (including freezers and coolers at 18 facilities) for receiving, stocking, order selection and shipping a large volume of customer orders. The Company believes that it currently has sufficient capacity at its distribution facilities to meet its anticipated needs and that its facilities are in satisfactory condition. 5 The Company's leases expire on various dates between 1999 and 2008, and in many instances give the Company renewal options. The aggregate rent paid in connection with the Company's distribution facilities, regional sales offices and corporate and administrative offices was approximately $6.7 million in 1997 and $7.0 million in 1998. The Company's distribution facilities range from 28,000 to 194,000 square feet and account for approximately 1.7 million square feet in aggregate. Management believes that the Company's current utilization of warehouse facilities is approximately 70% to 80% in the aggregate. ITEM 3. LEGAL PROCEEDINGS REGULATORY AND LEGISLATIVE MATTERS The tobacco industry is currently subject to significant regulatory restrictions, such as the requirement that product packages display warning labels, a prohibition on television and radio advertising and prohibitions on sales to minors. 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." The major U.S. tobacco manufacturers challenged the jurisdiction of the FDA to regulate tobacco products as "drugs" or "devices" and 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 were denied and, on January 19, 1999, the FDA filed a petition for review by the Supreme Court which is currently pending. In November 1998, 46 states, five territories and the District of Columbia entered into a settlement with four major tobacco companies to resolve litigation over smoking-related costs incurred by state Medicaid programs. 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 (including the use of cartoons in such promotion); use tobacco brand names to sponsor concerts, athletics 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; most of the remaining provisions will take effect by April 23, 1999. The Company is unable to assess the effects that this agreement will have on the sale of the Company's products; there can be no assurance that these new restrictions will not result in a material reduction of the consumption of tobacco products in the United States and thus will not have a material adverse effect on the Company's business and financial position. In addition, a number of bills were introduced in Congress during 1997 and 1998 that would confirm or expand the FDA's jurisdiction, but none were enacted. No legislation addressing FDA jurisdiction over tobacco products has been introduced in 1999 as of this date, but similar legislation is nonetheless possible. In addition, proposals have been made in recent years to require additional warning notices on tobacco products, to disallow advertising and promotional expenses as deductions under federal tax law and to further regulate the production and distribution of cigarettes and smokeless tobacco. While neither the FDA regulations, the state Medicaid litigation settlement, nor recent legislation would impose restrictions on the sale of cigarettes and smokeless tobacco products to adults, there can be no assurance such restrictions will not be proposed in the future or that any such proposed legislation or regulations would not result in a material reduction of the consumption of tobacco products in the United States or would 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 6 enacted prior to June 1, 1998. Additional state and local legislative and regulatory actions are being considered and are likely to be promulgated in the future. The Company is unable to assess the future effects that these various proposals may have on the sale of the Company's products. The Company is subject to various federal, state and local environmental, health and safety laws and regulations. Generally, these laws impose limitations on the discharge of pollutants and the presence of hazardous substances in the workplace and establish standards for vehicle and employee safety and for the handling of solid and hazardous wastes. These laws include the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Clean Air Act, the Hazardous Materials Transportation Act and the Occupational Safety and Health Act. Future developments, such as stricter environmental or employee health and safety laws and regulations thereunder, could affect the Company's operations. The Company does not currently anticipate that the cost of its compliance with or of any foreseeable liabilities under environmental and employee health and safety laws and regulations will have a material adverse effect on its business and financial condition. LEGAL MATTERS As previously reported, 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 as defendants. As previously reported, in January 1998, the Company was served with a summons and First Amended Complaint in an action brought by Operating Engineers Local 12 Health and Welfare Trust (on behalf of itself and all others similarly situated), now part of a coordinated proceeding pending in the Superior Court for San Diego County, against the principal tobacco manufacturers, the Company and other distributors and retailers of tobacco products. The complaint seeks, inter alia, compensatory and punitive damages, restitution for monies expended by the Trust for health care of its members who have used tobacco products, and forms of injunctive relief. From April 1998 through the date of this filing, the Company was named as a defendant in 23 additional similar actions brought by various union health and welfare trusts, coordinated into a single proceeding now pending in the Superior Court for San Diego County, against major tobacco manufacturers as well as other distributors. The complaints seek, inter alia, compensatory and punitive damages, restitution for monies expended by the trusts for health care of its members who have used tobacco products, and forms of injunctive relief. As previously reported, in May 1998, a division of the Company was named a defendant and served in an individual tobacco litigation complaint filed in a state court in Broward County, Florida. The other defendants include the principal U.S. tobacco manufacturers as well as other distributors/retailers. The case is brought on behalf of two individuals, residents of Florida, who have purchased cigarette products distributed by the Company, and alleges, among other things, the plaintiffs have suffered personal injuries and economic losses from the use of such cigarettes. The suit seeks, on behalf of the plaintiffs, compensatory damages and punitive damages. In November 1998, the Company was served with a summons and complaint in an action brought by the Pechanga Band of Luiseno Mission Indians, which is now part of the coordinated proceedings involved in the union health and welfare trust cases noted above. The complaint seeks, inter alia, compensatory and punitive damages, restitution for monies expended by the tribe for the health care of its members who have used tobacco products, and forms of injunctive relief. The Company does not believe that these actions will have a material adverse effect on the Company's financial condition. The Company has been indemnified with respect to certain claims alleged in each of the above actions. In addition, the Company is a party to other lawsuits incurred in the ordinary course of its business. The Company believes it is adequately insured with respect to such lawsuits or that such lawsuits will not result in losses material to its consolidated financial position or results of operations. 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Not applicable. ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA The following table sets forth selected historical consolidated financial and other data for the Company. The historical financial data as of the end of and for each year in the five year period ended December 31, 1998 have been derived from the Company's audited consolidated financial statements. The consolidated financial data set forth below should be read in conjunction with the historical consolidated financial statements of the Company and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," all contained elsewhere in this Form 10-K. 8 CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
YEAR ENDED DECEMBER 31, (IN THOUSANDS) ------------------------------------------------------------------ 1994 1995 1996 1997 1998 ------------ ----------- ---------- ---------- ---------- STATEMENT OF INCOME DATA: Net sales (a)....................... $1,855,356 $2,047,187 $2,175,367 $2,395,867 $2,476,376 Costs of goods sold (b)............. 1,719,999 1,901,604 2,017,654 2,216,162 2,295,659 --------- --------- --------- --------- --------- Gross profit (b).................... 135,357 145,583 157,713 179,705 180,717 Operating and administrative expenses........................ 116,080 125,245 130,493 148,902 150,977 --------- --------- --------- --------- --------- Operating income (b)................ 19,277 20,338 27,220 30,803 29,740 Interest expense, net............... 5,773 6,987 9,916 18,181 15,402 Amortization of debt refinancing costs (c)........ 1,600 1,065 1,319 1,498 2,204 --------- --------- --------- --------- --------- Income before income taxes and extraordinary item.......... 11,904 12,286 15,985 11,124 12,134 Income tax expense.................. 2,816 5,563 6,941 4,834 4,925 --------- --------- --------- --------- --------- Income before extraordinary item.... 9,088 6,723 9,044 6,290 7,209 Extraordinary item, net of tax (d).. -- -- (1,830) -- -- --------- --------- --------- --------- --------- Net income (b)...................... $ 9,088 $ 6,723 $ 7,214 $ 6,290 $ 7,209 --------- --------- -------- -------- -------- --------- --------- -------- -------- -------- OTHER DATA: EBITDAL (e)......................... $ 24,271 $ 29,696 $ 35,169 $ 41,597 $ 56,419 Cash provided by (used in): Operating activities............ 54,708 12,529 26,621 17,547 5,933 Investing activities............ (5,974) (16,896) (6,079) (30,739) (5,311) Financing activities............ (43,586) 11,397 (18,972) 3,549 9,533 Depreciation and amortization (f)... 5,541 5,943 6,573 7,528 8,065 LIFO expense (income) (b)........... (547) 3,415 1,376 3,266 18,614 Capital expenditures................ 5,376 7,286 6,079 9,378 5,311
AS OF DECEMBER 31, (IN THOUSANDS) ------------------------------------------------------------------ 1994 1995 1996 1997 1998 ------------ ---------- ---------- ---------- ---------- BALANCE SHEET DATA: Total assets....................... $293,743 $324,536 $329,036 $336,580 $359,390 Total debt, including current maturities..................... 84,627 101,598 193,463 197,012 208,124 Mandatorily redeemable preferred stock (g)............ 41,767 -- -- -- --
See Notes to Selected Historical Consolidated Financial and Other Data. 9 CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA (a) In the second quarter of 1995, the Company completed two acquisitions which added approximately $62 million in net sales for the year ended December 31, 1995. In February 1997, the Company completed an acquisition which added approximately $136 million in net sales for the year ended December 31, 1997. (b) The Company's U.S. inventories are valued at the lower of cost or market. Cost of goods sold is determined on a last-in, first-out (LIFO) basis. During periods of rising prices, the LIFO method of costing inventories generally results in higher costs being charged against income compared to the FIFO method ("LIFO expense") while lower costs are retained in inventories. Conversely, during periods of declining prices or a decrease of the Company's inventory quantities, the LIFO method of costing inventories generally results in lower costs being charged against income compared to the FIFO method ("LIFO income"). During the year ended December 31, 1998, the Company recognized LIFO expense of $18.6 million, primarily due to several increases in domestic cigarette wholesale prices during 1998. However, the LIFO expense in 1998 was more than offset by profits resulting from such price increases. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information on the impact of the LIFO inventory valuation method on other accounting periods. (c) Amortization of debt refinancing costs reflects the amortization of all costs associated with issuing, restructuring and refinancing debt. (d) In connection with the August 7, 1996 Recapitalization, the Company fully repaid the outstanding debt under a previously existing credit facility. The early extinguishment of this 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 (see Note 3 in the Notes to the Consolidated Financial Statements contained elsewhere in this Form 10-K). (e) EBITDAL represents operating income before depreciation, amortization and LIFO expense (income), each as defined herein. EBITDAL should not be considered in isolation or as a substitute for net income, operating income, cash flows or other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles, or as a measure of a company's profitability or liquidity. EBITDAL is included because it is one measure used by certain investors to determine a company's ability to service its indebtedness. (f) Depreciation and amortization includes depreciation on property and equipment, amortization of goodwill and other non-cash charges, and excludes amortization of debt refinancing costs. (g) Series B Preferred Stock, with a $50.0 million stated value and a mandatory redemption date of December 31, 1995, was issued in conjunction with a restructuring in 1991 and was initially recorded at a discounted fair value and accreted through March 1995, at which time it was exchanged, along with warrants owned by the senior lenders, for equity in a holding company that was also owned by certain members of management. At that time, the carrying value of the Preferred Stock was reclassified into additional paid-in capital. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the "Selected Historical Consolidated Financial and Other Data" and the consolidated financial statements of Core-Mark International, Inc. (the "Company") and notes thereto included elsewhere in this 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 year ended December 31, 1998, approximately 68%, 22% and 10% of the Company's net sales were derived from cigarettes, food products and non-food products, respectively. TOBACCO INDUSTRY BUSINESS ENVIRONMENT Manufacturers and distributors of cigarettes and other tobacco products are currently facing a number of significant issues that affect the business environment in which they operate including proposed additional governmental regulation (see Item 3. "Legal Proceedings - Regulatory and Legislative Matters"); actual and proposed excise tax increases (see "Impact of Tobacco Taxes"); increased litigation involving health and other effects of cigarette smoking and other uses of tobacco (see Item 3. "Legal Proceedings - Legal Matters"); and potential litigation by the U.S. Department of Justice to recover federal Medicare costs allegedly connected to smoking. 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, the four largest U.S. cigarette manufacturers and the attorneys general of 46 states, 5 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 consistent with the settlement (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 (see Item 3. "Legal Proceedings - Regulatory and Legislative Matters"). 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. 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 44% of carton sales in 1998. The Company believes that price and tax increases of this magnitude will have a negative impact on overall industry unit sales. Accordingly, the Company believes that these price and tax increases will negatively affect the Company's business of distributing tobacco products by decreasing the volume of product sales. 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 such higher working capital requirements. 11 During the most recent five year period, the Company's sales of cigarettes were (in thousands):
For the year ended December 31, Net Sales Cartons ----------- --------- ------- 1994 $1,299,687 80,703 1995 1,446,697 88,933 1996 1,505,744 90,897 1997 1,603,362 92,368 1998 1,671,860 87,951
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. IMPACT OF LIFO INVENTORY VALUATION METHOD The Company's U.S. inventories are valued at the lower of cost or market. Cost of goods sold is determined on a last-in, first-out (LIFO) basis using Producer Price Indices as determined by the U.S. Department of Labor Statistics. The Company's Canadian inventories are valued on a first-in, first-out (FIFO) basis. The LIFO method of determining cost of goods sold has had a significant impact on the results of operations, which is quantified separately in the discussion below. During periods of price inflation in the Company's product lines, the LIFO methodology generally results in higher expenses being charged to cost of goods sold ("LIFO expense") while lower costs are retained in inventories. Historically, increases in the Company's cost of cigarettes resulted from a combination of cost increases by cigarette manufacturers and increases in federal and state excise taxes. In 1996 and 1997, LIFO expense of $1.4 million and $3.3 million, respectively, is primarily the result of increases in cigarette prices. In 1998, cigarette manufacturers increased prices significantly, resulting in LIFO expense of $18.6 million for the year. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 NET SALES. Net sales for 1998 were $2,476.4 million, an increase of $80.5 million or 3.4% over 1997. The increase in net sales was due to higher net sales in both cigarettes and food and non-food products. Net sales of cigarettes for 1998 were $1,671.9 million, an increase of $68.5 million or 4.3% over 1997. The Company's total cigarette unit sales for 1998 were 88.0 million cartons, a decrease of 4.4 million cartons or 4.8% from 1997. The increase in net sales dollars of cigarettes was principally due to increases in manufacturers' list prices that were passed along to the Company's customers. The decrease in carton sales occurred both in the U.S., which declined by 3.2 million cartons or 4.2% and Canada, which declined by 1.2 million cartons or 7.8%. In the U.S. the decrease in carton sales occurred primarily in California, and was principally due to increased price competition. Outside of California, carton sales increased 6.7%. The California market, which is generally the most price competitive market in which the Company operates, has been significantly affected by sales of cigarettes originally intended for export, but which are reintroduced into the domestic market (known in the industry as "grey market" cigarettes). Although "grey market" cigarettes are produced by the major tobacco companies, the product is intended for export only, and traditional wholesalers, like the Company, are prohibited from acquiring and selling these products by the manufacturers who produce them. These "grey market" cigarettes sell for substantially less than cigarettes intended for domestic sale, and the Company has lost volume because of these products. In August 1998, the California Legislature passed a law prohibiting the sale and distribution of these export cigarettes. However, the Company is unable to predict what effect this new legislation will have on the sale of "grey market" cigarettes in the state of California. In Canada, the decline in cigarette volume is primarily due to the loss of one customer whose purchases were heavily oriented toward cigarettes. 