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Article by DailyStocks_admin    (03-25-08 08:03 AM)

Filed with the SEC from Feb 14 to Feb 20:

Core-Mark Holding (CORE) Loeb Partners and its affiliates reported ownership of 775,944 shares (7.44%), after buying 403,162 from Jan. 17 to March 7 at $24.06 to $29.20 each.

BUSINESS OVERVIEW

Company Overview

Core-Mark is one of the leading wholesale distributors to the convenience store industry in North America in terms of annual sales, and in providing sales and marketing, distribution and logistics services to customer locations across the United States and Canada. Our origins date back to 1888, when Glaser Bros., a family-owned-and-operated candy and tobacco distribution business, was founded in San Francisco.

Wholesale distributors provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from wholesale distributors’ broad retail coverage, inventory management and efficient processing of small orders. Wholesale distributors provide convenience retailers access to a broad product line, the ability to place small quantity orders, inventory management and access to trade credit. In addition, large full-service wholesale distributors, such as Core-Mark, offer retailers the ability to participate in manufacturer and Company sponsored marketing programs, merchandising and product category management services, as well as the use of information systems that are focused on minimizing retailers’ investment in inventory, while seeking to maximize their sales.

We operate in an industry where, in 2006, based on the National Association of Convenience Stores (NACS), 2007 State of the Industry (SOI) Report, total in-store sales at convenience retail locations approximated $164 billion and were generated through an estimated 145,000 stores across the United States. We estimate that 45% to 55% of the products that these stores sell are supplied by wholesale distributors such as Core-Mark. The convenience store retail industry gross profit for in-store sales was approximately $48 billion in 2006 which represents an increase of 7% over 2005. Over the ten years from 1996 through 2006, convenience in-store sales increased by a compounded annual growth rate of 8.8%. Two of the factors influencing this growth were a 12.5% compounded annual growth rate in cigarette sales for convenience retail locations and a 3.3% compounded annual growth rate in the number of stores.

We distribute a diverse line of national and private label convenience store products to approximately 21,000 customer locations in 45 states of the Unites States and five Canadian provinces. The products we distribute include cigarettes, tobacco, candy, snacks, fast food, groceries, fresh products, dairy, non-alcoholic beverages, general merchandise, and health and beauty care products. We service traditional convenience stores as well as alternative outlets selling convenience store products. Our traditional convenience store customers include many of the major national and super-regional convenience store operators as well as thousands of multi and single-store customers. Our alternative outlet customers comprise a variety of store formats, including drug stores, grocery stores, liquor stores, cigarette and tobacco shops, hotel gift shops, correctional facilities, military exchanges, college bookstores, casinos, video rental stores, hardware stores and airport concessions.

We operate a network of 24 distribution centers in 13 states and Canada, including two distribution centers that we operate as a third-party logistics provider. In 2007, we announced our plan to open a new distribution facility near Toronto, Ontario by February 2008. This new facility will expand our existing market geography in Canada. We distribute approximately 39,000 SKUs (Stock Keeping Units) of packaged consumable goods to our customers, and also provide an array of information and data services that enable our customers to better manage retail product sales and marketing functions.

In 2007, our consolidated net sales increased 4.6% to $5,560.9 million from $5,314.4 million in 2006. Cigarettes comprised approximately 69% of total net sales in 2007, while approximately 69% of our gross profit was generated from food/non-food products.

Competitive Strengths

We believe we have the following competitive strengths which are the foundation of our business strategy:

Experience in the Industry . Our origins date back to 1888, when Glaser Bros., a family-owned-and-operated candy and tobacco distribution business, was founded in San Francisco. The executive management team comprised of our CEO and 14 senior managers has largely overseen the operations of Core-Mark for more than a decade bringing their expertise to critical functional areas including logistics, sales and marketing, purchasing, information technology, finance, human resources and retail store support.

Distribution Capabilities. The wholesale distribution industry is highly fragmented and historically has consisted of a large number of small, privately-owned businesses and a small number of large, full-service wholesale distributors serving multiple geographic regions. Relative to smaller competitors, large distributors such as Core-Mark benefit from several competitive advantages including: increased purchasing power, the ability to service large national chain accounts, economies of scale in sales and operations, the ability to spread fixed costs over a larger revenue base, and the resources to invest in information technology and other productivity enhancing technology.

Innovative & Flexible. Wholesale distributors typically provide convenience retailers access to a broad product line, the ability to place small quantity orders, inventory management and access to trade credit. As a large full-service wholesale distributor we offer retailers the ability to participate in manufacturer and Company sponsored sales and marketing programs, merchandising and product category management services, as well as the use of information systems that are focused on minimizing retailers’ investment in inventory, while seeking to maximize their sales.

Business Strategy

Our objective is to increase overall return to shareholders by growing market share, revenues, profitability and cash flow. To achieve our objective, we plan to:

Continue Building Sustainable Competitive Advantage. We believe our ability to increase sales and profitability with existing and new customers is highly dependent upon us being able to deliver consistently high levels of service, innovative marketing programs, and information technology and logistics support. To that end, we are committed to further improving our operational efficiencies in our distribution centers while containing our costs in order to enhance profitability.

Drive our Vendor Consolidation Initiative (VCI). We expect our VCI program to allow us to grow by capitalizing on the highly fragmented nature of the distribution channel that services the convenience store industry. A convenience retailer generally receives their store merchandise through a large number of unique deliveries. This represents a highly inefficient and costly process for the individual stores. Our VCI program offers convenience stores the ability to receive one delivery for the bulk of their products, including dairy and other perishable items, thus simplifying the supply chain and eliminating operational costs.

Deliver Fresh Products. We believe there is an increasing trend among consumers to purchase fresh food and dairy products from convenience stores. We have added and continue to enhance our refrigerated capacity which enables us to deliver a significant range of chilled items including milk, produce and other food items to retail outlets. We intend on expanding the delivery of fresh food and dairy products through our VCI program and other offerings.

Expand our Presence Eastward. We believe there is significant opportunity for us to increase our market share by expanding our presence east of the Mississippi. According to the NACS 2007 SOI Report, during 2006, aggregate United States traditional convenience retail in-store sales were approximately $164 billion through approximately 145,000 stores with most of those stores located east of the Mississippi. We believe our expansion eastward will be accomplished by acquiring new customers, both national and regional, through a combination of exemplary service, VCI programs, fresh product deliveries, innovative marketing strategies, and competitive pricing. In addition, we intend to explore select acquisitions of other wholesale distributors which complement our business. In June 2006, we acquired the Klein Candy Company, L.P. to further our eastern expansion (See Note 3—Asset Acquisition of Klein Candy Co. L.P.) . In April 2007, we announced our plan to open a new distribution facility near Toronto, Ontario by February 2008. This new facility will expand our existing market geography in Canada.

