UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

þ		Annual Report Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934

o		Transition Report Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934

Commission File Number:

CORE-MARK HOLDING COMPANY, INC.

(Exact name of registrant as specified in its charter)

Delaware		20-1489747
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
395 Oyster Point Boulevard, Suite 415
South San Francisco, California 94080		(650) 589-9445
(Address of Principal Executive Offices, including Zip Code)		(Registrant’s Telephone Number, including Area Code)

Title of each class		Name of each exchange on which registered:
Common Stock, par value $0.01 per share		NASDAQ Global Market

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter: $269,030,306.

As of February 26, 2010, the Registrant had 10,612,543 shares of its common stock issued and outstanding.

See Parts III and IV. Registrant’s Proxy Statement for the 2010 Annual Meeting of Stockholders is incorporated by reference to Part III in this Form 10-K.

 

 

TABLE OF CONTENTS

		Page
PART I
ITEM 1. BUSINESS			1
ITEM 1.A. RISK FACTORS			9
ITEM 1.B. UNRESOLVED STAFF COMMENTS			16
ITEM 2. PROPERTIES			16
ITEM 3. LEGAL PROCEEDINGS			17
ITEM 4. (REMOVED AND RESERVED)			17
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES			17
ITEM 6. SELECTED FINANCIAL DATA			19
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			21
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA			40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			74
ITEM 9.A. CONTROLS AND PROCEDURES			74
ITEM 9.B. OTHER INFORMATION			74
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			75
ITEM 11. EXECUTIVE COMPENSATION			75
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS			75
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE			75
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES			75
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES			76
Exhibit 10.18
Exhibit 10.21
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Except for historical information, the statements made in this Annual Report on Form 10-K are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on certain assumptions or estimates, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial conditions or state other forward-looking information. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.

Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, actual results and performance could differ materially from those set forth in the forward-looking statements. Forward-looking statements in some cases can be identified by the use of words such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “believe,” “could,” “would,” “project,” “predict,” “continue,” “plan,” “propose” or other similar words or expressions. These forward-looking statements are based on the current plans and expectations of our management and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those discussed in such forward-looking statements.

Factors that might cause or contribute to such differences include, but are not limited to our dependence on the convenience retail industry for our revenues; uncertain economic conditions; competition; price increases; our dependence on relatively few suppliers; the low-margin nature of cigarette and consumable goods distribution; certain distribution centers’ dependence on a few relatively large customers; competition in the labor market; product liability claims and manufacturer recalls of products; fuel price increases; our dependence on our senior management; our ability to successfully integrate acquired businesses; currency exchange rate fluctuations; our ability to borrow additional capital; governmental regulations and changes thereto including the Family Smoking Prevention and Tobacco Control Act which was signed into law in June 2009 which granted the U.S. federal Food & Drug Administration (“FDA”) the authority to regulate the production and marketing of tobacco products in the U.S.; earthquake and natural disaster damage; failure or disruptions to our information systems; a greater decline than anticipated in cigarette sales volume; our ability to implement marketing strategies; and competition from sales of deep-discount cigarette brands and illicit and other low priced sales of cigarettes. Refer to Part I, Item 1A, “Risk Factors” of this Form 10-K. Except as provided by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 1.		BUSINESS

Unless the context indicates otherwise, all references in this Annual Report on Form 10-K to Core-Mark, the Company, we, us or our refer to Core-Mark Holding Company, Inc. and its subsidiaries.

Company Overview

Core-Mark is one of the largest marketers of fresh and broad-line supply solutions to the convenience retail industry in North America in terms of annual sales, providing sales and marketing, distribution and logistics services to customer locations across the U.S. 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.

Core-Mark offers 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. In addition, our wholesale distributing capabilities provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from our broad retail coverage, inventory management and efficient processing of small orders. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, optimizing inventory management and accessing trade credit.

We operate in an industry where, in 2008, based on the NACS Association for Convenience and Petroleum Retailing 2009 State of the Industry (“SOI”) Report, total in-store sales at convenience retail locations increased 3.2% to approximately $173.9 billion and were generated through an estimated 145,000 stores across the U.S. We estimate that 45% to 55% of the products that these stores sell are supplied by wholesale distributors such as Core-Mark. The convenience retail industry gross profit for in-store sales was approximately $56 billion in 2008 and $45 billion in 2007. Over the ten years from 1998 through 2008, convenience in-store sales increased by a compounded annual growth rate of 7.2%.

We distribute a diverse line of national and private label convenience store products to approximately 24,000 customer locations in all 50 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 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, military exchanges, college bookstores, casinos, movie theaters, hardware stores and airport concessions.

We operate a network of 26 distribution centers across the U.S. and Canada, including two distribution centers that we operate as a third party logistics provider. We distribute approximately 42,000 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 2009, our consolidated net sales increased 8.1% to $6,531.6 million from $6,044.9 million in 2008. Cigarettes comprised approximately 70.3% of total net sales in 2009, while approximately 64.6% of our gross profit was generated from food/non-food products.

Competitive Strengths

We believe we have the following fundamental 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 13 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.

Innovation & Flexibility. 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.

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.

Business Strategy

Our objective is to increase overall return to shareholders by growing market share, revenues, profitability and cash flow. To achieve that objective, we have become one of the largest marketers of fresh and broad-line supply solutions to the convenience retail industry in North America. In order to further enhance our value to the retailer, we plan to:

Drive our Vendor Consolidation Initiative (“VCI”). We expect our VCI program will allow us to grow by capitalizing on the highly fragmented nature of the distribution channel that services the convenience retail 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 retailers 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. To meet this expected demand, we have modified and upgraded our refrigerated capacity, including investing in chill docks, state-of-the-art ordering devices and tri-temperature trailers, which enables us to deliver a significant range of chilled items including milk, produce and other fresh foods to retail outlets. We have also established partnerships with strategically located bakeries and commissaries to further enable us to deliver the freshest product possible. We continue to expand the delivery of fresh products through the development of unique and comprehensive marketing programs, and we have rebranded the Company to properly reflect the role this fresh product line will play in our and the industry’s future. We believe our investments in infrastructure and branding, combined with our strategically located suppliers and in-house expertise, position us as the leader in providing fresh products and programs to convenience stores.

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 Association for Convenience and Petroleum Retailing 2009 SOI Report, during 2008, aggregate U.S. traditional convenience retail in-store sales were approximately $173.9 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 January 2008, we opened a distribution facility near Toronto, Ontario. This facility expanded our existing market geography in Canada. In June 2008, we acquired Auburn Merchandise Distributors, Inc. (“AMD” or “New England”), to further expand our presence and infrastructure in the Northeastern region of the U.S. (see Note 3—Acquisitions).

Continue Building Sustainable Competitive Advantage. We believe our ability to increase sales and profitability with existing and new customers is highly dependent upon our ability to deliver consistently high levels of service, innovative marketing programs and information technology and logistics support. To that fundamental end, we are committed to further improving our operational efficiencies in our distribution centers while containing our costs in order to enhance profitability. To further enhance our competitive advantage, we have been the first to recognize emerging trends and to offer to the retailer our unique marketing programs such as VCI and Fresh. We believe this innovation has established us as the market leader in providing valuable marketing and supply chain solutions in the industry.

Customers, Products and Suppliers

We service approximately 24,000 customer locations in all 50 states of the U.S. and 5 Canadian provinces. Our customers represent many of the large national and regional convenience retailers in the U.S. and Canada and leading alternative outlet customers. Our top ten customers accounted for approximately 30.6% of our sales in 2009, and no single customer accounted for 10% or more of our total sales in 2009.

Below is a comparison of our net sales mix by primary product category for the last three years (in millions):

		Year Ended December 31,
		2009								2008								2007
						% of Net								% of Net								% of Net
		Net Sales				Sales				Net Sales				Sales				Net Sales				Sales
Cigarettes		$	4,589.1				70.3	%		$	4,124.8				68.2	%		$	3,863.1				69.5	%
Food			738.0				11.3	%			710.1				11.7	%			596.7				10.7	%
Candy			405.0				6.2	%			401.3				6.7	%			349.8				6.3	%
Other tobacco products			434.0				6.6	%			402.7				6.7	%			353.4				6.4	%
Health, beauty & general			209.5				3.2	%			220.1				3.6	%			206.2				3.7	%
Non-alcoholic beverages			151.7				2.3	%			180.9				3.0	%			186.4				3.4	%
Equipment/other			4.3				0.1	%			5.0				0.1	%			5.3				0.1	%
Total Food/Non-food Products			1,942.5				29.7	%			1,920.1				31.8	%			1,697.8				30.5	%
Total net sales		$	6,531.6				100.0	%		$	6,044.9				100.0	%		$	5,560.9				100.0	%

Cigarette Products. We purchase cigarette products from major U.S. and Canadian manufacturers. With cigarettes accounting for approximately $4,589.1 million or 70.3% of our total net sales and 35.4% of our total gross profit in 2009, 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.

In the U.S., legislation was introduced in 2008 to fund the State Children’s Health Insurance Program (“SCHIP”) by raising the federal cigarette excise tax from 39¢ to $1.01 per pack. Federal excise tax is included as a component of our product cost charged by the manufacturer. The legislation, which was signed into law in February 2009, became effective April 1, 2009. As a result, our net cigarette sales for 2009 were inflated by approximately $534.0 million, due primarily to the significant price increases from manufacturers in response to the SCHIP legislation.

U.S. cigarette consumption has generally declined since 1980. Based on 2009 statistics provided by the Tobacco Merchants Association (“TMA”) published in early 2010 and compiled from the U.S. Department of Agriculture-Economic Research Service, total cigarette consumption in the U.S. declined from 467 billion cigarettes in 1999 to 336 billion cigarettes in 2009, or a 28% reduction in consumption. Prior to 2007, we had benefitted from a shift in cigarette and tobacco sales to the convenience retail segment. According to the most recent statistics available on the growth of cigarette sales in the convenience retail segment in the NACS 2007 SOI Report (which includes data through December 31, 2006), the convenience retail portion of aggregate U.S. cigarette sales increased from approximately 54% in 1999 to 64% in 2006. In 2009, convenience retailers were the largest trade class for cigarette sales accounting for approximately 70% of total industry volume according to the R.J. Reynolds’ 2009 Industry Report.

Total cigarette consumption also declined in Canada from 45.6 billion cigarettes in 1998 to 13.8 billion cigarettes in 2008, or a 70% reduction in consumption, according to consumption statistics published in 2009 by Canada’s central statistical agency, Statistics Canada.

In 2009, our average daily carton sales in the U.S. declined 9.9%, excluding the New England division, which was acquired in June 2008. We believe the decline in the U.S. is due largely to the significant price increases in 2009. Our average daily carton sales in Canada increased 14.4% primarily through market share gains dominated by our expansion in the Toronto market. The shift in cigarette carton sales from other channels to the convenience retail segment may no longer be adequate to compensate for consumption declines.

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 2009, we included in net sales approximately $1,516.0 million of state and provincial excise taxes. As of December 31, 2009, state cigarette excise taxes in the U.S. jurisdictions we serve ranged from $0.07 per pack of 20 cigarettes in South Carolina to $3.46 per pack of 20 cigarettes in the state of Rhode Island. In the Canadian jurisdictions we serve, provincial excise taxes ranged from C$2.47 per pack of 20 cigarettes in Ontario to C$5.36 per pack of 20 cigarettes in the Northwest Territories.

Food and Non-food Products. The food category includes fast food, snacks, groceries, non-alcoholic beverages, fresh produce, dairy and bread. The non-food category includes cigars, chewable tobacco, loose tobacco, health and beauty products, general merchandise and equipment. The combined food/non-food products categories totaled $1,942.5 million in net sales for 2009 or 29.7% of our total net sales and $259.2 million in gross profit or 64.6% of our total gross profit. Food/non-food generated gross margins of 14.36% excluding excise taxes in 2009, while the cigarette categories generated 3.83%. Due to the significantly higher margins earned, most of the company’s marketing programs are designed to promote and grow sales in the food and non-food categories.

Food/non-food sales grew 1.2% in 2009, while gross profits grew $4.2 million or 1.7%. These growth rates were negatively impacted by an $8.1 million reduction in floor stock income resulting from a decline in manufacturers’ price increases. Additionally, price deflation in 2009, primarily in certain dairy products, negatively impacted our net sales of food/non-food products.

Two of our key business strategies focus primarily on the higher margin categories in the food group. These categories include milk, fresh bread, fresh sandwiches, fresh fruit, fresh produce, fresh baked goods, healthy snacks and home replacement meals. This drive toward more healthy and fresh foods being sold in the convenience markets is a significant trend in the industry. We have invested a significant amount of capital to position our company to have the right infrastructure to deliver these highly perishable items. Our objective is to take market share and to increase our customer’s profit, thereby increasing our own.

Our Suppliers. We purchase products for resale from approximately 4,100 trade suppliers and manufacturers located across the U.S. and Canada. In 2009, we purchased approximately 63% of our products from our top 20 suppliers, with our top two suppliers, Philip Morris and R.J. Reynolds, representing approximately 28% 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 marketing 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.

Seasonality

We typically generate slightly higher revenues and gross profits during the warm weather months (May through September) than in other times throughout the year. We believe this occurs because the convenience store industry which we serve tends to be busier during this period due to vacation and travel. During the second and third quarters of both 2009 and 2008, we generated approximately 53% of our net sales for each fiscal year.

Operations

We operate a total of 26 distribution centers consisting of 22 in the U.S. and 4 in Canada as of December 31, 2009. The map below describes the scope of our operations and distribution centers.

Map of Operations

Two of the facilities we operate in the U.S., Artic Cascade and Allied Merchandising Industry, are consolidating warehouses which buy products from our suppliers in bulk quantities and then distribute the products to many of our other 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 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, Inc. The second distribution facility located in San Antonio, Texas, referred to as the Retail Distribution Center (“RDC”), is dedicated solely to supporting another major customer, Valero Energy Corporation.

