<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________to_____________________
Commission file number 333-14217
============
CORE-MARK INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1295550
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
395 OYSTER POINT BOULEVARD, SUITE 415
SOUTH SAN FRANCISCO, CA 94080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 589-9445
============
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
X Yes No
--- ---
At October 31, 1997, Registrant had outstanding 5,500,000 shares of Common
Stock.
===============================================
<PAGE>
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS OR INFORMATION
Certain statements contained in this quarterly report on Form 10-Q under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and elsewhere herein and in the documents incorporated
herein by reference are not statements of historical fact but are future-looking
or forward-looking statements that may constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Certain, but not necessarily all, of such forward-looking statements
can be identified by the use of such forward-looking terminology as the words
"believes," "expects," "may," "will," "should," or "anticipates" (or the
negative of such terms) or other variations thereon or comparable terminology,
or because they involve discussions of Core-Mark International, Inc.'s (the
"Company's") strategy. Such forward-looking statements are based upon a number
of assumptions concerning future conditions that may ultimately prove to be
inaccurate. The ability of the Company to achieve the results anticipated in
such statements is subject to various risks and uncertainties and other factors
which may cause the actual results, level of activity, performance or
achievements of the Company or the industry in which it operates to be
materially different from any future results, level of activity, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the general state of the economy and business
conditions in the United States and Canada; adverse changes in consumer
spending; the ability of the Company to implement its business strategy,
including the ability to integrate recently acquired businesses into the
Company; the ability of the Company to obtain financing; competition; the level
of retail sales of cigarettes and other tobacco products; possible effects of
legal proceedings against manufacturers and sellers of tobacco products and the
effect of government regulations affecting such products. As a result of the
foregoing and other factors affecting the Company's business beyond the
Company's control, no assurance can be given as to future results, levels of
activity, performance or achievements and neither the Company nor any other
person assumes responsibility for the accuracy and completeness of these
statements.
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of December 31, 1996 and
September 30, 1997. . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Income for the three and nine
months ended September 30, 1996 and 1997. . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and 1997 . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . . 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART II - OTHER INFORMATION
Item 1: Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 14
Item 2: Changes in Securities. . . . . . . . . . . . . . . . . . . 14
Item 3: Defaults upon Senior Securities. . . . . . . . . . . . . . 14
Item 4: Submission of Matters to a Vote of Security Holders. . . . 14
Item 5: Other information. . . . . . . . . . . . . . . . . . . . . 15
2
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PAGE
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Item 6: Exhibits and Reports on Form 8-K . . . . . . . . . . . 15
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3
<PAGE>
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,769 $ 11,095
Receivables:
Trade accounts, less allowance for doubtful accounts of $3,881 and
$4,180, respectively . . . . . . . . . . . . . . . . . . . . . 88,715 95,121
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,229 8,627
Inventories, net of LIFO allowance of $12,452 and $15,987, respectively 99,342 93,021
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . 6,214 7,342
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 232,269 215,206
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,534 55,430
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . (24,006) (27,217)
------------- -------------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . 22,528 28,213
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,792 8,783
Goodwill, net of accumulated amortization of $15,220 and $16,772,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,447 67,020
------------- -------------
$329,036 $319,222
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,572 $ 53,274
Cigarette and tobacco taxes payable. . . . . . . . . . . . . . . . . . . 43,912 47,194
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 454 1,090
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 7,397 7,326
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . 30,653 26,294
