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 JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________to_____________________
Commission file number 333-14217
============
CORE-MARK INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1295550
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
395 OYSTER POINT BOULEVARD, SUITE 415
SOUTH SAN FRANCISCO, CA 94080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 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 July 31, 1997, Registrant had outstanding 5,500,000 shares of Common Stock.
===============================================
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS OR INFORMATION
Certain statements contained in this quarterly report on Form 10-Q under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and elsewhere herein and in the documents
incorporated herein by reference are not statements of historical fact but
are future-looking or forward-looking statements that may constitute
"forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Certain, but not necessarily
all, of such forward-looking statements can be identified by the use of such
forward-looking terminology as the words "believes," "expects," "may,"
"will," "should," or "anticipates" (or the negative of such terms) or other
variations thereon or comparable terminology, or because they involve
discussions of Core-Mark International, Inc.'s (the "Company's") strategy.
Such forward-looking statements are based upon a number of assumptions
concerning future conditions that may ultimately prove to be inaccurate. The
ability of the Company to achieve the results anticipated in such statements
is subject to various risks and uncertainties and other factors which may
cause the actual results, level of activity, performance or achievements of
the Company or the industry in which it operates to be materially different
from any future results, level of activity, performance or achievements
expressed or implied by such forward-looking statements. Such factors
include, among others, the general state of the economy and business
conditions in the United States and Canada; adverse changes in consumer
spending; the ability of the Company to implement its business strategy,
including the ability to integrate recently acquired businesses into the
Company; the ability of the Company to obtain financing; competition; the
level of retail sales of cigarettes and other tobacco products; possible
effects of legal proceedings against manufacturers and sellers of tobacco
products and the effect of government regulations affecting such products.
As a result of the foregoing and other factors affecting the Company's
business beyond the Company's control, no assurance can be given as to future
results, levels of activity, performance or achievements and neither the
Company nor any other person assumes responsibility for the accuracy and
completeness of these statements.
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of December 31, 1996 and
June 30, 1997..................................................... 4
Condensed Consolidated Statements of Income for the three and six
months ended June 30, 1996 and 1997 .............................. 5
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1996 and 1997...................................... 6
Notes to Condensed Consolidated Financial Statements .................. 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................. 9
PART II - OTHER INFORMATION
Item 1: Legal Proceedings............................................ 13
Item 2: Changes in Securities........................................ 13
Item 3: Defaults upon Senior Securities.............................. 13
Item 4: Submission of Matters to a Vote of Security Holders.......... 13
Item 5: Other information............................................ 14
2
PAGE
----
Item 6: Exhibits and Reports on Form 8-K............................. 14
Signature.................................................................. 15
3
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
DECEMBER 31, JUNE 30,
1996 1997
------------- -------------
ASSETS (UNAUDITED)
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,769 $ 16,829
Receivables:
Trade accounts, less allowance for doubtful accounts of
$3,881 and $4,043, respectively. . . . . . . . . . . . 88,715 98,797
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,229 14,191
Inventories, net of LIFO allowance of $12,452 and $13,459,
respectively . . . . . . . . . . . . . . . . . . . . . 99,342 105,055
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . 6,214 7,183
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . 232,269 242,055
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . 46,534 53,166
Less accumulated depreciation . . . . . . . . . . . . . . . . . (24,006) (25,955)
---------- ----------
Net property and equipment . . . . . . . . . . . . . . . . . . . 22,528 27,211
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,792 9,014
Goodwill, net of accumulated amortization of $15,220 and $16,252,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . 64,447 67,540
---------- ----------
$ 329,036 $ 345,820
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . $ 51,572 $ 57,105
Cigarette and tobacco taxes payable. . . . . . . . . . . . . . . 43,912 48,365
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . 454 658
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . 7,397 7,386
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . 30,653 31,081
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . 133,988 144,595
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,463 197,461
Other accrued liabilities and deferred income taxes. . . . . . . . . 8,585 8,743
---------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . 336,036 350,799
Commitments and contingencies:
Shareholders' equity:
Common stock; $.01 par value; 10,000,000 shares authorized;
5,500,000 shares issued and outstanding . . . . . . . . . . 55 55
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 26,121 26,121
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . (28,576) (26,225)
Cumulative currency translation adjustments. . . . . . . . . . . (1,608) (1,938)
Additional minimum pension liability . . . . . . . . . . . . . . (2,992) (2,992)
---------- ----------
Total shareholders' equity (deficit). . . . . . . . . . . . (7,000) (4,979)
---------- ----------
$329,036 $ 345,820
---------- ----------
---------- ----------
See Notes to Condensed Consolidated Financial Statements.
