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 June 27, 2003
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 3,168,954 shares of its $.01 par value common stock
outstanding as of August 1, 2003.
Form 10-Q
3rd Quarter
INDEX
-------
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
--------------------------------------------
Condensed consolidated balance sheets at
June 2003 and September 2002 3
Condensed consolidated statements of operations
for the three and nine-month periods ended
June 2003 and 2002 4
Condensed consolidated statements of cash flows
for the nine-month periods ended
June 2003 and 2002 5
Notes to unaudited condensed consolidated
financial statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 32
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 33
2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Balance Sheets
June 2003 and September 2002
- ----------------------------------------------------------------------------------------
(Unaudited)
June 2003 September 2002
------------ --------------
ASSETS
Current assets:
Cash $ 581,216 $ 130,091
Accounts receivable, less allowance for doubtful
accounts of $0.7 million and $0.6 million,
respectively 26,438,363 31,216,783
Inventories 23,765,698 35,744,074
Income tax receivable 357,239 981,054
Deferred income taxes 324,369 324,369
Other 560,958 393,365
------------ -------------
Total current assets 52,027,843 68,789,736
Fixed assets, net 16,181,578 16,096,124
Available-for-sale investments 671,494 562,000
Goodwill 6,091,402 6,091,402
Other intangible assets, net 11,523,058 11,804,284
Other assets 1,403,501 1,242,923
------------ -------------
$ 87,898,876 $ 104,586,469
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,018,737 $ 19,873,851
Accrued expenses 3,600,878 3,969,164
Accrued wages, salaries, bonuses 1,701,770 1,371,310
Current liabilities of discontinued operations 118,011 93,558
Current portion of long-term debt 7,840,070 14,783,967
Current portion of subordinated debt 1,752,667 1,708,986
------------ -------------
Total current liabilities 29,032,133 41,800,836
------------ -------------
Deferred income taxes 763,103 788,316
Non-current liabilities of discontinued operations 170,025 197,024
Long-term debt, less current portion 32,986,445 36,362,099
Subordinated debt, less current portion 7,853,067 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, 3,168,954 and 3,156,962
issued, respectively 31,690 31,570
Additional paid-in capital 5,997,977 5,977,643
Accumulated other comprehensive income,
net of tax of $0.2 million and $0.2 million,
respectively 252,880 294,771
Retained earnings 10,811,556 10,395,324
------------ -------------
Total shareholders' equity 17,094,103 16,699,308
------------ -------------
$ 87,898,876 $ 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 and nine-months ended June 2003 and 2002
(Unaudited)
- ----------------------------------------------------------------------------------------------------------
For the three months For the nine months
ended June ended June
----------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Sales (including excise taxes of
$42.8 million and $42.7 million, and
$123.4 million and $119.5 million,
respectively) $ 189,949,079 $ 218,732,361 $ 564,678,909 $ 623,045,508
Cost of sales 173,924,679 202,677,900 520,979,369 577,650,180
------------- ------------- ------------- -------------
Gross profit 16,024,400 16,054,461 43,699,540 45,395,328
------------- ------------- ------------- -------------
Selling, general and administrative
expenses 13,628,524 12,873,782 38,803,228 37,986,850
Depreciation and amortization 574,332 743,610 1,706,844 2,197,531
------------- ------------- ------------- -------------
14,202,856 13,617,392 40,510,072 40,184,381
------------- ------------- ------------- -------------
Income from operations 1,821,544 2,437,069 3,189,468 5,210,947
------------- ------------- ------------- -------------
Other expense (income):
Interest expense 788,898 1,219,074 2,436,769 3,126,332
Other (85,159) (158,669) (367,294) (233,280)
Equity in loss of unconsolidated affiliate - - - 95,007
------------- ------------- ------------- -------------
703,739 1,060,405 2,069,475 2,988,059
------------- ------------- ------------- --------------
Income before income taxes 1,117,805 1,376,664 1,119,993 2,222,888
Income tax expense 427,000 534,071 428,000 899,217
------------- ------------- ------------- -------------
Net income $ 690,805 $ 842,593 $ 691,993 $ 1,323,671
============= ============= ============= =============
Earnings per share:
Basic $ 0.22 $ 0.27 $ 0.22 $ 0.44
============= ============= ============= =============
Diluted $ 0.22 $ 0.26 $ 0.22 $ 0.43
============= ============= ============= =============
Dividends per share $ 0.03 $ 0.03 $ 0.09 $ 0.09
============= ============= ============= =============
Weighted average shares outstanding:
Basic 3,168,955 3,112,962 3,165,270 3,004,852
Diluted 3,209,148 3,190,232 3,221,139 3,078,883
