UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 27, 2002
OR
/ / Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
------------------------------
COMMISSION FILE NUMBER 0-24708
------------------------------
AMCON DISTRIBUTING COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of Incorporation)
7405 Irvington Road
Omaha, NE 68122
(Address of principal executive offices)
(Zip Code)
47-0702918
(I.R.S. Employer Identification No.)
(402) 331-3727
(Registrant's telephone number, including area code)
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 X No
------- -------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
------- -------
The Registrant had 3,168,961 shares of its $.01 par value common stock
outstanding as of January 31, 2003.
Form 10-Q
1st Quarter
INDEX
-------
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
--------------------------------------------
Condensed consolidated balance sheets at
December 2002 and September 2002 3
Condensed consolidated statements of operations
for the three-month periods ended
December 2002 and 2001 4
Condensed consolidated statements of cash flows
for the three-month periods ended
December 2002 and 2001 5
Notes to unaudited condensed consolidated
financial statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Balance Sheets
December 2002 and September 2002
- ----------------------------------------------------------------------------------------
(Unaudited)
December 2002 September 2002
------------ --------------
ASSETS
Current assets:
Cash $ 118,375 $ 130,091
Accounts receivable, less allowance for doubtful
accounts of $0.7 million and $0.6 million,
respectively 26,488,856 31,216,783
Inventories 28,321,040 35,744,074
Income tax receivable 904,760 981,054
Deferred income taxes 324,369 324,369
Other 493,092 393,365
------------ ------------
Total current assets 56,650,492 68,789,736
Fixed assets, net 16,009,266 16,096,124
Available-for-sale investments 710,590 562,000
Goodwill 6,091,402 6,091,402
Other Intangible Assets 11,728,084 11,804,284
Other assets 1,287,244 1,242,923
------------ ------------
$ 92,477,078 $104,586,469
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,960,502 $ 19,873,851
Accrued expenses 3,390,965 3,969,164
Accrued wages, salaries, bonuses 1,595,735 1,371,310
Current liabilities of discontinued operations 87,378 93,558
Current portion of long-term debt 4,597,488 14,783,967
Current portion of subordinated debt 1,708,987 1,708,986
------------ ------------
Total current liabilities 31,341,055 41,800,836
------------ ------------
Deferred income taxes 844,780 788,316
Non-current liabilities of discontinued operations 188,025 197,024
Long-term debt, less current portion 34,375,600 36,362,099
Subordinated debt, less current portion 8,738,886 8,738,886
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized, none outstanding - -
Common stock, $.01 par value, 15,000,000
shares authorized, 3,168,961 and 3,156,962
issued, respectively 31,690 31,570
Additional paid-in capital 5,998,006 5,977,643
Accumulated other comprehensive income,
net of tax of $0.2 million and $0.2 million,
respectively 386,897 294,771
Retained earnings 10,572,139 10,395,324
------------ ------------
Total shareholders' equity 16,988,732 16,699,308
------------ ------------
$ 92,477,078 $104,586,469
============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Statements of Operations
for the three months ended December 2002 and 2001
(Unaudited)
- ----------------------------------------------------------------------------
2002 2001
------------- ------------
Sales (including excise taxes of
$41.7 million and $38.4 million,
respectively) $ 197,720,887 $ 210,153,847
Cost of sales 183,877,011 195,043,632
------------- -------------
Gross profit 13,843,876 15,110,215
------------- -------------
Selling, general and administrative
expenses 12,175,703 12,557,354
Depreciation and amortization 556,346 719,284
------------- -------------
12,732,049 13,276,638
------------- -------------
Income from operations 1,111,827 1,833,577
------------- -------------
Other expense (income):
Interest expense 843,655 1,084,098
Other income, net (171,802) (46,797)
Equity in loss of unconsolidated affiliate - 95,007
------------- -------------
671,853 1,132,308
------------- -------------
Income before income taxes 439,974 701,269
Income tax expense 165,000 310,627
------------- -------------
Net income $ 274,974 $ 390,642
============= =============
Earnings per share:
Basic $ 0.09 $ 0.14
============= =============
Diluted $ 0.09 $ 0.14
============= =============
Dividends per share $ 0.03 $ 0.03
============= =============
Weighted average shares outstanding:
Basic 3,157,790 2,788,633
Diluted 3,232,023 2,859,271
The accompanying notes are an integral part of these condensed consolidated financial
statements.
4
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
for the three months ended December 2002 and 2001
(Unaudited)
- ---------------------------------------------------------------------------------
2002 2001
------------ ------------
Net cash flows from operating activities $ 12,602,635 $ 11,499,094
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (506,634) (239,027)
Proceeds from sales of fixed assets 9,925 18,765
------------ ------------
Net cash flows from investing activities (496,709) (220,262)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on bank credit agreements (12,033,703) (10,604,411)
Payments on long-term debt and
subordinated debt (104,422) (136,295)
Payment of registration costs - (339,644)
Proceeds from exercise of stock options 20,489 325
Retirement of common stock (6) -
------------ ------------
Net cash flows from financing activities (12,117,642) (11,080,025)
------------ ------------
Net increase (decrease) in cash (11,716) 198,807
Cash, beginning of period 130,091 296,940
------------ ------------
Cash, end of period $ 118,375 $ 495,747
============ ============
SUPPLEMENTAL NONCASH INFORMATION:
Business combinations:
Fair value of assets acquired $ - $ 5,972,598
Subordinated debt assumed $ - $ 457,905
Other liabilities assumed $ - $ 1,508,435
Issuance of common stock $ - $ 2,069,511
Conversion of notes receivable
and acquisition costs $ - $ 692,058
The accompanying notes are an integral part of these condensed consolidated financial
statements.
5
AMCON Distributing Company and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
December 2002 and 2001
- ----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
include the accounts of AMCON Distributing Company and its subsidiaries
("AMCON" or the "Company"). All significant intercompany transactions and
balances have been eliminated in consolidation. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments necessary to fairly present the financial
information included therein, such adjustments consisting of normal recurring
items. It is suggested that these financial statements be read in
conjunction with the audited financial statements and notes thereto for the
fiscal year ended September 27, 2002, which are included in the Company's
Annual Report to Shareholders filed with Form 10-K ("2002 Annual Report").
Results for the interim period are not necessarily indicative of results to
be expected for the entire year.
AMCON's fiscal first quarters ended on December 27, 2002 and December 28,
2001. For convenience, the fiscal first quarters have been indicated as
December 2002 and 2001, respectively. Each fiscal quarter was comprised of
13 weeks.
2. Changes in Accounting Policy
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141")and Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles
being classified as goodwill, or alternatively, amounts initially recorded as
goodwill may be separately identified and recognized apart from goodwill.
