<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): April 19, 1997
(February 18, 1997)
CORE-MARK INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
------------
------------
COMMISSION FILE NUMBER 333-14217
------------
------------
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: (415) 589-9445
------------
------------
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On February 3, 1997, Core-Mark International, Inc. (the "Company")
consummated a transaction, pursuant to a Purchase Agreement dated January 31,
1997, to acquire certain assets and the business of two related companies,
Melvin Sosnick Company and Capital Cigar Company (collectively "Sosnick" or
the "Sosnick Companies"), a wholesale distributor to the convenience retail
market in northern California and northern Nevada. Sosnick operates in the
same geographic marketplace and provides similar products and services as the
Company. The Company is integrating the acquired business into its existing
operations and facilities and has hired a majority of Sosnick's former
employees (salespeople, warehouse employees and drivers) to support the
additional sales volume.
The assets acquired included trade accounts receivable, inventories and
warehouse equipment that the Company intends to continue to use in its
business. The acquisition excluded the assumption of substantially all of the
liabilities of Sosnick (such as notes payable, trade accounts payable,
commitments to lease warehouse facilities and other liabilities) disclosed in
Sosnick's historical financial statements included herein. As a result, the
historical financial statements of Sosnick and the pro forma financial
information of the Company included herein do not purport to be indicative of
the actual financial position or the results of operations of the Company had
the acquisition been completed as of the dates indicated herein, nor are they
indicative of future operating results or financial position of the Company.
The purchase price for the assets and the business totaled $21.9 million,
principally based upon book value of the assets. The terms of the
acquisition resulted from arms-length negotiations between representatives of
Sosnick and the Company. The Company financed the purchase price with
borrowings under its existing revolving credit facility.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<CAPTION>
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
<S> <C>
The following financial statements are filed with this Report: Page Number
-----------
Melvin Sosnick Company 5-22
--------------------------------
Independent Auditors' Report of Seiler and Company
Balance Sheet at September 28, 1996
Statement of Loss and Retained Earnings for the 52-53 week period ended
September 28, 1996
Statement of Cash Flows for the 52-53 week period ended September 28, 1996
Notes to Financial Statements
Capital Cigar Company 23-42
-----------------------------
Independent Auditors' Report of Seiler and Company
Balance Sheets as of September 28, 1996 and September 30, 1995
Statements of Income (Loss) and Retained Earnings for the periods ended
September 28, 1996 and September 30, 1995
Statements of Cash Flows for the periods ended September 28, 1996 and
September 30, 1995
Notes to Financial Statements
The Sosnick Companies 43-46
(Interim Period Financial Statements)
--------------------------------------
Combined Balance Sheets as of December 28, 1996 and September 28, 1996
Combined Statements of Income (Loss) for the periods ended December 28, 1996
and December 31, 1995
Combined Statements of Cash Flows for the periods ended December 28, 1996
and December 31, 1995
Notes to Financial Statements
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
(b) PRO FORMA FINANCIAL INFORMATION
<S> <C>
The following unaudited pro forma condensed financial statements are filed
with this Report: Page Number
-----------
Core-Mark International, Inc. and subsidiaries 47-52
--------------------------------------------------------
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1996
Unaudited Pro Forma Condensed Consolidated Statement of Income for the year
ended December 31, 1996
Notes to Unaudited Condensed Consolidated Pro Forma Financial Statements
(c) EXHIBITS
2.1 Purchase Agreement dated January 31, 1997 filed as an exhibit to the 53-54
registrant's Current Report on Form 8-K, filed with the Commission on
February 18, 1997.
23.1 Consent of Seiler & Company, LLP
</TABLE>
3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of South San Francisco,
State of California.
CORE-MARK INTERNATIONAL, INC.
By /s/ Leo F. Korman
-------------------------------------
Leo F. Korman, Senior Vice President and
Chief Financial Officer
Dated: April 19, 1997
4
<PAGE>
MELVIN SOSNICK COMPANY
INDEX TO FINANCIAL STATEMENT
Page No.
--------
INDEPENDENT AUDITORS' REPORT 6
FINANCIAL STATEMENT
Balance Sheet 7
Statement of Loss and Retained Earnings 8
Statement of Cash Flows 9 - 10
Notes to Financial Statement 11 - 22
5
<PAGE>
Seiler & Company
CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
MELVIN SOSNICK COMPANY
San Leandro, California
Independent Auditors' Report
----------------------------
We have audited the accompanying balance sheet of Melvin Sosnick Company as
of September 28, 1996, and the related statements of loss and retained earnings,
and cash flows for the 52-53 week period then ended. The financial statement is
the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement 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 balance sheet is free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. 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, the financial statement referred to above presents fairly,
in all material respects, the financial position of Melvin Sosnick Company as of
September 28, 1996, and the results of its operations and its cash flows for the
52-53 week period then ended in conformity with generally accepted accounting
principles.
The accompanying financial statement has been prepared assuming that the
Company will continue as a going concern. As discussed in Note 16 to the
financial statement, the Company has suffered recurring losses from operations
which raises substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters also are described in Note 16. The
financial statement does not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Seiler & Company
San Francisco, California
December 13, 1996
6
<PAGE>
MELVIN SOSNICK COMPANY
BALANCE SHEET
SEPTEMBER 28, 1996
ASSETS
------
CURRENT ASSETS:
Cash $ 16,399
Receivables 6,568,680
Due from affiliate 559,452
Merchandise inventory 6,081,109
Cigarette stamp inventory 704,639
Prepaid expenses 199,257
----------
Total current assets 14,129,536
PROPERTY, PLANT AND EQUIPMENT 3,953,832
INSURANCE PROCEEDS RECEIVABLE 165,864
INTANGIBLE ASSETS 4,000
OTHER ASSETS 506,013
----------
Total assets $18,759,245
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Checks drawn in excess of
available bank balance $ 585,112
Notes payable 6,937,461
Due to affiliate 1,732,434
Accounts payable - trade 3,227,835
Accrued expenses 1,849,442
Taxes payable:
Cigarette stamp tax 1,595,816
Other 309,738
----------
Total current liabilities 16,237,838
----------
LONG-TERM LIABILITIES:
Notes payable 1,216,345
Deposits 61,755
----------
COMMITMENTS AND CONTINGENCIES
Total liabilities 17,515,938
----------
STOCKHOLDERS' EQUITY:
Common stock - par value $100 per share;
10,000 shares authorized, 1,550 shares
issued and outstanding 155,000
Additional paid-in capital 158,117
Retained earnings 930,190
-----------
Total stockholders' equity 1,243,307
----------
Total liabilities and
stockholders' equity $18,759,245
----------
See accompanying notes.
7
<PAGE>
MELVIN SOSNICK COMPANY
STATEMENT OF LOSS AND RETAINED EARNINGS
FOR THE 52-53 WEEK PERIOD ENDED SEPTEMBER 28, 1996
<TABLE>
<CAPTION>
Amount Percent
------ -------
<S> <C> <C>
SALES $144,886,318 100.00%
COST OF SALES 131,373,692 90.67
----------- -------
GROSS PROFIT 13,512,626 9.33
----------- -------
LESS EXPENSES:
Officers' salaries 472,276 .33
Warehouse 4,321,704 2.98
Selling 4,720,172 3.26
Delivery 2,385,451 1.65
General and administrative 5,537,779 3.82
----------- -------
Total expenses 17,437,382 12.04
----------- -------
LOSS FROM OPERATIONS (3,924,756) (2.71)
OTHER INCOME 581,600 .40
----------- -------
LOSS BEFORE PROVISION FOR TAXES ON INCOME (3,343,156) (2.31)
PROVISION FOR TAXES ON INCOME 800 .00
----------- -------
NET LOSS (3,343,956) (2.31)%
--------
RETAINED EARNINGS, BEGINNING OF PERIOD 4,274,146
-----------
RETAINED EARNINGS, END OF PERIOD $ 930,190
-----------
</TABLE>
See accompanying notes.
8
<PAGE>
MELVIN SOSNICK COMPANY
STATEMENT OF CASH FLOWS
FOR THE 52-53 WEEK PERIOD ENDED SEPTEMBER 28, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,343,956)
Noncash items included in net income:
Depreciation 586,529
Amortization 12,945
Rental income 20,996
Loss on sale of fixed assets 17,386
(Increase) decrease in:
Receivables 1,389,729
Due from affiliate 129,668
Merchandise inventory 974,158
Cigarette tax stamp inventory (62,089)
Prepaid expenses (12,280)
Insurance proceeds receivable (16,000)
Other assets (153,190)
Increase (decrease) in:
Accounts payable 1,407,511
Cigarette and tobacco tax payable (821,570)
Other taxes payable 207,651
Deposits 37,515
Accrued expenses 1,044,765
------------
Net cash provided by
operating activities 1,419,768
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of improvements and equipment (706,836)
Proceeds from sale of fixed assets 27,875
------------
Net cash used by
investing activities (678,961)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 131,583,369
Repayment of notes payable (132,322,980)
Due to affiliate 1,732,434
Checks drawn in excess of available
bank balance (1,733,872)
------------
Net cash used by
financing activities (741,049)
------------
Net decrease in cash (242)
CASH AT BEGINNING OF PERIOD 16,641
------------
CASH AT END OF PERIOD $ 16,399
------------
See accompanying notes.
