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 March 31, 2000
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 April 30, 2000, Registrant had
outstanding 5,500,000 shares of Common Stock.
===============================================
<PAGE>
Core-Mark International, Inc. and Subsidiaries
FORWARD-LOOKING STATEMENTS OR INFORMATION
Certain statements contained in this quarterly report on Form 10-Q under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and elsewhere herein and in the documents incorporated
herein by reference are not statements of historical fact but are future-looking
or forward-looking statements that may constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Certain, but not necessarily all, of such forward-looking statements
can be identified by the use of such forward-looking terminology as the words
"believes," "expects," "may," "will," "should," or "anticipates" (or the
negative of such terms) or other variations thereon or comparable terminology,
or because they involve discussions of Core-Mark International, Inc.'s (the
"Company's") strategy. Such forward-looking statements are based upon a number
of assumptions concerning future conditions that may ultimately prove to be
inaccurate. The ability of the Company to achieve the results anticipated in
such statements is subject to various risks and uncertainties and other factors
which may cause the actual results, level of activity, performance or
achievements of the Company or the industry in which it operates to be
materially different from any future results, level of activity, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the general state of the economy and business
conditions in the United States and Canada; adverse changes in consumer
spending; the ability of the Company to implement its business strategy,
including the ability to integrate recently acquired businesses into the
Company; the ability of the Company to obtain financing; competition; the level
of retail sales of cigarettes and other tobacco products; possible effects of
legal proceedings against manufacturers and sellers of tobacco products and the
effect of government regulations affecting such products. As a result of the
foregoing and other factors affecting the Company's business beyond the
Company's control, no assurance can be given as to future results, levels of
activity, performance or achievements and neither the Company nor any other
person assumes responsibility for the accuracy and completeness of these
statements.
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Page
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1999 and
March 31, 2000......................................................... 3
Condensed Consolidated Statements of Income for the three months ended
March 31, 1999 and 2000................................................ 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 2000.......................................... 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................................................................ 12
PART II - OTHER INFORMATION
Item 1: Legal Proceedings............................................. 13
Item 2: Changes in Securities and Use of Proceeds..................... 13
Item 3: Defaults Upon Senior Securities............................... 13
Item 4: Submission of Matters to a Vote of Security Holders........... 13
Item 5: Other Information............................................. 13
Item 6: Exhibits and Reports on Form 8-K.............................. 13
Signature .................................................................. 14
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CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands of Dollars)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------- -------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash ...................................................................... $ 17,279 $ 19,255
Receivables:
Trade accounts, less allowance for doubtful accounts of $2,320 and
$2,442, respectively.............................................. 104,983 112,265
Other ................................................................. 15,287 12,635
Inventories, net of LIFO allowance of $40,003 and $40,753, respectively.... 109,139 77,657
Prepaid expenses and other................................................. 5,921 6,342
-------- --------
Total current assets .................................................. 252,609 228,154
Property and equipment ......................................................... 66,696 67,248
Less accumulated depreciation ............................................. (37,277) (37,685)
-------- --------
Net property and equipment ................................................ 29,419 29,563
Other assets .................................................................. 5,642 5,684
Goodwill, net of accumulated amortization of $21,458 and $21,978,
respectively .............................................................. 62,398 61,877
-------- --------
$350,068 $325,278
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable..................................................... $ 51,093 $ 57,139
Cigarette and tobacco taxes payable........................................ 59,975 58,375
Income taxes payable....................................................... 3,932 4,979
Deferred income taxes...................................................... 4,851 4,886
Other accrued liabilities.................................................. 31,073 27,725
-------- --------
Total current liabilities.............................................. 150,924 153,104
Long-term debt.................................................................. 165,335 136,414
Other accrued liabilities and deferred income taxes............................. 7,859 8,000
-------- --------
Total liabilities.......................................................... 324,118 297,518
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
Retained earnings.......................................................... 5,123 7,027
Accumulated comprehensive loss:
Foreign currency translation adjustments............................... (2,949) (3,043)
Minimum pension liability adjustment................................... (2,400) (2,400)
-------- --------
Total shareholders' equity............................................. 25,950 27,760
-------- --------
$350,068 $325,278
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In Thousands of Dollars)
(Unaudited)
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<CAPTION>
Three Months
Ended March 31,
------------------------
1999 2000
-------- --------
<S> <C> <C>
Net sales ............................................................... $629,452 $722,808
Cost of goods sold ...................................................... 583,882 676,789
-------- --------
Gross profit ....................................................... 45,570 46,019
Operating and administrative expenses ................................... 37,871 39,026
-------- --------
Operating income ................................................... 7,699 6,993
Interest expense, net ................................................... 3,395 3,054
Amortization of debt refinancing costs .................................. 318 318
-------- --------
Income before income taxes ......................................... 3,986 3,621
Income tax expense....................................................... 1,674 1,717
