FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________to_____________________
Commission file number 333-14217
============
Core-Mark International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 91-1295550
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
395 Oyster Point Boulevard, Suite 415
South San Francisco, CA 94080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 589-9445
============
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
_X_ Yes ___ No
At October 31, 1999, Registrant had outstanding
5,500,000 shares of Common Stock.
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Core-Mark International, Inc. and Subsidiaries
FORWARD-LOOKING STATEMENTS OR INFORMATION
Certain statements contained in this quarterly report on Form 10-Q under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and elsewhere herein and in the documents incorporated
herein by reference are not statements of historical fact but are future-looking
or forward-looking statements that may constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Certain, but not necessarily all, of such forward-looking statements
can be identified by the use of such forward-looking terminology as the words
"believes," "expects," "may," "will," "should," or "anticipates" (or the
negative of such terms) or other variations thereon or comparable terminology,
or because they involve discussions of Core-Mark International, Inc.'s (the
"Company's") strategy. Such forward-looking statements are based upon a number
of assumptions concerning future conditions that may ultimately prove to be
inaccurate. The ability of the Company to achieve the results anticipated in
such statements is subject to various risks and uncertainties and other factors
which may cause the actual results, level of activity, performance or
achievements of the Company or the industry in which it operates to be
materially different from any future results, level of activity, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the general state of the economy and business
conditions in the United States and Canada; adverse changes in consumer
spending; the ability of the Company to implement its business strategy,
including the ability to integrate recently acquired businesses into the
Company; the ability of the Company to obtain financing; competition; the level
of retail sales of cigarettes and other tobacco products; possible effects of
legal proceedings against manufacturers and sellers of tobacco products;
increases in federal and state taxes on tobacco products that have the effect of
increasing the prices of such 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.
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Page
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999..................................................... 3
Condensed Consolidated Statements of Income for the three and nine months
ended September 30, 1998 and 1999...................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1999............................................ 5
Notes to Condensed Consolidated Financial Statements................... 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 8
Item 3: Quantitative and Qualitative Disclosures About Market
Risk................................................................ 13
PART II - OTHER INFORMATION
Item 1: Legal Proceedings............................................. 14
Item 2: Changes in Securities and Use of Proceeds..................... 14
Item 3: Defaults Upon Senior Securities............................... 14
Item 4: Submission of Matters to a Vote of Security Holders........... 14
Item 5: Other Information............................................. 14
Item 6: Exhibits and Reports on Form 8-K.............................. 14
Signature................................................................... 15
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CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands of Dollars)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash ...................................................................... $ 24,586 $ 12,773
Receivables:
Trade accounts, less allowance for doubtful accounts of $2,761 and
$2,360, respectively.............................................. 103,412 113,721
Other ................................................................. 12,578 10,411
Inventories, net of LIFO allowance of $34,332 and $40,086, respectively.... 112,481 71,003
Prepaid expenses and other................................................. 6,576 6,029
-------- --------
Total current assets .................................................. 259,633 213,937
Property and equipment ......................................................... 61,332 64,533
Less accumulated depreciation ............................................. (33,283) (36,922)
-------- --------
Net property and equipment ................................................ 28,049 27,611
Other assets .................................................................. 7,227 6,109
Goodwill, net of accumulated amortization of $19,375 and $20,937,
respectively .............................................................. 64,481 62,919
-------- --------
$359,390 $310,576
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable..................................................... $ 48,867 $ 52,260
Cigarette and tobacco taxes payable........................................ 45,073 52,984
Income taxes payable....................................................... 2,698 2,874
Deferred income taxes...................................................... 6,992 6,809
Other accrued liabilities.................................................. 34,514 31,011
-------- --------
Total current liabilities.............................................. 138,144 145,938