12 YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 (CONTINUED) Net sales of food and non-food products in 1998 were $804.5 million, an increase of $12.0 million or 1.5% over 1997. The increase occurred primarily in grocery sales, which increased $12.5 million or 18.5%, fast food sales, which increased $9.2 million or 9.9%, and snack sales, which increased $7.1 million or 13.0%. The increases were partially offset by decreases in confection sales of $21.0 million, or 8.3%, which resulted from the loss of one customer whose purchases were heavily oriented towards confection products. GROSS PROFIT. Gross profit for 1998 was $180.7 million, an increase of $1.0 million or 0.6% over 1997. Gross profit dollars in the cigarette category increased over 1997, despite lower volumes, as gross profit dollars per carton increased over the previous year. Gross profit margins on cigarette sales were virtually unchanged from 1997. Gross profit on food and non-food products declined slightly from 1997, on a small increase in sales volume of $12 million. The Company experienced a small decline in gross profit margins on these food and non-food product lines. The Company recognized LIFO expense of $18.6 million in 1998, as compared to $3.3 million in 1997. The great majority of the Company's LIFO expense is the result of price increases in the domestic cigarette categories. In 1998, the wholesale price of cigarettes increased by $6.35 per carton, as compared to $1.20 per carton in 1997. The impact of LIFO expense on the financial statements, which was caused by the sharp increase in the price of cigarettes, was more than offset by profits resulting from such price increases. OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative expenses for 1998 were $151.0 million, an increase of $2.1 million or 1.4% over 1997. However, such expenses in 1998 decreased to 6.1% of net sales as compared to 6.2% for 1997. The higher expenses as a percent of net sales in 1997 reflect approximately $2.4 million (0.1% of 1997 net sales) of one-time duplicative facility costs incurred as a result of the Sosnick acquisition (see Note 10 in the Notes to the Consolidated Financial Statements contained elsewhere in this Form 10-K). OPERATING INCOME. As a result of the foregoing factors, operating income for 1998 was $29.7 million, a decrease of $1.1 million or 3.5% compared to 1997. As a percentage of net sales, operating income for 1998 was 1.2%, as compared to 1.3% in 1997. NET INTEREST EXPENSE. Net interest expense for 1998 was $15.4 million, a decrease of $2.8 million or 15.3% from 1997. The net decrease resulted from a decrease in the Company's borrowing rates as a result of the securitization of certain receivables described below (see "Asset Securitization") and a decrease in average debt levels. AMORTIZATION OF DEBT REFINANCING COSTS. Debt refinancing costs were $2.2 million for 1998, an increase of $0.7 million or 47.1% over 1997. This increase resulted primarily from the write off of a portion of unamortized costs resulting from the modification of the Revolving Credit Facility (see "Asset Securitization"). YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 NET SALES. Net sales for 1997 were $2,395.9 million, an increase of $220.5 million or 10.1% over 1996. The increase in net sales was due to the Sosnick acquisition (which contributed approximately $136 million in sales during 1997) and higher net sales of food and non-food products. Net sales of cigarettes for 1997 were $1,603.4 million, an increase of $97.6 million or 6.5% over 1996. The increase in net sales of cigarettes was principally due to the acquisition of the Sosnick Companies (which contributed approximately $74 million in cigarette net sales in 1997) 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 volume in 1997 was 92.4 million cartons, an increase of 1.5 million cartons or 1.6% over 1996. The Sosnick acquisition contributed approximately 4.8 million in unit sales in 1997, offsetting declines in unit volumes in the U.S. and Canada of approximately 3.0 and 0.4 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. 13 YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 (CONTINUED) Net sales of food and non-food products in 1997 were $792.5 million, an increase of $122.9 million or 18.4% over 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 $62 million in net sales in 1997). The increase occurred primarily in fast food sales, which increased $29.2 million or 46.1%, candy sales, which grew $28.6 million or 12.7%, and snack sales, which were higher by $15.4 million or 39.7%. GROSS PROFIT. Gross profit for 1997 was $179.7 million, an increase of $22.0 million or 13.9% over 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 year ended December 31, 1997 increased to 7.5% of net sales as compared to 7.3% of net sales for the year ended December 31, 1996. This increase resulted primarily from the growth in food and non-food sales (which carry significantly higher margins than cigarettes) to 33.1% of the Company's total 1997 net sales, from 30.8% for 1996. In 1997, the Company recognized LIFO expense of $3.3 million compared to $1.4 million 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 1997 (compared to $0.40 per carton in 1996), which was more than offset by profits related to such price increases. OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative expenses for 1997 were $148.9 million, an increase of $18.4 million or 14.1% over 1996. Such expenses for 1997 increased to 6.2% of net sales as compared to 6.0% for 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 factors discussed above, operating income for 1997 was $30.8 million, an increase of $3.6 million or 13.2% over 1996. As a percentage of net sales, operating income for 1997 and 1996 remained constant at 1.3%. NET INTEREST EXPENSE. Net interest expense for 1997 was $18.2 million, an increase of $8.3 million or 83.4% over 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. AMORTIZATION OF DEBT REFINANCING COSTS. The Company successfully completed a refinancing and note offering in the third quarter of 1996. The costs directly related to such transactions are being amortized over the terms of the related debt. Debt refinancing costs for 1997 were $1.5 million, compared to $1.3 million in 1996. ASSET SECURITIZATION On April 1, 1998, the Company entered into a transaction to securitize its U.S. trade accounts receivable portfolio ("Accounts Receivable Facility"). In connection with this transaction, the Company formed a wholly-owned special purpose bankruptcy-remote subsidiary (the "Special Purpose Company" or "SPC"), to which the U.S. trade accounts receivable originated by the Company are sold or contributed, without recourse, pursuant to a receivables sale agreement. The receivables have been assigned, with a call option by the SPC, to a trust formed pursuant to a pooling agreement. On April 1, 1998, the SPC issued two classes of term certificates with an aggregate principal value of $55 million, and variable certificates of up to $30 million representing fractional undivided interests in the receivables and the proceeds thereof. On a daily basis, collections related to sold receivables are administered by the Company acting as servicer, pursuant to a servicing agreement. Pursuant to supplements to the pooling agreement, certificate holders' accrued interest expense and other securitization expenses are reserved out of daily collections, before such remaining collections are returned to the Company by the SPC to pay for the SPC's purchase of newly originated receivables from the Company. The revolving period of the securitization expires in January 2003, or earlier if an early amortization event, as defined in the pooling agreement, occurs. The interest rate on the fixed term certificates is 0.28% (Class A) and 0.65% (Class B) above the Eurodollar Rate which was 5.06% as of December 31, 1998. The interest rate on the variable certificates is 0.50% above the commercial paper rate (as defined in the securitization agreement), which was 4.90% as of December 31, 1998. 14 ASSET SECURITIZATION (CONTINUED) In connection with the securitization of accounts receivable, the Company amended its Revolving Credit Facility. The amendment reduced the available credit facility from $175 million to $120 million, reduced its interest rates from 1.5% to 1.0% above the Prime Rate, and from 2.5% to 2.0% above the Eurodollar Rate, as defined in the amendment, and extended the maturity through April, 2003. As a result of this modification, the Company wrote off $0.9 million of unamortized refinancing costs relating to the Revolving Credit Facility in the second quarter of 1998. Based on certain criteria in the Revolving Credit Facility, the Company further reduced its interest rates effective October 1, 1998, from 1.0% to 0.75% above the Prime Rate, and from 2.0% to 1.75% above the Eurodollar Rate, which are the rates in effect at December 31, 1998. The net result of the (i) securitization of the Company's U.S. trade accounts receivable portfolio and (ii) the modification of the Revolving Credit Facility was to lower the Company's cost of borrowings, and to increase its variable-rate borrowing capacity from $175 million to $205 million. The Company incurred approximately $1.6 million for legal, professional and other costs related to the transactions described above. These costs were capitalized and classified as other assets and are being amortized over the term of these transactions. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity requirements arise primarily from the funding of its working capital needs, capital expenditure programs and debt service requirements with respect to its credit facilities. The Company has no mandatory reductions of principal on its Revolving Credit Facility, its Accounts Receivable Facility or its $75 million Senior Subordinated Notes prior to their final maturities in 2003. The Company has historically financed its operations through internally generated funds and borrowings under its credit facilities. In November 1998, the four largest U.S. cigarette manufacturers and the state attorneys general of almost all of the fifty states, agreed to a multi-billion dollar settlement over public health costs connected to smoking (see "Tobacco Industry Business Environment"). As a direct result of this settlement, the cigarette manufacturers raised the wholesale price of cigarettes by $4.50 per carton, effective November 24, 1998, in order to cover initial costs of the settlement. This manufacturer price increase resulted in an increase in inventories and trade accounts receivable for the Company, and correspondingly higher debt and interest levels. The Company believes that it will be able to adequately finance the corresponding increase in working capital requirements relating to its existing business under its current credit facilities. At current levels of business activity, the Company has substantial excess borrowing capacity under its current credit facilities. However, if manufacturers' price increases or federal excise tax increases (over and above currently enacted increases) continued to sharply escalate, or if payment terms for state and provincial taxes were adversely changed (see "Impact of Tobacco Taxes"), the Company might be required to seek additional financing in order to meet such higher working capital requirements. The Company's debt obligations totaled $208.1 million at December 31, 1998, an increase of $11.1 million or 5.6% from $197.0 million at December 31, 1997. As of December 31, 1998, the amount outstanding under the Revolving Credit Facility was $59.1 million; an additional $32.8 million, after taking into account the borrowing base, was available to be drawn. In addition, the amount outstanding under the Accounts Receivable Facility was $74.0 million as of December 31, 1998. Under this facility, at December 31, 1998, the Company had sufficient collateral to issue up to its limit of variable certificates, or an additional $11.0 million. The net increase in outstanding debt is due primarily to an increase in working capital funding requirements resulting principally from increases in trade accounts receivable and inventory, primarily a result of increases in cigarette manufacturers' list prices that were passed along to the Company's customers. 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. In 1998, net cash provided by operating activities was $5.9 million as compared to $17.6 million in 1997. The decrease resulted principally from changes in net working capital. In 1996, net cash provided by operating activities was $26.6 million. The decrease from 1996 to 1997 resulted principally from changes in net working capital. The Company made capital expenditures of $5.3 million in 1998. In 1999, the Company estimates it will spend approximately $7.5 million for capital requirements, principally consisting of warehouse facilities and other equipment. 15 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. During 1998, such taxes on cigarettes represented approximately 24% of cigarette net sales in the U.S. and 46% in Canada. In general, such taxes have been increasing, and many states and Canadian provinces are currently weighing proposals for higher excise taxes on cigarettes and other tobacco products. In November 1998, Proposition 10 was passed in the California general election. This proposition, which was effective January 1, 1999, increased California state 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 $2.40 per carton of cigarettes. In August 1997, legislation was enacted that will raise the federal excise tax by $1.00 per carton of cigarettes starting in the year 2000 and by an additional $.50 per carton of cigarettes in 2002. Unlike the state and provincial taxes described above, U.S. federal excise taxes on cigarettes are paid by the cigarette manufacturers and passed through to the Company as a component of the cost of cigarettes. Such increases in U.S. federal taxes will increase the Company's working capital requirements by increasing the balances of its inventories and accounts receivable. The President as well as various members of Congress have suggested additional excise taxes on cigarette and tobacco products, either as part of the proposed legislative resolution of various issues affecting the U.S. tobacco industry discussed above or to finance unrelated federal spending. IMPACT OF YEAR 2000 COMPLIANCE ISSUES In accordance with the safe harbor provisions of the Private Securities Act of 1995, the Company notes that certain statements contained in the following discussion concerning year 2000 issues are forward-looking in nature and are subject to many risks and uncertainties. These forward-looking statements include such matters as the Company's projected state of readiness, the Company's projected cost of remediation, the expected date of completion of each phase and the expected completion date of contingency plans. Such statements also constitute "year 2000 readiness disclosure" within the meaning of the year 2000 Information and Readiness Disclosure Act. The Company relies upon various information technology and non-information technology systems that the Company is currently in the process of assessing and modifying or converting to be year 2000 compliant. Year 2000 compliance indicates that computer software, hardware and embedded processors are able to correctly process the year 2000 date parameter. The systems being assessed for year 2000 compliance include the Company's computer programs, certain building infrastructure components (including elevators, alarm systems and certain HVAC systems), certain data collection and transmission devices and the systems of customers, vendors and other constituents with whom the Company has material relationships that could have an impact on the Company's operations. Non-compliance could result in a disruption of the business, which could have a material impact on the Company's results of operations, financial position and/or cash flows. The most reasonable and likely result of non-compliance would be the Company's inability to utilize its computer systems to process daily transactions, which could result in increased operating costs and delayed shipments to customers, and as a result, the possible monetary losses from canceled future business and lawsuits for breach of contract with these customers. The Company is currently in the process of developing contingency plans for various business disruptions, which will include procedures to mitigate the effect of year 2000 non-compliance issues. The contingency plans will include procedures for alternate processing of daily transactions in the event of an inability to use the Company's computer systems, as well as procedures for transmitting and receiving data from third parties with non-compliant systems. 16 IMPACT OF YEAR 2000 COMPLIANCE ISSUES (CONTINUED) The assessment phase of the Company's systems was complete as of December 31, 1998. The Company has completed modification or conversion and testing of approximately 85% of the Company's systems as of December 31, 1998. The Company presently believes that the modification or conversion of existing systems will be completed in the second quarter of 1999. The Company has initiated formal communications with customers, vendors and other constituents with whom the Company has material relationships, to determine the extent to which the Company is vulnerable to those third parties' failure to become year 2000 compliant. The Company presently believes that the third party assessment process will be completed by June 30, 1999 and was approximately 80% complete as of December 31, 1998. However, there can be no assurance that the systems of other companies will be modified or converted on time, which could have an adverse effect on the Company's operations. The Company has utilized and will continue to utilize internal resources to modify or convert and test for year 2000 compliance. The estimated total cost for the assessment, modification or converting and testing of the Company's systems is approximately $1.1 million. These costs represent approximately 45% of the fiscal 1998 information technology department expenses and are comprised of $0.1 million for assessment and $1.0 million for software modification or conversion. As a result of the year 2000 compliance effort, the Company believes that no information technology projects have been deferred that will have a material impact on the Company's operations. All of the costs related to year 2000 compliance have been expensed as incurred, and have been and are expected to be, funded through operating cash flows. The Company has incurred approximately $1.0 million of costs as of December 31, 1998 which were comprised of $0.1 million for assessment and $0.9 million for software modification or conversion. The costs associated with year 2000 compliance are based on management's estimates, which were derived using numerous assumptions of future events, including the cost and continued availability of certain resources, and other factors. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. INFLATION In response to increases or decreases in manufacturers' prices with respect to any of the Company's products, the Company historically has adjusted its selling price in order to maintain its gross profit dollars. Therefore, inflation and deflation generally do not have a material impact on the Company's gross profit. As described in "Tobacco Industry Business Environment", significant increases in manufacturers' prices of cigarettes have occurred, due to the settlement of a number of legal issues facing the industry. The Company has been able to pass along to its customers all of the price increases that have occurred to date, and, based upon the past experience of the Company, would expect to pass along any future price or tax increases. During the past several years, low levels of overall inflation have resulted in historically low interest rates, which have benefited the Company's results of operations because of the Company's high degree of leverage. If interest rates were to increase, as a result of increased inflation or otherwise, the Company could be adversely affected. NEW ACCOUNTING PRONOUNCEMENTS See Note 11 "New Accounting Pronouncements" included in the Notes to the Consolidated Financial Statements contained elsewhere in this Form 10-K. 17 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's major risk exposure is changes in short-term interest rates on its domestic variable rate debt. Depending upon the borrowing option chosen, the variable rate debt is based upon either the bank's Prime Rate, the Eurodollar Rate, or the Commercial Paper rate, plus an applicable margin over one of these base rates. If interest rates on existing variable rate debt rose 54 basis points (which approximates 10%), the Company's results from operations and cash flows would not be materially affected. The Company conducts business in Canada. However, changes in the U.S./Canadian exchange rate had no material impact on the overall results of the Canadian operation, as virtually all revenues and expenses of such operations are Canadian dollar based. 18 ITEM 8. FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report (Deloitte & Touche LLP)............................................. 20 Independent Auditors' Report (KPMG LLP).......................................................... 21 Consolidated Balance Sheets as of December 31, 1997 and 1998..................................... 22 Consolidated Statements of Income for the years ended December 31, 1996, 1997 and 1998........... 23 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1996, 1997 and 1998................................................................................. 24 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998....... 25 Notes to Consolidated Financial Statements....................................................... 26
INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS CORE-MARK INTERNATIONAL, INC.: We have audited the accompanying consolidated balance sheet of Core-Mark International, Inc. and subsidiaries (the "Company") as of December 31, 1998, and the related consolidated statements of income, shareholders' equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such 1998 consolidated financial statements present fairly, in all material respects, the financial position of Core-Mark International, Inc. and subsidiaries as of December 31, 1998, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP SAN FRANCISCO, CALIFORNIA FEBRUARY 25, 1999 20 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS CORE-MARK INTERNATIONAL, INC.: We have audited the accompanying consolidated balance sheets of Core-Mark International, Inc. and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity (deficit) and cash flows for each of the years in the two-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Core-Mark International, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG LLP SAN FRANCISCO, CALIFORNIA FEBRUARY 20, 1998 21 CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1998 (IN THOUSANDS OF DOLLARS)
1997 1998 ------ ------- ASSETS Current assets: Cash ................................................................. $ 15,281 $ 24,586 Receivables: Trade accounts, less allowance for doubtful accounts of $2,950 and $2,761, respectively.................. 96,610 103,412 Other............................................................. 12,806 12,578 Inventories, net of LIFO allowance of $15,718 and $34,332, respectively............................................. 103,246 112,481 Prepaid expenses and other............................................ 5,847 6,576 -------- -------- Total current assets.............................................. 233,790 259,633 Property and equipment: Equipment............................................................. 47,587 52,032 Leasehold improvements................................................ 9,046 9,300 -------- -------- 56,633 61,332 Less accumulated depreciation and amortization........................ (28,633) (33,283) -------- -------- Net property and equipment........................................ 28,000 28,049 Other assets ............................................................. 8,277 7,227 Goodwill, net of accumulated amortization of $17,293 and $19,375, respectively..................................... 66,513 64,481 -------- -------- $336,580 $359,390 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Trade accounts payable................................................ $ 50,737 $ 48,867 Cigarette and tobacco taxes payable................................... 43,506 45,073 Income taxes payable.................................................. 1,085 2,698 Deferred income taxes................................................. 7,599 6,992 Other accrued liabilities............................................. 28,647 34,514 -------- -------- Total current liabilities......................................... 131,574 138,144 Long-term debt............................................................. 197,012 208,124 Other accrued liabilities and deferred income taxes........................ 9,030 9,260 -------- -------- Total liabilities..................................................... 337,616 355,528 Commitments and contingencies Shareholders' equity (deficit): 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................................................... (22,286) (15,077) Accumulated comprehensive loss: Cumulative currency translation adjustments....................... (2,879) (4,225) Additional minimum pension liability.............................. (2,047) (3,012) -------- -------- Total shareholders' equity (deficit).................................. (1,036) 3,862 -------- -------- $336,580 $359,390 -------- -------- -------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 22 CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS OF DOLLARS)
1996 1997 1998 ------ ------ ------ Net sales............................................ $2,175,367 $2,395,867 $2,476,376 Cost of goods sold................................... 2,017,654 2,216,162 2,295,659 ------------ ------------ ------------ Gross profit................................... 157,713 179,705 180,717 Operating and administrative expenses................ 130,493 148,902 150,977 ------------ ------------ ------------ Operating income............................... 27,220 30,803 29,740 Interest expense, net................................ 9,916 18,181 15,402 Amortization of debt refinancing costs............... 1,319 1,498 2,204 ------------ ------------ ------------ Income before income taxes and extraordinary item.......................... 15,985 11,124 12,134 Income tax expense................................... 6,941 4,834 4,925 ------------ ------------ ------------ Income before extraordinary item............... 9,044 6,290 7,209 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit of $1,220.......................... (1,830) -- -- ------------ ------------ ------------ Net income........................................... $ 7,214 $ 6,290 $ 7,209 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 23 CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
ACCUMULATED TOTAL COMMON STOCK ADDITIONAL OTHER SHAREHOLDERS' ------------------ PAID-IN ACCUMULATED COMPREHENSIVE EQUITY COMPREHENSIVE SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) (DEFICIT) INCOME --------- ------- ----------- ------------- ------------- ------------ ----------- Balance, December 31, 1995................ 100 $ -- $128,351 $ (35,790) $ (4,892) $ 87,669 Net income................................ -- -- -- 7,214 -- 7,214 $ 7,214 Additional minimum pension liability...... -- -- -- -- 587 587 587 Foreign currency translation adjustments.. -- -- -- -- (295) (295) (295) Recapitalization: Issuance of new $.01 par value common... 27 -- 41,250 -- -- 41,250 -- Repurchase of old $.01 par value common............................... (91) -- (141,250) -- -- (141,250) -- Stock split: 155,000 for 1............. 5,499,964 55 (55) -- -- -- -- Transaction costs....................... -- -- (2,175) -- -- (2,175) -- ---------- ---- -------- ------- ------- ------- -------- Balance, December 31, 1996................ 5,500,000 55 26,121 (28,576) (4,600) (7,000) $ 7,506 -------- -------- Net income................................ -- -- -- 6,290 -- 6,290 6,290 Additional minimum pension liability...... -- -- -- -- 945 945 945 Foreign currency translation adjustments.. -- -- -- -- (1,271) (1,271) (1,271) ---------- ---- -------- ------- ------- ------- -------- Balance, December 31, 1997................ 5,500,000 55 26,121 (22,286) (4,926) (1,036) $ 5,964 -------- -------- Net income................................ -- -- -- 7,209 -- 7,209 7,209 Additional minimum pension liability...... -- -- -- -- (965) (965) (965) Foreign currency translation adjustments.. -- -- -- -- (1,346) (1,346) (1,346) ---------- ---- -------- ------- ------- ------- -------- BALANCE, DECEMBER 31, 1998................ 5,500,000 $55 $26,121 $(15,077) $(7,237) $ 3,862 $ 4,898 --------- --- ------- --------- -------- ------- -------- --------- --- ------- --------- -------- ------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 24 CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS OF DOLLARS)
1996 1997 1998 ---------- ---------- ---------- CASH PROVIDED BY OPERATING ACTIVITIES: Net income............................................................. $ 7,214 $ 6,290 $ 7,209 Adjustments to reconcile net income to net cash provided by operating activities: LIFO expense.................................................. 1,376 3,266 18,614 Amortization of goodwill...................................... 1,978 2,073 2,082 Depreciation and amortization................................. 4,595 5,455 5,983 Amortization of debt refinancing fees......................... 1,319 1,498 2,204 Extraordinary loss on early extinguishment of debt............ 1,830 -- -- Deferred income taxes......................................... 901 1,912 (1,183) Other adjustments for non-cash and non-operating activities................................ 235 (557) (71) Changes in operating assets and liabilities, net of acquisitions: (Increase) decrease in trade accounts receivable.............. 2,790 690 (7,760) (Increase) decrease in other receivables...................... 1,094 (679) 76 (Increase) decrease in inventories............................ (4,096) 69 (29,151) Increase in prepaid expenses and other........................ (1,006) (52) (1,236) Increase (decrease) in trade accounts payable................. 4,410 (253) (1,007) Increase in cigarette and tobacco taxes payable............... 3,368 453 2,726 Increase (decrease) in other accrued liabilities and income taxes payable.................... 613 (2,618) 7,447 ------ ------ ------ Net cash provided by operating activities.............................. 26,621 17,547 5,933 ------ ------ ------ INVESTING ACTIVITIES: Additions to property and equipment................................ (6,079) (9,378) (5,311) Net assets of acquired businesses.................................. -- (21,361) -- ------ ------ ------ Net cash used in investing activities.................................. (6,079) (30,739) (5,311) ------ ------ ------ FINANCING ACTIVITIES: Issuance of senior subordinated notes.............................. 75,000 -- -- Net borrowings (payments) under revolving credit agreement......... 16,865 3,549 (62,888) Debt refinancing fees.............................................. (8,662) -- (1,579) Net proceeds from sale of common stock............................. 39,075 -- -- Net proceeds from securitization of trade accounts receivable...... -- -- 74,000 Purchases of common shares......................................... (141,250) -- -- ------ ------ ------ Net cash provided by (used in) financing activities.................... (18,972) 3,549 9,533 ------ ------ ------ Effects of changes in foreign exchange rates........................... (248) (845) (850) ------ ------ ------ Increase (decrease) in cash............................................ 1,322 (10,488) 9,305 Cash, beginning of year................................................ 24,447 25,769 15,281 ------ ------ ------ CASH, END OF YEAR $ 25,769 $ 15,281 $ 24,586 -------- -------- -------- -------- -------- -------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash payments during the year for: Interest......................................................... $6,732 $ 17,937 $15,201 Income taxes..................................................... 7,427 2,301 4,523
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 25 CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 1. ORGANIZATION AND FORM OF BUSINESS Core-Mark International, Inc. and subsidiaries (the "Company") is a full-service wholesale distributor of tobacco, food and other consumer products to convenience stores, grocery stores, mass merchandisers and liquor and drug stores in western North America. On August 7, 1996, the Company completed a recapitalization as described in Note 3. Upon completion of the recapitalization, and at December 31, 1996, 1997 and 1998, Jupiter Partners L.P. owned 75% and senior management retained ownership of 25%, respectively, of the outstanding stock of the Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes any differences resulting from estimates will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions are eliminated. FOREIGN CURRENCY Assets and liabilities of the Company's Canadian operations are translated at exchange rates in effect at year-end. Income and expenses are translated at average rates for the year. Adjustments resulting from such translation are included in cumulative currency translation adjustments in other comprehensive income, a separate component of shareholders' equity. EXCISE TAXES State and provincial excise taxes paid by the Company on cigarettes were $479.2 million, $505.4 million and $466.8 million, for the years ended December 31, 1996, 1997 and 1998, respectively, and are included in net sales and cost of goods sold. INVENTORIES Inventories are valued at the lower of cost or market. In the United States, cost is determined on a last-in, first-out (LIFO) basis using Producer Price Indices as determined by the Department of Labor and Statistics. Under LIFO, current costs of goods sold are matched against current sales. Inventories in Canada amount to $20.3 million and $17.5 million at December 31, 1997 and 1998, respectively, and are valued on a first-in, first-out (FIFO) basis. During periods of rising prices, the LIFO method of costing inventories generally results in higher current costs being charged against income while lower costs are retained in inventories. An increase in cost of goods sold and a decrease in inventories of $1.4 million, $3.3 million and $18.6 million resulted from using the LIFO method for the years ended December 31, 1996, 1997 and 1998, respectively. 26 Core-Mark International, Inc. Notes to Consolidated Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Depreciation and amortization are provided on the straight-line method over the estimated useful lives of owned assets. The estimated useful lives for equipment are principally 5 to 15 years. Leasehold improvements are amortized over the estimated useful life of the property or over the term of the lease, whichever is shorter. GOODWILL Goodwill, which is the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over a forty-year period. Amortization expense for the year ended December 31, 1996 was $2.0 million and for each of the years ended December 31, 1997 and 1998 was $2.1 million. The Company assesses the recoverability of long-lived assets, including goodwill, by determining whether the amortization of such assets over the remaining life can be recovered through undiscounted future operating cash flows of the related operations. Based on this calculation, the Company is of the opinion that there is no impairment of long-lived assets as of December 31, 1998. REVENUE RECOGNITION The Company recognizes revenue at the time the product is shipped to the customer. STOCK-BASED COMPENSATION PLAN In 1997, the Company adopted a Stock Option Plan for its key employees. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." PENSION COSTS AND OTHER POSTRETIREMENT BENEFIT COSTS Pension costs and other postretirement benefit costs charged to earnings are determined on the basis of annual valuations by an independent actuary. Adjustments arising from plan amendments, changes in assumptions and experience gains and losses are amortized over the expected average remaining service life of the employee group. INCOME TAXES The Company accounts for income taxes under the liability method in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" (see Note 7). RECLASSIFICATIONS Prior years' amounts in the consolidated financial statements have been reclassified where necessary to conform to the current year's presentation. 27 Core-Mark International, Inc. Notes to Consolidated Financial Statements 3. CAPITAL TRANSACTIONS AUGUST 7, 1996 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 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 an advisory 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 during 1996 using the proceeds of the senior subordinated notes discussed in Note 4. Simultaneously with the closing of the stock purchase and the redemptions, the Company fully repaid the outstanding debt under the previously existing 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. 4. FINANCING Long-term debt consisted of the following at December 31 (in thousands):
1997 1998 -------- -------- Accounts receivable facility........................ $ - $ 74,000 Revolving credit facility........................... 122,012 59,124 Senior subordinated notes........................... 75,000 75,000 -------- -------- Long-term debt................................. $197,012 $208,124 -------- -------- -------- --------
ACCOUNTS RECEIVABLE FACILITY On April 1, 1998, the Company entered into a transaction to securitize its U.S. trade accounts receivable portfolio ("Accounts Receivable Facility"). In connection with this transaction, the Company formed a wholly-owned special purpose, bankruptcy-remote subsidiary (the "Special Purpose Company" or "SPC"), to which the U.S. trade accounts receivable originated by the Company are sold or contributed, without recourse, pursuant to a receivables sale agreement. The receivables have been assigned, with a call option by the SPC, to a trust formed pursuant to a pooling agreement. On April 1, 1998, the SPC issued two classes of term certificates with an aggregate principal value of $55 million, and variable certificates of up to $30 million representing fractional undivided interests in the receivables and the proceeds thereof. On a daily basis, collections related to sold receivables are administered by the Company acting as servicer, pursuant to a servicing agreement. Pursuant to supplements to the pooling agreement, certificate holders' accrued interest expense and other securitization expenses are reserved out of daily collections, before such remaining collections are returned to the Company by the SPC to pay for the SPC's purchase of newly originated receivables from the Company. The revolving period of the securitization expires in January 2003, or earlier if an early amortization event, as defined in the pooling agreement, occurs. The interest rate on the fixed term certificates is 0.28% (Class A) and 0.65% (Class B) above the Eurodollar Rate which was 5.06% as of December 31, 1998. The interest rate on the variable certificates is 0.50% above the commercial paper rate (as defined in the securitization agreement), which was 4.90% as of December 31, 1998. There is a commitment fee and facility fee of 0.375% and 0.1%, respectively, on the total value of available variable certificates. As of December 31, 1998, the amount outstanding under the Accounts Receivable Facility was $74.0 million, with sufficient collateral to issue an additional $11.0 million of variable certificates. 