Customers, Products and Suppliers

We service approximately 21,000 customer locations in 45 states of the United States and five Canadian provinces. Our customers represent many of the large national and regional convenience store retailers in the United States and Canada and leading alternative outlet customers. Our top ten customers accounted for approximately 28.6% of our sales in 2007, while our largest customer accounted for approximately 5.6% of our total sales in 2007.

Cigarette Products . We purchase cigarette products from major United States and Canadian manufacturers. With cigarettes accounting for approximately $3,863.1 million or 69% of our net sales and 31% of our gross profit in 2007, we control major purchases of cigarettes centrally in order to optimize inventory levels and purchasing opportunities. The daily replenishment of inventory and brand selection is controlled by our distribution centers.

Although United States cigarette consumption has declined since 1980, we have benefited from a shift in cigarette and tobacco sales to the convenience store segment. According to the NACS 2007 SOI Report (which includes data through December 31, 2006) the convenience store portion of aggregate United States cigarette sales increased from approximately 54% in 1999 to 64% in 2006. Based on 2007 statistics provided by the Tobacco Merchants Association (TMA), compiled from the United States Department of Agriculture-Economic Research Service, total cigarette consumption in the United States declined from 487 billion cigarettes in 1996 to 371 billion cigarettes in 2006, or a 24% reduction in consumption. Total cigarette consumption also declined in Canada from 47.1 billion cigarettes in 1996 to 21.9 billion cigarettes in 2006, or a 54% reduction in consumption, in accordance with consumption statistics published in 2007 by Canada’s central statistical agency, Statistics Canada.

We have no long-term cigarette purchase agreements and buy substantially all of our products on an as needed basis. Cigarette manufacturers historically have offered structured incentive programs to wholesalers based on maintaining market share and executing promotional programs. These programs are subject to change by the manufacturers without notice.

Excise taxes on cigarettes and other tobacco products are imposed by the various states, localities and provinces. We collect these taxes from our customers and remit these amounts to the appropriate authorities. Excise taxes are a significant component of our revenue and cost of sales. During 2007, we included in net sales approximately $1,349.4 million of excise taxes. As of December 31, 2007, state cigarette excise taxes in the United States jurisdictions we serve ranged from $0.07 per pack of 20 cigarettes in South Carolina to $2.58 per pack of 20 cigarettes in the state of New Jersey. In the Canadian jurisdictions we serve, provincial excise taxes ranged from C$2.47 per pack of 20 cigarettes in Ontario to C$4.20 per pack of 20 cigarettes in the Northwest Territories.

Food and Non-Food Products. The food product category includes candy, snacks, fast food, groceries, fresh products, dairy and non-alcoholic beverages. The non-food product category includes general merchandise, health and beauty care products and tobacco products other than cigarettes. Food and non-food product categories were $1,697.8 million of net sales for the year ended December 31, 2007 and account for approximately 31% of our sales, however, these categories represented approximately 69% of our gross profit. We structure our marketing and merchandising programs around these higher margin products.

Our Suppliers . We purchase products for resale from approximately 4,200 trade suppliers and manufacturers located across the United States and Canada. In 2007, we purchased approximately 60% of our products from our top 20 suppliers, with our top two suppliers, Philip Morris and R.J. Reynolds, representing approximately 25% and 14% of our purchases, respectively. We coordinate our purchasing from suppliers by negotiating, on a corporate-wide basis, special arrangements to obtain volume discounts and additional incentives, while also taking advantage of promotional and advertising incentives offered to us as a wholesale distributor. In addition, buyers in each of our distribution facilities purchase products, particularly food, directly from the manufacturers, improving product mix and availability for individual markets and reducing our inventory investment.

Operations

We operate a total of 24 distribution centers consisting of 21 in the United States and 3 in Canada as of December 31, 2007. In April 2007, we announced our plan to open a new distribution facility near Toronto, Ontario by February 2008. This new facility will expand our existing market geography in Canada. The Map below describes the scope of our operations and distributions centers.

Two of the facilities we operate in the Western region of the United States, Artic Cascade and Allied Merchandising Industry, are consolidating warehouses which buy products from our suppliers in bulk quantities and then distribute the products to our other Western distribution centers. By using Artic Cascade, located in Sacramento, California, to obtain products at lower cost from frozen product vendors, we are able to offer a broader selection of quality products to retailers at more competitive prices. Allied Merchandising Industry located in Corona, California purchases the majority of our non-food products, other than cigarettes and tobacco products, for our Western distribution centers enabling us to reduce our overall general merchandise and health and beauty care product inventory. We operate two additional facilities as a third party logistics provider. One distribution facility located in Phoenix, Arizona, referred to as the Arizona Distribution Center (ADC), is dedicated solely to supporting the logistics and management requirements of one of our major customers, Alimentation Couche-Tard. The second distribution facility located in San Antonio, Texas, referred to as the Valero Retail Distribution Facility (RDC) is dedicated solely to supporting another major customer, Valero.

We purchase a variety of brand name and private label products, totaling approximately 39,000 SKUs, including approximately 3,600 SKUs of cigarette and other tobacco products, from our suppliers and manufacturers. We offer customers a variety of food and non-food products, including candy, snacks, fast food, groceries, fresh products, dairy, non-alcoholic beverages, general merchandise and health and beauty care products.

A typical convenience store order is comprised of a mix of dry, frozen and chilled products. Our receivers, stockers, order selectors, stampers, forklift drivers and loaders received, stored and picked nearly 407 million, 405 million and 390 million items (a carton of 10 packs of cigarettes is one item) or 64 million, 59 million and 54 million cubic feet of product, during the years ended December 31, 2007, 2006 and 2005, respectively, while limiting the service error rate to about three errors per thousand items shipped (Note—these performance metrics do not include those of the Pennsylvania division prior to Core-Mark integrating them into our distribution system on October 1, 2006) (See Note 3—Asset Acquisition of Klein Candy Co., L.P.).

Our proprietary Distribution Center Management System, or DCMS, platform provides our distribution centers with the flexibility to adapt to our customers’ information technology requirements in an industry that does not have a standard information technology platform. Actively integrating our customers into our platform is a priority which enables fast, efficient and reliable service.

Distribution

At December 31, 2007, we had approximately 847 transportation department personnel, including delivery drivers, shuttle drivers, routers, training supervisors and managers who focus on achieving safe, on-time deliveries. Our daily orders are picked and loaded nightly in reverse order of scheduled delivery. At December 31, 2007, our trucking system consisted of approximately 575 tractors, trucks and vans, of which nearly all were leased. Our trailers are typically owned by us and many have refrigerated compartments that allow us to deliver frozen and chilled products alongside non-refrigerated goods. Our fuel consumption costs for 2007 totaled approximately $7.0 million, net of fuel surcharges passed on to customers, which represented an increase of approximately $0.5 million, from $6.5 million in 2006 due to increased fuel prices and miles driven.

