<PAGE>
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, 1996
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: (415) 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, 1997, 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, 1997 was 5,500,000 shares.
<PAGE>
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 (the "Company") strategy. Such forward-looking statements
are based upon a number of assumptions concerning future conditions that may
ultimately prove to be inaccurate. The ability of the Company to achieve the
results anticipated in such statements is subject to various risks and
uncertainties and other factors which may cause the actual results, level of
activity, performance or achievements of the Company or the industry in which it
operates to be materially different from any future results, level of activity,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the general state of the
economy and business conditions in the United States and Canada; adverse changes
in consumer spending; the ability of the Company to implement its business
strategy, including the ability to integrate recently acquired businesses into
the Company; the ability of the Company to obtain financing; competition; the
level of retail sales of cigarettes and other tobacco products; possible effects
of legal proceedings against manufacturers and sellers of tobacco products and
the effect of government regulations affecting such products. As a result of
the foregoing and other factors affecting the Company's business beyond the
Company's control, no assurance can be given as to future results, levels of
activity, performance or achievements and neither the Company nor any other
person assumes responsibility for the accuracy and completeness of these
statements.
PART I
ITEM 1. BUSINESS
GENERAL
The Company, with annual net sales of over $2.0 billion, 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 1989, the Company was acquired by a financial buyer. In 1994, the Company
repurchased such group's common stock ownership in the Company, and 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
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The wholesale distribution industry is highly fragmented and has
historically 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 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 replacing local distributors and jobbers in order to increase sales
of health and beauty care products and general merchandise products, all of
which carry higher gross margins than cigarettes. As part of this effort, the
Company provides compensation incentives to its sales force and a number of
value-added services and marketing programs to its customers. These programs
include: (i) Convenience 2000-Registered Trademark- (which offers enhanced
purchasing power and promotions to small, independent convenience stores); (ii)
Smart Sets (which helps ensure that retailers display the right product in the
right place); and (iii) Profit Builder and Promo Power (regular Company
publications which describe new products and manufacturer promotions).
ADD NEW CUSTOMER LOCATIONS IN EXISTING MARKETS. The Company is also seeking
to leverage its existing distribution network by securing additional customers
on existing routes. The Company believes it has many opportunities to add
additional customers at low marginal distribution costs. The Company is also
beginning 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 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 revenues can be integrated into the Company's operations without
significant additions to fixed costs.
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 69% of the Company's total net sales in 1996.
2
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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 and Doral; and deep discount
labels such as the Company's private label brand, Best Buy-Registered
Trademark-, as well as Basic, Best Value, Monarch and GPC.
FOOD AND NON-FOOD PRODUCTS
The Company offers its customers a wide variety of food and non-food
products (over 32,000 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 such as
Del Monte, Carnation, Kellogg's and Purina ranging from canned vegetables,
soups, cereals, baby food, frozen foods, soaps and paper products to pet foods.
The Company offers a variety of non-alcoholic beverages, including juices 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. Recently, the Company
has begun to expand its distribution to hotel gift shops, military bases,
correctional facilities, college bookstores, movie theaters and video rental
stores. In 1996, the Company's largest customer accounted for 3.6% of net sales,
and the Company's ten largest customers accounted for approximately 25% 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 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 customized retail
pricing, unique to an individual store's needs, 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.
SUPPLIERS AND MANUFACTURERS
The Company purchases products for resale to its customers from over 1,900
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, in 1996, approximately 27%, 14%, 14%
and 9% of the Company's net sales 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.
3
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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. In addition, because of the size of its sales force, its
technological capability and distribution expertise, the Company provides a key
channel of distribution that many manufacturers could not otherwise serve
economically.
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.
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 a new division, Artic Cascade, 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 facilities, one of
which services health and beauty care and general merchandise products (AMI) and
the other of which services frozen food (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 years or less. The Company employs a state-of-the-art, computerized
truck routing system generated by software called "Roadshow" 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, H.T. Hackney in the
southeast, and EBY Brown 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.
4
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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,
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 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, 1996, the Company had 2,113 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. In
addition, the Company is currently negotiating with the bargaining unit of
employees at its Victoria, British Columbia facility. 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, 1998. 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
satisfactory.
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 13 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.
The Company's leases expire on various dates between 1997 and 2005, 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 $5.6 million in 1995
and $6.1 million in 1996. The Company's distribution facilities range from
19,000 to 200,000 square feet and account for approximately 1.5 million square
feet in aggregate. Management believes that the Company's current utilization of
warehouse facilities is approximately 70% in the aggregate.
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ITEM 3. LEGAL PROCEEDINGS
REGULATORY MATTERS
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 affect on its business and
financial condition.
LEGAL MATTERS
In May 1996, the Court of Appeals for the Fifth Circuit decertified a
federal class action purportedly brought on behalf of all cigarette smokers in
the United States. Following the decertification, lawyers for the class brought
state class action lawsuits in a number of states, with the objective of filing
such lawsuits in all fifty states, the District of Columbia and Puerto Rico.
Several of these state lawsuits name cigarette distributors such as the Company
as defendants.
In October of 1996, a subsidiary of the Company was named as a defendant
in a class action lawsuit filed in State Court in New Mexico. The other
defendants include the principal U.S. tobacco manufacturers as well as other
distributors. The case is brought on behalf of a putative class of smokers who
reside in New Mexico, each of whom is allegedly nicotine dependent. The suit
seeks, on behalf of the class, compensatory damages, punitive damages and
equitable relief, including medical monitoring of the class members.
In October 1996, the Company was served with a summons and complaint (which
was subsequently amended) in an action brought by the County of Los Angeles and
by a member of the Board of Supervisors of the County, as a "private attorney-
general" on behalf of the general public, against major tobacco manufacturers,
the Company and other distributors of tobacco products. Pursuant to a successful
motion by the defense for change of venue, the case was transferred to the
Superior Court for the County of San Diego. The complaint seeks, inter alia,
damages and restitution for monies expended by the County for the health care of
smokers, as well as disgorgement of all revenues and profits allegedly earned by
the defendants in violation of the California Business and Professions Code.
In December 1996, the Company was named as a defendant in a "private
attorney-general" lawsuit filed by an individual plaintiff on behalf of the
general public in the Superior Court for the County of San Diego. The other
defendants include the principal U.S. tobacco manufacturers as well as other
distributors. The complaint seeks, inter alia, damages and restitution for
monies expended by the Company for the health care of smokers, as well as
disgorgement of all revenues and profits allegedly earned in violation of the
California Business and Professions Code.
In February and March 1997, a subsidiary of the Company was served with two
complaints filed by individual plaintiffs in the District Court of Nueces
County, Texas. The other defendants in the lawsuits include certain U.S. tobacco
manufacturers. The complaint seeks compensatory and punitive damages for
injuries allegedly caused by the use of tobacco products.
The Company does not believe that these actions will have a material
adverse effect on the Company's financial condition. The Company has been or
expects to be 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.
6
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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, 1996 have been
derived from the Company's audited consolidated financial statements which have
been audited by KPMG Peat Marwick LLP, independent accountants. Such financial
statements for the three year period ended December 31, 1996 are included herein
together with the report of such accountants thereon. 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.