28 Core-Mark International, Inc. Notes to Consolidated Financial Statements 4. FINANCING (CONT.) REVOLVING CREDIT FACILITY In connection with the securitization of accounts receivable, on April 1, 1998, the Company amended its Revolving Credit Facility. The amendment reduced the Revolving Credit Facility from $175 million to $120 million, extended the maturity from June 30, 2001 through April 1, 2003, and reduced interest rates. The Revolving Credit Facility initially provided 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 below, and (ii) a revolving credit facility (the "Revolving Credit Facility") under which borrowings in the amount of up to $175.0 million were available for working capital and general corporate purposes. Borrowings under this facility remain subject to borrowing base limitations based upon levels of eligible inventories, accounts receivable, other receivables and cash. Included in this facility are letters of credit up to a maximum of $40.0 million. Under the Revolving Credit Facility, the Company must maintain certain financial covenants as prescribed in the credit agreement, including, but not limited to, current ratio, net worth, leverage and interest coverage, and operating income before certain non-cash items. The Revolving Credit Facility limits certain activities of the Company, including, but not limited to, indebtedness, creation of liens, acquisitions and dispositions, capital expenditures, investments and dividends. Under the Revolving Credit Facility the Company has the option to borrow under: (i) Revolving Credit Loans, which prior to the amendment, bore interest at 1.5% above the bank's Prime Rate; or (ii) Eurodollar Loans, which prior to the amendment, bore interest at 2.5% above the bank's Eurodollar Rate. The amendment reduced interest rates to 1.0% above the Prime Rate, and to 2.0% above the Eurodollar Rate, as defined in the amendment. The Company has the ability to further reduce interest rates based on certain leverage ratio criteria as defined in the amendment. Based on this criteria, the Company further reduced its interest rates, effective October 1, 1998, from 1.0% to 0.75% above the Prime Rate, and from 2.0% to 1.75% above the Eurodollar Rate, which are the rates in effect at December 31, 1998. The bank's Prime Rate and Eurodollar Rate was 7.75% and 5.06%, respectively, at December 31, 1998. As of December 31, 1998, the amount outstanding under the Revolving Credit Facility was $59.1 million; an additional $32.8 million, after taking into account the borrowing base, was available to be drawn. There is a commitment fee of 0.375% on the unused portion of the Revolving Credit Facility. The obligations are secured by all assets of the Company, with the exception of U.S. trade accounts receivable, which are utilized to support the Accounts Receivable Facility. The Company had letters of credit of $8.3 million and $4.9 million outstanding at December 31, 1997 and 1998, respectively. The letters of credit are issued primarily to secure the Company's bond and insurance programs. The Company pays fees of 1.75% per annum on the outstanding portion of letters of credit. Prior to the amendment these fees were 2.50% per annum. The net result of the (i) securitization of the Company's U.S. trade accounts receivable portfolio and (ii) the modification of the Revolving Credit Facility was to lower the Company's cost of borrowings, and to increase its variable-rate borrowing capacity from $175 million to $205 million. The Company incurred approximately $1.6 million for legal, professional and other costs related to the transactions described above. These costs were capitalized and classified as other assets and are being amortized over the term of these facilities. In 1996, the Company incurred approximately $8.7 million for legal, professional, and other costs related to the original Revolving Credit Facility, and the Senior Subordinated Notes described below. These costs were capitalized and classified as other assets, and were initially amortized on a straight-line basis over the term of those facilities. As a result of the 1998 amendment to the Revolving Credit Facility, the Company wrote off $0.9 million of costs relating to the original credit facility. SENIOR SUBORDINATED NOTES 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 Term Loan discussed above and the subordinated notes discussed in Note 3. Interest on the Notes is payable semi-annually on March 15 and September 15 of each year. The Notes limit certain activities of the Company, including, but not limited to, changes in control, incurrence of indebtedness, creation of liens, acquisitions and dispositions, investments and dividends. 29 Core-Mark International, Inc. Notes to Consolidated Financial Statements 5. COMMITMENTS AND CONTINGENCIES LEASES The Company leases the majority of its sales and warehouse distribution facilities, automobiles and trucks under lease agreements expiring at various dates through 2008, excluding renewal options. The leases generally require the Company to pay taxes, maintenance and insurance. Management expects that in the normal course of business, leases that expire will be renewed or replaced by other leases. Future minimum rental payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) were as follows as of December 31, 1998 (in thousands): 1999 ................................................... $11,920 2000 ................................................... 10,460 2001 ................................................... 8,737 2002 ................................................... 5,734 2003 ................................................... 3,250 Thereafter.............................................. 8,029 ------- Total minimum lease payments....................... 48,130 Less minimum sublease rental income................ (664) ------- $47,466 ------- -------
Rental expense for operating leases was $11.7 million, $13.3 million and $13.9 million for the years ended December 31, 1996, 1997 and 1998, respectively. CLAIMS AND ASSESSMENTS The Company is a defendant to claims seeking damages for injuries allegedly arising from the use of tobacco products. The Company has been indemnified with respect to certain claims in each of the lawsuits regarding tobacco products. The Company is also a defendant to claims arising in the ordinary course of business. Management believes that the disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. 30 Core-Mark International, Inc. Notes to Consolidated Financial Statements 6. EMPLOYEE BENEFIT PLANS PENSION PLAN The Company sponsors a qualified pension plan and a non-pension postretirement benefit plan for employees hired before September 1986. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the two-year period ending December 31, 1998, and a statement of the December 31 funded status for both years (in thousands):
PENSION BENEFITS OTHER BENEFITS ------------------------------- ------------------------------ 1997 1998 1997 1998 --------------- --------------- --------------- -------------- BENEFIT OBLIGATION RECONCILIATION January 1 obligation $ 14,642 $ 14,791 $ 1,937 $ 2,063 Service cost - - 37 22 Interest cost 1,072 1,115 145 135 Participant contributions - - 69 64 Actuarial (gain)/loss 149 1,480 44 (93) Benefit payments (1,072) (1,136) (169) (129) ------------ ------------ ------------ ------------ December 31 obligation $ 14,791 $ 16,250 $ 2,063 $ 2,062 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ FAIR VALUE OF PLAN ASSETS RECONCILIATION January 1 fair value of plan assets $ 13,810 $ 14,558 $ - $ - Actual return on plan assets 1,820 1,447 - - Employer contributions - - 100 65 Participant contributions - - 69 64 Benefit payments (1,072) (1,136) (169) (129) ------------ ------------ ------------ ------------ December 31 fair value of plan assets $ 14,558 $ 14,869 $ - $ - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ FUNDED STATUS December 31 funded status $ (233) $ (1,381) $ (2,063) $ (2,062) Unrecognized: Unamortized prior service cost - - (185) (168) Actuarial loss 2,047 3,012 1,048 904 ------------ ------------ ------------ ------------ Net amount recognized $ 1,814 $ 1,631 $ (1,200) $ (1,326) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
The following table provides the amounts recognized in the Company's consolidated balance sheets as of December 31 (in thousands):
PENSION BENEFITS OTHER BENEFITS ------------------------------- ------------------------------ 1997 1998 1997 1998 --------------- --------------- --------------- -------------- Accrued benefit liability $ (233) $ (1,381) $ (1,200) $ (1,326) Additional minimum pension liability 2,047 3,012 - - ---------- --------- ----------- ----------- Net amount recognized $ 1,814 $ 1,631 $ (1,200) $ (1,326) ---------- --------- ----------- ----------- ---------- --------- ----------- -----------
31 Core-Mark International, Inc. Notes to Consolidated Financial Statements 6. EMPLOYEE BENEFIT PLANS (CONT.) The following table provides components of the net periodic pension and other benefit cost for fiscal years 1997 and 1998 (in thousands):
PENSION BENEFITS OTHER BENEFITS ------------------------------- ------------------------------ 1997 1998 1997 1998 --------------- --------------- --------------- -------------- Service cost $ - $ - $ 37 $ 22 Interest cost 1,072 1,115 145 135 Expected return on plan assets (966) (1,047) - - Amortization of: Prior service cost - - (17) (17) Net actuarial loss 197 115 65 50 ------------- ------------- ------------- ------------ Net periodic benefit cost $ 303 $ 183 $ 230 $ 190 ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------
The amount included within accumulated other comprehensive income in the Company's consolidated statement of shareholders' equity was $3,012,000 at December 31, 1998 and $2,047,000 at December 31, 1997. The prior-service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10% of the greater of the benefit obligation and market-related value of assets are amortized over the average remaining service period of active participants. The assumptions used in the measurement of the Company's benefit obligations are shown in the following table:
PENSION BENEFITS OTHER BENEFITS --------------- --------------- --------------- -------------- 1997 1998 1997 1998 --------------- --------------- --------------- -------------- December 31 weighted-average assumptions: Discount rate 7.50% 7.00% 7.50% 7.00% Expected return on plan assets 7.50 7.50 N/A N/A Rate of compensation increase N/A N/A N/A N/A
For measurement purposes, an 11% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1997 and 10% for 1998. The rate was assumed to decrease gradually each year to a rate of 6% for 2002 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement health care plans. A 1% change in assumed health care cost trend rates would have the following effects (dollars in thousands):
1% -------------------------------- INCREASE DECREASE --------------- -------------- Effect on total of service and interest cost components of net periodic postretirement health care benefit cost $ 27 $(23) Effect on the health care component of the accumulated postretirement benefit obligation 380 (321)
SAVINGS PLANS The Company maintains defined contribution plans in the United States, subject to Section 401(k) of the Internal Revenue Code, and in Canada, subject to the Department of National Revenue Taxation Income Tax Act. Eligible employees may elect to contribute on a tax-deferred basis from 1% to 10% of their compensation. A contribution of up to 6% is considered to be a "basic contribution" and the Company makes a matching contribution of $0.50 for each dollar of a participant's basic contribution. The Company's contributions to the plans were $1,017,000, $1,158,000 and $1,133,000 for 1996, 1997 and 1998, respectively. 32 Core-Mark International, Inc. Notes to Consolidated Financial Statements 6. EMPLOYEE BENEFIT PLANS (CONT.) STOCK-BASED COMPENSATION PLAN During 1997, the Company adopted a Stock Option Plan ("Option Plan") for its key employees, which provides for equity-based incentive awards. Upon adoption of the Option Plan, the Company had 300,000 options available for granting. Granted options vest over five years and become exercisable after eight years, with certain exercise acceleration provisions, including a change of control of the Company or an initial public stock offering. The Company issues options to employees with a grant price equal to the fair value. Accordingly, no compensation expense has been recognized on the Company's Option Plan. A summary of the Company's option activity and related information is as follows:
1997 1998 -------- -------- Options outstanding, beginning of the year.................... -- 211,000 Granted.................................................. 213,000 13,000 Exercised................................................ -- -- Forfeitures.............................................. (2,000) (9,000) ------- ------- Options outstanding, end of year.............................. 211,000 215,000 ------- ------- ------- ------- Options exercisable at end of year............................ -- -- Options available for grant at end of year.................... 89,000 85,000
All of the Company's options granted in 1997 and 1998 have an exercise price of $10.00 and a weighted-average remaining contractual life of 6.1 years. Pro forma information regarding net income is required by SFAS 123, and has been determined as if the Company had recorded compensation cost based on the fair value of the awards at the grant dates. The fair value for the options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: risk free interest rate of 5.76% for 1997 and 4.76% for 1998; volatility of 0.00%; dividend yield of 0.00%; and an expected life of the option of 5 years. The weighted-average estimated fair value per option granted in 1997 and 1998 was $2.47 and $2.10, respectively. For the purpose of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. Based on these assumptions, pro forma net income for 1997 and 1998 would have been $6,186,000, and $7,103,000, respectively. 7. INCOME TAXES The Company's income tax expense, before extraordinary items, consists of the following for the years ended December 31 (in thousands):
1996 1997 1998 ---------- --------- -------- Current: Federal.................................................. $4,648 $1,646 $4,594 State.................................................... 1,220 648 1,238 Foreign.................................................. 172 628 276 ------ ------ ------ 6,040 2,922 6,108 Deferred: Federal.................................................. 733 1,565 (1,590) State.................................................... (45) 181 313 Foreign.................................................. 213 166 94 ------ ------ ------ 901 1,912 (1,183) ------ ------ ------ Income tax expense............................................ $6,941 $4,834 $4,925 ------ ------ ------ ------ ------ ------
33 Core-Mark International, Inc. Notes to Consolidated Financial Statements 7. INCOME TAXES (CONT.) A reconciliation between the Company's income tax expense and income taxes computed by applying the statutory federal income tax rate to income before income taxes and extraordinary items is as follows for the years ended December 31 (in thousands):
1996 1997 1998 ------ ------ ------ Expected federal income tax expense at the statutory rate..... $5,595 $3,894 $4,247 Increase (decrease) in taxes resulting from: Goodwill amortization.................................... 692 692 692 State income tax expense, net of federal tax benefit..... 952 673 844 Other, net............................................... (298) (425) (858) ------ ------ ------ Income tax expense............................................ $6,941 $4,834 $4,925 ------ ------ ------ ------ ------ ------
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The tax effects of significant temporary differences which comprise deferred tax assets and liabilities are as follows at December 31 (in thousands):
1997 1998 -------- -------- Deferred tax assets: Net operating loss carryforwards...................................... $ 8,908 $ 7,953 Employee benefits, including postretirement benefits.................. 3,419 3,847 Other................................................................. 4,615 6,031 -------- -------- Total deferred tax assets......................................... 16,942 17,831 Less valuation allowance.............................................. (7,742) (7,153) -------- -------- Net deferred tax assets........................................... 9,200 10,678 -------- -------- Deferred tax liabilities: Inventories........................................................... 8,722 8,077 Other................................................................. 10,671 11,560 -------- -------- Total deferred tax liabilities.................................... 19,393 19,637 -------- -------- Net deferred tax liabilities...................................... $ 10,193 $ 8,959 -------- -------- -------- --------
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. At each balance sheet date, a valuation allowance has been established against the deferred tax assets based on management's assessment. During 1996, 1997 and 1998, the Company recorded a reduction of $1.5 million, $1.6 million and $0.6 million, respectively in the valuation allowance due to changes in factors affecting the realizability of the Company's deferred tax assets including generation of taxable income and changes in limitations on utilization of net operating loss carryforwards. At December 31, 1998, the Company has available for U.S. federal income tax return purposes net operating losses totaling approximately $23.6 million, subject to certain limitations, which will expire between the years 2005 and 2007. The Company also has available for U.S. income tax return purposes investment tax credits and alternative minimum tax credits totaling $0.5 million and $2.9 million, respectively. The investment tax credits expire by the year 2000 while the alternative minimum tax credits have an indefinite utilization period. 34 Core-Mark International, Inc. Notes to Consolidated Financial Statements 8. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS The carrying amount for the Company's cash, trade accounts receivable, other receivables, trade accounts payable, cigarette and tobacco taxes payable and other accrued liabilities approximates fair market value because of the short maturity of these financial instruments. The carrying amount of the Revolving Credit Facility and Accounts Receivable Facility, variable rate instruments, approximates fair market value. The rate of interest, which is tied to either the bank's Prime Rate or Eurodollar Rate or the commercial paper rate, fluctuates with market conditions. The fair value of the Notes, calculated based on quoted market prices, was $79,313,000 and $76,125,000 at December 31, 1997 and 1998, respectively. 9. SEGMENT INFORMATION The Company is a broad-line, full service wholesale distributor of packaged consumer products to the convenience retail industry in western North America, with revenues generated from the sale of cigarettes, tobacco products, candy, food, health and beauty aids and general merchandise. The Company's principal customers include traditional and petroleum convenience stores, grocery stores, drug stores, mass merchandisers and liquor stores. 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. Wholesale distribution segment information as of and for the years ended December 31 is set forth below (dollars in thousands):
1996 1997 1998 ---------- ---------- ---------- Net sales from external customers............................. $2,175,367 $2,395,867 $2,476,376 Segment depreciation and amortization expense (1)............. 4,195 4,967 5,435 Segment interest expense..................................... 11,245 13,739 13,739 Segment pre-tax operating income (2).......................... 18,353 19,625 18,631 Capital expenditures.......................................... 6,079 9,378 5,311 Segment assets................................................ 322,977 341,583
----------------- (1) Represents depreciation of property and equipment, and amortization of certain deferred assets that are shown as an expense in arriving at segment pre-tax operating income. (2) Represents operating income, including allocated interest expense, but excluding amortization of goodwill and debt refinancing costs, and income taxes. A reconciliation of certain of the segment information reported above, to the applicable items in the consolidated financial statements are as follows (dollars in thousands): INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM
1996 1997 1998 -------- -------- -------- Segment information .................................... $ 18,353 $ 19,625 $ 18,631 Less: Goodwill and other unallocated amortization ...... 2,378 2,561 2,630 Interest expense: unallocated and other........... (1,329) 4,442 1,663 Amortization of debt refinancing costs ........... 1,319 1,498 2,204 -------- -------- -------- Consolidated total...................................... $ 15,985 $ 11,124 $ 12,134 -------- -------- -------- -------- -------- --------
35 Core-Mark International, Inc. Notes to Consolidated Financial Statements 9. SEGMENT INFORMATION (CONT.) INTEREST EXPENSE