Long-term debt.................................................................. 208,124 137,649
Other accrued liabilities and deferred income taxes............................. 9,260 10,928
-------- --------
Total liabilities.......................................................... 355,528 294,515
Commitments and contingencies
Shareholders' equity:
Common stock; $.01 par value; 10,000,000 shares authorized;
5,500,000 shares issued and outstanding ............................... 55 55
Additional paid-in capital................................................. 26,121 26,121
Accumulated deficit........................................................ (15,077) (3,889)
Accumulated other comprehensive loss:
Foreign currency translation adjustments............................... (4,225) (3,214)
Minimum pension liability adjustment................................... (3,012) (3,012)
-------- --------
Total shareholders' equity............................................. 3,862 16,061
-------- --------
$359,390 $310,576
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................................ $657,893 $760,909 $1,830,164 $2,097,767
Cost of goods sold................................... 610,325 711,623 1,697,485 1,952,239
-------- -------- -------- --------
Gross profit..................................... 47,568 49,286 132,679 145,528
Operating and administrative expenses................ 38,830 38,722 111,880 115,694
-------- -------- -------- --------
Operating income................................. 8,738 10,564 20,799 29,834
Interest expense, net................................ 3,678 3,094 11,666 9,589
Debt refinancing costs............................... 311 318 1,884 955
-------- -------- -------- --------
Income before income taxes....................... 4,749 7,152 7,249 19,290
Income tax expense................................... 2,183 3,004 3,332 8,102
-------- -------- -------- --------
Net income....................................... $ 2,566 $ 4,148 $ 3,917 $ 11,188
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
----------------------------------------
1998 1999
-------- --------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income ..................................................................... $ 3,917 $ 11,188
Adjustments to reconcile net income to net cash provided by operating
activities:
LIFO expense............................................................... 5,481 5,754
Depreciation and amortization.............................................. 4,686 4,804
Amortization of goodwill................................................... 1,561 1,562
Amortization of debt refinancing fees...................................... 1,884 955
Deferred income taxes...................................................... (245) 1,499
Changes in operating assets and liabilities................................ 3,502 35,877
-------- --------
Net cash provided by operating activities ...................................... 20,786 61,639
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment ....................................... (3,932) (3,988)
-------- --------
Net cash used in investing activities .......................................... (3,932) (3,988)
-------- --------
FINANCING ACTIVITIES:
Net payments under revolving credit agreement.............................. (88,530) (56,475)
Net proceeds (payments) under securitization of accounts receivable........ 72,000 (14,000)
Debt refinancing fees...................................................... (1,541) --
-------- --------
Net cash used in financing activities .......................................... (18,071) (70,475)
-------- --------
Effects of changes in foreign exchange rates.................................... (1,176) 1,011
-------- --------
Decrease in cash ............................................................... (2,393) (11,813)
Cash, beginning of period ...................................................... 15,281 24,586
-------- --------
CASH, END OF PERIOD............................................................. $ 12,888 $ 12,773
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments during the period for:
Interest .................................................................. $ 13,588 $ 11,591
Income taxes .............................................................. 2,019 6,399
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 1999
(Unaudited)
1. Basis of Presentation
The condensed consolidated balance sheet as of September 30, 1999, the
condensed consolidated statements of income for the three-month and nine-month
periods ended September 30, 1998 and 1999, and the condensed consolidated
statements of cash flows for the nine-month periods ended September 30, 1998 and
1999, have been prepared by Core-Mark International, Inc. (the "Company"). In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the Company
at September 30, 1999 with respect to the interim financial statements, and the
results of its operations and cash flows for the interim periods ended September
30, 1998 and 1999, have been included. The results of operations for the interim
periods are not necessarily indicative of the operating results for the full
year.
The condensed consolidated balance sheet as of December 31, 1998, is
derived from the audited financial statements but does not include all
disclosures required by generally accepted accounting principles. The notes
accompanying the consolidated financial statements of the Company included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998
("1998 Form 10-K") include a description of the Company's significant accounting
policies and additional information pertinent to an understanding of both the
December 31, 1998 balance sheet and the interim financial statements included
herein.