-------- --------
Net income.......................................................... $ 2,312 $ 1,904
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In Thousands of Dollars)
(Unaudited)
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<CAPTION>
Three Months
Ended March 31,
-------------------------
1999 2000
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES:
<S> <C> <C>
Net income ........................................................... $ 2,312 $ 1,904
Adjustments to reconcile net income to
net cash provided by operating activities:
LIFO expense........................................................ 100 750
Amortization of goodwill............................................ 521 521
Depreciation and amortization....................................... 1,550 1,556
Amortization of debt refinancing fees............................... 318 318
Deferred income taxes............................................... 317 164
Other adjustments for non-cash and non-operating activities......... 53 (19)
Changes in operating assets and liabilities......................... 45,929 27,316
-------- --------
Net cash provided by operating activities ............................... 51,100 32,510
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment ................................ (971) (1,519)
-------- --------
Net cash used in investing activities ................................... (971) (1,519)
-------- --------
FINANCING ACTIVITIES:
Net borrowings (payments) under accounts receivable securitization.. 3,000 (25,000)
Net payments under revolving credit agreement ...................... (59,125) (3,921)
-------- --------
Net cash used in financing activities ................................... (56,125) (28,921)
-------- --------
Effects of changes in foreign exchange rates............................. 253 (94)
-------- --------
Increase (decrease) in cash ............................................. (5,743) 1,976
Cash, beginning of period ............................................... 24,586 17,279
-------- --------
CASH, END OF PERIOD...................................................... $ 18,843 $ 19,255
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments during the period for:
Interest ........................................................... $ 5,534 $ 5,125
Income taxes ....................................................... 63 507
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2000
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of March 31, 2000 and the
condensed consolidated statements of income and of cash flows for the
three-month periods ended March 31, 1999 and 2000 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 March 31, 2000 with
respect to the interim financial statements, and of the results of its
operations and cash flows for the interim periods then ended, have been
included. The results of operations for the interim periods are not necessarily
indicative of the operating results for the full year.
The condensed consolidated balance sheet as of December 31, 1999, 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, 1999
("1999 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, 1999 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 $100,000 and $750,000 for the three months ended March 31, 1999
and 2000, 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 sales and cost
of goods sold were $128.8 million and $144.2 million for the three months ended
March 31, 1999 and 2000, respectively.
4. COMPREHENSIVE INCOME
The Company's total comprehensive income was $2,669,000 and $1,810,000 for
the three months ended March 31, 1999 and 2000 respectively, which included
other comprehensive income related to foreign currency translation adjustments.
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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 1999 Form 10-K. Wholesale
distribution segment information for the three-month periods ended March 31 and
asset information as of December 31, 1999 and March 31, 2000 is set forth below
(dollars in thousands):
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Three Months
Ended March 31,
-------------------------
1999 2000
-------- --------
<S> <C> <C>
Net sales from external customers............................. $629,452 $722,808
Segment pre tax operating income (1) ......................... $ 4,884 $ 4,411
Less: Goodwill and other unallocated amortization ............ 562 588
Interest expense: unallocated and other............... 18 (116)
Amortization of debt refinancing costs ............... 318 318
-------- --------
Consolidated income before income taxes....................... $ 3,986 $ 3,621
======== ========
</TABLE>
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<CAPTION>
ASSETS December 31, March 31,
1999 2000
-------- --------
<S> <C> <C>
Segment information........................................... $338,038 $313,359
Add: Corporate and other...................................... 12,030 11,919
-------- --------
Consolidated assets........................................... $350,068 $325,278
======== ========
</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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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Management's
Discussion and Analysis and the discussion under the heading "Legal Proceedings
- - Regulatory and Legislative Matters" included in the Company's 1999 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 quarter ended March 31, 2000, approximately 72%, 19% and 9%
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, the FDA's petition for review was granted by the Supreme Court, and on
March 21, 2000, the Supreme Court ruled 5-4 that the FDA did not have authority
to regulate tobacco products.
In response to the Supreme Court ruling, legislation has recently been
introduced in Congress that would grant authority to the FDA to regulate tobacco
products. One cigarette manufacturer expressed interest in such legislation but
the remaining companies have stated their opposition. It is unclear whether
legislation giving FDA authority to regulate tobacco products will pass during
the year 2000.
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.
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.
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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, athletic events or other events in which a significant
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 long- term
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, and on
December 27, 1999 moved to dismiss the government's complaint. The government
opposed the motion to dismiss on February 25, 2000, the defendant companies
replied to the government's opposition on March 27, 2000, and the court's
decision is pending. 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; such circumstances could
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 42% of carton sales during the three
months ended March 31, 2000.
The major U.S. cigarette manufacturers raised the wholesale price of
cigarettes by $1.80 per carton, effective August 30, 1999, and $1.30 per carton,
effective January 17, 2000.
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 MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
NET SALES. Net sales for the three months ended March 31, 2000 were $722.8
million, an increase of $93.4 million or 14.8% over the same period in 1999. 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 2000
compared to 1999.
