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, 2002
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, 2002, 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 (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 effects on future
operations of the Company due to the acquisition of the Company by Fleming
Companies, Inc.; 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, 2001
and March 31, 2002..................................................... 3
Condensed Consolidated Statements of Income for the three
months ended March 31, 2001 and 2002............. ..................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and 2002................................... 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
-2-
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands of Dollars)
December 31, March 31,
2001 2002
-------- --------
Assets (Unaudited)
Current assets:
Cash....................................................................... $ 24,230 $ 23,542
Receivables:
Trade accounts, less allowance for doubtful accounts of $3,798 and
$4,183, respectively.............................................. 112,166 111,879
Other.................................................................. 20,002 19,023
Inventories, net of LIFO allowance of $51,914 and $52,133, respectively.... 128,168 118,278
Prepaid expenses and other................................................. 8,547 8,610
-------- --------
Total current assets................................................... 293,113 281,332
Property and equipment.......................................................... 78,027 77,970
Less accumulated depreciation.............................................. (45,180) (46,555)
-------- --------
Net property and equipment................................................. 32,847 31,415
Other assets.................................................................... 6,497 6,034
Goodwill, net of accumulated amortization of $25,623............................ 57,684 57,684
-------- --------
Total assets.................................................................... $390,141 $376,465
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable..................................................... $ 63,364 $ 55,884
Cigarette and tobacco taxes payable........................................ 53,771 59,088
Income taxes payable....................................................... 4,067 7,079
Deferred income taxes...................................................... 4,879 4,869
Current portion of long-term debt.......................................... 0 76,000
Other accrued liabilities.................................................. 37,620 31,674
-------- --------
Total current liabilities.............................................. 163,701 234,594
Long-term debt.................................................................. 163,467 75,000
Other accrued liabilities and deferred income taxes............................. 12,345 12,527
-------- --------
Total liabilities.......................................................... 339,513 322,121
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.......................................................... 33,688 37,443
Accumulated comprehensive loss:
Cumulative currency translation adjustments............................ (5,408) (5,447)
Additional minimum pension liability................................... (3,828) (3,828)
-------- --------
Total shareholders' equity............................................. 50,628 54,344
-------- --------
Total liabilities and shareholders' equity...................................... $390,141 $376,465
======== ========
See Notes to Condensed Consolidated Financial Statements.
-3-
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In Thousands of Dollars)
(Unaudited)
Three Months
Ended March 31,
---------------------
2001 2002
-------- --------
Net sales....................................................................... $754,266 $825,153
Cost of goods sold.............................................................. 705,121 774,297
-------- --------
Gross profit............................................................... 49,145 50,856
Operating and administrative expenses........................................... 42,150 41,463
-------- --------
Operating income........................................................... 6,995 9,393
Interest expense, net........................................................... 3,042 2,488
Amortization of debt refinancing costs.......................................... 318 318
-------- --------
Income before income taxes................................................. 3,635 6,587
Income tax expense.............................................................. 1,633 2,832
-------- --------
Net income................................................................. $ 2,002 $ 3,755
======== ========
See Notes to Condensed Consolidated Financial Statements.
-4-
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In Thousands of Dollars)
(Unaudited)
Three Months
Ended March 31,
---------------------
2001 2002
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income...................................................................... $ 2,002 $ 3,755
Adjustments to reconcile net income to net cash provided by operating
activities:
LIFO expense............................................................... 397 219
Amortization of goodwill................................................... 521 0
Depreciation and amortization.............................................. 1,954 2,052
Amortization of debt refinancing fees...................................... 318 318
Deferred income taxes...................................................... 318 135
Other...................................................................... 719 440
Changes in operating assets and liabilities................................ 42,638 5,045
-------- --------
Net cash provided by operating activities....................................... 48,867 11,964
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment........................................ (517) (152)
-------- --------
Net cash used in investing activities........................................... (517) (152)
-------- --------
FINANCING ACTIVITIES:
Net payments under accounts receivable securitization...................... (30,000) (500)
Net payments under revolving credit agreement.............................. (26,617) (11,967)
-------- --------
Net cash used in financing activities........................................... (56,617) (12,467)
-------- --------
Effects of changes in foreign exchange rates.................................... (1,027) (33)
-------- --------
Decrease in cash................................................................ (9,294) (688)
Cash, beginning of period....................................................... 28,129 24,230
-------- --------
CASH, END OF PERIOD............................................................. $ 18,835 $ 23,542
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments during the period for:
Interest, net of interest received......................................... $ 5,215 $ 4,548
Income taxes, net of refunds............................................... 155 (318)
See Notes to Condensed Consolidated Financial Statements.