2. Inventories
The condensed consolidated financial statements have been prepared using
the LIFO method of accounting for inventories. The use of the LIFO method
resulted in an increase in cost of goods sold and a corresponding decrease in
inventories of $1.4 million and $5.5 million for the three months ended
September 30, 1998 and 1999, respectively, and $5.5 million and $5.8 million for
the nine months ended September 30, 1998 and 1999, respectively. Interim LIFO
calculations are based on management's estimates of year-end inventory levels
and inflation rates for the year.
3. Excise Taxes
State and provincial excise taxes on cigarettes included in the Company's
net sales and cost of goods sold were $123.4 million and $155.0 million for the
three months ended September 30, 1998 and 1999, respectively and $352.0 million
and $430.1 million for the nine months ended September 30, 1998 and 1999,
respectively.
4. Comprehensive Income
The Company's total comprehensive income was $1.7 million and $4.1 million
for the three months ended September 30, 1998 and 1999, respectively, and $2.7
million and $12.2 million for the nine months ended September 30, 1998 and 1999,
respectively, which reflects net income and foreign currency translation
adjustments.
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Notes to Condensed Consolidated Financial Statements (cont.)
5. Segment Information
Management has determined that the only reportable segment of the Company
is its wholesale distribution segment, based on the level at which executive
management reviews the results of operations in order to make decisions
regarding performance assessment and resource allocation. There has been no
change in the segment reported or the basis of measurement of segment profit or
loss from that which was reported in the Company's 1998 Form 10-K. Wholesale
distribution segment information for the three-month and nine-month periods
ended September 30, and segment assets as of December 31, 1998 and September 30,
1999 are set forth below (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ ------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales from external customers............................. $657,893 $760,909 $1,830,164 $2,097,767
Segment pretax operating income (1).......................... $ 5,979 $ 7,886 $ 12,949 $ 21,848
Less: Goodwill and other unallocated amortization ............ 659 569 1,971 1,695
Interest expense: unallocated and other................. 260 (153) 1,845 (92)
Amortization of debt refinancing costs ................. 311 318 1,884 955
-------- -------- -------- --------
Consolidated income before income taxes....................... $ 4,749 $ 7,152 $ 7,249 $ 19,290
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Assets December 31, September 30,
1998 1999
-------- --------
<S> <C> <C>
Segment assets................................................ $341,583 $301,550
Add: Corporate and other...................................... 17,807 9,026
-------- --------
Consolidated assets........................................... $359,390 $310,576
======== ========
</TABLE>
---------------------
(1) Represents operating income, including allocated interest expense,
but excluding amortization of goodwill and debt refinancing costs,
and income taxes.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Management's
Discussion and Analysis and the discussion under the heading "Legal Proceeding -
Regulatory and Legislative Matters" included in the Company's 1998 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. For the nine months ended September 30, 1999, approximately 69%, 21%
and 10% of the Company's net sales were derived from cigarettes, food products
and non-food products, respectively.
Tobacco Industry Business Environment
Manufacturers and distributors of cigarettes and other tobacco products
face a number of significant issues that affect the business environment in
which they operate including proposed additional governmental regulation; actual
and proposed excise tax increases (see "Impact of Tobacco Taxes" below);
increased litigation involving health and other effects of cigarette smoking and
other uses of tobacco; and potential litigation by the U.S. Department of
Justice to recover federal Medicare costs allegedly connected to smoking.
In August 1996, the United States Food and Drug Administration (the "FDA")
determined that it had jurisdiction over cigarettes and smokeless tobacco
products and issued regulations restricting the sale, distribution and
advertising of cigarette and smokeless tobacco products, especially to minors.