Competition

We estimate that, as of December 31, 2007, there were approximately 375 wholesale distributors to traditional convenience store retailers in the United States. We believe that Core-Mark and McLane Company, Inc., a subsidiary of Berkshire Hathaway, Inc., are the two largest convenience wholesale distributors, measured by annual sales, in North America. There are also companies that provide products to specific regions of the country, such as The H.T. Hackney Company in the Southeast, Eby-Brown Company in the Midwest, Mid-Atlantic and Southeast and GSC Enterprises, Inc. in Texas and surrounding states, and several hundred local distributors serving small regional chains and independent convenience stores. In Canada, there are fewer wholesale distributors compared to the United States. In addition, certain manufacturers such as Coca-Cola bottlers, Frito Lay, and Interstate Bakeries deliver their products directly to convenience stores.

Competition within the industry is based primarily on the range and quality of the services provided, price, variety of products offered and the reliability of deliveries. We operate from a perspective that focuses heavily on providing outstanding customer service through our decentralized distribution centers, order fulfillment rates, on time deliveries and merchandising support as well as competitive pricing. At least one of our major competitors operates on a logistics model that concentrates on competitive pricing, using large distribution centers and providing competitive order fulfillment rates. This logistics model, however, may result in less certain delivery times and could leave the customer to perform all of the merchandising functions. Many of our small competitors focus on customer service from small distribution facilities and concentrate on long-standing customer relationships. We believe that our unique combination of service and price is a compelling combination that is highly attractive to customers and results in our increasing growth.

We purchase cigarettes primarily from manufacturers covered by the tobacco industry’s master settlement agreement (MSA), which was signed in November 1998. Since then, we have experienced increased wholesale competition for cigarette sales. Competition amongst cigarette wholesalers is primarily on the basis of service, price and variety. Competition among manufacturers for cigarette sales is based primarily on brand positioning, price, product attributes, consumer loyalty, promotions, advertising and retail presence. Cigarette brands produced by the major tobacco product manufacturers generally require competitive pricing, substantial marketing support, retail programs and other financial incentives to maintain or improve a brand’s market position. Deep-discount brands are brands manufactured by companies that are not original participants to the MSA, and accordingly, do not have cost structures burdened with MSA-related payments to the same extent as the original participating manufacturers. Historically, major tobacco product manufacturers have had a competitive advantage in the United States because significant cigarette marketing restrictions and the scale of investment required to compete made gaining consumer awareness and trial of new brands difficult.

We also face competition from the diversion into the United States market of cigarettes intended for sale outside the United States, the sale of cigarettes in non-taxable jurisdictions, the sale of cigarettes by third parties over the Internet and by other means designed to avoid collection of applicable taxes and imports of foreign low priced brands. The competitive environment has been impacted by alternative smoking products, such as snus and snuff, and higher prices due to higher state excise taxes and list price increases for cigarettes manufactured by parties to the MSA. As a result, the lowest priced products of manufacturers of numerous small share brands manufactured by companies that are not parties to the MSA have held their market share, putting pressure on the profitability of premium cigarettes.

Working Capital Practices

We sell products on credit terms to our customers that averaged, as measured by days sales outstanding, about 10 days for both years 2007 and 2006. Credit terms may impact pricing and are competitive within our industry. An increasing number of our customers remit payment electronically. Canadian days sales outstanding in receivables tend to be lower as Canadian industry practice is for shorter credit terms than those in the United States.

We maintain our inventory of products based on the level of sales of the particular product and manufacturer replenishment cycles. The number of days a particular item of inventory remains in our distribution centers varies by product and is principally driven by the turnover of that product and economic order quantities. We typically order and carry in inventory additional amounts of certain critical products to assure high order fulfillment levels for these items. The number of days of cost of sales in inventory averaged about 15 days during 2007 and 14 days in 2006.

We obtain terms from our vendors based on industry practices and consistent with our credit standing. We take advantage of the full complement of vendor offerings, including early payment terms. In 2007 we averaged approximately 11 days for days payable outstanding, including cigarette and tobacco taxes payable, as compared to 9 days for 2006, with a range of two days prepaid to 30 days credit. During 2007, we continued to re-establish credit terms, which were lost in 2003 as a result of the Fleming bankruptcy, regarding payment for excise tax stamps with several states.

Employees

As of December 31, 2007, we had approximately 4,035 employees, including 576 in finance, purchasing and administration, 938 in sales and marketing, and 2,521 in warehousing and distribution facilities. Approximately 406 employees are in locations outside the United States. Three of our distribution centers, Hayward, Las Vegas and Calgary, employ people who are covered by collective bargaining agreements with local affiliates of The International Brotherhood of Teamsters (Hayward and Las Vegas) and United Food and Commercial Workers (Calgary). Approximately 227 employees, or approximately 5.6% of our workforce, are unionized. There have been no disruptions in customer service, strikes, work stoppages or slowdowns as a result of union activities, and we believe we have satisfactory relations with our employees.

CEO BACKGROUND

Robert A. Allen , 57, has served as a Director of Core-Mark since August 2004. Mr. Allen was Acting Chief Operating Officer of the Fleming Companies, Inc. from March 2003 to April 2003. From 1998 to 2003, Mr. Allen served as the President and Chief Executive Officer of Core-Mark International, Inc. and President and Chief Operating Officer of Core-Mark International, Inc. from 1996 to 1998. Mr. Allen received a Bachelor of Arts degree from the University of California at Berkeley.

Stuart W. Booth , 56, has served as a Director of Core-Mark since August 2005. Mr. Booth has been employed by Central Garden & Pet Company, a publicly-traded marketer and producer of pet and lawn and garden supplies, since 2002, and is currently its Executive Vice President, Chief Financial Officer and Secretary. During 2001, Mr. Booth served as the Chief Financial Officer of RespondTV, Inc., an interactive television infrastructure and services company. From 1998 to 2000, Mr. Booth was Principal Vice President and Treasurer of Bechtel Group, Inc., an engineering, construction and project management firm. From 1975 to 1998, Mr. Booth served in various financial positions at Pacific Gas & Electric Company and related entities, including as principal financial officer for financial operations, acquisitions and divestitures at PG&E Enterprises. Mr. Booth received a Bachelor of Arts degree in economics from California State University, Chico, and a Masters of Business Administration from California State University, San Francisco.

