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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, 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
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CORE-MARK INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1295550
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
395 OYSTER POINT BOULEVARD, SUITE 415
SOUTH SAN FRANCISCO, CA 94080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 589-9445
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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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, 1998, 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, 1998 was 5,500,000 shares.
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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 almost $2.4 billion in 1997, is
one of the largest broad-line, full-service wholesale distributors of
packaged consumer products to the convenience retail industry in western
North America. The Company's principal customers include traditional and
petroleum convenience stores, grocery stores, drug stores, mass merchandisers
and liquor stores. The Company offers its customers a wide variety of
products including cigarettes, candy, snacks, fast food, groceries, health
and beauty care products and other general merchandise.
The Company's principal markets include the western United States and
western Canada. The Company services its United States customers from 15
distribution facilities, seven of which are located in California. In Canada,
the Company services its customers from four distribution facilities.
HISTORY
The Company's origins date back to 1888, when Glaser Bros., a
family-owned-and-operated candy and tobacco distribution business, was
founded. In late 1994, the Company repurchased the common stock in the
Company from its previous ownership. In early 1995, members of senior
management and certain lenders acquired equity in a new holding company which
held all of the stock of the Company. In August 1996, the Company completed a
recapitalization. The Company's equity is now held 75% by Jupiter Partners,
L.P. ("Jupiter") and 25% by senior management.
INDUSTRY OVERVIEW
Wholesale distributors provide valuable services to both manufacturers
of consumer products and convenience retailers. Manufacturers benefit from
wholesale distributors' broad retail coverage, inventory management and
efficient processing of small orders. Wholesale distributors provide
convenience retailers access to a broad product line, the ability to place
small quantity orders, inventory management and access to trade credit. In
addition, large full-service wholesale distributors such as the Company offer
retailers the ability to participate in manufacturer-sponsored marketing
programs, merchandising and category management services and systems focused
on minimizing customers' investment in inventory.
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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 Management
Information Services ("MIS") and other productivity enhancing technology.
These factors have led to a consolidation of the wholesale distribution
industry as companies either exit the industry or are acquired by large
distributors seeking to further leverage their existing operations.
BUSINESS STRATEGY
The Company's business strategy is to increase net sales and improve
operating margins. To achieve these goals, the Company intends to: (i)
increase sales to existing customers, particularly of higher gross margin,
non-cigarette products; (ii) add new customer locations in existing markets,
particularly along existing routes; (iii) continue to implement distribution
productivity enhancement programs; and (iv) make selective acquisitions.
INCREASE SALES TO EXISTING CUSTOMERS. Because the Company generally
carries many products that its typical retail store customer purchases from
other suppliers, a primary element of its growth strategy is to increase
sales to existing customers. The Company's typical customer purchases its
products from the Company, from manufacturers who distribute directly to
retailers, and from a variety of smaller local distributors or jobbers. The
Company is particularly focused on becoming the retail customer's primary
supplier. This will be accomplished by implementing programs designed to
eliminate the need for secondary means of delivery provided by local
distributors and jobbers. Such programs are centered on increasing
non-cigarette sales that provide higher gross margins than those associated
with the distribution of cigarettes. As part of the effort, the Company
provides compensation incentives to its sales force as well as a number of
value-added services and marketing programs to its customers. These programs
include: (i) Convenience 2000-Registered Trademark-(which offers enhanced
purchasing power and promotions to independent convenience stores); (ii)
Smart Sets (which helps ensure that retailers display the right product in
the right place); (iii) SmartStock-Registered Trademark-(which provides state
of the art category management for key, high-volume, high-impulse convenience
retail categories); and (iv) Profit Builder and Promo Power (regular Company
publications which describe new products and manufacturer promotions).
ADD NEW CUSTOMER LOCATIONS IN EXISTING MARKETS. The Company also seeks
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
continues to focus on a number of new trade channels, including hotel gift
shops, military bases, correctional facilities, college bookstores, movie
theaters and video rental stores. The Company believes that there is
significant opportunity to increase net sales and profitability by adding new
customers and maximizing economies of scale.
PRODUCTIVITY ENHANCEMENT PROGRAMS. During the past five years, the
Company has devoted a significant portion of its capital spending to a
variety of productivity enhancement programs. These productivity enhancement
programs include: (i) BOSS, a batch order selection system that increases the
efficiency and reduces the cost of full-case order fulfillment; (ii)
Pick-to-Light, a paperless picking system that reduces the travel time for
the selection of less-than-full-case order fulfillment; (iii) Radio
Frequency, a hand-held wireless computer technology that eliminates paperwork
and updates receiving inventory levels and stocking requirements on a
real-time basis; (iv) Checker Automation, an on-line order verification
system that has significantly reduced labor costs by automating inspection of
order accuracy; and (v) fleet management tools such as Roadshow, a software
program that optimizes the routing of customer deliveries. The Company
intends to continue to pursue cost reductions by completing the roll-out of
some of these and other programs.
SELECTIVE ACQUISITIONS. The wholesale distribution industry is highly
fragmented and comprised mainly of a large number of small, privately-held
businesses. Management believes that the consolidation that has taken place
in recent years will continue and that numerous attractive acquisition
opportunities will arise. Given the current utilization rates of the
Company's existing warehouse and distribution facilities as well as the
quality of the Company's in-house MIS capability, management believes that a
significant amount of incremental revenues can be integrated into the
Company's operations without significant additions to fixed costs.
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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 67% of the Company's total net
sales in 1997.
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 35,000 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 and sports drinks under brand names such as Tropicana, Veryfine and
Gatorade.
The Company's fast food products include prepared sandwiches, hot deli
foods, slush drinks, hot beverages, pastries and pizza, as well as packaged
supplies and paper goods, including brand name items such as Superior Coffee,
Tyson chicken, Oscar Mayer meats and Kraft and Heinz condiments. Since 1994,
the Company has targeted the fountain, slush, hot beverage (coffee and hot
chocolate) and frozen food product categories, which present significant
growth opportunities as sales in these product categories are among the
fastest growing product offerings of the convenience store industry.
NON-FOOD PRODUCTS. General merchandise products range from film, tape,
batteries, cigarette lighters and glue to automotive products and include
brand names such as Fuji, Kodak, Scotch and Mead Envelope. Health and beauty
care products include analgesics, hair care, cosmetics, hosiery, dental
products and lotions, from manufacturers of brand names such as Crest,
Tylenol, Johnson & Johnson Band-Aid, Vicks, Gillette and Jergens. The
Company's broad assortment of tobacco products includes imported and domestic
cigars, smokeless tobacco (snuff), chewing tobacco, smoking tobacco and
smoking accessories.
CUSTOMERS
The Company's current customer base is comprised of a wide range of
retailers, including traditional and petroleum convenience stores, grocery
stores, drug stores, mass-merchandisers and liquor stores. The Company also
provides services to hotel gift shops, military bases, correctional
facilities, college bookstores, movie theaters and video rental stores. In
1997, the Company's largest customer accounted for 4.0% of net sales, and the
Company's ten largest customers accounted for approximately 27% of net sales.
As a result of its size and geographic coverage, the Company supplies a
number of regional and national chain corporations and, therefore, is able to
distribute products to all or substantially all such customers' individual
store locations in the Company's market area.
The Company strives to offer its customers greater flexibility, service
and value than other distributors. The Company's willingness to work with
retailers to arrive at a suitable delivery time, thereby allowing the store
owner to schedule its labor requirements effectively, is an important facet
of this flexibility. The Company believes that its ability to provide fully
integrated technological services (EDI services, store automation
integration, data exchange, consultative services, retail price management
systems and UPC control), bar-coded shelf labels to assist in effective shelf
space management, timely communication of manufacturer price change
information, seasonal and holiday special product/promotional offerings and
salesperson assistance in order preparation are also important to the
retailer in its selection of the Company as its supplier.
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SUPPLIERS AND MANUFACTURERS
The Company purchases products for resale to its customers from over
2,400 suppliers and manufacturers located throughout the United States and
Canada. Although the Company purchases cigarette and tobacco products from
all major United States and Canadian manufacturers, approximately 29%, 14%,
12% and 8% of the Company's net sales in 1997 were derived from products
purchased by the Company from Philip Morris, R.J. Reynolds, Imperial Tobacco
and Brown & Williamson, respectively. No other supplier's products
represented more than 10% of net sales. In addition, Philip Morris
manufactures the Company's private label Best Buy-Registered Trademark-
cigarettes. The loss of or a major change in the Company's relationships with
any of these manufacturers or in any of the structured incentive programs
could have a material adverse effect on the Company's business and financial
results.
The Company generally has no long-term purchase agreements (other than
for Best Buy-Registered Trademark- products) and buys substantially all its
products as needed.
CIGARETTE PRODUCTS
The Company controls major purchases of cigarettes centrally in order to
minimize inventory levels. Daily replenishment of cigarette inventory and
brand selection is controlled by the local division based on demands of the
local market. The U.S. cigarette manufacturers charge all wholesale customers
the same price for national brand cigarettes regardless of volume purchased.
However, cigarette manufacturers do offer certain structured incentive
programs (including Philip Morris' Masters Program and R.J. Reynolds'
Partners Program) to wholesalers instead of the routine allowances associated
with non-cigarette products. These programs are based upon, among other
things, purchasing volume and often include performance-based criteria
related to the quality of the Company's efforts to keep certain brands and
volumes of cigarettes on the retail shelves.
FOOD PRODUCTS
Food products (other than frozen foods) are purchased directly from
manufacturers by buyers in each of the Company's distribution facilities.
Management believes that decentralized purchasing of food products results in
higher service levels, improved product availability tailored to individual
markets and reduced inventory investment. Although each division has
individual buyers, the Company negotiates corporate pricing where possible to
maximize purchasing power.
In February 1996, the Company established its Artic Cascade division, a
consolidated frozen warehouse which purchases frozen foods for all of the
Company's United States divisions. By consolidating the frozen food
purchases, the Company is able to obtain such products at lower cost. Buying
in one location also allows the Company to offer a wide selection of quality
products to retailers at more competitive prices.
NON-FOOD PRODUCTS
The majority of the Company's non-food products, other than cigarettes
and tobacco products (primarily health and beauty care products and general
merchandise), are purchased by Allied Merchandising Industry ("AMI"), one of
the Company's operating divisions that specializes in these categories. This
specialization seeks to ensure a better selection and more competitive
wholesale costs and enables the Company to reduce its overall general
merchandise and health and beauty care inventory levels. Tobacco products,
other than cigarettes, are purchased directly from the manufacturers by each
of the divisions.
DISTRIBUTION
The Company maintains 19 distribution facilities, of which 15 are
located in the western United States and four are located in western Canada.
These distribution facilities include two consolidating warehouse facilities,
AMI and Artic Cascade. Each distribution facility is outfitted with modern
equipment (including freezers and coolers as required) for receiving,
stocking, order selection and loading a large volume of customer orders on
trucks for delivery. Each facility provides warehouse, distribution, sales
and support functions for its geographic area under the supervision of a
division manager. In addition, the Company believes that the majority of its
distribution facilities have the capacity to absorb significant future growth
in net sales.
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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, GSC Enterprises in the south and southeast, H.T. Hackney
in the southeast, and Eby-Brown Company in the midwest. Relative to smaller
competitors, multi-regional distributors such as the Company benefit from
several competitive advantages including greater purchasing power, the
ability to service chain accounts, scale cost advantages in sales and
warehouse operations, the ability to spread fixed corporate costs over a
larger revenue base and the resources to invest in both MIS and productivity
enhancing technology. These factors have led to a consolidation of the
industry as small competitors exit the industry and some larger convenience
retail distributors seek acquisitions to increase the utilization of their
existing operations.