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 133,988 135,178
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,463 178,116
Other accrued liabilities and deferred income taxes. . . . . . . . . . . . . 8,585 8,928
------------- -------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 336,036 322,222
Commitments and contingencies:
Shareholders' equity:
Common stock; $.01 par value; 10,000,000 shares authorized;
5,500,000 shares issued and outstanding . . . . . . . . . . . . . . 55 55
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 26,121 26,121
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . (28,576) (23,949)
Cumulative currency translation adjustments. . . . . . . . . . . . . . . (1,608) (2,235)
Additional minimum pension liability . . . . . . . . . . . . . . . . . . (2,992) (2,992)
------------- -------------
Total shareholders' deficit . . . . . . . . . . . . . . . . . . . . (7,000) (3,000)
------------- -------------
$329,036 $319,222
------------- -------------
------------- -------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- -----------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . $ 568,691 $ 647,146 $1,637,266 $1,790,006
Cost of goods sold . . . . . . . . . . . 529,338 600,106 1,518,946 1,656,290
--------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . 39,353 47,040 118,320 133,716
Operating and administrative expenses. . 32,886 37,765 97,402 110,696
--------- ---------- ---------- ----------
Operating income . . . . . . . . . . 6,467 9,275 20,918 23,020
Interest expense, net. . . . . . . . . . 2,694 4,591 5,665 13,635
Debt refinancing costs . . . . . . . . . 293 340 928 1,123
--------- ---------- ---------- ----------
Income before income taxes and
extraordinary item. . . . . . . 3,480 4,344 14,325 8,262
Income tax expense . . . . . . . . . . . 1,645 2,068 6,274 3,635
--------- ---------- ---------- ----------
Income before extraordinary item . . 1,835 2,276 8,051 4,627
Extraordinary item, net of tax (Note 2). (1,830) --- (1,830) ---
--------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . $ 5 $ 2,276 $ 6,221 $ 4,627
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1996 1997
-------- --------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,221 $4,627
Adjustments to reconcile net income to
net cash provided by operating activities:
LIFO expense . . . . . . . . . . . . . . . . . . . . . . . . . . 1,360 3,535
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . 1,484 1,552
Extraordinary loss on early extinguishment of debt (Note 2). . . 1,830 ---
Depreciation and amortization. . . . . . . . . . . . . . . . . . 3,461 4,172
Amortization of debt refinancing fees. . . . . . . . . . . . . . 928 1,123
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . (510) 227
Other adjustments for non-cash and non-operating activities. . . 85 350
Changes in operating assets and liabilities, net of acquisitions 28,809 15,159
-------- --------
Net cash provided by operating activities . . . . . . . . . . . . . 43,668 30,745
-------- --------
INVESTING ACTIVITIES:
Net assets of acquired businesses . . . . . . . . . . . . . . . --- (21,361)
Additions to property and equipment . . . . . . . . . . . . . . (3,983) (8,547)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64) ---
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . . . (4,047) (29,908)
-------- --------
FINANCING ACTIVITIES:
Issuance of senior subordinated notes. . . . . . . . . . . . . . 75,000 ---
Net payments under revolving credit agreement. . . . . . . . . . (13,259) (15,347)
Debt refinancing and issuance costs. . . . . . . . . . . . . . . (7,474) ---
Net proceeds from sale of common stock . . . . . . . . . . . . . 39,075 ---
Purchase of common stock . . . . . . . . . . . . . . . . . . . . (141,250) ---
-------- --------
Net cash used in financing activities . . . . . . . . . . . . . . . (47,908) (15,347)
-------- --------
Effects of changes in foreign exchange rates . . . . . . . . . . . . 234 (164)
-------- --------
Decrease in cash . . . . . . . . . . . . . . . . . . . . . . . . . . (8,053) (14,674)
Cash, beginning of period. . . . . . . . . . . . . . . . . . . . . . 24,447 25,769
-------- --------
CASH, END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . $16,394 $11,095
-------- --------
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,270 $15,645
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 5,565 2,779
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of September 30, 1997, the
condensed consolidated statements of income for the three-month and nine-month
periods ended September 30, 1996 and 1997, and the condensed consolidated
statements of cash flows for the nine-month periods ended September 30, 1996 and
1997, have been prepared by Core-Mark International, Inc. (the "Company"). In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the Company
at September 30, 1997 (subject to year-end adjustments) and the results of its
operations and cash flows for the interim periods then ended, have been
included. The results of operations for the interim periods are not necessarily
indicative of the operating results for the full year.