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 nine months ended June 2003 and 2002
(Unaudited)
- ---------------------------------------------------------------------------------
2003 2002
------------ ------------
Net cash flows from operating activities $ 13,226,704 $ (3,757,013)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (1,705,061) (1,962,021)
Proceeds from sales of fixed assets 42,425 65,082
Proceeds from sale of available for
sale securities 112,926 140,142
------------ ------------
Net cash flows from investing activities (1,549,710) (1,756,797)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on bank credit agreement (9,857,184) 7,105,271
Payments on long-term debt and
subordinated debt (1,110,175) (1,087,182)
Dividends paid (286,961) (275,139)
Proceeds from short-term debt 7,998 -
Proceeds from exercise of stock options 20,489 325
Retirement of common stock (36) -
------------ ------------
Net cash flows from financing activities (11,225,869) 5,743,275
------------ ------------
Net increase in cash 451,125 229,465
Cash, beginning of period 130,091 296,940
------------ ------------
Cash, end of period $ 581,216 $ 526,405
============ ============
SUPPLEMENTAL NONCASH INFORMATION:
Business combinations:
Fair value of assets acquired $ - $ 6,013,978
Liabilities assumed $ - $ 3,157,087
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
June 2003 and 2002
- -----------------------------------------------------------------------------
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").
The accounting policies and methods of computation followed in these interim
financial statements are the same as those followed in the financial
statements for the year ended September 27, 2002. Results for the interim
period are not necessarily indicative of results to be expected for the
entire year.
AMCON's fiscal third quarters ended on June 27, 2003 and June 28, 2002. For
convenience, the fiscal quarters have been indicated as June 2003 and 2002,
respectively. Each quarter and each nine-month period ended comprised 13
weeks and 39 weeks, respectively.
Stock-based Compensation
- ------------------------
AMCON maintains a stock-based compensation plan which provides that the
Compensation Committee of the Board of Directors may grant incentive stock
options and non-qualified stock options. AMCON accounts for stock option
grants using the intrinsic value method under which compensation cost is
measured by the excess, if any, of the deemed fair market value of its common
stock on the date of grant over the exercise price of the stock option.
Accordingly, stock-based compensation cost related to stock option grants is
not reflected in net income as all options granted under the plan had an
exercise price equal to the market value of the underlying stock on the date
of grant.
In December 2002, the FASB issued Statement of Financial Accounting Standard
No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure"
("SFAS No. 148"). SFAS No. 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 No. 148 are effective for financial statements issued for
interim periods beginning after December 15, 2002, (Q2 2003 for AMCON), with
early adoption encouraged.
6
AMCON does not intend to voluntarily change to the fair value based
accounting principle. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation:
For the three months For the nine months
ended June ended June
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net earnings
============
Net income as reported $ 690,805 $ 842,593 $ 691,993 $ 1,323,671
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of
related tax effects (15,571) (17,646) (46,713) (52,938)
----------- ----------- ----------- -----------
Pro forma net income $ 675,234 $ 824,947 $ 645,280 $ 1,270,733
=========== =========== =========== ===========
Income per share
================
As reported: Basic $ 0.22 $ 0.27 $ 0.22 $ 0.44
=========== =========== =========== ===========
Diluted $ 0.22 $ 0.26 $ 0.21 $ 0.43
=========== =========== =========== ===========
Pro forma: Basic $ 0.21 $ 0.27 $ 0.20 $ 0.42
=========== =========== =========== ===========
Diluted $ 0.21 $ 0.26 $ 0.20 $ 0.41
=========== =========== =========== ===========
2. CHANGES IN ACCOUNTING POLICY
In June 2002, the FASB issued Statement of Financial Accounting Standard No.
146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS No. 146"). SFAS No. 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 No. 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 Emerging Issues Task Force
("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 No. 146 replaces EITF No. 94-3.
SFAS 146 is applied prospectively to exit or disposal activities initiated
after December 31, 2002 (at Q2 2003 for AMCON). The adoption of SFAS No. 146
had no impact to the Company.
7
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 June 2003 and will apply the
recognition provisions of FIN No. 45 prospectively to guarantees issued after
December 31, 2002.