9
<PAGE>
MELVIN SOSNICK COMPANY
STATEMENT OF CASH FLOWS
FOR THE 52-53 WEEK PERIOD ENDED SEPTEMBER 28, 1996
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR INTEREST AND INCOME TAXES:
Cash paid during the year for:
Income taxes $ 800
---------
Interest $1,187,045
---------
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
The Company purchased new equipment that was not paid by September 28, 1996.
The Company has accrued $349,394 for these assets.
See accompanying notes.
10
<PAGE>
MELVIN SOSNICK COMPANY
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 28, 1996
NOTE 1 - ACCOUNTING POLICIES
- ----------------------------
A. Business Combination
- --------------------------
Effective October 1, 1995, Bercovich Cigar Company, a related entity by common
ownership and control, was merged into the Melvin Sosnick Company in a
business combination accounted for as a pooling-of-interest. The net
assets of Bercovich Cigar Company, a wholesale distributor, were
transferred to the Melvin Sosnick Company at their book value, and neither
company recognized a gain or loss. The Melvin Sosnick Company issued 350
new shares which increased the common stock value and additional paid-in
capital of the Melvin Sosnick Company. Melvin Sosnick's retained earnings
were increased by the amount of Bercovich Cigar Company's retained earnings
and the common stock of Bercovich Cigar Company was canceled.
B. Nature of Business
- ------------------------
Melvin Sosnick Company is a corporate wholesale distributor of candies, tobacco,
groceries, health and beauty aids and sundries in the Northern California
and Los Angeles region.
C. Use of Estimates
- ----------------------
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
D. Inventories
- -----------------
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories are pledged as security for certain notes payable
(Note 7).
E. Property, Plant and Equipment
- -----------------------------------
Property, plant and equipment are stated at cost. Major improvements that
significantly add to the productive capacity or extend the life of an asset
are capitalized. Maintenance and repair costs are charged to income
currently. Depreciation of property and equipment, and amortization of
leasehold improvements, are computed on the straight-line and declining
balance methods over the useful lives of the assets which range from three
to thirty-nine years.
11
<PAGE>
MELVIN SOSNICK COMPANY
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 28, 1996
NOTE I - ACCOUNTING POLICIES (Continued)
- ----------------------------
F. Intangible Assets
- -----------------------
The cost of a covenant not to compete is being amortized on the straight-line
method over a five-year period.
G. Income Taxes
- ------------------
The Company has adopted SFAS 109, Accounting for Income Taxes, to account for
deferred income taxes. Deferred taxes are computed based on the tax
liability or benefit in future years of the reversal of temporary
differences in the recognition of income or deduction of expenses between
financial and tax reporting purposes.
The principal items resulting in the differences are state franchise taxes,
depreciation, the accrual of vacation pay, six-months free rent to a
warehouse tenant, and the capitalization of certain expenses related to
inventory per Internal Revenue Code Section 263A. The net difference
between tax expense and taxes currently payable is reflected in the balance
sheet as deferred taxes. Deferred tax assets and liabilities are
classified as current and noncurrent based on the classification of the
related asset or liability for financial reporting purposes, or based on
the expected reversal date for deferred taxes that are not related to an
asset or liability.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
H. Change in Accounting Period
- ---------------------------------
The Company elected to adopt a 52-53 week accounting period for financial and
tax reporting purposes. The fiscal year will end on the last Saturday of
September.
12
<PAGE>
MELVIN SOSNICK COMPANY
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 28, 1996
NOTE 2 - RECEIVABLES
- --------------------
Receivables consist of the following:
Trade $ 6,052,990
Other 819,389
----------
Subtotal 6,872,379
Less allowance for doubtful
accounts 303,699
----------
Total $ 6,568,680
----------
The Company grants credit to customers who are all located in California.
Receivables are pledged as security for certain notes payable (Note 7).
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment consist of the following:
Land $ 157,728
Building 889,219
Furniture, fixtures and equipment 7,394,553
Automotive equipment 115,295
Parking lot 135,554
Building improvements 1,569,485
----------
Subtotal 10,261,834
Less accumulated depreciation
and amortization 6,308,002
----------
Total $ 3,953,832
----------
Property, plant and equipment are pledged as security for certain notes payable
(Note 7).
Depreciation and amortization for the period ended September 28, 1996 was
$586,529.
NOTE 4 - INSURANCE PROCEEDS RECEIVABLE
- ---------------------------------------
The Company has entered into a split dollar life insurance agreement with an
officer of the Company. This policy has a face amount of $1,000,000. In
the event of the officer's death, the Company's share in the proceeds would
amount to $165,864.
13
<PAGE>
MELVIN SOSNICK COMPANY
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 28, 1996
NOTE 5 - INTANGIBLE ASSETS
- --------------------------
Intangible assets consist of the following:
Covenant not to compete $ 60,852
Goodwill 4,000
-------
Subtotal 64,852
Less accumulated amortization 60,852
-------
Total $ 4,000
-------
Amortization expense for the period ended September 28, 1996 was $9,315.
NOTE 6 - OTHER ASSETS
- ---------------------
Other assets consist of the following:
Unamortized rent $169,497
Totes (net) 123,565
Deposits 115,165
Noncurrent prepaid expenses 90,154
Investments at cost 7,632
-------
Total $506,013
-------
Rental Income
- -------------
Effective March 24, 1995, the Company leased their Santa Clara office/warehouse
facility for ten years. This lease provides for six-months free rent,
which will be amortized over the lease term in conformity with SFAS 13. It
further stipulates that total minimum rental income for the ten year period
will be $3,069,232.
14
<PAGE>
MELVIN SOSNICK COMPANY
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 28, 1996
NOTE 7 - NOTES PAYABLE
- ----------------------
Notes payable consist of the following:
Maturity date Interest rate Amount
------------- ------------- ------
Secured:
Line of credit(a) 09/21/97 Prime + 1.5% $6,811,395
Promissory note,
affiliate(b) 09/25/02 Prime + 1.5% 854,697
Promissory note(c) 08/15/02 Prime + 1.5% 487,714
---------
Total 8,153,806
Less current portion 6,937,461
---------
Long-term portion $1,216,345
---------
(a) On January 19, 1995, the Company entered into a secured line of credit with
the CIT Group. This line was available through January 18, 1997 with an
interest rate of prime plus 1.5%. The minimum joint credit amount was
$4,000,000 with a maximum credit of $12,000,000. On September 22, 1995, an
amendment was signed which extended the line of credit until September 21,
1997, added an affiliated company, and increased the maximum credit to
$15,000,000. The amount available is a factor of the receivable and
inventory balances. Receivables, inventory, and property and equipment are
pledged as security for the line of credit.
The Company is required by the CIT security agreement to meet certain loan
covenants in order to comply with their loan agreement. The Company is not
in compliance with the covenant that requires the financial statements to
be provided within ninety (90) days of year end.
(b) The Company converted outstanding payables in the amount of $883,031 to
Capital Cigar Company into a note payable on September 25, 1995. The terms
of the note require 83 monthly payments of $10,512. All unpaid principal
and accrued interest is payable at maturity with no prepayment penalties.
(c) The Company issued a promissory note in the amount of $569,000 to the CIT
Group on September 22, 1995. The terms of the note require 83 monthly
payments of $6,774. All unpaid principal and accrued interest are payable
at maturity. The note is secured by the CIT loan and security agreement
dated January 19, 1995. Interest is calculated by CIT on a monthly basis
and charged to the line-of-credit.
15
<PAGE>
MELVIN SOSNICK COMPANY
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 28, 1996
NOTE 7 - NOTES PAYABLE (Continued)
- ----------------------
Maturities of notes payable for each of the next five years are as follows:
1997 $6,937,461
1998 130,633
1999 135,665
2000 141,210
2001 147,321
Interest expense for the period ended September 28, 1996 was $1,187,045.