The Company also competes with wholesale clubs and certain retail stores
whose sales are primarily cigarettes, characterized by high volumes and very
aggressive pricing. These competitors have become a factor in the industry
within recent years, particularly in California markets. The wholesale clubs
have been aggressive in their pricing of cigarettes and candy, and
wholesalers have been forced to reduce margins to compete in densely
populated markets with a large number of wholesale clubs. Wholesale clubs
require the convenience store owner to take the time to travel, to shop at
their location, pay cash and choose from a very limited selection. They also
provide none of the merchandising support that the Company routinely offers.
Consequently, national chains do not routinely purchase product at the
wholesale clubs.
The principal competitive factors in the Company's business include
price, customer order fill rates, trade credit and the level and quality of
value-added services offered. Management believes the Company competes
effectively by offering a full product line, flexible delivery schedules,
competitive prices, high levels of customer service and an efficient
distribution network.
EMPLOYEES
As of December 31, 1997, the Company had 2,312 employees.
The Company is a party to local collective bargaining agreements with
the International Brotherhood of Teamsters covering clerical, warehouse and
transportation personnel at its facilities in Hayward, California, and
covering warehouse and transportation personnel in Las Vegas, Nevada. The
Company is party to a collective bargaining agreement with United Food
Commercial Workers covering warehouse and transportation personnel in
Calgary, Alberta. The Company is a party to a collective bargaining agreement
with Industrial Wood and Allied Workers of Canada covering warehouse
personnel in Victoria, British Columbia. The agreements covering employees in
Hayward and Las Vegas expire on January 15, 2000 and March 31, 1999,
respectively. The agreement covering employees in Calgary expires on August
31, 1998. The agreement covering employees in Victoria expires on April 5,
1999. These agreements cover an aggregate of less than 10% of the Company's
employees.
Management believes that the Company's relations with its employees are
good.
ITEM 2. PROPERTIES
The Company does not own any real property. The principal executive
offices of the Company are located in South San Francisco, California, and
consist of approximately 22,000 square feet of leased office space. In
addition, the Company leases approximately 24,000 square feet in Vancouver,
British Columbia for its Canadian regional corporate, tax and management
information systems departments and 11 small offices for use by sales
personnel in certain parts of the United States and Canada. The Company also
leases its 19 distribution facilities, 15 of which are located in the western
United States and four in western Canada. Each distribution facility is
equipped with modern equipment (including freezers and coolers at 18
facilities) for receiving, stocking, order selection and shipping a large
volume of customer orders. The Company believes that it currently has
sufficient capacity at its distribution facilities to meet its anticipated
needs and that its facilities are in satisfactory condition.
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The Company's leases expire on various dates between 1998 and 2007, and
in many instances give the Company renewal options. The aggregate rent paid
in connection with the Company's distribution facilities, regional sales
offices and corporate and administrative offices was approximately $6.1
million in 1996 and $6.7 million in 1997. The Company's distribution
facilities range from 14,000 to 200,000 square feet and account for
approximately 1.6 million square feet in aggregate. Management believes that
the Company's current utilization of warehouse facilities is approximately
70% to 80% in the aggregate.
ITEM 3. LEGAL PROCEEDINGS
REGULATORY MATTERS
The tobacco industry is currently subject to significant regulatory
restrictions, such as the requirement that product packages display warning
labels, a prohibition on television and radio advertising and prohibitions on
sales to minors. In August 1996, the United States Food and Drug
Administration (the "FDA") determined that it had jurisdiction over
cigarettes and smokeless tobacco products and issued regulations restricting
the sale, distribution and advertising of cigarette and smokeless tobacco
products, especially to minors. The regulations are significant not only
because of their substance but also because the FDA determined that it has
jurisdiction over cigarettes and smokeless tobacco as "combination products
having both a drug component, including nicotine, and device components." The
regulations regulate such products as "devices." The major tobacco
manufacturers have challenged the jurisdiction of the FDA to regulate tobacco
products as "drugs" or "devices," and in April 1997 the U.S. District Court
for the Middle District of North Carolina held that the FDA could impose
restrictions on access to tobacco products and on labeling of tobacco
products, but did not have authority to restrict the promotion and
advertisement of such products. The court stayed implementation of the FDA
regulations except for those establishing a federal minimum age of 18 for the
sale of tobacco products and requiring proof of age for anyone under the age
of 27. An appeal by both the tobacco companies and the FDA is pending. In
addition, a number of bills have been introduced in Congress during 1997 and
1998 that would confirm or expand the FDA's jurisdiction. In addition, in
recent years, proposals have been made to require additional warning notices
on tobacco products, to disallow advertising and promotional expenses as
deductions under federal tax law and to further regulate the production and
distribution of cigarettes and smokeless tobacco. While neither the FDA
regulations nor the pending legislation would impose restrictions on the sale
of cigarettes and smokeless tobacco products to adults, there can be no
assurance such restrictions will not be proposed in the future or that any
such proposed legislation or regulations would not result in a material
reduction of the consumption of tobacco products in the United States or
would not have a material adverse effect on the Company's business and
financial position.
Over the past decade, various state and local governments have imposed
significant regulatory restrictions on tobacco products, including sampling
and advertising bans or restrictions, packaging regulations and prohibitions
on smoking in restaurants, office buildings and public places. Additional
state and local legislative and regulatory actions are being considered and
are likely to be promulgated in the future. The Company is unable to assess
the future effects that these various proposals may have on the sale of the
Company's products. The FDA's regulation of cigarette and smokeless tobacco
products does not preempt individual states from issuing more stringent state
or local requirements, provided those state or local requirements do not
conflict with the FDA regulations, and a number of state and local
jurisdictions have applied for exemption from the FDA regulations in order to
impose such stricter rules.
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.
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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 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 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.
In January 1998, the Company was served with a summons and First Amended
Complaint in an action brought by Operating Engineers Local 12 Health and
Welfare Trust (on behalf of itself and all others similarly situated), in the
United States District Court for the Central District of California, against
major tobacco manufacturers, the Company, and other distributors and
retailers of tobacco products. The complaint seeks, inter alia, compensatory
and punitive damages, restitution for monies expended by the Trust for health
care of its members who have used tobacco products, and forms of injunctive
relief.
In March 1998, the Company was named as a defendant in a class action
complaint filed in a state court in Salt Lake City, Utah. The other
defendants include the principal U.S. tobacco manufacturers as well as
several other distributors. The case is brought on behalf of a class of
smokers who reside in Utah and who have purchased cigarette products
distributed by the Company, and alleges, among other things, the members of
the class have suffered personal injuries and economic losses from the use of
such cigarettes. The suit seeks, on behalf of the class, compensatory
damages, punitive damages, equitable relief including the establishment of a
medical monitoring fund and return of monies spent to purchase cigarette
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
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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, 1997
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, 1997 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.
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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)
------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales (a) . . . . . . . . . . . . . $1,868,932 $1,855,356 $2,047,187 $2,175,367 $2,395,867
Costs of goods sold (b) . . . . . . . . 1,704,982 1,719,999 1,901,604 2,017,654 2,216,162
---------- ---------- ---------- ---------- ----------
Gross profit (b). . . . . . . . . . . . 163,950 135,357 145,583 157,713 179,705
Operating and administrative
expenses . . . . . . . . . . . . . . 117,411 116,080 125,245 130,493 148,902
---------- ---------- ---------- ---------- ----------
Operating income (b). . . . . . . . . . 46,539 19,277 20,338 27,220 30,803
Interest expense, net . . . . . . . . . 4,887 5,773 6,987 9,916 18,181
Debt refinancing costs (c). . . . . . . -- 1,600 1,065 1,319 1,498
---------- ---------- ---------- ---------- ----------
Income before income taxes,
cumulative effects of changes
in accounting principles and
extraordinary item . . . . . . . . . 41,652 11,904 12,286 15,985 11,124
Income tax expense. . . . . . . . . . . 2,472 2,816 5,563 6,941 4,834
---------- ---------- ---------- ---------- ----------
Income before cumulative effects of
changes in accounting principles
and extraordinary item . . . . . . . 39,180 9,088 6,723 9,044 6,290
Cumulative effect of changes in
accounting principles for:
Income taxes. . . . . . . . . . . 492 -- -- -- --
Postretirement benefits
other than pensions . . . . . . (988) -- -- -- --
---------- ---------- ---------- ---------- ----------
Income before extraordinary item. . . . 38,684 9,088 6,723 9,044 6,290
Extraordinary item, net of tax. . . . . -- -- -- (1,830) --
---------- ---------- ---------- ---------- ----------
Net income (b). . . . . . . . . . . . . $ 38,684 $ 9,088 $ 6,723 $ 7,214 $ 6,290
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
OTHER DATA:
EBITDAL (d) . . . . . . . . . . . . . . $ 29,309 $ 24,271 $ 29,696 $ 35,169 $ 41,597
Cash provided by (used in):
Operating activities . . . . . . . . 21,176 54,708 12,529 26,621 17,547
Investing activities . . . . . . . . (6,806) (5,974) (16,896) (6,079) (30,739)
Financing activities . . . . . . . . (11,406) (43,586) 11,397 (18,972) 3,549
Depreciation and amortization (e) . . . 5,737 5,541 5,943 6,573 7,528
Capital expenditures. . . . . . . . . . 5,501 5,376 7,286 6,079 9,378
AS OF DECEMBER 31,
(IN THOUSANDS)
------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Total assets. . . . . . . . . . . . . . $329,855 $293,743 $324,536 $329,036 $336,580
Total debt, including current
maturities . . . . . . . . . . . . . 127,053 84,627 101,598 193,463 197,012
Mandatorily redeemable
preferred stock (f). . . . . . . . . 34,890 41,767 -- -- --
See Notes to Selected Historical Consolidated Financial and Other Data.
</TABLE>
9
<PAGE>
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Selected Historical Consolidated
Financial And Other Data
(a) In the second quarter of 1995, the Company completed two acquisitions which
added approximately $62 million in net sales for the year ended
December 31, 1995. In February 1997, the Company completed the acquisition
of the Sosnick Companies which added approximately $136 million in net
sales for the year ended December 31, 1997.
(b) The Company's U.S. inventories are valued at the lower of cost or market.
Cost of goods sold is determined on a last-in, first-out (LIFO) basis.
During 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
("LIFO income") 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 as defined herein). EBITDAL
should not be considered in isolation or as a substitute for net income,
operating income, cash flows or other consolidated income or cash flow data
prepared in accordance with generally accepted accounting principles, or
as a measure of a company's profitability or liquidity. EBITDAL is
included because it is one measure used by certain investors to determine
a company's ability to service its indebtedness.
(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 certain members of management. At that time, the carrying
value of the Preferred Stock was reclassified into additional paid-in
capital.
10
<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, 1997, approximately 67%, 22%
and 11% of the Company's net sales were derived from cigarettes, food
products and non-food products, respectively.
TOBACCO INDUSTRY BUSINESS ENVIRONMENT
Manufacturers and distributors of cigarettes and other tobacco products
in the United States are currently facing a number of significant issues that
affect the business environment in which they operate including proposed
additional governmental regulation (see Item 3. "Legal Proceedings -
Regulatory Matters"); actual and proposed excise tax increases (see "Impact
of Tobacco Taxes" ); increased litigation involving health and other effects
of cigarette smoking and other uses of tobacco (see Item 3. "Legal
Proceedings - Legal Matters"); and proposed legislative action to resolve
certain regulatory and litigation issues affecting the U.S. tobacco industry
described below.
