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, 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 October 31, 2000, 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 (if any)
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
September 30, 2000....................... ............................. 3
Condensed Consolidated Statements of Income for the three and nine
months ended September 30, 1999 and 2000............................... 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 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................................................................ 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,
1999 2000
-------- --------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash....................................................................... $ 17,279 $ 18,653
Receivables:
Trade accounts, less allowance for doubtful accounts of $2,320 and
$2,847, respectively.............................................. 104,983 110,072
Other.................................................................. 15,287 11,880
Inventories, net of LIFO allowance of $40,003 and $41,653, respectively.... 109,139 69,515
Prepaid expenses and other................................................. 5,921 6,163
-------- --------
Total current assets................................................... 252,609 216,283
Property and equipment.......................................................... 66,696 70,800
Less accumulated depreciation.............................................. (37,277) (39,798)
-------- --------
Net property and equipment................................................. 29,419 31,002
Other assets.................................................................... 5,642 7,589
Goodwill, net of accumulated amortization of $21,458 and $23,020,
respectively............................................................... 62,398 60,287
-------- --------
$350,068 $315,161
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable..................................................... $ 51,093 $ 59,490
Cigarette and tobacco taxes payable........................................ 59,975 44,414
Income taxes payable....................................................... 3,932 1,895
Deferred income taxes...................................................... 4,851 5,156
Other accrued liabilities.................................................. 31,073 28,520
-------- --------
Total current liabilities.............................................. 150,924 139,475
Long-term debt.................................................................. 165,335 132,602
Other accrued liabilities and deferred income taxes............................. 7,859 8,491
-------- --------
Total liabilities.......................................................... 324,118 280,568
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 14,477
Accumulated comprehensive loss:
Foreign currency translation adjustments............................... (2,949) (3,660)
Minimum pension liability adjustment................................... (2,400) (2,400)
-------- --------
Total shareholders' equity............................................. 25,950 34,593
-------- --------
$350,068 $315,161
======== ========
</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,
-------------------- ------------------------
1999 2000 1999 2000
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales............................................ $760,909 $782,723 $2,097,767 $2,277,342
Cost of goods sold................................... 711,623 730,774 1,952,239 2,128,653
-------- -------- ---------- ----------
Gross profit..................................... 49,286 51,949 145,528 148,689
Operating and administrative expenses................ 38,722 41,461 115,694 120,395
-------- -------- ---------- ----------
Operating income................................. 10,564 10,488 29,834 28,294
Interest expense, net................................ 3,094 3,290 9,589 9,551
Debt refinancing costs............................... 318 318 955 955
-------- -------- ---------- ----------
Income before income taxes....................... 7,152 6,880 19,290 17,788
Income tax expense................................... 3,004 3,262 8,102 8,434
-------- -------- ---------- ----------
Net income....................................... $ 4,148 $ 3,618 $ 11,188 $ 9,354
======== ======== ========== ==========
</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,
-------------------------
1999 2000
-------- --------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income...................................................................... $ 11,188 $ 9,354
Adjustments to reconcile net income to net cash provided by operating
activities:
LIFO expense............................................................... 5,754 1,650
Depreciation and amortization.............................................. 4,804 4,863
Amortization of goodwill................................................... 1,562 1,562
Amortization of debt refinancing fees...................................... 955 955
Deferred income taxes...................................................... 1,499 947
Changes in operating assets and liabilities................................ 35,877 21,510
-------- --------
Net cash provided by operating activities....................................... 61,639 40,841
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment........................................ (3,988) (6,023)
-------- --------
Net cash used in investing activities........................................... (3,988) (6,023)
-------- --------
FINANCING ACTIVITIES:
Net payments under accounts receivable securitization...................... (14,000) (25,000)
Net payments under revolving credit agreement.............................. (56,475) (7,733)
-------- --------
Net cash used in financing activities........................................... (70,475) (32,733)
-------- --------
Effects of changes in foreign exchange rates.................................... 1,011 (711)
-------- --------
Increase (decrease) in cash..................................................... (11,813) 1,374
Cash, beginning of period....................................................... 24,586 17,279
-------- --------
CASH, END OF PERIOD............................................................. $ 12,773 $ 18,653
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments during the period for:
Interest................................................................... $ 11,591 $ 6,859
Income taxes............................................................... 6,399 9,712
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2000
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of September 30, 2000, the
condensed consolidated statements of income for the three-month and nine-month
periods ended September 30, 1999 and 2000 and the condensed consolidated
statements of cash flows for the nine-month periods ended September 30, 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 September 30, 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 $5.5 million and $0.8 million for the three months ended
September 30, 1999 and 2000, respectively, and $5.8 million and $1.7 million for
the nine months ended September 30, 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 $155.0 million and $153.2 million for the three months ended
September 30, 1999 and 2000, respectively, and $430.1 million and $449.3 million
for the nine months ended September 30, 1999 and 2000, respectively.