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Net sales of cigarettes for the three months ended March 31, 2000 were
$519.9 million, an increase of $84.5 million or 19.4% over the same period in
1999. The increase in net sales of cigarettes was principally due to increases
in manufacturers' list prices, which have been passed on to the Company's
customers in the form of higher prices and an increase in carton sales. The
Company's total cigarette unit sales for the three months ended March 31, 2000
were 19.2 million cartons, an increase of 1.4 million cartons or 8.1% from the
same period of 1999. Cigarette carton sales in the U.S. increased by 1.3 million
cartons or 9.2% compared to the same period in 1999. The increase in the
Company's carton sales occurred primarily in California, and was due to a number
of factors. Consumers in California purchased large quantities of cigarettes in
December 1998, in advance of the increase in state excise taxes which became
effective January 1, 1999. This had a negative impact on the Company's sales of
cigarettes in the first three months of 1999. Additionally, the competition from
so called grey market cigarettes appears to have lessened with the passage of
California bill SB702. This bill, passed in October 1999 made it illegal to
affix state tax stamps to grey market cigarettes. For the three months ended
March 31, 2000, cigarette carton sales in the United States, outside of
California, were substantially the same in 2000 as in the comparable period of
1999.
Net sales of food and non-food products for the three months ended March
31, 2000 were $202.9 million, an increase of $8.8 million or 4.6% over the same
period in 1999.
GROSS PROFIT. Gross profit for the three months ended March 31, 2000 was
$46.0 million, an increase of $0.4 million or 1.0% over the same period in 1999.
The gross profit margin for the three months ended March 31, 2000 decreased to
6.4% of net sales as compared to 7.2% of net sales for the comparable period in
1999. The decline in overall gross profit margin was primarily due to the
increase in the wholesale cost of cigarettes over the past year. Gross margins
on cigarettes are significantly lower than the margins on food and non-food
products, and the much faster growth in cigarette revenues caused the overall
reduction in margins.
For the three months ended March 31, 2000, the Company recognized LIFO
expense of $0.8 million compared to $0.1 million for the comparable period in
1999. The increase in LIFO expense for the three months ended March 31, 2000,
was primarily the result of a cigarette price increase that occurred in the
first quarter of 2000, whereas no such increase occurred in the first quarter of
1999.
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses for the three months ended March 31, 2000 were $39.0 million, an
increase of $1.2 million or 3.1% over the same period in 1999. However, such
expenses for the three months ended March 31, 2000 decreased to 5.4% of net
sales as compared to 6.0% for the same period in 1999. 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 three months ended March 31, 2000 was $7.0 million, a decrease of $0.7
million or 9.2% as compared to the same period in 1999. As a percentage of net
sales, operating income for the three months ended March 31, 2000 was 1.0%, as
compared to 1.2% for the same period in 1999.
NET INTEREST EXPENSE. Net interest expense for the three months ended March
31, 2000 was $3.1 million, a decrease of $0.3 million or 10.0% compared to 1999,
which resulted from a decrease in the Company's average debt levels.
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 $136.4 million at March 31, 2000, a
decrease of $28.9 million or 17.5% from $165.3 million at December 31, 1999. 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 2000. Debt
requirements are generally the highest at December 31, when the Company
historically carries higher inventory.
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<PAGE>
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 $1.5 million in the first quarter
of 2000. For the remainder of 2000, the Company estimates it will spend
approximately $5 to $6 million for capital requirements, principally consisting
of warehouse and other equipment.
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. In the first quarter of 2000, such taxes on cigarettes
represented approximately 24% 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 as well as 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 $3.40 per carton of
cigarettes, including a $1.00 per carton increase, which was effective January
1, 2000. Legislation was enacted that will raise the federal excise tax by an
additional $.50 per carton of cigarettes in 2002. In its fiscal 2001 budget, the
Administration proposed accelerating the scheduled increase for 2002 to take
effect October 1, 2000. Congress has not considered the proposed acceleration to
this date and is not scheduled to do so until the summer of 2000. 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. The President as well as
various members of Congress has 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. 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.
NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board (FASB) issued SFAS 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. As
amended in June 1999 by SFAS No. 137, this statement is effective for all fiscal
years beginning after June 15, 2000 and is not to be applied retrospectively to
financial statements for prior periods. 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.
-11-
<PAGE>
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 1999 Consolidated Financial
Statements.
-12-
<PAGE>
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
As previously reported, in November 1999, the Company was named in two
separate law suits filed in State Court in New Mexico by two individual
plaintiffs. The other defendants include the principal U.S. tobacco
manufacturers, as well as other distributors. The complaints seek compensatory
and punitive damages or injuries allegedly caused by the use of tobacco
products.
The Company does not believe that these actions will have a material
adverse effect on the Company's financial condition. The Company has been
indemnified with respect to certain claims alleged in each of the above actions.
In addition, the Company is a party to other lawsuits incurred in the
ordinary course of its business. The Company believes it is adequately insured
with respect to such lawsuits or that such lawsuits will not result in losses
material to its consolidated financial position or results of operations.
Item 2: Changes in Securities 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.
-13-
<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 May 11, 2000.
CORE-MARK INTERNATIONAL, INC.
By /s/ Leo F. Korman
___________________________________
Leo F. Korman, Senior Vice President and
Chief Financial Officer
-14-
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