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142") at the beginning of
fiscal year 2003. SFAS No. 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 at least
annually 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. Upon adoption of SFAS No. 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 upon
implementation of SFAS No. 142. As of June 2003, 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 three and nine months ended June 28, 2002:
Three Months Nine Months
Ended June Ended June
2002 2002
--------- -----------
Reported net income $ 842,593 $ 1,323,671
Add goodwill amortization (net of tax) 49,367 145,203
Add tradename amortization (net of tax) 67,555 202,666
--------- -----------
Adjusted net income $ 959,515 $ 1,671,540
========= ===========
Earnings per share-basic:
Reported net income $ 0.27 $ 0.44
Add goodwill amortization (net of tax) 0.02 0.05
Add tradename amortization (net of tax) 0.02 0.07
--------- -----------
Adjusted earnings per share-basic $ 0.31 $ 0.56
========= ===========
8
Earnings per share-diluted:
Reported net income $ 0.26 $ 0.43
Add goodwill amortization (net of tax) 0.02 0.05
Add tradename amortization (net of tax) 0.02 0.07
--------- -----------
Adjusted earnings per share-diluted $ 0.30 $ 0.55
========= ===========
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, 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 six months of
fiscal 2002.
Assuming the above acquisition had occurred on October 1, 2001 unaudited pro
forma consolidated sales, net income and net earnings per share for the nine
months ended June 2002, would have been as follows:
Nine months ended
June 2002
-----------------
Sales $ 623,531,842
Net income $ 1,068,128
Net earnings per share:
Basic $ 0.36
Diluted $ 0.35
9
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
beverage operation's inventories are stated at the lower of cost (LIFO) or
market and consist of raw materials and finished goods. Raw materials
inventory of $0.3 million consists of pre-forms used to make bottles, caps,
labels and various packaging and shipping materials. Finished goods
inventory of $23.5 million includes materials, labor and manufacturing
overhead costs. LIFO inventories at June 2003 and 2002 were approximately
$3.7 million and $4.5 million less than the amount of such inventories valued
on a first-in, first-out basis, respectively.
5. DIVIDENDS:
The Company paid cash dividends totaling $0.03 per share during the quarter
ended June 2003, representing dividends of $0.09 per share for the first nine
months of fiscal 2003.
6. EARNINGS 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 June 2003 and 2002,
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 194,340 with an average exercise
price of $7.17 for the three months ended June 2003, and 179,340 with an
average exercise price of $7.41 for the nine month period ended June 2003,
and 145,390 with an average exercise price of $8.01 for the three and nine
month periods ended June 2002.
10
For the three-month period ended June
-------------------------------------------------------
2003 2002
------------------------- -------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
1. Weighted average common
shares outstanding 3,168,955 3,168,955 3,112,962 3,112,962
2. Weighted average of net
additional shares outstanding
assuming dilutive options and
warrants exercised and proceeds
used to purchase treasury stock - 40,193 - 77,270
----------- ----------- ----------- -----------
3. Weighted average number of
shares outstanding 3,168,955 3,209,148 3,112,962 3,190,232
=========== =========== =========== ===========
4. Net income $ 690,805 $ 690,805 $ 842,593 $ 842,593
=========== =========== =========== ===========
5. Net income per share $ 0.22 $ 0.22 $ 0.27 $ 0.26
=========== =========== =========== ===========
For the nine-month period ended June
-------------------------------------------------------
2003 2002
------------------------- -------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
1. Weighted average common
shares outstanding 3,165,270 3,165,270 3,004,852 3,004,852
2. Weighted average of net
additional shares outstanding
assuming dilutive options and
warrants exercised and proceeds
used to purchase treasury stock - 55,869 - 74,031
----------- ----------- ----------- -----------
3. Weighted average number of
shares outstanding 3,165,270 3,221,139 3,004,852 3,078,883
=========== =========== =========== ===========
4. Net income $ 691,993 $ 691,993 $ 1,323,671 $ 1,323,671
=========== =========== =========== ===========
5. Net income per share $ 0.22 $ 0.22 $ 0.44 $ 0.43
=========== =========== =========== ===========
11
7. COMPREHENSIVE INCOME (LOSS):
The following is a reconciliation of net income per the accompanying
unaudited condensed consolidated statements of operations to comprehensive
income for the periods indicated:
For the three months For the nine months
ended June ended June
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income $ 690,805 $ 842,593 $ 691,993 $ 1,323,671
Other comprehensive income:
Unrealized holding gains from
investments arising during the
period, net of income tax expense (benefit)
of $17,000 and $(64,000) for the three
months ended June 2003 and 2002
and $83,000 and $30,000 for the nine
months ended June 2003 and
2002, respectively 28,194 (105,229) 134,709 52,821
Reclassification adjustments for
gains included in net income
in prior periods - (78,107) (58,374) (78,107)
Interest rate swap valuation
adjustment, net of income tax
benefit of $72,000 (118,226) - (118,226) -
----------- ----------- ----------- -----------
Comprehensive income $ 600,773 $ 659,257 $ 650,102 $ 1,298,385
=========== =========== =========== ===========
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
June 2003, the outstanding balance on the Facility was $28.2 million. The
Facility bears interest at a variable interest rate equal to the bank's base
rate, which was 4.00% at June 2003 or LIBOR plus 2.50% as selected by the
Company. However, as discussed below, a notional amount of $15.0 million is
subject to two interest rate swap agreements which have the effect of
converting this amount to fixed rates ranging between 4.38% and 4.87%. 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 distribution segment's equipment, intangibles,
inventories and accounts receivable.