The condensed consolidated balance sheet as of December 31, 1996, is
derived from the audited financial statements but does not include all
disclosures required by generally accepted accounting principles. The notes
accompanying the consolidated financial statements of the Company included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996
("1996 Form 10-K") include a description of the Company's significant accounting
policies and additional information pertinent to an understanding of both the
December 31, 1996 balance sheet and the interim financial statements included
herein.
2. RECAPITALIZATION
On August 7, 1996, the Company completed a recapitalization (the
"Recapitalization") which resulted in the purchase of newly issued common stock
of the Company by Jupiter Partners L.P. ("Jupiter") for $41.3 million in cash,
the redemption of all of the common stock held by three financial institutions
and a portion of the common stock held by six members of senior management
("Senior Management") for $135.0 million in cash and $6.3 million initial value
of subordinated notes due 2004. Pursuant to the stock subscription agreement
between the Company and Jupiter, the Company paid an affiliate of Jupiter a
transaction fee of $2.2 million on August 7, 1996. Upon completion of the
Recapitalization, Jupiter and Senior Management owned 75% and 25%,
respectively, of the outstanding common stock of the Company. Jupiter also
purchased from the Company an $18.8 million subordinated note due 2004. Both of
these subordinated notes were repaid prior to September 30, 1996, as discussed
in Note 3.
In connection with the Recapitalization, the Company entered into a
credit facility with a group of banks, which provides for aggregate
borrowings of up to $210.0 million, consisting of: (i) a $35.0 million term
loan (the "Term Loan"), which was repaid as discussed in Note 3, and (ii) a
revolving credit facility (the "Revolving Credit Facility"), under which
borrowings in the amount of up to $175.0 million are available (subject to
compliance with a borrowing base) for working capital and general corporate
purposes. Under the Revolving Credit Facility the Company has the option to
borrow under Eurodollar Rate Advances, which bear interest at 2.5% above the
bank's Eurodollar Rate, or Base Rate Advances which bear interest at 1.5%
above the bank's Base Rate. The bank's Base Rate and Eurodollar Rate was
8.25% and 5.41%, respectively, at September 30, 1996. There is a commitment
fee of 0.5% on the unused portion of the Revolving Credit Facility.
Simultaneously with the closing of the stock purchase and the
redemptions, the Company fully repaid the outstanding debt under a previous
credit facility. The early extinguishment of the previously existing debt
resulted in a one-time extraordinary charge to income to write-off
unamortized debt refinancing costs of $1.8 million which is net of a $1.2
million income tax benefit.
3. NOTE OFFERING
On September 27, 1996, the Company issued $75.0 million of 11 3/8%
Senior Subordinated Notes (the "Notes") which mature on September 15, 2003,
the proceeds of which were used to repay in full the subordinated notes and
Term Loan discussed in Note 2.
7
<PAGE>
4. INVENTORIES
The condensed consolidated financial statements have been prepared
using the LIFO method of accounting for inventories. The use of the LIFO
method resulted in an increase in cost of goods sold and a corresponding
decrease in inventories of $0.6 million and $2.5 million for the three months
ended September 30, 1996 and 1997, respectively, and $1.4 million and $3.5
million for the nine months ended September 30, 1996 and 1997, respectively.
Interim LIFO calculations are based on management's estimates of year-end
inventory levels and inflation rates for the year.
5. EXCISE TAXES
State and provincial excise taxes paid by the Company on cigarettes
were $123.3 million and $136.5 million for the three months ended September
30, 1996 and 1997, respectively, and $361.1 million and $379.9 million for
the nine months ended September 30, 1996 and 1997, respectively. These
amounts are included in net sales and cost of goods sold for the periods
indicated.
6. ACQUISITION OF THE SOSNICK COMPANIES
On February 3, 1997, the Company consummated a transaction, pursuant
to a Purchase Agreement dated January 31, 1997, to acquire certain assets and
the business of two related companies, Melvin Sosnick Company and Capital
Cigar Company (collectively "Sosnick" or the "Sosnick Companies"), a
wholesale distributor to the convenience retail market in northern California
and northern Nevada.