The FDA regulations are significant not only because of their substance, but
also because the FDA determined that it has jurisdiction over cigarettes and
smokeless tobacco as "combination products having both a drug component,
including nicotine, and device components." The regulations regulate such
products as "devices." In April 1997, the U.S. District Court for the Middle
District of North Carolina held that the FDA could impose restrictions on access
to and labeling of tobacco products, but did not have authority to restrict the
promotion and advertisement of such products. The court stayed implementation of
the FDA regulations except for those establishing a federal minimum age of 18
for the sale of tobacco products and requiring proof of age for anyone under the
age of 27. On August 14, 1998, however, the United States Court of Appeals for
the Fourth Circuit reversed the decision of the District Court, finding that the
FDA lacked statutory authority to regulate tobacco products altogether. The
FDA's petitions for rehearing and rehearing en banc by the Fourth Circuit were
denied, but, on April 26, 1999, the Supreme Court granted certiorari to review
the decision of the Court of Appeals. Briefing on the case has been completed,
and oral argument before the Supreme Court has been set for December 1, 1999.
In June 1997, a so called "national settlement" of many of these issues was
proposed following negotiations among major U.S. tobacco manufacturers, state
attorneys general, representatives of the public health community and attorneys
representing plaintiffs in certain smoking and health litigation. The national
settlement required implementation by federal legislation, however, and such
legislation was considered but not passed by the Congress in 1998. Similar
federal legislation has not been introduced to date in 1999.
In light of failure of the national settlement legislation, in November
1998, the four largest U.S. cigarette manufacturers and the attorneys general of
46 states, five territories, and the District of Columbia agreed to a settlement
of approximately $400 billion for public health-care costs allegedly connected
to smoking. The settlement - which takes effect in each settling jurisdiction
when the courts in each such jurisdiction enter a final consent decree and any
appeals of such decree are disposed of or become time-barred - allows for
payment of the agreed sum by the cigarette manufacturers over 25 years, settles
the state and territory health-care claims against the tobacco industry and
imposes a number of new marketing, advertising, sales and other restrictions on
tobacco products. As a direct result of this settlement, the major cigarette
manufacturers raised the wholesale price of cigarettes by $4.50 per carton,
effective November 24, 1998, bringing the total per-carton price increase in the
United States in 1998 to $6.35.
Included in the terms of the settlement are conditions that tobacco
companies participating in the settlement may not: target youth in the
advertising, promotion or marketing of tobacco products; use tobacco brand names
to sponsor concerts, athletics events or other events in which a significant
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percentage of the audience is under 18 years of age; advertise products in
conspicuous places outdoors (such as billboards) or on transit vehicles;
merchandise a tobacco brand name through the marketing, distribution or sale of
apparel or other merchandise; provide free samples of tobacco products in any
area except an adults-only facility; distribute or sell cigarettes in pack sizes
of less than 20; or lobby state legislatures on certain anti-tobacco initiatives
(such as limitations on youth access to vending machines). Many of these
provisions took effect in November 1998 and most of the remaining provisions
took effect by April 23, 1999. The Company is unable to assess the effects that
this agreement will have on the sale of the Company's products; there can be no
assurance that these new restrictions will not result in a material reduction of
the consumption of tobacco products in the United States and thus will not have
a material adverse effect on the Company's business and financial position.
Over the past decade, various state and local governments have imposed
significant regulatory restrictions on tobacco products, including sampling and
advertising bans or restrictions, packaging regulations and prohibitions on
smoking in restaurants, office buildings and public places. With a limited
number of exceptions, the state Medicaid litigation settlement prohibits the
participating tobacco manufacturers from challenging any restriction relating to
tobacco control enacted prior to June 1, 1998. Additional state and local
legislative and regulatory actions are being considered and are likely to be
promulgated in the future. The Company is unable to assess the future effects
that these various proposals may have on the sale of the Company's products.
On September 22, 1999, the U.S. Department of Justice filed "an action to
recover health care costs paid for and furnished...by the federal government for
lung cancer, heart disease, emphysema and other tobacco-related illnesses caused
by the fraudulent and tortious conduct of..." the major tobacco manufacturers.
The defendant companies announced that they would fight the litigation. Congress
did not include funding for the $20 million that the President requested to
pursue this litigation, and the President included this funding omission among
the reasons for his veto of the Justice Department appropriations bill on
October 26, 1999. If the Justice Department prevails in the litigation, or if
the litigation is settled, there can be no assurance that the litigation will
not result in increased cigarette prices and/or a material reduction of the
consumption of tobacco products in the United States, and thus will not have a
material adverse affect on the Company's business and financial position.