7
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CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
SELECTED HISTORICAL
CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales (a)................. $1,784,852 $1,868,932 $1,855,356 $2,047,187 $2,175,367
Costs of goods sold (b)....... 1,659,293 1,704,982 1,719,999 1,901,604 2,017,654
---------- ---------- ---------- ---------- ----------
Gross profit (b).............. 125,559 163,950 135,357 145,583 157,713
Operating and administrative
expenses..................... 115,243 117,411 116,080 125,245 130,493
---------- ---------- ---------- ---------- ----------
Operating income (b).......... 10,316 46,539 19,277 20,338 27,220
Interest expense, net......... 5,983 4,887 5,773 6,987 9,916
Debt refinancing costs (c).... -- -- 1,600 1,065 1,319
---------- ---------- ---------- ---------- ----------
Income before income taxes,
cumulative effects of changes
in accounting principles and
extraordinary item........... 4,333 41,652 11,904 12,286 15,985
Income tax expense............ 700 2,472 2,816 5,563 6,941
---------- ---------- ---------- ---------- ----------
Income before cumulative
effects of changes in
accounting principles
and extraordinary item....... 3,633 39,180 9,088 6,723 9,044
Cumulative effect of changes in
accounting principles for:
Income taxes............... -- 492 -- -- --
Postretirement benefits
other than pensions....... -- (988) -- -- --
---------- ---------- ---------- ---------- ----------
Income before extraordinary
item......................... 3,633 38,684 9,088 6,723 9,044
Extraordinary item, net of
tax.......................... -- -- -- -- (1,830)
---------- ---------- ---------- ---------- ----------
Net income (b)................ $ 3,633 $ 38,684 $ 9,088 $ 6,723 $ 7,214
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
OTHER DATA:
EBITDAL (d)................... $ 21,848 $ 29,309 $ 24,271 $ 29,696 $ 35,169
Cash provided by (used in):
Operating activities......... 12,425 21,176 54,708 12,529 26,621
Investing activities......... (5,241) (6,806) (5,974) (16,896) (6,079)
Financing activities......... (2,229) (11,406) (43,586) 11,397 (18,972)
Depreciation and
amortization (e)............. 5,805 5,737 5,541 5,943 6,573
Capital expenditures.......... 4,295 5,501 5,376 7,286 6,079
<CAPTION>
AS OF DECEMBER 31,
(IN THOUSANDS)
----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.................. 318,127 329,855 293,743 324,536 329,036
Total debt, including current
maturities................... 142,432 127,053 84,627 101,598 193,463
Mandatorily redeemable
preferred stock (f).......... 29,146 34,890 41,767 -- --
</TABLE>
See Notes to Selected Historical Consolidated Financial and Other Data.
8
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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 compared to the year ended December 31, 1994.
(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 the year ended December 31, 1993, the Company's U.S. cigarette
inventory quantities declined and the wholesale cost of U.S. premium
cigarettes significantly declined. These factors resulted in a substantially
lower inventory cost being charged to cost of goods sold under the LIFO
method of valuation compared to the FIFO method in an amount of $23.0
million, materially impacting the results of operations during such fiscal
year. 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) Debt refinancing costs include all costs associated with restructuring
and refinancing debt and amortization of debt issuance costs.
(d) EBITDAL represents operating income plus depreciation, amortization and
LIFO expense, and minus LIFO income (each 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.
(e) Depreciation and amortization includes depreciation on property and
equipment, amortization of goodwill and other non-cash charges, and excludes
amortization of debt refinancing costs.
(f) 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 management. At that time, the carrying value of the
Preferred Stock was reclassified into additional paid-in capital.
9
<PAGE>
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, 1996, approximately 69%, 21% and 10%
of the Company's net sales were derived from cigarettes, food products and
non-food products, respectively.
IMPACT OF REGULATION OF TOBACCO ON THE COMPANY
The tobacco industry is subject to significant regulatory restrictions. In
recent years, these regulations have generally become more restrictive, and the
aggregate unit volume of cigarettes sold in the U.S. and Canada has declined and
is expected to continue to decline. It is not possible for the Company to
predict or quantify the impact that current and future regulations affecting
cigarettes and other tobacco products will have on its business in the future.
During the most recent five year period, the Company's sales of cigarettes were:
For the year ended Cigarettes (in thousands)
December 31, Net Sales Units
------------ ---------- ------
1992 $1,301,296 73,427
1993 1,344,707 76,740
1994 1,299,687 80,703
1995 1,446,697 88,933
1996 1,505,744 90,897
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 mitigate the impact of possible future declines in unit sales and
profitability of its cigarette 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 line, the LIFO
methodology generally results in the impact of inflation on year end inventories
being charged as additional expenses to cost of goods sold 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. During the years
ended December 31, 1995 and 1996, the impact of using the LIFO method increased
the cost of goods sold ("LIFO expense") by $3.4 million and $1.4 million,
respectively. In 1995, cigarette and candy manufacturers increased prices
contributing to the LIFO expense of $3.4 million during 1995. In 1996 LIFO
expense of $1.4 million is primarily the result of increases in cigarette
prices.
Conversely, during periods of price deflation, the LIFO methodology
generally results in lower inventory costs being charged to cost of goods sold
while higher costs are retained in inventories ("LIFO income"). A reduction in
inventory units can also contribute to a reduction of current cost of goods sold
and an increase in inventory costs using the LIFO method. In 1994 there were no
cigarette price increases or decreases; however, there were net changes in units
which contributed to the LIFO income of $0.5 million for the year ended December
31, 1994.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating results as a percentage of
net sales, for the periods indicated:
YEAR ENDED
DECEMBER 31,
---------------------------
1994 1995 1996
------ ------ ------
Net Sales....................... 100.0% 100.0% 100.0%
Cost of goods sold (a).......... 92.7 92.9 92.7
----- ----- -----
Gross profit.................... 7.3 7.1 7.3
Operating and administrative
expenses....................... 6.3 6.1 6.0
----- ----- -----
Operating income................ 1.0% 1.0% 1.3%
----- ----- -----
----- ----- -----
(a) LIFO (income) expense is included in cost of goods sold.
The following table sets forth gross profit and operating income as a
percentage of net sales, after adjusting for LIFO expense, for the periods
indicated:
YEAR ENDED
DECEMBER 31,
---------------------------
1994 1995 1996
------ ------ ------
Gross profit.................... 7.30% 7.11% 7.25%
LIFO (income) expense........... (0.03) 0.17 0.06
----- ----- -----
Adjusted gross profit 7.27 7.28 7.31
Operating and administrative
expenses....................... 6.26 6.12 6.00
----- ----- -----
Adjusted operating income....... 1.01% 1.16% 1.31%
----- ----- -----
----- ----- -----
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales for 1996 were $2,175.4 million, an increase of $128.2
million or 6.3% compared to 1995. The increase was the result of growth in all
categories of the Company's operations.
Cigarette net sales for 1996 were $1,505.8 million, an increase of $59.1
million or 4.1% compared to 1995. The Company's total cigarette unit volume in
1996 was 90.9 million cartons, an increase of 2.0 million cartons or 2.2%
compared to 1995. This increase was comprised of unit volume growth in both the
U.S. and Canada. During 1996, prices of U.S. and Canadian cigarettes increased
slightly, contributing to an increase in cigarette net sales.
Net sales of food and non-food products in 1996 were $669.6 million, an
increase of $69.1 million or 11.5% compared to 1995. This increase was due to
the Company's focus on increasing food and non-food product sales. The increase
primarily occurred in candy sales, which increased $19.8 million or 9.7%, cigars
and other tobacco product sales, which increased $13.6 million or 12.3%, and
general merchandise sales, which increased $11.8 million or 27.3%.
GROSS PROFIT. Gross profit for 1996 was $157.7 million, an increase of
$12.1 million or 8.3%, compared to 1995. The improvement was primarily due to
increased gross profits from food and non-food product categories sales
growth. For 1996, the Company recognized LIFO expense of $1.4 million
compared to LIFO expense of $3.4 million in 1995. Also, in 1996, gross profit
margins were impacted by higher profits from forward buying of cigarettes and
candy in advance of manufacturers' price increases. The following table
illustrates the impact of the LIFO adjustment on the Company's gross profit
margin:
11
<PAGE>
1995 1996
----- ----
Reported gross profit margin.......... 7.11% 7.25%
Impact of LIFO expense................ 0.17 0.06
----- -----
Adjusted gross profit margin.......... 7.28% 7.31%
----- -----
----- -----
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses for 1996 were $130.5 million, an increase of $5.2 million or 4.2%
compared to 1995. However, such expenses declined as a percentage of net sales
from 6.1% to 6.0% compared to 1995, as a result of the Company's continued
aggressive efforts to control costs.
OPERATING INCOME. As a result of the above, operating income for 1996 was
$27.2 million, an increase of $6.9 million or 33.8% as compared to 1995. As a
percentage of sales, operating income for 1996 was 1.3%, as compared to 1.0% in
1995.