1996 1997 1998 -------- -------- -------- Segment information........................................... $ 11,245 $ 13,739 $ 13,739 Add: Unallocated and other.................................... (1,329) 4,442 1,663 --------- ------- -------- Consolidated total............................................ $ 9,916 $ 18,181 $ 15,402 --------- -------- -------- --------- -------- -------- DEPRECIATION AND AMORTIZATION 1996 1997 1998 -------- -------- -------- Segment information........................................... $ 4,195 $ 4,967 $ 5,435 Add: Unallocated and other.................................... 400 488 548 --------- ------- -------- Consolidated total............................................ $ 4,595 $ 5,455 $ 5,983 --------- ------- -------- --------- ------- -------- ASSETS 1997 1998 -------- -------- Segment information........................................... $ 322,977 $ 341,583 Add: Corporate assets......................................... 13,603 17,807 --------- --------- Consolidated total............................................ $ 336,580 $ 359,390 --------- --------- --------- ---------
The Company operates in the United States and Canada. Foreign and domestic net sales and identifiable assets are as follows as at and for the years ended December 31, (in thousands):
1996 1997 1998 ---------- ---------- ---------- Net Sales: United States................................................. $1,639,500 $1,871,149 $2,008,813 Canada........................................................ 535,867 524,718 467,563 ---------- ---------- ---------- Total......................................................... $2,175,367 $2,395,867 $2,476,376 ---------- ---------- ---------- ---------- ---------- ---------- Identifiable Assets: United States................................................. $ 279,171 $ 305,464 Canada........................................................ 43,806 36,119 Corporate..................................................... 13,603 17,807 ---------- ---------- Total......................................................... $ 336,580 $ 359,390 ---------- ---------- ---------- ----------
10. ACQUISITION OF THE SOSNICK COMPANIES On February 3, 1997, the Company acquired 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. 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, and the results of operations of Sosnick have been included in the consolidated financial statements since the date of acquisition. The purchase price for the assets and the business totaled $21.4 million. 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, and is being amortized on a straight-line basis over a period of 40 years. 36 Core-Mark International, Inc. Notes to Consolidated Financial Statements 10. ACQUISITION OF THE SOSNICK COMPANIES (CONT.) PRO FORMA INFORMATION (UNAUDITED) The Company's net sales for the year ended December 31, 1996 would have been $2,409 million if the acquisition had occurred as of January 1, 1996. The Company's net sales for the year ended December 31, 1997 would have been $2,410 million if the acquisition had occurred as of January 1, 1997. The impact of the acquisition on net income before the effect of the extraordinary item would not have been material for the years ended December 31, 1996 and 1997. 11. NEW ACCOUNTING PRONOUNCEMENTS In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which prescribes standards for reporting comprehensive income and its components. Comprehensive income consists of net income or loss for the current period and other comprehensive income (income, expenses, gains and losses that currently bypass the income statement and are reported directly in a separate component of equity). SFAS 130 requires that components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for financial statements issued for periods beginning after December 15, 1997, and was first reflected in the Company's first quarter of 1998 interim financial statements. Comprehensive income was included in the Consolidated Statement of Shareholders' Equity (Deficit) in the Company's consolidated financial statements for the year ended December 31, 1998. In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 changes the way companies report segment information and requires segments to be determined and reported based on how management measures performance and makes decisions about allocating resources. SFAS 131 is effective for financial statements issued for periods beginning after December 15, 1997, and is reflected in the Company's consolidated financial statements for the year ended December 31, 1998 (see Note 9). In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This Statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. This Statement standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis and eliminates certain disclosures. Restatement of disclosures for the prior year has been made for comparative purposes. This Statement has been adopted by the Company effective December 31, 1998, and is reflected herein (see Note 6). In 1998, the 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. The Company plans to adopt this statement for fiscal 1999. The Company has not yet determined the effect adoption of this statement will have on the Company's consolidated financial position, results of operations or cash flows. In 1998, the American Institute of Certified Public Accountants issued Statement of Opinion ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP provides guidance on accounting for the costs of computer software developed or obtained for internal use. This SOP requires that entities capitalize certain internal-use software costs once certain criteria are met. Currently, the Company generally expenses the costs of developing or obtaining internal-use software as incurred. The Company is currently evaluating SOP 98-1, but does not expect it to have a material impact on its consolidated financial statements. This SOP is effective for the Company's consolidated financial statements for the year ended December 31, 1999. 37 Core-Mark International, Inc. Notes to Consolidated Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE (a) Previous independent accountants (1) (i) On January 27, 1998, the Registrant determined not to engage KPMG Peat Marwick LLP as the independent public accountants for its 1998 fiscal year and has appointed Deloitte & Touche LLP as its independent public accountants for its 1998 fiscal year. (ii) The reports of KPMG Peat Marwick LLP on the Registrant's consolidated financial statements for the fiscal years ended December 31, 1997 and 1996 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. (iii) The Audit Committee of the Registrant's Board of Directors recommended the decision to change independent accountants, whose decision was approved by the Board of Directors. (iv) In connection with the audits of the Registrant's consolidated financial statements for the fiscal years ended December 31, 1997 and 1996, and through March 20, 1998, there were no disagreements with KPMG Peat Marwick LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of KPMG Peat Marwick LLP, would have caused KPMG Peat Marwick LLP to make reference to the matter in connection with its report. (v) During the Registrant's two most recent fiscal years and through March 20, 1998, there were no "reportable events" as defined in Item 304 (a)(1)(v) of Regulation S-K. (2) The Registrant has received from KPMG Peat Marwick LLP a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the above statements. The copy of the letter from KPMG Peat Marwick LLP to the Securities and Exchange Commission dated March 20, 1998 is incorporated herein by reference as Exhibit 16.1. (b) New Independent Auditors (i) On January 27, 1998, the Registrant determined to engage Deloitte & Touche LLP as its new independent accountants effective for the 1998 fiscal year. During the Registrant's two most recent fiscal years and through January 27, 1998, neither the Registrant nor anyone else on its behalf consulted Deloitte & Touche LLP regarding any of the matters or events set forth in Item 304 (a)(2)(i) and (ii) of Regulation S-K. (c) Disagreements with Accountants None. 38 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and directors of the Company are as follows (as of December 31, 1998):
NAME AGE POSITION ---- --- -------- Gary L. Walsh.................................... 57 Chairman and Director Robert A. Allen.................................. 49 President, Chief Executive Officer and Director Leo Granucci..................................... 60 Senior Vice President, Sales and Marketing Leo F. Korman.................................... 51 Senior Vice President, Chief Financial Officer and Secretary Basil P. Prokop.................................. 55 President, Canada Division J. Michael Walsh................................. 50 Senior Vice President, Distribution Thomas A. Berglund............................... 38 Director Terry J. Blumer.................................. 40 Director John F. Klein.................................... 35 Director John A. Sprague.................................. 46 Director
GARY L. WALSH has been Chairman and a director of the Company since 1990. He served as Chief Executive Officer of the Company from 1990 through 1997. Effective January 1, 1998, Mr. Walsh retired from his position as Chief Executive Officer. Mr. Walsh served as President from 1990 until 1996. ROBERT A. ALLEN has been Chief Executive Officer of the Company since January 1998 and President since January 1996. He served as Chief Operating Officer of the Company from January 1996 to December 1997. Prior to 1996, he served as Senior Vice President, Distribution from 1992 through 1995, and as Vice President, Distribution from 1989 to 1992. He has been a director of the Company since 1994. LEO GRANUCCI has been Senior Vice President, Sales and Marketing since 1994. Prior thereto, he served for seven years as Executive Vice President of Sales and Marketing at Bergen Brunswig, a wholesale pharmaceutical distribution company. LEO F. KORMAN has been Senior Vice President and Chief Financial Officer since January 1994 and served as Vice President and Chief Financial Officer from 1991 to 1994. BASIL P. PROKOP has been President of the Canada Division since 1992. Mr. Prokop joined the Company in 1984. J. MICHAEL WALSH has been Senior Vice President, Distribution since January 1996. Prior thereto, he served as Senior Vice President, Operations since 1992 and served as Vice President, Operations from 1991 to 1992. THOMAS A. BERGLUND has been a director of the Company since August 1996. He is a Principal at Jupiter and has been associated with the firm since 1994. Prior to that he served for three years as an employee of the Invus Group, a privately funded buy-out group specializing in food-related companies. TERRY J. BLUMER has been a director of the Company since August 1996. Prior to co-founding Jupiter in 1994, Mr. Blumer was associated with Goldman, Sachs & Co. for over eight years, most recently as an Executive Director. JOHN F. KLEIN has been a director of the Company since August 1996. He is a Principal at Jupiter and has been associated with the firm since 1995. Prior to that, he served for three years as a consultant at Bain & Company, a management consulting firm. JOHN A. SPRAGUE has been a director of the Company since August 1996. Prior to co-founding Jupiter in 1994, Mr. Sprague was associated with Forstmann Little & Co. for eleven years, most recently as a partner. He is a director of Harmon Industries. 39 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONT.) Directors are elected for one year terms and hold office until their successors are elected and qualified or until their earlier resignation or removal. Executive officers of the Company are appointed by and serve at the discretion of the Board of Directors. The only family relationship between any of the executive officers or directors is between Gary L. Walsh and J. Michael Walsh, who are brothers. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS Directors of the Company do not receive compensation for service as directors other than reimbursement for reasonable expenses incurred in connection with attending the meetings. EXECUTIVE COMPENSATION The following table summarizes the compensation paid to the Company's chief executive officer and its four other most highly compensated executive officers for the years ended December 31, 1998, 1997 and 1996. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------- ALL OTHER FISCAL SALARY BONUS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1)(2)(3) - --------------------------- ---- --- --- ------------ Robert A. Allen....................................... 1998 $298,077 $300,000 $7,882 President and Chief Executive Officer 1997 $250,000 $ 87,000 $7,203 1996 $247,457 $102,000 $7,658 Leo Granucci.......................................... 1998 $208,483 $125,000 $7,151 Senior Vice President, Sales and Marketing 1997 $200,762 $ 74,000 $6,801 1996 $200,465 $ 50,000 $7,190 Leo F. Korman......................................... 1998 $206,524 $140,000 $7,135 Senior Vice President and Chief Financial Officer 1997 $198,875 $ 74,000 $6,786 1996 $198,581 $ 95,000 $7,082 J. Michael Walsh...................................... 1998 $198,581 $110,000 $7,070 Senior Vice President, Distribution 1997 $191,226 $ 60,000 $6,663 1996 $190,693 $ 52,500 $6,484 Basil P. Prokop....................................... 1998 $161,812 $ 21,565 $5,003 President, Canada Division 1997 $162,665 $ 64,996 $5,240 1996 $165,528 $ 35,339 $3,729
- ----------- (1) These figures for 1998 consist of the sum of: (i) Company matching contributions to the Savings Plan (defined below) in the following amounts: Mr. Allen, $4,800; Mr. Granucci, $4,800; Mr. Korman, $4,800; and Mr. J.M. Walsh, $4,800; (ii) Company matching contributions to the Registered Retirement Savings Plan (defined below) for Mr. Prokop, $3,033; (iii) life and other insurance premiums in the following amounts: Mr. Allen, $3,082; Mr. Granucci, $2,351; Mr. Korman, $2,335; Mr. J.M. Walsh, $2,270; and Mr. Prokop, $1,970. 40 EXECUTIVE COMPENSATION (CONT.) (2) These figures for 1997 consist of the sum of: (i) Company matching contributions to the Savings Plan (defined below) in the following amounts: Mr. Allen, $4,500; Mr. Granucci, $4,500; Mr. Korman, $4,500; and Mr. J.M. Walsh, $4,440; (ii) Company matching contributions to the Registered Retirement Savings Plan (defined below) for Mr. Prokop, $3,250; (iii) life and other insurance premiums in the following amounts: Mr. Allen, $2,703; Mr. Granucci, $2,301; Mr. Korman, $2,286; Mr. J.M. Walsh, $2,223; and Mr. Prokop, $1,990. (3) These figures for 1996 consist of the sum of: (i) Company matching contributions to the Savings Plan (defined below) in the following amounts: Mr. Allen, $4,750; Mr. Granucci, $4,711; Mr. Korman, $4,620; Mr. J.M. Walsh, $4,094; (ii) Company matching contributions to the Registered Retirement Savings Plan (defined below) for Mr. Prokop, $1,716; (iii) life and other insurance premiums in the following amounts: Mr. Allen, $2,908; Mr. Granucci, $2,479; Mr. Korman, $2,462; Mr. J.M. Walsh, $2,390; and Mr. Prokop, $2,013. CERTAIN AGREEMENTS WITH MANAGEMENT Each member of the Company's top five executive officers has entered into an agreement with the Company which provides that if the employment of such officer party thereto is terminated other than for Cause (as defined therein) or other than as a result of such officer's resignation for Good Reason (as defined therein), the Company may, in its sole discretion, continue to pay to such officer, for a period of up to one year following such termination, such officer's base salary as in effect on the effective date of such termination. Under these agreements each of such officers has agreed not to engage in activities that compete with those of the Company (i) while such officer is an employee of the Company and (ii) if the Company makes the severance payments described above to such officer, for an additional period of one year after such employment terminates if such officer's employment with the Company terminates for Cause or as a result of his resignation other than for Good Reason. INDEMNIFICATION AGREEMENTS Each of the Company's directors and Mr. Leo F. Korman, the Company's Chief Financial Officer, and certain other officers of the Company (collectively, the "Indemnitees"), is party to an identical indemnification agreement with the Company. Pursuant to such agreements, the Company has agreed generally to indemnify and hold harmless each Indemnitee against any losses incurred in connection with any suit, arbitration or proceeding resulting from such Indemnitee's service as an officer, agent, employee or director of the Company, provided that the Company will generally not be required to indemnify an Indemnitee in connection with losses arising out of the Indemnitee's own fraudulent or willful misconduct. Each indemnification agreement terminates upon the occurrence of a Change of Control (as defined in the agreements) of the Company, provided that the Company's obligations to indemnify for events occurring prior to such Change of Control continue. THE SAVINGS PLAN The Company maintains the Core-Mark International, Inc. Nest Egg Savings Plan (the "Savings Plan"), which is a defined contribution plan with a cash or deferred arrangement (as described under Section 401(k) of the Internal Revenue Code of 1986, as amended). All non-union U.S. employees of the Company and its affiliates (unless a bargaining agreement expressly provides for participation) are eligible to participate in the Savings Plan after completing one year of service. Eligible employees may elect to contribute on a tax deferred basis from 1% to 10% of their compensation (as defined in the Savings Plan), subject to statutory limitations. A contribution of up to 6% is considered to be a "basic contribution" and the Company makes a matching contribution of $0.50 for each dollar of a participant's basic contribution (all of which may be subject to certain statutory limitations). Each participant has a fully vested (nonforfeitable) interest in all contributions made by the individual and all earnings thereon. Each participant must be employed at the end of each quarter to receive an allocation of matching contribution for the most recent calendar quarter. The amount of Company matching contributions that the following officers have accrued in the Savings Plan as of December 31, 1998 is as follows: Robert A. Allen $28,756; Leo Granucci $15,426; Leo F. Korman $28,013; and J. Michael Walsh $28,639. 41 THE REGISTERED RETIREMENT SAVINGS PLAN (CANADA) The Company maintains the Core-Mark International, Inc. Group Retirement Savings Plan (Canada) (the "Registered Retirement Savings Plan" or "RRSP"), which is a defined contribution plan with a cash or deferred arrangement (as described under the Department of National Revenue Taxation Income Tax Act). All non-union Canadian employees of the Company and its affiliates (unless a bargaining agreement expressly provides for participation) are eligible to participate in the Registered Retirement Savings Plan after completing one year of service. Eligible employees may elect to contribute on a tax deferred basis from 1% to 10% of their compensation (as defined in the RRSP), subject to statutory limitations. A contribution of up to 6% is considered to be a "basic contribution" and the Company makes a matching contribution of $0.50 for each dollar of a participant's basic contribution (all of which may be subject to certain statutory limitations). Basil P. Prokop has $27,811 of Company matching contributions in the Registered Retirement Savings Plan as of December 31, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of December 31, 1998, certain information regarding the beneficial ownership of the common stock of the Company (i) by each person who is known by the Company to own beneficially more than 5% of the outstanding shares of common stock of the Company, (ii) by each of the Company's directors and executive officers and (iii) by all directors and executive officers as a group. The Company believes that the beneficial owners of the securities listed below, based on information furnished by such owners, have sole investment and voting power with respect to all the shares of common stock of the Company shown as being beneficially owned by them.