In June 1997, a so called "national settlement" of many of these issues
was proposed (referred to herein as the "Proposed Settlement") following
negotiations among major U.S. tobacco manufacturers, state attorneys general,
representatives of the public health community and attorneys representing
plaintiffs in certain smoking and health litigation. The Proposed Settlement
can be implemented only by federal legislation. The President as well as
several members of Congress have criticized aspects of the Proposed
Settlement and certain members of Congress have introduced alternative
legislation that would substantially increase taxes on tobacco products
without affording the tobacco manufacturers and other industry participants
protection from private litigation, which is a significant aspect of the
Proposed Settlement. At the present time, there can be no assurance that
federal legislation reflecting the Proposed Settlement will be enacted or if
changes will be made to the terms of the Proposed Settlement before it is
enacted. The major U.S. cigarette manufacturers have disclosed in a report
dated October 8, 1997 to a U.S. Senate task force that, if the Proposed
Settlement were enacted in its current form, among other things, prices of
cigarettes would increase significantly and cigarette consumption would
decline, although it is not possible to forecast , with any degree of
confidence, the magnitude of the decline in consumption.
During the most recent five year period, the Company's sales of
cigarettes were:
<TABLE>
<CAPTION>
For the year ended Cigarettes (in thousands)
December 31, Net Sales Cartons
------------------ --------- -------
<S> <C> <C>
1993 $1,344,707 76,740
1994 1,299,687 80,703
1995 1,446,697 88,933
1996 1,505,744 90,897
1997 1,603,362 92,368
</TABLE>
The Company believes that, if the Proposed Settlement were enacted in
its current form, the Company's business of distributing tobacco products
would be negatively affected by decreases in the volume of sales of tobacco
products and by the impact of increases in cigarette prices on its working
capital (see "Liquidity and Capital Resources"). The Company does not believe
it is able to quantify the impact that the proposed legislation or other
future legislation or governmental regulation affecting cigarettes and other
tobacco products will have on future sales of cigarettes and other tobacco
products. However, based upon current industry estimates of wholesale price
increases (including enacted federal excise tax increases (See "Impact of
Tobacco Taxes")) ranging from $4.00 to $8.00 per carton of cigarettes over
the next two to three years as a result of the Proposed Settlement, the
Company believes that it would be able to adequately finance the
corresponding increase in its working capital requirements relating to its
existing business under its existing and proposed credit facilities.
11
<PAGE>
If such price increases were to occur, the Company's debt levels and
interest expense would significantly increase. However, if the actual
level of wholesale price increases (including enacted federal excise tax
increases) exceeds $8 per carton; federal excise taxes were increased to
levels beyond those which have already been enacted; payment terms for
state and provincial excise taxes were adversely changed (see "Impact of
Tobacco Taxes"); or the volume of cigarettes sold by the Company declines
significantly as a result of higher prices or taxes, or both, the Company
may be required to seek additional financing in order to meet such higher
working capital requirements.
The Company's business strategy has included and continues to include
increasing sales of higher margin, non-tobacco products, a strategy which is
intended to lessen the impact of potential future declines in unit sales and
profitability of its tobacco distribution business.
IMPACT OF LIFO INVENTORY VALUATION METHOD
The Company's U.S. inventories are valued at the lower of cost or
market. Cost of goods sold is determined on a last-in, first-out (LIFO) basis
using Producer Price Indices as determined by the U.S. Department of Labor
Statistics. The Company's Canadian inventories are valued on a first-in,
first-out (FIFO) basis. The LIFO method of determining cost of goods sold has
had a significant impact on the results of operations, which is quantified
separately in the discussion below.
During periods of price inflation in the Company's product 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
("LIFO expense") while lower costs are retained in inventories.
Historically, increases in the Company's cost of cigarettes resulted from
a combination of cost increases by cigarette manufacturers and increases
in federal and state excise taxes. In 1995, cigarette and candy
manufacturers increased prices contributing to LIFO expense of $3.4
million during 1995. In 1996 and 1997, LIFO expense of $1.4 million and
$3.3 million, respectively, is primarily the result of increases in
cigarette prices.
RESULTS OF OPERATIONS
The following table sets forth certain operating results as a percentage
of net sales, for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of goods sold (a) 92.9 92.7 92.5
----- ----- -----
Gross profit 7.1 7.3 7.5
Operating and administrative expenses 6.1 6.0 6.2
----- ----- -----
Operating income 1.0% 1.3% 1.3%
----- ----- -----
----- ----- -----
</TABLE>
(a) LIFO 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:
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Gross profit 7.11% 7.25% 7.50%
LIFO expense 0.17 0.06 0.14
----- ----- -----
Adjusted gross profit 7.28 7.31 7.64
Operating and administrative expenses 6.12 6.00 6.21
----- ----- -----
Adjusted operating income 1.16% 1.31% 1.43%
----- ----- -----
----- ----- -----
</TABLE>
12
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales for 1997 were $2,395.9 million, an increase of
$220.5 million or 10.1% over 1996. The increase in net sales was due to the
Sosnick acquisition (which contributed approximately $136 million in sales
during 1997) and higher net sales of food and non-food products.
Net sales of cigarettes for 1997 were $1,603.4 million, an increase
of $97.6 million or 6.5% over 1996. The increase in net sales of
cigarettes was principally due to the acquisition of the Sosnick
Companies (which contributed approximately $74 million in cigarette net
sales in 1997) and an increase in cigarette prices offset by a general
decline in cigarette unit volume (excluding Sosnick unit volume). The
Company's total cigarette unit volume in 1997 was 92.4 million cartons,
an increase of 1.5 million cartons or 1.6% over 1996. The Sosnick acquisition
contributed approximately 4.8 million in unit sales in 1997, offsetting
declines in unit volumes in the U.S. and Canada of approximately 3.0 and
0.4 million cartons, respectively. Unit declines are primarily the result
of lower cigarette sales by the Company's customer base, and the
termination of some high volume, marginally profitable cigarette business.
Net sales of food and non-food products in 1997 were $792.5 million, an
increase of $122.9 million or 18.4% over 1996. The increase was primarily due
to the Company's continued focus on increasing food and non-food product
sales and to the Sosnick acquisition (which contributed approximately $62
million in net sales in 1997). The increase occurred primarily in fast food
sales, which increased $29.2 million or 46.1%, candy sales, which grew $28.6
million or 12.7%, and snack sales, which were higher by $15.4 million or
39.7%.
GROSS PROFIT. Gross profit for 1997 was $179.7 million, an increase
of $22.0 million or 13.9% over 1996. The improvement was primarily due to
increased gross profits from continued sales growth in the food and
non-food product categories and the Sosnick acquisition. The gross profit
margin for the year ended December 31, 1997 increased to 7.5% of net
sales as compared to 7.3% of net sales for the year ended December 31,
1996. This increase resulted primarily from the growth in food and
non-food sales (which carry significantly higher margins than cigarettes)
to 33.1% of the Company's total 1997 net sales, from 30.8% for 1996. In
1997, the Company recognized LIFO expense of $3.3 million compared to
$1.4 million in 1996. This increase in LIFO expense was primarily due to
several increases in domestic cigarette wholesale prices totaling
approximately $1.20 per carton during 1997 (compared to $0.40 per carton
in 1996), which was more than offset by higher profits related to such
price increases.
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses for 1997 were $148.9 million, an increase of $18.4 million or 14.1%
over 1996. Such expenses for 1997 increased to 6.2% of net sales as compared
to 6.0% for 1996. The increase reflects approximately $2.4 million (0.1% of
net sales) of one-time duplicative facility costs as a result of the Sosnick
acquisition, higher levels of staffing during the initial integration process
and other integration costs associated with the acquisition. The remaining
increase in expenses as a percentage of sales is primarily attributable to
the decline in cigarette volumes and the slightly higher handling costs
associated with the increased sales growth of the higher margin food and
non-food product categories.
OPERATING INCOME. As a result of the factors discussed above,
operating income for 1997 was $30.8 million, an increase of $3.6 million
or 13.2% over 1996. As a percentage of net sales, operating income for
1997 and 1996 remained constant at 1.3%.
NET INTEREST EXPENSE. Net interest expense for 1997 was $18.2 million,
an increase of $8.3 million or 83.4% over 1996. This increase resulted from
an increase in average debt levels and the Company's average interest rate
primarily due to the recapitalization and senior subordinated note offering
which occurred in the third quarter of 1996, as well as additional debt
incurred to finance the Sosnick acquisition.
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 the related debt. Debt refinancing costs
for 1997 were $1.5 million, compared to $1.3 million in 1996.
13
<PAGE>
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% over 1995. The increase was the result of growth in
all categories of the Company's operations.
Net sales of cigarettes for 1996 were $1,505.8 million, an increase of
$59.1 million or 4.1% over 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%
over 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% over 1995. This increase was due to the
Company's focus on increasing food and non-food product sales. The increase
occurred primarily in candy sales, which increased $19.8 million or 9.7%,
general merchandise sales, which increased $11.8 million or 27.3%, and fast
food sales, which increased $5.7 million or 9.9%.
GROSS PROFIT. Gross profit for 1996 was $157.7 million, an increase of
$12.1 million or 8.3% over 1995. The improvement resulted primarily from
growth in food and non-food product categories. 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.
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses for 1996 were $130.5 million, an increase of $5.2 million or 4.2%
over 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 factors discussed above, operating
income for 1996 was $27.2 million, an increase of $6.9 million or 33.8% over
1995. As a percentage of net 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% over 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 the debt. 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.
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 and 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 and 1997.
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.
14
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise primarily from the funding of
its working capital needs, capital expenditure programs and debt service
requirements with respect to the Revolving Credit Facility and the Notes. The
Company has no mandatory payments of principal on the Notes scheduled prior
to their final maturity on September 15, 2003, 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.
Significant increases in the cost of cigarettes to the Company would
occur if legislation were approved to enact the Proposed Settlement (See
"Tobacco Industry Business Environment"). Based upon current industry
estimates of wholesale price increases (including enacted federal excise
tax increases (see "Impact of Tobacco Taxes")) ranging from $4.00 to
$8.00 per carton of cigarettes over the next two to three years as a
result of the Proposed Settlement, the Company believes that it will be
able to adequately finance the corresponding increase in its working
capital requirements relating to its existing business under its existing
and proposed credit facilities. If such price increases were to occur,
the Company's debt levels and interest expense would significantly
increase. However, if the actual level of wholesale price increases
(including enacted federal excise tax increases) exceeds $8 per carton;
federal excise taxes were increased to levels beyond those which have
already been enacted; payment terms for state and provincial excise taxes
were adversely changed (see "Impact of Tobacco Taxes"); or the volume of
cigarettes sold by the Company declines significantly as a result of
higher prices or taxes, or both, the Company may be required to seek
additional financing in order to meet such higher working capital
requirements.
The Company's debt obligations totaled $197.0 million at December 31,
1997, a slight increase of $3.5 million or 1.8% from $193.5 million at
December 31, 1996. As of December 31, 1997, the amount outstanding under the
Revolving Credit Facility was $122.0 million; an additional $36.7 million,
after taking into account the borrowing base, was available to be drawn. The
net increase in outstanding debt is due primarily to an increase in working
capital funding requirements resulting principally from increases in accounts
receivable and inventory, primarily as a result of the Sosnick acquisition.