NOTE 8 - ACCRUED EXPENSES
- -------------------------
Accrued expenses consist of the following:
General and administrative expenses $1,088,464
Accrued vacation and PTO 411,584
Equipment purchases 349,394
---------
Total $1,849,442
---------
During the year, the Company changed its policy for providing vacation and sick
pay for nonunion employees. Previously, employees were only entitled to
unused vacation upon termination. Under the new policy, employees are
entitled to unused vacation, sick pay, and other floating holidays. For
accrued sick time, or PTO (paid time off), the policy was retroactive to
each employee's service date with a maximum cap for unused sick days.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Leases
- ------
The following is a summary of noncancellable operating leases:
Description Minimum Renewal
of property annual rent Expiration-date option
----------- ----------- --------------- -------
Office/warehouse
facility (1) $180,000 December 31, 2000 No
Fresno facility (1) 42,000 June 30, 1999 No
Pleasanton office (2) 94,045 January 31, 1999 No
Ontario
office/warehouse 7,239 December 31, 1996 No
Delivery trucks 130,151 Various Various
Autos 8,242 Various Yes
Equipment 24,114 Various Various
16
<PAGE>
MELVIN SOSNICK COMPANY
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 28, 1996
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
- --------------------------------------
(1) Leases are with partnerships owned by a majority of the stockholders of the
Company.
(2) Effective October 1, 1995, the Company modified an existing sublease
agreement whereby 25% of the lease obligation would be paid by Capital
Cigar Company. The above minimum rental represents the Company's 75%
portion.
On June 17, 1996, the Company subleased the Pleasanton office. The lease
expires on January 31, 1999 which is the expiration of the Company's lease
obligation. The agreement calls for monthly rental payments of $11,273
that began in July 1996. The minimum future sublease income is $135,276.
Noncapitalized lease commitments extending for one year or more, primarily
involving real and personal property, will require the following future
payments:
Real Personal
Year property property Total
---- -------- -------- -----
1997 $323,284 $162,506 $ 485,790
1998 317,577 140,178 457,755
1999 243,359 81,757 325,116
2000 45,000 1,721 46,721
2001 -0- -0- -0-
-------- -------- ----------
Total $929,220 $386,162 $1,315,382
-------- -------- ----------
Rental expense for the period ended September 28, 1996 was $733,743.
The Company is currently renting an annex adjacent to the San Leandro warehouse
on a month-to-month basis. The monthly rental fee is $1,893.
Co-insurance
- ------------
At September 28, 1996, the Company was underinsured at its Fresno warehouse.
The current insurance policy covers personal property up to $375,000. The
estimated personal property at the Fresno warehouse is $2,000,000.
17
<PAGE>
MELVIN SOSNICK COMPANY
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 28, 1996
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
- --------------------------------------
Litigation
- ----------
The Company and its joint affiliates are named as defendants in a lawsuit filed
by an independent consultant for breach of contract and fraud alleging
damages in the amount of $400,000. Per legal counsel, it is not possible
at this time to predict the possible outcome nor damages. Management has
reviewed the litigation with legal counsel and intends to defend this
matter vigorously.
The Company is involved in legal actions arising in the ordinary course of
business. In the opinion of management, the Company has adequate legal
defenses or insurance coverage with respect to each of these actions and
does not believe that they will materially affect the Company's results of
operations or financial position.
Employment Agreement
- --------------------
The Company has employment contracts with two officers calling for a base salary
plus an annual incentive bonus based on specified levels of income. No
bonus payments were made for the period ended September 28, 1996.
NOTE 10 - PENSION PLANS AND 401(k)
- ----------------------------------
Defined Benefit Plan
- --------------------
The Company has trusteed noncontributory pension and welfare plans covering
employees whose wages and benefits are determined by union contracts.
Certain nonunion employees of the Company are covered by the pension plan of
Melvin Sosnick Company and Capital Cigar Company. The consultant for the
plan has determined that the plan was overfunded for tax purposes at
December 31, 1995.
The following pension information was provided by the actuarial company and
includes amounts for both companies.
The Company sponsors a defined benefit pension plan that covers all nonunion
employees. The plan provides benefits to be paid to eligible employees at
retirement based upon years of service with the Company and compensation
rates near retirement. Contributions to the plan reflect benefits
attributed to employees' service to date, as well as services expected to
be earned in the future. Plan assets consist primarily of cash equivalent
accounts, interest bearing bonds, government securities, pooled mutual
funds and equities.
18
<PAGE>
MELVIN SOSNICK COMPANY
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 28, 1996
NOTE 10 - PENSION PLANS AND 401(k) (Continued)
- ----------------------------------
The following sets forth the funded status of the plan at December 31, 1995. The
funded status as of September 28, 1996 is not currently available.
Actuarial present value of benefit obligations:
Vested benefits $(2,074,791)
Nonvested benefits (50,992)
----------
Accumulated benefit obligation (2,125,783)
Effect of anticipated future compensation
levels and other events (4,394)
Projected benefit obligation (2,130,177)
Fair value of assets held in plan 4,187,925
----------
Excess of plan assets over projected
benefit obligation 2,057,748
Items not yet recognized in earnings:
Unamortized prior service cost -
Remaining net unrecognized (gain) (2,314,361)
Remaining unrecognized net transition (gain) (30,106)
Pension liability included in the
balance sheet -
----------
(Accrued) Pension Cost $ (286,719)
----------
The weighted average discount rate used to measure the projected benefit
obligation is 8.5%, the rate of increase in future compensation levels is
3.5%, and the expected long-term rate of return on assets is 8.5%. The
Company uses the straight-line method of amortization for unrecognized
gains and losses.
The above accrued pension cost has not been reflected in these financial
statements due to the fact that the amount allocable to Melvin Sosnick
Company cannot be determined by the actuary at the time of this statement.
401(k)
- ------
During the year, the Company adopted a IRC 401(k) plan covering substantially
all eligible nonunion employees. Under the provisions of the plan,
eligible employees may defer up to 15% of their compensation. The Plan
provides for 10% matching Company contributions up to 8% of the employee
contribution. Employees must complete one year of service and attain age
21 before they are eligible to participate. Participants may enter the
plan in May or November immediately following the completion of the age and
service requirement. The Company contributed $6,702 for the period ended
September 28, 1996.
19
<PAGE>
MELVIN SOSNICK COMPANY
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 28, 1996
NOTE 10 - PENSION PLANS (Continued)
- -----------------------
401(k) (Continued)
- -----
As of September 28, 1996, the Company had not received a determination letter
from the Internal Revenue Service that the Plan was approved.
NOTE 11 - INCOME TAXES
- ----------------------
The Company's total deferred tax assets, deferred tax liabilities, and deferred
tax asset valuation allowances at September 28, 1996 are as follows:
Total deferred tax assets $ 1,158,569
Less valuation allowance (1,158,569)
-----------
Net deferred tax asset $ -0-
-----------
For federal tax purposes, the Company has approximately $5,900,000 of net
operating loss carry forward as of September 28, 1996, of which
approximately $89,000 expires in 2001 and approximately $5,811,000 expires
in 2010. At September 28, 1996, the Company has approximately $6,500,000 in
net operating loss carryforward for alternative minimum tax.
For state purposes, the Company has approximately $3,100,000 of net operating
loss carryforward as of September 28, 1996 of which $49,000 expires in
1999, and $3,051,000 in 2000.
NOTE 12 - AFFILIATED COMPANIES
- ------------------------------
Melvin Sosnick Company is affiliated with Capital Cigar Company. Both companies
are incorporated in California. The stock in both companies is owned, in
different percentages, by related family members.
The above companies sell merchandise to each other at their cost. The amounts
sold through affiliated companies is less than one percent of sales.
As of September 28, 1996, Capital Cigar Company was indebted to Melvin Sosnick
Company for $559,452 related to general operating expenses and purchases
made by Melvin Sosnick Company on behalf of Capital Cigar Company. Melvin
Sosnick Company was indebted to Capital Cigar Company for $1,732,434
related to cash borrowing for operations.
20
<PAGE>
MELVIN SOSNICK COMPANY
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 28, 1996
NOTE 13 - CONCENTRATIONS
- ------------------------
Substantial Vendor Purchases
- ----------------------------
Purchases from two major suppliers totaled approximately $54,000,000 or 41.3% of
total purchases for the period ended September 28, 1996.
Substantial Customer Sales
- --------------------------
Sales to one major customer totaled approximately $24,000,000 or 16.6% of total
sales for the period ended September 28, 1996.
Substantial Product Sales
- -------------------------
Sales of cigarettes and other tobacco products totaled approximately $80,000,000
or 55.4% of total sales for the period ended September 28, 1996.
Union Employees
- ---------------
The Company employs approximately 120 union employees. The current collective
bargaining agreement is due for renegotiation on April 1, 1997. Management
anticipates that a new contract will be signed prior to the expiration of
the current agreement.
NOTE 14 - STOCK OPTION PLAN
- ---------------------------
Pursuant to Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation (FAS 123), the Company has elected not to adopt
the statement but follow the rules under APB 25. The Company will comply
with the disclosures as required under the statement.
On January 1, 1989, the Company approved the adoption of a stock option plan,
whereby options were granted to a key employee to purchase up to 158 shares
of common stock at a price which varies with the exercise date. The
current exercise price per share is $4,839.