NET INTEREST EXPENSE. Net interest expense for 1996 was $9.9 million, an
increase of $2.9 million or 41.9% compared to 1995. The net increase resulted
from the additional debt incurred in connection with the Recapitalization
described below.
DEBT REFINANCING COSTS. The Company successfully completed a refinancing
and note offering (see "Recapitalization and Note Offering" below) in the third
quarter of 1996. The costs directly related to such transactions are being
amortized over the terms of these transactions. Debt refinancing costs for 1996
were $1.3 million, compared to $1.1 million in 1995.
EXTRAORDINARY ITEM. During the third quarter of 1996, the Company fully
repaid its outstanding debt under a previous credit facility (see
"Recapitalization and Note Offering" below). 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.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET SALES. Net sales for 1995 were $2,047.2 million, an increase of $191.8
million or 10.3% compared to 1994. The increase was the result of growth in all
categories of the Company's operations. Net sales increased by approximately $62
million compared to 1994 due to the acquisition in the second quarter of 1995 of
two businesses (see "Liquidity and Capital Resources" below).
Cigarette net sales for 1995 were $1,446.7 million, an increase of $147.0
million or 11.3% compared to 1994 net sales of $1,299.7 million. Cigarette net
sales for 1995 in the U.S. increased in part due to the second quarter 1995
acquisitions which contributed approximately $42 million in net sales or
approximately 3.3 million cartons. The Company's total cigarette unit volume in
1995 was 88.9 million cartons, an increase of 8.2 million cartons or 10.2%
compared to 1994. This increase was comprised of unit volume growth in both the
U.S. and Canada. During 1995, prices of U.S. and Canadian cigarettes increased
slightly, contributing to an increase in cigarette net sales.
Net sales of food and non-food products in 1995 were $600.5 million, an
increase of $44.8 million or 8.1% compared to 1994 net sales of $555.7 million.
Food and non-food net sales in the U.S. increased in part due to the second
quarter 1995 acquisitions which contributed approximately $20 million in net
sales. The principal components of the total increase in 1995 were candy sales,
which increased $13.3 million or 7.0% and beverage products which increased $7.2
million or 16.7%.
GROSS PROFIT. Gross profit for 1995 was $145.6 million, an increase of
$10.2 million or 7.6%, compared to 1994. The improvement was primarily due to
increased gross profits from food and non-food product categories sales growth.
For 1995, the Company recognized LIFO expense of $3.4 million compared to LIFO
income of $0.5 million in 1994, and as a result, the adjusted gross profit
margin in 1995 remained constant compared to 1994. The following table
illustrates the impact of the LIFO adjustment on the Company's gross profit
margin:
12
<PAGE>
1994 1995
----- -----
Reported gross profit margin............... 7.30% 7.11%
Impact of LIFO (income) expense............ (0.03) 0.17
----- -----
Adjusted gross profit margin............... 7.27% 7.28%
----- -----
----- -----
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses for 1995 were $125.2 million, an increase of $9.2 million or 7.9%
compared to 1994. Such expenses declined as a percentage of net sales from 6.3%
to 6.1%. The decrease as a percentage of net sales was primarily due to a
decrease in warehouse and delivery expenses as a percentage of net sales
compared to 1994 which was the result of the Company's investment in
productivity enhancements.
OPERATING INCOME. As a result of the above, operating income for 1995 was
$20.3 million, an increase of $1.1 million or 5.5% as compared to 1994. As a
percentage of net sales, operating income for 1995 was 1.0%, the same as in
1994.
NET INTEREST EXPENSE. Net interest expense for 1995 was $7.0 million, an
increase of $1.2 million or 21.0% compared to 1994. The net increase resulted
from a $0.8 million decrease in cash interest expense offset by a $2.0 million
non-cash credit. The decrease in cash interest was due to a reduction in average
borrowings due to lower working capital requirements, offset by higher average
interest rates in 1995. The non-cash credit of $2.0 million in 1994 related to
the 1991 restructuring of the Company's credit facility. As a result of such
restructuring, $50.0 million of senior debt was converted into preferred stock
and warrants to purchase common stock of the Company. The difference between the
face value of the debt converted and the fair value assigned to the preferred
stock and warrants was amortized as a reduction of interest expense on an
effective yield basis, and amounted to $2.0 million for 1994.
DEBT REFINANCING COSTS. The Company successfully completed a refinancing in
March 1995. The costs directly related to such refinancing were being amortized
over the term of such debt facility. Debt refinancing costs for 1995 were $1.1
million, compared to $1.6 million in 1994.
RECAPITALIZATION AND NOTE OFFERING
On August 7, 1996, the Company completed a recapitalization (the
"Recapitalization") which resulted in the purchase of newly issued common stock
of the Company by Jupiter Partners L.P. ("Jupiter") for $41.3 million in cash,
the redemption of all of the common stock held by three financial institutions
and a portion of the common stock held by six members of senior management
("Senior Management") for $135.0 million in cash and $6.3 million initial value
of subordinated notes due 2004. Upon completion of the Recapitalization, Jupiter
and Senior Management owned 75% and 25%, respectively, of the outstanding common
stock of the Company. Jupiter also purchased from the Company an $18.8 million
subordinated note due 2004. Both of these subordinated notes were repaid prior
to December 31, 1996 as discussed below. As a result of the Recapitalization,
the Company has a total shareholders' deficit at December 31, 1996.
In connection with the Recapitalization, the Company entered into a credit
facility with a group of banks, which 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 is no longer
available for reborrowing, and (ii) a revolving credit facility (the "Revolving
Credit Facility"), under which borrowings up to $175.0 million are available
(subject to compliance with a borrowing base) for working capital and general
corporate purposes.
Simultaneously with the closing of the stock purchase and the redemptions,
the Company fully repaid the outstanding debt under a previous credit facility.
The early extinguishment of the previously existing debt resulted in a one-time
extraordinary charge to income to write-off unamortized debt refinancing costs
of $1.8 million, which is net of a $1.2 million income tax benefit.
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 the issuance of the Notes were principally used to repay in full the
subordinated notes and Term Loan discussed above. Interest on the Notes is
payable semi-annually on March 15 and September 15 of each year commencing on
March 15, 1997.
LIQUIDITY AND CAPITAL RESOURCES
On August 7, 1996, in connection with the Recapitalization, the Company
replaced its existing credit facility with the Revolving Credit Facility
described above. As of December 31, 1996, the amount outstanding under the
Revolving Credit Facility was $118.5 million, and an additional $43.0 million
was available to be drawn, based upon the borrowing base as defined in the
credit agreement.
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 the Revolving Credit Facility and the Notes. The
Company has no mandatory payments of principal on the Notes scheduled prior to
their final maturity and has no mandatory payments of principal scheduled under
the Revolving Credit Facility, which matures June 30, 2001. The Company has
historically financed its operations through internally generated funds and
borrowings under its credit facilities.
The Company's debt obligations totaled $193.5 million at December 31, 1996,
an increase of $91.9 million from $101.6 million at December 31, 1995. The net
increase in outstanding debt is due primarily to the Recapitalization, offset
slightly by a reduction in working capital funding requirements resulting
principally from decreases in accounts receivable and increases in
13
<PAGE>
trade accounts and cigarette taxes payable. 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 Revolving Credit Facility. In 1996, net cash
provided by operating activities was $26.6 million as compared to $12.5
million in 1995. This improvement resulted principally from a $6.9 million
increase in operating income in 1996 as compared to 1995 and from changes in
net working capital. At year end, the Company typically carries higher
inventories, which are then liquidated in future periods. Therefore, net cash
provided by operating activities is typically lower at the end of any fiscal
year when compared to interim periods.
During the fiscal year ended December 31, 1995, net cash provided by
operating activities was $12.5 million compared to $54.7 million in 1994. Net
cash provided by operating activities in 1994 was positively impacted by
management's decision to reduce inventories, principally cigarette inventories,
by $24.2 million. The Company also benefited in 1994 from improved management of
trade accounts receivable, reducing balances in 1994 by $6.7 million or 7.4% and
a large increase in trade payables at December 31, 1994, which was primarily a
timing benefit.