-5-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of March 31, 2002 and the
condensed consolidated statements of income and of cash flows for the three
months ended March 31, 2001 and 2002 have been prepared by Core-Mark
International, Inc. and subsidiaries (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,
2002, and the results of its operations and cash flows for the interim periods
ended March 31, 2001 and 2002, 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, 2001, is
derived from the audited financial statements but does not include all
disclosures required by accounting principles generally accepted in the United
States of America. 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, 2001 ("2001 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, 2001 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 $0.4 million and $0.2 million for the three months ended March
31, 2001 and 2002, 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 $141.4 million and $153.5 million for the three months ended
March 31, 2001 and 2002, respectively.
4. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations" and SFAS No.142, "Goodwill and Other Intangible Assets". SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. SFAS No. 142 addresses the initial recognition and measurement of
intangibles assets acquired outside of a business combination and the
recognition and measurement of goodwill and other intangibles assets subsequent
to their acquisition. The Company adopted SFAS No. 142 on January 1, 2002 and
goodwill is no longer being amortized but is required to be tested for
impairment at least annually. The Company is evaluating the impact that the
adoption SFAS No. 142 will have on its financial position, results of operations
and cash flows. The Company will complete the impairment analysis for goodwill
during the second quarter. Goodwill amortization expense totaled $2.1 million
for the fiscal year ended December 31, 2001.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." While SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", it retains many of the fundamental provisions of that
Statement. SFAS No. 144 also supersedes the accounting and reporting provision
of APB No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions" for the disposal of a business.
It retains, however, the requirement in APB No. 30 to report separately
discontinued operations, and extends that reporting to a component of an entity
that either has been disposed of or is classified as held for sale. The Company
adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not
have a material impact on the Company's financial position, results of
operations or cash flows.
-6-
5. COMPREHENSIVE INCOME
The Company's comprehensive income was $1.0 million and $3.7 million for
the three months ended March 31, 2001 and 2002 respectively, which included net
income and other comprehensive losses related to foreign currency translation
adjustments.
6. 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 2001 Form 10-K. Wholesale
distribution segment information for the three months ended March 31 and asset
information as of December 31, 2001 and March 31, 2002 is set forth below
(dollars in thousands):
Three Months
Ended March 31,
---------------------
2001 2002
-------- --------
Net sales from external customers............................. $754,266 $825,153
Segment pre tax operating income (1).......................... $ 3,625 $ 5,727
Less: Goodwill and other unallocated amortization ............ 587 109
Interest expense: unallocated and other................. (915) (1,287)
Amortization of debt refinancing costs.................. 318 318
-------- --------
Consolidated income before income taxes....................... $ 3,635 $ 6,587
======== ========
Assets December 31, March 31,
2001 2002
-------- --------
Segment information.......................................... $382,015 $368,585
Add: Corporate and other...................................... 8,126 7,880
-------- --------
Consolidated assets........................................... $390,141 $376,465
======== ========
- --------------------------------------------------------------------------------
(1) Represents operating income, including allocated interest expense, but
excluding amortization of goodwill and debt refinancing costs, and income
taxes.
7. Agreement and Plan of Merger with Fleming Companies
Core-Mark International, Inc., Fleming Companies, Inc., and Platform
Corporation, a wholly owed subsidiary of Fleming Companies, Inc. entered into an
Agreement and Plan of Merger dated as of April 23, 2002, pursuant to which
Fleming Companies, Inc. will acquire the Company. The consummation of the
transaction is subject to certain conditions being met as described in the
Merger Agreement.
-7-
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 2001 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, 2002, approximately 72%, 19% and 9%
of the Company's net sales were derived from cigarettes, food products and
non-food products, respectively.
On April 23, 2002 the Company and Fleming Companies, Inc. entered into an
agreement and plan of merger, pursuant to which Fleming Companies, Inc. will
acquire the Company. The merger is expected to close prior to June 30, 2002.