The assets acquired included trade accounts receivable, inventories and
warehouse equipment that the Company intends to continue to use in its business.
The acquisition excluded the assumption of substantially all of the liabilities
of Sosnick (such as notes payable, trade accounts payable, commitments to lease
warehouse facilities and other liabilities). The acquisition has been accounted
for using the purchase method of accounting.
The purchase price for the assets and the business totaled $21.4
million and has been allocated as follows (in thousands):
Accounts receivable, net $ 8,613
Inventory, net 8,224
Property and equipment 1,265
Goodwill 4,125
Other assets 225
Liabilities assumed (247)
Other liabilities incurred in connection with the
acquisition (844)
---------
Total purchase price $21,361
---------
---------
The excess of the purchase price over the fair value of assets acquired
and liabilities assumed was $4.1 million and has been recorded as goodwill,
which will be amortized on a straight-line basis over a period of 40 years.
The acquisition was primarily financed by borrowings under the
Company's existing revolving credit facility. The total amount of
incremental borrowings required to acquire Sosnick at closing was $18.4
million. The remaining purchase price was due and payable in installments
during the first ninety days subsequent to closing in varying amounts
specified in the purchase agreement, of which $1.3 million was paid in the
first quarter of 1997 and $1.6 million was paid in the second quarter of
1997. Based on certain contractual provisions, the total purchase price was
reduced by approximately $0.5 million during the second quarter of 1997,
reflecting a decrease in the total assets acquired.
8
<PAGE>
6. ACQUISITION OF THE SOSNICK COMPANIES (CON'T.)
The Company's net sales for the three and nine-month periods ended
September 30, 1996 would have been $630 million and $1,819 million,
respectively, if the acquisition had occurred as of January 1, 1996. The
Company's net sales for the nine month-period ended September 30, 1997 would
have been $1,805 million, if the acquisition had occurred as of January 1,
1997. The Company's net sales for the three-month period ended September 30,
1997 includes Sosnick sales for the entire period. The impact of the
acquisition on net income before the effect of the extraordinary item would
not have been material for the three or nine-month periods ended September
30, 1996 and 1997.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with
Management's Discussion and Analysis included in the Company's 1996 Form 10-K.
GENERAL
The Company is a broad-line, full-service wholesale distributor of
packaged consumer products to the convenience retail industry in North America.
The products distributed by the Company include cigarettes, food products
such as candy, fast food, snacks, groceries, and non-alcoholic beverages, and
non-food products such as film, batteries, and other sundries, health and
beauty care products and tobacco products other than cigarettes.
RESULTS OF OPERATIONS
The following table sets forth certain operating results as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------ ------------------
1996 1997 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of goods sold . . . . . . . . . . 93.1 92.7 92.8 92.5
------- ------- ------- -------
Gross profit . . . . . . . . . . . . . 6.9 7.3 7.2 7.5
Operating & administrative expenses. . 5.8 5.8 5.9 6.2
------- ------- ------- -------
Operating income . . . . . . . . . . . 1.1% 1.5% 1.3% 1.3%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
NET SALES. Net sales for the three months ended September 30, 1997
were $647.1 million, an increase of $78.4 million or 13.8% compared to the same
period in 1996. The increase in net sales was due to increases in net sales of
cigarettes and food and non-food products during the period and the Sosnick
acquisition (which contributed approximately $37 million in sales in the 1997
period).
Net sales of cigarettes for the three months ended September 30, 1997
were $430.1 million, an increase of $41.7 million or 10.7% compared to the same
period in 1996. The increase in net sales of cigarettes was principally due to
the acquisition of the Sosnick Companies (which contributed approximately $20
million in cigarette net sales in the 1997 period) and an increase in cigarette
prices. The Company's total cigarette unit sales for the three months ended
September 30, 1997 were 24.6 million cartons, an increase of 1.4 million cartons
or 5.8% compared to the same period in 1996. The increase was due to the
Sosnick acquisition (which contributed approximately 1.3 million in unit sales
in the 1997 period), and slight increases in unit volumes in the U.S. and
Canada.