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
12
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. The
Company was in compliance with its debt covenants at June 2003.
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, which expired on May 27, 2003, the Company agreed
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 converted $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. The Company did not renew this swap
agreement. This interest rate swap agreement was not designated as a hedge.
In June 2003, the Company entered into two interest rate swap agreements with
a bank. Under the agreements, the Company agrees to exchange, at specified
intervals, fixed interest amounts for variable interest amounts calculated by
reference to agreed-upon notional principal amounts of $10.0 million and $5.0
million. The interest rate swaps effectively convert $15.0 million of
variable-rate senior debt to fixed-rate debt at rates of 4.87% and 4.38% on
the $10.0 million and $5.0 million notional amounts through the maturity of
the swap agreements on June 2, 2006 and 2005, respectively. These interest
rate swap agreements have been designated as hedges and will be accounted for
as such for financial accounting purposes.
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 June 2003.
As of June 2003, the outstanding balance under the Water Facility was $2.8
million. The Water Facility is guaranteed by the Company=s Chairman.
The Company has a $2.0 million credit facility with a bank collateralized by
inventories of the Retail segment (the "Retail Facility "). Borrowings under
the Retail Facility bear interest at the bank=s base rate plus 1.0%, which
equaled 6.75% at June 2003. As of June 2003, the outstanding balance under
the Retail Facility was $1.9 million.
13
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. Intersegment
sales have been recorded at amounts approximating market. The segments are
evaluated on revenue, operating income (loss) and income (loss) before taxes.
Wholesale Eliminate
Distribution Retail Beverage Intersegment Consolidated
------------- ----------- ----------- ------------ -------------
QUARTER ENDED JUNE 2003:
External revenue:
Cigarettes $ 135,446,471 $ - $ - $ - $ 135,446,471
Confectionery 14,150,458 - - - 14,150,458
Health food - 8,315,500 - - 8,315,500
Tobacco, beverage & other 31,010,861 - 1,025,880 (91) 32,036,650
------------- ----------- ----------- ---------- -------------
Total external revenue 180,607,790 8,315,500 1,025,880 (91) 189,949,079
Depreciation and amortization 311,977 244,683 46,365 - 603,025
Operating income (loss) 2,988,164 176,946 (1,349,753) 6,187 1,821,544
Interest expense 333,456 338,128 117,314 - 788,898
Income (loss) before taxes 2,730,841 (153,725) (1,465,498) 6,187 1,117,805
Total assets 60,933,876 17,661,428 9,303,572 - 87,898,876
Capital expenditures 121,064 60,172 92,759 - 273,995
QUARTER ENDED JUNE 2002:
External revenue:
Cigarettes $ 164,602,322 $ - $ - - $ 164,602,322
Confectionery 13,882,660 - - - 13,882,660
Health food - 8,065,582 - - 8,065,582
Tobacco, beverage & other 31,462,945 - 718,852 - 32,181,797
------------- ----------- ------------ ---------- -------------
Total external revenue 209,947,927 8,065,582 718,852 - 218,732,361
Depreciation and amortization 349,463 376,473 17,674 - 743,610
Operating income (loss) 2,753,246 32,925 (349,102) - 2,437,069
Interest expense 865,695 290,617 62,762 - 1,219,074
Income (loss) before taxes 1,968,442 (313,552) (278,226) - 1,376,664
Total assets 84,631,285 19,038,198 6,479,991 - 110,149,474
Capital expenditures 1,036,430 57,347 214,839 - 1,308,616
14
NINE MONTHS ENDED JUNE 2003:
External revenue:
Cigarettes $ 414,575,090 $ - $ - $ - $ 414,575,090
Confectionery 37,390,510 - - - 37,390,510
Health food - 24,713,813 - - 24,713,813
Tobacco, beverage & other 85,567,462 - 2,585,125 (153,091) 87,999,496
------------- ------------ ----------- ---------- -------------
Total external revenue 537,533,062 24,713,813 2,585,125 (153,091) 564,678,909
Depreciation and amortization 949,931 706,950 136,038 - 1,792,919
Operating income (loss) 5,225,925 453,590 (2,443,362) (46,685) 3,189,468
Interest expense 1,090,500 1,049,157 297,112 - 2,436,769
Income (loss) before taxes 4,462,954 (586,167) (2,710,109) (46,685) 1,119,993
Total assets 60,933,876 17,661,428 9,303,572 - 87,898,876