Options may be exercised any number of times by the optionee during the option
period for an amount of shares not less than 28. The option period expires
on the earlier of six months and one day following the death of the
optionee or six months and one day following the termination of the
optionee's employment. No options were exercised as of September 28, 1996.
21
<PAGE>
MELVIN SOSNICK COMPANY
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 28, 1996
NOTE 15 - SUBSEQUENT EVENTS
- ---------------------------
Sale of Business
- ----------------
Subsequent to year-end, the Company entered into an agreement to sell the
majority of its assets to Core-Mark International (CMI). As part of the
agreement, CMI will acquire 100% of the fully collectible trade accounts
receivable, 100% of the fully salable inventory, and all of the fixed assets,
excluding leasehold improvements and capitalized software. The purchase
price for the acquisition of these assets would be the net book value plus
an additional amount.
The proposed effective date of this agreement is January 31, 1997. The Company
plans to cease operations as of such date.
Warehouse Closure
- -----------------
Subsequent to the balance sheet date and before the financial statements were
issued, the Company announced plans to close its Fresno warehouse. The
Company expects to incur approximately $50,000 of out-of-pocket expenses
related to employee severance, dismantlement of the warehouse,
transportation of inventory, and other miscellaneous costs. The total
financial impact due to losses on the retirement and sale of fixed assets
are not determinable as of the report date.
In addition, management has not estimated the annual savings, but expects
significant cost reductions in the following period.
NOTE 16 - GOING CONCERN
- -----------------------
These statements are presented on the basis that the Company is a going concern.
Going concern contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business over a reasonable length of
time. The accompanying financial statements show a loss from operations of
$3,924,756. Losses have been significant over the past few years, and
current liabilities exceed current assets by $2,108,302.
Management has initiated plans to consolidate operations and reduce overhead
costs.
22
<PAGE>
CAPITAL CIGAR COMPANY
INDEX TO FINANCIAL STATEMENTS
Page No.
--------
INDEPENDENT AUDITORS' REPORT 24 - 25
FINANCIAL STATEMENTS
Balance Sheets 26 - 27
Statements of Income (Loss) and Retained Earnings 28
Statements of Cash Flows 29 - 30
Notes to Financial Statements 31 - 42
23
<PAGE>
Seiler & Company
CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
CAPITAL CIGAR COMPANY
San Leandro, California
Independent Auditors' Report
----------------------------
We have audited the accompanying balance sheet of Capital Cigar Company as
of September 28, 1996, and the related statements of income (loss) and retained
earnings, and cash flows for the 52-53 week period then ended. The financial
statement is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement 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 balance sheet. 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, the financial statement referred to above presents fairly,
in all material respects, the financial position of Capital Cigar Company as of
September 28, 1996, and the results of its operations and its cash flows for the
52-53 week period then ended in conformity with generally accepted accounting
principles.
The September 30, 1995 financial statement was reviewed by us, and our
opinion thereon dated November 30, 1995, stated that we were not aware of any
material modifications that should be made to that statement for it to be in
conformity with generally accepted accounting principles. However, a review is
substantially less in scope than an audit and does not provide a basis for the
expression of an opinion on the financial statement taken as a whole.
24
<PAGE>
To the Board of Directors
CAPITAL CIGAR COMPANY
Page Two
The accompanying financial statement has been prepared assuming that the
Company will continue as a going concern. As discussed in Note 20 to the
financial statement, the Company has suffered recurring losses from operations
which raises substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters also are described in Note 20. The
financial statement does not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Seiler & Company
San Francisco, California
December 26, 1996
25
<PAGE>
CAPITAL CIGAR COMPANY
BALANCE SHEETS
SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
ASSETS
------
1996 1995
---- ----
CURRENT ASSETS:
Cash $ 16,068 $ 103,749
Receivables 3,345,343 3,514,651
Note receivable, affiliate 44,780 34,098
Due from affiliate l,732,434 -0-
Merchandise inventory 2,565,067 2,748,380
Cigarette stamp inventory 398,678 214,581
Prepaid expenses 22,349 41,248
Insurance proceeds receivable 314,500 -0-
--------- ---------
Total current assets 8,439,219 6,656,707
NOTE RECEIVABLE, AFFILIATE 809,918 848,933
PROPERTY AND EQUIPMENT 430,090 523,542
INSURANCE PROCEEDS RECEIVABLE -0- 297,500
INTANGIBLE ASSETS 21,800 23,750
OTHER ASSETS 313,377 64,897
INVESTMENTS 14,306 7,025
--------- ---------
Total assets $10,028,710 $8,422,354
---------- ---------
See accompanying notes.
26
<PAGE>
CAPITAL CIGAR COMPANY
BALANCE SHEETS
SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
1996 1995
---- ----
CURRENT LIABILITIES:
Checks drawn in excess of
available bank balance $ 659,803 $ 709,132
Note payable 2,604,955 619,587
Accounts payable - trade 1,642,406 1,333,872
Due to affiliate 559,452 689,120
Accrued expenses 287,230 269,741
Taxes payable:
Cigarette stamp tax 1,241,030 1,090,509
Other 164,971 119,382
---------- ---------
Total current liabilities 7,159,847 4,831,343
---------- ---------
COMMITMENTS AND CONTINGENCIES
Total liabilities 7,159,847 4,831,343
---------- ---------
STOCKHOLDERS' EQUITY:
Common stock - par value $100
per share; 10,000 shares
authorized, 800 shares issued
and outstanding 80,000 80,000
Retained earnings 2,788,863 3,511,011
---------- ---------
Total stockholders' equity 2,868,863 3,591,011
---------- ---------
Total liabilities and
stockholders' equity $10,028,710 $8,422,354
---------- ---------
See accompanying notes.
27
<PAGE>
CAPITAL CIGAR COMPANY
STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS
FOR THE PERIODS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
1996 1995
---------------- ----------------
Amount Percent Amount Percent
------ ------- ------ -------
SALES $63,602,322 100.00% $63,234,920 100.00%
COST OF SALES 58,013,415 91.21 58,160,431 91.98
---------- ----- ---------- -----
GROSS PROFIT 5,588,907 8.79 5,074,489 8.02
LESS EXPENSES:
Warehouse 1,317,240 2.07 1,431,676 2.26
Selling 1,783,296 2.80 1,756,463 2.78
Delivery 1,075,932 1.69 1,128,997 1.79
General and
administrative 2,426,088 3.82 2,100,245 3.32
---------- ----- ---------- -----
Total expenses 6,602,556 10.38 6,417,381 10.15
---------- ----- ---------- -----
LOSS FROM OPERATIONS (1,013,649) (1.59) (1,342,892) (2.13)
OTHER INCOME 292,301 .46 223,491 .35
---------- ----- ---------- -----
INCOME (LOSS) BEFORE
PROVISION FOR TAXES (721,348) (1.13) (1,119,401) (1.78)
PROVISION (CREDIT) FOR
TAXES ON INCOME 800 (.00) (61,428) (.10)
---------- ----- ---------- -----
NET INCOME (LOSS) (722,148) (1.13) (1,057,973) (1.68)
----- -----
RETAINED EARNINGS,
BEGINNING OF PERIOD 3,511,011 4,568,984
---------- ----------
RETAINED EARNINGS,
END OF PERIOD $ 2,788,863 $ 3,511,011
---------- ----------
See accompanying notes.
28
<PAGE>
CAPITAL CIGAR COMPANY
STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(722,148) $(1,057,973)
Noncash items included in net income:
Depreciation 108,851 145,985
Amortization 3,353 1,950
Deferred income taxes -0- 15,166
(Gain) loss on sale of fixed assets 585 (13,134)
(Increase) decrease in:
Receivables 169,308 25,482
Merchandise inventory 183,313 (145,902)
Cigarette tax stamp inventory (184,097) (33,716)
Prepaid expense 18,899 11,187
Insurance proceeds receivable (17,000) (25,500)
Other assets (249,883) (54,000)
Investments (7,281) (7,025)
Increase (decrease) in:
Accounts payable 308,534 1,064,958
Other payables 17,489 (7,983)
Cigarette stamp tax payable 150,521 285,601
Other taxes payable 45,589 (18,974)
---------- ---------
Net cash provided (used) by
operating activities (173,967) 186,122
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of improvements
and equipment (22,484) (18,515)
Proceeds from sale of fixed assets 6,500 29,872
Note receivable, affiliate 28,333 (883,031)
Due from affiliate (1,732,434) -0-
---------- ---------
Net cash (used) by
investing activities (1,720,085) (871,674)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 61,826,606 4,836,383
Repayment of notes payable (59,841,238) (5,816,796)
Due to affiliate (129,668) 689,120
Checks drawn in excess of
available bank balance (49,329) 709,132
---------- ---------
Net cash provided by
financing activities 1,806,371 417,839
---------- ---------
Net decrease in cash (87,681) (267,713)
CASH AT BEGINNING OF PERIOD 103,749 371,462
---------- ---------
CASH AT END OF PERIOD $ 16,068 $ 103,749
---------- ---------
See accompanying notes.