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 1997, net cash
provided by operating activities was $17.6 million as compared to $26.6
million in 1996. The decrease resulted principally from changes in net
working capital. In 1995, net cash provided by operating activities was $12.5
million. The increase from 1995 to 1996 resulted principally from a $6.9
million increase in operating income and changes in net working capital.
As discussed in Note 10, "Acquisition of the Sosnick Companies", to the
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 acquisition was financed
primarily by borrowings under the Company's existing Revolving Credit
Facility. The total amount of incremental borrowings required to acquire the
Sosnick Companies at closing was $18.4 million. The remaining purchase price
was due and payable in installments subsequent to closing in varying amounts
specified in the purchase agreement.
The Company made capital expenditures of $9.4 million in 1997. In 1998,
the Company estimates it will spend approximately $8 million for capital
requirements, principally consisting of warehouse facilities and other
equipment.
15
<PAGE>
The Company intends to consummate a series of transactions to securitize
its U.S. trade accounts receivable portfolio in early 1998. In connection
with this proposed transaction, the Company will form a wholly-owned special
purpose, bankruptcy-remote subsidiary, to which the U.S. trade accounts
receivable originated by the Company will be sold, without recourse. The
receivables will be assigned to a trust, as collateral for the issuance of up
to $75 million of fixed amount term certificates and variable certificates.
The revolving period of the securitization is expected to expire in January
2003, or earlier based on certain events. The initial net proceeds of this
transaction will be used to reduce the balance outstanding under the
Revolving Credit Facility. In connection with this proposed transaction, the
Company will modify its Revolving Credit Facility. The modification is
expected to reduce the available credit commitment facility from $175 million
to a proposed $100 million and extend the maturity through 2003. As a result
of this modification, the Company is expected to write off approximately $1.2
million of unamortized refinancing costs related to the Revolving Credit
Facility in 1998. The Company expects to realize lower interest rates as a
result of these transactions, as compared to its current Revolving Credit
Facility.
The Company is currently in the process of modifying or replacing its
computer systems for the year 2000 compliance. This activity is expected to
continue through 1999, and is not expected to have a material impact on the
financial position or results of operations of the Company in any given year.
However, due to the interrelated nature of computer systems, the Company may
be impacted in the year 2000 depending on whether entities not affiliated
with the Company have addressed this issue successfully. Expenses related to
this process are being expensed as incurred.
IMPACT OF TOBACCO TAXES
State and Canadian provincial tobacco taxes represent a significant
portion of the Company's net sales and cost of goods sold attributable to
cigarettes and other tobacco products. During 1997, such taxes on cigarettes
represented approximately 26% of cigarette net sales in the U.S. and 47% in
Canada. In general, such taxes have been increasing, and many states and
Canadian provinces are currently weighing proposals for higher excise taxes
on cigarettes and other tobacco products.
Under current law, almost all state and Canadian provincial taxes are
payable by the Company under credit terms which, on the average, exceed the
credit terms the Company has approved for its customers to pay for products
which include such taxes. This practice has benefited the Company's cash
flow. If the Company were required to pay such taxes at the time such
obligation was incurred without the benefit of credit terms, the Company
would incur a substantial permanent increase in its working capital
requirements and might be required to seek additional financing in order to
meet such higher working capital requirements. Consistent with industry
practices, the Company has secured a bond to guarantee its tax obligations to
those states requiring such a surety (a majority of states in the Company's
operating areas).
The U.S. federal excise tax on cigarettes is currently $2.40 per carton
of cigarettes. In August 1997, legislation was enacted that will raise the
federal excise tax by $1.00 per carton of cigarettes starting in the year
2000 and by an additional $.50 per carton of cigarettes in 2002. Unlike the
state and provincial taxes described above, U.S. federal excise taxes on
cigarettes are paid by the cigarette manufacturers and passed through to the
Company as a component of the cost of cigarettes. Such increases in U.S.
federal taxes increase the Company's working capital requirements by
increasing the balances of its inventories and accounts receivable. The
President as well as various members of Congress have suggested additional
excise taxes on cigarette and tobacco products, either as part of the
proposed legislative resolution of various issues affecting the U.S. tobacco
industry discussed above or to finance unrelated federal spending. If the
actual level of wholesale cigarette price increases (including enacted
federal excise taxes) exceeds $8.00 per carton over the next two to three
years or if federal excise taxes were increased to levels beyond those which
have already been enacted, the Company may be required to seek additional
financing in order to meet its higher working capital requirements.
CURRENCY FLUCTUATIONS
During 1997, on average, the Canadian dollar weakened approximately
1.5%, decreasing the U.S. dollar value of Canadian revenues in the Company's
consolidated financial statements. During 1996, on average, the Canadian
dollar strengthened less than 1%, increasing the U.S. dollar value of
Canadian revenues in the Company's consolidated financial statements. 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.
16
<PAGE>
INFLATION
In response to increases or decreases in manufacturers' prices with
respect to any of the Company's products, the Company historically has
adjusted its selling price in order to maintain its gross profit. Therefore,
inflation and deflation generally do not have a material impact on the
Company's gross profit. However, as described in "Tobacco Industry Business
Environment," significant increases in the manufacturers' prices of
cigarettes would occur if the Proposed Settlement described therein were to
be enacted or if additional federal excise taxes are enacted. While the Company
expects to pass on to its customers any price increases that result from the
Proposed Settlement or federal excise tax increases, it is not possible to
predict, with any degree of confidence, the magnitude of any volume decline
which might result from the higher prices. In addition, 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
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," which prescribes standards for reporting comprehensive
income and its components. Comprehensive income consists of net income or
loss for the current period and other comprehensive income (income, expenses,
gains and losses that currently bypass the income statement and are reported
directly in a separate component of equity). SFAS 130 requires that
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS 130
is effective for financial statements issued for periods beginning after
December 15, 1997, and is expected to first be reflected in the Company's
first quarter of 1998 interim financial statements.
In 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 changes the way companies report segment information
and requires segments to be determined and reported based on how management
measures performance and makes decisions about allocating resources. SFAS 131
is effective for financial statements issued for periods beginning after
December 15, 1997, and will first be reflected in the Company's financial
statements for the year ended December 31, 1998.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . 19
Consolidated Balance Sheets as of December 31, 1996 and 1997 . . . . . . . 20
Consolidated Statements of Income for the years ended December 31, 1995,
1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1996 and 1997 . . . . . . . . . . . . . . . . . . . . 22
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 24
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
CORE-MARK INTERNATIONAL, INC.:
We have audited the accompanying consolidated balance sheets of
Core-Mark International, Inc. and subsidiaries (the "Company") as of December
31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Core-Mark
International, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/S/ KPMG Peat Marwick LLP
SAN FRANCISCO, CALIFORNIA
FEBRUARY 20, 1998
19
<PAGE>
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1996 1997
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,769 $ 15,281
Receivables:
Trade accounts, less allowance for doubtful
accounts of $3,881 and $2,950, respectively . . . 88,715 96,610
Other. . . . . . . . . . . . . . . . . . . . . . . . . 12,229 12,806
Inventories, net of LIFO allowance of $12,452 and
$15,718, respectively. . . . . . . . . . . . . . . . . 99,342 103,246
Prepaid expenses and other. . . . . . . . . . . . . . . . . 6,214 5,847
-------- --------
Total current assets . . . . . . . . . . . . . . . . . 232,269 233,790
Property and equipment:
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . 38,587 47,587
Leasehold improvements. . . . . . . . . . . . . . . . . . . 7,947 9,046
-------- --------
46,534 56,633
Less accumulated depreciation and amortization. . . . . . . (24,006) (28,633)
-------- --------
Net property and equipment . . . . . . . . . . . . . . 22,528 28,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 9,792 8,277
Goodwill, net of accumulated amortization of
$15,220 and $17,293, respectively . . . . . . . . . . . . . 64,447 66,513
-------- --------
$329,036 $336,580
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable. . . . . . . . . . . . . . . . . . . $ 51,572 $ 50,737
Cigarette and tobacco taxes payable . . . . . . . . . . . . 43,912 43,506
Income taxes payable. . . . . . . . . . . . . . . . . . . . 454 1,085
Deferred income taxes . . . . . . . . . . . . . . . . . . . 7,397 7,599
Other accrued liabilities . . . . . . . . . . . . . . . . . 30,653 28,647
-------- --------
Total current liabilities. . . . . . . . . . . . . . . 133,988 131,574
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 193,463 197,012
Other accrued liabilities and deferred income taxes. . . . . . . 8,585 9,030
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . 336,036 337,616
Commitments and contingencies:
Shareholders' deficit:
Common stock; $.01 par value; 10,000,000 shares authorized;
5,500,000 shares issued and outstanding. . . . . . . . 55 55
Additional paid-in capital. . . . . . . . . . . . . . . . . 26,121 26,121
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (28,576) (22,286)
Cumulative currency translation adjustments . . . . . . . . (1,608) (2,879)
Additional minimum pension liability. . . . . . . . . . . . (2,992) (2,047)
-------- --------
Total shareholders' deficit . . . . . . . . . . . . . . . . (7,000) (1,036)
-------- --------
$329,036 $336,580
-------- --------
-------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
20
<PAGE>
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,047,187 $2,175,367 $2,395,867
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . 1,901,604 2,017,654 2,216,162
---------- ---------- ----------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . 145,583 157,713 179,705
Operating and administrative expenses. . . . . . . . . . . . . . 125,245 130,493 148,902
---------- ---------- ----------
Operating income. . . . . . . . . . . . . . . . . . . . . . 20,338 27,220 30,803
Interest expense, net. . . . . . . . . . . . . . . . . . . . . . 6,987 9,916 18,181
Debt refinancing costs . . . . . . . . . . . . . . . . . . . . . 1,065 1,319 1,498
---------- ---------- ----------
Income before income taxes and
extraordinary item . . . . . . . . . . . . . . . . . . . 12,286 15,985 11,124
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . 5,563 6,941 4,834
---------- ---------- ----------
Income before extraordinary item. . . . . . . . . . . . . . 6,723 9,044 6,290
Extraordinary item - loss on early
extinguishment of debt, net of income
tax benefit of $1,220 . . . . . . . . . . . . . . . . . . . -- (1,830) --
---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,723 $ 7,214 $ 6,290
---------- ---------- ----------
---------- ---------- ----------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
21
<PAGE>
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE ADDITIONAL TOTAL
------------------- ADDITIONAL CURRENCY MINIMUM SHAREHOLDERS'
SHARES PAID-IN ACCUMULATED TRANSLATION PENSION EQUITY
OUTSTANDING AMOUNT CAPITAL DEFICIT ADJUSTMENT LIABILITY (DEFICIT)
----------- ------ --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 adjustments . . . . . . . . . -- -- -- -- 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)
Net income . . . . . . . . . . . . . . . . -- -- -- 6,290 -- -- 6,290
Additional minimum
pension liability . . . . . . . . . . . . -- -- -- -- -- 945 945
Foreign currency
translation adjustments . . . . . . . . . -- -- -- -- (1,271) -- (1,271)
--------- ---- ------- --------- -------- -------- -------
BALANCE, DECEMBER 31, 1997 . . . . . . . . 5,500,000 $ 55 $26,121 $ (22,286) $ (2,879) $ (2,047) $(1,036)
--------- ---- ------- --------- -------- -------- -------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
22
<PAGE>
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1996 1997
------------- ---------- ------------
<S> <C> <C> <C>
CASH PROVIDED BY
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,723 $ 7,214 $ 6,290
Adjustments to reconcile net income to
net cash provided by operating activities:
LIFO expense. . . . . . . . . . . . . . . . . . . . . . . . . . 3,415 1,376 3,266
Amortization of goodwill. . . . . . . . . . . . . . . . . . . . 1,978 1,978 2,073
Depreciation and amortization . . . . . . . . . . . . . . . . . 3,965 4,595 5,455
Amortization of debt refinancing fees . . . . . . . . . . . . . 1,065 1,319 1,498
Extraordinary loss on early extinguishment of debt. . . . . . . -- 1,830 --
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . (769) 901 1,912
Other adjustments for non-cash and
non-operating activities . . . . . . . . . . . . . . . . . . 869 235 (557)
Changes in operating assets and liabilities, net of acquisitions:
(Increase) decrease in trade accounts receivable. . . . . . . . (3,789) 2,790 690
(Increase) decrease in other receivables. . . . . . . . . . . . (2,699) 1,094 (679)
(Increase) decrease in inventories. . . . . . . . . . . . . . . (3,285) (4,096) 69
Increase in prepaid expenses and other. . . . . . . . . . . . . (2,122) (1,006) (52)
Increase (decrease) in trade accounts payable . . . . . . . . . (3,303) 4,410 (253)
Increase in cigarette and tobacco taxes payable . . . . . . . . 2,975 3,368 453
Increase (decrease) in other accrued
liabilities and income taxes payable . . . . . . . . . . . . 7,506 613 (2,618)
-------- -------- --------
Net cash provided by operating activities. . . . . . . . . . . . . . . 12,529 26,621 17,547
-------- -------- --------
INVESTING ACTIVITIES:
Additions to property and equipment. . . . . . . . . . . . . . . . . (7,286) (6,079) (9,378)
Net assets of acquired businesses. . . . . . . . . . . . . . . . . . (9,610) -- (21,361)
-------- -------- --------
Net cash used in investing activities. . . . . . . . . . . . . . . . . (16,896) (6,079) (30,739)
-------- -------- --------
FINANCING ACTIVITIES:
Issuance of senior subordinated notes. . . . . . . . . . . . . . . . -- 75,000 --
Net borrowings under revolving credit agreement. . . . . . . . . . . 16,971 16,865 3,549
Debt refinancing fees. . . . . . . . . . . . . . . . . . . . . . . . (5,379) (8,662) --
Net proceeds from sale of common stock . . . . . . . . . . . . . . . -- 39,075 --
Purchases of common shares . . . . . . . . . . . . . . . . . . . . . (195) (141,250) --
-------- -------- --------
Net cash provided by (used in) financing activities. . . . . . . . . . 11,397 (18,972) 3,549
-------- -------- --------
Effects of changes in foreign exchange rates . . . . . . . . . . . . . 337 (248) (845)
-------- -------- --------
Increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . 7,367 1,322 (10,488)
Cash, beginning of year. . . . . . . . . . . . . . . . . . . . . . . . 17,080 24,447 25,769
-------- -------- --------
CASH, END OF YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,447 $ 25,769 $ 15,281
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,739 $ 6,732 $17,937
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,903 7,427 2,301
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
23
<PAGE>
Core-Mark International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1995, 1996 and 1997
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 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
and December 31, 1997, 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
$466.5 million, $479.2 million, and $505.4 million, for the years ended
December 31, 1995, 1996 and 1997, respectively, and are included in net
sales and cost of goods sold.