The Company made capital expenditures of $6.1 million in 1996. In 1997,
the Company estimates it will spend approximately $9 to $11 million for capital
requirements, principally consisting of warehouse facilities and equipment.
In the second quarter of 1995, the Company acquired two wholesale
distributors within its existing and contiguous markets: (i) two divisions of
Flaks, Inc., with operations in Albuquerque, New Mexico and Denver, Colorado;
and (ii) Humboldt Distributors, Inc., with operations in Northern California.
These acquisitions were structured as asset purchases of inventory and accounts
receivable. The aggregate consideration for these acquisitions was $9.6 million.
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"), 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 assets acquired included trade accounts receivable, inventories and
warehouse equipment that the Company intends to continue to use in its business.
The aggregate purchase price for the assets and business acquired was
approximately $21.9 million, which reflected principally the 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 Revolving Credit Facility.
The Company is merging 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. As a result, the Company expects to incur certain one-time facility
integration costs that will impact the Company's operating expenses and capital
spending during fiscal 1997.
IMPACT OF TOBACCO TAXES
State and 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 1996, such taxes on cigarettes represented
approximately 26% of cigarette net sales in the U.S. and 48% in Canada.
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. Consistent
with industry practices, the Company has secured a bond to guarantee its tax
obligations to those states requiring such a surety (a majority of states in the
Company's operating areas).
CURRENCY FLUCTUATIONS
As compared to 1994 and 1995, in 1996, the Canadian dollar strengthened
slightly against the U.S. dollar, increasing the U.S. dollar value of Canadian
revenues in the Company's consolidated financial statements. On average, the
Canadian dollar weakened approximately 5% in 1994, less than 1% in 1995, and
strengthened less than 1% in 1996. The change in the U.S./Canadian exchange rate
had no impact on the overall financial results of the Canadian operations as
virtually all revenues and expenses are Canadian dollar based.
14
<PAGE>
INFLATION
Following increases or decreases in manufacturers' prices with respect to
any of the Company's products, the Company generally adjusts its selling prices,
in order to maintain its gross profit, and therefore, inflation and deflation
generally do not have a material impact on the Company's gross profit. During
the past several years, low levels of overall inflation and resulting low
interest rates have benefited the Company's results of operations because of the
Company's high degree of leverage. If interest rates increase (as a result of
increased inflation or otherwise), the Company could be adversely affected.
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards No. 121
("SFAS No. 121"), "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF", effective January 1, 1996. SFAS No. 121
provides specific guidance regarding when impairment of long-lived assets such
as property and equipment and certain intangibles, including goodwill, should be
recognized and how impairment losses of such assets should be measured. The
effect of the adoption of SFAS No. 121 on the Company's financial results was
immaterial.
In October 1995, Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123"), "ACCOUNTING FOR STOCK-BASED COMPENSATION", was issued. The standard
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options and other equity instruments to employees
based on fair value accounting rules. The standard is effective for fiscal years
beginning after December 15, 1995. The Company adopted a stock option plan in
conjunction with the Recapitalization. As of December 31, 1996, no options have
been granted under this plan and, therefore, adoption of SFAS No. 123 in 1996 is
not required. The Company plans to grant options under this plan in 1997 but has
not yet determined if it will adopt the accounting provisions of SFAS No. 123 or
only the disclosure provision. The Company does not believe that adoption of
SFAS No. 123 will have a significant effect on its results of operations or
financial condition.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report.................................. 17
Consolidated Balance Sheets as of December 31, 1995 and 1996.. 18
Consolidated Statements of Income for the years ended
December 31, 1994, 1995 and 1996.............................. 19
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1994, 1995 and 1996.................. 20
Consolidated Statements of Cash Flows for the years
ended December 31, 1994, 1995 and 1996........................ 21
Notes to Consolidated Financial Statements.................... 22
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
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, 1996 and
1995, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/S/ KPMG Peat Marwick LLP
SAN FRANCISCO, CALIFORNIA
FEBRUARY 21, 1997
17
<PAGE>
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(IN THOUSANDS OF DOLLARS)
1995 1996
--------- --------
ASSETS
- ------
Current assets:
Cash........................................ $ 24,447 $ 25,769
Receivables:
Trade accounts, less allowance for
doubtful accounts of $3,600 and $3,881,
respectively............................ 91,858 88,715
Other..................................... 13,332 12,229
Inventories, net of LIFO allowance of
$11,076 and $12,452, respectively.......... 96,703 99,342
Prepaid expenses and other.................. 4,542 6,214
-------- --------
Total current assets...................... 230,882 232,269
Property and equipment:
Equipment................................... 33,000 38,587
Leasehold improvements...................... 7,746 7,947
-------- --------
40,746 46,534
Less accumulated depreciation and
amortization............................... (20,217) (24,006)
-------- --------
Net property and equipment................ 20,529 22,528
Other assets.................................. 6,700 9,792
Goodwill, net of accumulated amortization of
$13,242 and $15,220, respectively............ 66,425 64,447
-------- --------
$324,536 $329,036
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Trade accounts payable...................... $ 47,205 $ 51,572
Cigarette and tobacco taxes payable......... 40,613 43,912
Income taxes payable........................ 3,057 454
Deferred income taxes....................... 7,274 7,397
Other accrued liabilities................... 28,503 30,653
-------- --------
Total current liabilities................. 126,652 133,988
Long-term debt................................ 101,598 193,463
Other accrued liabilities and deferred income
taxes......................................... 8,617 8,585
-------- --------
Total liabilities.......................... 236,867 336,036
Commitments and contingencies:
Shareholders' equity (deficit):
Common stock; $.01 par value; 3,000 shares
authorized; 100 shares issued and
outstanding in 1995......................... -- --
Common stock; $.01 par value; 10,000,000
shares authorized; 5,500,000 shares issued
and outstanding in 1996..................... -- 55
Additional paid-in capital................... 128,351 26,121
Accumulated deficit.......................... (35,790) (28,576)
Cumulative currency translation adjustments.. (1,313) (1,608)
Additional minimum pension liability......... (3,579) (2,992)
-------- --------
Total shareholders' equity (deficit)....... 87,669 (7,000)
-------- --------
$324,536 $329,036
-------- --------
-------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
18
<PAGE>
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS OF DOLLARS)
1994 1995 1996
---------- ---------- ----------
Net sales................................. $1,855,356 $2,047,187 $2,175,367
Cost of goods sold........................ 1,719,999 1,901,604 2,017,654
---------- ---------- ----------
Gross profit.......................... 135,357 145,583 157,713
Operating and administrative expenses..... 116,080 125,245 130,493
---------- ---------- ----------
Operating income...................... 19,277 20,338 27,220
Interest expense, net..................... 5,773 6,987 9,916
Debt refinancing costs.................... 1,600 1,065 1,319
---------- ---------- ----------
Income before income taxes and
extraordinary item................... 11,904 12,286 15,985
Income tax expense........................ 2,816 5,563 6,941
---------- ---------- ----------
Income before extraordinary item...... 9,088 6,723 9,044
Extraordinary item - loss on early
extinguishment of debt, net of income
tax benefit of $1,220.................... -- -- (1,830)
---------- ---------- ----------
Net income $ 9,088 $ 6,723 $ 7,214
---------- ---------- ----------
---------- ---------- ----------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
19
<PAGE>
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE ADDITIONAL TOTAL
COMMON STOCK ADDITIONAL CURRENCY MINIMUM SHAREHOLDERS'
------------------------- PAID-IN ACCUMULATED TRANSLATION PENSION EQUITY
SHARES OUTSTANDING AMOUNT CAPITAL DEFICIT ADJUSTMENTS LIABILITY (DEFICIT)
------------------ ------ ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993.................... 670,000 $ 1 $ 97,917 $ (51,601) $ (1,260) $ (3,920) $ 41,137
Net income.................................... -- -- -- 9,088 -- -- 9,088
Additional minimum pension liability.......... -- -- -- -- -- 154 154
Capital contribution for compensation......... -- -- 38 -- -- -- 38
Foreign currency translation adjustment....... -- -- -- -- (694) -- (694)
Increase in carrying value of preferred stock. -- -- (6,877) -- -- -- (6,877)