SFAS 142 requires the use of a nonamortization approach to account for
purchased goodwill and certain intangibles. Under a nonamortization
approach, goodwill and certain intangibles will not be amortized into results
of operations, but instead will be reviewed for impairment and written down
and charged to results of operations only in the periods in which the
impairment recognition criteria has been met and the recorded value of
goodwill and certain intangibles is more than its measured fair value. The
provisions of each statement, which apply to goodwill and intangible assets
acquired prior to June 30, 2001, were adopted by the Company at the beginning
of fiscal 2003. Upon adoption of SFAS 142, goodwill and tradename
amortization ceased as it has been considered that they have indefinite
useful lives. Management obtained an independent valuation of its goodwill
and intangible assets and did not incur an impairment charge in the first
quarter of fiscal 2003 upon implementation of SFAS No. 142. As of December
2002, the Company had approximately $6.1 million of goodwill and $10.9
million of tradenames reflected on the accompanying condensed consolidated
balance sheet.
The following is certain unaudited pro forma information assuming SFAS No.
142 had been in effect for the fiscal quarter ended December 28, 2001:
6
December
2001
---------
Reported net income $ 390,642
Add goodwill amortization (net of tax) 46,313
Add tradename amortization (net of tax) 67,555
---------
Adjusted net income $ 504,510
=========
Earnings per share-basic:
Reported net income $ 0.14
Add goodwill amortization (net of tax) 0.02
Add tradename amortization (net of tax) 0.02
---------
Adjusted earnings per share-basic $ 0.18
=========
Earnings per share-diluted:
Reported net income $ 0.14
Add goodwill amortization (net of tax) 0.02
Add tradename amortization (net of tax) 0.02
---------
Adjusted earnings per share-diluted $ 0.18
=========
3. ACQUISITIONS OF BUSINESSES:
On December 17, 2001, Hawaiian Natural Water Company, Inc. ("HNWC") merged
with and into, and thereby became, a wholly-owned subsidiary of AMCON. The
merger consideration valued the entire common equity interest in HNWC at
approximately $2.9 million, which was paid in cash of $0.8 million during
fiscal 2001 and in common stock of the Company valued at $2.1 million. As a
result, the Company issued 373,558 shares of its common stock to outside HNWC
shareholders, representing 12.0% of the Company's outstanding shares after
giving effect to the merger. HNWC option holders and warrant holders also
received comparable options and warrants of the Company but with the exercise
price and number of shares covered thereby being adjusted to reflect the
exchange ratio. Transaction costs, totaling approximately $0.3 million, were
incurred to complete the merger and consist primarily of fees and expenses
for bankers, attorneys and accountants, SEC filing fees, stock exchange
listing fees and financial printing and other related charges.
The merger has been recorded on the Company's books using the purchase method
of accounting. The purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values. The portion of the
purchase price in excess of the fair value of the net assets acquired to be
allocated to other identifiable assets is approximately $3.5 million. The
identifiable intangible asset, the HNWC trade name, is considered to have an
indefinite useful life. Therefore, in accordance with SFAS No. 142, no
amortization has been recorded since the acquisition occurred subsequent to
June 30, 2001.
Prior to the acquisition, the Company accounted for its initial common stock
investment in HNWC under the equity method. The charge to the Company's
results of operations to record its equity in the losses of HNWC from the
investment date was approximately $0.1 million in the first quarter of fiscal
2002.
7
Assuming the above acquisition had occurred on October 1, 2001, unaudited pro
forma consolidated sales, net income (loss) and net income (loss) per share
for the three months ended December 2001, would have been as follows:
Three months ended
December 2001
-------------
Sales $ 210,640,182
Net income $ 124,724
Net earnings per share:
Basic $ 0.04
Diluted $ 0.04
4. INVENTORIES:
The wholesale distribution segment inventories consist of finished products
purchased in bulk quantities to be redistributed to the Company's customers
and are stated at the lower of cost (last-in, first-out or "LIFO" method) or
market. The retail health food operations utilize the retail LIFO inventory
method of accounting stated at the lower of cost (LIFO) or market. The
bottled spring water operation's inventories are stated at the lower of cost
(LIFO) or market and consist of raw materials and finished goods. Raw
materials inventory consists of pre-forms used to make bottles, caps, labels
and various packaging and shipping materials. Finished goods inventory
includes materials, labor and manufacturing overhead costs. LIFO inventories
at December 2002 and 2001 were approximately $4.6 million and $4.1 million
less than the amount of such inventories valued on a first-in, first-out
basis, respectively.
5. DIVIDENDS:
In December 2002, the Company declared a cash dividend of $0.03 per share
payable on January 17, 2003 to shareholders of record as of December 31,
2002. The dividend represents dividends for the fourth fiscal quarter of
2002. The Company has accrued this dividend as of December 2002 in accrued
expenses in the accompanying unaudited condensed consolidated balance sheet.
6. EARNINGS (LOSS) PER SHARE:
Basic earnings per share is calculated by dividing net income by the weighted
average common shares outstanding for each period. Diluted earnings per
share is calculated by dividing net income by the sum of the weighted average
common shares outstanding and the weighted average dilutive options, using
the treasury stock method. Stock options outstanding at December 2002 and
2001, which were not included in the computations of diluted earnings per
share because the option's exercise price was greater than the average market
price of the Company's common shares, totaled 144,340 with an average
exercise price of $8.05 and 145,390 with an average exercise price of $8.01,
respectively.
8
For the three-month period ended December
-----------------------------------------------------
2002 2001
------------------------ ------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
1. Weighted average common
shares outstanding 3,157,790 3,157,790 2,788,633 2,788,633
2. Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds
used to purchase treasury stock - 74,233 - 70,638
----------- ----------- ----------- -----------
3. Weighted average number of
shares outstanding 3,157,790 3,232,023 2,788,633 2,859,271
=========== =========== =========== ===========
4. Net income $ 274,974 $ 274,974 $ 390,642 $ 390,642
=========== =========== =========== ===========
5. Net earnings per share $ 0.09 $ 0.09 $ 0.14 $ 0.14
=========== =========== =========== ===========
7. COMPREHENSIVE INCOME (LOSS):
The following is a reconciliation of net income (loss) per the accompanying
unaudited condensed consolidated statements of operations to comprehensive
income (loss) for the periods indicated:
For the three months
ended December
-------------------------
2002 2001
----------- -----------
Net income $ 274,974 $ 390,642
Other comprehensive income:
Unrealized holding gains (loss)
from investments arising during
the period, net of income tax expense
(benefit) of $56,000 and $(4,000),
respectively 92,126 (6,057)
----------- -----------
Comprehensive income $ 367,100 $ 384,585
=========== ===========
8. DEBT
The Company maintains a revolving credit facility (the "Facility") with a
bank that allows the Company to borrow up to $55.0 million at any time,
subject to eligible accounts receivable and inventory requirements. As of
December 2002, the outstanding balance on the Facility was $28.5 million. The
Facility bears interest at a variable interest rate equal to the bank's base
rate, which was 4.25% at December 2002. However, as discussed below, a
notional amount of $25.0 million is subject to an interest rate swap
agreement which has the effect of converting this amount to a fixed rate. In
addition, the Company is required to pay an unused commitment fee equal to
0.25% per annum on the difference between the maximum loan limit and the
average monthly borrowing for the month. The Facility is collateralized by
all of the wholesale segment's equipment, intangibles, inventories and
accounts receivable.