TOBACCO INDUSTRY BUSINESS ENVIRONMENT
Manufacturers and distributors of cigarettes and other tobacco products are
currently facing 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; increased litigation
involving health and other effects of cigarette smoking and other uses of
tobacco; and litigation by the U.S. Department of Justice to recover federal
Medicare costs allegedly connected to smoking. The tobacco industry is also
currently subject to significant regulatory restrictions, such as the
requirement that product packages display warning labels, a prohibition on
television and radio advertising and prohibitions on sales to minors.
On March 21, 2000, the U.S. Supreme Court ruled that the United States Food
and Drug Administration (the "FDA") does not have jurisdiction over cigarettes
and smokeless tobacco products. Subsequent to this ruling, legislation has been
introduced in Congress that would grant the FDA authority to regulate tobacco
products. Although no such legislation passed during the year 2001, the
prospects for similar legislation in the future are uncertain. If such
legislation is passed, there could be no assurance that the FDA would not
promulgate regulations that would result in a material reduction in the
consumption of tobacco products in the United States, or would otherwise have a
material adverse effect on the Company's business and financial position.
In November 1998, 46 states, five territories and the District of Columbia
entered into a settlement of approximately $250 billion with four major tobacco
companies to resolve litigation over smoking-related costs incurred by state
Medicaid programs. 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.
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 (including the use of
cartoons in such promotion); 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). These provisions took effect
by April 23, 1999.
-8-
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 - including substantial increases in excise
taxes - 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. Nonetheless, the Company does
anticipate that any increase in cigarette prices, whether as a result of an
increase in excise taxes or some other regulatory initiative, may cause a
reduction of the consumption of tobacco products in the relevant jurisdiction.
In addition, proposals have been made in Congress in recent years to
require additional warning notices on tobacco products, to disallow advertising
and promotional expenses as deductions under federal tax law and to further
regulate the production and distribution of cigarettes and smokeless tobacco.
While neither the state Medicaid litigation settlement nor recent legislation
would impose restrictions on the sale of cigarettes and smokeless tobacco
products to adults, there can be no assurance that such restrictions will not be
proposed in the future or that any such proposed legislation or regulations
would not result in a material reduction of the consumption of tobacco products
in the United States or would not have a material adverse effect on the
Company's business and financial position.
The Company is subject to various federal, state and local environmental,
health and safety laws and regulations. Generally, these laws impose limitations
on the discharge of pollutants and the presence of hazardous substances in the
workplace and establish standards for vehicle and employee safety and for the
handling of solid and hazardous wastes. These laws include the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the Clean Air Act, the Hazardous Materials
Transportation Act and the Occupational Safety and Health Act. Future
developments, such as stricter environmental or employee health and safety laws
and regulations thereunder, could affect the Company's operations. The Company
does not currently anticipate that the cost of its compliance with or of any
foreseeable liabilities under environmental and employee health and safety laws
and regulations will have a material adverse effect on its business and
financial condition.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
NET SALES. Net sales for the three months ended March 31, 2002 were $825.2
million, an increase of $70.9 million or 9.4% over the same period in 2001. 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 2002
compared to 2001.
Net sales of cigarettes for the three months ended March 31, 2002 were
$593.8 million, an increase of $48.1 million or 8.8% over the same period in
2001. 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, 2002
were 20.3 million cartons, an increase of 0.7 million cartons or 3.7% from the
same period of 2001.
Net sales of food and non-food products for the three months ended March
31, 2002 were $231.4 million, an increase of $22.8 million or 11.0% over the
same period in 2001. The increase occurred primarily in fast food sales, which
increased $7.5 million, or 26.4%, primarily due to new customer volume; general
merchandise, which increased $5.2 million or 28.9%, due to increases in new and
existing customer volume; and snacks, which increased $4.0 million or 23.0%, due
to increases in new and existing customer volume.
GROSS PROFIT. Gross profit for the three months ended March 31, 2002 was
$50.9 million, an increase of $1.7 million or 3.5% over the same period in 2001.
The gross profit margin for the three months ended March 31, 2002 decreased to
6.2% of net sales as compared to 6.5% of net sales for the comparable period in
2001. The decline in overall gross profit margin was principally due to an
increase in the wholesale cost of cigarettes over the past year. Gross profit
margins on cigarettes are significantly lower than the margins on food and
non-food products, and the larger growth in cigarette revenues contributed to
the overall reduction in margins. In addition gross profit margins on food and
non-food products declined slightly.