We purchase a variety of brand name and private label products, totaling approximately 42,000 SKUs, including approximately 4,200 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 426 million, 435 million and 407 million items (a carton of 10 packs of cigarettes is one item) or 65 million, 66 million and 64 million cubic feet of product, during the years ended December 31, 2009, 2008 and 2007, respectively, while limiting the service error rate to approximately two errors per thousand items shipped.

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, 2009, we had approximately 940 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, 2009, our trucking fleet consisted of approximately 660 tractors, trucks and vans, of which nearly all were leased. We have made a significant investment over the past few years in upgrading our trailer fleet to tri-temperature (“tri-temp”) which gives us the capability to deliver frozen, chilled and non-refrigerated goods in one delivery. As of December 31, 2009, over 55% of our fleet consisted of tri-temp trailers with the remainder capable of delivering refrigerated and non-refrigerated foods. This provides us the multiple temperature zone capability needed to support our focus on delivering fresh products to our customers. Our fuel consumption costs for 2009 totaled approximately $4.9 million, net of fuel surcharges passed on to customers, which represented a decrease of approximately $4.5 million, from $9.4 million in 2008 due to decreased fuel prices, partially offset by an increase in miles driven and the addition of our New England division.

Competition

We estimate that, as of December 31, 2009, there were over 300 wholesale distributors to traditional convenience retailers in the U.S. We believe that McLane Company, Inc., a subsidiary of Berkshire Hathaway, Inc., and Core-Mark 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 retailers. In Canada, there are fewer wholesale distributors compared to the U.S. In addition, certain manufacturers such as Coca-Cola bottlers, Frito Lay and Hostess Brands, Inc. deliver their products directly to convenience retailers.

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 flexibility and providing outstanding customer service through our distribution centers, order fulfillment rates, on-time delivery performance using delivery equipment sized for the small format store, innovative marketing solutions and merchandising support, as well as competitive pricing. We believe this represents a contrast to some large competitors who offer a standardized logistics approach, with emphasis on uniformity of product lines, and company determined delivery schedules using large delivery equipment designed for large format stores, while also providing competitive order fulfillment rates and pricing. The emphasis on the logistics approach, while responsive to competitive pricing, is not in our opinion best suited for retailers looking for more customized solutions and support from their supply partners in addition to competitive pricing. Some small competitors focus on customer service and long standing customer relationships but oftentimes lack the range of offerings of the larger distributor. We believe that our unique combination of service, marketing solutions and price is a compelling combination that is highly attractive to customers and may enhance their growth and profitability.

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 based primarily on service, price and variety, whereas competition amongst manufacturers for cigarette sales is based primarily on brand positioning, price, product attributes, consumer loyalty, promotions, marketing 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. Historically, major tobacco product manufacturers have had a competitive advantage in the U.S. 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 sale of cigarettes by third parties over the internet and by other means designed to avoid collection of applicable taxes, including the sale of cigarettes in non-taxable jurisdictions, imports of foreign low-priced brands and the diversion into the U.S. market of cigarettes intended for sale outside the U.S. 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 9 days for 2009 and 2008. Credit terms may impact pricing and are competitive within our industry. An increasing number of our customers remit payment electronically, which facilitates efficient and timely monitoring of payment risk. Canadian days sales outstanding in receivables tend to be lower as Canadian industry practice is for shorter credit terms than those in the U.S.

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 2009 and 2008.

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. Our days payable outstanding during 2009 averaged 11 days, including cigarette and tobacco taxes payable, as compared to 12 days for 2008, with a range of three days prepaid to 30 days credit.

Employees

The following chart provides a breakdown of our employees by function and geographic region as of December 31, 2009:

TOTAL EMPLOYEES BY BUSINESS FUNCTIONS

		U.S.				Canada				Total
Management, Administration, Finance and Purchasing			489				108				597
Sales and Marketing			1,044				64				1,108
Warehousing and Distribution			2,290				272				2,562
Total Categories			3,823				444				4,267

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 220 employees, or 5.2% 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.

Regulation

As a distributor of food products, we are subject to the Federal Food, Drug and Cosmetic Act and regulations promulgated by the U.S. Food and Drug Administration (“FDA”). The FDA regulates the holding requirements for foods through its current good manufacturing practice regulations, specifies the standards of identity for certain foods and prescribes the format and content of certain information required to appear on food product labels. A limited number of the over-the-counter medications that we distribute are subject to the regulations of the U.S. Drug Enforcement Administration. In Canada, similar standards related to food and over-the-counter medications are governed by Health Canada. The products we distribute are also subject to federal, state, provincial and local regulation through such measures as the licensing of our facilities, enforcement by state, provincial and local health agencies of relevant standards for the products we distribute and regulation of our trade practices in connection with the sale of our products. Our facilities are inspected periodically by federal, state, provincial and local authorities including the Occupational Safety and Health Administration under the U.S. Department of Labor which require us to comply with certain health and safety standards to protect our employees.

We are also subject to regulation by numerous other federal, state, provincial and local regulatory agencies, including but not limited to the U.S. Department of Labor, which sets employment practice standards for workers, and the U.S. and Canadian Departments of Transportation, which regulate transportation of perishable goods, and similar state, provincial and local agencies. Compliance with these laws has not had and is not anticipated to have a material effect on our results of operations.

We voluntarily participate in random quality inspections of all of our distribution centers, conducted by the American Institute of Baking (“AIB”). The AIB publishes standards as a tool to permit operators of distribution centers to evaluate the food safety risks within their operations and determine the levels of compliance with the standards. AIB conducts an inspection which is composed of food safety and quality criteria. AIB conducts its inspections based on five categories: adequacy of the company’s food safety program, pest control, operational methods and personnel practices, maintenance of food safety and cleaning practices. Within these five categories, the AIB evaluates over 100 criteria items. AIB’s independent evaluation is summarized and posted on its website for our customers’ review. In 2009, nearly 89% of our distribution centers received the highest rating from the AIB with 10% receiving the second highest rating.

Registered Trademarks

We have registered trademarks including the following: Arcadia Bay^®, Cable Car^®, Core-Mark^®, Core-Mark International^®, EMERALD^®, Java Street^®, QUICKEATS^®, Richland Valley^TM, SmartStock^® and Tastefully Yours^®.

Segment and Geographic Information

We operate in two reportable geographic segments—the U.S. and Canada. See Note 15—Segment Information to our consolidated financial statements.

Corporate and Available Information

The office of our corporate headquarters is located at 395 Oyster Point Boulevard, Suite 415, South San Francisco, California 94080 and the telephone number is (650) 589-9445.

Our internet website address is www.core-mark.com. We provide free access to various reports that we file with or furnish to the U.S. Securities and Exchange Commission (“SEC”) through our website, as soon as reasonably practicable after they have been filed or furnished. These reports include, but are not limited to, our annual reports on Form 10-K, quarterly reports on Form 10-Q and any amendments to those reports. Our SEC reports can be accessed through the “Investor Relations” section of our website, or through www.sec.gov. Also available on our website are printable versions of Core-Mark’s Audit Committee Charter, Compensation Committee Charter, Nominating and Corporate Governance Committee Charter and Code of Business Conduct and Ethics. Copies of these documents may be requested from:

Core-Mark International
395 Oyster Point Blvd, Suite 415
South San Francisco, CA 94080
Attention: Investor Relations

Corporate Governance—Code of Business Conduct and Ethics and Whistle Blower Policy:

Our Code of Business Conduct and Ethics is designed to promote honest, ethical and lawful conduct by all employees, officers and directors and is posted on the “Investor Relations” section of our website at www.core-mark.com under “Corporate Governance.”

Additionally, the Audit Committee (“Audit Committee”) of the Board of Directors of Core-Mark has established procedures to receive, retain, investigate and act on complaints and concerns of employees, shareholders and others regarding accounting, internal accounting controls and auditing matters, including complaints regarding attempted or actual circumvention of internal accounting controls or complaints regarding violations of the Company’s accounting policies. The procedures are also described in our website address at www.core-mark.com under Corporate Governance in the “Investor Relations” section.

ITEM 1.A.		RISK FACTORS

You should carefully consider the following risks together with all of the other information contained in this Annual Report on Form 10-K. Additional risks and uncertainties not currently known to us may also materially adversely affect our business, financial condition or results of operations.

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, the risk factors set forth below (see—Special Note Regarding Forward-Looking Statements prior to Item 1. Business).

Risks Related to the Economy and Market Conditions

Current difficult economic conditions may reduce demand for our products and increase credit risks.

Current difficult economic conditions, including the rising unemployment and underemployment rates, significant declines in real estate values, large losses to consumer retirement and investment accounts, increases in food prices and uncertainty regarding federal tax and economic policies have resulted in reduced consumer confidence and curtailed consumer spending. If these economic conditions persist or deteriorate further, we expect that convenience retail operators will experience continued weakness and further reductions in same store sales, which will adversely affect demand for our products and lead to reduced sales and pressures on margins. In addition, the uncertainty in the financial markets and the resulting pressures on liquidity may place a number of our convenience retail customers under financial stress, which could increase our credit risk and potential bad debt exposure. These economic and market conditions may have a material adverse effect on our business and operating results.

Our business is sensitive to gasoline prices, which could adversely affect business.

Our operating results are sensitive to, and may be adversely affected by, unexpected increases in fuel or other transportation-related costs. Our retailers have reported to us that when gasoline prices increased they have experienced a decrease in the proportion of their customers’ expenditures on food/non-food products compared to customers’ expenditures on cigarettes. The shift in expenditures may place pressure on our sales and gross margins since sales of food/non-food products result in higher margins than sales of cigarettes do.

Historically, we have been able to pass on a substantial portion of increases in our own fuel costs to our customers in the form of fuel surcharges, but our ability to continue to pass through price increases, either from manufacturers or costs incurred in the business, including fuel costs, is not assured. If we are unable to continue to pass on fuel cost increases to our customers, our operating results could be materially and adversely affected.

As a result of recent recessionary economic conditions, our pension plan is currently underfunded and we will be required to make cash payments to the plan, reducing the cash available for our business.

We record a liability associated with our pension plans equal to the excess of the benefit obligation over the fair value of plan assets. The benefit liability recorded at December 31, 2009 was $35.2 million for the pension plan. Our pension plan’s underfunded status decreased from approximately $12.8 million in 2008 to approximately $11.6 million in 2009. The decrease in the underfunded status of the plan from 2008 to 2009 is due primarily to a higher return than expected on invested plan assets as of December 31, 2009 compared to December 31, 2008. The amount of the estimated contributions is expected to increase in 2010 due, in part, to the underperformance of the plan assets relative to our expectations given the overall market downturn during 2008. If the performance of the assets in the plan does not meet our expectations, or if other actuarial assumptions are modified, our future cash payments to the plan could be substantially higher than we expect. The pension plan is subject to the Employee Retirement Income Security Act of 1974, or ERISA. Under ERISA, the Pension Benefit Guaranty Corporation, or PBGC, has the authority to terminate an underfunded pension plan under limited circumstances. In the event our pension plan is terminated for any reason while it is underfunded, we will incur a liability to the PBGC that may be equal to the entire amount of the underfunding in the pension plan.

Risks Related to Our Business and Industry

We are dependent on the convenience retail industry for our revenues, and our results of operations would suffer if there is an overall decline or consolidation in the convenience retail industry.

The majority of our sales are made under purchase orders and short-term contracts with convenience retail stores which inherently involve significant risks. These risks include declining sales in the convenience retail industry due to general economic conditions, credit exposure from our customers, termination of customer relationships without notice, consolidation of our customer base and consumer movement toward purchasing from club stores. Any of these factors could negatively affect our results of operations.

We face competition in our distribution markets and if we are unable to compete effectively in any distribution market, we may lose market share and suffer a decline in sales.

Our distribution centers operate in highly competitive markets. We face competition from local, regional and national tobacco and consumable products distributors on the basis of service, price and variety of products offered, schedules and reliability of deliveries and the range and quality of services provided. Some of our competitors, including a subsidiary of Berkshire Hathaway Inc., McLane Company, Inc., the largest convenience wholesale distributor in the U.S., have substantial financial resources and long standing customer relationships. In addition, heightened competition among our existing competitors, or by new entrants into the distribution market, could create additional competitive pressures that may reduce our margins and adversely affect our business. If we fail to successfully respond to these competitive pressures or to implement our strategies effectively, we may lose market share and our results of operations could suffer.

If we are not able to retain existing customers and attract new customers, our results of operations could suffer.

Increasing the growth and profitability of our distribution business is particularly dependent upon our ability to retain existing customers and attract additional customers. The ability to attract additional customers through our existing network of distribution centers is especially important because it enables us to leverage our distribution centers and other fixed assets. Our ability to retain existing customers and attract new customers is dependent upon our ability to provide industry-leading customer service, offer competitive products at low prices, maintain high levels of productivity and efficiency in distributing products to our customers while integrating new customers into our distribution system, and offer marketing, merchandising and ancillary services that provide value to our customers. If we are unable to execute these tasks effectively, we may not be able to attract a significant number of new customers and our existing customer base could decrease, either or both of which could have an adverse impact on our results of operations.

If the costs to us of the products we distribute increase and we cannot pass the increase on to our customers, our results of operations could be adversely affected.

Our industry is characterized by a high volume of sales with relatively low profit margins. We experience increases in our cost of goods sold when manufacturers increase prices or reduce or eliminate discounts and incentive programs. If we cannot pass along such cost increases to our customers due to resistance to higher prices, our narrow profit margins and earnings could be negatively affected.

We rely on funding from manufacturer discount and incentive programs and cigarette excise stamping allowances; any material changes in these programs could adversely affect our results of operations.