4
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -------------------------
1996 1997 1996 1997
-------- -------- ---------- ----------
Net sales . . . . . . . . . . . . . . . . . . . . . $555,687 $614,994 $1,068,575 $1,142,860
Cost of goods sold . . . . . . . . . . . . . . . . . 513,612 568,428 989,608 1,056,184
-------- -------- ---------- ----------
Gross profit . . . . . . . . . . . . . . . . . . 42,075 46,566 78,967 86,676
Operating and administrative expenses . . . . . . . 32,986 37,708 64,516 72,931
-------- -------- ---------- ----------
Operating income . . . . . . . . . . . . . . . . 9,089 8,858 14,451 13,745
Interest expense, net . . . . . . . . . . . . . . . 1,417 4,653 2,971 9,044
Debt refinancing costs . . . . . . . . . . . . . . . 315 391 635 783
-------- -------- ---------- ----------
Income before income taxes . . . . . . . . . . . 7,357 3,814 10,845 3,918
Income tax expense . . . . . . . . . . . . . . . . . 3,096 1,525 4,629 1,567
-------- -------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . $ 4,261 $ 2,289 $ 6,216 $ 2,351
-------- -------- ---------- ----------
-------- -------- ---------- ----------
See Notes to Condensed Consolidated Financial Statements.
5
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
------------------------
1996 1997
--------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,216 $ 2,351
Adjustments to reconcile net income to
net cash provided by operating activities:
LIFO expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 727 1,007
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . 989 1,032
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . 2,281 2,726
Amortization of debt refinancing fees. . . . . . . . . . . . . . . . . . . 635 783
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . (438) 121
Other adjustments for non-cash and non-operating activities. . . . . . . . 256 193
Changes in operating assets and liabilities, net of acquisitions . . . . . 19,350 6,382
--------- ---------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . 30,016 14,595
--------- ---------
INVESTING ACTIVITIES:
Net assets of acquired businesses . . . . . . . . . . . . . . . . . . . . --- (21,361)
Additions to property and equipment . . . . . . . . . . . . . . . . . . . (2,423) (6,196)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) ---
--------- ---------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . (2,431) (27,557)
--------- ---------
FINANCING ACTIVITIES:
Net borrowings (payments) under revolving credit agreement . . . . . . . . (39,194) 3,998
--------- ---------
Net cash provided by (used in) financing activities . . . . . . . . . . . . . (39,194) 3,998
--------- ---------
Effects of changes in foreign exchange rates . . . . . . . . . . . . . . . . . 73 24
--------- ---------
Decrease in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,536) (8,940)
Cash, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . 24,447 25,769
--------- ---------
CASH, END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,911 $ 16,829
--------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,062 $8,778
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,849 1,248
See Notes to Condensed Consolidated Financial Statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of June 30, 1997, the
condensed consolidated statements of income for the three-month and six-month
periods ended June 30, 1996 and 1997, and the condensed consolidated
statements of cash flows for the six-month periods ended June 30, 1996 and
1997, have been prepared by Core-Mark International, Inc. (the "Company"). In
the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of
the Company at June 30, 1997 (subject to year-end adjustments) and the
results of its operations and cash flows for the interim periods then ended,
have been included. The results of operations for the interim periods are not
necessarily indicative of the operating results for the full year.
The condensed consolidated balance sheet as of December 31, 1996, is
derived from the audited financial statements but does not include all
disclosures required by generally accepted accounting principles. The notes
accompanying the consolidated financial statements of the Company included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996
("1996 Form 10-K") include a description of the Company's significant
accounting policies and additional information pertinent to an understanding
of both the December 31, 1996 balance sheet and the interim financial
statements included herein.
2. 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 $382,000 and $611,000 for the three months ended June 30, 1996
and 1997, respectively, and $727,000 and $1,007,000 for the six months ended
June 30, 1996 and 1997, respectively. Interim LIFO calculations are based on
management's estimates of year-end inventory levels and inflation rates for
the year.