INVENTORIES
Inventories are valued at the lower of cost or market. In the 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 $23.8 million and $20.3 million at December 31, 1996 and
1997, 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, $1.4 million and $3.3 million
resulted from using the LIFO method for the years ended December 31, 1995,
1996 and 1997, respectively.
24
<PAGE>
Core-Mark International, Inc.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1995
and 1996 was $2.0 million and for the year ended December 31, 1997 was $2.1
million.
The Company assesses the recoverability of long-lived assets, including
goodwill, by determining whether the amortization of such assets over the
remaining life can be recovered through undiscounted future operating cash
flows of the related operations. Based on this calculation, the Company is of
the opinion that there is no impairment of long-lived assets as of December
31, 1997.
REVENUE RECOGNITION
The Company recognizes revenue at the time the product is shipped to the
customer.
STOCK-BASED COMPENSATION PLAN
In 1997, the Company adopted a Stock Option Plan for its key employees.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized. The Company has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation."
PENSION COSTS AND OTHER POSTRETIREMENT BENEFIT COSTS
Pension costs and other postretirement benefit costs charged to earnings
are determined on the basis of annual valuations by an independent actuary.
Adjustments arising from plan amendments, changes in assumptions and
experience gains and losses are amortized over the expected average remaining
service life of the employee group.
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 and a portion of the common stock held by six members of senior
management for $135.0 million in cash and $6.3 million initial value of
subordinated notes due 2004. Pursuant to the stock subscription agreement
between the Company and Jupiter, the Company paid an affiliate of Jupiter an
advisory fee of $2.2 million on August 7, 1996. Upon completion of the
Recapitalization, Jupiter and senior management owned 75% and 25%,
respectively, of the outstanding common stock of the Company. Jupiter also
purchased from the Company an $18.8 million subordinated note due 2004. Both
of these subordinated notes were repaid during 1996 using the proceeds of the
senior subordinated notes discussed in Note 4.
25
<PAGE>
Core-Mark International, Inc.
Notes to Consolidated Financial Statements
3. CAPITAL TRANSACTIONS (CONTINUED)
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):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Revolving credit facility $118,463 $122,012
Senior subordinated notes 75,000 75,000
-------- --------
Long-term debt $193,463 $197,012
-------- --------
-------- --------
</TABLE>
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, 1997, the amount
outstanding under the Revolving Credit Facility was $122.0 million; an
additional $36.7 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: (i) under Revolving Credit Loans which bear interest at 1.5% above
the bank's Prime Rate; or (ii) Eurodollar Loans which bear interest at 2.5%
above the bank's Eurodollar Rate. The bank's Prime Rate and Eurodollar Rate
was 8.50% and 5.97%, respectively, at December 31, 1997. 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 6.00% at December 31, 1997. There were
no borrowings under this facility at December 31, 1996 and 1997.
The Company had letters of credit of $9.0 million and $8.3 million
outstanding at December 31, 1996 and 1997, respectively. The letters of
credit are issued primarily to secure the Company's bond and insurance
programs. The Company pays fees of 2.50% per annum on the outstanding portion
of letters of credit.
26
<PAGE>
Core-Mark International, Inc.
Notes to Consolidated Financial Statements
4. FINANCING (CONTINUED)
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 years ended December 31, 1996 and 1997
was approximately $0.6 million and $1.5 million, respectively.
SENIOR SUBORDINATED NOTES
On September 27, 1996, the Company issued $75.0 million of 11 3/8%
Senior Subordinated Notes (the "Notes") which mature on September 15, 2003,
the proceeds of which were used to repay in full the Term Loan discussed
above and the subordinated notes discussed in Note 3. Interest on the Notes
is payable semi-annually on March 15 and September 15 of each year. The Notes
limit certain activities of the Company, including, but not limited to,
changes in control, indebtedness, creation of liens, acquisitions and
dispositions, investments and dividends.
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 2007, 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, 1997 (in thousands):
<TABLE>
<S> <C>
1998....................................... $10,835
1999....................................... 9,300
2000....................................... 7,290
2001....................................... 6,340
2002....................................... 4,324
Thereafter................................. 6,269
-------
Total minimum lease payments.......... 44,358
Less minimum sublease rental income... (1,494)
-------
$42,864
-------
-------
</TABLE>
Rental expense for operating leases was $11.3 million, $11.7 million and
$13.3 million for the years ended December 31, 1995, 1996 and 1997,
respectively.
CLAIMS AND ASSESSMENTS
The Company and its subsidiaries are defendants to claims seeking
damages for injuries allegedly arising from the use of tobacco products. The
Company has been indemnified with respect to certain claims in each of the
lawsuits regarding tobacco products. The Company and its subsidiaries are
also 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, 1997.
27
<PAGE>
Core-Mark International, Inc.
Notes to Consolidated Financial Statements
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):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Interest cost . . . . . . . . . . . . . . . . . . $ 1,062 $ 1,072
Return on assets. . . . . . . . . . . . . . . . . (1,110) (1,820)
Net other components. . . . . . . . . . . . . . . 344 1,051
-------- --------
Net periodic pension cost. . . . . . . . . . . 296 303
-------- --------
-------- --------
Accumulated benefit obligation. . . . . . . . . . 14,642 14,791
Plan assets at estimated fair value . . . . . . . 13,767 14,558
-------- --------
875 233
Prepaid pension cost. . . . . . . . . . . . . . . 2,117 1,814
-------- --------
Additional minimum pension liability
(a reduction of shareholders' equity). . . . $ 2,992 $ 2,047
-------- --------
-------- --------
Weighted average discount rate. . . . . . . . . . 7.50% 7.50%
Expected long-term rate of return on assets . . . 7.50% 7.50%
</TABLE>
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 106") "Employers' Accounting for Postretirement
Benefits Other Than Pensions" are summarized in the following table for the
years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Service cost benefits attributed to service during the period . . . . $ 34 $ 37
Interest cost on accumulated postretirement benefit obligation. . . . 136 145
Other components. . . . . . . . . . . . . . . . . . . . . . . . . . . 52 48
------- --------
Net postretirement health care cost. . . . . . . . . . . . . . . $ 222 $ 230
------- --------
------- --------
</TABLE>
The accumulated postretirement benefit obligation is summarized in the
following table at December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Retirees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,103 $ 1,137
Other fully eligible participants . . . . . . . . . . . . . . . . . . 328 349
Other active participants . . . . . . . . . . . . . . . . . . . . . . 506 577
------- -------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,937 2,063
Prior service cost. . . . . . . . . . . . . . . . . . . . . . . . . . 202 185
Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . . (1,070) (1,048)
------- -------
Accrued postretirement benefit liability . . . . . . . . . . . . $ 1,069 $ 1,200
------- -------
------- -------
</TABLE>
28
<PAGE>
Core-Mark International, Inc.
Notes to Consolidated Financial Statements
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
For measurement purposes, a 11% annual rate of increase in the per
capita cost of covered health care claims was assumed for 1997; 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, 1997 by $371,000 and the aggregate of
the service and interest cost components of net postretirement health care
cost for the year ended December 31, 1997 by $35,000. The weighted-average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.5%.
SAVINGS PLAN
The Company maintains defined contribution plans in the U.S., subject to
Section 401(k) of the Internal Revenue Code, and in Canada, subject to the
Department of National Revenue Taxation Income Tax Act. Eligible employees
may elect to contribute on a tax deferred basis from 1% to 10% of their
compensation. A contribution of up to 6% is considered to be a "basic
contribution" and the Company makes a matching contribution of $0.50 for each
dollar of a participant's basic contribution. The Company's contributions to
the plans were $953,000, $1,017,000 and $1,158,000 for 1995, 1996 and 1997,
respectively.
STOCK-BASED COMPENSATION PLAN
During 1997, the Company adopted a Stock Option Plan ("Option Plan") for
its key employees, which provides for equity-based incentive awards. Upon
adoption of the Option Plan, the Company had 300,000 options available for
granting. Granted options vest over five years and become exercisable after
eight years, with certain exercise acceleration provisions, including a
change of control of the Company or an initial public stock offering. The
Company issues options to employees with a grant price equal to the fair
value. Accordingly, no compensation expense has been recognized on the
Company's Option Plan.