Capital expenditures 575,578 369,046 760,437 - 1,705,061
NINE MONTHS ENDED JUNE 2002:
External revenue:
Cigarettes $ 471,633,774 $ - $ - - $ 471,633,774
Confectionery 39,190,407 - - - 39,190,407
Health food - 23,668,614 - - 23,668,614
Tobacco, beverage & other 87,110,890 - 1,441,823 - 88,552,713
------------- ------------ ------------ ---------- -------------
Total external revenue 597,935,071 23,668,614 1,441,823 - 623,045,508
Depreciation and amortization 1,023,422 1,127,100 47,009 - 2,197,531
Operating income (loss) 5,536,919 406,128 (732,100) - 5,210,947
Interest expense 2,038,386 963,775 124,171 - 3,126,332
Income (loss) before taxes 3,564,287 (662,031) (679,368) - 2,222,888
Total assets 84,631,285 19,038,198 6,479,991 - 110,149,474
Capital expenditures 1,431,215 167,557 363,249 - 1,962,021
10. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In November 2002, the FASB's EITF reached a consensus on EITF Issue No. 00-
21, "Revenue Arrangements with Multiple Deliverables". EITF Issue No. 00-21
provides guidance for revenue arrangements that involve the delivery or
performance of multiple products or services where performance may occur at
different points or over different periods of time. EITF Issue No. 00-21 is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003 (i.e., the Company's fiscal 2004). The Company does not
believe that adoption of EITF Issue No. 00-21 will have a material impact on
its results from operations.
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 June 2003 and
will apply the provisions of FIN No. 46 prospectively to investments in
variable interest entities made after February 1, 2003.
15
In March 2003, the FASB added a project to address issues related to share-
based payments. In April 2003, the FASB decided that goods and services,
including employee stock options, received in exchange for stock-based
compensation should be recognized in the income statement as an expense, with
the cost measured at fair value. An exposure draft is expected by the end of
this year and a final statement could be effective in 2004.
In April 2003, the FASB issued Statement of Financial Accounting Standard No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" (SFAS No. 149). SFAS No. 149 amends FASB No. 133 for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. SFAS No. 149 also amends certain other
existing pronouncements. It will require contracts with comparable
characteristics to be accounted for similarly. In particular, SFAS No. 149
clarifies when a contract with an initial net investment meets the
characteristic of a derivative and clarifies when a derivative that contains
a financing component will require special reporting in the statement of cash
flows. SFAS No. 149 is effective for AMCON for contracts entered into or
modified after June 30, 2003. AMCON and its subsidiaries are evaluating the
impact of adopting the requirements of SFAS No. 149.
In April 2003, the FASB issued Statement of Financial Accounting Standard No.
150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" (SFAS No. 150). SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
an issuer to classify a financial instrument that is within its scope as a
liability (or asset in some circumstances). Many of those instruments were
previously classified as equity. SFAS No. 150 is effective for AMCON for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003 (Q4 for AMCON). It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of SFAS No. 150 and still
existing at the beginning of the interim period of adoption. Restatement is
not permitted. AMCON and its subsidiaries are evaluating the impact of
adopting the requirements of SFAS No. 150.
16
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
13,000 consumer products, including cigarettes and tobacco products, candy
and other confectionery, food service products, beverages, groceries, paper
products, health and beauty care products and 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 during the fiscal year,
management expects financial performance of the retail segment to continue to
improve. If financial performance of this segment improves consistent with
our expectations, it lays the foundation for future expansion in the number
of retail stores.
Our beverage segment consists of Hawaiian Natural Water Company, Inc.