NUMBER OF SHARES OF PERCENTAGE OF COMMON STOCK OF TOTAL SHARES OF THE COMPANY COMMON STOCK OF NAME AND ADDRESS OF BENEFICIALLY THE COMPANY BENEFICIAL OWNERS(a) OWNED ------------- ------------------- ------------ Jupiter............................................................... 4,125,000 75.0% Robert A. Allen....................................................... 281,875 5.1 Leo Granucci.......................................................... 158,125 2.9 Leo F. Korman......................................................... 213,125 3.9 Basil P. Prokop....................................................... 164,999 3.0 Gary L. Walsh......................................................... 343,751 6.2 J. Michael Walsh...................................................... 213,125 3.9 Thomas A. Berglund.................................................... -- -- Terry J. Blumer....................................................... 4,125,000(b) 75.0 John F. Klein......................................................... -- -- John A. Sprague....................................................... 4,125,000(b) 75.0 All directors and executive officers as a group (10 persons) (b)....................................... 5,500,000 100.0%
- ----------- (a) The address for Jupiter, Mr. Berglund, Mr. Blumer, Mr. Klein and Mr. Sprague is 30 Rockefeller Plaza, Suite 4525, New York, New York 10112. The address for Gary L. Walsh, Mr. Allen, Mr. Granucci, Mr. Korman, Mr. Prokop and J. Michael Walsh is 395 Oyster Point Boulevard, Suite 415, South San Francisco, California 94080. (b) Represents the shares owned by Jupiter. Messrs. Sprague and Blumer exercise investment and voting power over the shares owned by Jupiter and accordingly are deemed to "beneficially own" such shares in accordance with Rule 13d-3 promulgated under the Exchange Act. Each of Messrs. Blumer and Sprague disclaim beneficial ownership of all shares of the Company owned by Jupiter, except to the extent of their respective ownership interests in such partnership. 42 STOCKHOLDERS AGREEMENT On August 7, 1996, the Company entered into a Stockholders Agreement (the "Stockholders Agreement") with Jupiter, the five executive officers and one former executive officer listed in the table above (individually, a "Management Stockholder" and collectively, the "Management Stockholders"), which parties constitute all of the Company's common stockholders. The Stockholders Agreement (a) places significant restrictions on the ability of a Management Stockholder to transfer, pledge or otherwise dispose of 60% of his shares of common stock of the Company (the "Restricted Shares") prior to the Company's initial public offering of common stock, and limits the amount of Restricted Shares that may be sold by such Management Stockholder after such initial public offering, (b) restricts the ability of a Management Stockholder to pledge his shares of common stock that do not constitute Restricted Shares, (c) grants "tag-along" rights (i.e., rights to participate in a sale on a PRO RATA basis) to each stockholder in connection with the sale (i) by Jupiter of any of its common stock of the Company and (ii) by a Management Stockholder of any of his Restricted Shares, and (d) grants to Jupiter "drag-along" rights (i.e., the right to require Management Stockholders to participate on a PRO RATA basis in a sale by Jupiter) with respect to shares of common stock held by the Management Stockholders, whether or not Restricted Shares, in connection with a sale by Jupiter of common stock constituting at least 1% of the Company's common stock. The Stockholders Agreement also grants to the Company, first, and Jupiter, second, certain call rights with respect to the purchase of Restricted Shares held by a Management Stockholder in the event that, prior to the fifth anniversary of the date of the Stockholders Agreement, such Management Stockholder's employment with the Company is terminated (other than as a result of death, disability or resignation for Good Reason (as defined therein)). The call provision also applies in the event such Management Stockholder breaches his obligations under the Severance and Non-Competition Agreement described under "Certain Agreements with Management". The purchase price with respect to such call rights under the Stockholders Agreement is the lower of $10 per share and a specified formula described therein (the "Repurchase Formula"), in the event the call right arises as a result of such Management Stockholder's termination for Cause (as defined therein), his resignation other than for Good Reason or a breach of his obligations under the Severance and Non-Competition Agreement to which he is a party. The purchase price with respect to a call right arising as a result of any other employment termination is the Repurchase Formula. Jupiter has agreed that neither it nor the Company will exercise their respective call rights with respect to the Restricted Shares held by Gary L. Walsh in the event that, after December 31, 1997, his employment with the Company is terminated without cause or he resigns without cause or for Good Reason. Mr. Walsh resigned as chief executive officer, effective January 1, 1998. REGISTRATION RIGHTS AGREEMENT Pursuant to a Registration Rights Agreement, dated as of August 7, 1996 (the "Registration Rights Agreement"), the Company granted certain demand registration rights to Jupiter and certain "piggy-back" registration rights to Jupiter and the Management Stockholders with respect to the sale of common stock of the Company held by them. In addition to customary priority cut-back provisions relating to underwritten offerings, the Registration Rights Agreement imposes limitations on the number of shares of common stock of the Company that may be included in a "piggy-back" registration by a Management Stockholder. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 43 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following financial statements, schedules and exhibits are filed as part of this report or are incorporated herein as indicated. 1. Financial Statements The consolidated financial statements listed in Item 8. Financial Statements, which appear on page 19, are included herein. 2. Financial Statement Schedule The following financial statement schedule of Core-Mark International, Inc. for the fiscal years ended December 31, 1996, 1997, and 1998 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Core-Mark International, Inc. and subsidiaries. Schedule II - Valuation and Qualifying Accounts Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto. 3. Exhibits The following Exhibits are filed as part of, or incorporated by reference into, this Report:
EXHIBIT NUMBER EXHIBIT -------- ------- 2.1 Stock Subscription Agreement, dated June 17, 1996, by and among Jupiter Partners, L.P., as amended, incorporated herein by reference from Exhibit 2.1 to Core-Mark International, Inc.'s Registration Statement on Form S-4 (Registration No. 333-14217). 2.2 Stock Purchase Agreement, dated June 17, 1996, by and between Core-Mark L.L.C. and the Company, as amended, incorporated herein by reference from Exhibit 2.2 to Core-Mark International, Inc.'s Registration Statement on Form S-4 (Registration No. 333-14217). 3.1.1 Articles of Incorporation of the Company, incorporated herein by reference from Exhibit 3.1 to Core-Mark International, Inc.'s Registration Statement on Form S-4 (Registration No. 333-14217). 3.1.2 Restated Articles of Incorporation of the Company dated August 18, 1998 (Filed herewith). 3.2 Amended By-laws of the Company (Filed herewith). 4.1 Indenture, dated as of September 27, 1996, between the Company and Bankers Trust Company as Trustee, incorporated herein by reference from Exhibit 4.1 to Core-Mark International, Inc.'s Registration Statement on Form S-4 (Registration No. 333-14217). 44 4.2 Form of Face of Exchange Security, incorporated herein by reference from Exhibit 4.4 to Core-Mark International, Inc.'s Registration Statement on Form S-4 (Registration No. 333-14217). 10.1.1 Manufacturing Rights Agreement by and among Famous Value Brands, Core-Mark International Inc., Core-Mark Interrelated Companies, Inc. and C/M Products, Inc., incorporated herein by reference from Exhibit 10.1 to Core-Mark International, Inc.'s Registration Statement on Form S-4 (Registration No. 333-14217). *10.1.2 Amendment dated December 31, 1997 to Manufacturing Rights Agreement by and among Famous Value Brands, Core-Mark International Inc., Core-Mark Interrelated Companies, Inc. and C/M Products, Inc., incorporated herein by reference from exhibit 10.11 to Core-Mark International Inc.'s Annual Report on Form 10-K filed March 20, 1998 (Registration No. 333-14217). 10.2.1 Manufacturing Agreement for "Best Buy" Cigarettes by and between Famous Value Brands and C/M Products, Inc., incorporated herein by reference from Exhibit 10.2 to Core-Mark International, Inc.'s Registration Statement on Form S-4 (Registration No. 333-14217). *10.2.2 Amendment dated December 31, 1997 to Manufacturing Agreement for "Best Buy" Cigarettes by and between Famous Value Brands and C/M Products, Inc., incorporated herein by reference from exhibit 10.12 to Core-Mark International Inc.'s Annual Report on Form 10-K filed March 20, 1998 (Registration No. 333-14217). 10.3.1 Trademark License Agreement by and between Famous Value Brands and Core-Mark Interrelated Companies, Inc., incorporated herein by reference from Exhibit 10.3 to Core-Mark International, Inc.'s Registration Statement on Form S-4 (Registration No. 333-14217). 10.3.2 Amendment dated December 31, 1997 to Trademark License Agreement by and between Famous Value Brands and Core-Mark Interrelated Companies, Inc., incorporated herein by reference from exhibit 10.13 to Core-Mark International Inc.'s Annual Report on Form 10-K filed March 20, 1998 (Registration No. 333-14217). 10.4 Stockholders Agreement dated as of August 7, 1996, by and among the Company and all of the holders of its Common Stock, incorporated herein by reference from Exhibit 10.5 to Core-Mark International, Inc.'s Registration Statement on Form S-4 (Registration No. 333-14217). 10.5.1 Severance and Noncompetition Agreement, dated August 7, 1996, between the Company and Gary L. Walsh, incorporated herein by reference from Exhibit 10.6.1 to Core-Mark International, Inc.'s Registration Statement on Form S-4 (Registration No. 333-14217). 10.5.2 Schedule of Severance and Non Competition Agreements omitted pursuant to Instruction no. 2 to Item 601 of Regulation S-K, incorporated herein by reference from Exhibit 10.6.2 to Core-Mark International, Inc.'s Registration Statement on Form S-4 (Registration No. 333-14217). 10.6 Letter, dated August 7, 1996, from Jupiter Partners LP to Gary L. Walsh, incorporated herein by reference from Exhibit 10.7 to Core-Mark International, Inc.'s Registration Statement on Form S-4 (Registration No. 333-14217). 10.7 Purchase Agreement, dated September 24, 1996, between the Company, Chase Securities Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, incorporated herein by reference from Exhibit 10.8 to Core-Mark International, Inc.'s Registration Statement on Form S-4 (Registration No. 333-14217). 10.8.1 Indemnification Agreement, dated November 12, 1996, between the Company and John F. Klein, incorporated herein by reference from Exhibit 10.9.1 to Core-Mark International, Inc.'s Registration Statement on Form S-4 (Registration No. 333-14217). 10.8.2 Schedule of Indemnification Agreements omitted pursuant to Instruction No. 2 to Item 601 of Regulation S-K, incorporated herein by reference from Exhibit 10.9.2 to Core-Mark International, Inc.'s Registration Statement on Form S-4 (Registration No. 333-14217). 45 10.9 Purchase Agreement dated January 31, 1997 between the Company and Melvin Sosnick Company and Capital Cigar Company, incorporated herein by reference from Exhibit (i) to Core-Mark International, Inc.'s Current Report on Form 8-K filed February 18, 1997 (Registration No. 333-14217). 10.10 $120,000,000 Amended and Restated Credit Agreement dated as of April 1, 1998, among Core-Mark International Inc., the Several Lenders from time to time Parties Hereto and The Chase Manhattan Bank, as Administrative Agent, incorporated herein by reference from exhibit 10.14 to Core-Mark International, Inc. Quarterly Report on Form 10-Q filed August 14, 1998 (Registration No. 333-14217). 10.11 Amended and Restated Security Agreement dated as of April 1, 1998, among Core-Mark International, Inc., C/M Products, Inc., Core-Mark Interrelated Companies, Inc., and Core-Mark Midcontinent, Inc., in favor of The Chase Manhattan Bank, as Administrative Agent, incorporated herein by reference from exhibit 10.16 to Core-Mark International Inc. Quarterly Report on Form 10-Q filed August 14, 1998 (Registration No. 333-14217). 10.12 Amendment to Borrower Stock Pledge Agreement dated as of April 1, 1998, between Core-Mark International, Inc., and The Chase Manhattan Bank, as Administrative Agent, incorporated herein by reference from exhibit 10.17 to Core-Mark International, Inc. Quarterly Report on Form 10-Q filed August 14, 1998 (Registration No. 333-14217). 10.13 Pooling Agreement, dated as of April 1, 1998, among Core-Mark Capital Corporation, Core-Mark International, Inc., as Servicer, and The Chase Manhattan Bank, as Trustee, incorporated herein by reference from exhibit 10.18 to Core-Mark International, Inc. Quarterly Report on Form 10-Q filed August 14, 1998 (Registration No. 333-14217). 10.14 Series 1998-1 Supplement to the Pooling Agreement, dated as of April 1, 1998, among Core-Mark Capital Corporation, Core-Mark International, Inc., as Servicer, and The Chase Manhattan Bank, incorporated herein by reference from exhibit 10.19 to Core-Mark International, Inc. Quarterly Report on Form 10-Q filed August 14, 1998 (Registration No. 333-14217). 10.15 Series 1998-2 Supplement to the Pooling Agreement, dated as of April 1, 1998, among Core-Mark Capital Corporation, Core-Mark International, Inc., as Servicer, and The Chase Manhattan Bank, incorporated herein by reference from exhibit 10.20 to Core-Mark International, Inc. Quarterly Report on Form 10-Q filed August 14, 1998 (Registration No. 333-14217). 10.16 Servicing Agreement, dated as of April 1, 1998, among Core-Mark Capital Corporation, Core-Mark International, Inc., as Servicer, Subsidiaries of Core-Mark International, Inc., as Subservicers, and The Chase Manhattan Bank, incorporated herein by reference from exhibit 10.21 to Core-Mark International, Inc. Quarterly Report on Form 10-Q filed August 14, 1998 (Registration No. 333-14217). 10.17 Receivables Sale and Contribution Agreement, dated as of April 1, 1998, among Core-Mark Capital Corporation, Core-Mark International, Inc., Core-Mark Midcontinent, Inc., and Core-Mark Interrelated Companies, Inc., as Sellers, incorporated herein by reference from exhibit 10.22 to Core-Mark International, Inc. Quarterly Report on Form 10-Q filed August 14, 1998 (Registration No. 333-14217). 16 Letter to Securities and Exchange Commission from KPMG Peat Marwick LLP dated January 27, 1998 from Exhibit 16 to Core-Mark International Inc.'s Current Report on Form 8-K filed January 27, 1998 (Registration No. 333-14217), incorporated herein by reference from exhibit 16 to Core-Mark International, Inc. Annual Report on Form 10-K filed March 20, 1998 (Registration No. 333-14217). 16.1 Letter to Securities and Exchange Commission from KPMG Peat Marwick LLP dated March 20, 1998, incorporated herein by reference from exhibit 16.1 to Core-Mark International Inc. Annual Report on Form 10-K filed March 20, 1998 (Registration No. 333-14217). 21 List of Subsidiaries of the Company, incorporated herein by reference from Exhibit 21 to Core-Mark International, Inc.'s Registration Statement on Form S-4 (Registration No. 333-14217). 27 Financial Data Schedule 46 * Portions of these exhibits have been omitted pursuant to an Order Granting Confidential Treatment Under the Securities Exchange Act of 1934 by the Company with the Commission pursuant to Rule 24b-2, under the Securities Exchange Act of 1934, as amended.