We receive payments from the manufacturers of the products we distribute for allowances, discounts, volume rebates and other merchandising and incentive programs. These payments are a substantial benefit to us. The amount and timing of these payments are affected by changes in the programs by the manufacturers, our ability to sell specified volumes of a particular product, attaining specified levels of purchases by our customers and the duration of carrying a specified product. In addition, we receive discounts from states in connection with the purchase of excise stamps for cigarettes. If the manufacturers or states change or discontinue these programs or change the timing of payments, or if we are unable to maintain the volume of our sales, our results of operations could be negatively affected.

We depend on relatively few suppliers for a large portion of our products, and any interruptions in the supply of the products that we distribute could adversely affect our results of operations.

We obtain the products we distribute from third party suppliers. At December 31, 2009, we had approximately 4,100 vendors, and during 2009 we purchased approximately 63% of our products from our top 20 suppliers, with our top two suppliers, Philip Morris and R. J. Reynolds, representing approximately 28% and 14% of our purchases, respectively. We do not have any long-term contracts with our suppliers committing them to provide products to us. Our suppliers may not provide the products we distribute in the quantities we request on favorable terms, or at all. We are also subject to delays caused by interruption in production due to conditions outside our control, such as job actions or strikes by employees of suppliers, inclement weather, transportation interruptions, regulatory requirements and natural disasters or other catastrophic events. Our inability to obtain adequate supplies of the products we distribute could cause us to fail to meet our obligations to our customers and reduce the volume of our sales and profitability.

We may lose business if cigarette or other manufacturers decide to engage in direct distribution of their products.

In the past, certain large manufacturers have elected to engage in direct distribution of their products and eliminate distributors such as Core-Mark. If other manufacturers make similar decisions in the future, our revenues and profits would be adversely affected and there can be no assurance that we will be able to take action to compensate for such losses.

Cigarette and consumable goods distribution is a low-margin business sensitive to economic conditions.

We derive most of our revenues from the distribution of cigarettes, other tobacco products, candy, snacks, fast food, groceries, fresh products, dairy, non-alcoholic beverages, general merchandise and health and beauty care products. Our industry is characterized by a high volume of sales with relatively low profit margins. Our food/non-food sales are at prices that are based on the cost of the product plus a percentage markup. As a result, our profit levels may be negatively impacted during periods of cost deflation for these products, even though our gross profit as a percentage of the price of goods sold may remain relatively constant. Alternatively, periods of product cost inflation may also have a negative impact on our profit margins and earnings with respect to sales of cigarettes. Gross profit on cigarette sales are generally fixed on a cents per carton basis. Therefore, as cigarette prices increase, gross profit generally decreases as a percent of sales. In addition, if the cost of the cigarettes that we purchase increases due to manufacturer price increases or increases in applicable excise tax rates, our inventory costs and accounts receivable could rise. To the extent that we are unable to pass on product cost increases to our customers, our profit margins and earnings could be negatively impacted.

Some of our distribution centers are dependent on a few relatively large customers, and our failure to maintain our relationships with these customers could substantially harm our business and prospects.

Some of our distribution centers are dependent on relationships with a single customer or a few customers, and we expect our reliance on these relationships to continue for the foreseeable future. Any termination or non-renewal of customer relationships could severely and adversely affect the revenues generated by certain of our distribution centers. Any future termination, non-renewal or reduction in services that we provide to these select customers would cause our revenues to decline and our operating results to suffer.

We may be subject to product liability claims which could materially adversely affect our business, and our operations could be subject to disruptions as a result of manufacturer recalls of products.

Core-Mark, as with other distributors of food and consumer products, faces the risk of exposure to product liability claims in the event that the use of products sold by us causes injury or illness. With respect to product liability claims, we believe that we have sufficient liability insurance coverage and indemnities from manufacturers. However, product liability insurance may not continue to be available at a reasonable cost, or, if available, may not be adequate to cover all of our liabilities. We generally seek contractual indemnification and insurance coverage from parties supplying the products we distribute, but this indemnification or insurance coverage is limited, as a practical matter, to the creditworthiness of the indemnifying party and the insured limits of any insurance provided by suppliers. If we do not have adequate insurance, if contractual indemnification is not available or if a party cannot fulfill its indemnification obligation, product liability relating to defective products could materially adversely impact our results of operations.

In addition, we may be required to manage a recall of products on behalf of a manufacturer. Managing a recall could disrupt our operations as we might be required to devote substantial resources toward implementing the recall, which could materially adversely affect our ability to provide quality service to our customers.

Adverse publicity or lack of confidence in our products could adversely affect reputation and reduce earnings.

Our business could be adversely affected if consumers lose confidence in the safety and quality of certain food products and services we distribute. Adverse publicity may discourage consumers from buying our products or using our services. In addition, such adverse publicity may result in product liability claims, a loss of reputation, and product recalls which would have a material adverse effect on our sales and operations.

Unexpected outcome in legal proceedings may result in adverse effect on results of operations.

On occasion, we are a party to legal proceedings, including matters involving personnel and employment issues, personal injury, antitrust claims and other proceedings arising in the ordinary course of business. Furthermore, there are an increasing number of cases being filed against companies generally, which include class-action allegations under federal and state wage and hour laws. We estimate our exposure to these legal proceedings and establish reserves for the estimated liabilities. Assessing and predicting the outcome of these matters involve substantial uncertainties. Although not currently anticipated by management, unexpected outcomes in these legal proceedings, or changes in our evaluation of the proceedings, could have a material adverse impact on our finances and results of operations.

Our ability to operate effectively could be impaired by the risks and costs associated with the efforts to grow our business through acquisitions.

Efforts to grow our distribution business may include acquisitions. Acquisitions entail various risks such as identifying suitable candidates, effecting acquisitions at acceptable rates of return, obtaining adequate financing and acceptable terms and conditions. Successful integration of new operations will depend on our ability to manage those operations, fully assimilate the operations into our distribution network, realize opportunities for revenue growth presented by strengthened product offerings and expanded geographic market coverage, maintain the customer base and eliminate redundant and excess costs. We may not realize the anticipated benefits or savings from an acquisition to the extent or in the time frame anticipated, if at all, or such benefits and savings may include higher costs than anticipated.

We may not be able to achieve the expected benefits from the implementation of new marketing initiatives.

We are taking action to improve our competitive performance through a series of strategic marketing initiatives. The goal of this effort is to develop and implement a comprehensive and competitive business strategy, addressing the special needs of the convenience industry environment, increase our market position within the industry and ultimately create increased shareholder value.

We may not be able to successfully execute our new marketing initiatives to realize the intended synergies, business opportunities and growth prospects. Many of the risk factors previously mentioned, such as increased competition, may limit our ability to capitalize on business opportunities and expand our business. Our efforts to capitalize on business opportunities may not bring the intended result. Assumptions underlying estimates of expected revenue growth or overall cost savings may not be met or economic conditions may deteriorate. Customer acceptance of new distribution formats developed may not be as anticipated, hampering our ability to attract new customers or maintain our existing customer base. Additionally, our management may have its attention diverted from other important activities while trying to execute new marketing initiatives. If these or other factors limit our ability to execute our strategic initiatives, our expectations of future results of operations, including expected revenue growth and cost savings, may not be met.

Our information technology systems may be subject to failure or disruptions, which could seriously harm our business.

Our business is highly dependent on our Distribution Center Management System, or DCMS. The convenience retail industry does not have a standard information technology, or IT, platform. Therefore, actively integrating our customers into our IT platform is a priority, and our DCMS platform provides our distribution centers with the flexibility to adapt to our customers’ IT requirements. We also rely on DCMS and our internal information technology staff to maintain the information required to operate our distribution centers and to provide our customers with fast, efficient and reliable deliveries. While we have taken steps to increase redundancy in our IT systems, if our DCMS fails or is not reliable, we may suffer disruptions in service to our customers and our results of operations could suffer.

We depend on our senior management.

We substantially depend on the continued services and performance of our senior executive officers as named in our Proxy Statement. We do not maintain key person life insurance policies on these individuals, and we do not have employment agreements with any of them. The loss of the services of any of our senior executive officers could harm our business.

We operate in a competitive labor market and a portion of our employees are covered by collective bargaining agreements.

Our continued success will depend partly on our ability to attract and retain qualified personnel. We compete with other businesses in each of our markets with respect to attracting and retaining qualified employees. While current market conditions have provided us with a surplus of qualified employee candidates, in the future, a shortage of qualified employees could require us to enhance our wage and benefit packages in order to compete effectively in the hiring and retention of qualified employees or to hire more expensive temporary employees. In addition, at December 31, 2009, 220, or 5.2%, of our employees were covered by collective bargaining agreements with labor organizations, which expire at various times.

We cannot assure you that we will be able to renew our respective collective bargaining agreements on favorable terms, that employees at other facilities will not unionize, that our labor costs will not increase, that we will be able to recover any increases in labor costs through increased prices charged to customers or that we will not suffer business interruptions as a result of strikes or other work stoppages. If we fail to attract and retain qualified employees, to control our labor costs, or to recover any increased labor costs through increased prices charged to our customers or offsets by productivity gains, our results of operations could be materially adversely affected.

Risks Related to the Distribution of Cigarettes

Our sales volume is largely dependent upon the distribution of cigarette products, sales of which are declining.

The distribution of cigarette and other tobacco products is currently a significant portion of our business. In 2009, approximately 70.3% of our revenues came from the distribution of cigarettes and 35.4% of our gross profit was generated from cigarettes. Due to increases in the prices of cigarettes and other tobacco products, restrictions on marketing and promotions by cigarette manufacturers, increases in cigarette regulation and excise taxes, health concerns, increased pressure from anti-tobacco groups and other factors, the U.S. and Canadian cigarette and tobacco market has generally been declining since 1980 and is expected to continue to decline.

Prior to 2007 our cigarette sales had benefitted from a shift in sales to the convenience retail segment, and as a result of this shift, convenience store cigarette sales had not declined in proportion to the decline in overall consumption. However, our cigarette carton sales began to decline in 2007, and this decline continued in 2008 and 2009. We expect consumption trends of legal cigarette and tobacco products will continue to be negatively impacted by rising prices, diminishing social acceptance and legislative and regulatory actions that create limitations on where a consumer can smoke, and how products can be promoted and produced. In addition, we expect rising prices will stimulate a higher percentage of consumers to purchase from illicit markets to fulfill consumer demand. We believe this may adversely impact our cigarette carton volume, primarily in the U.S., in future periods.

Legislation and other matters are negatively affecting the cigarette and tobacco industry.

The tobacco industry is subject to a wide range of laws and regulations regarding the marketing, sale, taxation and use of tobacco products imposed by local, state, federal and foreign governments. Various state and provincial governments have adopted or are considering legislation and regulations restricting displays and marketing of tobacco products, establishing fire safety standards for cigarettes, raising the minimum age to possess or purchase tobacco products, requiring the disclosure of ingredients used in the manufacture of tobacco products, imposing restrictions on public smoking, restricting the sale of tobacco products directly to consumers or other recipients over the Internet and other tobacco product regulation. For example, the U.S. Supreme Court has recently determined that lawsuits may proceed against tobacco manufacturers based on alleged deceptive advertising in the marketing of so-called “light” cigarettes. In June 2009, the Family Smoking Prevention and Tobacco Control Act was signed into law, which granted the U.S. federal Food & Drug Administration (“FDA”) the authority to regulate the production and marketing of tobacco products in the U.S. The new legislation establishes a new FDA office that will regulate changes to nicotine yields and the chemicals and flavors used in tobacco products, require ingredient listings be displayed on tobacco products, prohibit the use of certain terms which may attract youth or mislead users as to the risks involved with using tobacco products, as well as limit or otherwise impact the marketing and marketing of tobacco products by requiring additional labels or warnings as well as pre-approval of the FDA. This new FDA office is to be financed through user fees paid by tobacco companies prorated based on market share. This new legislation and related regulation could adversely impact the market for tobacco products and, accordingly, our sales of such products. In British Columbia, Canada, legislation was adopted authorizing the provincial government to seek recovery of tobacco-related health care costs from the tobacco industry and a lawsuit under such legislation is underway. The Supreme Court of Canada unanimously upheld the Province’s right to sue the tobacco industry and concluded the Tobacco Damages and Health Care Costs Recovery Act is constitutional. Quebec, New Brunswick and Ontario have joined British Columbia in passing legislation that would allow them to file lawsuits against tobacco manufacturers. Other states and provinces may adopt similar legislation and initiate similar lawsuits. Furthermore, in Alberta, Canada, the Tobacco Reduction Act was passed in 2008 to prohibit the sale of all cigarette and tobacco products from all health-care facilities, public post-secondary campuses, pharmacies and stores containing a pharmacy effective January 1, 2009.

Cigarettes and other tobacco products are subject to substantial excise taxes and, if these taxes are increased, our sales of cigarettes and other tobacco products could decline.

Cigarettes and tobacco products are subject to substantial excise taxes in the U.S. and Canada. Significant increases in cigarette-related taxes and/or fees have been proposed or enacted and are likely to continue to be proposed or enacted within the U.S. and Canada. States continue to pass ballot measures that may result in increasing excise taxes on cigarettes and other tobacco products. In February 2009, U.S. legislation was signed into law which funds the SCHIP program by raising the federal cigarette excise tax from 39¢ to $1.01 per pack. This legislation was effective April 1, 2009.

These tax increases are expected to continue to have an adverse impact on sales of cigarettes due to lower consumption levels and a shift in sales from the premium to the non-premium or discount cigarette segments or to sales outside of legitimate channels. In addition, state and local governments may require us to prepay for excise tax stamps placed on packages of cigarettes and other tobacco products that we sell. If these excise taxes are substantially increased, it could have a negative impact on our liquidity. Accordingly, we may be required to obtain additional debt financing, which we may not be able to obtain on satisfactory terms or at all. Our inability to prepay the excise taxes may prevent or delay our purchase of cigarettes and other tobacco products, which could materially adversely affect our ability to supply our customers.