9
The Facility contains covenants which, among other things, (i) restrict
permitted investments, (ii) restrict intercompany advances to HNWC, (iii)
restrict incurrence of additional debt, (iv) restrict mergers and
acquisitions and changes in business or conduct of business and (v) require
the maintenance of certain financial ratios and net worth levels including,
average annual debt service coverage ratio of 1.0 to 1.0, to be measured
quarterly, and minimum tangible net worth of $8.0 million for fiscal year
2003. In addition, the Company must maintain a fill rate percentage of not
less than 93% calculated on a weekly basis. The fill rate percentage is
determined by dividing the total dollar amount of inventory delivered to the
Company's customers each week into the total amount of orders which
correspond to such deliveries. The Facility also provides that the Company
may not pay dividends in excess of $0.12 per share on an annual basis.
In connection with the purchase of the Quincy, Illinois distribution business
in June 2001, the Company assumed an interest rate swap agreement with a
bank. Under the agreement, the Company agrees to exchange, at specified
intervals, fixed interest amounts for variable interest amounts calculated by
reference to an agreed-upon notional principal amount of $25.0 million. The
interest rate swap effectively converts $25.0 million of variable-rate senior
debt to fixed-rate debt (before accounting for the impact of the change in
market value of the interest rate swap derivative financial instrument) at a
rate of 8.33%, through the maturity of the swap agreement on May 27, 2003.
This interest rate swap agreement has not been designated as a hedge. At
December 2002, the swap instrument had a negative fair value of approximately
$0.5 million.
The Company has a $2.8 million credit facility with a bank to be used to fund
operating activities at our natural spring water bottling operation in
Hawaii, (the "Water Facility"). Borrowings under the Water Facility bear
interest at the bank's base rate plus 1.0%, which equaled 6.75% at December
2002. As of December 2002, the outstanding balance under the Water Facility
was $2.7 million. The Water Facility is guaranteed by the Company's
Chairman.
9. BUSINESS SEGMENTS:
AMCON has three reportable business segments: the wholesale distribution of
consumer products, the retail sale of health and natural food products, and
the bottling, marketing and distribution of Hawaiian natural spring water and
other beverage products. Prior to the first quarter of fiscal 2003, the
Beverage segment consisted of the bottling, marketing and distribution of
Hawaiian natural spring water. Due to the formation of the new beverage
marketing and distribution company during the first quarter of fiscal 2003,
the Beverage segment now includes the marketing and distribution of other
beverage products, as well as, Hawaiian natural spring water. The segments
are evaluated on revenue, operating income (loss) and income (loss) before
taxes.
Wholesale
Distribution Retail Beverage Consolidated
-------------- ------------ ------------ -------------
QUARTER ENDED DECEMBER 2002:
External revenue:
Cigarettes $ 149,162,347 $ - $ - $ 149,162,347
Health food - 7,695,856 - 7,695,856
Confectionery 11,862,369 - - 11,862,369
Tobacco, beverage & other 28,443,381 - 556,934 29,000,315
------------- ------------ ------------ -------------
Total external revenue 189,468,097 7,695,856 556,934 197,720,887
Depreciation and amortization /1/ 319,532 221,802 43,704 585,038
Operating income (loss) 1,569,027 (36,279) (420,921) 1,111,827
Interest expense 403,970 358,205 81,480 843,655
Income (loss) before taxes 1,307,296 (385,210) (482,112) 439,974
Total assets 65,636,153 19,887,017 6,953,908 92,477,078
Goodwill 3,935,931 2,155,471 - 6,091,402
Capital expenditures 260,152 140,877 105,605 506,634
10
Wholesale
Distribution Retail Beverage Consolidated
-------------- ------------ ------------ -------------
QUARTER ENDED DECEMBER 2001:
External revenue:
Cigarettes $ 159,699,896 $ - $ - $ 159,699,896
Health food - 7,266,582 - 7,266,582
Confectionery 13,339,047 - - 13,339,047
Tobacco, beverage & other 29,777,989 - 70,333 29,848,322
------------ ------------ ------------ -------------
Total external revenue 202,816,932 7,266,582 70,333 210,153,847
Depreciation and amortization /1/ 331,207 373,518 14,559 719,284
Operating income (loss) 1,784,158 98,071 (48,652) 1,833,577
Interest expense 708,494 366,326 9,278 1,084,098
Income (loss) before taxes 1,017,973 (258,774) (57,930) 701,269
Total assets, excluding
discontinued operations 66,708,587 19,196,143 6,070,367 91,975,097
Goodwill 4,080,203 2,250,316 - 6,330,519
Capital expenditures 166,562 72,465 - 239,027
/1/ Includes depreciation reported in cost of sales for the Beverage segment.
There are no intersegment sales between the three operating segments during
the quarter ended December 2002.
10. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143
requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the long-
lived asset. The liability is discounted and accretion expense is recognized
using the credit-adjusted risk-free interest rate in effect when the
liability was initially recognized. SFAS 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002 (at the
beginning of fiscal 2003 for AMCON). There was no effect on AMCON for the
quarter ended December 2002.
In August 2001, the FASB issued Statement of Financial Accounting Standard
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets to be held and used, to be
disposed of other than by sale and to be disposed of by sale. Although the
statement retains certain of the requirements of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), it
supercedes SFAS 121 and Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring
Events and Transactions", for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS 144 also amends Accounting
Research Bulletin No. 51, "Consolidated Financial Statements", to eliminate
the exception to consolidation for a subsidiary for which control is likely
to be temporary. SFAS 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within
those years (at the beginning of fiscal 2003 for AMCON). There was no effect
on AMCON for the quarter ended December 2002.
11
In June 2002, the FASB issued Statement of Financial Accounting Standard No.
146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date of
a commitment to an exit or disposal plan. Examples of costs covered by SFAS
146 include lease termination costs and certain employee severance costs that
are associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. Previous accounting guidance was
provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 replaces EITF No. 94-3. SFAS
146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002.
In December 2002, the FASB issued Statement of Financial Accounting Standard
No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure
"("SFAS 148"). SFAS 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-
based employee compensation. It also amends the disclosure provisions of
that Statement to require prominent disclosure about the effects on reported
net income of an entity's accounting policy decisions with respect to stock-
based employee compensation. Finally, this Statement amends APB Opinion No.
28, Interim Financial Reporting, to require disclosure about those effects in
interim financial information. The disclosure provisions of SFAS 148 are
effective for financial statements issued for interim periods beginning after
December 15, 2002, (at Q2 2003 for AMCON), with early adoption encouraged.