("HNWC") and The Beverage Group Inc. ("TBG"). HNWC bottles natural spring
water from an exclusive source located on the Big Island of Hawaii. HNWC
currently markets its products primarily in the State of Hawaii, but is in
the process of expanding marketing to the mainland United States and certain
international markets. HNWC was acquired during the first quarter of fiscal
2002 and completed an upgrade of its bottling equipment in fiscal 2002 in
order to increase its production capacity. During Q2 2003, HNWC began
construction of an expanded warehouse and packaging building at its plant in
Hawaii which is expected to be completed late in Q4 2003. 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, TBG will focus on marketing and distribution
of HWNC bottled water products and other beverages including Hype Energy
Drink/TM/, Royal Kona Coffee/R/, Bottle Green/R/ drinks and Xterra/R/, a line
of sports beverages in the United States, Canada and Mexico.
17
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 71% of total revenue and 39%
of gross margin of the Company in the third 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 and
tobacco stores, which represent ADC's largest customer base, have increased
their share of the cigarette market. This trend has partially mitigated the
effect of lower overall cigarette consumption on the Company's sales.
However, over the past few years as prices for national cigarette brands have
increased, primarily to cover payments to states in accordance with the
Master Settlement Agreement signed in 1998, and state excise taxes have
increased to fund state budget deficits, sales of national cigarette brands
have decreased at a more rapid rate than for all cigarettes. For example, as
reported in Altria Inc.'s 2002 Annual Report, U.S. cigarette industry
shipment volume in 2002 declined 3.7%, while shipments from Philip Morris
declined 7.5%. At the same time, sales of value-priced cigarettes have
actually increased.
Generally, wholesale cigarette distributors align themselves as national
brand distributors or value-priced distributors. Since a national brand
distributor derives a significant amount of its gross profit from selling
national cigarette brands, it is generally a detriment to gross profit to
focus sales efforts on value-priced brands. The loss of one key customer
that was acquired and several smaller customers due to competitive pricing
strategies, combined with ADC's alignment as primarily a national brand
distributor has resulted in a higher rate of decline in cigarette carton
sales (11.2%) than the national average, when compared to the prior year.
Changes in manufacturers' cigarette pricing over the past decade and
increases in state excise taxes over the past year have greatly affected the
market for value-priced, 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 value-priced, 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 entered into a new private label cigarette manufacturing
agreement with Philip Morris effective October 1, 2002. The new agreement
ends on December 31, 2004, and has two one-year renewal options. However,
given the current cigarette industry environment, terms of the new agreement
are not as favorable to the Company as the prior agreement, and, as a result,
the Company expects that gross margin related to private label cigarettes
will decrease by up to $1.4 million in fiscal 2003, as compared to fiscal
2002.
18
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 presently 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. In addition to marketing HNWC=s natural spring water
products, TBG has acquired exclusive licenses to market and distribute
several premium beverage products which will be marketed as a portfolio.
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 at least annually 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
(at least annually) 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 due to the
implementation of SFAS No. 142.
In March 2003, the FASB added a project to address issues related to share-
based payments. In April 2003, the FASB decided that goods and services,
including employee stock options, received in exchange for stock-based
compensation should be recognized in the income statement as an expense, with
the cost measured at fair value. An exposure draft is expected by the end of
this year and a final statement could be effective in 2004.
19
On April 30, 2003, the FASB issued Statement of Financial Accounting Standard
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" (SFAS No. 149). SFAS No. 149 amends FASB No. 133 for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. SFAS No. 149 also amends certain other
existing pronouncements. It will require contracts with comparable
characteristics to be accounted for similarly. In particular, SFAS No. 149
clarifies when a contract with an initial net investment meets the
characteristic of a derivative and clarifies when a derivative that contains
a financing component will require special reporting in the statement of cash
flows. SFAS No. 149 is effective for AMCON for contracts entered into or
modified after June 30, 2003. AMCON and its subsidiaries are evaluating the
impact of adopting the requirements of SFAS No. 149.
In April 2003, the FASB issued Statement of Financial Accounting Standard No.
150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" (SFAS No. 150). SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
an issuer to classify a financial instrument that is within its scope as a
liability (or asset in some circumstances). Many of those instruments were
previously classified as equity. SFAS No. 150 is effective for AMCON for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003 (Q4 for AMCON). It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of SFAS No. 150 and still
existing at the beginning of the interim period of adoption. Restatement is
not permitted. AMCON and its subsidiaries are evaluating the impact of
adopting the requirements of SFAS No. 150.
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. In addition to the critical accounting policies
previously discussed in the Company's 2002 Annual Report to Shareholders on
Form 10-K for the fiscal year ended September 27, 2002, the Company adopted
SFAS No. 142 in Q1 2003 and believes its accounting policy with respect to
goodwill and other identifiable intangible assets is a critical accounting
policy. The following is a summary of this critical accounting policy.