In the U.S. we purchase cigarettes primarily from manufacturers covered by the tobacco industry’s Master Settlement Agreement (“MSA”), which results in our facing certain potential liabilities and financial risks including competition from lower priced sales of cigarettes produced by manufacturers who do not participate in the MSA.

In June 1994, the Mississippi attorney general brought an action against various tobacco industry members on behalf of the state to recover state funds paid for health-care costs related to tobacco use. Most other states sued the major U.S. cigarette manufacturers based on similar theories. The cigarette manufacturer defendants settled the first four of these cases with Mississippi, Florida, Texas and Minnesota by separate agreements. These states are referred to as non-MSA states. In November 1998, the major U.S. tobacco product manufacturers entered into the MSA with 46 states, the District of Columbia and certain U.S. territories. The MSA and the other state settlement agreements settled health-care cost recovery actions and monetary claims relating to future conduct arising out of the use of, or exposure to, tobacco products, imposed a stream of future payment obligations on major U.S. cigarette manufacturers and placed significant restrictions on the ability to market and sell cigarettes. The payments required under the MSA result in the products sold by the participating manufacturers to be priced at higher levels than non-MSA manufacturers.

In order to limit our potential tobacco related liabilities, we try to limit our purchases of cigarettes from non-MSA manufacturers for sale in MSA states. The benefits of liability limitations and indemnities we are entitled to under the MSA do not apply to sales of cigarettes manufactured by non-MSA manufacturers. From time to time, however, we find it necessary to purchase a limited amount of cigarettes from non-MSA manufacturers. For example, during a transition period while integrating distribution operations from an acquisition we may need to purchase and distribute cigarettes manufactured by non-MSA manufacturers to satisfy the demands of customers of the acquired business. With respect to sales of such non-MSA cigarettes, we could be subject to litigation that could expose us to liabilities for which we would not be indemnified.

If the tobacco industry’s Master Settlement Agreement is invalidated, or tobacco manufacturers cannot meet their obligations to indemnify us, we could be subject to substantial litigation liability.

In connection with the MSA, we are indemnified by most of the tobacco product manufacturers from which we purchase cigarettes and other tobacco products for liabilities arising from our sale of the tobacco products that they supply to us. To date, litigation challenging the validity of the MSA, including claims that the MSA violates antitrust laws, has not been successful. However, if such litigation were to be successful and the MSA is invalidated, we could be subject to substantial litigation due to our sales of cigarettes and other tobacco products, and we may not be indemnified for such costs by the tobacco product manufacturers in the future. In addition, even if we continue to be indemnified by cigarette manufacturers that are parties to the MSA, future litigation awards against such cigarette manufacturers and our company could be so large as to eliminate the ability of the manufacturers to satisfy their indemnification obligations.

We face competition from sales of deep-discount brands and illicit and other low priced sales of cigarettes.

As a result of purchasing cigarettes for sale in MSA states primarily from manufacturers that are parties to the MSA, we are adversely impacted by sales of brands from non-MSA manufacturers and deep-discount brands manufactured by small manufacturers that are not original participants to the MSA. The cigarettes subject to the MSA that we sell have been burdened by MSA related payments and are thus negatively impacted by widening price gaps between those brands and deep-discount brands for the past several years. Growth in market share of deep-discount brands since the MSA was signed in 1998 has had an adverse impact on the volume of the cigarettes that we sell.

We also face competition from the diversion into the U.S. market of cigarettes intended for sale outside the U.S., the sale of counterfeit cigarettes by third parties, the sale of cigarettes in non-taxable jurisdictions, inter-state and international smuggling of cigarettes, increased imports of foreign low priced brands, the sale of cigarettes by third parties over the internet and by other means designed to avoid collection of applicable taxes. The competitive environment has been characterized by a continued influx of cheap products that challenge sales of higher priced and taxed cigarettes manufactured by parties to the MSA. Increased sales of counterfeit cigarettes, sales by third parties over the internet, or sales by means to avoid the collection of applicable taxes, could have an adverse effect on our results of operations.

Risks Related to Foreign Exchange and Financing

Currency exchange rate fluctuations could have an adverse effect on our revenues and financial results.

We generate a significant portion of our revenues in Canadian dollars, approximately 15% in both 2009 and 2008. We also incur a significant portion of our expenses in Canadian dollars. To the extent that we are unable to match revenues received in Canadian dollars with costs paid in the same currency, exchange rate fluctuations in Canadian dollars could have an adverse effect on our revenues and financial results. During times of a strengthening U.S. dollar, our reported sales and earnings from our Canadian operations will be reduced because the Canadian currency will be translated into fewer U.S. dollars. Conversely, during times of a weakening U.S. dollar, our reported sales and earnings from our Canadian operations will be increased because the Canadian currency will be translated into more U.S. dollars. Accounting principles generally accepted in the U.S. (“U.S. GAAP”) require that foreign currency transaction gains or losses on short-term intercompany transactions be recorded currently as gains or losses within the income statement. To the extent we incur losses on such transactions, our net income and earnings per share will be reduced.

We may not be able to borrow additional capital to provide us with sufficient liquidity and capital resources necessary to meet our future financial obligations.

During the current economic downturn, some companies had experienced difficulties in drawing on lines of credit, issuing debt and raising capital generally, which had a material adverse effect on their liquidity. In addition, if banks from which companies expect to receive financing fail or become insolvent, the borrowing capacity of those companies may be reduced. We expect that our principal sources of funds will be cash generated from our operations and, if necessary, borrowings under our $200 million credit facility. While we believe our sources of liquidity are adequate, we cannot assure you that these sources will be available or continue to provide us with sufficient liquidity and capital resources required to meet our future financial obligations, or to provide funds for our working capital, capital expenditures and other needs. As such, additional equity or debt financing may be necessary, but we may not be able to obtain financing on terms satisfactory to us, or at all.

Our operating flexibility is limited in significant respects by the restrictive covenants in our Credit Facility.

Our credit facility imposes restrictions on us that could increase our vulnerability to general adverse economic and industry conditions by limiting our flexibility in planning for and reacting to changes in our business and industry. Specifically, these restrictions limit our ability, among other things, to: incur additional indebtedness, pay dividends and make distributions, issue stock of subsidiaries, make investments, repurchase stock, create liens, enter into transactions with affiliates, merge or consolidate, or transfer and sell our assets. In addition, under our credit facility, under certain circumstances we are required to meet a fixed charge coverage ratio. Our ability to comply with this covenant may be affected by factors beyond our control and a breach of the covenant could result in an event of default under our credit facility, which would permit the lenders to declare all amounts incurred thereunder to be immediately due and payable and terminate their commitments to make further extensions of credit.

Risks Related to Government Regulation and Environment

If we are unable to comply with governmental regulations that affect our business or if there are substantial changes in these regulations, our business could be adversely affected.

As a distributor of food products, we are subject to regulation by the U.S. Food and Drug Administration, Health Canada and similar regulatory authorities at the state, provincial and local levels. In addition, our employees operate tractor trailers, trucks, forklifts and various other powered material handling equipment and we are therefore subject to regulation by the U.S. and Canadian Departments of Transportation.

Our operations are also subject to regulation by the Occupational Safety and Health Administration, the Drug Enforcement Agency and other federal, state, provincial and local agencies. Each of these regulatory authorities has broad administrative powers with respect to our operations. If we fail to adequately comply with government regulations or regulations become more stringent, we could experience increased inspections, regulatory authorities could take remedial action including imposing fines or shutting down our operations or we could be subject to increased compliance costs. If any of these events were to occur, our results of operations would be adversely affected.

Earthquake and natural disaster damage could have a material adverse affect on our business.

Our headquarters and operations in California, as well as one of our data centers located in Richmond, British Columbia, Canada, are located in or near high hazard earthquake zones. In addition, one of our data centers is located in Plano, Texas, which is susceptible to wind storms. We also have operations in areas that have been affected by natural disasters such as hurricanes, tornados, flooding, ice and snow storms. While we maintain insurance to indemnify us for losses due to such occurrences, our insurance may not be sufficient in the event of a significant natural disaster or payments under our policies may not be received timely enough to prevent adverse impacts on our business. Our customers could also be affected by like events, which could adversely impact our sales.

Tax legislation could impact future cash flows.

The U.S. budget proposal currently being discussed includes potential changes to current tax law, including the repeal of the LIFO (Last-In, First-Out) method of inventory accounting. As currently drafted, LIFO would be repealed for tax years beginning after 2011 and LIFO reserves existing at that time would be taxed ratably over an eight year period. Should LIFO be repealed, the payment of income taxes, and any future tax deferral prior to the date of repeal, over the eight year period, would reduce the amount of money that we have for our operations, working capital, capital expenditures, expansions, acquisitions or general corporate or other business activities, which could materially and adversely affect our business, financial condition and results of operations.

New accounting standards could result in changes to our methods of quantifying and recording accounting transactions, and could affect our financial results and financial position.

Changes to U.S. GAAP arise from new and revised standards, interpretations and other guidance issued by the Financial Accounting Standards Board, the SEC and others. In addition, the SEC is considering a potential requirement for U.S. issuers to report future financial results in accordance with International Financial Reporting Standards (“IFRS”) rather than U.S. GAAP. The U.S. Government may also issue new or revised Cost Accounting Standards or Cost Principles. The effects of such changes may include prescribing an accounting method where none had been previously specified, prescribing a single acceptable method of accounting from among several acceptable methods that currently exist or revoking the acceptability of a current method and replacing it with an entirely different method, among others. Such changes could result in unanticipated effects on our results of operations, financial position and other financial measures.

ITEM 1.B.		UNRESOLVED STAFF COMMENTS

None.

ITEM 2.		PROPERTIES

Our headquarters are located in South San Francisco, California, and consist of approximately 26,000 square feet of leased office space. We also lease approximately 13,000 square feet for use by our information technology and tax personnel in Richmond, British Columbia and approximately 6,000 square feet for use by our information technology personnel in Plano, Texas. We lease approximately 2.7 million square feet and own approximately 0.4 million square feet of distribution space.

Distribution Center Facilities by City and State of Location⁽¹⁾

Albuquerque, New Mexico		Las Vegas, Nevada		Whitinsville, Massachusetts
Atlanta, Georgia		Los Angeles, California		Wilkes-Barre, Pennsylvania
Bakersfield, California		Leitchfield, Kentucky		Calgary, Alberta
Corona, California(2)		Minneapolis, Minnesota		Toronto, Ontario
Denver, Colorado		Portland, Oregon		Vancouver, British Columbia
Fort Worth, Texas		Sacramento, California(3)		Winnipeg, Manitoba
Grants Pass, Oregon		Salt Lake City, Utah
Hayward, California		Spokane, Washington

We also operate distribution centers on behalf of two of our major customers, one in Phoenix, Arizona for Alimentation Couche-Tard Inc. and one in San Antonio, Texas for Valero Energy Corporation. Each facility is leased by the specific customer solely for their use and operated by Core-Mark.

ITEM 3.		LEGAL PROCEEDINGS

As of December 31, 2009, we were not involved in any material legal proceedings.

ITEM 4.		(REMOVED AND RESERVED)

ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on the NASDAQ Global Market under the symbol “CORE.” According to the records of our transfer agent, we had 3,174 stockholders of record as of February 26, 2010.

The following table provides the range of high and low sales prices of our common stock as reported by the NASDAQ Global Market for the periods indicated:

		Low				High
		Price				Price
Fiscal 2009
4th Quarter		$	25.93			$	33.20
3rd Quarter			24.73				30.12
2nd Quarter			17.55				27.35
1st Quarter			15.60				22.01

		Low				High
		Price				Price
Fiscal 2008
4th Quarter		$	14.81			$	24.94
3rd Quarter			24.65				30.74
2nd Quarter			25.53				30.03
1st Quarter			22.59				29.95

We have not declared or paid any cash dividends on our common stock. The credit agreement for our Credit Facility places limitations on our ability to pay cash dividends on our common stock. The payment of any future dividends will be determined by our board of directors in light of then existing conditions, including our earnings, financial condition and capital requirements, strategic alternatives, restrictions in financing agreements, business conditions and other factors.

PERFORMANCE COMPARISON

The graph below presents a comparison of cumulative total return to stockholders for the period Core-Mark had securities trading on the Pink Sheets or on the NASDAQ Global Market and the cumulative total return of the NASDAQ Non-Financial Stock Index and a peer group of companies (“the Performance Peer Group”).

Cumulative total return to stockholders is measured by per share price change for the period by the share price at the beginning of the measurement period. Core-Mark’s cumulative stockholder return is based on an investment of $100 on November 7, 2005 and is compared to the total return of the NASDAQ Non-Financial Stock Index, the Russell 2000 Index, and the weighted-average performance of the Performance Peer Group over the same period with a like amount invested, including the assumption that any dividends have been reinvested. We regularly compare our performance to the Russell 2000 Index since it includes primarily companies with relatively small market capitalization similar to us.

The companies composing the Performance Peer Group are Sysco Corp. (SYY), Nash Finch Company (NAFC), United Natural Foods, Inc. (UNFI) and AMCON Distributing Co. (DIT).