29
<PAGE>
CAPITAL CIGAR COMPANY
STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
SUPPLEMENTAL DISCLOSURE:
1996 1995
---- ----
Cash paid during the period for:
Income taxes $ 800 $ -0-
----------- ------------
Interest expense $ 236,548 $ 56,362
----------- ------------
See accompanying notes.
30
<PAGE>
CAPITAL CIGAR COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
NOTE 1 - ACCOUNTING POLICIES
- ----------------------------
A. Nature of Business
- ---------------------
Capital Cigar Company is a corporate wholesale distributor of candies, tobacco,
groceries, health and beauty aids and sundries in and around the
surrounding regions of Sacramento, California and Reno, Nevada.
B. Use of Estimates
- -------------------
The preparation of financial statements in conformity with generally accepted
accounting principles 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
period. Actual results could differ from those estimates.
C. Inventories
- --------------
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories are pledged as security for certain notes payable (Note 9).
D. Property and Equipment
- -------------------------
Property and equipment are stated at cost. Major improvements that significantly
add to the productive capacity or extend the life of an asset are
capitalized. Maintenance and repair costs are charged to income currently.
Depreciation of property and equipment, and amortization of leasehold
improvements, are computed on the straight-line and declining balance
methods over the useful lives of the assets which range from three to
thirty-one and one-half years.
E. Intangible Assets
- ---------------------
The cost of a covenant not to compete is being amortized over a period of twenty
years on the straight-line method.
31
<PAGE>
CAPITAL CIGAR COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
F. Income Taxes
- ---------------
The Company has adopted SFAS 109, Accounting for Income Taxes, to account for
deferred income taxes. Deferred taxes are computed based on the tax
liability or benefit in future years of the reversal of temporary
differences in the recognition of income or deduction of expenses between
financial and tax reporting purposes.
The principal items resulting in the differences are state franchise taxes,
depreciation, the accrual of vacation pay, six-months free rent to a
warehouse tenant, and the capitalization of certain expenses related to
inventory per Internal Revenue Code Section 263A. The net difference
between tax expense and taxes currently payable is reflected in the
balance sheet as deferred taxes. Deferred tax assets and liabilities are
classified as current and noncurrent based on the classification of the
related asset or liability for financial reporting purposes, or based on
the expected reversal date for deferred taxes that are not related to an
asset or liability.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
G. Change in Accounting Period
- ------------------------------
The Company elected to adopt a 52-53 week accounting period for financial and
tax reporting purposes. The fiscal year will end on the last Saturday of
September.
NOTE 2 - RECEIVABLES
- --------------------
Receivables consist of the following:
1996 1995
---- ----
Trade $3,102,969 $3,474,774
Legal reimbursements 40,702 -0-
Miscellaneous 272,887 86,399
---------- ----------
Subtotal 3,416,558 3,561,173
Less allowance for doubtful
accounts 71,215 46,522
---------- ----------
Total $3,345,343 $3,514,651
---------- ----------
32
<PAGE>
CAPITAL CIGAR COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
NOTE 2 - RECEIVABLES (Continued)
- --------------------
The Company grants credit to customers, substantially all of whom are located in
the Sacramento, California and Reno, Nevada areas. Receivables are pledged
as security for certain notes payable (Note 9).
NOTE 3 - NOTE RECEIVABLE, AFFILIATE
- -----------------------------------
Note receivable, affiliate consists of the following:
Maturity Interest
date rate 1996 1995
--------- -------- ---- ----
Melvin Sosnick Prime
Company 10/25/02 + 1.50% $ 854,698 $ 883,031
-------- ---------
Total 854,698 883,031
Less current portion 44,780 34,098
-------- ---------
Long-term portion $ 809,918 $ 848,933
-------- ---------
The Company converted outstanding receivables from Melvin Sosnick Company into a
note receivable on September 25, 1995. The terms of the note require 83
monthly payments of $10,512. All unpaid principal and accrued interest is
payable at maturity with no prepayment penalties.
NOTE 4 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment consist of the following:
1996 1995
---- ----
Furniture, fixtures and equipment $1,665,969 $1,646,827
Automotive equipment 565,889 604,487
Leasehold improvements 214,678 212,152
Signs 9,510 9,510
--------- ---------
Subtotal 2,456,046 2,472,976
Less accumulated depreciation
and amortization 2,025,956 1,949,434
--------- ---------
Total $ 430,090 $ 523,542
--------- ---------
Depreciation and amortization charged to earnings were $108,851 and $145,985 in
1996 and 1995, respectively. Property and equipment are pledged as
security for certain notes payable (Note 9).
33
<PAGE>
CAPITAL CIGAR COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
NOTE 5 - INSURANCE PROCEEDS RECEIVABLE
- --------------------------------------
The Company has entered into a split dollar life insurance agreement with an
officer of the Company. This policy has a face amount of $1,000,000. In
the event of the officer's death, the Company's share in the proceeds would
amount to $314,500 and $297,500 for September 28, 1996 and September 30,
1995, respectively.
During the year, the officer died, and the Company was entitled to receive the
proceeds of all payments. As of September 28, 1996, none of the proceeds
had been received. After the balance sheet date, the Company received
two-thirds of its premium paid, or $209,666 plus interest. One-third of
the policy has not been received, but the Company expects to collect the
amounts plus interest in the following period.
NOTE 6 - INTANGIBLE ASSETS
- --------------------------
Intangible assets consist of the following:
1996 1995
---- ----
Covenant not to compete $ 39,000 $ 39,000
Goodwill 1,000 1,000
------- -------
Subtotal 40,000 40,000
Less accumulated amortization 18,200 16,250
------- -------
Total $ 21,800 $ 23,750
------- -------
Amortization charged to earnings for both 1996 and 1995 was $1,950.
NOTE 7 - OTHER ASSETS
- ---------------------
Other assets consist of the following:
1996 1995
---- ----
Certified Grocers Agreement (Note 8) $254,000 $54,000
Totes (net) 49,097 -0-
Club membership initiation fee 9,500 9,500
Telephone equipment lease -0- l,397
Other deposits 780 -0-
------- ------
Total $313,377 $64,897
------- ------
34
<PAGE>
CAPITAL CIGAR COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
NOTE 8 - INVESTMENTS
- --------------------
The Company entered into an agreement to purchase 100 shares of Class A common
stock of Certified Grocers of California Ltd. on December 22, 1994. The
investment is recorded at cost which is $14,306 at September 28, 1996. In
addition, the agreement requires a $254,000 deposit.
NOTE 9 - NOTE PAYABLE
- ---------------------
Note payable consists of the following:
Maturity Interest
date rate 1996 1995
-------- -------- ---- ----
Secured:
Prime +
Line of credit 09/21/97 + 1.25% $2,604,955 $619,587
--------- -------
On September 22, 1995, the Company and its affiliated company entered into a
joint secured line of credit with the CIT Group. This joint line is
available through September 21, 1997 with an interest rate of prime plus
1.25%. The minimum joint credit amount is $4,000,000 with a maximum credit
of $15,000,000. The amount available is a factor of the receivable and
inventory balances. Receivables, inventory, and property and equipment are
pledged as security for the line of credit.
The Company is required by the CIT security agreement to meet certain loan
covenants in order to comply with their loan agreement. The Company is not
in compliance with the covenant that requires the financial statements to be
provided within ninety (90) days of year end.
35
<PAGE>
CAPITAL CIGAR COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
NOTE 10 - ACCRUED EXPENSES
- --------------------------
Accrued expenses consist of the following:
1996 1995
---- ----
General and administrative expenses $164,400 $231,742
Accrued vacation and PTO 122,830 37,999
------- -------
Total $287,230 $269,741
------- -------
During the year, the Company changed its policy for providing vacation and sick
pay for nonunion employees. Previously, employees were only entitled to
unused vacation upon termination. Under the new policy, employees are
entitled to unused vacation, sick pay, and other floating holidays. For
accrued sick time, or PTO (paid time off), the policy was retroactive to
each employee's service date with a maximum cap for unused sick days.
NOTE 11- LEASES
- ---------------
The following is a summary of noncancellable operating leases:
Minimum annual Expiration Renewal
rent date option
-------------- ---------- -------
Office/warehouse
facility (1) $123,600 June 30, 2004 No
Warehouse
facility/Sparks 21,600 May 31, 1999 No
Delivery trucks 19,946 Various Yes
Autos 2,903 Various No
(1) The lease is with a partnership owned by a majority of the stockholders of
the Company.