Purchases of common shares.................... (664,703) (1) (3,499) -- -- -- (3,500)
--------- --- -------- --------- -------- -------- --------
Balance, December 31, 1994.................... 5,297 -- 87,579 (42,513) (1,954) (3,766) 39,346
Net income.................................... -- -- -- 6,723 -- -- 6,723
Additional minimum pension liability.......... -- -- -- -- -- 187 187
Foreign currency translation adjustment....... -- -- -- -- 641 -- 641
Increase in carrying value of preferred stock. -- -- (1,271) -- -- -- (1,271)
Exchange of capital stock..................... (5,197) -- 42,043 -- -- -- 42,043
--------- --- -------- --------- -------- -------- --------
Balance, December 31, 1995.................... 100 -- 128,351 (35,790) (1,313) (3,579) 87,669
Net income.................................... -- -- -- 7,214 -- -- 7,214
Additional minimum pension liability.......... -- -- -- -- -- 587 587
Foreign currency translation adjustments...... -- -- -- -- (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) $ (1,608) $ (2,992) $ (7,000)
--------- --- -------- --------- -------- -------- --------
--------- --- -------- --------- -------- -------- --------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
20
<PAGE>
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS OF DOLLARS)
1994 1995 1996
------- -------- -------
CASH PROVIDED BY
OPERATING ACTIVITIES:
Net income................................. $ 9,088 $ 6,723 $ 7,214
Adjustments to reconcile net income to
net cash provided by operating
activities:
LIFO (income) expense.................. (547) 3,415 1,376
Amortization of goodwill............... 1,978 1,978 1,978
Depreciation and amortization.......... 3,563 3,965 4,595
Amortization of debt refinancing fees.. -- 1,065 1,319
Extraordinary loss on early
extinguishment of debt................ -- -- 1,830
Amortization of debt premium........... (1,972) -- --
Deferred income taxes.................. (72) (769) 901
Provision for postretirement benefits.. 63 64 97
Other adjustments for non-cash and
non-operating activities............. (403) 805 138
Changes in operating assets and
liabilities, net of acquisitions:
(Increase) decrease in trade accounts
receivable........................... 6,731 (3,789) 2,790
(Increase) decrease in other
receivables.......................... 2,649 (2,699) 1,094
(Increase) decrease in inventories..... 24,181 (3,285) (4,096)
(Increase) decrease in prepaid
expenses and other................... 96 (2,122) (1,006)
Increase (decrease) in trade accounts
payable.............................. 9,396 (3,303) 4,410
Increase (decrease) in cigarette and
tobacco taxes payable................ (3,545) 2,975 3,368
Increase in other accrued liabilities
and income taxes payable............. 3,502 7,506 613
------- -------- -------
Net cash provided by operating activities.. 54,708 12,529 26,621
------- -------- -------
INVESTING ACTIVITIES:
Additions to property and equipment... (5,376) (7,286) (6,079)
Net assets of acquired businesses..... -- (9,610) --
Other................................. (598) -- --
------- -------- -------
Net cash used in investing activities..... (5,974) (16,896) (6,079)
------- -------- -------
FINANCING ACTIVITIES:
Issuance of senior subordinated notes.. -- -- 75,000
Net (payments) borrowings under
revolving credit agreement.......... (37,783) 16,971 16,865
Principal payments under term loan
agreements.......................... (2,303) -- --
Debt refinancing fees.................. -- (5,379) (8,662)
Net proceeds from sale of common stock. -- -- 39,075
Purchases of common shares............. (3,500) (195) (141,250)
------- -------- -------
Net cash (used in) provided by financing
activities............................... (43,586) 11,397 (18,972)
------- -------- -------
Effects of changes in foreign exchange
rates.................................... (519) 337 (248)
------- -------- -------
Increase in cash........................... 4,629 7,367 1,322
Cash, beginning of year.................... 12,451 17,080 24,447
------- -------- -------
CASH, END OF YEAR.......................... $17,080 $24,447 $25,769
------- -------- -------
------- -------- -------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments during the year for:
Interest............................... $7,384 $6,739 $6,732
Income taxes........................... 920 6,903 7,427
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
21
<PAGE>
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
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 December 16, 1994, the Company purchased all of the common stock owned
by its previous majority shareholder, leaving management as the sole common
shareholder as of December 31, 1994.
On March 2, 1995, the Company's common and preferred shareholders
contributed their equity interest in the Company in exchange for the equity
interest in a newly formed limited liability company, Core-Mark L.L.C. ("LLC").
Accordingly, the LLC became the Company's sole common shareholder.
On August 7, 1996, the Company completed a recapitalization as described
in Note 3. Upon completion of the recapitalization, and at December 31, 1996,
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.
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 have been
translated at average rates for the year. Adjustments resulting from such
translation are included in cumulative currency translation adjustments, a
separate component of shareholders' equity.
EXCISE TAXES
State and provincial excise taxes paid by the Company on cigarettes were
$435.0 million, $466.5 million, and $479.2 million, for the years ended December
31, 1994, 1995, and 1996, respectively, and are included in net sales and cost
of goods sold.
22
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost or market. In the U.S., 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
$20.2 million and $23.8 million at December 31, 1995 and 1996, 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 $3.4 million and $1.4 million resulted from using the
LIFO method for the years ended December 31, 1995 and 1996, respectively.
Conversely, in periods of decreasing prices, the LIFO method generally
results in a reduction of current costs charged against income while higher
costs are retained in inventories. A reduction in inventory units can also
contribute to a reduction of current cost of goods sold and an increase in the
dollar value of inventory using the LIFO method vs. the FIFO method. In 1994,
although cigarette prices remained flat, a reduction in cigarette inventories
contributed to a net decrease in cost of goods sold and an increase of
inventories using the LIFO method of $0.5 million for the year ended December
31, 1994.
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 4 to 10 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 each of the years ended December 31, 1994, 1995 and
1996 was $2.0 million.
The Company adopted Statement of Financial Accounting Standards No. 121
("SFAS No. 121"), "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF", effective January 1, 1996. SFAS 121
provides specific guidance regarding when impairment of long-lived assets such
as property and equipment and certain intangibles, including goodwill, should be
recognized and how impairment losses of such assets should be measured.
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,
1996.
REVENUE RECOGNITION
The Company recognizes revenue at the time the product is shipped to the
customer.
23
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PENSION COSTS AND OTHER POSTRETIREMEMENT 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. See Note 6.
RECLASSIFICATIONS
Prior years' amounts in the consolidated financial statements have been
reclassified where necessary to conform to the current year's presentation.
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
through the LLC and a portion of the common stock held by six members of senior
management through the LLC 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 stock of the Company. Jupiter also purchased
from the Company an $18.8 million subordinated note due 2004. Both of these
subordinated notes were repaid prior to December 31, 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.
MARCH 2, 1995 EXCHANGE OF CAPITAL STOCK
On March 2, 1995, the Company's common and preferred shareholders
contributed their equity interest, including common stock, preferred stock, and
warrants, in the Company for the equity interest in the LLC, which became the
sole shareholder of the Company. As a result of this exchange, the carrying
value of the preferred stock, net of transaction costs, $42.0 million, was
reclassified to additional paid-in capital, increasing total common
shareholder's equity.
4. FINANCING
Long-term debt consisted of the following at December 31 (in thousands):
1995 1996
-------- --------
Revolving credit facility $101,598 $118,463
Senior subordinated notes -- 75,000
-------- --------
Long-term debt $101,598 $193,463
-------- --------
-------- --------
24
<PAGE>
4. FINANCING (CONTINUED)
EXISTING CREDIT FACILITY
On August 7, 1996, the Company entered into the existing credit facility
which replaced the previous credit facility. The existing 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 is no longer available for reborrowing, and (ii) a revolving
credit facility (the "Revolving Credit Facility"), under which borrowings in the
amount of up to $175.0 million are available for working capital and general
corporate purposes. The Revolving Credit Facility expires on June 30, 2001 and
borrowings are 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. As of
December 31, 1996, the amount outstanding under the Revolving Credit Facility
was $118.5 million, and an additional $43.0 million, after taking into account
the borrowing base, was available to be drawn.