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG CORE-MARK, NASDAQ NON-FINANCIAL STOCK AND RUSSELL 2000 INDEXES,
AND THE PERFORMANCE PEER GROUP

		Investment Value at
		11/7/05				12/30/05				3/31/06				6/30/06				9/29/06				12/29/06				3/30/07				6/29/07				9/28/07				12/31/07
CORE		$	100.00			$	101.27			$	121.46			$	113.65			$	99.49			$	106.19			$	113.27			$	114.22			$	111.84			$	91.17
NASDAQ Index		$	100.00			$	101.56			$	107.91			$	99.68			$	103.71			$	111.38			$	112.39			$	121.93			$	127.83			$	126.36
Russell 2000 Index		$	100.00			$	102.04			$	116.27			$	110.42			$	110.91			$	120.78			$	123.13			$	128.57			$	124.59			$	118.89
Performance Peer Group		$	100.00			$	101.47			$	107.08			$	102.10			$	111.38			$	123.46			$	114.34			$	112.48			$	120.86			$	108.20
		3/31/08				6/30/08				9/30/08				12/31/08				3/31/09				6/30/09				9/30/09				12/31/09
CORE		$	91.24			$	83.17			$	79.33			$	68.32			$	57.84			$	82.73			$	90.89			$	104.63
NASDAQ Index		$	108.28			$	110.64			$	98.85			$	57.94			$	57.39			$	69.63			$	81.04			$	87.34
Russell 2000 Index		$	107.12			$	107.75			$	106.55			$	78.72			$	66.95			$	80.80			$	96.38			$	100.11
Performance Peer Group		$	99.25			$	95.28			$	108.50			$	82.18			$	81.58			$	82.77			$	91.20			$	103.81

Sales of Unregistered Securities

Common Stock and Warrants Issued Pursuant to the Plan of Reorganization in 2004

Pursuant to the plan of reorganization (May 2004) described in Exhibit 2.1 and incorporated by reference (see Part IV, Item 15, Exhibit Index of this Form 10-K), herein referred to as “Fleming’s bankruptcy” or “plan of reorganization,” on August 23, 2004 we issued an aggregate of 9,800,000 shares of our common stock and warrants to purchase an aggregate of 990,616 shares of our common stock to the Class 6(B) creditors of Fleming. We refer to the warrants we issued to the Class 6(B) creditors as the Class 6(B) Warrants. We received no cash consideration for the issuance of common stock and the Class 6(B) Warrants. The Class 6(B) Warrants have an exercise price of $20.93 per share and may be exercised at the election of the holder at any time prior to August 23, 2011, at which time any outstanding warrants will be net issued. The shares of common stock and the Class 6(B) Warrants were issued pursuant to an exemption from registration under Section 1145(a) of the Bankruptcy Code. We also issued warrants to purchase an aggregate of 247,654 shares of our common stock to the holders of our Tranche B Notes. The Tranche B Warrants have an exercise price of $15.50 per share. Shares of our common stock issued upon exercise of the Tranche B Warrants are issued pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933.

During 2009, 15,822 of the Class 6(B) warrants were exercised and issued in cash transactions, and a total of 37,810 shares of common stock have been issued since inception pursuant to exercises of Class 6(B) warrants. The exercise of such warrants was also done pursuant to an exemption from registration under Section 1145(a) of the Bankruptcy Code. During 2009, there were no Tranche B warrants exercised and issued in cashless transactions, and the total number of shares of common stock issued since inception pursuant to Tranche B warrants as of December 31, 2009 remained at 73,507 shares.

Issuer Purchases of Equity Securities

There were no repurchases of common stock shares during the three months ended December 31, 2009.

ITEM 6.		SELECTED FINANCIAL DATA

Core-Mark Holding Company, Inc., or Core-Mark, is the ultimate parent holding company for Core-Mark International, Inc. and our wholly-owned subsidiaries.

Basis of Presentation

The selected consolidated financial data for the years 2009, 2008, 2007, 2006 and 2005 are derived from Core-Mark’s audited consolidated financial statements included in our Annual Reports on Form 10-K. The following financial data should be read in conjunction with the consolidated financial statements and notes thereto and with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

SELECTED CONSOLIDATED FINANCIAL DATA

		Core-Mark Holding Company, Inc. and Subsidiaries
		Year Ended December 31,
(in millions except per share amounts)		2009(a)				2008(b)				2007				2006 (c)				2005
Statement of Operations Data:
Net sales		$	6,531.6			$	6,044.9			$	5,560.9			$	5,314.4			$	4,891.1
Gross profit (d)			401.6				359.1				332.6				297.7				271.0
Warehousing and distribution expenses (d)			197.3				197.6				174.1				151.1				135.7
Selling, general and administrative expenses			137.3				129.4				119.0				106.6				90.0
Income from operations			65.0				30.1				37.7				38.5				44.0
Interest expense, net (e)			1.4				1.2				1.0				4.2				11.0
Net income			47.3				17.9				24.1				20.6				14.3
Per share data:
Basic income per common share		$	4.53			$	1.71			$	2.30			$	2.05			$	1.46
Diluted income per common share		$	4.35			$	1.64			$	2.15			$	1.87			$	1.37
Shares used to compute net income per share:
Basic			10.5				10.5				10.5				10.0				9.8
Diluted			10.9				10.9				11.2				11.0				10.5
Other Financial Data:
Excise taxes (f)		$	1,516.0			$	1,474.4			$	1,349.4			$	1,313.3			$	1,195.0
Cigarette inventory holding profits/FET (g)			25.2				3.1				7.3				4.1				5.7
OTP tax refunds (h)			0.6				1.4				13.3				—				—
LIFO expense			6.7				11.0				13.1				2.9				7.5
Depreciation and amortization (i)			18.7				17.4				14.9				13.2				12.5
Stock-based compensation			5.1				3.9				5.3				4.4				4.0
Capital expenditures			21.1				19.9				20.8				12.8				7.8
		December 31,
		2009				2008				2007				2006				2005
Balance Sheet Data:
Total assets		$	677.9			$	612.6			$	577.1			$	555.6			$	510.4
Total debt, including current maturities			20.0				30.8				29.7				78.0				59.6

ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with the accompanying audited consolidated financial statements and notes thereto that are included under Part II, Item 8, of this Form 10-K. Also refer to “Special Note Regarding Forward-Looking Statements,” which is included after Table of Contents in this Form 10-K.

Our Business

Core-Mark is one of the largest marketers of fresh and broad-line supply solutions to the convenience retail industry in North America. We offer a full range of products, marketing programs and technology solutions to approximately 24,000 customer locations in the U.S. and Canada. Our customers include traditional convenience stores, grocery stores, drug stores, liquor stores and other specialty and small format stores that carry convenience products. Our product offering includes cigarettes, tobacco, candy, snacks, fast food, groceries, fresh products, dairy, non-alcoholic beverages, general merchandise and health and beauty care products. We operate a network of 26 distribution centers (including two distribution facilities we operate as a third party logistics provider) in the U.S. and Canada.

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.

Overview of 2009 Results

Net sales for 2009 increased 8.1% to $6.53 billion compared to $6.04 billion in 2008. Sales of cigarettes and other tobacco products increased in absolute dollars, primarily as a result of price increases by U.S. cigarette manufacturers in response to the federal excise taxes levied on manufacturers by the SCHIP legislation that became effective April 1, 2009. We believe these significant price increases contributed to the drop in our average daily U.S. cigarette carton sales which declined 9.9% during the year, excluding our New England division which we acquired in June 2008. This decrease was partially offset by a 14.4% increase in average daily Canadian carton sales, driven by market share gains in Toronto and other parts of Ontario. We expect consumption trends of legal cigarette and tobacco products will continue to be negatively impacted by rising prices, diminishing social acceptance and legislative and regulatory actions that create limitations on where a consumer can smoke and how products can be promoted and produced. In addition, we expect rising prices will stimulate a higher percentage of consumers to purchase from illicit markets to fulfill consumer demand. We believe this may adversely impact our cigarette carton volume, primarily in the U.S., in future periods.

Sales of our food/non-food products for 2009 increased slightly to $1.94 billion compared with $1.92 billion for 2008. We believe the ongoing general weakness in the economy negatively impacted our overall sales in this category as consumers curtailed discretionary spending on certain products. Additionally, sales in our beverages category declined in 2009 due to distribution and marketing changes by some of the retail beverage manufacturers and sales in our dairy category were negatively impacted by significant price deflation during the year. Despite these challenging times, we did benefit from price increases related to the SCHIP legislation in some of the other tobacco product lines and we experienced sales growth from our marketing initiatives that focus on fresh foods and vendor consolidation.

We continue to monitor current macroeconomic conditions including consumer confidence, employment and inflation/deflation. If consumer spending declines further and/or the current decline persists for a prolonged period of time, our sales and associated gross profit could be negatively impacted in future quarters. Conversely, if consumer confidence and employment conditions improve, our results could benefit.

Operating income for 2009 increased by $34.9 million to $65.0 million from $30.1 million in 2008. This increase included a $33.6 million increase in cigarette holding profits, offset by $11.5 million of federal excise floor taxes, and a $4.3 million reduction in LIFO expense resulting primarily from lack of inflation in our food/non-food categories. Excluding these items from both periods, operating income for 2009 increased by $8.5 million, or 22.4%, to $46.5 million as compared to $38.0 million in 2008. This increase in operating income was due primarily to a $16.9 million increase in remaining gross profit offset by an increase of $7.6 million in operating expenses. Higher cigarette gross profit was partially offset by a decrease in our food/non-food remaining gross profit resulting primarily from a decline in floor stock income which we typically recognize as our vendors increase their prices. Our gross profit can be positively or negatively impacted on a comparable basis depending on the relative level of price inflation or deflation period over period.

The increase in our operating expenses resulted primarily from incremental expenses from our New England and Toronto divisions added during 2008, salary merit increases, higher incentive based compensation, increases in healthcare costs and a decrease in cooperative marketing reimbursements from vendors. These were partially offset by lower net fuel costs, increased operating efficiencies at certain divisions and cost saving in other areas. Inflation in future fuel costs or reductions in the fuel surcharges we pass on to our customers may materially impact our financial results depending on the extent and timing of these changes.

Business and Supply Expansion

We continue to expand our presence eastward, expand our fresh product delivery and drive our vendor consolidation initiative. Some of our recent activities include:

•

In 2009, as part of our strategy of selling “fresh” product, we enrolled almost 2,000 new stores in our program of delivering fresh sandwiches, bakery items, fruits and vegetables, dairy products and other fresh items multiple times per week. This program was in addition to our other sales and marketing initiatives focused on increasing sales of fresh products.

•

We entered into a five-year contract with BP Products North America in February 2010 to provide all of the ampm® proprietary products to its 1,200 stores nationwide. This agreement expands our existing relationship with BP Products North America from a focus in western states to a national basis. In addition, Core-Mark is now designated as the approved supplier for traditional nonproprietary products, in a move designed to further advance ampm®’s ongoing progress in supply chain efficiencies, marketing program effectiveness and consistency of offerings.

•

We signed a non-binding memorandum of intent with Jamba, Inc. (“Jamba”) in February 2010 to establish a relationship to offer and deliver health-oriented Jamba-branded food and beverage consumer products to Core-Mark serviced convenience retail locations. The proposed three-year relationship would us the generally exclusive distribution rights of the Jamba-branded products to the convenience store retail channel.

•

We acquired in June 2008 substantially all of the assets of Auburn Merchandise Distributors, Inc. (“AMD”), located in Whitinsville, Massachusetts, a wholly-owed subsidiary of Warren Equities, Inc., for approximately $28.7 million, including transaction costs. The assets purchased include primarily accounts receivable, inventory and fixed assets. The AMD acquisition expanded our presence and infrastructure in the Northeastern region of the U.S., as its facility and the majority of its customers are located there (see Note 3—Acquisitions).

•

We opened a distribution facility near Toronto, Ontario, in January 2008, to expand our existing market geography in Canada, and we signed a long-term supply agreement with Couche-Tard, a Canadian retailer that operates over 600 stores in the province of Ontario.

Other Business Developments

Impact of the Passage of Family Smoking Prevention and Tobacco Control Act

In June 2009, the Family Smoking Prevention and Tobacco Control Act was signed into law, which granted the U.S. federal Food & Drug Administration (“FDA”) the authority to regulate the production and marketing of tobacco products in the U.S. The new legislation establishes a new FDA office that will regulate changes to nicotine yields and the chemicals and flavors used in tobacco products, requires ingredient listings be displayed on tobacco products, prohibits the use of certain terms which may attract youth or mislead users as to the risks involved with using tobacco products and limits the advertising and marketing of tobacco products. This new FDA office is to be financed through user fees paid by tobacco companies prorated based on market share. To date this legislation and its associated regulations have not had a material impact on our business.

Federal Excise Tax Liability Impact for the State Children’s Health Insurance Program

In February 2009, SCHIP was signed into law, which increased federal cigarette excise taxes levied on manufacturers of cigarettes from 39¢ to $1.01 per pack effective April 1, 2009. In March 2009, most U.S. manufacturers increased their list prices that resulted in an increase of approximately 28.0% on Core-Mark’s product purchases. We believe these price increases were in response to the passage of the SCHIP legislation and increased sales by approximately $534.0 million in 2009. These price increases resulted in cigarette inventory holding profits net of Federal Excise Taxes (“FET”) associated with the SCHIP legislation of $25.2 million for 2009. We paid approximately $12.7 million of federal excise floor taxes and received $1.2 million in reimbursements from cigarette and tobacco manufacturers for a net floor stock tax amount of $11.5 million, which was reflected as an increase to our cost of goods sold for the second quarter of 2009. We earn a cash discount of approximately 2% (or approximately 14¢ incremental gross profit per carton) on purchases from cigarette manufacturers.

Tobacco Tax Refunds Settlement Agreements

In November 2008, we entered into a settlement agreement with the State of Texas Comptroller of Public Accounts related to a technical interpretation of the State of Texas’ Other Tobacco Products Tax Law, which resulted in a net refund of $1.4 million. This refund, which was received in January 2009, was recorded in the fourth quarter of 2008 as a reduction to cost of goods sold.

In April 2007, we entered into a settlement agreement with the State of Washington Department of Revenue related to 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.

Share Repurchase Program

In March 2008, our Board of Directors authorized a share repurchase program of up to $30 million to repurchase shares of our common stock in the open market or in privately negotiated transactions subject to market conditions. The number of shares to be repurchased and the timing of the purchases will be based on market conditions, our cash and liquidity requirements, relevant securities laws and other factors. The share repurchase program may be discontinued or amended at any time. We funded repurchases under the program, and plan to fund any future repurchases, from available cash. Our Credit Facility was amended in 2008 to allow us to execute the share repurchase program. As of December 31, 2009 there was $16.8 million available for future share repurchases under the program. Our available funds for future share repurchases were re-established at $30 million under the February 2010 amendment to our Credit Facility (see Note 7—Long-Term Debt).