3. EXCISE TAXES
State and provincial excise taxes paid by the Company on cigarettes were
$122.1 million and $129.6 million for the three months ended June 30, 1996
and 1997, respectively, and $237.8 million and $243.4 million for the six
months ended June 30, 1996 and 1997, respectively. These amounts are included
in net sales and cost of goods sold for the periods indicated.
4. ACQUISITION OF THE SOSNICK COMPANIES
On February 3, 1997, the Company consummated a transaction, pursuant to a
Purchase Agreement dated January 31, 1997, to acquire certain assets and the
business of two related companies, Melvin Sosnick Company and Capital Cigar
Company (collectively "Sosnick" or the "Sosnick Companies"), a wholesale
distributor to the convenience retail market in northern California and
northern Nevada. Sosnick operates in the same geographic marketplace as the
Company and provides similar products and services. The Company is
integrating the acquired business into its existing operations and facilities
and has hired a majority of Sosnick's former employees (salespeople,
warehouse employees and drivers) to support the additional sales volume.
The assets acquired included trade accounts receivable, inventories and
warehouse equipment that the Company intends to continue to use in its
business. The acquisition excluded the assumption of substantially all of the
liabilities of Sosnick (such as notes payable, trade accounts payable,
commitments to lease warehouse facilities and other liabilities). The
acquisition has been accounted for using the purchase method of accounting.
7
4. ACQUISITION OF THE SOSNICK COMPANIES (CON'T.)
The purchase price for the assets and the business totaled $21.4 million
and has been allocated as follows (in thousands):
Accounts receivable, net $ 8,613
Inventory, net 8,224
Property and equipment 1,265
Goodwill 4,125
Other assets 225
Liabilities assumed (247)
Other liabilities incurred in connection with the
acquisition (844)
--------
Total purchase price $21,361
--------
--------
The excess of the purchase price over the fair value of assets acquired
and liabilities assumed was $4.1 million and has been recorded as goodwill,
which will be amortized on a straight-line basis over a period of 40 years.
The acquisition was primarily financed by borrowings under the Company's
existing revolving credit facility. The total amount of incremental
borrowings required to acquire Sosnick at closing was $18.4 million. The
remaining purchase price was due and payable in installments during the first
ninety days subsequent to closing in varying amounts specified in the
purchase agreement, of which $1.3 million was paid in the first quarter of
1997 and $1.6 million was paid in the second quarter of 1997. Based on
certain contractual provisions, the total purchase price was reduced by
approximately $0.5 million during the second quarter of 1997, reflecting a
decrease in the total assets acquired.
The Company's net sales for the three and six-month periods ended June
30, 1996 would have been $618 million and $1,189 million, respectively, if the
acquisition had occurred as of January 1, 1996. The Company's net sales for
the six month period ended June 30, 1997 would have been $1,157 million, if
the acquisition had occurred as of January 1, 1997. The Company's net sales
for the three-month period ended June 30, 1997 includes Sosnick sales for the
entire period. The impact of the acquisition on net income would not have
been material for the three or six-month periods ended June 30, 1996 and 1997.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Management's
Discussion and Analysis included in the Company's 1996 Form 10-K.
GENERAL
The Company is a broad-line, full-service wholesale distributor of
packaged consumer products to the convenience retail industry in North
America. The products distributed by the Company include cigarettes, food
products such as candy, fast food, snacks, groceries, and non-alcoholic
beverages, and non-food products such as film, batteries, and other sundries,
health and beauty care products and tobacco products other than cigarettes.
RESULTS OF OPERATIONS
The following table sets forth certain operating results as a percentage
of net sales for the periods indicated:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ---------------------
1996 1997 1996 1997
------ ------ ------ ------
Net sales. . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of goods sold . . . . . . . . . . . 92.4 92.4 92.6 92.4
------ ------ ------ ------
Gross profit . . . . . . . . . . . . . . 7.6 7.6 7.4 7.6
Operating & administrative expenses. . . 5.9 6.1 6.0 6.4
------ ------ ------ ------
Operating income . . . . . . . . . . . . 1.6% 1.4% 1.4% 1.2%
------ ------ ------ ------
------ ------ ------ ------
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
NET SALES. Net sales for the three months ended June 30, 1997 were
$615.0 million, an increase of $59.3 million or 10.7% compared to the same
period in 1996. The increase in net sales was principally due to the Sosnick
acquisition (which contributed approximately $41 million in sales in the
1997 period) and increases in net sales of food and non-food products during
the period.