10
<PAGE>
Net sales of food and non-food products for the three months ended
September 30, 1997 were $217.1 million, an increase of $36.8 million or 20.4%
compared to the same period in 1996. The increase was primarily due to the
Company's continued focus on increasing food and non-food product sales and to
the Sosnick acquisition (which contributed approximately $17 million in net
sales in the 1997 period). The increase occurred primarily in candy sales, which
grew $10.9 million or 18.9%, fast food sales, which increased $8.3 million or
47.1%, and snack sales, which were higher by $4.7 million or 44.8%.
GROSS PROFIT. Gross profit for the three months ended September 30,
1997 was $47.0 million, an increase of $7.7 million or 19.5% compared to the
same period in 1996. The improvement in gross profit and gross profit margin
was primarily due to increased gross profits from continued sales growth in
the food and non-food product categories (which carry significantly higher
margins than cigarettes) and the Sosnick acquisition. For the three months
ended September 30, 1997, the Company recognized LIFO expense of $2.5 million
compared to $0.6 million for the same period in 1996, as a result of
wholesale price increases in the third quarter of 1997 of approximately $0.70
per carton by several cigarette manufacturers. The increase in the cost of
goods sold was largely offset by higher operating profits in the quarter
related to such price increases.
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses for the three months ended September 30, 1997 were $37.8 million, an
increase of $4.9 million or 14.8% compared to 1996. However, such expenses for
the three months ended September 30, 1997 and 1996 remained constant at 5.8% of
net sales.
OPERATING INCOME. As a result of the foregoing factors, operating
income for the three months ended September 30, 1997 was $9.3 million, an
increase of $2.8 million or 43.4% as compared to the same period in 1996. As
a percentage of net sales, operating income for the three months ended
September 30, 1997 was 1.5%, as compared to 1.1% for the same period in 1996.
NET INTEREST EXPENSE. Net interest expense for the three months ended
September 30, 1997 was $4.6 million, an increase of $1.9 million or 70.4%
compared to the same period in 1996. This increase resulted from an increase in
average debt levels and the Company's average interest rate primarily due to the
recapitalization and senior subordinated note offering which occurred in the
third quarter of 1996, as well as the additional debt incurred to finance the
Sosnick acquisition.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
NET SALES. Net sales for the nine months ended September 30, 1997 were
$1,790.0 million, an increase of $152.7 million or 9.3% compared to the same
period in 1996. The increase in net sales was principally due to the Sosnick
acquisition (which contributed approximately $104 million in sales in the 1997
period). Excluding the impact of the Sosnick acquisition, the increase in net
sales was due to higher net sales of food and non-food products.
Net sales of cigarettes for the nine months ended September 30, 1997
were $1,194.2 million, an increase of $61.2 million or 5.4% compared to the same
period in 1996. The increase in net sales of cigarettes was principally due to
the acquisition of the Sosnick Companies (which contributed approximately $56
million in cigarette net sales in the 1997 period) and an increase in cigarette
prices offset by a general decline in cigarette unit volume (excluding Sosnick
unit volume). The Company's total cigarette unit sales for the nine months ended
September 30, 1997 were 69.4 million cartons, an increase of 0.7 million cartons
or 1.1% compared to the same period in 1996. The Sosnick acquisition
contributed approximately 3.6 million in unit sales in the 1997 period,
offsetting declines in unit volumes in the U.S. and Canada of approximately 2.7
and 0.2 million cartons, respectively. Unit declines are primarily the result of
lower cigarette sales by the Company's customer base, and the termination of
some high volume, marginally profitable cigarette business.