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 (at least annually) 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.
20
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 third quarters ended on June 27, 2003 and June 28, 2002. For
ease of discussion, the fiscal quarters are referred to herein as June 2003
and 2002, respectively or Q3 2003 and Q3 2002, respectively.
Comparison of the three and nine-month periods ended June 2003 and 2002
- -----------------------------------------------------------------------
SALES
Three Months
- ------------
Sales for Q3 2003 decreased 13.2% to $189.9 million, compared to $218.7
million in Q3 2002. Sales are reported net of costs associated with sales
incentives provided to retailers, totaling $1.9 million in both Q3 2003 and
Q3 2002, respectively. Sales changes by business segment are as follows:
Wholesale distribution $(29.3) million
Retail health food stores 0.2 million
Beverage 0.3 million
------
$(28.8) million
======
Sales from the wholesale distribution business decreased by $29.3 million
from Q3 2002 to Q3 2003. Of the total decrease, $29.2 million related to
cigarettes, with $16.9 million attributable to a decrease in cigarette prices
on Philip Morris and Brown & Williamson brands during Q3 2003. Although the
Philip Morris price reduction program was communicated as a temporary
reduction, Philip Morris has extended the program through September 2003 and
could extend it further. The Brown & Williamson price reduction program is
permanent. The remaining decrease in cigarette sales of $12.3 million was
the result of a 12.2% reduction in carton volume. See discussion above under
INDUSTRY SEGMENT OVERVIEWS for additional information regarding cigarette
sales trends. Sales of tobacco, confectionary and other products accounted
for the remainder of the decrease as sales of these products fell by $0.1
million over the prior year primarily due to the loss of a key customer,
however, we believe the Company is positioned to increase our customer base
in certain geographic regions and 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 Q3 2003 increased by $0.2
million, or 3.1%, when compared to Q3 2002, due primarily to improvements in
the Midwest retail stores. The Florida market continues to suffer from lower
tourist trade and general economic depression. Competition by national
chains who have stores in the same markets as our stores and an overall
softening of the natural food retail market over the past two years continue
to hamper sales growth in the retail health food segment.
21
Sales from the beverage segment during Q3 2003 increased by $0.3 million or
42.7% when compared to Q3 2002, due to increases in the customer base in
Hawaii and Japan. The marketing and distribution business, which was started
in Q1 2003, accounted for $0.1 million of the increase in sales. Management
continues to seek out new ways of increasing the customer base and is
currently establishing a nationwide broker network to get the beverage
products into distribution companies to sell to retail stores.
There were no material intersegment sales eliminated in consolidation for Q3
2003 or Q3 2002.
Nine Months
- -----------
Sales for the nine months ended June 2003 decreased 9.4% to $564.7 million,
compared to $623.1 million for the same period in the prior fiscal year.
Sales changes by business segment are as follows:
Wholesale distribution $ (60.3) million
Retail health food stores 1.0 million
Beverage 1.1 million
Intersegment eliminations (0.2) million
-------
$ (58.4) million
=======
Sales from the wholesale distribution business decreased by $60.3 million for
the nine months ended June 2003 as compared to the same period in the prior
year. Of the total decrease, $57.1 million was attributable to a decrease in
sales of cigarettes, with $25.7 million related to a decrease in cigarette
prices on Philip Morris and Brown & Williamson brands during the second and
third quarters of 2003. Although the Philip Morris price reduction program
was communicated as a temporary reduction, Philip Morris has extended the
program through September 2003 and could extend it further. The Brown &
Williamson price reduction program is permanent. The remaining decrease in
cigarette sales of $31.4 million resulted primarily from a 11.2% reduction in
carton volume. See discussion above under INDUSTRY SEGMENT OVERVIEWS for
additional information regarding cigarette sales trends. Sales of tobacco,
confectionary and other products accounted for the remainder of the decrease
as sales of these products decreased by $3.2 million or 3.0% from the prior
year due to loss of several key customers during the 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
and anticipate increases to our customer base in the fourth quarter as a
result of these efforts.
Sales from the retail health food segment increased by $1.0 million, or 4.4%,
when compared to the nine months ended June 2002 due primarily to the
improvements in the Midwest retail stores in which same store sales increased
by 9.5% over the prior year. The Florida market continues to suffer from
lower tourist trade and general economic depression.