Net sales of cigarettes for the three months ended June 30, 1997 were
$408.4 million, an increase of $23.4 million or 6.1% compared to the same
period in 1996. The increase in net sales of cigarettes was principally due
to the acquisition of the Sosnick Companies (which contributed approximately
$22 million in cigarette net sales in the 1997 period) and an increase in
cigarette prices. The Company's total cigarette unit sales for the three
months ended June 30, 1997 were 23.7 million cartons, an increase of 0.6
million cartons or 2.6% compared to the same period in 1996. The Sosnick
acquisition contributed approximately 1.5 million in unit sales in the 1997
period, offsetting a 3.7% decline in unit volumes in the U.S. and Canada.
9
Net sales of food and non-food products for the three months ended June
30, 1997 were $206.6 million, an increase of $35.9 million or 21.0% compared
to the same period in 1996. The increase was primarily due to the Company's
continued focus on increasing food and non-food product sales and to the
Sosnick acquisition (which contributed approximately $19 million in net sales
in the 1997 period). The increase occurred primarily in fast food sales,
which increased $8.1 million or 51.6%, candy sales, which grew $8.1 million
or 14.6%, and snack sales, which were higher by $5.0 million or 49.4%.
GROSS PROFIT. Gross profit for the three months ended June 30, 1997 was
$46.6 million, an increase of $4.5 million or 10.7% compared to the same
period in 1996. The improvement was primarily due to increased gross profits
from continued sales growth in the food and non-food product categories
(which carry significantly higher margins than cigarettes) and the Sosnick
acquisition. For the three months ended June 30, 1997, the Company recognized
LIFO expense of $0.6 million compared to $0.4 million for the same period in
1996.
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses for the three months ended June 30, 1997 were $37.7 million, an
increase of $4.7 million or 14.3% compared to 1996. Such expenses for the
three months ended June 30, 1997 increased to 6.1% of net sales as compared
to 5.9% for the same period in 1996. The increase reflects approximately $0.9
million (0.1% of net sales) of one-time duplicative facility costs as a
result of the Sosnick acquisition, higher levels of staffing during the
initial integration process and other integration costs associated with the
acquisition. The remaining increase in expenses as a percentage of sales is
primarily attributable to the decline in cigarette volumes and the slightly
higher handling costs associated with the increased sales growth of the
higher margin food and non-food product categories.
OPERATING INCOME. As a result of the foregoing factors, operating income
for the three months ended June 30, 1997 was $8.9 million, a decrease of $0.2
million or 2.6% as compared to the same period in 1996. As a percentage of
net sales, operating income for the three months ended June 30, 1997 was
1.4%, as compared to 1.6% for the same period in 1996.
NET INTEREST EXPENSE. Net interest expense for the three months ended
June 30, 1997 was $4.7 million, an increase of $3.2 million or 228.4%
compared to the same period in 1996. This increase resulted from an increase
in average debt levels and the Company's average interest rate primarily due
to the recapitalization and senior subordinated note offering which occurred
in the third quarter of 1996, as well as the additional debt incurred to
finance the Sosnick acquisition.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
NET SALES. Net sales for the six months ended June 30, 1997 were
$1,142.9 million, an increase of $74.3 million or 7.0% compared to the same
period in 1996. The increase in net sales was principally due to the Sosnick
acquisition (which contributed approximately $67 million in sales in the 1997
period). Excluding the impact of the Sosnick acquisition, the increase in net
sales was due to higher net sales of food and non-food products, partially
offset by a decline in net sales of cigarettes in the 1997 period compared to
the 1996 period.