Effective January 1, 1999, the State of California increased the state
excise tax on cigarettes by $5.00 per carton. California is the Company's
largest market, representing approximately 38% of carton sales during the nine
months ended September 30, 1999.
The major U.S. cigarette manufacturers raised the wholesale price of
cigarettes by $1.80 per carton, effective August 30, 1999.
The Company believes that price and tax increases of the magnitude recently
experienced, as well as increases which occur in the future (see "--Impact of
Tobacco Taxes"), will have a negative impact on overall industry unit sales and
will negatively affect the Company's sales of tobacco products. The Company does
not believe that it is able to quantify the impact of these higher prices and
taxes on future sales of cigarettes and other tobacco products. Manufacturer
price increases will also increase the Company's debt and interest expense
levels. The Company believes that it has adequate financing arrangements in
place at the present time to finance the additional working capital requirements
of the most recent manufacturer price increases. However, depending upon future
levels of manufacturer price increases, or if the terms or amounts of state and
provincial excise taxes were adversely changed, the Company may be required to
seek additional financing in order to meet future 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.
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
NET SALES. Net sales for the three months ended September 30, 1999 were
$760.9 million, an increase of $103.0 million or 15.7% over the same period in
1998. The increase in net sales was primarily due to an increase in net sales of
cigarettes, as well as increased sales of food and non-food products in 1999
compared to 1998.
Net sales of cigarettes for the three months ended September 30, 1999 were
$530.6 million, an increase of $93.6 million or 21.4% over the same period in
1998. The increase in net sales of cigarettes was principally due to increases
in manufacturers' list prices as well as the $5.00 per carton increase in
California state excise taxes which became effective January 1, 1999, all of
which have been passed on to the Company's customers in the form of higher
prices. The Company's total cigarette unit sales for the three months ended
September 30, 1999 were 21.0 million cartons, a decrease of 2.0 million cartons
or 8.9% from the same period of 1998. The decrease in the Company's carton sales
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occurred primarily in California, and was due to a number of factors. In both
1998, and in 1999, the competition from grey market cigarettes continued to be
intense in California. Grey market cigarettes are cigarettes produced by the
major tobacco companies, and intended for export only, but which are
reintroduced into the domestic market by unauthorized distributors at prices
substantially lower then domestic cigarettes. However, in October 1999, the
California legislature passed and the governor signed, bill SB702, which will
make it illegal to affix state tax stamps to grey market cigarettes. If enforced
by the state of California, this bill could result in an improvement in the
Company's California cigarette volume. For the three months ended September 30,
1999, cigarette carton sales in the United States, outside of California, were
substantially the same as in the comparable period of 1998.
Net sales of food and non-food products for the three months ended
September 30, 1999 were $230.3 million, an increase of $9.4 million or 4.3% over
the same period in 1998.
GROSS PROFIT. Gross profit for the three months ended September 30, 1999
was $49.3 million, an increase of $1.7 million or 3.6% over the same period in
1998. The increase was primarily due to the higher level of sales in both the
cigarette and food and non-food categories. The gross profit margin for the
three months ended September 30, 1999 decreased to 6.5% of net sales as compared
to 7.2% of net sales for the comparable period in 1998. However, the decline in
overall gross profit margin was primarily due to the sharp increase in the
wholesale cost of cigarettes over the past year. Gross margins on cigarettes are
significantly lower then the margins on food and non-food products, and the much
faster growth in cigarette revenues caused the reduction in margins. During the
period, while cigarette gross profit margins declined slightly, gross profit per
carton increased, and the gross profit margins on food and non-food products
remained virtually unchanged.