Gary F. Colter , 61, has served as a Director of Core-Mark since August 2004. Mr. Colter has been employed principally by CRS Inc., a corporate restructuring and strategy management consulting company since 2002 and currently serves as its President. Prior to that time, Mr. Colter was employed by KPMG, serving as: Vice Chairman of KPMG Canada from 2001 to 2002; Managing Partner–Global Financial Advisory Services and Member International Executive Team of KPMG International from 1998 to 2000; Vice Chairman–Financial Advisory Services, Chairman and Chief Executive Officer of KPMG Inc. and on the Management Committee of KPMG Canada from 1989 to 1998; and Partner of KPMG Canada and its predecessor, Peat Marwick, from 1975 to 2002. Mr. Colter is a member of the board of directors of Canadian Imperial Bank of Commerce and Owens-Illinois, Inc. and serves on the board of trustees for Retirement Residences Real Estate Investment Trust (a private company). In addition, Mr. Colter serves as the chair of the audit committee and is a member of the governance committees for all three companies. Mr. Colter received a Bachelor of Arts degree in business administration from the Ivey Business School of the University of Western Ontario. Mr. Colter is a fellow chartered accountant (FCA).

L. William Krause , 64, has served as a Director of Core-Mark since August 2005. Mr. Krause presently serves as President of LWK Ventures, a private investment firm, a position he has held since 1991. Mr. Krause has been Chairman of the Board of Caspian Networks, Inc., a high performance networking systems provider, since April 2002 and was CEO from April 2002 until June 2004. From September 2001 to February 2002, Mr. Krause was Chairman and Chief Executive Officer of Exodus Communications, Inc., which he guided through Chapter 11 Bankruptcy to a sale of assets. He also served as President and Chief Executive Officer of 3Com Corporation, a global data networking company, from 1981 to 1990, and as its Chairman from 1987 to 1993 when he retired. Presently, Mr. Krause serves on the board of directors of Brocade Communications Systems, Inc., Packeteer, Inc., Sybase, Inc., and TriZetto Group. Mr. Krause received a Bachelor of Science degree in electrical engineering from The Citadel.

Harvey L. Tepner , 50, has served as a Director of Core-Mark since August 2004 and also serves as a member of the board of directors of Global Aero Logistic Inc. (formerly known as New ATA Holdings Inc. and is on the board of the Post Confirmation Trust of the Fleming Companies. Since December 2002, Mr. Tepner has been a Partner of Compass Advisers, LLP in charge of its investment banking restructuring practice. Prior to that time Mr. Tepner was a Managing Director of Loeb Partners Corporation from 1995 to 2002. Prior to Loeb, Mr. Tepner worked as an officer in the corporate finance departments of Dillon, Read & Co. Inc. and Rothschild Inc. Mr. Tepner is a Chartered Accountant (Canada) and previously worked for Price Waterhouse in Canada. Mr. Tepner received a Bachelor of Arts degree from Carleton University and a Masters of Business Administration degree from Cornell University.

Randolph I. Thornton , 61, has served as a Director and Chairman of the Board of Directors of Core-Mark since August 2004 and also serves as a member of the board of directors of the Post Confirmation Trust of the Fleming Companies. Mr. Thornton has served as the President and Chief Executive Officer of Comdisco Holding Company, Inc. since August 2004. From May 1970 to February 2004, Mr. Thornton was employed by Citigroup, Inc., most recently serving as a managing director until Mr. Thornton retired from Citigroup, Inc. in February 2004. Mr. Thornton is a member of the board of directors of Comdisco Holding Company, Inc. In addition, Mr. Thornton was a member of the board of directors of Edison Brothers Stores, Inc. from 1997 to 2000 and served as the chair of its audit committee during that time. Mr. Thornton received a Bachelor of Arts degree in history from Lafayette College and a Master of Business Administration from Columbia Business School.

J. Michael Walsh , 59, has served as our President and Chief Executive Officer since March 2003 and as a Director since August 2004. From October 1999 to March 2003, Mr. Walsh served as our Executive Vice President—Sales. From April 1991 to January 1996, Mr. Walsh was a Senior Vice President—Operations and was Senior Vice President—U.S. Distribution from January 1996 to October 1999. Before joining Core-Mark, Mr. Walsh served as the Senior Vice President—Operations of Food Services of America. Mr. Walsh received a Bachelor of Science degree in industrial engineering from Texas Tech University and a Master of Business Administration from Texas A&M at West Texas.

STOCK OWNERSHIP

[1] The address of Post Confirmation Trust of Fleming Companies, Inc. (the “PCT”) is 5801 North Broadway, Suite 100, Oklahoma City, Oklahoma 73118. Pursuant to Core-Mark’s emergence from bankruptcy in August 2004, the company issued an aggregate of 9,800,000 shares of its common stock to the PCT in exchange for the stock of Core-Mark International, Inc. and its subsidiaries. The PCT has distributed 8,624,973 shares of our common stock to certain of Fleming Companies, Inc. creditors and continues to hold 1,175,027 shares that are subject to future distribution to Fleming’s creditors as claims are resolved.
[2] The address of Third Point LLC is 390 Park Avenue, 18th Floor, New York, New York 10022. Mr. Daniel Loeb exercises voting and investment control over such shares and may be deemed to beneficially own the shares. Share amounts listed are derived from Third Point LLC’s Schedule 13G/A filing with the SEC on February 13, 2007.
[3] The address of River Run Management, LLC is 152 West 57th Street—52nd Floor, New York, New York 10019. Mr. Ian Wallace exercises voting and investment control over such shares and may be deemed to beneficially own the shares. Mr. Wallace disclaims beneficial ownership of all such shares except to the extent of his pecuniary interest therein. Share amounts listed are derived from River Run Management, LLC’s Schedule 13G filed with the SEC on February 13, 2006.
[4] The address of The Goldman Sachs Group, Inc. is 85 Broad Street, New York, New York 10004. Share amounts listed are derived from Goldman Sachs Group, Inc.’s Schedule 13G/A filed with the SEC on January 22, 2007.
[5] Includes beneficial ownership of aggregate options and restricted stock units held by such individual and exercisable within 60 days of March 31, 2007 into the following amount of shares: Mr. J.M. Walsh—93,890, Ms. Loretz-Congdon—8,057, Mr. Prokop—86,075, Mr. C. Walsh—74,330, Mr. Perkins—57,377, Mr. Wall—none.
[6] Share amounts represent beneficial ownership of aggregate options held by such individual and exercisable within 60 days of March 31, 2007.

COMPENSATION

We reimburse the members of our board of directors for reasonable expenses in connection with their attendance at board and committee meetings. In addition, non-employee directors receive an annual fee of $30,000 and a fee of $1,500 for each board and committee meeting attended. In addition, the Chairman of the board of directors receives an annual fee of $50,000 as consideration for acting as the Chairman of the board of directors. For 2006, the Chairman of the audit committee, compensation committee, nominating and corporate governance committee and finance and investment committee received an annual fee of $15,000, $7,500, $7,500 and $7,500 (pro-rated to $4,688 for 2006), respectively, in consideration for acting as the Chairman of the respective committee. For 2007 the annual fee of the Chairman of the Audit Committee has been increased to $20,000. The annual fee is paid in equal quarterly installments. Each non-employee director also received an option to purchase 7,500 shares of our common stock under our 2004 or 2005 Directors Equity Incentive Plan. The exercise price of the stock options granted to our non-employee directors is based on the fair value of our common stock as determined by our board of directors on the date of grant. The options vest one-third on the first anniversary of the grant date, and the balance quarterly over the next two years.