During 2009, we repurchased 98,646 shares of common stock under the share repurchase program at an average price of $22.77 per share for a total cost of $2.2 million. During the year ended December 31, 2008, we repurchased 396,716 shares of common stock under the share repurchase program at an average price of $27.66 per share for a total cost of $11.0 million.

Results of Operations

Comparison of 2009 and 2008⁽¹⁾

		2009			2009													2008
		Increase												% of Net												% of Net
		(Decrease)				Amounts				% of Net				sales, less				Amounts				% of Net				sales, less
		(in millions)				(in millions)				sales				excise taxes				(in millions)				sales				excise taxes
Net sales		$	486.7			$	6,531.6				100.0				—			$	6,044.9				100.0				—
Net sales— Cigarettes			464.3				4,589.1				70.3				64.0				4,124.8				68.2				60.7
Net sales— Food/Non-food			22.4				1,942.5				29.7				36.0				1,920.1				31.8				39.3
Net sales, less excise taxes (2)			445.1				5,015.6				76.8				100.0				4,570.5				75.6				100.0
Gross profit (3)			42.5				401.6				6.1				8.0				359.1				5.9				7.9
Warehousing and distribution expenses			(0.3	)			197.3				3.0				3.9				197.6				3.3				4.3
Selling, general and administrative expenses			7.9				137.3				2.1				2.7				129.4				2.1				2.8
Income from operations			34.9				65.0				1.0				1.3				30.1				0.5				0.7
Interest expense			(0.5	)			1.7				—				—				2.2				—				0.1
Interest income			(0.7	)			(0.3	)			—				—				(1.0	)			—				—
Foreign currency transaction (gains) losses, net			(8.5	)			(2.2	)			—				—				6.3				0.1				0.1
Income before taxes			43.2				65.8				1.0				1.3				22.6				0.4				0.5
Net income			29.4				47.3				0.7				0.9				17.9				0.3				0.4

Consolidated Net Sales. Net sales increased by $486.7 million, or 8.1%, to $6,531.6 million for 2009 from $6,044.9 million in 2008. Excluding the effects of foreign currency fluctuations, net sales increased by 9.1% in 2009 compared to 2008. The increase in net sales was attributable primarily to approximately $534.0 million from manufacturer price increases in response to the SCHIP legislation and incremental sales of $136.9 million from our New England and Toronto divisions, which were acquired or became operational in 2008, partially offset by a reduction in the volume of cigarette carton sales and one less selling day in 2009 compared to 2008. The significant cigarette price increases and the resulting increase in our net sales impact certain year over year comparisons on a percent of net sales basis.

Net Sales of Cigarettes. Net sales of cigarettes for 2009 increased by $464.3 million, or 11.3%, to $4,589.1 million from $4,124.8 million in 2008. Net cigarette sales for 2009 increased 12.4%, excluding the effects of foreign currency fluctuations. The increase in net cigarette sales in 2009 was driven by a 19.1% increase in the average sales price per carton due primarily to manufacturer price increases and incremental sales of $115.5 million from our New England and Toronto divisions, partially offset by a decline in average daily carton sales in the U.S. of 9.9%, excluding the New England division. We believe the decline in average daily carton sales in the U.S. is due in part to the significant price increases during 2009 which led to reduced carton sales. Average daily carton sales in Canada increased 14.4% primarily through market share gains. Total net cigarette sales as a percentage of total net sales increased to 70.3% in 2009 compared to 68.2% in 2008. This increase was due primarily to the significant price increases from the manufacturers in response to the SCHIP legislation.

Net Sales of Food/Non-food Products. Net sales of food and non-food products for 2009 increased $22.4 million, or 1.2%, to $1,942.5 million from $1,920.1 million in 2008. The following table provides the increases in net sales by product category for our Food/Non-food Products (in millions):

		2009				2008				Increase / (Decrease)
Product Category		Net Sales				Net Sales				Dollars				Percentage
Food			738.0				710.1				27.9				3.9	%
Candy			405.0				401.3				3.7				0.9	%
Other tobacco products			434.0				402.7				31.3				7.8	%
Health, beauty & general			209.5				220.1				(10.6	)			-4.8	%
Non-alcoholic beverages			151.7				180.9				(29.2	)			-16.1	%
Equipment/other			4.3				5.0				(0.7	)			-14.0	%
Total Food/Non-food Products			1,942.5				1,920.1				22.4				1.2	%

Excluding the effects of foreign currency fluctuations, net sales of food and non-food products increased 2.2% in 2009 compared to 2008. The increase in net food/non-food sales was attributable to incremental sales of $21.4 million from our New England and Toronto divisions, our sales and marketing initiatives, impacting primarily the food category, and price inflation in the Other Tobacco Products category related primarily to SCHIP. The increase was offset partially by a reduction in non-alcoholic beverages resulting from a change in the marketing and distribution methods of some beverage manufacturers. Total net sales of food and non-food products as a percentage of total net sales were 29.7% for 2009 compared to 31.8% for 2008.

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, the federal floor stock tax and changes in LIFO reserves are classified as elements of cost of goods sold. Gross profit for 2009 increased by $42.5 million, or 11.8%, to $401.6 million from $359.1 million in 2008. Gross profit for 2009 was significantly higher compared to 2008 as we realized $36.7 million of cigarette inventory holding profits due primarily to increased cigarette prices by manufacturers in response to the increase in federal excise taxes mandated by the SCHIP legislation, partially offset by $11.5 million of a FET tax related to SCHIP.

The following table provides the components comprising the change in gross profit as a percentage of net sales for 2009 and 2008⁽¹⁾:

		2009												2008
										% of Net												% of Net
		Amounts				% of Net				sales, less				Amounts				% of Net				sales, less
		(in millions)				sales				excise taxes				(in millions)				sales				excise taxes
Net sales		$	6,531.6				100.0				—			$	6,044.9				100.0				—
Net sales, less excise taxes (2)			5,015.6				76.8				100.0	%			4,570.5				75.6				100.0	%
Components of gross profit:
Cigarette inventory holding profits			36.7				0.56				0.73				3.1				0.05				0.07
Net federal floor stock tax (3)			(11.5	)			(0.18	)			(0.23	)			—				—				—
OTP tax refunds (4)			0.6				0.01				0.01				1.4				0.02				0.03
LIFO expense			(6.7	)			(0.10	)			(0.13	)			(11.0	)			(0.18	)			(0.24	)
Remaining gross profit (5)			382.5				5.86				7.63				365.6				6.05				8.00
Gross profit		$	401.6				6.15				8.01	%		$	359.1				5.94				7.86	%

Our remaining gross profit was 5.86% of total net sales for 2009 compared with 6.05% in 2008. The cigarette price increases associated with SCHIP that increased our total net sales also reduced our remaining gross profit margins by approximately 52 basis points in 2009.

Cigarette remaining gross profit increased approximately 24.5% on a cents per carton basis in 2009 compared with 2008 due primarily to increased margins as a result of the manufacturers’ price increases. We believe cigarette margins may revert closer to normal historical margins over time. Remaining gross profit for our food/non-food categories decreased approximately 17 basis points in 2009 to 13.36% compared to 13.53% in 2008, due primarily to an $8.1 million reduction in floor stock income earned from manufacturer price increases. In 2009, our remaining gross profit for food/non-food products declined to approximately 67.9% of our total remaining gross profit compared to 71.1% in 2008. The decline was due primarily to the impact of SCHIP which resulted in higher cigarette remaining gross profit in 2009.

Operating Expenses. Our operating expenses include costs related to warehousing, distribution, and selling, general and administrative activities. In 2009, operating expenses increased $7.6 million, or 2.3%, to $336.6 million from $329.0 million in 2008. The increase in operating expenses was driven by a 6.1% increase in selling, general and administrative expenses. As a percentage of net sales, total operating expenses were 5.2% in 2009 compared to 5.4% in 2008. Operating expenses, as a percent to total net sales, were favorably impacted by approximately 46 basis points due to the SCHIP related cigarette price increases which increased our total net sales.

Warehousing and Distribution Expenses. Warehousing and distribution expenses decreased by $0.3 million, or 0.2%, to $197.3 million in 2009 from $197.6 million in 2008. The decrease in warehousing and distribution expenses was due primarily to a decrease in net fuel costs of $4.5 million and increases in warehousing efficiencies at certain divisions offset by incremental expenses of $3.4 million from our New England division, acquired in June 2008, and an increase in healthcare and workers’ compensation costs of $3.6 million. The increase in healthcare and workers’ compensation costs for 2009 was due primarily to higher overall medical costs and an increase in the severity of certain claims. As a percentage of net sales, warehousing and distribution expenses were 3.0% for 2009 compared with 3.3% for 2008. The impact of SCHIP related cigarette price increases on total net sales favorably impacted warehousing and distribution expenses as a percent of sales by approximately 27 basis points.

Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses increased $7.9 million, or 6.1%, in 2009 to $137.3 million from $129.4 million in 2008. The increase in SG&A for 2009 was due primarily to $3.6 million of incremental expenses from our New England and Toronto divisions, salary merit increases of $2.0 million and an increase in employee incentives consisting of $1.3 million and $1.2 million of bonus and stock compensation respectively. As a percentage of net sales, SG&A expenses were 2.1% for both 2009 and 2008. The impact of price increases associated with SCHIP favorably impacted SG&A expenses as a percent to total net sales by approximately 19 basis points.

Interest Expense. Interest expense includes both debt interest and amortization of fees related to borrowings. Interest expense was $1.7 million for 2009 compared to $2.2 million in 2008. Average borrowings for 2009 were $8.2 million compared to $21.1 million for 2008. During 2009, the weighted-average interest rate on borrowings from our revolving credit facility was 2.0% compared to 3.8% in 2008. The decline in interest rates was the result of general decreases in both bank prime and LIBOR borrowing rates. Interest expense declined period over period due to lower average interest rates and lower average borrowings.

Interest Income. In 2009, interest income was $0.3 million compared to $1.0 million for 2008. Our interest income was derived primarily from earnings on cash balances kept in trust, checking accounts and overnight deposits. Interest income was lower in 2009 due primarily to a reduction in prevailing interest rates.

Foreign Currency Transaction (Gains) Losses, Net. We incurred foreign currency transaction gains of $2.2 million for 2009 compared to losses of $6.3 million in 2008. The fluctuation was due primarily to the level of investment in our Canadian operations and to changes in the Canadian/U.S. exchange rate.

Income Taxes. Our effective tax rate was 28.1% for 2009 compared to 20.8% for 2008 (see Note 9—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 2009 was a $6.7 million net benefit, inclusive of a net interest recovery of $2.1 million related to unrecognized tax benefits, compared to a net benefit of $3.2 million, inclusive of net interest expense of $0.1 million, for 2008. The net benefits related primarily to the expiration of the statute of limitations for uncertain tax positions, changes to prior year estimates based upon finalization of tax returns and state tax credits claimed for prior years.

Comparison of 2008 and 2007⁽¹⁾

		2008				2008												2007
		Increase												% of Net												% of Net
		(Decrease)				Amounts				% of Net				sales, less				Amounts				% of Net				sales, less
		(in millions)				(in millions)				sales				excise taxes				(in millions)				sales				excise taxes
Net sales		$	484.0			$	6,044.9				100.0				—			$	5,560.9				100.0				—
Net sales—Cigarettes			261.7				4,124.8				68.2				60.7				3,863.1				69.5				62.4
Net sales—Food/Non-food			222.3				1,920.1				31.8				39.3				1,697.8				30.5				37.6
Net sales, less excise taxes(2)			359.0				4,570.5				75.6				100.0				4,211.5				75.7				100.0
Gross profit			26.5				359.1				5.9				7.9				332.6				6.0				7.9
Warehousing and distribution expenses(3)			23.5				197.6				3.3				4.3				174.1				3.1				4.1
Selling, general and administrative expenses			10.4				129.4				2.1				2.8				119.0				2.1				2.8
Income from operations			(7.6	)			30.1				0.5				0.7				37.7				0.7				0.9
Interest expense			(0.2	)			2.2				—				0.1				2.4				—				0.1
Interest income			(0.4	)			(1.0	)			—				—				(1.4	)			—				—
Foreign currency transaction losses (gains), net			7.2				6.3				0.1				0.1				(0.9	)			—				—
Income before income taxes			(15.0	)			22.6				0.4				0.5				37.6				0.7				0.9
Net income			(6.2	)			17.9				0.3				0.4				24.1				0.4				0.6

Consolidated Net Sales. Net sales increased by $484.0 million, or 8.7%, to $6,044.9 million for 2008 from $5,560.9 million in 2007. The increase includes excise taxes of $124.9 million. Excluding our new distribution facility in Toronto and the recently acquired New England division, net sales increased $227.6 million, or 4.1%, driven by net sales increases from existing and new customers.

Net Sales of Cigarettes. Net sales of cigarettes for 2008 increased $261.7 million, or 6.8%, to $4,124.8 million from $3,863.1 million in 2007. The increase in net cigarette sales was driven by a 4.5% increase in the average sales price per carton due primarily to manufacturer price and state excise tax increases and sales from our new distribution facilities in Toronto and New England, which also contributed to an approximate 2.2% increase in overall carton sales compared with 2007. Carton sales declined approximately 1.7% in the U.S., excluding sales from our New England division, due primarily to overall lower consumer demand. Carton sales in Canada increased 19.6%, or 8.3%, excluding sales from our new Toronto division. The increase in carton sales in Canada was attributable primarily to market share gains and sales of additional product lines. Total net cigarette sales as a percentage of total net sales was 68.2% for 2008 and 69.5% for 2007.