4. COMPREHENSIVE INCOME
The Company's total comprehensive income was $4.1 million and $3.3 million
for the three months ended September 30, 1999 and 2000, respectively, and $12.2
million and $8.6 million for the nine months ended September 30, 1999 and 2000
respectively, which reflected other comprehensive income or loss 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 and nine-month periods
ended September 30, and asset information as of December 31, 1999 and September
30, 2000 is set forth below (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- -----------------------
1999 2000 1999 2000
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales to external customers............................... $760,909 $782,723 $2,097,767 $2,277,342
Segment pretax operating income (1).......................... $ 7,886 $ 7,476 $ 21,848 $ 19,960
Less: Goodwill and other unallocated amortization............. 569 594 1,695 1,776
Interest expense (income): unallocated and other........ (153) (316) (92) (559)
Amortization of debt refinancing costs.................. 318 318 955 955
-------- -------- ---------- ----------
Consolidated income before income taxes....................... $ 7,152 $ 6,880 $ 19,290 $ 17,788
======== ======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Assets December 31, September 30,
1999 2000
-------- --------
<S> <C> <C>
Segment information.................................................... $338,038 $306,827
Add: Corporate and other............................................... 12,030 8,334
-------- --------
Consolidated assets.................................................... $350,068 $315,161
======== ========
</TABLE>
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(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 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. For the nine months ended September 30, 2000, approximately 71%, 20%
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 unlikely that
legislation giving the FDA authority to regulate tobacco products will pass
during the year 2000, but the prospects for similar legislation in the future is
uncertain.
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 $250 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
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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, 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. On September 28,
2000, the U.S. District Court for the District of Columbia dismissed some of the
government's claims but allowed the case to precede on two "civil RICO" grounds.
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 41% of carton sales during the nine
months ended September 30, 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.
On July 14, 2000, a Florida state court jury awarded $145 billion in
punitive damages against the major U.S. tobacco companies to a class of Florida
smokers who allegedly died or became ill due to cigarette smoking. The tobacco
companies have moved to set aside the award and remove the case to Federal
court. On November 3, 2000, U.S. District Judge Ursula Ungaro - Benages of the
Southern District of Florida denied the defendants motion to remove the case to
Federal Court. The $145 billion judgement was returned to the state court for
further proceedings. On November 6, 2000, the Florida state court denied the
defendants' motion to set aside the punitive damage award and rejected the
tobacco companies request for a new trial. The tobacco companies are expected to
appeal the judgement. On July 31, 2000, the major U.S. tobacco companies
increased wholesale cigarette prices by $.60 per carton.
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.
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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, 2000 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1999
NET SALES. Net sales for the three months ended September 30, 2000 were
$782.7 million, an increase of $21.8 million or 2.9% over the same period in
1999. The increase in net sales was due to an increase in net sales of
cigarettes, offset by a decrease in net sales of food and non-food products in
2000 as compared to 1999.
Net sales of cigarettes for the three months ended September 30, 2000 were
$556.4 million, an increase of $25.7 million or 4.9% 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, offset by a slight decrease in carton
sales. The Company's total cigarette unit sales for the three months ended
September 30, 2000 were 20.5 million cartons, a decrease of 0.5 million cartons
or 2.2% from the same period of 1999. Cigarette carton sales in the U.S.
decreased by 0.2 million cartons or 1.4% compared to the same period in 1999.
Although California carton sales increased slightly, carton sales in other U.S.
and Canadian divisions decreased.
Net sales of food and non-food products for the three months ended
September 30, 2000 were $226.3 million, a decrease of $3.9 million or 1.7% over
the same period in 1999. The decrease occurred primarily in cigar and tobacco
sales, which decreased $4.1 million or 10.5%.
GROSS PROFIT. Gross profit for the three months ended September 30, 2000
was $51.9 million, an increase of $2.7 million or 5.4% over the same period in
1999. The gross profit margin for the three months ended September 30, 2000
increased to 6.6% of net sales as compared to 6.5% of net sales for the
comparable period in 1999. The increase in gross profit margin was due to slight
increases in both the cigarette and food and non-food gross profit margins.
For the three months ended September 30, 2000 and September 30, 1999, the
Company recognized LIFO expense of $0.8 million, and $5.5 million respectively.
The decrease in LIFO expense for the three months ended September 30, 2000 was
primarily the result of a cigarette price increase that occurred in the third
quarter of 1999 that was significantly higher than a cigarette price increase
that occurred in the third quarter of 2000.
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses for the three months ended September 30, 2000 were $41.5 million, an
increase of $2.7 million or 7.1% over the same period in 1999. Operating
expenses for the three months ended September 30, 2000 increased to 5.3% of net
sales as compared to 5.1% for the same period in 1999.