For noncapitalized leases, primarily involving real and personal property,
commitments under noncancellable leases extending for one year or more
will require the following future payments:
36
<PAGE>
CAPITAL CIGAR COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
NOTE 11- LEASES (Continued)
- ---------------
Real Personal
Period ending property property Total
------------- -------- -------- --------
1997 $145,200 $ 23,349 $168,549
1998 145,200 19,946 165,146
1999 138,000 4,987 142,987
2000 123,600 -0- 123,600
2001 123,600 -0- 123,600
-------- -------- --------
Total $675,600 $ 48,282 $723,882
-------- -------- --------
Rent charged to earnings was $351,852 and $366,945 in 1996 and 1995,
respectively.
NOTE 12 - COMMITMENTS AND CONTINGENCIES.
- ---------------------------------------
Litigation
- ----------
The Company and its joint affiliates are named as defendants in a lawsuit filed
by an independent consultant for breach of contract and fraud alleging
damages in the amount of $400,000. Per legal counsel, it is not possible
at this time to predict the possible outcome nor damages. Management has
reviewed the litigation with legal counsel and intends to defend this
matter vigorously.
The Company is involved in legal actions arising in the ordinary course of
business. In the opinion of management, the Company has adequate legal
defenses or insurance coverage with respect to each of these actions and
does not believe that they will materially affect the Company's results of
operations or financial position.
Employment Agreement
- --------------------
The Company has employment contracts with two officers calling for a base salary
plus an annual incentive bonus based on specified levels of income. No
bonus payments were made for the period ended September 28, 1996.
37
<PAGE>
CAPITAL CIGAR COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
NOTE 13 - PENSION PLANS AND 401(k)
- ----------------------------------
Defined Benefit Plan
- --------------------
The Company has trusteed noncontributory pension and welfare plans covering
employees whose wages and benefits are determined by union contracts.
Certain nonunion employees of the Company are covered by the pension plan of
Melvin Sosnick Company and Capital Cigar Company. The consultant for the
plan has determined that the plan was overfunded for tax purposes at
December 31, 1995.
The following pension information was provided by the actuarial company and
includes amounts for both companies.
The Company sponsors a defined benefit pension plan that covers all nonunion
employees. The plan provides benefits to be paid to eligible employees at
retirement based upon years of service with the Company and compensation
rates near retirement. Contributions to the plan reflect benefits
attributed to employees' service to date, as well as services expected to
be earned in the future. Plan assets consist primarily of cash equivalent
accounts, interest bearing bonds, government securities, pooled mutual
funds and equities.
The following sets forth the funded status of the plan at December 31, 1995. The
funded status as of September 28, 1996 is not currently available.
Actuarial present value of benefit obligations:
Vested benefits $(2,074,791)
Nonvested benefits (50,992)
----------
Accumulated benefit obligation (2,125,783)
Effect of anticipated future compensation
levels and other events (4,394)
Projected benefit obligation (2,130,177)
Fair value of assets held in plan 4,187,925
----------
Excess of plan assets over projected
benefit obligation 2,057,748
Items not yet recognized in earnings:
Unamortized prior service cost -0-
Remaining net unrecognized (gain) (2,314,361)
Remaining unrecognized net transition (gain) (30,106)
Pension liability included in the
balance sheet -0-
----------
(Accrued) Pension Cost $ (286,719)
----------
38
<PAGE>
CAPITAL CIGAR COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
NOTE 13 - PENSION PLANS AND 401 (k) (Continued)
- -----------------------------------
The weighted average discount rate used to measure the projected benefit
obligation is 8.5%, the rate of increase in future compensation levels
is 3.5%, and the expected long-term rate of return on assets is 8.5%.
The Company uses the straight-line method of amortization for unrecognized
gains and losses.
The above accrued pension cost has not been reflected in these financial
statements due to the fact that the amount allocable to Capital Cigar
Company cannot be determined by the actuary at the time of this statement.
401 (k)
- -------
During the year, the Company adopted a IRC 401(k) plan covering substantially
all eligible nonunion employees. Under the provisions of the plan,
eligible employees may defer up to 15% of their compensation. The Plan
provides for 10% matching Company contributions up to 8% of the employee
contribution. Employees must complete one year of service and attain age
21 before they are eligible to participate. Participants may enter the
plan in May or November immediately following the completion of the age and
service requirement. The Company contributed $3,239 for the period ended
September 28, 1996.
As of September 28, 1996, the Company had not received a determination letter
from the Internal Revenue Service that the Plan was approved.
NOTE 14 - INCOME TAXES
- ----------------------
Income tax (benefit) consists of the following components:
1996 1995
---- ----
Current $800 $800
Deferred -0- 15,166
Tax benefit of applying net
operating loss to reduce
prior period's taxable income -0- (77,394)
---- --------
Total income tax (benefit) expense $800 $(61,428)
---- --------
39
<PAGE>
CAPITAL CIGAR COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
NOTE 14 - INCOME TAXES (Continued)
- ----------------------
The Company's total deferred tax assets, deferred tax liabilities, and deferred
tax asset valuation allowances at September 28, 1996 and September 30, 1995
are as follows:
1996 1995
---- ----
Total deferred tax assets $188,094 $ 63,786
Less valuation allowance (188,094) (63,786)
-------- --------
Net deferred tax asset $ -0- $ -0-
-------- --------
For federal tax purposes, the Company has approximately $1,400,000 of net
operating loss carryforward as of September 28, 1996, which expires in 2010. At
September 28, 1996, the Company has approximately $1,400,000 in net operating
loss carryforward for alternative minimum tax.
For state tax purposes, the Company has approximately $800,000 of net operating
loss carryforward as of September 28, 1996 of which $564,000 expires in
1999 and $236,000 expires in 2000.
NOTE 15 - AFFILIATED COMPANIES
- ------------------------------
Capital Cigar Company is affiliated with Melvin Sosnick Company. Both companies
are incorporated in California. The stock in both companies is owned, in
different percentages, by family members.
The above companies sell merchandise to each other at their cost. The amounts
sold through affiliated companies is less than one percent of sales.
In April 1991, the companies formed a corporate marketing group. Marketing
expenses are paid by Melvin Sosnick Company and are reimbursed by Capital
Cigar Company. Corporate marketing expenses were $442,549 and $423,052 for
the periods ended September 28, 1996 and September 30, 1995, respectively.
As of September 28, 1996, Capital Cigar Company was indebted to Melvin Sosnick
Company for $559,452 related to general operating expenses and purchases
made by Melvin Sosnick Company on behalf of Capital Cigar Company. Melvin
Sosnick Company was indebted to Capital Cigar Company for $1,732,434
related to cash borrowing for operations.
40
<PAGE>
CAPITAL CIGAR COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
NOTE 16 - CONCENTRATIONS
- ------------------------
Substantial Vendor Purchases
- ----------------------------
Purchases from two major suppliers totaled $27,440,279 or 47.2% of total
purchases for the period ended September 28, 1996 and $25,663,341 or 44.0%
of total purchases for the period ended September 30, 1995.
Substantial Customer Sales
- --------------------------
Sales to one major customer totaled approximately $10,100,000 or 15.9% of total
sales for the period ended September 28, 1996 and $10,900,000 or 17.3% of
total sales for the period ended September 30, 1995.
Substantial Product Sales
- -------------------------
Sales of cigarettes and other tobacco products totaled approximately $39,500,000
or 62.15% of total sales for the period ended September 28, 1996 and
$38,900,000 or 61.58% of total sales for the period ended September 30,
1995.
Union Employees
- ---------------
The Company employs approximately 50 union employees. The current collective
bargaining agreement is due for renegotiation on April 1, 1997. Management
anticipates that a new contract will be signed prior to the expiration of
the current agreement.
NOTE 17 - STOCK OPTION PLAN
- ---------------------------
Pursuant to Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation (FAS 123), the Company has elected not to adopt
the statement but follow the rules under APB 25. The Company will comply
with the disclosures as required under the statement.
On January 1, 1989, the Company approved the adoption of a stock option plan,
whereby options were granted to a key employee to purchase up to 149 shares
of common stock at a price which varies with the exercise date. The
current exercise price per share is $4,688.
Options may be exercised any number of times by the optionee during the option
period for an amount of shares not less than 28. The option period expires
on the earlier of six months and one day following the death of the
optionee or six months and one day following the termination of the
optionee's employment. No options were exercised as of September 28, 1996.
41
<PAGE>
CAPITAL CIGAR COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
NOTE 18 - RECLASSIFICATIONS
- ---------------------------
Certain amounts on the 1995 balance sheet and statement of loss have been
reclassified to conform with current year's presentation.