For the three months ended March 31, 2002, the Company recognized LIFO
expense of $0.2 million compared to $0.4 million for the comparable period in
2001.
-9-
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses for the three months ended March 31, 2002 were $41.5 million, a
decrease of $0.7 million or 1.6% as compared to the same period in 2001.
Operating expenses for the three months ended March 31, 2002 decreased to 5.0%
of net sales as compared to 5.6% of net sales for the same period in 2001,
primarily due to the fact that the Company continues to exert tight control over
expenses.
OPERATING INCOME. As a result of the foregoing factors, operating income
for the three months ended March 31, 2002 was $9.4 million, an increase of $2.4
million or 34.3% over the same period in 2001. As a percentage of net sales,
operating income for the three months ended March 31, 2002 was 1.1%, as compared
to 1.0% for the same period in 2001.
NET INTEREST EXPENSE. Net interest expense for the three months ended March
31, 2002 was $2.5 million, a decrease of $0.6 million or 18.2% as compared to
the same period in 2001, which resulted from a decrease in the Company's average
debt levels and a decrease 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 $151.0 million at March 31, 2002, a
decrease of $12.5 million or 7.6% from $163.5 million at December 31, 2001. 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.
The following table summarizes the Company's debt obligations as of March
31, 2002 (in thousands):
Current portion of long-term debt:
Accounts Receivable facility............. $ 76,000
Long term debt:
Revolving Credit facility................ 0
Senior Subordinated notes................ 75,000
--------
Total......................................... $151,000
========
The revolving period of the Accounts Receivable Facility expires in January
2003. This facility is structured such that, upon expiration, the subsequent
collections of U.S. trade receivables are used to pay the outstanding balance
until it is paid in full. The Revolving Credit Facility expires on April 30,
2003. The Senior Subordinated notes mature on September 15, 2003. The Company
intends to refinance all outstanding long-term debt prior to their maturities.
If the acquisition of the Company by Fleming Companies, Inc. does not occur, the
Company will explore alternative financing arrangements. These alternatives
include arrangements similar to existing arrangements such as a new accounts
receivable securitization, a revolving facility, new senior subordinated notes,
as well as other financing vehicles. Depending on the market conditions at the
time of the refinancing, the terms obtained by the Company may, or may not be as
favorable as the current terms.
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. Inventories at March 31, 2002 were significantly higher then normal for
this time of year, due to the decision to build cigarette inventories in
anticipation of a manufacturer cigarette price increase in early April. This
resulted in a decline in cash provided by operating activites compared to the
same period in 2001.
The Company made capital expenditures of $0.2 million in the first quarter
of 2002. For the remainder of 2002, the Company estimates it will spend
approximately $4 to $6 million for capital requirements, principally consisting
of warehouse and other equipment.
-10-
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 2002, such taxes on cigarettes
represented approximately 23% 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.
Under current law, almost all state and Canadian provincial taxes are
payable by the Company under credit terms which, on the average, are more
favorable than 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).
As of January 1, 2002, the U.S. federal excise tax on cigarettes is $3.90
per carton of cigarettes, which includes a $.50 per carton increase that took
effect on January 1, 2002. Unlike the state and provincial taxes described
above, U.S. federal excise taxes on cigarettes are paid by the cigarette
manufacturers and passed through to the Company as a component of the cost of
cigarettes. Increases in U.S. federal excise taxes raise the Company's working
capital requirements by increasing the balances of its inventories and accounts
receivable. While the Company is unaware of any pending 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.
-11-
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 Consolidated Financial Statements
contained in the Company's 2001 annual report on Form 10-K.
-12-
PART II - OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
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.
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 proceed on two
"civil RICO" grounds. The parties have filed various procedural motions and
pre-trial documents. The trial is scheduled to begin in July 2003. 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.
On July 14, 2000, a Florida state court jury awarded a class of Florida
smokers $145 billion in punitive damages against the major U.S. tobacco
companies. The tobacco companies moved to set aside the award and remove the
case to federal court; such motions were denied, as was the tobacco companies'
request for a new trial. The tobacco companies appealed the judgment. The appeal
is pending in the Third District Court of Appeals in Miami, Florida. If the
class of Florida smokers 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.
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
None.
(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 May 15, 2002.
CORE-MARK INTERNATIONAL, INC.
By /s/ Leo F. Korman
-----------------------------------
Leo F. Korman, Senior Vice President and
Chief Financial Officer
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