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses for the three months ended September 30, 1999 were $38.7 million, a
decrease of $0.1 million or 0.3% over the same period in 1998. As a percent of
net sales, expenses for the three months ended September 30, 1999 decreased to
5.1% of net sales as compared to 5.9% of net sales for the same period in 1998.
The decline in operating expenses as a percent of net sales is primarily due to
the higher level of cigarette net sales resulting from cigarette price
increases, and a slight decline in warehouse and distribution costs.
OPERATING INCOME. As a result of the foregoing factors, operating income
for the three months ended September 30, 1999 was $10.6 million, an increase of
$1.8 million or 20.9% compared to the same period in 1998. As a percentage of
net sales, operating income for the three months ended September 30, 1999 was
1.4%, as compared to 1.3% for the same period in 1998.
NET INTEREST EXPENSE. Net interest expense for the three months ended
September 30, 1999 was $3.1 million, a decrease of $0.6 million or 15.9%
compared to 1998. The net decrease resulted from a decrease in the Company's
average debt levels.
DEBT REFINANCING COSTS. Debt refinancing costs for the three months ended
September 30, 1999 were $0.3 million, and remained constant compared to the same
period in 1998.
Nine Months Ended September 30, 1999 Compared to Nine Months
Ended September 30, 1998
NET SALES. Net sales for the nine months ended September 30, 1999 were
$2,097.8 million, an increase of $267.6 million or 14.6% over the comparable
period in 1998. The increase in net sales was due to an increase in net sales of
cigarettes and food and non-food products in 1999 compared to 1998.
Net sales of cigarettes for the nine months ended September 30, 1999 were
$1,455.5 million, an increase of $235.2 million or 19.3% over the prior year.
The increase in net sales of cigarettes was principally due to increases in
manufacturers' list prices as well as the $5.00 per carton increase in
California state excise taxes which became effective January 1, 1999, all of
which have been passed along to the Company's customers. The Company's total
cigarette unit sales for the nine months ended September 30, 1999 were 58.6
million cartons, a decrease of 7.3 million cartons or 11.1% from the comparable
period in 1998. The decrease in the Company's carton sales occurred primarily in
California, and was due to a number of factors. In both 1998, and in 1999, the
competition from grey market cigarettes continued to be intense in California.
However, in October 1999, the California legislature passed and the governor
signed, bill SB702, which will make it illegal to affix state tax stamps to grey
market cigarettes. If enforced by the state of California, this bill could
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result in an improvement in the Company's California cigarette volume. For the
nine months ended September 30, 1999, cigarette carton sales in the United
States, outside of California, were substantially the same as in the comparable
period of 1998.
Net sales of food and non-food products for the nine months ended September
30, 1999 were $642.3 million, an increase of $32.4 million or 5.3% over the
comparable period in 1998.
GROSS PROFIT. Gross profit for the nine months ended September 30, 1999 was
$145.5 million, an increase of $12.8 million or 9.7% from the comparable period
in 1998. The increase was primarily due to sales increases in the cigarette and
food and non-food categories. The gross profit margin for the nine months ended
September 30, 1999 decreased slightly to 6.9% of net sales as compared to 7.3%
of net sales for the first nine months of 1998. However, the decline in overall
gross profit margin was primarily due to the sharp increase in the wholesale
cost of cigarettes over the past year. Gross margins on cigarettes are
significantly lower then the margins on food and non-food products, and the much
faster growth in cigarette revenues caused the reduction in margins. During the
period, both cigarette gross profit margins, and gross profit per carton
increased, while the gross profit margins on food and non-food products remained
virtually unchanged.
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses for the nine months ended September 30, 1999 were $115.7 million, an
increase of $3.8 million or 3.4% over the comparable period in 1998. However,
such expenses for the nine months ended September 30, 1999 decreased to 5.5% of
net sales as compared to 6.1% for the comparable period in 1998. The decline in
operating expenses as a percent of net sales is primarily due to the higher
level of cigarette net sales resulting from cigarette price increases.