If the 2007 Long-Term Incentive Plan (the 2007 Plan) that is the subject of Proposal 2 below is approved by our stockholders, each of our non-employee directors will receive an annual grant under the 2007 Plan having a value of $30,000. It is currently anticipated that fifty percent of the value of each grant would be in the form of restricted stock units, and fifty percent of such value would be in the form of stock options having an exercise price equal to fair market value on the date of grant. Each annual grant would be subject to a one-year vesting requirement.

Elements of Executive Compensation

Total compensation for our executive officers consists of the following elements of pay:


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Base salary.


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Annual cash incentive bonus dependent on our financial performance and achievement of individual objectives.


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Long-term incentive compensation through grants of equity-based awards. Past awards have consisted of restricted stock, restricted stock units, and stock options. We anticipate that under our 2007 Plan, as proposed for approval in this Proxy Statement, we will also make grants in the form of performance shares or performance units.


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An Executive Severance Plan providing for severance payments upon involuntary termination of an executive other than for cause.


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Participation in retirement benefits available to U.S. employees through a 401(k) Savings Plan and to employees in Canada through a Registered Retirement Savings Plan (RRSP). We do not offer other types of retirement or pension plans to our executive officers.


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Health and welfare benefits that are available to substantially all our employees. We share the expense of such health and welfare benefits with our employees, the cost depending on the level of benefits coverage an employee elects to receive. Our health and welfare plan offerings are the same for our executive officers and its other non-executive employees.


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Group Life, Accidental Death & Dismemberment and Short and Long Term Disability insurances are also provided to both our executive officers and non-executive employees. However, executive officers and other senior officers and managers are provided with additional group life insurance, determined as a percentage of base salary, subject to a cap.

What We Reward, Why We Pay Each Element of Compensation and How Each Element Relates to Our Compensation Objectives

Our base salaries and our base benefits such as 401(k), RRSP, severance, group health and group life insurance are designed to attract and retain qualified and dedicated professionals by providing a base standard that is competitive in the markets in which we operate, and are intended to compensate for performing the basic functions of an executive’s job. Base salaries are not intended to provide the total compensation potential for an executive who has the capacity and opportunity to move our business forward. The higher up the organizational ladder an executive is, the lower that base salary as a percentage of total potential compensation becomes. That is, the more impact an executive can have on the organization, the more that executive will have to rely on performance based compensation and the larger performance based compensation will become as a percentage of the executive’s total compensation.

Through our incentive bonus program, we attempt to tailor performance goals to each individual executive officer and to our current priorities and needs. Accordingly, the results we attempt to reward may vary from executive to executive and from year to year. In general, however, we seek to reward our executives based on the Company or relevant region meeting a pre-determined level of FIFO pre-tax net profit (which we define as net income plus income tax expense, plus LIFO expense or less LIFO income, as applicable, less cigarette manufacturers’ price increase holding profits), on the Company or region meeting a pre-determined level of revenue, and on the executive’s meeting various individual goals. A more detailed discussion of factors used in 2006 appears below.

Through our equity incentive plans we attempt to align the interests of our executive officers with those of our stockholders by rewarding our executives based on increases in our stock price over time. Past awards have consisted of restricted stock, restricted stock units and stock options. We anticipate that under our 2007 Plan, proposed for approval in this Proxy Statement, we will also make grants in the form of performance shares and performance units.

How We Determine the Amounts We Pay

Base Salary

In setting, reviewing and adjusting base salaries and the levels and scope of our benefits programs we consider a number of factors, including both external factors such as market conditions as well as other factors that are not readily measured by performance goals. Such factors include: the specific expertise, capabilities, and potential of the individual; our perception of market wage conditions and the amounts required to attract and retain capable executives; and our experience in attracting and keeping managers with similar responsibilities. While we from time to time review publicly available salary data from companies we consider similar to Core-Mark, we did not rely on external salary data in setting base salaries for 2006 and we do not engage in “benchmarking.”

We do not ascribe to rigid, formulaic, mandated salary brackets. Our Chief Executive Officer recommends base salaries for our executive management team (including our named executive officers) based on the CEO’s subjective evaluation of each executive’s general level of performance and contribution to the Company over the prior year. These recommendations are then evaluated, discussed, modified as appropriate and ultimately approved by the Compensation Committee of our Board of Directors.

Annual Incentive Bonus Program

We have established an annual bonus program that is designed around the Company’s or relevant region’s achievement of identified financial goals supplemented by a “Management-By-Objectives ” format. This means that an executive’s bonus potential is based on the Company’s or region’s actual performance against identified financial goals and on the executive achieving certain individual objectives that are above and beyond the basic functions of the job or that complement the Company’s overall business objectives. Bonus payments are “at risk” and depend on both the results of the Company or region and the executive’s department and/or division as well as to the executive’s own, specific contribution to reaching such objectives. Overall Company-wide bonus levels are designed to provide an appropriate level of results-based incentives to our executive team while bearing in mind that the Company is a low margin business and must control costs.

Annual bonus objectives for our executive officers (other than the CEO) are developed through discussions between our CEO and the affected executives in conjunction with the annual business planning process. The proposed objectives for our named executive officers resulting from these discussions are then reviewed, adjusted if necessary and ultimately approved by our Compensation Committee after discussion with our CEO. Bonus objectives for our CEO are established through discussions between the CEO and the Compensation Committee. The applicable bonus criteria change to some degree each year to fit the current needs of the Company and/or region. The level of an executive’s total maximum bonus opportunity is structured as a percentage of base salary.

In 2006, total maximum bonus opportunities for our named executive officers ranged from 100% of base salary (for our CEO) to 80% of base salary. For 2007, our CEO’s total maximum bonus will be 125% of base salary, while the total maximum for our other named executive officers will remain at 80%. The total maximum bonus for each executive is allocated among several bonus components, with a specified percentage of the maximum allocated to each component.

Generally, our bonus objectives include a threshold requirement that the Company or applicable region realize at least 80% of its planned FIFO pre-tax net profit, either on a Company-wide basis (for corporate level executives) or for the applicable region. Satisfaction of this requirement is a precondition to the payment of any bonuses. In 2006 this requirement was satisfied on a Company-wide basis and in the applicable United States regions, but was not satisfied in Canada. Accordingly, Mr. Prokop, whose bonus was to be determined with respect to our results in Canada, was not eligible for a bonus for 2006.