OPERATING INCOME. As a result of the foregoing factors, operating income
for the three months ended September 30, 2000 was $10.5 million, a decrease of
$0.1 million or 0.7% as compared to the same period in 1999. As a percentage of
net sales, operating income for the three months ended September 30, 2000 was
1.3%, as compared to 1.4% for the same period in 1999.
NET INTEREST EXPENSE. Net interest expense for the three months ended
September 30, 2000 was $3.3 million, an increase of $0.2 million or 6.4%
compared to 1999, which resulted primarily from an increase in average borrowing
rates.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
NET SALES. Net sales for the nine months ended September 30, 2000 were
$2,277.3 million, an increase of $179.6 million or 8.6% 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 nine months ended September 30, 2000 were
$1,624.1 million, an increase of $168.6 million or 11.6% 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 nine months ended September 30,
2000 were 60.1 million cartons, an increase of 1.5 million cartons or 2.6% from
the same period of 1999. Cigarette carton sales in the U.S. increased by 1.7
million cartons or 3.4% 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 six months of 1999. Additionally, the Company believes
the increase in California carton sales was attributable both to increased
volume with new and existing customers and a reduction in cigarette distribution
among grey market suppliers (resellers of cigarettes intended for international
markets but sold in the United States) as a result of the passage of California
bill SB702. This bill, passed in October 1999 made it illegal to affix state tax
stamps to grey market cigarettes.
Net sales of food and non-food products for the nine months ended September
30, 2000 were $653.2 million, an increase of $11.0 million or 1.7% over the same
period in 1999.
GROSS PROFIT. Gross profit for the nine months ended September 30, 2000 was
$148.7 million, an increase of $3.2 million or 2.2% over the same period in
1999. The gross profit margin for the nine months ended September 30, 2000
decreased to 6.5% of net sales as compared to 6.9% 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 nine months ended September 30, 2000, the Company recognized LIFO
expense of $1.7 million compared to $5.8 million for the comparable period in
1999. The decrease in LIFO expense for the nine months ended September 30, 2000,
was primarily the result of a cigarette price increase that occurred in the
third quarter of 1999 that was much higher than a cigarette price increase that
occurred in the third quarter of 2000.
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses for the nine months ended September 30, 2000 were $120.4 million, an
increase of $4.7 million or 4.1% over the same period in 1999. However, such
expenses for the nine months ended September 30, 2000 decreased to 5.3% of net
sales as compared to 5.5% for the same period in 1999. The decline in operating
expenses as a percent of net sales is a result of the Company continuing to
exert tight control over expenses. Operating and administrative expenses grew
4.1% over the same period in 1999, which was a slower rate than real growth in
volume.
OPERATING INCOME. As a result of the foregoing factors, operating income
for the nine months ended September 30, 2000 was $28.3 million, a decrease of
$1.5 million or 5.2% as compared to the same period in 1999. As a percentage of
net sales, operating income for the nine months ended September 30, 2000 was
1.2%, as compared to 1.4% for the same period in 1999.
NET INTEREST EXPENSE. Net interest expense for the nine months ended
September 30, 2000 and September 30, 1999 was $9.6 million. This was the result
of a decrease in the Company's average debt levels, offset by an increase in
average borrowing rates.
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 $132.6 million at September 30,
2000, a decrease of $32.7 million or 19.8% 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. Debt
requirements are generally the highest at December 31, when the Company
historically carries higher inventory.
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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 for the first nine months than for the fiscal year.
The Company made capital expenditures of $6.0 million for the nine months
ended September 30, 2000. For the remainder of 2000, the Company estimates it
will spend approximately $1 to $2 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 nine months of 2000, such taxes on
cigarettes represented approximately 24% of cigarette net sales in the U.S. and
44% 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. Congress has not considered
the proposed acceleration to this date. 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. Such legislation has not passed either House of
Congress to date. 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 FASB further amended SFAS 133 to
address implementation issues by issuing SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133", in June 2000. 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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements", which provides the SEC staff's views on selected revenue
recognition issues. In March 2000, the SEC released SAB 101A, which delayed for
one quarter the implementation date of SAB 101 for registrants with fiscal years
beginning between December 16, 1999 and March 15, 2000. In June 2000, the SEC
released SAB 101B, which delayed the implementation date of SAB 101 until no
later than the fourth fiscal quarter of fiscal years beginning after December
15, 1999. The Company is evaluating what impact, if any, SAB 101 will have on
the Company's income statement presentation, operating results or financial
position.
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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.
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PART II - OTHER INFORMATION
Item 1: Legal Proceedings
As previously reported, in November 1999, the Company was named in two
separate lawsuits 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 for injuries allegedly caused by the use of tobacco
products.
The Company does not believe that these actions will have a material
adverse effect on the Company's financial condition. The Company has been
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.
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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 10, 2000.
CORE-MARK INTERNATIONAL, INC.
By /s/ Leo F. Korman
-----------------------------------
Leo F. Korman, Senior Vice President and
Chief Financial Officer
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