OPERATING INCOME. As a result of the foregoing factors, operating income
for the nine months ended September 30, 1999 was $29.8 million, an increase of
$9.0 million or 43.4% compared to the comparable period in 1998. As a percentage
of net sales, operating income for the nine months ended September 30, 1999 was
1.4%, as compared to 1.1% for the comparable period in 1998.
NET INTEREST EXPENSE. Net interest expense for the nine months ended
September 30, 1999 was $9.6 million, a decrease of $2.1 million or 17.8%
compared to 1998. The net decrease resulted from a decrease in the Company's
average debt levels and a decline in the average borrowing rates primarily as a
result of the accounts receivable securitization program, which was effective
April 1, 1998.
DEBT REFINANCING COSTS. Debt refinancing costs for the nine months ended
September 30, 1999 were $1.0 million, a decrease of $0.9 million or 49.3% over
the comparable period in 1998. The decrease is a result of the write-off of a
portion of unamortized costs relating to the modification of the revolving
credit facility, which occurred in April 1998.
Liquidity and Capital Resources
The Company's liquidity requirements arise primarily from the funding of
its working capital needs, capital expenditure programs and debt service
requirements with respect to its credit facilities. The Company has no mandatory
reductions of principal on its Revolving Credit Facility, its Accounts
Receivable Facility or its $75 million Senior Subordinated Notes prior to their
final maturities in 2003. The Company has historically financed its operations
through internally generated funds and borrowings under its credit facilities.
The Company's debt obligations totaled $137.6 million at September 30,
1999, a decrease of $70.5 million or 33.9% from $208.1 million at December 31,
1998. The net decrease in outstanding debt is primarily due to decreased
borrowings needed to finance working capital funding requirements which resulted
from the increase in net cash provided from operating activities experienced in
1999. Debt requirements are generally the highest at December 31, when the
Company historically carries higher inventory.
The Company's principal sources of liquidity are net cash provided by
operating activities and its credit facilities. At year end the Company
typically carries higher inventories which are then liquidated in future
periods. Therefore, net cash provided by operating activities is typically
higher at interim periods than at the end of any fiscal year.
The Company made capital expenditures of $4.0 million for the nine months
ended September 30, 1999. For the remainder of 1999, the Company estimates it
will spend approximately $2 to $3 million for capital requirements, principally
consisting of warehouse and other equipment.
-11-
<PAGE>
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. For the nine months ended September 30, 1999, such taxes
on cigarettes represented approximately 26% of cigarette net sales in the U.S.
and 45% 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.
Effective January 1, 1999, the State of California increased excise taxes
on cigarettes by $5.00 per carton and also increased taxes on cigars and other
tobacco products.
Under current law, almost all state and Canadian provincial taxes are
payable by the Company under credit terms which, on the average, exceed the
credit terms the Company has approved for its customers to pay for products
which include such taxes. This practice has benefited the Company's cash flow.
If the Company were required to pay such taxes at the time such obligation was
incurred without the benefit of credit terms, the Company would incur a
substantial permanent increase in its working capital requirements and might be
required to seek additional financing in order to meet such higher working
capital requirements. Consistent with industry practices, the Company has
secured a bond to guarantee its tax obligations to those states and provinces
requiring such a surety (a majority of states in the Company's operating areas).
The U.S. federal excise tax on cigarettes is currently $2.40 per carton of
cigarettes. The federal excise tax is scheduled to increase by $1.00 per carton
of cigarettes starting in the year 2000 and by an additional $.50 per carton of
cigarettes in 2002. Unlike the state and provincial taxes described above, U.S.
federal excise taxes on cigarettes are paid by the cigarette manufacturers and
passed through to the Company as a component of the cost of cigarettes. Such
increases in U.S. federal taxes will increase the Company's working capital
requirements by increasing the balances of its inventories and accounts
receivable.
In 1999, the Clinton Administration proposed as part of its budget for
Fiscal Year 2000 that the excise tax on cigarettes be increased by 55 cents per
pack (in addition to the increases already scheduled for 2000 and 2002), in
order to avoid using the social security trust fund surplus to finance unrelated
federal spending. On October 19, 1999, the House of Representatives defeated tax
legislation that included this increase. While the Company is unaware of
additional legislation that might further increase the federal excise tax on
cigarettes, there can be no assurance that similar proposals will not be
considered in the future.