Net Sales of Food/Non-food Products. Net sales of food and non-food products for 2008 increased $222.3 million, or 13.1%, to $1,920.1 million from $1,697.8 million for 2007. The increase was due primarily to increases in our food, candy and other tobacco product categories driven by the Company’s sales and marketing initiatives and the addition of our new Toronto and New England divisions. Total net sales of food and non-food products as a percentage of total net sales was 31.8% for 2008 compared to 30.5% for 2007.

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 2008 increased by $26.5 million, or 8.0%, to $359.1 million from $332.6 million in 2007.

The following table provides the components comprising the change in gross profit as a percentage of net sales for 2008 and 2007⁽¹⁾:

		2008												2007
										% of Net												% of Net
		Amounts				% of Net				sales, less				Amounts				% of Net				sales, less
		(in millions)				sales				excise taxes				(in millions)				sales				excise taxes
Net sales		$	6,044.9				100.0	%			—			$	5,560.9				100.0	%			—
Net sales, less excise taxes(2)			4,570.5				75.6				100.0	%			4,211.5				75.7				100.0	%
Components of gross profit:
OTP tax refunds(3)			1.4				0.02				0.03				13.3				0.24				0.32
LIFO expense			(11.0	)			(0.18	)			(0.24	)			(13.1	)			(0.24	)			(0.31	)
Cigarette inventory holding profits			3.1				0.05				0.07				7.3				0.13				0.17
Remaining gross profit			365.6				6.05				8.00				325.1				5.85				7.72
Gross profit		$	359.1				5.94	%			7.86	%		$	332.6				5.98	%			7.90	%

As a percentage of net sales, our remaining gross profit improved to 6.05% for 2008 compared to 5.85% for 2007. Our remaining gross profit percentage for cigarettes declined approximately 5 basis points for 2008 to 2.56% compared with 2.61% in 2007. This decline was due primarily to inflation in product cost from increases in excise taxes. Our remaining cigarette gross profit increased 2.4% on a cents per carton basis. Remaining gross profit related to our food/non-food category increased approximately 32 basis points for 2008 to 13.53% compared with 13.21% in 2007. Excluding our new divisions, Toronto and New England, remaining gross profit for food/non-food category increased 47 basis points to 13.68% in 2008 compared with 2007. The increase in remaining gross profit percentage was due primarily to a higher percentage of sales from higher margin food/non-food products combined with an increase in inventory holding gains related to candy, somewhat offset by an increase in inventory shrinkage and the addition of national chain store customers.

In 2008, approximately 71.0% of gross profit was derived from food/non-food products compared to 69.5% in 2007, including the impact of the OTP tax refunds.

Operating Expenses. Our operating expenses include costs related to warehousing, distribution, and selling, general and administrative activities. In 2008, operating expenses increased $34.1 million, or 11.6%, to $329.0 million from $294.9 million in 2007. Included in operating expenses for 2007 was a bad debt charge of $5.9 million related to two customers and a workers’ compensation benefit of $3.1 million related to favorable claims experience prior to 2007. Excluding these two items, operating expenses increased $36.9 million, or 12.6%, for 2008. This increase in operating expenses was driven primarily by a 13.5% increase in warehouse and distribution expenses and an 8.7% increase in selling, general and administrative expenses. As a percentage of sales, total operating expenses were 5.4% in 2008 compared with 5.3% in 2007.

Warehousing and Distribution Expenses. Warehousing and distribution expenses increased $23.5 million, or 13.5%, to $197.6 million in 2008 from $174.1 million in 2007. The increase in warehousing and distribution expenses was due primarily to increases in sales volume, the addition of our Toronto and New England divisions which represented 48.9% of the increase, sales growth and related operational inefficiencies at two of our divisions which accounted for 24.8% of the increase, higher fuel costs, net of surcharges, which represented 7.0% of the increase, and an increase in facility and truck rental expense due primarily to investment in additional capacity in certain locations to support our growth in key markets. As a percentage of sales, warehousing and distribution expenses were 3.3% for 2008 as compared to 3.1% for 2007.

Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses increased $10.4 million, or 8.7%, to $129.4 million in 2008 from $119.0 million in 2007. SG&A expenses were impacted in 2007 by a $5.9 million bad debt charge related to two customers that filed for bankruptcy protection and a workers’ compensation benefit of $3.1 million related to favorable claims experience prior to 2007. Excluding these two items, SG&A expenses increased by $13.2 million, or 11.4%, in 2008. The increase for 2008 is due primarily to higher employee benefit costs driven by increases in healthcare and workers’ compensation costs due to a higher wage base, increased medical costs, as well as an increase in the severity of certain claims, the addition of the Toronto and New England divisions, and lower bonus last year as a result of fewer employees qualifying. As a percentage of net sales, SG&A expenses were 2.1% for both 2008 and 2007.

Interest Expense. Interest expense includes both debt interest and amortization of fees related to borrowings. For 2008, interest expense decreased by $0.2 million, or 8.3%, to $2.2 million from $2.4 million in 2007. The decrease in interest expense was due primarily to lower interest rates during 2008 compared to 2007. Average borrowings for 2008 were $21.1 million compared to $19.8 million for 2007. During 2008, the weighted-average interest rate on the revolving credit facility was 3.8% compared to 6.7% in 2007. The decline in interest rates is the result of general decreases in rates charged to us on both prime and LIBOR borrowings.

Interest Income. In 2008 interest income was $1.0 million compared to $1.4 million for 2007. Interest income is derived from our earnings on cash balances kept in trust, checking accounts and overnight deposits. The interest income was lower for 2008 due primarily to a reduction in prevailing interest rates.

Foreign Currency Transaction (Gains) Losses, Net. We incurred foreign currency transaction losses of $6.3 million in 2008 compared to $0.9 million in gains in 2007. The fluctuation was due primarily to the depreciation of the Canadian foreign exchange rate against the US dollar over the last six months of 2008 on transactions between our Canadian and U.S. operations. For 2008 the average Canadian/U.S. exchange rate was $1.0676 compared to $1.0735 for 2007.

Income Taxes. Our effective tax rate was 20.8% for 2008 compared to 35.9% for 2007 (see Note 9—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 2008 was a $3.2 million net benefit related primarily to the expiration of the statute of limitations for uncertain tax positions and changes to prior year’s estimates, and $0.1 million of penalties net of after-tax interest credit related to unrecognized tax benefits recorded under generally accepted accounting principles.

Comparison of Sales and Gross Profit by Product Category

The following table summarizes our cigarette and other product sales, LIFO expense, gross profit and other relevant financial data for 2009, 2008 and 2007 (dollars in millions)⁽¹⁾:

		2009				2008				2007
Cigarettes
Net sales (2)		$	4,589.1			$	4,124.8			$	3,863.1
Excise taxes in sales (3)		$	1,381.0			$	1,350.9			$	1,237.2
Net sales, less excise taxes (4)		$	3,208.1			$	2,773.9			$	2,625.9
LIFO expense		$	6.6			$	4.7			$	6.7
Gross profit (6)		$	142.4			$	104.1			$	101.5
Gross profit %			3.10	%			2.52	%			2.63	%
Gross profit % less excise taxes			4.44	%			3.75	%			3.87	%
Remaining gross profit (5)		$	122.9			$	105.7			$	100.9
Remaining gross profit %			2.68	%			2.56	%			2.61	%
Remaining gross profit % less excise taxes			3.83	%			3.81	%			3.85	%
Food/Non-food Products
Net sales		$	1,942.5			$	1,920.1			$	1,697.8
Excise taxes in sales (3)		$	135.0			$	123.5			$	112.2
Net sales, less excise taxes (4)		$	1,807.5			$	1,796.6			$	1,585.6
LIFO expense		$	0.1			$	6.3			$	6.4
Gross profit (7)		$	259.2			$	255.0			$	231.1
Gross profit %			13.34	%			13.28	%			13.61	%
Gross profit % less excise taxes			14.34	%			14.19	%			14.57	%
Remaining gross profit (5)		$	259.6			$	259.9			$	224.2
Remaining gross profit %			13.36	%			13.53	%			13.21	%
Remaining gross profit % less excise taxes			14.36	%			14.46	%			14.14	%
Totals
Net sales (2)		$	6,531.6			$	6,044.9			$	5,560.9
Excise taxes in sales (3)		$	1,516.0			$	1,474.4			$	1,349.4
Net sales, less excise taxes (4)		$	5,015.6			$	4,570.5			$	4,211.5
LIFO expense		$	6.7			$	11.0			$	13.1
Gross profit (6),(7)		$	401.6			$	359.1			$	332.6
Gross profit %			6.15	%			5.94	%			5.98	%
Gross profit % less excise taxes			8.01	%			7.86	%			7.90	%
Remaining gross profit (5)		$	382.5			$	365.6			$	325.1
Remaining gross profit %			5.86	%			6.05	%			5.85	%
Remaining gross profit % less excise taxes			7.63	%			8.00	%			7.72	%

Liquidity and Capital Resources

Our cash and cash equivalents as of December 31, 2009 were $17.7 million compared to $15.7 million as of December 31, 2008. Our restricted cash as of December 31, 2009 was $12.4 million compared to $11.4 million as of December 31, 2008. Restricted cash primarily represents funds that have been set aside in trust as required by one of the Canadian provincial taxing authorities to secure amounts payable for cigarette and tobacco excise taxes.

Our liquidity requirements arise primarily from the funding of our working capital, capital expenditures and debt service requirements of our credit facilities. We have historically funded our liquidity requirements through our current operations and external borrowings. For the year ended December 31, 2009, our cash flows from operating activities provided $33.1 million and we had $196.9 million of borrowing capacity available in our revolving credit facility as of December 31, 2009. In February 2010, we entered into a third amendment to our Credit Facility (the “Third Amendment”), which extended our credit facility for four years, to February 2014, and decreased the lenders’ revolving loan commitments by $50 million to $200 million, at our request.

Based on our anticipated cash needs, availability under our revolving credit facility and the scheduled maturity of our debt, we expect that our current liquidity will be sufficient to meet all of our anticipated needs during the next twelve months.

Cash flows from operating activities

Year ended December 31, 2009

Net cash provided by operating activities decreased by $22.5 million to $33.1 million for the year ended December 31, 2009 compared with $55.6 million for the same period in 2008. The decrease in cash provided by operating activities was due primarily to a $61.6 million net decrease in working capital, driven by the timing of vendor prepayments and increased cigarette prices resulting from the SCHIP legislation, which resulted in higher accounts receivable and inventory balances. This decrease in working capital was partially offset by a $39.1 million increase in net income plus adjustments for non-cash items such as depreciation, amortization and LIFO expense, which was driven primarily by income from cigarette price increases related to the SCHIP legislation.

Year ended December 31, 2008

Net cash provided by operating activities decreased by $11.0 million to $55.6 million for 2008 compared with $66.6 million for 2007. The decrease in net cash flows provided by operations was due primarily to a $7.0 million decrease in net income adjusted for non-cash activity such as depreciation, amortization, LIFO expense and foreign currency transaction losses, coupled with a $4.0 million decrease in working capital due primarily to the addition of our Toronto and New England divisions and higher cigarette inventories to capitalize on buying opportunities.

Cash flows from investing activities

Year ended December 31, 2009

Net cash used in investing activities decreased by $28.5 million to $20.6 million for the year ended December 31, 2009 compared with $49.1 million for the same period 2008. In June 2008, we acquired AMD and paid approximately $28.0 million which consisted primarily of purchased accounts receivable, inventory and fixed assets, offset by approximately $1.6 million of cash received in the acquisition. Capital expenditures increased by $1.2 million to $21.1 million in 2009 compared with $19.9 million for 2008. We estimate that fiscal 2010 capital expenditures will not exceed $20 million.

Year ended December 31, 2008

Net cash used in investing activities increased by $25.8 million to $49.1 million for 2008 from $23.3 million in 2007. This increase was due primarily to the acquisition of AMD. We paid approximately $28.0 million which consisted primarily of purchased accounts receivable, inventory and fixed assets, offset by approximately $1.6 million of cash received in the acquisition. Capital expenditures were $19.9 million in 2008 compared with $20.8 million for 2007. Capital expenditures for 2008 related primarily to the completion of our new Toronto distribution facility and expenditures for refrigerated delivery and warehouse equipment.

Cash flows from financing activities

Year ended December 31, 2009

Net cash used in financing activities decreased by $1.8 million to $9.2 million for 2009 compared with $11.0 million for 2008. We had net repayments on our revolving line of credit of $10.7 million during 2009 compared to $0.1 million of borrowings during 2008. Additionally, cash payments to repurchase our common stock pursuant to our share repurchase program decreased from $11.0 million in 2008 to $2.2 million in 2009. The decrease in net cash used in financing activities was also offset by an increase in book overdrafts due to the timing of excise tax payments.

Year ended December 31, 2008

Net cash used in financing activities decreased by $28.5 million to $11.0 million in 2008 compared with $39.5 million in 2007. The decrease was due primarily to higher repayments on our revolving line of credit made in 2007 as compared to 2008, offset by approximately $11.0 million of cash payments to repurchase our common stock and a decrease in book overdrafts.

Our Credit Facility

In October 2005, we entered into a five-year revolving credit facility (“Credit Facility”) with a capacity of $250 million and an expiration date of October 2010.

In February 2010, we entered into a third amendment to our Credit Facility (the “Third Amendment”), which extended our credit facility for four years, to February 2014, and decreased the lenders’ revolving loan commitments by $50 million to $200 million, at our request. Pricing under the new facility increased as a result of generally higher prices in the bank loan market. The basis points added to LIBOR increased to a range of 275 to 350 basis points, up from a range of 100 to 175 basis points, tied to achieving certain operating results as defined in the Credit Facility. Additionally, unused facility fees and letter of credit fees increased. The Third Amendment also increased our basket for permitted acquisitions following the date of the Third Amendment to $125 million and re-established our basket for permitted stock repurchases at $30 million. At the date of signing the Amendment, we incurred fees of approximately $2.0 million, which will be amortized over the term of the amendment.