AMCON does not intend to voluntarily change to the alternative accounting
principle.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing certain
guarantees. FIN No. 45 also elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. The recognition
provisions of FIN No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements of
FIN No. 45 are effective for financial statements of interim or annual
periods ending after December 15, 2002 (at Q2 2003 for AMCON). The Company
did not have any guarantees outstanding at December 2002 and will apply the
recognition provisions of FIN No. 45 prospectively to guarantees issued after
December 31, 2002.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 clarifies when variable interest entities are
consolidated by business enterprises where the equity investment at risk is
not sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties, which is
provided through other interests that will absorb some or all of the expected
losses of the entity, or, where equity investors lack certain characteristics
of a controlling financial interest. FIN No. 46 applies immediately to
variable interest entities created after January 31, 2003 and to variable
interest entities in which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The Company did
not have any investments in any variable interest entities at December 2002
and will apply the provisions of FIN No. 46 prospectively to investments in
variable interest entities made after February 1, 2003.
Management is not aware of any events or circumstances that would create a
significant impact on future operating results upon adoption of SFAS No. 146,
SFAS No. 148, FIN No. 45 or FIN No. 46.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
COMPANY OVERVIEW
AMCON Distributing Company ("AMCON" or the "Company") is primarily engaged in
the wholesale distribution business in the Great Plains and Rocky Mountain
regions of the United States. In addition, AMCON operates 13 retail health
food stores as well as a beverage division consisting of a natural spring
water bottling operation and a newly formed beverage marketing and
distribution business. As used herein, unless the context indicates
otherwise, the term "ADC" means the wholesale distribution segment and
"AMCON" or the "Company" means AMCON Distributing Company and its
consolidated subsidiaries.
ADC operates six distribution centers located in Illinois, Missouri,
Nebraska, North Dakota, South Dakota and Wyoming. ADC sells approximately
9,000 consumer products, including cigarettes and tobacco products, candy and
other confectionery, beverages, groceries, paper products, health and beauty
care products, frozen and chilled products. ADC distributes products
primarily to retailers such as convenience stores, discount and general
merchandise stores, grocery stores and supermarkets, drug stores and gas
stations. In addition, ADC services institutional customers, such as
restaurants and bars, schools, sports complexes and vendors, as well as other
wholesalers.
Our retail health food segment operates seven stores in Florida under the
name Chamberlin's Market & Cafe and six stores in Oklahoma, Kansas, Missouri
and Nebraska under the name Akin's Natural Foods Market. These stores carry
a comprehensive line of approximately 35,000 natural and gourmet foods,
supplements, herbs, natural cosmetics, homeopathic and sports nutrition
products. Although this segment has not achieved profitability, with the
realignment of top management, development of a new marketing department,
increased focus on in-store staff training and the implementation of a new
central point-of-sale inventory control system, management expects
profitability of the retail segment to improve. If profitability of this
segment improves consistent with our expectations, it may lay the foundation
for future expansion in the number of retail stores.
AMCON's wholly-owned subsidiary, Hawaiian Natural Water Company, Inc.
("HNWC") bottles natural spring water from an exclusive source located on the
island of Hawaii. HNWC currently markets its products primarily in the State
of Hawaii, but plans to expand marketing to the mainland United States and
certain international markets. HNWC was acquired during the first quarter of
fiscal 2002 and has recently completed upgrading its bottling equipment in
order to increase its production capacity. HNWC has historically operated at
a loss and is expected to continue to do so until it is able to complete the
planned expansion of its markets. AMCON's newly formed wholly-owned
subsidiary, The Beverage Group, Inc., will focus on marketing and
distribution of HWNC bottled water products and other beverages in the United
States, Canada and Mexico.
INDUSTRY SEGMENT OVERVIEWS
The wholesale distribution industry continues to consolidate as larger
distribution companies acquire smaller companies. Competition and pressure
on profit margins continue to affect both large and small distributors and
demands that distributors consolidate in order to become more efficient.
Although ADC sells a diversified line of products, it remains dependent on
cigarette sales, which represented approximately 75% of total revenue and 40%
of gross margin of the Company in the first quarter of fiscal 2003. Overall
cigarette consumption in the United States continues to decline and many
retailers, such as grocery stores and general merchandise stores, have
discontinued the sale of cigarettes. As a result, convenience stores, which
represent ADC's largest customer base, have increased their share of the
cigarette market.
13
Changes in manufacturers' cigarette pricing over the past decade have greatly
affected the market for generic and private label cigarettes. Although sales
of ADC's private label cigarettes have steadily declined over the past nine
years due to the relatively small price differential between its private
label brands and national brands, and the increasing price differential
between our brands and new generic and import brands, ADC's net income is
still heavily dependent on sales of private label cigarettes and the volume
discounts it receives from manufacturers in connection with these sales. The
Company is currently negotiating an extension of its private label cigarette
manufacturing agreement.
The retail natural foods industry is highly fragmented, with more than 9,000
stores operated independently or as part of small chains. The two leading
natural food chains continue to expand their geographic markets and acquire
smaller independent competitors. In addition, conventional supermarkets and
mass market outlets have increased their emphasis on natural products. This
business climate subjects operating income to a number of factors which are
beyond the control of management, such as competing retail stores opening in
close proximity to AMCON's retail stores and manufacturers' changing prices
and promotional programs.
The natural bottled water and beverage business is also highly competitive.
All of the popular national brands of natural water, plus several local
brands, are sold in Hawaii, which is HNWC's primary market. HNWC competes
primarily by differentiating its products from those of its competitors due
to the fact that it is the only producer of natural spring water bottled in
Hawaii.
CERTAIN ACCOUNTING CONSIDERATIONS
During fiscal 2002 the Company acquired HNWC. In accordance with Statement
of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations,"
the Company used the purchase method of accounting to record the business
combination. Recorded intangibles, primarily the HNWC tradename, were
separately identified and recognized. No goodwill was recognized in the
acquisition.
SFAS No. 142, "Goodwill and Other Intangible Assets," requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain
intangibles will not be amortized into results of operations, but instead
will be reviewed for impairment and written down and charged to results of
operations only in the periods in which the impairment recognition criteria
has been met and the recorded value of goodwill and certain intangibles is
more than its measured fair value. Due to the adoption of SFAS No. 142 by
the Company at the beginning of fiscal 2003, the Company no longer amortizes
goodwill, tradenames and other intangible assets considered to have
indefinite useful lives. Goodwill, tradenames and other intangible assets
not subject to amortization are now reviewed periodically to determine if
their recorded values exceed their fair values. If the recorded value of
these assets is determined to be impaired, it will be written down to fair
value and the write down will be charged to operations during the period in
which the impairment is recognized. Management has obtained an independent
valuation of its goodwill and intangible assets and did not incur an
impairment charge for the first quarter of fiscal 2003 due to the
implementation of SFAS No. 142.
14
CRITICAL ACCOUNTING POLICIES
Certain accounting policies used in the preparation of the Company's
financial statements require us to make judgments and estimates and the
financial results we report may vary depending on how we make these
judgements and estimates. The following are the most critical accounting
policies relating to our financial statements.
ACCOUNTS RECEIVABLE. Accounts receivable consist primarily of amounts due to
the Company from our normal business activities. We maintain an allowance
for doubtful accounts to reflect the expected uncollectibility of accounts
receivable based on past collection history and specific risks identified in
the portfolio.