Impact of Year 2000 Compliance Issues
In accordance with the safe harbor provisions of the Private Securities Act
of 1995, the Company notes that certain statements contained in the following
discussion concerning year 2000 compliance issues are forward-looking in nature
and are subject to many risks and uncertainties. These forward-looking
statements include such matters as the Company's projected state of readiness,
the Company's projected cost of remediation, the expected date or state of
completion of each phase and the expected date or state of completion of
contingency plans. Such statements also constitute "year 2000 readiness
disclosure" within the meaning of the year 2000 Information and Readiness
Disclosure Act.
The Company relies upon various information technology and non-information
technology systems that are required to be year 2000 compliant. Year 2000
compliance indicates that computer software, hardware and embedded processors
are able to correctly process the year 2000 date parameter. The Company has
completed the assessment, modification or conversion and testing of the
Company's systems for year 2000 compliance. The systems that were assessed,
modified or converted for year 2000 compliance included the Company's computer
programs, certain building infrastructure components (including elevators, alarm
systems and certain HVAC systems), and certain data collection and transmission
devices. Additionally, the systems of customers, vendors and other constituents
with whom the Company has material relationships that could have an impact on
the Company's operations were assessed for year 2000 compliance. The third party
assessment process has also been completed. Procedures have been undertaken by
third parties to remediate their non-compliant systems, however there can be no
assurance that the systems of other companies will be modified or converted on
time, which could have an adverse effect on the Company's operations.
Non-compliance could result in a disruption of the business, which could have a
material impact on the Company's results of operations, financial position
and/or cash flows.
The most reasonable and likely result of non-compliance would be the
Company's inability to utilize its computer systems to process daily
transactions, which could result in increased operating costs and delayed
shipments to customers and, as a result, possible monetary losses from canceled
future business and lawsuits for breach of contract with these customers. The
-12-
<PAGE>
Company has developed contingency plans for various business disruptions, which
include procedures to mitigate the effect of year 2000 non-compliance issues.
The contingency plans include procedures for alternate processing of daily
transactions in the event of an inability to use the Company's computer systems,
as well as procedures for transmitting and receiving data from third parties
with non-compliant systems.
The Company utilized internal resources to assess, modify or convert and
test for year 2000 compliance. The total cost for the assessment, modification
or conversion and testing of the Company's systems was approximately $1.1
million, all of which have been incurred. These costs represent approximately
44% of the fiscal 1999 information technology department budgeted expenses and
are comprised of $0.1 million for assessment and $1.0 million for software
modification or conversion. As a result of the year 2000 compliance effort, the
Company believes that no information technology projects have been deferred that
will have a material impact on the Company's operations. All of the costs
related to year 2000 compliance have been expensed as incurred and have been
funded through operating cash flows. The costs associated with year 2000
compliance are based on management's estimates, which were derived using
numerous assumptions of resources, and other factors.
New Accounting Standards
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which standardizes the accounting for derivatives,
requiring recognition as either assets or liabilities on the balance sheet and
measurement at fair value. The Company plans to adopt this statement for fiscal
2001. The Company has not yet determined the effect adoption of this statement
will have on the Company's consolidated financial position, results of
operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes there has been no material change in its exposure to
market risk from that discussed in the Company's 1998 Consolidated Financial
Statements.
-13-
<PAGE>
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities and Use of Proceeds
Not applicable
Item 3: Defaults Upon Senior Securities
Not applicable
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable
Item 5: Other Information
Not applicable
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
-14-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of South San Francisco,
California, on November 12, 1999.
CORE-MARK INTERNATIONAL, INC.
By /s/ Leo F. Korman
-----------------------------------
Leo F. Korman, Senior Vice President and
Chief Financial Officer
-15-
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