(b) Reports on Form 8-K None. 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 March 19, 1999. CORE-MARK INTERNATIONAL, INC. By /s/ Leo F. Korman ----------------------------------- Leo F. Korman, Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Gary L. Walsh - -------------------------------------- Gary L. Walsh Chairman and Director March 19, 1999 /s/ Robert A. Allen - -------------------------------------- Robert A. Allen President, Chief Executive Officer and Director March 19, 1999 /s/ Leo F. Korman - -------------------------------------- Leo F. Korman Senior Vice President, Chief Financial Officer and March 19, 1999 Principal Accounting Officer /s/ Thomas A. Berglund - -------------------------------------- Thomas A. Berglund Director March 19, 1999 /s/ Terry J. Blumer - -------------------------------------- Terry J. Blumer Director March 19, 1999 /s/ John F. Klein - -------------------------------------- John F. Klein Director March 19, 1999 /s/ John A. Sprague - -------------------------------------- John A. Sprague Director March 19, 1999
48 INDEPENDENT AUDITORS' REPORT To The Board of Directors Core-Mark International, Inc. We have audited the accompanying consolidated balance sheet of Core-Mark International, Inc. and subsidiaries (the "Company") as of December 31, 1998 and the related consolidated statements of income, shareholders' equity (deficit) and cash flows for the year ended December 31, 1998 and have issued our report thereon dated February 25, 1999; such report is included elsewhere in this Form 10-K. Our audit also included the 1998 financial statement schedule of the Company listed in Item 14 (a) 2. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such 1998 financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Deloitte & Touche LLP SAN FRANCISCO, CALIFORNIA FEBRUARY 25, 1999 49 INDEPENDENT AUDITORS' REPORT To The Board of Directors Core-Mark International, Inc. Under date of February 20, 1998, we reported on the consolidated balance sheets of Core-Mark International, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity (deficit) and cash flows for each of the years in the two-year period ended December 31, 1997. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP SAN FRANCISCO, CALIFORNIA FEBRUARY 20, 1998 50 SCHEDULE II CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS)
Column A Column B Column C Column D Column E Additions -------------------------------------- ---------- --------------------------- ---------- ---------- Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Year Expenses Accounts Deductions Year - -------------------------------------- ---------- ---------- ---------- ---------- ---------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Year Ended December 31, 1996................................ $ 3,600 $ 895 $ _ $ (614)(a) $ 3,881 1997................................ 3,881 1,237 _ (2,168)(a) 2,950 1998................................ 2,950 810 _ (999)(a) 2,761
(a) Deductions consist of accounts determined to be uncollectible and charged against reserves, net of collections on accounts previously charged off. 51 EX-3.1-2 2 EXHIBIT 3.1.2 Exhibit 3.1.2 RESTATED CERTIFICATE OF INCORPORATION OF CORE-MARK INTERNATIONAL, INC. Core-Mark International, Inc. (hereinafter called the "corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: FIRST: The present name of the corporation is Core-Mark International, Inc., which is the name under which the corporation was originally incorporated; and the date of filing the original certificate of incorporation of the corporation with the Secretary of State of the State of Delaware is March 1, 1995. SECOND: The certificate of incorporation of the corporation is hereby amended by striking out Article EIGHTH thereof in its entirety and restating and integrating into a single instrument all of the provisions of such certificate of incorporation as so amended. THIRD: The provisions of the certificate of incorporation of the corporation as heretofore amended and/or supplemented, and as herein amended, are hereby restated and integrated into the single instrument which is hereinafter set forth, and which is entitled Restated Certificate of Incorporation of Core-Mark International, Inc. without any further amendment other than the amendment herein certified and without any discrepancy between the provisions of the certificate of incorporation as heretofore amended and supplemented and the provisions of the said single instrument hereinafter set forth. FOURTH: The amendment and the restatement of the certificate of incorporation herein certified have been duly adopted by the stockholders in accordance with the provisions of Sections 228, 242, and 245 of the General Corporation Law of the State of Delaware. FIFTH: The certificate of incorporation of the corporation, as amended and restated herein, shall at the effective time of this Restated Certificate of Incorporation, read as follows: 1 "RESTATED CERTIFICATE OF INCORPORATION OF CORE-MARK INTERNATIONAL, INC. THE UNDERSIGNED, being a natural person for the purpose of organizing a corporation under the General Corporation Law of the State of Delaware ("DGCL"), hereby certifies that: FIRST: The name of the Corporation is: Core-Mark International, Inc. (the "Corporation"). SECOND: The address of the registered office of the Corporation in the State of Delaware is: 32 Loockerman Square, Suite L-100, Dover, Kent County, Delaware 19904. The name of the registered agent of the Corporation in the State of Delaware at such address is: The Prentice-Hall Corporation System, Inc. THIRD: The purpose of the Corporation is to engage in and conduct any lawful act or activity for which corporations may be organized under the DGCL. FOURTH: The total number of shares of capital stock that the Corporation shall have authority to issue is ten million (10,000,000), all of which shall be shares of Common Stock having a par value of one cent ($0.01) per share. FIFTH: In furtherance and not in limitation of the powers conferred by law, subject to any limitations contained elsewhere in this Certificate of Incorporation, By-Laws of the Corporation may be adopted, amended or repealed by a majority of the Board of Directors of the Corporation, but any By-Laws of the Corporation adopted by the Board of Directors may be amended or repealed by the stockholders entitled to vote thereon. Election of directors need not be by written ballot. SIXTH: (a) A director of the Corporation shall not be personally liable either to the Corporation or to any stockholder for monetary damages for breach of fiduciary duty as a director, except (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, or (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or (iii) under Section 174 of the DGCL or any successor provision thereto or (iv) for any transaction from which the director shall have derived an improper personal benefit. Neither amendment nor repeal of this paragraph (a) nor the adoption of any provision of the Certificate of Incorporation inconsistent with this paragraph (a) shall eliminate or reduce the effect of this paragraph (a) in respect of any matter occurring, or any cause of action, suit or claim that, but for this paragraph (a) of this Article SIXTH, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. 2 (b) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to, or testifies in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative in nature, by reason of the fact that such person is or was a director, officer, employee, agent, stockholder or a holder of any ownership interest in any stockholder of the Corporation (each, an "Indemnitee"), or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise (an "Other Entity"), against expenses (including attorneys' fees and disbursements), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding to the full extent permitted by law. Persons who are not Indemnitees of the Corporation may be similarly indemnified in respect of service to the Corporation or to an Other Entity at the request of the Corporation to the extent the Board of Directors at any time specifies that such persons are entitled to the benefits of this Article SIXTH, and the Corporation may adopt By-Laws or enter into agreements with any such person for the purpose of providing for such indemnification. (c) The Corporation shall, from time to time, reimburse or advance to any Indemnitee or other person entitled to indemnification under this Article SIXTH the funds necessary for payment of expenses (including attorney's fees and disbursements) actually and reasonably incurred by such person in defending or testifying in a civil, criminal, administrative or investigative action, suit or proceeding; PROVIDED, HOWEVER, that the Corporation may pay such expenses in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Indemnitee to repay such amount if it shall ultimately be determined by final judicial decision that such Indemnitee is not entitled to be indemnified by the Corporation against such expenses as authorized by this Article SIXTH, and the Corporation may adopt By-Laws or enter into agreements with such persons for the purpose of providing for such advances. (d) The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was an Indemnitee of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of an Other Entity against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article SIXTH or otherwise. (e) The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Article SIXTH shall 3 not be deemed exclusive of any other rights to which a person seeking indemnification or reimbursement or advancement of expenses may have or hereafter be entitled under any statute, this Certificate of Incorporation, the By-Laws, any agreement, any vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. (f) The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Article SIXTH shall continue as to a person who has ceased to be an Indemnitee (or other person indemnified hereunder) and shall inure to the benefit of the executors, administrators, legatees and distributees of such person. (g) The provisions of this Article SIXTH shall be a contract between the Corporation, on the one hand, and each Indemnitee who serves in such capacity at any time while this Article SIXTH is in effect and any other person indemnified hereunder, on the other hand, pursuant to which the Corporation and each such Indemnitee or other person intend to be legally bound. No repeal or modification of this Article SIXTH shall affect any rights or obligations with respect to any state of facts then or theretofore existing or thereafter arising or any proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. (h) The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Article SIXTH shall be enforceable by any person entitled to such indemnification or reimbursement or advancement of expenses in any court of competent jurisdiction. The burden of proving that such indemnification or reimbursement or advancement of expenses is not appropriate shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel and its stockholders) to have made a determination prior to the commencement of such action that such indemnification or reimbursement or advancement of expenses is proper in the circumstances nor an actual determination by the Corporation (including its Board of Directors, its independent legal counsel and its stockholders) that such person is not entitled to such indemnification or reimbursement or advancement of expenses shall constitute a defense to the action or create a presumption that such person is not so entitled. Such a person shall also be indemnified for any expenses incurred in connection with successfully establishing his or her right to such indemnification or reimbursement or advancement of expenses, in whole or in part, in any such proceeding. (i) Any Indemnitee of the Corporation serving in any capacity for (a) another corporation of which a majority of the shares entitled to vote in the election of its directors is held, directly or indirectly, by the Corporation or (b) any 4 employee benefit plan of the Corporation or any corporation referred to in clause (a) shall be deemed to be doing so at the request of the Corporation. (j) Any person entitled to be indemnified or to reimbursement or advancement of expenses as a matter of right pursuant to this Article SIXTH may elect to have the right to indemnification or reimbursement or advancement of expenses interpreted on the basis of the applicable law in effect at the time of the occurrence of the event or events giving rise to the applicable action, suit or proceeding, to the extent permitted by law, or on the basis of the applicable law in effect at the time such indemnification or reimbursement or advancement of expenses is sought. Such election shall be made, by a notice in writing to the Corporation, at the time indemnification or reimbursement or advancement of expenses is sought; PROVIDED, HOWEVER, that if no such notice is given, the right to indemnification or reimbursement or advancement of expenses shall be determined by the law in effect at the time indemnification or reimbursement or advancement of expenses is sought." Executed on this 18th day of August, 1998. CORE-MARK INTERNATIONAL, INC. By: /s/ Leo F. Korman ----------------------------- Name: Leo F. Korman Title: SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 5 EX-3.2 3 EXHIBIT 3.2 Exhibit 3.2 BY-LAWS OF CORE-MARK INTERNATIONAL, INC. (a Delaware corporation) ARTICLE I STOCKHOLDERS SECTION I.1. ANNUAL MEETINGS. The annual meeting of stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held each year at such date and time, within or without the State of Delaware, as the Board of Directors shall determine. SECTION I.2. SPECIAL MEETINGS. Special meetings of stockholders for the transaction of such business as may properly come before the meeting may be called by order of the Board of Directors or by stockholders holding together at least a majority of all the shares of the Corporation entitled to vote at the meeting, and shall be held at such date and time, within or without the State of Delaware, as may be specified by such order. Whenever the directors shall fail to fix such place, the meeting shall be held at the principal executive office of the Corporation. SECTION I.3. NOTICE OF MEETINGS. Written notice of all meetings of the stockholders, stating the place, date and hour of the meeting and the place within the city or other municipality or community at which the list of stockholders may be examined, shall be mailed or delivered to each stockholder not less than 10 nor more than 60 days prior to the meeting. Notice of any special meeting shall state in general terms the purpose or purposes for which the meeting is to be held. SECTION I.4. STOCKHOLDER LISTS. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of 1 the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this section, or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. SECTION I.5. QUORUM. Except as otherwise provided by law, the Corporation's Certificate of Incorporation or these By-Laws, a majority of the shares entitled to vote, present in person or represented by proxy, shall constitute a quorum at a meeting of the stockholders. If there is no quorum, a majority of the shares entitled to vote at the meeting, present in person or represented by proxy, may adjourn the meeting from time to time without further notice until a quorum shall be obtained. When a quorum is obtained, it is not broken by the subsequent withdrawal of any stockholder. SECTION I.6. ORGANIZATION. Meetings of stockholders shall be presided over by the Chairman, if any, or if none or in the Chairman's absence the President, or if none or in the President's absence a Vice President, or, if none of the foregoing is present, by a chairman to be chosen by the stockholders entitled to vote who are present in person or by proxy at the meeting. The Secretary of the Corporation, or in the Secretary's absence an Assistant Secretary, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present, the presiding officer of the meeting shall appoint any person present to act as secretary of the meeting. SECTION I.7. VOTING; PROXIES; REQUIRED VOTE. (a) At each meeting of stockholders, every stockholder shall be entitled to vote in person or by proxy appointed by instrument in writing, subscribed by such stockholder or by such stockholder's duly authorized attorney-in-fact (but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period), and, unless the Certificate of Incorporation provides otherwise, shall have one vote for each share of stock entitled to vote registered in the name of such stockholder on the books of the Corporation on the applicable record date fixed pursuant to these By-Laws. At all elections of directors taken at any meeting of stockholders, the voting may be, but need not be, by written ballot. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. In all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders, whether or not a quorum is present when the vote is taken. 2 (b) Any action required or permitted to be taken at any meeting of stockholders may, except as otherwise required by law or the Certificate of Incorporation, be taken without a meeting, without prior notice, and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of record of the issued and outstanding capital stock of the Corporation having the number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, and the writing or writings are filed with the permanent records of the Corporation. Prompt notice of the taking of corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. SECTION I.8. INSPECTORS. The Board of Directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not so appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, and the validity and effect of proxies, and shall receive votes, ballots, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors, if any, shall make a report in writing of any challenge, question, or matter determined by such inspector or inspectors and execute a certificate of any fact found by such inspector or inspectors. ARTICLE II BOARD OF DIRECTORS SECTION II.1. GENERAL POWERS. The business, property, and affairs of the Corporation shall be managed by, or under the direction of, the Board of Directors. SECTION II.2. QUALIFICATION; NUMBER; TERM; REMUNERATION. (a) Each director shall be at least 18 years of age. A director need not be a stockholder, a citizen of the United States, or a resident of the State of Delaware. The number of directors constituting the entire Board shall be eight, or such other number 3 as may be fixed from time to time by resolution of the Board of Directors, one of whom may be selected by the Board of Directors to be its Chairman. The use of the phrase "entire Board" herein refers to the total number of directors which the Corporation would have if there were no vacancies. (b) Directors who are elected at an annual meeting of stockholders, and directors who are elected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. (c) Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. SECTION II.3. QUORUM AND MANNER OF VOTING. Except as otherwise provided by law or by agreement of the stockholders, a majority of the entire Board shall constitute a quorum. A majority of the directors present, whether or not a quorum is present, may adjourn a meeting from time to time to another time and place without notice. The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. SECTION II.4. PLACES OF MEETINGS. Meetings of the Board of Directors may be held at any place within or without the State of Delaware, as may from time to time be fixed by resolution of the Board of Directors, or as may be specified in the notice of meeting. SECTION II.5. ANNUAL MEETING. Following the annual meeting of stockholders, the newly elected Board of Directors shall meet for the purpose of the election of officers and the transaction of such other business as may properly come before the meeting. Such meeting may be held without notice immediately after the annual meeting of stockholders at the same place at which such stockholders' meeting is held. SECTION II.6. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times and places as the Board of Directors shall from time to time by resolution determine. Notice need not be given of regular meetings of the Board of Directors held at times and places fixed by resolution of the Board of Directors. 4 SECTION II.7. SPECIAL MEETINGS. Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board, the President, or by a majority of the directors then in office. SECTION II.8. NOTICE OF MEETINGS. A notice of the place, date, and time and the purpose or purposes of each meeting of the Board of Directors shall be given to each director by mailing the same at least five business days before the meeting, or by telegraphing or telephoning the same or by delivering the same personally not later than two days before the day of the meeting. SECTION II.9. ORGANIZATION. At all meetings of the Board of Directors, the Chairman, if any, or, if none or in the Chairman's absence or inability to act, the President, or in the President's absence or inability to act, any Vice President who is a member of the Board of Directors, or in such Vice President's absence or inability to act, a chairman chosen by the directors, shall preside. The Secretary of the Corporation shall act as secretary at all meetings of the Board of Directors when present, and, in the Secretary's absence, the presiding officer may appoint any person to act as secretary. SECTION II.10. RESIGNATION. Any director may resign at any time upon written notice to the Corporation and such resignation shall take effect upon receipt thereof by the President or the Secretary, unless otherwise specified in the resignation. Any or all of the directors may be removed, with or without cause, by the holders of a majority of the shares of stock outstanding and entitled to vote for the election of directors. SECTION II.11. VACANCIES. Unless otherwise provided in these By-Laws or in an agreement among or binding upon the stockholders, vacancies on the Board of Directors, whether caused by resignation, death, disqualification, removal, an increase in the authorized number of directors, or otherwise, may be filled by the affirmative vote of a majority of the remaining directors, although less than a quorum, or by a sole remaining director, or at a special meeting of the stockholders, by the holders of shares entitled to vote for the election of directors. SECTION II.12. ACTION BY WRITTEN CONSENT. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if all the directors consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. ARTICLE III COMMITTEES 5 SECTION III.1. APPOINTMENT; MEMBERSHIP. In addition to the committees established under Section 3.6 hereof, from time to time the Board of Directors by a resolution adopted by a majority of the entire Board may appoint any committee or committees for any purpose or purposes, to the extent lawful, which shall have powers as shall be determined and specified by the Board of Directors in the resolution of appointment. SECTION III.2. PROCEDURES, QUORUM, AND MANNER OF ACTING. Each committee shall fix its own rules of procedure, and shall meet where and as provided by such rules or by resolution of the Board of Directors. Except as otherwise provided by law, the presence of a majority of the then appointed members of a committee shall constitute a quorum for the transaction of business by that committee, and in every case where a quorum is present the affirmative vote of a majority of the members of the committee present shall be the act of the committee. Each committee shall keep minutes of its proceedings, and actions taken by a committee shall be reported to the Board of Directors. SECTION III.3. NOTICE OF MEETINGS. Notice of the place, date and time and the purpose or purposes of each meeting of any committee of the Board of Directors shall be given to each member of such committee the same at least five business days before the meeting, or by telegraphing or telephoning the same or by delivering the same personally not later than two days before the day of the meeting. SECTION III.4. ACTION BY WRITTEN CONSENT. Any action required or permitted to be taken at any meeting of any committee of the Board of Directors may be taken without a meeting if all the members consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the committee. SECTION III.5. TERM; TERMINATION. In the event any person shall cease to be a director of the Corporation, such person shall simultaneously therewith cease to be a member of any committee appointed by the Board of Directors. SECTION III.6. STANDING COMMITTEES. (a) COMPENSATION COMMITTEE. There shall be a committee of the Board of Directors, which shall be the Compensation Committee. The Compensation Committee shall have the authority and responsibility for considering, adopting, authorizing and implementing the salary, bonus and other benefits, direct and indirect, of, and any employment, severance, termination, bonus, benefit or other similar agreements or plans with or for the benefit of, the officers of the Corporation and shall have the authority and responsibility for considering, authorizing and acting upon such other matters as may be designated to such committee from time to time by the Board of Directors. The vote of the majority of the members of the Compensation Committee 6 present at a meeting at which a quorum is present shall be the act of the Compensation Committee. (b) AUDIT COMMITTEE. There shall be a committee of the Board of Directors, which shall be the Audit Committee. The Audit Committee shall have the authority and responsibility for considering and recommending to the Board of Directors the process for producing the Corporation's financial data, internal controls and the independence of the Corporation's external auditors and shall have the authority and responsibility for considering and recommending to the Board of Directors such other matters as may be designated to such committee from time to time by the Board of Directors. The vote of the majority of the members of the Audit Committee present at a meeting at which a quorum is present shall be the act of the Audit Committee. ARTICLE IV OFFICERS SECTION IV.1. ELECTION AND QUALIFICATIONS. The Board of Directors shall elect the officers of the Corporation, which shall include a Chief Executive Officer, a President and a Secretary, and may include, by election or appointment, one or more Vice Presidents (any one or more of whom may be given an additional designation of rank or function), a Treasurer, and such Assistant Secretaries, such Assistant Treasurers, and such other officers as the Board of Directors may from time to time deem proper. Each officer shall have such powers and duties as may be prescribed by these By-Laws and as may be assigned by the Board of Directors or the Chief Executive Officer. Any two or more offices may be held by the same person. SECTION IV.2. TERM OF OFFICE AND REMUNERATION. Except as otherwise provided in an employment agreement, the term of office of all officers shall be one year and until their respective successors have been elected and qualified, but any officer may be removed from office, either with or without cause, at any time by the Board of Directors. Any vacancy in any office arising from any cause may be filled for the unexpired portion of the term by the Board of Directors. The remuneration of all officers of the Corporation may be fixed by the Board of Directors or in such manner as the Board of Directors shall provide. SECTION IV.3. RESIGNATION; REMOVAL. Any officer may resign at any time upon written notice to the Corporation and such resignation shall take effect upon receipt thereof by the Chief Executive Officer, the President or the Secretary, unless otherwise specified in the resignation. Any officer shall be subject to removal, with or without cause, at any time by vote of a majority of the entire Board. 7 SECTION IV.4. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the Corporation shall have general supervision over the business of the Corporation, subject, however, to the control of the Board of Directors. The Chief Executive Officer shall preside at all meetings of the stockholders and at all meetings of the Board of Directors at which the Chairman (if there be one) is not present. The Chief Executive Officer may execute and deliver, in the name of the Corporation, powers of attorney, contracts, bonds and all other obligations and instruments. SECTION IV.5. CHAIRMAN OF THE BOARD. The Chairman of the Board of Directors, if there be one, shall preside at all meetings of the stockholders and the Board of Directors and shall have such other powers and duties as may from time to time be assigned by the Board of Directors. SECTION IV.6. PRESIDENT. At the request of the Chief Executive Officer, or in the Chief Executive Officer's absence, at the request at the Board of Directors, the President, if there be one, shall perform all of the duties of the Chief Executive Officer and, in so performing, shall have all the powers of, and be subject to all restrictions upon, the Chief Executive Officer. The President may execute and deliver, in the name of the Corporation, powers of attorney, contracts, bonds and all other obligations and instruments. The President shall perform such other duties as from time to time may be assigned to the President by the Board of Directors or by the Chief Executive Officer. SECTION IV.7. VICE PRESIDENT. A Vice President may execute and deliver in the name of the Corporation contracts and other obligations and instruments pertaining to the regular course of the duties of said office, and shall have such other authority as from time to time may be assigned by the Board of Directors or the Chief Executive Officer. SECTION IV.8. TREASURER. The Treasurer shall in general have all duties incident to the position of Treasurer and such other duties as may be assigned by the Board of Directors or the Chief Executive Officer. SECTION IV.9. SECRETARY. The Secretary shall in general have all the duties incident to the office of Secretary and such other duties as may be assigned by the Board of Directors or the Chief Executive Officer. SECTION IV.10. ASSISTANT OFFICERS. Any assistant officer shall have such powers and duties of the officer such assistant officer assists as such officer or the Board of Directors shall from time to time prescribe. ARTICLE V 8 INDEMNIFICATION SECTION V.1. INDEMNITY. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to, or testifies in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative in nature, by reason of the fact that such person is or was a director, officer, employee, agent, stockholder or a holder of any ownership interest in any stockholder of the Corporation (each, an "Indemnitee"), or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise (an "Other Entity"), against expenses (including attorneys' fees and disbursements), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding to the full extent permitted by law. Persons who are not Indemnitees of the Corporation may be similarly indemnified in respect of service to the Corporation or to an Other Entity at the request of the Corporation to the extent the Board at any time specifies that such persons are entitled to the benefits of this Article V, and the Corporation may enter into agreements with any such person for the purpose of providing for such indemnification. SECTION V.2. ADVANCEMENT OF EXPENSES. The Corporation shall, from time to time, reimburse or advance to any indemnitee or other person entitled to indemnification under this Article V the funds necessary for payment of expenses (including attorney's fees and disbursements) actually and reasonably incurred by such person in defending or testifying in a civil, criminal, administrative or investigative action, suit or proceeding; PROVIDED, HOWEVER, that the Corporation may pay such expenses in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Indemnitee to repay such amount if it shall ultimately be determined by final judicial decision that such Indemnitee is not entitled to be indemnified by the Corporation against such expenses as authorized by this Article V, and the Corporation may enter into agreements with such persons for the purpose of providing for such advances. SECTION V.3. INSURANCE. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was an Indemnitee of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of an Other Entity against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article V or otherwise. SECTION V.4. RIGHTS NOT EXCLUSIVE. The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, 9 this Article V shall not be deemed exclusive of any other rights to which a person seeking indemnification or reimbursement or advancement of expenses may have or hereafter be entitled under any statute, the Certificate of Incorporation, these By-Laws, any agreement, any vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. SECTION V.5. CONTINUATION OF BENEFITS. The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Article V shall continue as to a person who has ceased to be an Indemnitee (or other person indemnified hereunder) and shall inure to the benefit of the executors, administrators, legatees and distributees of such person. SECTION V.6. BINDING EFFECT. The provisions of this Article V shall be a contract between the Corporation, on the one hand, and each Indemnitee who serves in such capacity at any time while this Article V is in effect and any other person indemnified hereunder, on the other hand, pursuant to which the Corporation and each such Indemnitee or other person intend to be legally bound. No repeal or modification of this Article V shall affect any rights or obligations with respect to any state of facts then or theretofore existing or thereafter arising or any proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. SECTION V.7. PROCEDURAL RIGHTS. The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Article V shall be enforceable by any person entitled to such indemnification or reimbursement or advancement of expenses in any court of competent jurisdiction. The burden of proving that such indemnification or reimbursement or advancement of expenses is not appropriate shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel and its stockholders) to have made a determination prior to the commencement of such action that such indemnification or reimbursement or advancement of expenses is proper in the circumstances nor an actual determination by the Corporation (including its Board of Directors, its independent legal counsel and its stockholders) that such person is not entitled to such indemnification or reimbursement or advancement of expenses shall constitute a defense to the action or create a presumption that such person is not so entitled. Such a person shall also be indemnified for any expenses incurred in connection with successfully establishing his or her right to such indemnification or reimbursement or advancement of expenses, in whole or in part, in any such proceeding. SECTION V.8. SERVICE DEEMED AT CORPORATION'S REQUEST. Any Indemnitee of the Corporation serving in any capacity for (a) another corporation of which a majority of the shares entitled to vote in the election of its directors is held, 10 directly or indirectly, by the Corporation or (b) any employee benefit plan of the Corporation or any corporation referred to in clause (a) shall be deemed to be doing so at the request of the Corporation. SECTION V.9. ELECTION OF APPLICABLE LAW. Any person entitled to be indemnified or to reimbursement or advancement of expenses as a matter of right pursuant to this Article V may elect to have the right to indemnification or reimbursement or advancement of expenses interpreted on the basis of the applicable law in effect at the time of the occurrence of the event or events giving rise to the applicable action, suit or proceeding, to the extent permitted by law, or on the basis of the applicable law in effect at the time such indemnification or reimbursement or advancement of expenses is sought. Such election shall be made, by a notice in writing to the Corporation, at the time indemnification or reimbursement or advancement of expenses is sought; PROVIDED, HOWEVER, that if no such notice is given, the right to indemnification or reimbursement or advancement of expenses shall be determined by the law in effect at the time indemnification or reimbursement or advancement of expenses is sought. ARTICLE VI BOOKS AND RECORDS SECTION VI.1. LOCATION. The books and records of the Corporation may be kept at such place or places within or outside the State of Delaware as the Board of Directors or the respective officers in charge thereof may from time to time determine. The record books containing the names and addresses of all stockholders, the number and class of shares of stock held by each, and the dates when they respectively became the owners of record thereof shall be kept by the Secretary as prescribed in the By-Laws and by such officer or agent as shall be designated by the Board of Directors. SECTION VI.2. ADDRESSES OF STOCKHOLDERS. Notices of meetings and all other corporate notices may be delivered personally or mailed to each stockholder at the stockholder's address as it appears on the records of the Corporation. SECTION VI.3. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining the stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is 11 given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; PROVIDED, HOWEVER, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in this State, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by this chapter, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (c) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. ARTICLE VII CERTIFICATES REPRESENTING STOCK SECTION VII.1. CERTIFICATES; SIGNATURES. The shares of the Corporation shall be represented by certificates, provided that the Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all 12 classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate, signed by or in the name of the Corporation by the Chairman or Vice Chairman of the Board of Directors, or the President or Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, representing the number of shares registered in certificate form. Any and all signatures on any such certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. The name of the holder of record of the shares represented thereby, with the number of such shares and the date of issue, shall be entered on the books of the Corporation. SECTION VII.2. TRANSFERS OF STOCK. Upon compliance with provisions restricting the transfer or registration of transfer of shares of stock, if any, shares of capital stock shall be transferable on the books of the Corporation only by the holder of record thereof in person, or by duly authorized attorney, upon surrender and cancellation of certificates for a like number of shares, properly endorsed, and the payment of all taxes due thereon. SECTION VII.3. FRACTIONAL SHARES. The Corporation may, but shall not be required to, issue certificates for fractions of a share where necessary to effect authorized transactions, or the Corporation may pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or it may issue scrip in registered or bearer form over the manual or facsimile signature of an officer of the Corporation or of its agent, exchangeable as therein provided for full shares, but such scrip shall not entitle the holder to any rights of a stockholder except as therein provided. The Board of Directors shall have power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates representing shares of the Corporation. SECTION VII.4. LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may issue a new certificate of stock in place of any certificate theretofore issued by it that is alleged to have been lost, stolen, or destroyed, and the Board of Directors may require the owner of any allegedly lost, stolen, or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged 13 loss, theft or destruction of any such certificate or the issuance of any such new certificate. ARTICLE VIII DIVIDENDS SECTION VIII.1. Subject always to the provisions of law and the Certificate of Incorporation, the Board of Directors shall have full power to determine whether any, and, if any, what part of any, funds legally available for the payment of dividends shall be declared as dividends and paid to stockholders. The division of the whole or any part of such funds of the Corporation shall rest wholly within the lawful discretion of the Board of Directors, and it shall not be required at any time, against such discretion, to divide or pay any part of such funds among or to the stockholders as dividends or otherwise. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, thinks proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board of Directors shall determine to be in the best interests of the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE IX RATIFICATION SECTION IX.1. Any transaction questioned in any law suit on the ground of lack of authority, defective or irregular execution, adverse interest of a director, officer, or stockholder, non-disclosure, miscomputation, or the application of improper principles or practices of accounting, may be ratified before or after judgment, by the Board of Directors or by the stockholders, and if so ratified shall have the same force and effect as if the questioned transaction had been originally duly authorized. Such ratification shall be binding upon the Corporation and its stockholders and shall constitute a bar to any claim or execution of any judgment in respect of such questioned transaction. ARTICLE X CORPORATE SEAL SECTION X.1. The corporate seal shall have inscribed thereon the name of the Corporation and the year of its incorporation, and shall be in such form and contain such other words and/or figures as the Board of Directors shall determine. 14 The corporate seal may be used by printing, engraving, lithographing, stamping, or otherwise making, placing, or affixing, or causing to be printed, engraved, lithographed, stamped, or otherwise made, placed, or affixed, upon any paper or document, by any process whatsoever, an impression, facsimile, or other reproduction of said corporate seal. ARTICLE XI FISCAL YEAR SECTION XI.1. The fiscal year of the Corporation shall be fixed, and shall be subject to change, by the Board of Directors. Unless otherwise fixed by the Board of Directors, the fiscal year of the Corporation shall be the calendar year. ARTICLE XII WAIVER OF NOTICE SECTION XII.1. Whenever notice is required to be given by these By-Laws or by the Certificate of incorporation or by law, a written waiver thereof, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to notice. ARTICLE XIII BANK ACCOUNTS, DRAFTS, CONTRACTS, ETC. SECTION XIII.1. BANK ACCOUNTS AND DRAFTS. In addition to such bank accounts as may be authorized by the Board of Directors, the primary financial officer or any person designated by said primary financial officer, whether or not an employee of the Corporation, may authorize such bank accounts to be opened or maintained in the name and on behalf of the Corporation as may be deemed necessary or appropriate, payments from such bank accounts to be made upon and according to the check of the Corporation in accordance with the written instructions of said primary financial officer, or other person so designated by the Treasurer. SECTION XIII.2. CONTRACTS. The Board of Directors may authorize any person or persons, in the name and on behalf of the Corporation, to enter into or execute and deliver any and all deeds, bonds, mortgages, contracts, and other obligations or instruments, and such authority may be general or confined to specific instances. 15 SECTION XIII.3. PROXIES; POWERS OF ATTORNEY; OTHER INSTRUMENTS. The Chairman, the President or any other person designated by either of them shall have the power and authority to execute and deliver proxies, powers of attorney, and other instruments on behalf of the Corporation in connection with the rights and powers incident to the ownership of stock by the Corporation. The Chairman, the President or any other person authorized by proxy or power of attorney executed and delivered by either of them on behalf of the Corporation may attend and vote at any meeting of stockholders of any company in which the Corporation may hold stock, and may exercise on behalf of the Corporation any and all of the rights and powers incident to the ownership of such stock at any such meeting, or otherwise as specified in the proxy or power of attorney so authorizing any such person. The Board of Directors, from time to time, may confer like powers upon any other person. SECTION XIII.4. FINANCIAL REPORTS. The Board of Directors may appoint the primary financial officer or other fiscal officer and/or the Secretary or any other officer to cause to be prepared and furnished to stockholders entitled thereto any special financial notice and/or financial statement, as the case may be, which may be required by any provision of law. ARTICLE XIV AMENDMENTS SECTION XIV.1. The Board of Directors shall have power to adopt, amend, or repeal by-laws. Any by-laws adopted by the Board of Directors may be repealed or changed, and new by-laws made, by the stockholders, and the stockholders may prescribe that any by-law made by them shall not be altered, amended, or repealed by the Board of Directors. 16 EX-27 4 EXHIBIT 27
5 1,000 YEAR DEC-31-1998 DEC-31-1998 24,586 0 115,990 2,761 112,481 259,633 61,332 33,283 359,390 138,144 208,124 0 0 55 3,807 359,390 2,476,376 2,476,376 2,295,659 150,977 2,204 0 15,402 12,134 4,925 7,209 0 0 0 7,209 0 0
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