Net sales of food and non-food products for the nine months ended
September 30, 1997 were $595.8 million, an increase of $91.6 million or 18.2%
compared to the same period in 1996. The increase was primarily due to the
Company's continued focus on increasing food and non-food product sales and
to the Sosnick acquisition (which contributed approximately $48 million in
net sales in the 1997 period). The increase occurred primarily in candy
sales, which increased $23.5 million or 14.0%, fast food sales, which grew
$21.2 million or 45.5%, and snack sales, which were higher by $11.8 million
or 40.6%.
11
<PAGE>
GROSS PROFIT. Gross profit for the nine months ended September 30,
1997 was $133.7 million, an increase of $15.4 million or 13.0% compared to
1996. The improvement was primarily due to increased gross profits from
continued sales growth in the food and non-food product categories and the
Sosnick acquisition. The gross profit margin for the nine months ended
September 30, 1997 increased to 7.5% of net sales as compared to 7.2% of net
sales for the same period in 1996. This increase is principally due to food
and non-food sales (which carry significantly higher margins than cigarettes)
constituting 33.3% of the Company's total net sales for the nine months ended
September 30, 1997 compared to 30.8% for the same period in 1996. For the
nine months ended September 30, 1997, the Company recognized LIFO expense of
$3.5 million compared to $1.4 million for the same period in 1996. This
increase in LIFO expense was primarily due to several increases in domestic
cigarette wholesale prices totaling approximately $1.20 per carton during the
period (compared to $0.40 per carton in the comparable 1996 period), and
which was more than offset by higher profits during the same periods related
to such price increases.
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses for the nine months ended September 30, 1997 were $110.7 million, an
increase of $13.3 million or 13.6% compared to 1996. Such expenses for the nine
months ended September 30, 1997 increased to 6.2% of net sales as compared to
5.9% for the same period in 1996. The increase reflects approximately $2.4
million (0.1% of net sales) of one-time duplicative facility costs as a result
of the Sosnick acquisition, higher levels of staffing during the initial
integration process and other integration costs associated with the acquisition.
The remaining increase in expenses as a percentage of sales is primarily
attributable to the decline in cigarette volumes and the slightly higher
handling costs associated with the increased sales growth of the higher margin
food and non-food product categories.
OPERATING INCOME. As a result of the foregoing factors, operating
income for the nine months ended September 30, 1997 was $23.0 million, an
increase of $2.1 million or 10.0% as compared to the same period in 1996. As
a percentage of net sales, operating income for the nine months ended
September 30, 1997 and 1996 remained constant at 1.3%.
NET INTEREST EXPENSE. Net interest expense for the nine months ended
September 30, 1997 was $13.6 million, an increase of $8.0 million or 140.7%
compared to the same period in 1996. This increase resulted from an increase in
average debt levels and the Company's average interest rate primarily due to the
recapitalization and senior subordinated note offering which occurred in the
third quarter of 1996, as well as additional debt incurred to finance the
Sosnick acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise primarily from the funding of its
working capital needs, capital expenditure programs, and debt service
requirements with respect to its revolving credit facility and senior
subordinated notes. The Company has no mandatory payments of principal on its
senior subordinated notes prior to their final maturity on September 15, 2003,
and has no mandatory payments of principal scheduled under its revolving credit
facility, which matures June 30, 2001. The Company has historically financed its
operations through internally generated funds and borrowings under its credit
facilities.
The Company's debt obligations totaled $178.1 million at September 30,
1997, a decrease of $15.4 million from $193.5 million at December 31, 1996. The
net decrease in outstanding debt is primarily due to decreased borrowings used
to finance working capital funding requirements.
The Company's principal sources of liquidity are net cash provided by
operating activities and its revolving credit facility. At year end the Company
typically carries higher inventories which are then liquidated in future
periods. Therefore, net cash provided by operating activities is typically lower
at the end of any fiscal year compared to interim periods. However, at September
30, 1997, the Company's inventory levels were higher than at September 30, 1996
due primarily to the Sosnick acquisition, and a temporary increase in cigarette
inventories. As a result, net cash provided by operating activities was
significantly lower for the nine months ended September 30, 1997 as compared to
the same period in 1996.