Net sales of cigarettes for the six months ended June 30, 1997 were
$764.2 million, an increase of $19.5 million or 2.6% compared to the same
period in 1996. The increase in net sales of cigarettes was principally due
to the acquisition of the Sosnick Companies (which contributed approximately
$36 million in cigarette net sales in the 1997 period) and an increase in
cigarette prices offset by a general decline in cigarette unit volume
(excluding Sosnick unit volume). The Company's total cigarette unit sales for
the six months ended June 30, 1997 were 44.7 million cartons, a decrease of
0.6 million cartons or 1.4% compared to the same period in 1996. The Sosnick
acquisition contributed approximately 2.4 million in unit sales in the 1997
period, offsetting declines in unit volumes in the U.S. and Canada of
approximately 2.8 and 0.3 million cartons, respectively. Unit declines are
primarily the result of lower cigarette sales by the Company's customer base,
and the termination of some high volume, marginally profitable cigarette
business.
10
Net sales of food and non-food products for the six months ended June 30,
1997 were $378.7 million, an increase of $54.8 million or 16.9% compared to
the same period in 1996. The increase was primarily due to the Company's
continued focus on increasing food and non-food product sales and to the
Sosnick acquisition (which contributed approximately $31 million in net sales
in the 1997 period). The increase occurred primarily in fast food sales,
which grew $12.9 million or 44.5%, candy sales, which increased $12.6 million
or 11.4%, and snack sales, which were higher by $7.1 million or 38.2%.
GROSS PROFIT. Gross profit for the six months ended June 30, 1997 was
$86.7 million, an increase of $7.7 million or 9.8% compared to 1996. The
improvement was primarily due to increased gross profits from continued sales
growth in the food and non-food product categories and the Sosnick
acquisition. The gross profit margin for the six months ended June 30, 1997
increased to 7.6% of net sales as compared to 7.4% of net sales for the same
period in 1996. This increase is principally due to food and non-food sales
(which carry significantly higher margins than cigarettes) constituting 33.1%
of the Company's total net sales for the six months ended June 30, 1997
compared to 30.3% for the same period in 1996. For the six months ended June
30, 1997, the Company recognized LIFO expense of $1.0 million compared to $0.7
million for the same period in 1996.
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses for the six months ended June 30, 1997 were $72.9 million, an
increase of $8.4 million or 13.0% compared to 1996. Such expenses for the six
months ended June 30, 1997 increased to 6.4% of net sales as compared to 6.0%
for the same period in 1996. The increase reflects approximately $2.2 million
(0.2% of net sales) of one-time duplicative facility costs as a result of the
Sosnick acquisition, higher levels of staffing during the initial integration
process and other integration costs associated with the acquisition. The
remaining increase in expenses as a percentage of sales is primarily
attributable to the decline in cigarette volumes and the slightly higher
handling costs associated with the increased sales growth of the higher
margin food and non-food product categories.
OPERATING INCOME. As a result of the foregoing factors, operating income
for the six months ended June 30, 1997 was $13.7 million, a decrease of $0.7
million or 4.9% as compared to the same period in 1996. As a percentage of
net sales, operating income for the six months ended June 30, 1997 was 1.2%,
as compared to 1.4% for the same period in 1996.
NET INTEREST EXPENSE. Net interest expense for the six months ended June
30, 1997 was $9.0 million, an increase of $6.1 million or 204.4% compared to
the same period in 1996. This increase resulted from an increase in average
debt levels and the Company's average interest rate primarily due to the
recapitalization and senior subordinated note offering which occurred in the
third quarter of 1996, as well as additional debt incurred to finance the
Sosnick acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise primarily from the funding of its
working capital needs, capital expenditure programs, and debt service
requirements with respect to its revolving credit facility and senior
subordinated notes. The Company has no mandatory payments of principal on its
senior subordinated notes prior to their final maturity on September 15,
2003, and has no mandatory payments of principal scheduled under its
revolving credit facility, which matures June 30, 2001. The Company has
historically financed its operations through internally generated funds and
borrowings under its credit facilities.
The Company's debt obligations totaled $197.5 million at June 30, 1997,
an increase of $4.0 million from $193.5 million at December 31, 1996. The net
increase in outstanding debt is primarily due to borrowings required to
finance the Sosnick acquisition offset by reductions in working capital
funding requirements.
The Company's principal sources of liquidity are net cash provided by
operating activities and its revolving credit facility. At year end the
Company typically carries higher inventories which are then liquidated in
future periods. Therefore, net cash provided by operating activities is
typically lower at the end of any fiscal year compared to interim periods.