NOTE 19 - SUBSEQUENT EVENT
- --------------------------
Subsequent to year-end, the Company entered into an agreement to sell the
majority of its assets to Core-Mark International (CMI). As part of the
agreement, CMI will acquire 100% of the fully collectible trade accounts
receivable, 100% of the fully salable inventory, and all of the fixed assets,
excluding leasehold improvements and capitalized software. The purchase
price for the acquisition of these assets would be the net book value plus an
additional amount.
The proposed effective date of this agreement is January 31, 1997. The Company
plans to cease operations as of such date.
NOTE 20 - GOING CONCERN
- -----------------------
These statements are presented on the basis that the Company is a going concern.
Going concern contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business over a reasonable length of
time. The accompanying financial statements show a loss from the combined
results of operations of $1,013,649. Losses have been significant over the
past few years.
Management has initiated plans to consolidate operations and reduce overhead
costs.
42
<PAGE>
THE SOSNICK COMPANIES
COMBINED BALANCE SHEETS
(in thousands)
September December
28, 1996 28, 1996
(Unaudited)
------------ ------------
ASSETS
CURRENT ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . $ 32 $ 32
Trade receivables, net . . . . . . . . . . . . 9,914 11,193
Inventories, net . . . . . . . . . . . . . . . 9,750 9,597
Prepaid expenses and other current assets . . 536 376
------------ ------------
Total current assets . . . . . . . . . . . . 20,232 21,198
Property and equipment, net . . . . . . . . . . . 4,384 4,216
Other assets . . . . . . . . . . . . . . . . . . . 999 922
Intangible assets, net . . . . . . . . . . . . . . 26 25
------------ ------------
$ 25,641 $ 26,361
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable . . . . . . . . . . . . $ 6,115 $ 6,485
Cigarette and tobacco taxes payable. . . . . . 2,837 2,353
Notes payable . . . . . . . . . . . . . . . . 9,498 12,247
Other accrued liabilities. . . . . . . . . . . 2,611 2,055
------------ ------------
Total current liabilities. . . . . . . . . . 21,061 23,140
Long-term debt . . . . . . . . . . . . . . . . . . 406 386
Other accrued liabilities and deferred income taxes 62 62
------------ ------------
Total liabilities. . . . . . . . . . . . . . . 21,529 23,588
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock . . . . . . . . . . . . . . . . . . . 235 235
Additional paid-in capital . . . . . . . . . . . . 158 158
Retained earnings . . . . . . . . . . . . . . . . 3,719 2,380
------------ ------------
Total shareholders' equity . . . . . . . . . . 4,112 2,773
------------ ------------
$ 25,641 $ 26,361
------------ ------------
See Notes to Combined Financial Statements.
43
<PAGE>
THE SOSNICK COMPANIES
COMBINED STATEMENTS OF INCOME
(Unaudited)
(in thousands)
Three Months 13 Weeks
Ended Ended
December December
31, 1995 28, 1996
------------ ------------
Net sales . . . . . . . . . . . . . . . . . . . . $ 50,504 $ 44,048
Cost of goods sold . . . . . . . . . . . . . . . . 45,741 39,969
------------ ------------
Gross profit . . . . . . . . . . . . . . . . . 4,763 4,079
Operating and administrative expenses . . . . . . 5,950 5,605
------------ ------------
Operating loss . . . . . . . . . . . . . . . . (1,187) (1,526)
Other income . . . . . . . . . . . . . . . . . . . 227 191
------------ ------------
Loss before income taxes . . . . . . . . . . . (960) (1,335)
Income tax expense . . . . . . . . . . . . . . . . -- --
------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . $ (960) $ (1,335)
------------ ------------
See Notes to Combined Financial Statements.
44
<PAGE>
THE SOSNICK COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months 13 Weeks
Ended Ended
December December
31, 1995 28, 1996
------------ ------------
NET CASH USED BY OPERATING ACTIVITIES . . . . . . $ (3,711) $ (2,729)
------------ ------------
INVESTING ACTIVITIES
Purchase of improvements and equipment . . . . (21) --
------------ ------------
Net cash used in investing activities . . . . . . (21) --
------------ ------------
FINANCING ACTIVITIES
Net borrowings under notes payable . . . . . . 3,641 2,729
------------ ------------
Net cash used in financing activities . . . . . . 3,641 2,729
------------ ------------
Net change in cash . . . . . . . . . . . . . . (91) --
CASH, BEGINNING OF PERIOD . . . . . . . . . . . . 120 32
------------ ------------
CASH, END OF PERIOD . . . . . . . . . . . . . . . $ 29 $ 32
------------ ------------
See Notes to Combined Financial Statements.
45
<PAGE>
THE SOSNICK COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE THIRTEEN WEEKS ENDED DECEMBER 28, 1996
1. Basis of Presentation
Effective September 29, 1996, the shareholders of Melvin Sosnick Company
and Capital Cigar Company (collectively the "Sosnick Companies") commenced
plans to merge the two companies into one legal entity. As a result, the
interim financial statements were prepared on a combined basis, with
significant intercompany transactions eliminated. The results of operations
for the interim periods are not necessarily indicative of the operating
results for the full year.
The condensed balance sheet as of September 28, 1996, is prepared on a
combined basis (due to the merger previously described) and derived from the
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. The notes accompanying the financial
statements included in this Report on Form 8-K/A include accounting policies
and additional information pertinent to an understanding of both the December
28, 1996 balance sheet and the interim financial statements included herein.
Effective with the fiscal year ending September 28, 1996, the Sosnick
Companies elected to adopt a 52 - 53 week accounting period for financial and
tax reporting purposes. The fiscal year ended on the last Saturday of
September. As a result of the timing of this decision, the interim condensed
income statement for the period ended December 31, 1995 is a three-month period
as compared to the period ended December 28, 1996, which is a thirteen-week
period.
2. Subsequent Event
Effective February 3, 1997, the Sosnick Companies sold the majority of
its assets and business to Core-Mark International, Inc. Pursuant to the
sale, Core-Mark International, Inc. acquired all of the fully collectible
trade accounts receivable, all of the fully salable inventory, and certain
fixed assets (excluding real estate, leasehold improvements and capitalized
software). The purchase price for the acquisition of these assets was net
book value plus an additional amount.
46
<PAGE>
CORE-MARK INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
The following Unaudited Pro Forma Condensed Consolidated Financial
Statements of Core-Mark International, Inc. (the "Company") have been derived
from the historical financial statements of the Company and of the Sosnick
Companies included elsewhere herein and have been prepared by the application
of pro forma adjustments giving effect to the acquisition by the Company of
certain assets and the business of Sosnick as if such acquisition had
occurred (i) on December 31, 1996, in the case of the Unaudited Pro Forma
Condensed Consolidated Balance Sheet of the Company as of December 31, 1996
and (ii) on January 1, 1996, in the case of the Unaudited Pro Forma Condensed
Consolidated Statement of Income for the year ended December 31, 1996. The
Sosnick acquisition has been accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed will be
recorded at their estimated fair values. Although the Company has made
preliminary estimates of such amounts, these estimates are subject to further
refinement.
The Unaudited Pro Forma Condensed Consolidated Financial Statements
should be read in conjunction with the historical audited financial
statements and related notes thereto of the Company, as included in Form
10-K, and the Sosnick Companies, which are included herein. These Unaudited
Pro Forma Condensed Financial Statements do not purport to be indicative of
the actual financial position or the results of operations of the Company
that would have been achieved had the acquisition been completed on the date
or for the period indicated, nor are they indicative of future operating
results or financial position of the Company.
The Unaudited Pro Forma Condensed Consolidated Statement of Income does
not reflect the effect of certain anticipated expense reductions that
management believes may be realized following the Sosnick acquisition. These
expense reductions are expected to occur during the integration of the
acquired business into the Company's existing operations and facilities and
will result principally from reductions in the number of employees and
elimination of certain duplicative facility operating costs. Management
expects the integration process to be complete by the end of the fiscal year.