In addition to this threshold requirement, each executive was given a set of individual objectives, each of which was assigned a weight, or percentage of the maximum available bonus. Specific objectives and relative weights for each named executive officer are discussed below. In general, for each executive these consisted of a component based on revenues (ranging from 15% to 30% of total bonus in 2006), a component based on FIFO pre-tax net profit (ranging from 25% to 45% of total bonus in 2006), and other components tailored to the responsibilities of that executive. Revenue targets and measures for 2006 excluded incremental revenue due to our acquisition of Klein Candy.

Our bonus plans provide for three levels of possible bonus for each component. Performance at the “Maximum” level for any component entitles an executive to the maximum amount allocated to that component. Performance at the “Target” level for any component entitles the executive to two-thirds of the maximum amount allocated to that component, and performance at the “Threshold” level for any component entitles the executive to one-third of the amount allocated to that component.

In general, for bonus targets the middle, or “Target” level represents the approved operating plan for the Company or the relevant region, the lowest, or “Threshold” level reflects the minimal level of performance deemed worthy of a bonus, and the highest, or “Maximum” level represents outstanding achievement well in excess of plan. However, the CEO has the authority, with the approval of the Compensation Committee, to establish different target levels based on his subjective evaluation of a region’s operating plan. For example, if the CEO views a component of a plan as exceptionally aggressive or challenging, that plan, or amounts close to that plan, may be set as the Maximum performance level for that component of the bonus, and the Target and Threshold levels adjusted accordingly.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Core-Mark is one of the leading wholesale distributors to the convenience store industry in North America in terms of annual sales, providing sales and marketing, distribution and logistics services to customer locations across the United States and Canada. We operate a network of 24 distribution centers in the United States and Canada, distributing a diverse line of national and private label convenience store products to approximately 21,000 customer locations. The products we distribute include cigarettes, tobacco, candy, snacks, fast food, groceries, fresh products, dairy, non-alcoholic beverages, general merchandise, and health and beauty care products. We service a variety of store formats including traditional convenience stores, grocery stores, drug stores, liquor stores and other stores that carry convenience products.

We derive our net sales primarily from sales to convenience store customers. Our gross profit is derived primarily by applying a markup to the cost of the product at the time of the sale and from cost reductions derived from vendor credit term discounts received and other vendor incentive programs. Our operating expenses are comprised primarily of sales personnel costs; warehouse personnel costs related to receiving, stocking, and selecting product for delivery; delivery costs such as delivery personnel, truck leases and fuel; costs relating to the rental and maintenance of our facilities, and other general and administrative costs.

Business Developments

Distribution Development by Imperial Tobacco of Canada

The largest tobacco manufacturer in Canada, Imperial Tobacco Canada, sales of whose products represented approximately 40% of our Canadian revenues, or approximately 8% of our total revenues, for the six months ended June 30, 2006, commenced by-passing wholesale distributors when it began direct-to-store delivery of its products in September 2006. This resulted in a decline in our sales of approximately $253.9 million for the year ended December 31, 2007 compared to 2006. As a result of the application of surcharges or increased mark-ups on other products we distribute to our Canadian customers, we believe we have recovered substantially all of our lost profits that resulted from the decision of Imperial Tobacco. Although competition provides our Canadian customers choices, thus far they have selected to continue purchasing products and services from us despite our need to apply surcharges and other means of recouping lost profits from the sales of Imperial Tobacco products.

Asset Acquisition of Klein Candy Co., LLP (Pennsylvania division)

On June 19, 2006, we completed the purchase of substantially all the assets and certain liabilities of Klein Candy Co. L.P. (Klein or Pennsylvania division), a full service distributor of tobacco and grocery items to convenience stores and other retail store formats in nine Eastern and mid-Western states, for approximately $58.3 million, including $0.7 million of direct transaction costs. We acquired Klein to help build a national distribution capacity. To fund the acquisition, we increased our borrowing under the 2005 Revolving Credit Facility by $57.6 million, but also increased our available borrowing capacity by $27.6 million as a result of the inclusion of the Klein assets in our borrowing base. Approximately 60 days subsequent to the acquisition, we established accounts payable credit terms, including cigarette and tobacco taxes payable, of approximately $23.1 million related to the Pennsylvania division operations, which reduced the borrowings required as a result of the Klein acquisition. In October 2006, we integrated the Pennsylvania division onto our proprietary DCMS platform ( See Note 3 — Asset Acquisition of Klein Candy Co., LLP.).

As of December 31, 2007 Klein has been fully integrated into our operations as a division. The impact Klein has had to our sales and operations is discussed below under our Results of Operations.

Tax Refund Settlement Agreement

In April 2007, we entered into a settlement agreement with the State of Washington Department of Revenue related to a technical interpretation of the State of Washington’s Other Tobacco Tax Law which specified a refund of Other Tobacco Product (OTP) tax of approximately $13.3 million, representing 25% of the State of Washington OTP tax we paid for the periods of December 1991 through December 1996 and May 1998 through June 2005. This refund, which was received in July 2007, was recorded in the second quarter of 2007 as a reduction to cost of goods sold.

Expansion to Eastern Canada

In April 2007, we announced our plan to open a new distribution facility near Toronto, Ontario by February 2008. This new facility will expand our existing market geography in Canada. We signed a long-term supply agreement with Couche-Tard, a Canadian retailer that operates over 600 stores in the province of Ontario. We estimate the total cost of the facility to be approximately $9.5 million, including $1.5 million of start-up costs of which approximately $0.8 million was expensed in 2007 and the remainder will be expensed in 2008.

New Business and Supply Agreement with MAPCO Express, Inc.

In November 2007, we announced that we had signed a non-binding letter of intent and were negotiating a definitive Supply Agreement with MAPCO Express, Inc. (MAPCO). On December 31, 2007, we signed a Supply Agreement with MAPCO to serve their network of 500 convenience stores in 8 southeastern states. This is a new business relationship that we expect will strengthen our sales and operations in the southeast starting in 2008.

Results of Operations

Comparison of the years ended December 31, 2007 and 2006

(1) Net sales, less excise taxes is a non-GAAP financial measure which we provide to separate the increase in sales due to actual sales growth and increases in excise taxes ( See—Comparison of Sales and Gross Profit by Product Line, page 32 ). Increases in cigarette-related taxes and/or fees, excise taxes, drive prices higher on the cigarette products we sell which result in higher net sales without increasing gross profit dollars. Increases in excise taxes result in a decline in overall gross profit percentage since net sales increase and gross profit dollars remain the same.
(2) Warehousing and distribution expenses are not included as a component of cost of goods sold.