INVENTORIES. Inventories consist of finished products purchased in bulk
quantities to be sold to customers. An allowance for obsolete inventory is
maintained to reflect the expected unsaleable or unrefundable inventory based
on an evaluation of slow moving products.
GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS. Goodwill associated with
the excess purchase price over the fair value of assets acquired and other
identifiable intangible assets, such as trademarks and tradenames, with
indefinite useful lives are no longer amortized, but will be reviewed
periodically to determine if the recorded values exceed the fair market
values of the assets. If impairment exists, the impairment write-down will
be charged to operations during the period in which the impairment is
recognized. Identifiable intangible assets that are considered to have
definite useful lives are amortized on the straight-line method over their
estimated useful lives.
REVENUE RECOGNITION. The Company recognizes revenue when products are
delivered to customers, which generally is the same day products are shipped,
or sold to consumers in stores. Sales are shown net of returns, discounts,
and sales incentives to customers.
INSURANCE. The Company's insurance for worker's compensation, general
liability and employee-related health care benefits are effectively self-
insured. As a result, the Company accrues worker's compensation liability
based upon the claim reserves established by a third-party administrator each
month. The employee health insurance benefit liability is based on the
Company's historical claims experience rate. The reserves associated with
the exposure to these self-insured liabilities are reviewed by management for
adequacy at the end of each reporting period.
RESULTS OF OPERATIONS
As more fully described in our 2002 Annual Report to Shareholders on Form 10-
K for the fiscal year ended September 27, 2002, we completed the acquisition
of HNWC on December 17, 2001. Accordingly, the results of operations for
this acquisition are included in the accompanying unaudited condensed
consolidated statements of operations from the date of acquisition.
AMCON's fiscal first quarters ended on December 27, 2002 and December 28,
2001. For ease of discussion, the fiscal quarters are referred to herein as
December 2002 and 2001, respectively or Q1 2003 and Q1 2002, respectively.
Comparison of the three month periods ended December 2002 and 2001
- ------------------------------------------------------------------
Sales for Q1 2003 decreased 5.9% to $197.7 million, compared to $210.2
million in Q1 2002. Sales are reported net of costs associated with sales
incentives provided to retailers, totaling $2.0 million and $2.1 million, for
Q1 2003 and Q1 2002, respectively. The change in sales by business segment
from Q1 2002 to Q1 2003 is as follows:
15
Wholesale distribution $(13.3) million
Retail health food stores .4 million
Beverage .5 million
------
$(12.4) million
======
Sales from the wholesale distribution business decreased by $13.3 million
from Q1 2002 to Q1 2003. The decrease was partially due to pricing strategies
implemented by several competitors and loss of customers due to acquisition
by other retailers. Cigarette sales decreased by approximately $10.2 million
compared to the prior year as a result of a 10.8% decrease in carton volume.
Sales of tobacco, confectionary and other products accounted for the
remainder of the decrease as sales of these products decreased by $3.1
million or 7.2% from the prior year. We continue to market our full service
capabilities in an effort to differentiate our Company from competitors, who
utilize pricing as their primary marketing tool.
Sales from the retail health food segment during Q1 2003 increased by $0.4
million, or 5.9%, when compared to Q1 2002 due to benefits received from
rearranging the display of products in certain stores and from increased
promotional activities.
The beverage segment accounted for $0.6 million in sales for Q1 2003. The
water bottling operation was acquired during the latter part of Q1 2002 and
the marketing and distribution business was started in Q1 2003.
Accordingly, sales during the first quarter of fiscal 2002 were nominal. The
operating results are included in the accompanying unaudited consolidated
statements of operations from the date of acquisition.
GROSS PROFIT
Gross profit decreased 8.4% to $13.8 million in Q1 2003 from $15.1 million in
Q1 2002. Gross profit as a percent of sales declined to 7.0% in Q1 2003
compared to 7.2% in Q1 2002. Gross profit by business segment is as follows
(dollars in millions):
Quarter ended
December
---------------- Incr
2002 2001 (Decr)
------ ------ -----
Wholesale distribution $ 10.7 $ 12.0 $(1.3)
Retail health food stores 3.1 3.1 -
Beverage segment - - -
------ ------ -----
$ 13.8 $ 15.1 $(1.3)
====== ====== =====
Gross profit from our wholesale distribution business for Q1 2003 decreased
approximately $1.3 million as compared to Q1 2002. This was primarily due to
the absence of a cigarette price increase in Q1 2003. Gross profit of $0.5
million was generated in Q1 2002 related to a cigarette price increase during
that quarter. Gross profit also decreased by $0.1 million due to lower sales
of private label cigarettes, a decrease in incentive allowances from
manufacturers of approximately $0.3 million (net of amounts paid to
customers) and a decrease of $0.6 million in gross profit from reduced sales
of candy and other products. These items were offset by an increase of $0.2
million in gross profit due to a smaller charge to cost of sales to account
for the increase in the LIFO reserve, as compared to Q1 2002.
16
Gross profit for the retail health food segment was flat compared with Q1
2002. An increase in gross profit from increased sales volume in Q1 2003 was
offset by a nominal charge to cost of sales to account for the increase in
the LIFO reserve in Q1 2003, as compared to a decrease of $0.1 million to
cost of sales for a reduction of the LIFO reserve in Q1 2002.
No gross profit was generated from the beverage segment for Q1 2003, as sales
volume was not sufficient to cover direct plant overhead costs allocated to
cost of goods sold.
Gross profit as a percentage of sales declined primarily due to reductions in
selling prices of many products to maintain market share in both the
wholesale and retail businesses.
Total operating expense, which includes selling, general and administrative
expenses and depreciation and amortization, decreased 4.1% or approximately
$0.5 million to $12.7 million in Q1 2003 compared to Q1 2002. The decrease
was primarily due to reductions of $0.9 million in warehouse and delivery
costs in the wholesale segment resulting from integration of the Quincy
distribution business in fiscal 2002 and $0.2 million related to reductions
in bad debt expense and management bonus expense. These costs were partially
offset by a $0.1 million increase in professional fees. Total operating
expense in the retail segment increased by $0.1 million primarily do to
increased personnel costs of $0.2 million associated with the growth in
sales. These costs were partially offset by reductions in goodwill and
tradename amortization of $0.1 million compared to Q1 2002, which are non-
cash expenses. The beverage segment incurred $0.4 million in operating
expense. There are no comparable period expenses for the beverage business
as the bottling operation was acquired late in Q1 2002 and the marketing and
distribution business was not formed until late in Q1 2003.
As a result of the above, income from operations for Q1 2003 decreased by
$0.7 million to $1.1 million, as compared to Q1 2002.
Interest expense for Q1 2003 decreased 22.2% to approximately $0.8 million
compared to approximately $1.1 million during Q1 2002. The decrease was
primarily due to a positive valuation adjustment on the interest rate swap
contract, totaling $0.2 million during Q1 2003 and reductions in interest of
$0.1 million resulting from a decrease of approximately $2.0 million in
average borrowings during Q1 2003 compared to Q1 2002.