However, at June 30, 1997, the Company's inventory levels were higher than at
June 30, 1996 due primarily to a temporary increase in cigarette inventories.
As a result, net cash provided by operating activities was significantly
lower for the six months ended June 30, 1997 as compared to the same period
in 1996.
11
As discussed in Note 4 "Acquisition of the Sosnick Companies" to the
Condensed Consolidated Financial Statements, on February 3, 1997, the Company
acquired certain assets and the business of the Sosnick Companies. The assets
acquired included trade accounts receivable, inventories, and warehouse
equipment that the Company is using in its business. The aggregate purchase
price for the assets and business acquired was $21.4 million. The excess of
the purchase price over the fair value of the assets acquired was $4.1
million and has been reflected as goodwill.
The acquisition was primarily financed by borrowings under the Company's
existing revolving credit facility. The total amount of incremental
borrowings required to acquire Sosnick at closing was $18.4 million. The
remaining purchase price was due and payable in installments during the first
ninety days subsequent to closing in varying amounts specified in the
purchase agreement, of which $2.9 million was paid in the first six months of
1997.
The Company made capital expenditures of $6.2 million for the six months
ended June 30, 1997. For the remainder of 1997, the Company estimates it will
spend approximately $3 to $5 million for capital requirements, principally
consisting of warehouse facilities and equipment. These expenditures are
expected to be funded out of net cash provided by operating activities and
the Company's revolving credit facility.
12
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
In May 1996, the Court of Appeals for the Fifth Circuit decertified a
federal class action purportedly brought on behalf of all cigarette smokers in
the United States. Following the decertification, lawyers for the class brought
state class action lawsuits in a number of states, with the objective of filing
such lawsuits in all fifty states, the District of Columbia and Puerto Rico.
Several of these state lawsuits name cigarette distributors such as the Company
as defendants.
Two separate actions being heard by the Superior Court for the County of
San Diego were referred to in previous filings. Both actions were initially
dismissed by the Court and the plaintiffs were allowed to re-file their
complaints. In July 1997, both complaints were re-filed by the plaintiffs;
however, the Company is no longer named as defendants to these complaints.
In October of 1996, a subsidiary of the Company was named as a defendant
in a class action lawsuit filed in State Court in New Mexico. The other
defendants include the principal U.S. tobacco manufacturers as well as other
distributors. The case is brought on behalf of a putative class of smokers
who reside in New Mexico, each of whom is allegedly nicotine dependent. The
suit seeks, on behalf of the class, compensatory damages, punitive damages
and equitable relief, including medical monitoring of the class members.
In February, March and April 1997, a subsidiary of the Company was served
with three complaints filed by individual plaintiffs in the District Court of
Nueces County, Texas. The other defendants in the lawsuits include certain
U.S. tobacco manufacturers. The complaints seek compensatory and punitive
damages for injuries allegedly caused by the use of tobacco products.
In May 1997, a subsidiary of the Company was named as a defendant in an
action brought by the Attorney General of New Mexico in an action filed in
State Court in Santa Fe, New Mexico. The other defendants include the
principal U.S. tobacco manufacturers as well as other distributors. The
Attorney General alleges, among other things, that the defendants realized
significant profits from the manufacture, distribution, and sale of tobacco
products, and that these activities have caused residents of New Mexico to
suffer illnesses and diseases. The State of New Mexico seeks both monetary
damages and a permanent injunction to require defendants to fund public
education and smoking cessation programs.
The Company does not believe that these actions will have a material
adverse effect on the Company's financial condition. The Company has been
indemnified with respect to certain claims alleged in each of the above
actions.
In addition, the Company is a party to other lawsuits incurred in the
ordinary course of its business. The Company believes it is adequately
insured with respect to such lawsuits or that such lawsuits will not result
in losses material to its consolidated financial position or results of
operations.
Item 2: Changes in Securities
Not applicable
Item 3: Defaults Upon Senior Securities
Not applicable
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable
13
Item 5: Other Information
Not applicable
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the second quarter of 1997
14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORE-MARK INTERNATIONAL, INC.
(Registrant)
Date: August 8, 1997 By: /s/ Leo F. Korman
--------------------- -----------------------------
Leo F. Korman, Senior Vice
President and
Chief Financial Officer
(Principal Accounting Officer and
duly authorized officer)
15