Consolidated Net Sales. Net sales increased by $246.5 million, or 4.6%, to $5,560.9 million in 2007 from $5,314.4 million in 2006. The increase is due primarily to $231.9 million of incremental sales from our Pennsylvania division which we acquired in June 2006, and net sales increases of $268.5 million to existing and new customers offset by lost sales of $253.9 million due to Imperial Tobacco’s move to direct-to-store delivery. Increases in our overall Canadian operations net sales due to foreign currency exchange rate changes were approximately $40.9 million for 2007 compared to $59.1 million for 2006.

Net Sales of Cigarettes. Net sales of cigarettes for 2007 increased $79.3 million, or 2.1%, to $3,863.1 million from $3,783.8 million in 2006. The increase in net cigarette sales was driven by a 3.6% increase in the average sales price per carton due primarily to manufacturer price and state excise tax increases, offset by a 1.4% decrease in overall carton sales compared to 2006. The decrease in cigarette carton sales was due primarily to the loss of Imperial Tobacco volume described above offset by incremental sales from the Pennsylvania division. Adjusting for these items, remaining carton sales declined 2.1% for 2007. Total net cigarette sales as a percentage of total net sales was 69% for 2007 and 71% for 2006.

Net Sales of Food/Non-Food Products. Net sales of food and non-food products for 2007 increased $167.2 million, or 10.9%, to $1,697.8 million from $1,530.6 million in 2006. The increase was due primarily to higher sales to existing and new customers driven by the Company’s sales and marketing initiatives, and incremental sales from the Pennsylvania division. Total net sales of food and non-food products as a percentage of total net sales was 31% for 2007 and 29% for 2006.

Gross Profit. Gross profit represents the portion of sales remaining after deducting the cost of goods sold during the period. Vendor incentives, cigarette holding profits and changes in LIFO reserves are classified as elements of cost of goods sold. Gross profit in 2007 increased by $34.9 million, or 11.7%, to $332.6 million from $297.7 million in 2006. The increase in gross profit dollars for 2007 was due primarily to an overall increase in sales volume, the State of Washington OTP tax refund of $13.3 million recorded as a reduction to cost of goods sold, and an increase in cigarette inventory holding profits of $3.2 million, partially offset by an increase of $10.2 million in LIFO expense.

As a percentage of net sales, gross profit increased to 6.0% for 2007 from 5.60% for 2006. In 2007, approximately 69% of gross profit was derived from food/non-food products compared to 67% in 2006.

Operating Expenses . Our operating expenses include costs related to warehousing, distribution, and selling, general and administrative activities. In 2007, operating expenses increased $35.7 million, or 13.8%, to $294.9 million from $259.2 million in 2006. As a percentage of sales, total operating expenses were 5.3% in 2007 compared with 4.9% in 2006. The increase in operating expenses as a percentage of sales was due primarily to an increase in warehousing and distribution expenses which were 3.1% of sales in 2007 compared to 2.8% in 2006 and to the reduction in sales related to the loss of Imperial Tobacco volume.

Warehousing and Distribution Expenses . Warehousing and distribution expenses increased by $23.0 million, or 15.2%, to $174.1 million in 2007 from $151.1 million in 2006. The increase in warehousing and distribution expenses was due primarily to the addition of the Pennsylvania division in June 2006, an increase in sales volume, higher salaries and benefits and an increase in facility rent expense. The increase in salaries and benefits was driven primarily by tight labor market conditions at five of our divisions. Rent expense increased due primarily to investment in additional leased capacity in certain locations to support our growth in key markets. Additionally, included in warehousing and distribution costs in 2007 is approximately $0.2 million of start up costs related to our new Toronto facility which will be operational in 2008. As a percentage of sales these expenses were 3.1% for 2007 as compared to 2.8% for 2006.

Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses increased $12.4 million, or 11.6%, to $119.0 million in 2007 from $106.6 million in 2006. The increase in SG&A expenses was due primarily to incremental expenses from our Pennsylvania division which we acquired in June 2006, an increase in the allowance for doubtful accounts of $5.9 million related to two customers, and severance expense due to organizational changes in Canada amounting to $0.6 million, offset by a workers’ compensation benefit of $3.1 million related to favorable claims experience for prior years. Additionally, included in SG&A expenses for 2007 is approximately $0.6 million of start up costs related to our new Toronto facility which will be operational in 2008. SG&A expenses for 2006 include a benefit of $3.8 million of workers’ compensation costs resulting from a favorable settlement of amounts owed by us for claims inherited in connection with the Fleming bankruptcy, and the favorable settlement of vendors’ payables and previously written-off customer’s receivables totaling $1.6 million. Additionally in 2006, we received a $1.6 million benefit in insurance proceeds related to a fire at our Denver distribution center in 2002. These benefits in 2006 were offset by incremental costs of $1.0 million incurred in connection with the integration of the Pennsylvania division, and $0.6 million of closure and consolidation costs for the Victoria/Vancouver Facility in Canada.

As a percentage of net sales, SG&A expenses were 2.1% for 2007 compared to 2.0% for 2006.

Interest Expense. Interest expense includes both debt interest and amortization of fees related to borrowings. For 2007, interest expense decreased by $2.9 million, or 54.7%, to $2.4 million from $5.3 million in 2006. The decrease in interest expense was due primarily to lower average borrowings during 2007 compared to 2006, partially offset by a higher average interest rate. The average borrowings for 2007 were $19.8 million compared to $60.7 million for 2006. During 2007, the weighted average interest rate on the revolving credit facility was 6.7% compared to 6.5% for the same period in 2006.

Interest Income. In 2007 interest income was $1.4 million compared to $1.1 million for 2006. Our interest income is derived from earnings on cash balances kept in trust, checking accounts and overnight deposits.

Foreign Currency Transaction (Gains) Losses, net . We incurred foreign currency transaction gains of $0.9 million in 2007 compared to $0.3 million in losses in 2006. The fluctuation was due to inter-company activity related to our Canadian operations and to changes in Canadian foreign exchange rates. For 2007 the average Canadian/United States exchange rate was $1.0735 compared to $1.1343 for 2006.

Income Taxes. Our effective tax rate was 35.9% for 2007 compared to 39.4% for 2006 (See Note 10, Income Taxes for a reconciliation of the differences between the federal statutory tax rate and the effective tax rate). Included in the provision for income taxes for 2007 was $1.4 million of after tax interest related to the underpayment of income taxes in 2004 and 2005, and to unrecognized tax benefits under FIN 48. The underpayment of income taxes in 2004 and 2005 was due primarily to the misapplication of a tax position we adopted upon emergence from bankruptcy in 2004. The provision for income taxes also included a $2.1 million benefit, inclusive of $0.4 million of after tax interest, related primarily to corrections to our tax liability reserves associated with unitary taxes and other bankruptcy related costs, and to the expiration of the statute of limitations for certain tax positions included in our unrecognized tax benefits as of December 31, 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Comparison of the three months ended September 30, 2007 and 2006

Consolidated Net Sales . Net sales decreased by $4.5 million, or 0.3%, to $1,477.5 million for the three months ended September 30, 2007 as compared to $1,482.0 million for the same period in 2006. The decrease in net sales of $4.5 million was due primarily to lost sales of approximately $72.8 million related to the move by a large Canadian supplier, Imperial Tobacco, to direct-to-store delivery of its products in Canada offset by net sales increases to existing and new customers. Included in the changes in net sales above are decreases in excise taxes of $21.9 million, relating primarily to cigarettes and a $14.5 million benefit from favorable foreign currency exchange rates.