During 1997, the Company granted 213,000 options with an exercise price
of $10.00, of which 2,000 were forfeited during the year. The Company had
211,000 options outstanding at December 31, 1997 with an exercise price of
$10.00 and a weighted-average remaining contractual life of seven years. As
of December 31, 1997, the options granted under the Option Plan have not
become exercisable.
Pro forma information regarding net income is required by SFAS 123, and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of this statement. The fair value for the
options was estimated at the date of grant using a Black-Scholes option
pricing model with the following assumptions: risk free interest rate of
5.76%; volatility of 0.00%; dividend yield of 0.00%; and an expected life of
the option of 5 years. The weighted-average estimated fair value per option
granted in 1997 was $2.47. For the purpose of pro forma disclosure, the
estimated fair value of the options is amortized to expense over the options'
vesting period. Based on these assumptions, pro forma net income for 1997
would be $6,186,000.
7. INCOME TAXES
The Company's income tax expense, before extraordinary items, consists
of the following for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal . . . . . . . . . . . . . $4,625 $4,648 $1,646
State . . . . . . . . . . . . . . 1,218 1,220 648
Foreign . . . . . . . . . . . . . 489 172 628
------ ------ ------
6,332 6,040 2,922
Deferred:
Federal . . . . . . . . . . . . . (990) 733 1,565
State . . . . . . . . . . . . . . 53 (45) 181
Foreign . . . . . . . . . . . . . 168 213 166
------ ------ ------
(769) 901 1,912
------ ------ ------
Income tax expense. . . . . . . . . $5,563 $6,941 $4,834
------ ------ ------
------ ------ ------
</TABLE>
29
<PAGE>
Core-Mark International, Inc.
Notes to Consolidated Financial Statements
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):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Expected federal income tax expense at the statutory rate . $4,300 $5,595 $3,894
Increase (decrease) in taxes resulting from:
Goodwill amortization. . . . . . . . . . . . . . . . . 692 692 692
State income tax expense, net of federal taxes . . . . 684 952 673
Other, net . . . . . . . . . . . . . . . . . . . . . . (113) (298) (425)
------ ------ ------
Income tax expense. . . . . . . . . . . . . . . . . . . . . $5,563 $6,941 $4,834
------ ------ ------
------ ------ ------
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards . . . . . . . . . . . $ 9,864 $ 8,908
Employee benefits, including postretirement benefits . 4,543 3,419
Other. . . . . . . . . . . . . . . . . . . . . . . . . 5,326 4,615
------- -------
Total deferred tax assets . . . . . . . . . . . . 19,733 16,942
Less valuation allowance . . . . . . . . . . . . . . . (9,310) (7,742)
------- -------
Net deferred tax assets . . . . . . . . . . . . . 10,423 9,200
------- -------
Deferred tax liabilities:
Inventories. . . . . . . . . . . . . . . . . . . . . . 8,927 8,722
Other. . . . . . . . . . . . . . . . . . . . . . . . . 9,807 10,671
------- -------
Total deferred tax liabilities. . . . . . . . . . 18,734 19,393
------- -------
Net deferred tax liability. . . . . . . . . . . . $ 8,311 $10,193
------- -------
------- -------
</TABLE>
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, 1996 and 1997, the Company
recorded a reduction of $1.0 million, $1.5 million and $1.6 million,
respectively in the valuation allowance due to changes in factors affecting
the realizability of the Company's deferred tax assets including generation
of taxable income and changes in limitations on utilization of net operating
loss carryforwards.
At December 31, 1997, the Company has available for U.S. federal income
tax return purposes net operating losses totaling approximately $26.0
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.
8. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The carrying amount for the Company's cash, trade accounts receivable,
other receivables, trade accounts payable, cigarette and tobacco taxes
payable and other accrued liabilities approximates fair market value because
of the short maturity of these financial instruments.
The carrying amount of the Revolving Credit Facility, a variable rate
instrument, approximates fair market value. The rate of interest, which is
tied to either the bank's Prime Rate or Eurodollar Rate, fluctuates with
market conditions. The fair value of the Notes, calculated based on quoted
market prices, was $ 76,875,000 and $79,313,000 at December 31, 1996 and
1997, respectively.
30
<PAGE>
Core-Mark International, Inc.
Notes to Consolidated Financial Statements
9. SEGMENT INFORMATION
The Company's revenues are generated from the distribution of
cigarettes, tobacco products, candy, food, health and beauty aids, and
general merchandise. The Company operates 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):
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net Sales:
United States . . . . . . . . $1,538,816 $1,639,500 $1,871,149
Canada. . . . . . . . . . . . 508,371 535,867 524,718
---------- ---------- ----------
Total . . . . . . . . . . . . $2,047,187 $2,175,367 $2,395,867
---------- ---------- ----------
---------- ---------- ----------
Operating Income:. . . . . . . . .
United States . . . . . . . . $ 19,411 $ 25,822 $ 28,706
Canada. . . . . . . . . . . . 927 1,398 2,097
---------- ---------- ----------
Total . . . . . . . . . . . . $ 20,338 $ 27,220 $ 30,803
---------- ---------- ----------
---------- ---------- ----------
Identifiable Assets: . . . . . . .
United States . . . . . . . . $ 257,755 $ 250,557 $ 277,624
Canada. . . . . . . . . . . . 49,284 51,752 43,806
Corporate . . . . . . . . . . 17,497 26,727 15,150
---------- ---------- ----------
Total . . . . . . . . . . . . $ 324,536 $ 329,036 $ 336,580
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
10. 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):
<TABLE>
<S> <C>
Accounts receivable, net . . . . . . . . . . $ 8,613
Inventory, net . . . . . . . . . . . . . . . 8,224
Property and equipment . . . . . . . . . . . 1,265
Goodwill . . . . . . . . . . . . . . . . . . 4,139
Other assets. . . .. . . . . . . . . . . . . 225
Liabilities assumed. . . . . . . . . . . . . (247)
Other liabilities incurred in connection
with the acquisition. . . . . . . . . . . (858)
-------
Total purchase price . . . . . . . . . . . . $21,361
-------
-------
</TABLE>
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 forty
years.
31
<PAGE>
Core-Mark International, Inc.
Notes to Consolidated Financial Statements
10. ACQUISITION OF THE SOSNICK COMPANIES (CONTINUED)
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 subsequent to
closing in varying amounts specified in the purchase agreement.
The Company's net sales for the year ended December 31, 1996 would have
been $2,409 million if the acquisition had occurred as of January 1, 1996.
The Company's net sales for the year ended December 31, 1997 would have been
$2,410 million if the acquisition had occurred as of January 1, 1997. The
impact of the acquisition on net income before the effect of the
extraordinary item would not have been material for the years ended December
31, 1996 and 1997.
11. NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," which prescribes standards for reporting comprehensive
income and its components. Comprehensive income consists of net income or
loss for the current period and other comprehensive income (income, expenses,
gains and losses that currently bypass the income statement and are reported
directly in a separate component of equity). SFAS 130 requires that
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS 130
is effective for financial statements issued for periods beginning after
December 15, 1997, and is expected to first be reflected in the Company's
first quarter of 1998 interim financial statements.
In 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 changes the way companies report segment information
and requires segments to be determined and reported based on how management
measures performance and makes decisions about allocating resources. SFAS 131
is effective for financial statements issued for periods beginning after
December 15, 1997, and will first be reflected in the Company's financial
statements for the year ended December 31, 1998.
32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) Previous independent accountants
(1) (i) On January 27, 1998, the Registrant determined not to
engage KPMG Peat Marwick LLP as the independent public
accountants for its 1998 fiscal year and has appointed
Deloitte & Touche LLP as its independent public accountants
for its 1998 fiscal year.
(ii) The reports of KPMG Peat Marwick LLP on the Registrant's
consolidated financial statements for the fiscal years
ended December 31, 1997 and 1996 did not contain an adverse
opinion or a disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope or accounting
principles.
(iii) The Audit Committee of the Registrant's Board of Directors
recommended the decision to change independent accountants,
whose decision was approved by the Board of Directors.
(iv) In connection with the audits of the Registrant's
consolidated financial statements for the fiscal years
ended December 31, 1997 and 1996, and through the date of
this report, there were no disagreements with KPMG Peat
Marwick LLP on any matters of accounting principles or
practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to
the satisfaction of KPMG Peat Marwick LLP, would have
caused KPMG Peat Marwick LLP to make reference to the
matter in connection with its report.
(v) During the Registrant's two most recent fiscal years and
through the date of this report, there were no "reportable
events" as defined in Item 304 (a)(1)(v) of Regulation S-K.
(2) The Registrant has received from KPMG Peat Marwick LLP a letter
addressed to the Securities and Exchange Commission stating
whether or not it agrees with the above statements. The copy of
the letter from KPMG Peat Marwick LLP to the Securities and
Exchange Commission dated March 20, 1998 is attached hereto as
Exhibit 16.1.
(b) New Independent Auditors
(i) On January 27, 1998, the Registrant determined to engage
Deloitte & Touche LLP as its new independent accountants
effective for the 1998 fiscal year. During the Registrant's two
most recent fiscal years and through January 27, 1998, neither
the Registrant nor anyone else on its behalf consulted Deloitte
& Touche LLP regarding any of the matters or events set forth in
Item 304 (a)(2)(i) and (ii) of Regulation S-K.
33
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are as follows (as of
December 31, 1997):
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gary L. Walsh.................... 56 Chairman, Chief Executive Officer and Director
Robert A. Allen.................. 48 President, Chief Operating Officer and Director
Leo Granucci..................... 59 Senior Vice President, Sales and Marketing
Leo F. Korman.................... 50 Senior Vice President, Chief Financial Officer and
Secretary
Basil P. Prokop.................. 54 President, Canada Division
J. Michael Walsh................. 49 Senior Vice President, Distribution
Thomas A. Berglund............... 37 Director
Terry J. Blumer.................. 40 Director
John F. Klein.................... 34 Director
John A. Sprague.................. 44 Director
</TABLE>
GARY L. WALSH has been Chairman and Chief Executive Officer of the
Company from 1990 to 1997. Effective January 1, 1998, Mr. Walsh retired from
his position as Chief Executive Officer. Mr. Walsh served as President from
1990 until 1996. He has been a director of the Company since 1990.
ROBERT A. ALLEN has been President and Chief Operating Officer of the
Company from January 1996 to December 1997. Upon the retirement of Mr. Walsh,
effective January 1, 1998, Mr. Allen became Chief Executive Officer. Prior to
1996, he served as Senior Vice President, Distribution from 1992 through
1995, and as Vice President, Distribution from 1989 to 1992. He has been a
director of the Company since 1994.
LEO GRANUCCI has been Senior Vice President, Sales and Marketing since
1994. Prior thereto, he served for seven years as Executive Vice President of
Sales and Marketing at Bergen Brunswig, a wholesale pharmaceutical
distribution company.
LEO F. KORMAN has been Senior Vice President and Chief Financial Officer
since January 1994 and served as Vice President and Chief Financial Officer
from 1991 to 1994.
BASIL P. PROKOP has been President of the Canada Division since 1992.
Mr. Prokop joined the Company in 1984.
J. MICHAEL WALSH has been Senior Vice President, Distribution since
January 1996. Prior thereto, he served as Senior Vice President, Operations
since 1992 and served as Vice President, Operations from 1991 to 1992.
THOMAS A. BERGLUND has been a director of the Company since August 1996.
He 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.
34
<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.