Other income for Q1 2003 of approximately $0.2 million was generated
primarily from $0.1 million in proceeds received from a settlement related to
a former leased distribution facility and interest income and dividends
received on investment securities. Other income of approximately $47,000 for
Q1 2002 was generated primarily from interest income and dividends received
on investment securities.
Included in other income (expense) in Q1 2002 is equity in loss of an
unconsolidated affiliate of $0.1 million, which represented our ownership
interest in the loss of HNWC up to the date of acquisition.
As a result of the above factors, net income for the three months ended
December 2002 was $0.3 million compared to $0.4 million for the three months
ended December 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of December 2002, our liquidity was provided by cash on hand of
approximately $0.1 million and approximately $26.5 million available under a
revolving credit facility with a capacity of $55.0 million. In addition, we
have approximately $2.0 million available under a revolving credit facility
in our retail segment. During the three months ended December 2002, we
generated approximately $12.6 million in cash through operating activities
primarily through reductions in accounts receivable and inventory, as we
managed inventory levels during non-peak periods. Our working capital was
17
approximately $25.3 million as of December 2002 compared to approximately
$27.0 million at September, 2002. Our debt to equity ratio declined to 2.91
at December 2002, compared to 3.69 at September 2002, primarily due to a
decrease in our revolving line of credit of approximately $12.5 million as
inventory was reduced and cash was used to pay down debt. Investing
activities required cash of approximately $0.5 million during the three-month
period ended December 2002 and primarily represents the purchases of fixed
assets. Financing activities utilized cash of approximately $12.1 million to
reduce amounts outstanding under the revolving credit facilities and
long-term debt.
The following table summarizes our outstanding contractual obligations and
commitments as of fiscal year end September 2002. Other than the paydown of
approximately $12.5 million on the outstanding balance of the revolving
credit facility discussed above, there have been no significant changes to
debt or other obligations since September 2002. (amounts in thousands):
Payments Due By Period
--------------------------------------------------------------------
Contractual Fiscal Fiscal Fiscal Fiscal Fiscal
Obligations Total 2003 2004 2005 2006 2007 Thereafter
- ------------------ --------- -------- -------- ------- ------- ------- ----------
Long-Term Debt $ 50,208 $ 14,634 $ 29,181 $ 200 $ 6,193 $ - $ -
Subordinated Debt 10,448 1,709 7,763 976 - - -
Capital Lease 938 150 228 266 254 40 -
Obligations
Operating Leases 24,877 5,091 4,451 3,956 3,213 1,698 6,468
--------- -------- -------- ------- ------- ------- ----------
$ 86,471 $ 21,584 $ 41,623 $ 5,398 $ 9,660 $ 1,738 $ 6,468
========= ======== ======== ======= ======= ======= ==========
Total
Other Commercial Amounts Fiscal Fiscal Fiscal Fiscal Fiscal
Commitments Committed 2003 2004 2005 2006 2007 Thereafter
- ------------------ --------- -------- -------- ------- ------- ------- ----------
Lines of Credit $ 59,500 $ 59,500 $ 55,000 $ - $ - $ - $ -
Letters of Credit 530 530 400 - - - -
--------- -------- -------- ------- ------- ------- ----------
$ 60,030 $ 60,030 $ 55,400 $ - $ - $ - $ -
========= ======== ======== ======= ======= ======= ==========
We maintain a revolving credit facility, ("the Facility ") that allows us to
borrow up to $55.0 million at any time, subject to eligible accounts
receivable and inventory requirements. As of December 2002, the outstanding
balance on the Facility was $28.5 million. The Facility bears interest at a
variable rate equal to the bank's base rate, which was 4.25% at December
2002. However, as discussed under "Qualitative and Quantitative Disclosures
about Market Risk", a notional amount of $25.0 million is subject to an
interest rate swap agreement which has the effect of converting this amount
to a fixed rate. In addition, the Company is required to pay an unused
commitment fee equal to 0.25% per annum on the difference between the maximum
loan limit and average monthly borrowing for the month. The Facility is
collateralized by all of ADC's equipment, intangibles, inventories, and
accounts receivable.
The Facility contains covenants which, among other things, set certain
financial ratios and net worth requirements, including covenants that (i)
restrict permitted investments, (ii) restrict intercompany advances to HNWC,
(iii) restrict incurrence of additional debt, (iv) restrict mergers and
acquisitions and changes in business or conduct of business and (v) require
the maintenance of certain financial ratios and net worth levels including an
average annual debt service coverage ratio of 1.0 to 1.0, and a minimum
tangible net worth of $8.0 million. In addition, the Company must maintain a
18
fill rate percentage of not less than 93% calculated on a weekly basis. The
fill rate percentage is determined by dividing the total dollar amount of
inventory delivered to the Company's customers each week into the total
amount of orders which correspond to such deliveries. The Facility also
provides that the Company may not pay dividends in excess of $0.12 per share
on an annual basis.
In November 2002, the Company increased its credit facility with a bank, to
be used to fund operating activities at our natural spring water bottling
operation in Hawaii to $2.8 million (the "Water Facility"). The Water
Facility bears interest at a variable rate equal to the bank's base rate plus
1.0%, which equaled 6.75% at December 2002. As of December 2002, the
outstanding balance under the Water Facility was $2.7 million. The Water
Facility is personally guaranteed by the Company's Chairman.
In June 2002, the Company renewed a $2.0 million credit facility with a bank,
to be used to fund the expansion and remodeling of our retail health food
stores (the "Retail Facility"). The Retail Facility bears interest at a
variable rate equal to the published prime rate plus 1.0%. The Retail
Facility is secured by all of the inventory of the retail stores. No balance
was outstanding on the Retail Facility at December 2002.
The Company borrowed $6.9 million from a bank, at a fixed rate of 7.5%, to
purchase the distribution facility in Quincy, IL, referred to herein as the
Real Estate Loan, and to retire term debt. As of December 2002, the
outstanding balance on the Real Estate Loan was approximately $6.5 million.
The acquisition of the Quincy distribution business provides for deferred
payments to be made to the seller totaling $3.4 million (plus interest).
These deferred payments are subordinate to the Facility and the Real Estate
Loan and are due in installments of $0.9 million (including interest) on the
first, second, third and fourth anniversaries of the closing date of the
transaction. In addition, the Company entered into a noncompetition
agreement with the seller that requires the Company to make payments of $0.1
million annually on the first through fourth anniversary dates of the closing
of the transaction. The Company has recorded the seller obligations at their
fair values utilizing a 6% effective interest rate which was determined based
on the Company's approximate average borrowing rate. The outstanding
obligation to the seller was approximately $2.6 million as of December 2002.
In September 1999, borrowings under an 8% Convertible Subordinated Note,
referred to herein as the Convertible Note, and a Collateralized Promissory
Note, referred to herein as the Collateralized Note, in addition to
borrowings under the revolving credit facility were used to purchase all of
the common stock of Health Food Associates. Both the Convertible Note and the
Collateralized Note have five-year terms and bear interest at 8% per annum.
Principal on the Convertible Note is due in a single payment at maturity.