Net Sales of Cigarettes . Net sales of cigarettes for the three months ended September 30, 2007 decreased by $39.1 million, or 3.7%, to $1,021.1 million compared to $1,060.2 million for the same period in 2006. The decrease in net cigarette sales was driven primarily by a 6.6% decrease in cigarette carton sales combined with a decrease in excise taxes. The decrease in cigarette carton sales and excise taxes was due primarily to the loss of Imperial Tobacco volume described above. Adjusting for the loss of Imperial Tobacco, net cigarette sales increased by 3.4% for the third quarter of 2007 due primarily to manufacturer price and state excise tax increases offset by a 2.8% decline in carton volume. Cigarette sales at two of the Company’s divisions contributed to approximately 65% of this decrease in carton volume as a result of increases in excise taxes and changes in laws related to cigarette consumption. Total net cigarette sales as a percentage of total net sales were 69.1% and 71.5% for the three months ended September 30, 2007 and 2006, respectively.

Net Sales of Food/Non-Food Products . Net sales of food and non-food products for the three months ended September 30, 2007 increased $34.6 million, or 8.2%, to $456.4 million compared to $421.8 million for the same period in 2006. The increase was due primarily to higher net sales to existing and new customers driven by the Company’s sales and marketing initiatives. Total net sales of food and non-food products as a percentage of total net sales were 30.9% and 28.5% for the three months ended September 30, 2007 and 2006, respectively.

Gross Profit . Gross profit represents the portion of sales remaining after deducting the cost of goods sold during the period. Vendor incentives, cigarette holding profits and changes in LIFO reserves are classified as elements of cost of goods sold. Gross profit for the three months ended September 30, 2007 increased by $6.2 million, or 7.9%, to $85.2 million compared to $79.0 million for the same period in 2006. The increase in gross profit dollars in the third quarter of 2007 was due primarily to an increase in cigarette inventory holding profits of $2.3 million, a higher percentage of sales from higher-margin food/non-food products partially offset by an increase of $3.8 million in LIFO expense. For the three months ended September 30, 2007, approximately 69.0% of gross profit was derived from food/non-food products compared to 66.5% for the same period in 2006.

Operating Expenses . Our operating expenses include costs related to warehousing, distribution, and selling, general and administrative activities. For the three months ended September 30, 2007, operating expenses increased $9.8 million, or 13.8%, to $80.6 million from $70.8 million for the same period in 2006. During the third quarter of 2007, we increased our allowance for doubtful accounts, which was included in selling, general and administrative expenses, by $5.2 million. The increase related to the deteriorating financial conditions of two of our customers and their projected inability to make future payments. This accounted for 53.1% of the increase in operating expenses for the three months ended September 30, 2007 (See Note 3, Allowance for Doubtful Accounts Receivable). Overall, costs related to labor and benefits comprised approximately 59% and 64% of warehousing, distribution and selling, general and administrative expenses for the three months ended September 30, 2007 and 2006, respectively. The percentage of labor and benefits to total warehousing distribution and selling, general and administrative expenses decreased by approximately 4% for the third quarter of 2007 due to the increases in the allowance for doubtful accounts discussed above. A significant percentage of our labor costs is variable in nature and fluctuates relative to our sales volume.

Warehousing and Distribution Expenses . Warehousing and distribution expenses for the three months ended September 30, 2007 increased by $3.3 million, or 7.8%, to $45.6 million from $42.3 million for the same period in 2006. The increase in warehousing and distribution expenses was due primarily to an increase in facility rent expense and higher salaries and benefits. Rent expense increased due primarily to an investment in additional leased capacity in certain locations to support the Company’s growth. The increase in salaries and benefits was driven primarily by tight labor market conditions at five of the Company’s divisions. As a percentage of net sales, warehousing and distribution expenses were 3.1% for the three months ended September 30, 2007 compared to 2.9% for the same period in 2006. The reduction in sales related to the loss of Imperial Tobacco volume resulted in an increase of approximately 14 basis points in warehousing and distribution expenses as a percentage of net sales.

Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses increased $6.5 million, or 23.1%, to $34.6 million for the three months ended September 30, 2007 compared to $28.1 million for the same period in 2006. The increase in SG&A expenses was due primarily to the increase in the allowance for doubtful accounts of $5.2 million mentioned above. SG&A expenses for the three months ended September 30, 2006 included division integration and closure costs of $0.6 million. As a percentage of net sales, SG&A expenses were 2.3% for the three months ended September 30, 2007 compared to 1.9% for the same period in 2006. The increase in SG&A as a percentage of net sales compared with last year was due primarily to the increase in the allowance for doubtful accounts and the reduction in sales related to the loss of Imperial Tobacco volume.

Interest Expense. Interest expense includes both debt interest and amortization of fees related to borrowings. For the three months ended September 30, 2007, interest expense decreased by $1.2 million, or 70.6%, to $0.5 million from $1.7 million for the same period in 2006. The decrease in interest expense was due primarily to lower average borrowings in the third quarter of 2007 compared with the third quarter of 2006, partially offset by a higher average interest rate. The average borrowings for the three months ended September 30, 2007 were $15.9 million compared to $78.8 million for the same period in 2006. During the third quarter of 2007, the weighted average interest rate on the revolving credit facility was 6.9% compared to 6.7% in the third quarter of 2006.

Foreign Currency Transaction Gains, net . We recognized foreign currency transaction gains of $0.3 million for the three months ended September 30, 2007. We did not recognize any gain or loss for the three months ended September 30, 2006. The fluctuation in foreign currency was due to inter-company activity related to our Canadian operations and to changes in Canadian foreign exchange rates. For the three months ended September 30, 2007 the average Canadian/United States exchange rates was $1.0446 as compared to $1.1212 for the same period in 2006.

Income Taxes. Our effective tax rate was 28.3% for the three months ended September 30, 2007 compared to 36.2% for the same period in 2006. Included in the provision for income taxes for the three months ended September 30, 2007 was $0.2 million of after tax interest primarily related to unrecognized tax benefits under FIN 48. The provision for income taxes also included a $0.7 million benefit related to the expiration of the statute of limitations for certain tax positions included in our unrecognized tax benefits (See Note 7, Income Taxes).

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