Under the existing credit facility, the Company has the option to borrow
under Revolving Credit Loans which bear interest at 1.5% above the bank's Prime
Rate or under Eurodollar Loans which bear interest at 2.5% above the bank's
Eurodollar Rate. The bank's Prime Rate and Eurodollar Rate was 8.25% and 5.53%,
respectively, at December 31, 1996. There is a commitment fee of 0.5% on the
unused portion of the working capital revolving credit facility. The obligations
are secured by all assets of the Company, including inventories, trade accounts
receivable and property and equipment.
Under the existing 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 existing 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.
The Canadian credit facility allows for borrowings up to $10.0 million for
general corporate use and is secured by letters of credit under the existing
credit facility. The Canadian dollar advances bear interest at the Canadian
bank's prime rate which was 4.75% at December 31, 1996. There were no borrowings
under this facility at December 31, 1995 and 1996.
The Company had letters of credit of $18.7 million and $9.0 million
outstanding at December 31, 1995 and 1996, respectively. The letters of credit
are issued primarily to secure the Company's bond and insurance programs. The
Company pays fees of 2.25% per annum on the outstanding portion of letters of
credit.
The Company incurred approximately $8.7 million for legal, professional,
and other costs related to the structuring of the existing credit facility and
issuance of the senior subordinated notes described below. These costs were
capitalized and classified as other assets and are being amortized on a
straight-line basis over the term of the existing credit facility. Amortization
of these costs for the year ended December 31, 1996 was approximately $0.6
million.
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 commencing on March 15,
1997. The Notes limit certain activities of the Company, including, but not
limited to, changes in control, indebtedness, creation of liens, acquisitions
and dispositions, investments and dividends.
25
<PAGE>
4. FINANCING (CONTINUED)
1991 DEBT AND CAPITAL RESTRUCTURING
In April 1991, the Company's U.S. credit facility was restructured.
Pursuant to this restructuring, debt was converted into mandatorily redeemable
preferred stock and warrants to purchase common stock of the Company. The
preferred stock was initially recorded at its 1991 estimated fair value and was
increased to its redemption value by charges to additional paid-in capital which
amounted to $6.9 million and $1.3 million for the years ended December 31, 1994
and 1995, respectively.
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 2005, 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, 1996 (in thousands):
1997.......................................................... $ 9,779
1998.......................................................... 8,304
1999.......................................................... 6,174
2000.......................................................... 4,569
2001.......................................................... 4,218
Thereafter.................................................... 6,742
-------
Total minimum lease payments............................ 39,786
Less minimum sublease rental income...................... (2,125)
-------
$37,661
-------
-------
Rental expense for operating leases was $11.2 million, $11.3 million and
$11.7 million for the years ended December 31, 1994, 1995 and 1996,
respectively.
CLAIMS AND ASSESSMENTS
The Company and its subsidiaries are defendants to claims arising in the
ordinary course of business. Management has provided reserves it believes are
adequate and is of the view that the disposition of these matters will not have
a material adverse effect on the Company's consolidated financial position.
6. EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company sponsors a defined benefit pension plan for qualified
employees. As of September 30, 1986, the plan was frozen and plan participants
ceased accruing benefits as of that date. The most recent actuarial valuation of
the plan was performed as of January 1, 1996.
26
<PAGE>
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of the plan and amounts
recognized in the Company's consolidated balance sheets as of December 31 (in
thousands):
1995 1996
------- -------
Interest cost.................................... $ 1,100 $ 1,062
Return on assets................................. (2,178) (1,110)
Net other components............................. 1,413 344
------- -------
Net periodic pension cost.................... 335 296
------- -------
------- -------
Accumulated benefit obligation................... 14,972 14,642
Plan assets at estimated fair value.............. 12,864 13,767
------- -------
2,108 875
Prepaid pension cost............................. 1,471 2,117
------- -------
Additional minimum pension liability
(a reduction of shareholders' equity).... $ 3,579 $ 2,992
------- -------
------- -------
Weighted average discount rate................... 7.50% 7.50%
Expected long-term rate of return on assets...... 7.50% 7.50%
The additional minimum pension liability is equal to the accumulated
benefit obligation in excess of plan assets at estimated fair value, plus
prepaid pension costs.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company sponsors a defined benefit postretirement health care plan for
qualified employees. As of September 30, 1986, the plan was frozen and is only
available to those who qualify for the pension plan as described previously in
this note. The plan pays stated percentages of most necessary medical expenses
incurred by retirees, after subtracting payments by Medicare or other providers
and after a stated deductible has been met. Participants become eligible for the
benefit if they retire from the Company after reaching age 55 with 5 or more
years of service and qualify under the Company defined benefit pension plan. The
plan is contributory, with retiree contributions adjusted annually. The Company
does not fund this plan.
The components of the expense under Statement of Financial Accounting
Standards No. 106 ("SFAS No. 106") "EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT
BENEFITS OTHER THAN PENSIONS" are summarized in the following table for the
years ended December 31 (in thousands):
1995 1996
------- -------
Service cost benefits attributed to service
during the period............................ $ 28 $ 34
Interest cost on accumulated postretirement
benefit obligation........................... 154 136
Other components................................. 54 52
------- -------
Net postretirement health care cost.......... $ 236 $ 222
------- -------
------- -------
27
<PAGE>
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The accumulated postretirement benefit obligation is summarized in the
following table at December 31 (in thousands):
1995 1996
------- -------
Retirees.......................................... $ 1,379 $ 1,103
Other fully eligible participants................. 268 328
Other active participants......................... 513 506
------- -------
Total......................................... 2,160 1,937
Prior service cost................................ 219 202
Unrecognized net loss............................. (1,455) (1,070)
------- -------
Accrued postretirement benefit liability...... $ 924 $ 1,069
------- -------
------- -------
For measurement purposes, a 12% annual rate of increase in the per capita
cost of covered health care claims was assumed for 1996; the rate was assumed to
decrease gradually to 6% for 2002, and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. Increasing the assumed health care cost trend rates by 1% in each year
would increase the accumulated postretirement benefit obligation as of December
31, 1996 by $353,000 and the aggregate of the service and interest cost
components of net postretirement health care cost for the year ended December
31, 1996 by $34,000. The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 7.5%.
7. INCOME TAXES
The Company's income tax expense, before extraordinary items, consists of
the following for the years ended December 31 (in thousands):
1994 1995 1996
------ ------ ------
Current:
Federal................................... $ 675 $4,625 $4,648
State..................................... 1,102 1,218 1,220
Foreign................................... 1,111 489 172
------ ------ ------
2,888 6,332 6,040
Deferred:
Federal................................... 59 (990) 733
State..................................... (353) 53 (45)
Foreign................................... 222 168 213
------ ------ ------
(72) (769) 901
------ ------ ------
Income tax expense............................ $2,816 $5,563 $6,941
------ ------ ------
------ ------ ------
28
<PAGE>
7. INCOME TAXES (CONTINUED)
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):
1994 1995 1996
-------- ------ ------
Expected federal income tax expense at the
statutory rate.............................. $ 4,166 $4,300 $5,595
Increase (decrease) in taxes resulting from:
Goodwill amortization....................... 692 692 692
State income tax expense, net of federal
taxes................................... 487 684 952
Alternative minimum tax..................... 707 -- --
Utilization of loss carryforwards........... (8,432) (980) (983)
Net operating loss and timing differences
not tax effected........................ 4,206 946 385
Other, net.................................. 990 (79) 300
-------- ------ ------
Income tax expense.............................. $ 2,816 $5,563 $6,941
-------- ------ ------
-------- ------ ------
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):
1995 1996
------- -------
Deferred tax assets:
Net operating loss carryforwards............ $10,822 $ 9,864
Employee benefits, including postretirement
benefits................................ 4,768 4,543
Other....................................... 5,196 5,326
------- -------
Total deferred tax assets............... 20,786 19,733
Less valuation allowance.................... (10,824) (9,310)
------- -------
Net deferred tax assets................. 9,962 10,423
------- -------
Deferred tax liabilities:
Inventories................................. 9,001 8,927
Other....................................... 8,374 9,807
------- -------
Total deferred tax liabilities.......... 17,375 18,734
------- -------
Net deferred tax liability............. $ 7,413 $ 8,311
------- -------
------- -------
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 1995 and 1996, the Company recorded a reduction of $1.0
million and $1.5 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, 1996, the Company has available for U.S. federal income tax
return purposes net operating losses totaling approximately $29.0 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 $1.1 million, respectively. The investment tax credits expire by the year
2000 while the alternative minimum tax credits have an indefinite utilization
period.