Principal on the Collateralized Note is payable in installments of $0.8
million per year with the balance due at maturity. The principal balance of
the Convertible Note may be converted into stock of The Healthy Edge, Inc.,
formerly known as Food for Health Co., Inc., under circumstances set forth in
the Convertible Note. As of December 2002, the outstanding balances of the
Convertible Note and the Collateralized Note were $2.0 million and $5.6
million, respectively.
The Company has borrowings under various notes to purchase the assets of
health food stores and water bottling equipment. The notes have terms
ranging from three to five years with principal and interest payments due
monthly. As of December 2002, the outstanding balance of the notes was
approximately $0.2 million.
In connection with the purchase of the Quincy distribution business and HNWC,
we assumed several capital leases for office equipment, automobiles and
warehouse equipment. As of December 2002, the outstanding balances on the
capital leases totaled approximately $0.9 million.
19
In connection with the discontinued operations of the health and natural
foods distribution business, AMCON is obligated on a letter of credit issued
to the buyer in the amount of $0.1 million which expires in March 2003. In
addition, AMCON has a letter of credit in the amount of approximately $0.4
million that is required to be issued to the Company's workers compensation
insurance carrier as part of its self-insured insurance program.
We believe that funds generated from operations, supplemented as necessary
with funds available under our revolving credit facilities, will provide
sufficient liquidity to cover our debt service and any reasonably foreseeable
future working capital and capital expenditure requirements associated with
existing operations.
ACQUISITIONS
On December 17, 2001, the Company completed a merger with HNWC, pursuant to
which HNWC merged with and into, and thereby became, a wholly-owned
subsidiary of AMCON Distributing Company. The merger consideration consisted
of $0.8 million in cash and 373,558 shares of AMCON's common stock. HNWC
option holders and warrant holders also received comparable options and
warrants of the Company but with the exercise price and number of shares
covered thereby being adjusted to reflect the exchange ratio.
Transaction costs, totaling approximately $0.3 million, were incurred to
complete the merger and consist primarily of fees and expenses for bankers,
attorneys and accountants, SEC filing fees, stock exchange listing fees and
financial printing and other related charges.
RELATED PARTY TRANSACTIONS
In Q1 2003, we were charged $15,000 by AMCON Corporation, the former parent
of the Company, as consideration for office rent and management services,
which is included in selling, general and administrative expenses. We also
contracted with one of our outside directors for consulting services in
connection with our retail health food operations during Q1 2003. The amount
paid for consulting services during Q1 2003 was $22,500, plus reimbursement
of expenses.
In addition, effective October 1, 2001, the president of the wholesale health
food distribution business, which was sold in March 2001, was terminated and
we entered into a four-year consulting agreement with him at the rate of
$104,000 per year. The total amount to be paid under the agreement
approximates the amount of our obligation under his employment agreement.
The amount paid for consulting services during Q1 2003 was $26,000.
CONCERNING FORWARD LOOKING STATEMENTS
This Quarterly Report, including the Management's Discussion and Analysis
and other sections, contains forward looking statements that are subject to
risks and uncertainties and which reflect management's current beliefs and
estimates of future economic circumstances, industry conditions, company
performance and financial results. Forward looking statements include
information concerning the possible or assumed future results of operations
of the Company and those statements preceded by, followed by or that include
the words "future," "position," "anticipate(s)," "expect," "believe(s),"
"see," "plan," "further improve," "outlook," "should" or similar expressions.
For these statements, we claim the protection of the safe harbor for forward
looking statements contained in the Private Securities Litigation Reform Act
of 1995. You should understand that the following important factors, in
addition to those discussed elsewhere in this document, could affect the
future results of the Company and could cause those results to differ
materially from those expressed in our forward looking statements: changing
market conditions with regard to cigarettes and the demand for the Company's
products, domestic regulatory risks, and competitive and other risks over
which the Company has little or no control. Any changes in such factors
could result in significantly different results. Consequently, future
results may differ from management's expectations. Moreover, past financial
performance should not be considered a reliable indicator of future
performance.
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In connection with the purchase of the Quincy, Illinois distribution business
in June 2001, we assumed an interest rate swap agreement with a bank. Under
the agreement, we agree to exchange, at specified intervals, fixed interest
amounts for variable interest amounts calculated by reference to an agreed-
upon notional principal amount of $25.0 million. The interest rate swap
effectively converts $25.0 million of our variable-rate senior debt to fixed-
rate debt (before accounting for the impact of the change in market value of
the interest rate swap derivative financial instrument) at a rate of 8.33%,
through the maturity of the swap agreement on May 27, 2003.
Due to the significant decline in variable interest rates from the date the
swap agreement was initially entered into, the negative fair value of the
swap instrument recorded as a liability on our balance sheet at the closing
date was approximately $0.9 million. Upon assuming the swap liability, we
did not designate the swap transaction as a hedge and therefore, we recognize
changes in the fair value of the instrument in current earnings (interest
expense). At December 2002, the swap instrument had a negative fair value of
approximately $0.5 million. The change in fair value of the swap instrument
from a negative fair value of $0.8 million as of fiscal year end 2002 to a
negative fair value of $0.5 million at December 2002 was recorded as a
decrease to interest expense in Q1 2003. We do not utilize financial
instruments for trading purposes and hold no derivative financial instruments
other than the interest rate swap which could expose us to significant market
risk.
At December 2002, we had $6.2 million of variable rate debt outstanding
(excluding $25 million variable rate debt which is fixed through the swap),
with maturities through May 2004. The interest rates on this debt ranged
from 4.25% to 6.75% at December 2002. Through December 31, 2001, we had the
ability to select the bases on which our variable interest rates were
calculated by selecting an interest rate based on our lender's base interest
rate or based on LIBOR. This provided management with some control of our
variable interest rate risk. Effective January 1, 2002, the LIBOR borrowing
rate option was removed. We intend to negotiate for reinstatement of the
LIBOR borrowing option in the future. We estimate that our annual cash flow
exposure relating to interest rate risk based on our current borrowings is
approximately $0.1 million for each 1% change in our lender's prime interest
rate.
In addition, we are exposed to market risk relating to our available-for-sale
investment in the common stock of Consolidated Water Company Limited ("CWCO")
a public company traded on the NASDAQ National Market system. At December
2002 and 2001 we held 50,000 and 70,000 shares, respectively, of common stock
of CWCO valued at approximately $0.7 million and $0.8 million. We value this
investment at market and record price fluctuations in shareholders' equity as
unrealized gain or loss on investments. The unrealized gain on CWCO shares
was approximately $0.6 million and $0.6 million at December 2002 and 2001,
respectively.
Item 4. Controls and Procedures
A review and evaluation was performed by the Company's management, including
the Company's Principal Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures as of a date within 90 days prior to the filing of
this quarterly report. Based on that review and evaluation, the Principal
Executive Officer and Chief Financial Officer have concluded that the
Company's current disclosure controls and procedures, as designed and
implemented, were effective. There have been no significant changes in the
Company's internal controls subsequent to the date of their evaluation.
There were no significant material weaknesses identified in the course of
such review and evaluation and, therefore, no corrective measures were taken
by the Company.