35
<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, 1997, 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)(3)
--------------------------- ---- --- --- --- ------------
<S> <C> <C> <C> <C> <C>
Gary L. Walsh.............................................. 1997 $324,480 $286,510 $ 3,311
Chairman and Chief Executive Officer 1996 $324,000 $309,000 $ 3,606
1995 $311,539 $312,000 $35,621
Robert A. Allen............................................ 1997 $250,000 $ 87,000 $ 7,203
President and Chief Operating Officer 1996 $247,457 $102,000 $ 7,658
1995 $183,601 $132,500 $38,490
Leo Granucci............................................... 1997 $200,762 $ 74,000 $ 6,801
Senior Vice President, Sales and Marketing 1996 $200,465 $ 50,000 $ 7,190
1995 $192,923 $105,000 $48,677(4) $ 4,649
Leo F. Korman.............................................. 1997 $198,875 $ 74,000 $ 6,786
Senior Vice President and Chief Financial Officer 1996 $198,581 $ 95,000 $ 7,082
1995 $190,944 $110,000 $23,207
J. Michael Walsh........................................... 1997 $191,226 $ 60,000 $ 6,663
Senior Vice President, Distribution 1996 $190,693 $ 52,500 $ 6,484
1995 $177,120 $126,500 $22,378
</TABLE>
___________
(1) These figures for 1997 consist of the sum of: (i) Company matching
contributions to the Savings Plan (defined below) in the following
amounts: Mr. Allen, $4,500; Mr. Granucci, $4,500; Mr. Korman, $4,500;
and Mr. J.M. Walsh, $4,440; (ii) life and other insurance premiums in
the following amounts: Mr. G.L. Walsh, $3,311; Mr. Allen, $2,703;
Mr. Granucci, $2,301; Mr. Korman, $2,286; and Mr. J.M. Walsh, $2,223.
(2) These figures for 1996 consist of the sum of: (i) Company matching
contributions to the Savings Plan 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.
36
<PAGE>
(3) 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.
(4) Consists of relocation expenses.
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, 1997 is as follows:
Robert A. Allen $23,956; Leo Granucci $10,626; Leo F. Korman $23,213; and J.
Michael Walsh $23,839. Gary L. Walsh is not a participant in the Savings
Plan.
37
<PAGE>
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).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1997, 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.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF PERCENTAGE OF
COMMON STOCK TOTAL SHARES
OF OF
THE COMPANY COMMON STOCK
NAME AND ADDRESS OF BENEFICIALLY OF
BENEFICIAL OWNERS(a) OWNED THE COMPANY
-------------------- ------------ -----------
<S> <C> <C>
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%
</TABLE>
___________
(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.
38
<PAGE>
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 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
None.
39
<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 appear on page 18, are included herein.
2. Financial Statement Schedule
The following financial statement schedule of Core-Mark International,
Inc. for the fiscal years ended December 31, 1995, 1996, and 1997 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:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<S> <C>
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 are 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 are 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).
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).
40
<PAGE>
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).
41
<PAGE>
10.9 Purchase agreement dated January 31, 1997 between the Company and Melvin
Sosnick Company and Capital Cigar Company, incorporated herein by
reference from Exhibit (i) to Core-Mark International, Inc.'s Current
Report on Form 8-K filed February 18, 1997 (Registration No. 333-14217).
10.10 First Amendment dated as of January 31, 1997 to the Credit
Agreement dated as of August 7, 1996, incorporated herein by
reference from Exhibit 10.10 to Core-Mark International, Inc.'s
Quarterly Report on Form 10-Q filed May 14, 1997 (Registration No.
333-14217).
*10.11 Amendment dated December 31, 1997 to Manufacturing Rights Agreement
by and among Famous Value Brands, the Company, Core-Mark
Interrelated Companies, Inc. and C/M Products, Inc.
*10.12 Amendment dated December 31, 1997 to Manufacturing Agreement for
"Best Buy" Cigarettes by and between Famous Value Brands and C/M
Products, Inc.
10.13 Amendment dated December 31, 1997 to Trademark License Agreement by
and between Famous Value Brands and Core-Mark Interrelated
Companies, Inc.
16 Letter to Securities and Exchange Commission from KPMG Peat Marwick LLP
dated January 27, 1998 from Exhibit 16 to Core-Mark International Inc.'s
Current Report on Form 8-K filed January 27, 1998 (Registration No. 333-14217).
16.1 Letter to Securities and Exchange Commission from KPMG Peat Marwick LLP
dated March 20, 1998.
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
* Portions of these exhibits have been omitted pursuant to an
Application for Confidential Treatment filed by the Company
with the Commission pursuant to Rule 406 of the Securities
Act of 1933, as amended.
</TABLE>
(b) Reports on Form 8-K
None.
42
<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 20, 1998.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Gary L. Walsh
_____________________________
Gary L. Walsh Chairman and Director March 20, 1998
/s/ Robert A. Allen
_____________________________ President, Chief Executive
Robert A. Allen Officer and Director March 20, 1998
/s/ Leo F. Korman Senior Vice President, Chief
_____________________________ Financial Officer and Principal
Leo F. Korman Accounting Officer March 20, 1998
/s/ Thomas A. Berglund
_____________________________
Thomas A. Berglund Director March 20, 1998
/s/ Terry J. Blumer
_____________________________
Terry J. Blumer Director March 20, 1998
/s/ John F. Klein
_____________________________
John F. Klein Director March 20, 1998
/s/ John A. Sprague
______________________________
John A. Sprague Director March 20, 1998
</TABLE>
43
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
Core-Mark International, Inc.
Under date of February 20, 1998, we reported on the consolidated balance
sheets of Core-Mark International, Inc. and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/S/ KPMG Peat Marwick LLP
SAN FRANCISCO, CALIFORNIA
FEBRUARY 20, 1998
44
<PAGE>
SCHEDULE II
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(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,
1995........................... 2,692 1,720 -- (812)(a) 3,600
1996........................... 3,600 895 -- (614)(a) 3,881
1997........................... 3,881 1,237 -- (2,168)(a) 2,950
(a) Deductions consist of accounts determined to be uncollectible and charged against reserves, net of collections on
accounts previously charged off.
- -----------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSET VALUATION
ALLOWANCE
Year Ended December 31,
1995........................... 11,842 -- -- (1,018)(b) 10,824
1996........................... 10,824 -- -- (1,514)(b) 9,310
1997........................... 9,310 -- -- (1,568)(b) 7,742
(b) Deductions are due to changes in factors affecting the realizability of the Company's deferred tax assets.
</TABLE>
45
<PAGE>
AMENDMENT NO. 1 TO
GRANT OF EXCLUSIVE MANUFACTURING RIGHTS
THIS AMENDMENT NO. 1 is made as of the 31st day of December, 1997 (this
"Amendment"), between FAMOUS VALUE BRANDS, a division of PHILIP MORRIS
INCORPORATED, a Virginia corporation with offices at 120 Park Avenue, New
York, New York 10017 ("Manufacturer"), CORE-MARK INTERNATIONAL INC., a Nevada
corporation with offices at 395 Oyster Point Boulevard, Suite 415, South San
Francisco, California 94080 ("Parent"), CORE-MARK INTERRELATED COMPANIES,
INC., a California corporation with offices at 395 Oyster Point Boulevard,
Suite 415, South San Francisco, California 94080 ("Licensor"), and C/M
PRODUCTS, INC., a California corporation with offices at 395 Oyster Point
Boulevard, Suite 415, South San Francisco, California 94080 ("C/M Products").
PRELIMINARY STATEMENTS
A. Manufacturer and Grantor entered into that certain Grant of Exclusive
Manufacturing Rights dated as of July 1, 1993 (the "Grant Agreement"),
providing for, among other things, each of Parent, Licensor and C/M Products
to grant and convey to Manufacturer exclusive rights to manufacture for
Grantor (as defined therein) any and all proprietary private label brand
cigarettes
<PAGE>
for sale and distribution in the United States, including cigarettes
utilizing the trademark(s) and package designs identified on EXHIBIT A
attached thereto.
B. Manufacturer and each of Parent, Licensor and C/M Products desire to
amend certain provisions of the Grant Agreement as more particularly
described herein, and to continue the Grant Agreement, as amended hereby, the
Manufacturing Agreement for "Best Buy" Cigarettes, dated as of July 1, 1993,
as amended by Amendment No. 1 dated as of the date hereof, between
Manufacturer and C/M Products (the "Private Label Manufacturing Agreement"),
and the Amended and Restated Trademark License Agreement, dated as of July 1,
1993, as amended by Amendment No. 1 dated as of the date hereof, between
Manufacturer and Licensor (the "Amended and Restated Trademark License
Agreement"), in full force and effect on the terms contained therein and
herein.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants and agreements contained herein, the parties hereto agree as
follows:
- 2 -
<PAGE>
ARTICLE I
AMENDMENTS
Section 1.1 AMENDMENT TO SECTION 1.2. The Grant Agreement is hereby
amended by deleting Section 1.2 thereof in its entirety and inserting in lieu
thereof the following new Section 1.2:
"Section 1.2 MANUFACTURER'S ANNUAL PAYMENTS.
[Section 1.2 has been omitted and filed separately with the Commission pursuant
to Rule 406.]
- 3 -
<PAGE>
Section 1.2 AMENDMENT TO SECTION 4.1. The Grant Agreement is hereby
amended by deleting Section 4.1 in its entirety and inserting in lieu thereof
the following new Section 4.1:
"Section 4.1 TERM. Unless earlier terminated pursuant to Section
4.2 of this Agreement, this Agreement shall continue for an initial term
(the "Initial Term") ending on December 31, 2001. C/M Products shall
have the option, exercisable no later than ninety (90) days prior to the
end of the Initial Term, to extend this Agreement for a single
additional one-year term (the "Extended Term") following the expiration
of the Initial Term. Thereafter, this Agreement shall continue in effect
upon the same terms and conditions for one or more additional one-year
periods (each a "Renewal Period") unless, at least ninety (90) days prior
to the end of the Extended Term, or any successive Renewal Period, either
party provides the other with written notice of its intent not to renew
this Agreement."
ARTICLE II
GENERAL PROVISIONS
Section 2.1 PRE-EXISTING CONTRACTUAL RELATIONSHIP. C/M Products
represents that the pre-existing manufacturing agreement referenced in
Section 1.3 of the Grant Agreement terminated, in accordance
- 4 -
<PAGE>
with its terms and consistent with the rights and obligations of the parties
thereunder, and is no longer of any force or effect.
Section 2.2 NO FURTHER MODIFICATION. The Grant Agreement, the Private
Label Manufacturing Agreement and the Amended and Restated Trademark License
Agreement shall remain in full force and effect on the terms and conditions
contained therein and herein. The Grant Agreement shall not be deemed to be
amended, modified or supplemented in any respect except as expressly set
forth in this Amendment. For purposes of this Amendment, each of the
representations and warranties of Manufacturer in Section 3.1 of the Grant
Agreement shall be deemed to be made by Manufacturer on and as of the date
hereof, and each of the representations and warranties of Parent, Licensor
and C/M Products in Section 3.2 of the Grant Agreement shall be deemed to be
made by each of them on and as of the date hereof.
Section 2.3 SEVERABILITY. If any provision of this Amendment is
determined to be invalid or unenforceable, the provision shall be deemed to
be severable from the remainder of this Amendment and shall not cause the
invalidity or unenforceability of the remainder of this Amendment.
- 5 -
<PAGE>
Section 2.4 GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York (other than
the choice of law provisions thereof).
Section 2.5 ENTIRE AGREEMENT. The Grant Agreement, as amended by this
Amendment, constitutes the entire agreement between the parties with respect
to the subject matter hereof and supersedes all prior and contemporaneous
agreements, contracts, negotiations and understandings between them (other
than the Private Label Manufacturing Agreement and the Amended and Restated
Trademark License Agreement).