29
<PAGE>
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 Company's long-term debt approximates fair
market value. The Revolving Credit Facility is a variable rate instrument. The
rate of interest, which is tied to either the bank's Prime Rate or Eurodollar
Rate, fluctuates with market changes. The Notes are at a fixed rate which
approximates market.
9. SEGMENT INFORMATION
The Company has substantially all of its operations in the distribution
business. Its revenues are generated from the distribution of cigarettes,
tobacco products, candy, food, health and beauty aids, and general merchandise.
The Company operates principally in the United States and Canada. Foreign and
domestic net sales, operating income, and identifiable assets are as follows at
and for years ended December 31, (in thousands):
1994 1995 1996
---------- ---------- ----------
Net Sales:
United States........................ $1,343,911 $1,538,816 $1,639,500
Canada............................... 511,445 508,371 535,867
---------- ---------- ----------
Total................................ $1,855,356 $2,047,187 $2,175,367
---------- ---------- ----------
---------- ---------- ----------
Operating Income:
United States....................... $ 16,590 $ 19,411 $ 25,822
Canada.............................. 2,687 927 1,398
---------- ---------- ----------
Total............................... $ 19,277 $ 20,338 $ 27,220
---------- ---------- ----------
---------- ---------- ----------
Identifiable Assets:
United States....................... $ 237,558 $ 257,755 $ 250,557
Canada.............................. 48,898 49,284 51,752
Corporate........................... 7,287 17,497 26,727
---------- ---------- ----------
Total............................... $ 293,743 $ 324,536 $ 329,036
---------- ---------- ----------
---------- ---------- ----------
10. SUBSEQUENT EVENT
In February 1997, the Company completed the acquisition of two related
companies, Melvin Sosnick Company and Capital Cigar Company ("Sosnick"),
wholesale distributors to the convenience retail market in northern California
and northern Nevada, for approximately $21.9 million, principally based upon
book value of the assets. The purchase price was financed with borrowings under
the Company's existing credit facility.
The acquisition will be accounted for under the purchase method of
accounting in 1997. The purchase price will be allocated to the assets acquired
based upon their estimated fair values. Results of operations for Sosnick will
be included with those of the Company for periods subsequent to the date of
acquisition.
The excess of the purchase price over the net assets acquired will be
amortized over a period not to exceed 40 years. The purchase price allocation
will be determined during 1997 when additional information becomes available.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are as follows (ages as
of December 31, 1996):
NAME AGE POSITION
- -------------------------- --- ------------------------------------------
Gary L. Walsh............. 55 Chairman and Chief Executive Officer
and Director
Robert A. Allen........... 47 President and Chief Operating Officer and
Director
Leo Granucci.............. 58 Senior Vice President, Sales and Marketing
Leo F. Korman............. 49 Senior Vice President, Chief Financial
Officer and Secretary
Basil P. Prokop........... 53 President, Canada Division
J. Michael Walsh.......... 48 Senior Vice President, Distribution
Thomas A. Berglund........ 36 Director
Terry J. Blumer........... 39 Director
John F. Klein............. 33 Director
John A. Sprague........... 44 Director
GARY L. WALSH has been Chairman and Chief Executive Officer since 1990, and
served as President from 1990 until 1996. He has been a director of the Company
since 1990. Prior to 1990, he served as Chief Executive Officer of Food Services
of America, a food distribution company. Mr. Walsh has more than 30 years of
management experience in the food distribution industry.
ROBERT A. ALLEN has been President and Chief Operating Officer since
January 1996. Prior to that time, 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. Before joining
the Company, he served as Executive Vice President and Chief Operating Officer
of Twin City Wholesale Drug Company of Minneapolis.
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
has been a Vice President at Jupiter 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 has
been an associate at Jupiter since November 1995. Prior to that, he served for
three years as a consultant at Bain & Company, a management consulting firm, and
as a manager in the Turnaround and Corporate Recovery Services Group at Price
Waterhouse.
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
Heartland Wireless Communications, Inc.
31
<PAGE>
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.
32
<PAGE>
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, 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------------------
OTHER ANNUAL ALL OTHER
FISCAL SALARY BONUS COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($)(1)(2)
- --------------------------- ------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Gary L. Walsh............................................ 1996 $324,000 $309,000 $3,606
Chairman and Chief Executive Officer 1995 $311,539 $312,000 $35,621
Robert A. Allen.......................................... 1996 $247,457 $102,000 $7,658
President and Chief Operating Officer 1995 $183,601 $132,500 $38,490
Leo Granucci............................................. 1996 $200,465 $50,000 $7,190
Senior Vice President, Sales and Marketing 1995 $192,923 $105,000 $48,677(3) $4,649
Leo F. Korman............................................ 1996 $198,581 $95,000 $7,082
Senior Vice President and Chief Financial Officer 1995 $190,944 $110,000 $23,207
J. Michael Walsh......................................... 1996 $190,693 $52,500 $6,484
Senior Vice President, Distribution 1995 $177,120 $126,500 $22,378
</TABLE>
- -----------
(1) 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; and Mr. J.M.
Walsh, $4,094; (ii) life and other insurance premiums in the following
amounts: Mr. G.L. Walsh, $3,606; Mr. Allen, $2,908; Mr. Granucci, $2,479;
Mr. Korman, $2,462; and Mr. J.M. Walsh, $2,390.
(2) These figures for 1995 consist of the sum of: (i) Company matching
contributions to the Savings Plan in the following amounts: Mr. Allen,
$4,620; Mr. Granucci, $1,415; Mr. Korman, $4,620; and Mr. J.M. Walsh,
$3,976; (ii) life and other insurance premiums in the following amounts:
Mr. G.L. Walsh, $4,862; Mr. Allen, $3,111; Mr. Granucci, $3,234; Mr.
Korman, $3,207; and Mr. J.M. Walsh, $3,022; and (iii) income received in
connection with the cancellation of certain stock options in the following
amounts: Mr. G.L. Walsh, $30,759; Mr. Allen, $30,759; Mr. Korman, $15,380;
and Mr. J.M. Walsh, $15,380.
(3) Consists of relocation expenses.
33
<PAGE>
CERTAIN AGREEMENTS WITH MANAGEMENT
Each member of Senior Management, constituting the Company's top six
executive officers, has entered into a Severance and Non-Competition Agreement
with the Company, dated as of August 7, 1996 (collectively, the "Severance and
Non-Competition Agreements"), 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 the Severance and Non-Competition 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 Ms. Debra L. Varian, the Company's Controller
(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, 1996 is as follows: Robert
A. Allen $19,456.43; Leo Granucci $6,126.03; Leo F. Korman $18,713.13; and J.
Michael Walsh $19,398.55. Gary L. Walsh is not a participant in the Savings
Plan.
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).
34
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of December 31, 1996, 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
COMMON STOCK OF PERCENTAGE OF
THE COMPANY TOTAL SHARES OF
NAME AND ADDRESS OF BENEFICIALLY COMMON STOCK OF
BENEFICIAL OWNERS(a) OWNED THE COMPANY
-------------------- --------------- ---------------
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.
STOCKHOLDERS AGREEMENT
On August 7, 1996, the Company entered into a Stockholders Agreement (the
"Stockholders Agreement") with Jupiter and the Senior Management (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
35
<PAGE>
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.