21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
2.1 Fifth Amended and Restated Agreement and Plan of Merger dated
September 27, 2001 by and between AMCON Distributing Company, AMCON
Merger Sub, Inc. and Hawaiian Natural Water Company Inc. (incorporated
by reference to Exhibit 2.1 of AMCON's Registration Statement on Form
S-4(Registration No. 333-71300) filed on November 13, 2001)
2.2 Assets Purchase and Sale Agreement by and between Food For Health
Company, Inc., AMCON Distributing Company and Tree of Life, Inc.
dated March 8, 2001 (incorporated by reference to Exhibit 2.1 of
AMCON's Current Report on Form 8-K filed on April 10, 2001)
2.3 Amendment to Assets Purchase and Sale Agreement by and between Food
For Health Company, Inc., AMCON Distributing Company and Tree of Life,
Inc. effective March 23, 2001 (incorporated by reference to Exhibit
2.2 of AMCON's Current Report on Form 8-K filed on April 10, 2001)
2.4 Asset Purchase Agreement, dated February 8, 2001, between AMCON
Distributing Company, Merchants Wholesale Inc. and Robert and Marcia
Lansing (incorporated by reference to Exhibit 2.1 of AMCON's Current
Report on Form 8-K filed on June 18, 2001)
2.5 Addendum to Asset Purchase Agreement, dated May 30, 2001, between
AMCON Distributing Company, Merchants Wholesale Inc. and Robert and
Marcia Lansing (incorporated by reference to Exhibit 2.2 of AMCON's
Current Report on Form 8-K filed on June 18, 2001)
2.6 Real Estate Purchase Agreement, dated February 8, 2001, between AMCON
Distributing Company and Robert and Marcia Lansing (incorporated by
reference to Exhibit 2.3 of AMCON's Current Report on Form 8-K filed
on June 18, 2001)
2.7 Addendum to Real Estate Purchase Agreement, dated May 30, 2001,
between AMCON Distributing Company and Robert and Marcia Lansing
(incorporated by reference to Exhibit 2.4 of AMCON's Current Report on
Form 8-K filed on June 18, 2001)
3.1 Restated Certificate of Incorporation of the Company, as amended March
19, 1998 (incorporated by reference to Exhibit 3.1 of AMCON's
Quarterly Report on Form 10-Q filed on May 11, 1998)
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 of
AMCON's Registration Statement on Form S-1 (Registration No. 33-82848)
filed on August 15, 1994)
4.1 Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 of AMCON's Registration Statement on Form S-1
(Registration No. 33-82848) filed on August 15, 1994)
10.1 Grant of Exclusive Manufacturing Rights, dated October 1, 1993,
between the Company and Famous Value Brands, a division of Philip
Morris Incorporated, including Private Label Manufacturing Agreement
and Amended and Restated Trademark License Agreement (incorporated by
reference to Exhibit 10.1 of Amendment No. 1 to AMCON's Registration
Statement on Form S-1 (Registration No. 33-82848) filed on November 8,
1994)
10.2 Amendment No. 1 to Grant of Exclusive Manufacturing Rights, dated
October 1, 1998, between the Company and Famous Value Brands, a
division of Philip Morris Incorporated, including Amendment No. 1 To
Private Label Manufacturing Agreement and Amendment No. 1 to Amended
and Restated Trademark License Agreement (incorporated by reference to
Exhibit 10.2 of AMCON's Annual Report on Form 10-K filed on December
24, 1998)
22
10.3 Loan and Security Agreement, dated June 1, 2001, between the Company
and LaSalle National Bank (incorporated by reference to Exhibit 10.3
on Form 10-Q filed on August 13, 2001)
10.4 ISDA Master Agreement, dated as of December 22, 2000 between LaSalle
Bank National Association and Merchants Wholesale Inc., as assumed by
the Company on June 1, 2001 (incorporated by reference to Exhibit 10.4
on Form 10-Q/A filed on October 4, 2001)
10.5 Secured Promissory Note, dated as of May 30, 2001 between the Company
and Gold Bank (incorporate by reference to Exhibit 10.5 on Form 10-Q/A
filed on October 4, 2001)
10.6 8% Convertible Subordinated Note, dated September 15, 1999 by and
between Food For Health Company Inc. and Eric Hinkefent, Mary Ann
O'Dell, Sally Sobol, and Amy Laminsky (incorporated by reference to
Exhibit 10.1 of AMCON's Current Report on Form 8-K filed on September
30, 1999)
10.7 Secured Promissory Note, dated September 15, 1999, by and between Food
For Health Company, Inc. and James C. Hinkefent and Marilyn M.
Hinkefent, as trustees of the James C. Hinkefent Trust dated July 11,
1994, as amended, Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and
Amy Laminsky (incorporated by reference to Exhibit 10.2 of AMCON's
Current Report on Form 8-K filed on September 30, 1999)
10.8 Pledge Agreement, dated September 15, 1999, by and between Food For
Health Company, Inc. and James C. Hinkefent and Marilyn M. Hinkefent,
as trustees of the James C. Hinkefent Trust dated July 11, 1994, as
amended, Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy
Laminsky (incorporated by reference to Exhibit 10.3 of AMCON's Current
Report on Form 8-K filed on September 30, 1999)
10.9 First Amended and Restated AMCON Distributing Company 1994 Stock
Option Plan (incorporated by reference to Exhibit 10.17 of AMCON's
Current Report on Form 10-Q filed on August 4, 2000)
10.10 AMCON Distributing Company Profit Sharing Plan (incorporated by
reference to Exhibit 10.8 of Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-82848)
filed on November 8, 1994)
10.11 Employment Agreement, dated May 22, 1998, between the Company and
William F. Wright (incorporated by reference to Exhibit 10.14 of
AMCON's Quarterly Report on Form 10-Q filed on August 6, 1998)
10.12 Employment Agreement, dated May 22, 1998, between the Company and
Kathleen M. Evans incorporated by reference to Exhibit 10.15 of
AMCON's Quarterly Report on Form 10-Q filed on August 6, 1998)
11.1 Statement re: computation of per share earnings (incorporated by
reference to footnote 3 to the financial statements which are
incorporated herein by reference to Item 1 of Part I herein)
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by the Company during the quarter
ended December 27, 2002.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
AMCON DISTRIBUTING COMPANY
(registrant)
Date: February 10, 2003 /s/ William F. Wright
----------------- -----------------------------
William F. Wright
Chairman of the Board and
Principal Executive Officer
Date: February 10, 2003 /s/ Michael D. James
----------------- -----------------------------
Michael D. James
Treasurer & CFO and
Principal Financial and
Accounting Officer
24
CERTIFICATION
I, William F. Wright, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AMCON
Distributing Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 10, 2003 /s/ William F. Wright
----------------- ---------------------
William F. Wright, Chairman and
Principal Executive Officer
CERTIFICATION
I, Michael D. James, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AMCON
Distributing Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 10, 2003 /s/ Michael D. James
----------------- --------------------
Michael D. James, Chief Financial Officer