Section 2.6 COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
- 6 -
<PAGE>
IN WITNESS WHEREOF, this Amendment No. 1 to the Grant Agreement has been
duly executed as of the date first above written.
FAMOUS VALUE BRANDS,
a division of
PHILIP MORRIS INCORPORATED,
a Virginia corporation
By: /s/ Roy Anise
---------------------------
Name: Roy Anise
Title: VP - Discount Brands
Dated: 12/29/97
CORE-MARK INTERNATIONAL INC.
By: /s/ Robert A. Allen
---------------------------
Robert A. Allen
President
Dated: 12/16/97
C/M PRODUCTS, INC.
By: /s/ Robert A. Allen
---------------------------
Robert A. Allen
President
Dated: 12/16/97
CORE-MARK INTERRELATED COMPANIES, INC.
By: /s/ Robert A. Allen
---------------------------
Robert A. Allen
President
Dated: 12/16/97
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<PAGE>
AMENDMENT NO. 1 TO
MANUFACTURING AGREEMENT FOR "BEST BUY" CIGARETTES
THIS AMENDMENT NO. 1 is made as of the 31st day of December, 1997 (this
"Amendment"), between FAMOUS VALUE BRANDS, a division of PHILIP MORRIS
INCORPORATED, a Virginia corporation with offices at 120 Park Avenue, New
York, New York 10017 ("Manufacturer"), and C/M PRODUCTS, INC., a California
corporation with offices at 395 Oyster Point Boulevard, Suite 415, South San
Francisco, California 94080 ("C/M Products").
PRELIMINARY STATEMENTS
A. Manufacturer and C/M Products entered into that certain Manufacturing
Agreement for "Best Buy" Cigarettes dated as of July 1, 1993 (the
"Manufacturing Agreement"), providing for, among other things, Manufacturer
to manufacture and sell to C/M Products certain private label brand
cigarettes utilizing the Trademarks (as defined in the Manufacturing
Agreement).
B. Manufacturer and C/M Products desire to amend certain provisions of
the Manufacturing Agreement as more particularly described herein, and,
except as amended hereby, the Manufacturing Agreement shall continue in full
force and effect on the terms contained therein and herein.
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, the parties hereto agree as
follows:
ARTICLE I
AMENDMENTS
Section 1.1 AMENDMENT TO SECTION 1.4. The Manufacturing Agreement is
hereby amended by inserting as the second sentence and the first word of the
third sentence in Section 1.4 thereof the following sentence and word:
"Without limiting the generality of the preceding sentence, this
Agreement shall not require that Manufacturer produce any packing of the
Products which is uneconomical for Manufacturer to produce due to the
unreasonably low level of sales of such packing relative to other Products.
Furthermore,"
Section 1.2 AMENDMENT TO SECTION 3.1. The Manufacturing Agreement is
hereby amended by deleting Section 3.1 in its entirety and inserting in lieu
thereof the following new Section 3.1.
"Section 3.1 TERM. Unless earlier terminated pursuant to Section
3.2 of this Agreement, this Agreement shall continue for an initial term
(the "Initial Term") ending on December 31, 2001, or, if C/M Products shall
have elected to extend to December 31, 2002 the initial term of the
Grant of Exclusive Manufacturing Rights, as amended on the date hereof,
between C/M Products, certain of its affiliates and Manufacturer, ending
on December 31, 2002. Thereafter, this Agreement shall continue in effect
upon the same terms and conditions for one or more additional one-year
periods (each a "Renewal Period") unless, at least ninety (90) days prior
to the end of the
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<PAGE>
Extended Term, or any successive Renewal Period, either party provides
the other with written notice of its intent not to renew this Agreement."
Section 1.3 AMENDMENT TO SECTION 3.2
[Section 1.3 has been omitted and filed separately with the Commission
pursuant to Rule 406.]
ARTICLE II
GENERAL PROVISIONS
Section 2.1 PRE-EXISTING CONTRACTUAL RELATIONSHIP. C/M Products
represents and warrants that the pre-existing manufacturing agreement
referenced in Section 1.3 of the Manufacturing Agreement terminated, in
accordance with its terms and consistent with the rights and obligations of
the parties thereunder, and is no longer of any force or effect.
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<PAGE>
Section 2.2 NO FURTHER MODIFICATION. The Manufacturing Agreement shall
remain in full force and effect and shall not be deemed to be amended,
modified or supplemented in any respect, except as expressly set forth in
this Amendment. For purposes of this Amendment, each of the representations
and warranties of Manufacturer in Section 2.1 of the Manufacturing Agreement
shall be deemed to be made by Manufacturer on and as of the date hereof, and
each of the representations and warranties of C/M Products in Section 2.2
of the Manufacturing Agreement shall be deemed to be made by C/M Products on
and as of the date hereof.
Section 2.3 SEVERABILITY. If any provision of this Amendment is
determined to be invalid or unenforceable, the provision shall be deemed to
be severable from the remainder of this Amendment and shall not cause the
invalidity or unenforceability of the remainder of this Amendment.
Section 2.4 GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York (other than
the choice of law provisions thereof).
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<PAGE>
Section 2.5 ENTIRE AGREEMENT. The Manufacturing Agreement, as amended by
this Amendment, constitutes the entire agreement between the parties with
respect to the Products (as defined in the Manufacturing Agreement) and
supersedes all prior and contemporaneous agreements, contracts, negotiations
and understandings between them (other than the Grant of Exclusive
Manufacturing Rights, dated as of July 1, 1993, between Core-Mark
International Inc., Core-Mark Interrelated Companies, Inc. ("Licensor") and
C/M Products, as amended by Amendment No. 1 dated the date hereof, and the
Amended and Restated Trademark License Agreement, dated as of July 1, 1993,
between Manufacturer and Licensor, as amended by Amendment No. 1 dated the
date hereof).
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<PAGE>
Section 2.6 COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, this Amendment No. 1 has been duly executed as of
the date first above written.
C/M PRODUCTS, INC. FAMOUS VALUE BRANDS, A
DIVISION OF PHILIP
MORRIS INCORPORATED, A
VIRGINIA CORPORATION
By: /s/ Robert A. Allen By: /s/ Roy Anise
------------------------------- ------------------------------
Robert A. Allen Its: V.P. - Discount Brands
President
Dated: 12/16/97 Dated: 12/29/97
Each of the undersigned hereby
agrees and consents to each of the
terms and conditions of this Amendment No. 1:
CORE-MARK INTERNATIONAL, INC.
By: /s/ Robert A. Allen
-------------------------------
Robert A. Allen
President
Dated:
CORE-MARK INTERRELATED COMPANIES, INC.
By: /s/ Robert A. Allen
-------------------------------
Robert A. Allen
President
Dated:
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<PAGE>
AMENDMENT NO. 1 TO
AMENDED AND RESTATED
TRADEMARK LICENSE AGREEMENT
THIS AMENDMENT NO. 1 is made as of the 31st day of December, 1997 (this
"Amendment"), by and between FAMOUS VALUE BRANDS, a division of PHILIP
MORRIS INCORPORATED, a Virginia corporation with offices at 120 Park Avenue,
New York, New York 10017 ("Manufacturer"), and CORE-MARK INTERRELATED
COMPANIES, INC., a California corporation with offices at 395 Oyster Point
Boulevard, Suite 415, South San Francisco, California 94080 ("Licensor").
WHEREAS, this Amendment is an amendment to that certain Amended and
Restated Trademark License Agreement, dated as of July 1, 1993 (the "Amended
and Restated Trademark and License Agreement"), between Manufacturer and
Licensor.
NOW, THEREFORE, Manufacturer and Licensor agree as follows:
<PAGE>
ARTICLE I
AMENDMENTS
Section 1.1 AMENDMENT TO SECTION 3. The Amended and Restated Trademark
License Agreement is hereby amended by deleting the reference to "December
31, 1998" contained in Section 3 and inserting in lieu thereof "December 31,
2001 (or December 31, 2002, if the Manufacturing Agreement shall have been
extended to such date)".
ARTICLE II
GENERAL PROVISIONS
Section 2.1 NO FURTHER MODIFICATION. The Amended and Restated Trademark
License Agreement shall remain in full force and effect on the terms and
conditions contained therein and herein, and shall not be deemed to be
amended, modified or supplemented in any respect except as expressly set
forth in this Amendment. For purposes of this Amendment, each of the
representations, warranties and agreements of Licensor in Section 5 of the
Amended and Restated Trademark License Agreement shall be deemed to be made
by Licensor on and as of the date hereof.
Section 2.2 SEVERABILITY. If any provision of this Amendment is
determined to be invalid or
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<PAGE>
unenforceable, the provision shall be deemed to be severable from the
remainder of this Amendment and shall not cause the invalidity or
unenforceability of the remainder of this Amendment.
Section 2.3 GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York (other than
the choice of law provisions thereof).
Section 2.4 ENTIRE AGREEMENT. This Amendment constitutes the entire
agreement between the parties with respect to the subject matter hereof.
- 3 -
<PAGE>
IN WITNESS WHEREOF the parties have duly executed this Amendment as of
the date first set out above.
FAMOUS VALUE BRANDS, A CORE-MARK INTERRELATED
DIVISION OF PHILIP MORRIS COMPANIES, INC.
INCORPORATED, A VIRGINIA
CORPORATION
By: /s/ Roy Anise By: /s/ Robert A. Allen
--------------------------- ---------------------------
Its: V.P. - Discount Brands Robert A. Allen
---------------------- President
Dated: 12/29/97 Dated: 12/16/97
The undersigned agrees and consents
to each of the terms and conditions
of this Amendment No. 1:
CORE-MARK INTERNATIONAL INC.
By: /s/ Robert A. Allen
---------------------------
Robert A. Allen
President
Dated:
- 4 -
<PAGE>
EXHIBIT 16.1
March 20, 1998
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously the principal accountants for Core-Mark International,
Inc. and, under the date of February 20, 1998, we reported on the
consolidated financial statements of Core-Mark International, Inc. and
subsidiaries (the Company) as of and for the years ended December 31, 1997
and 1996. On January 27, 1998, the Company determined not to engage KPMG
Peat Marwick LLP as the independent public accountants for its 1998 fiscal
year. We have read the Company's statements included in Item 9 of its Form
10-K dated March 20, 1998, and we agree with such statements, except that we
are not in a position to agree or disagree with the Company's statements that
the change was approved by the Board of Directors or the Company's statements
in the seventh paragraph of Item 9 of the aforementioned Form 10-K.
Very truly yours,
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,281
<SECURITIES> 0
<RECEIVABLES> 109,416
<ALLOWANCES> 2,950
<INVENTORY> 103,246
<CURRENT-ASSETS> 233,790
<PP&E> 56,633
<DEPRECIATION> 28,633
<TOTAL-ASSETS> 336,580
<CURRENT-LIABILITIES> 131,574
<BONDS> 197,012
0
0
<COMMON> 55
<OTHER-SE> (1,091)
<TOTAL-LIABILITY-AND-EQUITY> 336,580
<SALES> 2,395,867
<TOTAL-REVENUES> 2,395,867
<CGS> 2,216,162
<TOTAL-COSTS> 148,902
<OTHER-EXPENSES> 1,498
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<INTEREST-EXPENSE> 18,181
<INCOME-PRETAX> 11,124
<INCOME-TAX> 4,834
<INCOME-CONTINUING> 6,290
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<EXTRAORDINARY> 0
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<NET-INCOME> 6,290
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