12
<PAGE>
As discussed in Note 6 "Acquisition of the Sosnick Companies" to the
Condensed Consolidated Financial Statements, on February 3, 1997, the Company
acquired certain assets and the business of the Sosnick Companies. The assets
acquired included trade accounts receivable, inventories, and warehouse
equipment that the Company is using in its business. The aggregate purchase
price for the assets and business acquired was $21.4 million. The excess of the
purchase price over the fair value of the assets acquired was $4.1 million and
has been reflected as goodwill.
The acquisition was primarily financed by borrowings under the
Company's existing revolving credit facility. The total amount of
incremental borrowings required to acquire Sosnick at closing was $18.4
million. The remaining purchase price was due and payable in installments
during the first ninety days subsequent to closing in varying amounts
specified in the purchase agreement, of which $3.0 million was paid in the
first nine months of 1997.
The Company made capital expenditures of $8.5 million for the nine
months ended September 30, 1997. For the remainder of 1997, the Company
estimates it will spend approximately $1 to $2 million for capital
requirements, principally consisting of warehouse facilities and equipment.
These expenditures are expected to be funded out of net cash provided by
operating activities and the Company's revolving credit facility.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
In May 1996, the Court of Appeals for the Fifth Circuit decertified a
federal class action purportedly brought on behalf of all cigarette smokers in
the United States. Following the decertification, lawyers for the class brought
state class action lawsuits in a number of states, with the objective of filing
such lawsuits in all fifty states, the District of Columbia and Puerto Rico.
Several of these state lawsuits name cigarette distributors such as the Company
as defendants.
In October of 1996, a subsidiary of the Company was named as a
defendant in a class action lawsuit filed in State Court in New Mexico. The
other defendants include the principal U.S. tobacco manufacturers as well as
other distributors. The case is brought on behalf of a putative class of
smokers who reside in New Mexico, each of whom is allegedly nicotine
dependent. The suit seeks, on behalf of the class, compensatory damages,
punitive damages and equitable relief, including medical monitoring of the
class members.
In February, March and April 1997, a subsidiary of the Company was
served with three complaints filed by individual plaintiffs in the District
Court of Nueces County, Texas. The other defendants in the lawsuits include
certain U.S. tobacco manufacturers. The complaints seek compensatory and
punitive damages for injuries allegedly caused by the use of tobacco
products. As of September 30, 1997, these actions have been dismissed by the
District Court.
In May 1997, a subsidiary of the Company was named as a defendant in an
action brought by the Attorney General of New Mexico in an action filed in
State Court in Santa Fe, New Mexico. The other defendants include the principal
U.S. tobacco manufacturers as well as other distributors. The Attorney General
alleges, among other things, that the defendants realized significant profits
from the manufacture, distribution, and sale of tobacco products, and that these
activities have caused residents of New Mexico to suffer illnesses and diseases.
The State of New Mexico seeks both monetary damages and a permanent injunction
to require defendants to fund public education and smoking cessation programs.
The Company does not believe that these actions will have a material
adverse effect on the Company's financial condition. The Company has been
indemnified with respect to certain claims alleged in each of the above actions.
In addition, the Company is a party to other lawsuits incurred in the
ordinary course of its business. The Company believes it is adequately insured
with respect to such lawsuits or that such lawsuits will not result in losses
material to its consolidated financial position or results of operations.
Item 2: Changes in Securities
Not applicable
Item 3: Defaults Upon Senior Securities
Not applicable
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable
14
<PAGE>
Item 5: Other Information
Not applicable
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the third quarter of 1997.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORE-MARK INTERNATIONAL, INC.
(Registrant)
Date: November 7, 1997 By: /s/ Leo F. Korman
----------------------------------- ---------------------------
Leo F. Korman, Senior Vice
President and
Chief Financial Officer
(Principal Accounting Officer and
duly authorized officer)
16
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