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
In connection with a restructuring of the Company in 1994, Gary L. Walsh,
Robert A. Allen, Leo F. Korman, Basil P. Prokop, J. Michael Walsh and Leo
Granucci (together, "Senior Management") entered into an equity sharing
arrangement with certain prior lenders to the Company. As a result of this
arrangement and subsequent transactions, Senior Management owned approximately a
53% equity interest in the Company at the time of the Recapitalization.
On August 7, 1996, in connection with the Recapitalization, the Company
redeemed all of the common stock held by the prior lenders (representing
approximately 47% of the total outstanding equity interests) and a portion of
the common stock held by the Senior Management (representing approximately 44%
of the total outstanding equity interests) on a pro rata basis for $135.0
million in cash and $6.3 million initial value of subordinated notes, except
that the prior lenders did not receive any subordinated notes. The portion of
the common stock previously held by Senior Management which was not redeemed
represented 8.9% of the equity interests in the Company outstanding immediately
prior to the Recapitalization and represents in the aggregate 25% of the
outstanding common stock following the Recapitalization. The Company paid the
amount due on the subordinated notes held by Senior Management (a total of
approximately $6.3 million, including accreted interest thereon) on September
27, 1996.
On August 7, 1996, in connection with the Recapitalization, Jupiter
purchased from the Company an $18.8 million initial value of subordinated note.
The Company paid the amount due on the subordinated note held by Jupiter (a
total of approximately $18.9 million including accreted interest thereon) on
September 27, 1996.
Jupiter Partners, Inc., an affiliate of Jupiter, received a $2.15 million
advisory fee from the Company in connection with the Recapitalization and the
Revolving Credit Facility transactions.
36
<PAGE>
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 appears on page 16, are included herein.
2. Financial Statement Schedule
The following financial statement schedule of Core-Mark International, Inc.
for the fiscal years ended December 31, 1994, 1995, and 1996 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 which is 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 which is 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 Articles of Incorporation of the Company which is incorporated herein
by reference from Exhibit 3.1 to Core-Mark International, Inc.'s
Registration Statement on Form S-4 (Registration No. 333-14217).
3.2 By-laws of the Company which is incorporated herein by reference from
Exhibit 3.2 to Core-Mark International, Inc.'s Registration Statement
on Form S-4 (Registration No. 333-14217).
4.1 Indenture, dated as of September 27, 1996, between the Company and
Bankers Trust Company as Trustee which is incorporated herein by
reference from Exhibit 4.1 to Core-Mark International, Inc.'s
Registration Statement on Form S-4 (Registration No. 333-14217).
37
<PAGE>
4.4 Form of Face of Exchange Security which is 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 Manufacturing Rights Agreement by and among Famous Value Brands, the
Company, Core-Mark Interrelated Companies, Inc. and C/M Products,
Inc. which is incorporated herein by reference from Exhibit 10.1 to
Core-Mark International, Inc.'s Registration Statement on Form S-4
(Registration No. 333-14217).
10.2 Manufacturing Agreement for "Best Buy" Cigarettes by and between
Famous Value Brands and C/M Products, Inc. which is incorporated
herein by reference from Exhibit 10.2 to Core-Mark International,
Inc.'s Registration Statement on Form S-4 (Registration No.
333-14217).
10.3 Trademark License Agreement by and between Famous Value Brands and
Core-Mark Interrelated Companies, Inc. which is incorporated herein
by reference from Exhibit 10.3 to Core-Mark International, Inc.'s
Registration Statement on Form S-4 (Registration No. 333-14217).
10.4 The Credit Agreement, dated August 7, 1996, among the Company,
several lenders parties thereto and The Chase Manhattan Bank which is
incorporated herein by reference from Exhibit 10.4 to Core-Mark
International, Inc.'s Registration Statement on Form S-4
(Registration No. 333-14217).
10.5 Stockholders Agreement dated as of August 7, 1996, by and among the
Company and all of the holders of its Common Stock which is
incorporated herein by reference from Exhibit 10.5 to Core-Mark
International, Inc.'s Registration Statement on Form S-4
(Registration No. 333-14217).
10.6.1 Severance and Noncompetition Agreement, dated August 7, 1996, between
the Company and Gary L. Walsh which is 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).
10.6.2 Schedule of Severance and Non Competition Agreements omitted pursuant
to Instruction no. 2 to Item 601 of Regulation S-K which is
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).
10.7 Letter, dated August 7, 1996, from Jupiter Partners LP to Gary
L. Walsh which is incorporated herein by reference from Exhibit 10.7
to Core-Mark International, Inc.'s Registration Statement on Form S-4
(Registration No. 333- 14217).
10.8 Purchase Agreement, dated September 24, 1996, between the Company,
Chase Securities Inc. and Donaldson, Lufkin & Jenrette Securities
Corporation which is incorporated herein by reference from Exhibit
10.8 to Core-Mark International, Inc.'s Registration Statement on
Form S-4 (Registration No. 333-14217).
10.9.1 Indemnification Agreement, dated November 12, 1996, between the
Company and John F. Klein which is 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).
10.9.2 Schedule of Indemnification Agreements omitted pursuant to
Instruction no. 2 to Item 601 of Regulation S-K, which is
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).
38
<PAGE>
21 List of Subsidiaries of the Company which is 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
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
39
<PAGE>
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 28, 1997.
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 Chairman, Chief Executive March 28, 1997
- ----------------------------- Officer and Director
Gary L. Walsh
/s/ Robert A. Allen President, Chief Operating March 28, 1997
- ----------------------------- Officer and Director
Robert A. Allen
/s/ Leo F. Korman Senior Vice President, Chief March 28, 1997
- ----------------------------- Financial Officer and Principal
Leo F. Korman Accounting Officer
/s/ Thomas A. Berglund Director March 28, 1997
- -----------------------------
Thomas A. Berglund
/s/ Terry J. Blumer Director March 28, 1997
- -----------------------------
Terry J. Blumer
/s/ John F. Klein Director March 28, 1997
- -----------------------------
John F. Klein
/s/ John A. Sprague Director March 28, 1997
- -----------------------------
John A. Sprague
40
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Core-Mark International, Inc.
Under date of February 21, 1997, we reported on the consolidated balance
sheets of Core-Mark International, Inc. and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996. 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 Peat Marwick LLP
SAN FRANCISCO, CALIFORNIA
FEBRUARY 21, 1997
41
<PAGE>
SCHEDULE II
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
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
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year Ended December 31,
1994............................ 3,022 1,159 -- (1,489)(a) 2,692
1995............................ 2,692 1,720 -- (812)(a) 3,600
1996............................ 3,600 895 -- (614)(a) 3,881
</TABLE>
(a) Deductions consist of accounts determined to be uncollectible and charged
against reserves, net of collections on accounts previously charged off.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DEFERRED TAX ASSET VALUATION
ALLOWANCE
Year Ended December 31,
1994............................ 15,857 -- -- (4,015)(b) 11,842
1995............................ 11,842 -- -- (1,018)(b) 10,824
1996............................ 10,824 -- -- (1,514)(b) 9,310
</TABLE>
(b) Deductions are due to changes in factors affecting the realizability of the
Company's deferred tax assets.
42
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 25,769
<SECURITIES> 0
<RECEIVABLES> 100,944
<ALLOWANCES> 3,881
<INVENTORY> 99,342
<CURRENT-ASSETS> 232,269
<PP&E> 46,534
<DEPRECIATION> 24,006
<TOTAL-ASSETS> 329,036
<CURRENT-LIABILITIES> 133,988
<BONDS> 193,463
0
0
<COMMON> 55
<OTHER-SE> (7,055)
<TOTAL-LIABILITY-AND-EQUITY> 329,036
<SALES> 2,175,367
<TOTAL-REVENUES> 2,175,367
<CGS> 2,017,654
<TOTAL-COSTS> 130,493
<OTHER-EXPENSES> 1,319
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,916
<INCOME-PRETAX> 15,985
<INCOME-TAX> 6,941
<INCOME-CONTINUING> 9,044
<DISCONTINUED> 0
<EXTRAORDINARY> (1,830)
<CHANGES> 0
<NET-INCOME> 7,214
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<EPS-DILUTED> 0
</TABLE>