All obligations under the Credit Facility are secured by first priority liens upon substantially all of our present and future assets. The terms of the Credit Facility permit prepayment without penalty at any time (subject to customary breakage costs with respect to LIBOR- or CDOR-based loans prepaid prior to the end of an interest period).

Amounts borrowed, outstanding letters of credit and amounts available to borrow under the Credit Facility were as follows (in millions):

		December 31,				December 31,
		2009				2008
Amounts borrowed		$	19.2			$	30.0
Outstanding letters of credit		$	26.1			$	24.4
Amounts available to borrow (prior to Third Amendment)		$	196.9			$	186.0

Since the total amount of the Credit Facility was reduced by $50 million in February 2010, the maximum amount available to borrow is subject to the lower ceiling of $200 million permitted by the Third Amendment.

The Credit Facility contains restrictive covenants, including among others, limitations on dividends and other restricted payments, other indebtedness, liens, investments and acquisitions and certain asset sales. We were in compliance with all of the covenants under the Credit Facility as of December 31, 2009.

Our weighted-average interest rate was calculated based on our daily cost of borrowing which was computed on a blend of prime and LIBOR rates. The weighted-average interest rate on our revolving credit facility for the years ended December 31, 2009 and 2008 was 2.0% and 3.8%, respectively. We paid total unused facility fees of $0.5 million for both 2009 and 2008. Unamortized debt issuance costs were $0.4 million as of December 31, 2009 and $1.0 million at December 31, 2008.

Contractual Obligations and Commitments

Contractual Obligations. The following table presents information regarding our contractual obligations that existed as of December 31, 2009:

																										2015 and
(in millions)		Total				2010				2011				2012				2013				2014				Thereafter
Long-term debt(1)		$	19.2			$	—			$	—			$	—			$	—			$	19.2			$	—
Purchase obligations(2)			0.2				0.2				—				—				—				—				—
Letters of credit			26.1				26.1				—				—				—				—				—
Operating leases			176.0				28.5				26.1				21.9				16.7				12.7				70.1
Capitalized leases(3)			0.8				—				0.1				0.1				0.1				0.1				0.4
Total contractual obligations(4)(5)(6)		$	222.3			$	54.8			$	26.2			$	22.0			$	16.8			$	32.0			$	70.5

Off-Balance Sheet Arrangements

Letter of Credit Commitments. As of December 31, 2009, our standby letters of credit issued under our Credit Facility were $26.1 million related primarily to casualty insurance and tax obligations. The standby letters of credit expire in 2010. However, in the ordinary course of our business, we will continue to renew or modify the terms of the letters of credit to support business requirements. The liabilities underlying the letters of credit are reflected on our consolidated balance sheets.

Operating Leases. The majority of our sales offices, warehouse facilities and trucks are subject to lease agreements which expire at various dates through 2022 (excluding renewal options). These leases generally require us to maintain, insure and pay any related taxes. In most instances, we expect the leases that expire will be renewed or replaced in the normal course of our business.

Third Party Distribution Centers. We currently manage two regional distribution centers for third party convenience store operators who engage in self-distribution. Under the agreement relating to one of these facilities, the third party has a “put” right under which it may require us to acquire the facility. If the put right is exercised, we will be required to (1) purchase the inventory in the facilities at cost, (2) purchase the physical assets of the facilities at fully depreciated cost and (3) assume the obligations of the third party as lessees under the leases related to those facilities. While we believe the likelihood that this put option will be exercised is remote, if it were exercised, we would be required to make aggregate capital expenditures of approximately $4.9 million based on current estimates. The amount of capital expenditures would vary depending on the timing of any exercise of such put right and does not include an estimate of the cost to purchase inventory because such purchases would simply replace other planned inventory purchases and would not represent an incremental cost.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of our Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of our consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. The critical accounting polices used in the preparation of the consolidated financial statements are those that are important both to the presentation of financial condition and results of operations and require significant judgments with regards to estimates. We base our estimates on historical experience and on various assumptions we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. We believe the current assumptions and other considerations used to estimate amounts reflected in our financial statements are appropriate; however, actual results could differ from these estimates.

We believe that the following represent the more critical accounting policies, which are subject to estimates and assumptions used in the preparation of our financial statements.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for losses we estimate will arise from our trade customers’ inability to make required payments. We evaluate the collectability of accounts receivable and determine the appropriate allowance for doubtful accounts based on historical experience and a review of specific customer accounts. In determining the adequacy of allowances for customer receivables, we analyze factors such as the value of any collateral, customer financial statements, historical collection experience, aging of receivables, general economic conditions and other factors. It is possible that the accuracy of the estimation process could be materially affected by different judgments as to the collectability based on information considered and further deterioration of accounts. If circumstances change (i.e., further evidence of material adverse creditworthiness, additional accounts become credit risks, store closures or deterioration in general economic conditions), our estimates of the recoverability of amounts due us could be reduced by a material amount, including to zero.

The allowance for doubtful accounts at December 31, 2009, 2008 and 2007 amounted to 5.6%, 6.0% and 6.9%, respectively, of net trade accounts receivable.

Bad debt expense associated with our trade customer receivables was $1.8 million for 2009, $1.6 million for 2008 and $6.9 million for 2007. Bad debt expense for 2007 included a charge of $5.9 million related to two customers who declared bankruptcy in the fourth quarter of 2007. As a percentage of sales, our bad debt expense was less than 0.1% for both 2009 and 2008, and 0.1% for 2007.

Inventories

Our U.S. inventories are valued at the lower of cost or market. Cost of goods sold is determined on a last-in, first-out (“LIFO”) basis using producer price indices (“PPIs”) as published by the U.S. Department of Labor. PPIs are updated by the Department of Labor on a lag basis for manufacturer price increases or decreases implemented after the initial PPI has been published for a given month. When we are aware of material price increases or decreases from manufacturers, we will estimate the PPI for the respective period in order to more accurately reflect inflation rates. The PPIs are applied to inventory which is grouped by merchandise having similar characteristics. Under the LIFO method, current costs of goods sold are matched against current sales. During periods of rising prices, the LIFO method of costing inventories generally results in higher costs being charged against income (LIFO expense), while lower costs are retained in inventories. To the extent inventories or prices decline significantly at the end of any period where there have been increasing prices in prior periods, under LIFO some older and potentially lower priced inventory is considered as having been sold, resulting in a lower cost of goods sold compared to current prices, and increased current gross profit (LIFO income).

Vendor and Sales Incentives

Vendors’ Discounts, Rebates and Allowances—Periodic payments from vendors in various forms including volume or other purchase discounts are reflected in the carrying value of the related inventory when earned and as cost of goods sold as the related merchandise is sold. Up-front consideration received from vendors linked to purchase or other commitments is initially deferred and amortized ratably to cost of goods sold or as the performance of the activities specified by the vendor to earn the fee is completed. Cooperative marketing incentives from suppliers are recorded as reductions to cost of goods sold to the extent the vendor considerations exceed the costs relating to the programs. These amounts are recorded in the period the related promotional or merchandising programs were provided. Some of the vendor incentive promotions require that we make assumptions and judgments regarding, for example, the likelihood of achieving market share levels or attaining specified levels of purchases. Vendor incentives are at the discretion of our vendors and can fluctuate due to changes in vendor strategies and market requirements.

Customers’ Sales Incentives—We also provide sales rebates or discounts to our customers on a regular basis. The customers’ sales incentives are recorded as a reduction to sales revenue as the “sales incentive” is earned by the customer. Additionally, we may provide racking and slotting allowances for the customers’ commitments to continue using us as the supplier of their products. These allowances may be paid at the inception of the contract or on a periodic basis. Allowances paid at the inception of the contract are capitalized and amortized over the period of the distribution agreement as a reduction to sales.

Income Taxes

Income taxes are accounted for under U.S. GAAP using the liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when management does not consider it more likely than not that some portion or all of the deferred tax assets will be realized. In assessing the need for a valuation allowance, our management evaluates all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies. As of December 31, 2009, we had a valuation allowance of $0.1 million with respect to 100% of the deferred tax asset related to foreign tax credits. We believe that it is more likely than not we will be unable to utilize the foreign tax credits, which will expire at various times from 2014 to 2016, due primarily to the relatively lower taxable income generated in Canada compared with the U.S. Changes in the expectations regarding the realization of deferred tax assets could materially impact income tax expense in future periods.

According to U.S. GAAP, a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. We have established an estimated liability for income tax exposures that arise and meet the criteria for accrual under U.S. GAAP. We prepare and file tax returns based on our interpretation of tax laws and regulations and record estimates based on these judgments and interpretations. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law resulting from legislation, regulation and/or as concluded through the various jurisdictions’ tax court systems. We classify interest and penalties related to income taxes as income tax expense.

Claims Liabilities and Insurance Recoverables

We maintain reserves related to workers’ compensation, general and auto liability and health and welfare programs that are principally self-insured. Our workers’ compensation, general and auto liability insurance policies include a deductible of $500,000 per occurrence and we maintain excess loss insurance that covers any health and welfare costs in excess of $200,000 per person per year.

Our reserves for workers’ compensation, general and auto insurance liabilities are estimated based on applying an actuarially derived loss development factor to our incurred losses, including losses for claims incurred but not yet reported. Actuarial projections of losses concerning workers’ compensation, general and auto insurance liabilities are subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, health care costs, litigation trends, legal interpretations, legislative reforms, benefit level changes and claim settlement patterns. Our reserve for health and welfare claims includes an estimate of claims incurred but not yet reported which is derived primarily from historical experience.

Our claim liabilities and the related recoverables from insurance carriers for estimated claims in excess of deductible amounts and other insured events are presented in their gross amounts because there is no right of offset. The following is a summary of our net reserves as of December 31, 2009 and December 31, 2008:

		2009												2008
						Long-												Long-
		Current				Term				Total				Current				Term				Total
Gross claims liabilities:
Workers’ compensation liability		$	5.8			$	31.3			$	37.1			$	5.7			$	29.2			$	34.9
Auto & general liability			0.9				1.0				1.9				1.3				1.8				3.1
Health & welfare liability			1.7				0.3				2.0				2.3				0.3				2.6
Total gross claims liabilities			8.4				32.6				41.0				9.3				31.3				40.6
Insurance recoverables			(2.7	)			(21.0	)			(23.7	)			(2.9	)			(19.8	)			(22.7	)
Reserves (net):
Workers’ compensation liability		$	3.5			$	10.8			$	14.3			$	3.2			$	10.3			$	13.5
Auto & general liability			0.5				0.5				1.0				0.9				0.9				1.8
Health & welfare liability			1.7				0.3				2.0				2.3				0.3				2.6
Reserves (net):		$	5.7			$	11.6			$	17.3			$	6.4			$	11.5			$	17.9

The decrease in these reserves for 2009 is due primarily to a decrease in our auto and general liability due to favorable claims experience and a decrease in our health and welfare liability due to an increase in the contribution percentage of the employee portion of health premiums during 2009, offset by an increase in workers’ compensation liability due to the severity of certain claims.

A 10% change in our incurred but not reported estimates would increase or decrease the estimated reserves for our workers’ compensation liability, general and auto insurance liability and health and welfare liability as of December 31, 2009 by $0.8 million, $0.1 million and $0.2 million, respectively.

Pension Liabilities

We sponsored a qualified defined-benefit pension plan and a post-retirement benefit plan for employees hired before September 1986. There have been no new entrants to the pension or non-pension post-retirement benefit plans after those benefit plans were frozen on September 30, 1989. Pursuant to the plan of reorganization (May 2004) described in Exhibit 2.1 and incorporated by reference (see Part IV, Item 15, Exhibit Index of this Form 10-K), we were assigned the obligations for three former Fleming defined-benefit pension plans. All of the pension and post-retirement benefit plans are collectively referred to as the “Pension Plans.”

The determination of the obligation and expense associated with our Pension Plans are dependent, in part, on our selection of certain assumptions used by our independent actuaries in calculating these amounts. These assumptions are disclosed in Note 12 to the consolidated financial statements and include, among other things, the weighted-average discount rate, the expected weighted-average long-term rate of return on plan assets and the rate of compensation increases. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors. In accordance with U.S. GAAP, actual results that differ from the actuarial assumptions are accumulated and amortized over future periods and, therefore, affect recognized expense and recorded obligation in such future periods. While we believe our assumptions are appropriate, significant differences in actual results or changes in our assumptions may materially affect our pension and other post-retirement obligations and the future expense.

We select the weighted-average discount rates for each benefit plan as the rate at which the benefits could be effectively settled as of the measurement date. In selecting an appropriate weighted-average discount rate we use a yield curve methodology, matching the expected benefits at each duration to the available high quality yields at that duration and calculating an equivalent yield, which is the ultimate discount rate used. The weighted-average discount rate used to determine 2009 pension expense was 6.26%. A lower weighted-average discount rate increases the present value of benefit obligations and increases pension expense. Expected return on pension plan assets is based on historical experience of our portfolio and the review of projected returns by asset class on broad, publicly traded equity and fixed-income indices, as well as target asset allocation. Our target asset allocation mix is designed to meet our long-term pension and post-retirement benefit plan requirements. For 2009 our assumed weighted-average rate of return was 7.35% on our assets.

Sensitivity to changes in the major assumptions for our pension plans as of December 31, 2009 is as follows (dollars in millions):

Projected

Benefit

Percentage

Obligation

Expense

Point

Decrease

Decrease

Change

(Increase)

(Increase)

Expected return on plan assets

+/- .25 pt

$

0.0 /(0.0

)

$

0.1 / (0.1

)

Discount rate—Pension

+/- .25 pt

$

0.8 /(0.8

)

$

0.0 / (0.0

)

Discount rate—Post-retirement

+/- .25 pt

$

0.1 /(0.1

)

$

0.0 / (0.0

)