47
<PAGE>
<TABLE>
<CAPTION>
CORE-MARK INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(in thousands)
Historical Historical
Sosnick Core-Mark Pro Forma
Companies Int'l. Inc. Adjustments Total
------------ ------------ --------------- --------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . $ 32 $ 25,769 $ (32) (1) $ 25,769
Trade receivables, net . . . . . . . . . . . . . . 11,193 100,944 (677) (1) 111,460
Inventories, net . . . . . . . . . . . . . . . . . 9,597 99,342 -- 108,939
Prepaid expenses and other current assets . . . . 376 6,214 (376) (1) 6,214
---------- ------------ --------- ------------
Total current assets . . . . . . . . . . . . . . 21,198 232,269 (1,085) 252,382
Property and equipment, net . . . . . . . . . . . . . 4,216 22,528 (2,924) (1) 23,820
Other assets . . . . . . . . . . . . . . . . . . . . . 922 9,792 (697) (1) 10,017
Intangible assets, net . . . . . . . . . . . . . . . . 25 64,447 4,100 (1) 68,572
---------- ------------ --------- ------------
26,361 329,036 (606) 354,791
---------- ------------ --------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable . . . . . . . . . . . . . . 6,485 51,572 (6,485) (1) 51,572
Cigarette and tobacco taxes payable. . . . . . . . 2,353 43,912 (2,353) (1) 43,912
Notes payable . . . . . . . . . . . . . . . . . . 12,247 -- (12,247) (1) --
Other accrued liabilities. . . . . . . . . . . . . 2,055 38,504 3,057 (1) 43,616
---------- ------------ --------- ------------
Total current liabilities. . . . . . . . . . . . 23,140 133,988 (18,028) 139,100
Long-term debt . . . . . . . . . . . . . . . . . . . . 386 193,463 20,257 (1) 214,106
Other accrued liabilities and deferred income taxes. . 62 8,585 (62) (1) 8,585
---------- ------------ ---------- ------------
Total liabilities. . . . . . . . . . . . . . . . . 23,588 336,036 2,167 361,791
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock . . . . . . . . . . . . . . . . . . . . . 235 55 (235) (1) 55
Additional paid-in capital . . . . . . . . . . . . . . 158 26,121 (158) (1) 26,121
Retained earnings (accumulated deficit) . . . . . . . 2,380 (28,576) (2,380) (1) (28,576)
Cumulative currency translation adjustment . . . . . . -- (1,608) -- (1,608)
Additional minimum pension liability . . . . . . . . . -- (2,992) -- (2,992)
---------- ------------ --------- ------------
Total shareholders' equity (deficit) . . . . . . . 2,773 (7,000) (2,773) (7,000)
---------- ------------ --------- ------------
$ 26,361 $ 329,036 $ (606) $ 354,791
---------- ------------ --------- ------------
See Notes to Unaudited Condensed Consolidated Pro Forma Financial Statements.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
CORE-MARK INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(in thousands)
Historical Historical
Sosnick Core-Mark Pro Forma
Companies Int'l. Inc. Adjustments Total
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales...................................... $196,145 $2,175,367 $37,893 (1) $2,409,405
Cost of goods sold............................. 177,728 2,017,654 37,539 (1) 2,232,921
-------- ---------- --------- ----------
Gross profit.............................. 18,417 157,713 354 176,484
Operating and administrative expenses.......... 23,694 130,493 (5,184)(2)
159 (3)
(292)(4)
(1,451)(5) 147,419
-------- ---------- --------- ----------
Operating income (loss)................... (5,277) 27,220 7,122 29,065
Interest expense, net.......................... -- 9,916 1,507 (5) 11,423
Debt refinancing and issuance costs............ -- 1,319 -- 1,319
Other income................................... 839 -- (354)(1)
(485)(6) --
-------- ---------- --------- ----------
Income (loss) before income taxes......... (4,438) 15,985 4,776 16,323
Income tax expense ........................... 2 6,941 118 (7) 7,061
-------- ---------- --------- ----------
Income (loss) from continuing operations.. $ (4,440) $ 9,044 $ 4,658 $ 9,262
-------- ---------- --------- ----------
See Notes to Unaudited Condensed Consolidated Pro Forma Financial Statements.
</TABLE>
49
<PAGE>
CORE-MARK INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
(in thousands)
PRO FORMA BALANCE SHEET ADJUSTMENT
1. The purchase price of the Sosnick acquisition would have been allocated
as follows if the transaction had occurred on December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C>
Total purchase price to be allocated $24,665
Historical book value of the Sosnick Companies 2,773
Adjusted for assets not acquired, net of liabilities not assumed:
Cash (32)
Accounts receivable, other than trade accounts (677)
Prepaid expenses (376)
Net property and equipment, other than vehicles and warehouse equipment (2,418)
Intangible and other assets (947)
Notes payable 12,247
All other current liabilities, net of $247 assumed 10,647
Long-term debt and other long-term liabilities 448
------
Net assets acquired 21,665
Excess of purchase price over book value of net assets acquired, allocated as follows:
Goodwill (intangible assets) 4,125
Covenant not to compete (other assets) 225
Write-down of net property and equipment acquired to fair value (506)
Liabilities incurred directly related to acquisition (844)
-----
Total excess purchase price $ 3,000
-------
-------
</TABLE>
The acquisition was primarily financed under the Company's existing
revolving credit facility. The total amount of borrowings would have been
$20,643, with the remaining $4,022 due and payable in installments during
the first ninety days subsequent to closing in varying amounts specified
pursuant to the purchase agreement.
The Company may be obligated to make certain payments to Sosnick's
shareholders, based on net sales associated with former customers of
Sosnick. Such payments, when determinable, will be allocated to goodwill.
The Company would not have been required to make any such payments on a pro
forma basis for the year ended December 31, 1996.
50
<PAGE>
PRO FORMA INCOME STATEMENT ADJUSTMENTS
<TABLE>
<CAPTION>
The Sosnick Companies' most recent fiscal years ended September 28, 1996. Therefore, for purposes of the pro forma income
statement, the Sosnick income statement was brought up to within 93 days of the Company's fiscal year by adding the December 28,
1996 interim period to the fiscal year-end and subtracting the December 31, 1995 interim period.
<S> <C>
1. The pro forma adjustment to sales and cost of sales reflect the following:
To conform Sosnick's historical financial statements to the Company's with respect to
the classification of cigarette excise taxes (increase to sales)........................ $37,893
To conform Sosnick's historical financial statements to the Company's with respect to
the classification of rebate income earned on products sold (reclassify from other
income to cost of goods sold)........................................................... (354)
----------
Total increase to cost of sales......................................................... $37,539
----------
----------
2. The pro forma adjustment to operating expenses reflects the elimination of expense included in
historical statements of Sosnick related to the following:
Compensation expense of former Sosnick employees not hired by the Company as of
the acquisition date..................................................................... 3,769
Facilities expense (rent, telephone, depreciation and others) associated with locations owned
and leased by Sosnick and not acquired or assumed by the Company in conjunction with the
acquisition.............................................................................. 1,128
Insurance expense associated with Sosnick insurance policies canceled or not assumed by the
Company in conjunction with the acquisition, net of incremental expense to increase
coverage under the Company's policies.................................................... 287
----------
Total......................................................................................... $ 5,184
----------
----------
3. The pro forma adjustment represents the amortization of goodwill and the non-compete agreement
associated with the acquisition, over lives of 40 and 4 years, respectively.
4. The pro forma adjustment represents a net reduction of depreciation expense as follows:
Historical Sosnick depreciation on assets not acquired by the Company........................ $ 528
Depreciation expense on property and equipment acquired, based on fair value after
allocation of purchase price............................................................ (236)
----------
Net reduction................................................................................. $ 292
----------
----------
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
5. The pro forma adjustment represents a net increase in interest expense as follows:
Interest expense for the increase in the Company's revolving credit agreement to finance the
acquisition............................................................................ $ 1,507
Elimination of interest expense included in operating and administrative expenses in
the historical statements of Sosnick related to the historical Sosnick debt that was not
assumed in the acquisition............................................................... (1,451)
6. The pro forma adjustment represents elimination of other income included in the historical
statements of Sosnick, comprised principally of rental income on Sosnick properties not acquired
by the Company in conjunction with the acquisition.
7. The pro forma adjustment represents the tax effect, at the Company's statutory rate, on the
incremental income before taxes (calculated by comparing the pro forma income before tax to the
Company's historical income before tax).
</TABLE>
52
<PAGE>
Seiler & Company, LLP
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Core-Mark International, Inc.
We consent to the inclusion of our unqualified report dated December 13,
1996, with respect to the balance sheet of Melvin Sosnick Company as of
September 28, 1996 and the related statement of earnings, stockholders'
equity, and cash flows, which report appears in the Form 8-K of Core-Mark
International, Inc. dated April 19, 1997.
Our report dated December 13, 1996, contains an explanatory paragraph
that states that the Company has suffered recurring losses from operations
and has a net capital deficiency, which raises substantial doubt about its
ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of that
uncertainty.
/s/ Seiler & Company, LLP
San Francisco, California
April 17, 1997
53
<PAGE>
Seiler & Company, LLP
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Core-Mark International, Inc.
We consent to the inclusion of our unqualified report dated December 26,
1996, with respect to the balance sheet of Capital Cigar Company as of
September 28, 1996 and the related statement of earnings, stockholders'
equity, and cash flows, which report appears in the Form 8-K of Core-Mark
International, Inc. dated April 19, 1997.
Our report dated December 26, 1996, contains an explanatory paragraph
that states that the Company has suffered recurring losses from operations,
which raises substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that
might result from the outcome of that uncertainty.
/s/ Seiler & Company, LLP
San Francisco, California
April 17, 1997
54