22
The beverage segment accounted for $2.6 million in sales for the nine months
ended June 2003, compared to $ 1.5 million for the same period in 2002. The
water bottling operation was acquired during the latter part of Q1 2002. The
marketing and distribution business, which accounted for $0.2 million of the
sales, was started in Q1 2003.
There were $0.2 million of intersegment sales eliminated in consolidation for
the nine months ended June 2003, all of which related to beverage segment
sales to wholesale distribution. There were no intersegment sales for the
same period in 2002.
GROSS PROFIT
Three Months
- ------------
Gross profit decreased 0.2% to $16.0 million in Q3 2003 from $16.1 million in
Q3 2002. Gross profit as a percent of sales increased to 8.4% in Q3 2003
compared to 7.3% in Q3 2002. Gross profit by business segment is as follows
(dollars in millions):
Quarter ended
June
---------------- Incr
2003 2002 (Decr)
------ ------ -----
Wholesale distribution $ 12.3 $ 12.8 $(0.5)
Retail health food stores 3.4 3.2 0.2
Beverage segment 0.3 0.1 0.2
------ ------ -----
$ 16.0 $ 16.1 $(0.1)
====== ====== =====
Gross profit from our wholesale distribution business for Q3 2003 decreased
approximately $0.5 million as compared to Q3 2002. This is primarily due to
the absence of a cigarette price increase in Q3 2003 as compared to the same
period last year, which accounted for $1.0 million in gross profit, and a
decrease of $0.5 million in incentive payments received on our private label
cigarettes. These items were offset by a $1.9 million decrease in cost of
sales to account for a reduction in the LIFO reserve, as compared to Q3 2002.
The decrease in the LIFO reserve was primarily attributable to the cigarette
price decreases discussed in the SALES section above. Gross profit was
further impacted by a decrease in incentive allowances received primarily
from cigarette manufacturers on products other than private label cigarettes
of approximately $1.5 million (net of amounts paid to customers) which was
partially offset by an increase of $0.6 million in gross profit from sales of
other products.
Gross profit for the retail health food segment increased by $0.2 million
compared with Q3 2002. An increase in gross profit from increased sales
volume in Q3 2003 of $0.3 million was offset by a decrease of $0.1 million in
gross profit due to a larger charge to cost of sales to account for the
increase in the LIFO reserve in Q3 2003, as compared to Q3 2002.
23
Gross profit of $0.3 million was generated from the beverage segment in Q3
2003, compared to $0.1 million in Q3 2002. The increase was primarily due to
new sales generated in the segment from the formation of the marketing and
distribution business in Q1 2003.
There was no impact on gross profit from intersegment sales eliminated in
consolidation for Q3 2003 or Q3 2002.
Nine Months
- -----------
For the nine months ended June 2003, gross profit decreased 3.7% to $43.7
million from $45.4 million for the same period during the prior fiscal year.
Gross profit as a percent of sales increased to 7.7% for the nine month
period ended June 2003 compared to 7.3% for the nine month period ended June
2002. Gross profit by business segment is as follows (dollars in millions):
Nine months ended
June
----------------
2003 2002 Incr
(Decr)
------ ------ -----
Wholesale distribution $ 33.3 $ 35.4 $ (2.1)
Retail health food stores 9.9 9.8 0.1
Beverage segment 0.6 0.2 0.4
Intersegment elimination (0.1) - (0.1)
------ ------ -----
$ 43.7 $ 45.4 $ (1.7)
====== ====== =====
Gross profit from our wholesale distribution business for the nine months
ended June 2003 decreased approximately $2.1 million, as compared to the
prior year, primarily due to a decrease of $1.2 million in incentive payments
received on our private label cigarettes, the absence of a cigarette price
increase during the first nine months of fiscal 2003 which accounted for a
$1.5 million decrease in gross profit, and a decrease in incentive allowances
received primarily from cigarette manufacturers on products other than
private label cigarettes of approximately $1.9 million (net of amounts paid
to customers). The above decrease in gross profit was partially offset by a
$1.7 million decrease in cost of sales to account for the reduction in the
LIFO reserve, and a $0.8 million decrease related to sales of other products.
The decrease in the LIFO reserve was primarily attributable to the cigarette
price decreases discussed in the SALES section above.
Gross profit for the retail health food segment increased approximately $0.1
million compared with the nine months ended June 2002 due to increased sales.
Gross profit from the beverage segment increased by $0.4 million over the
same period in the prior year. The increase was due to a full nine months of
sales in the current year from the natural spring water bottling operation
compared to six months in the prior year, and new sales generated in the
segment from the formation of the marketing and distribution business in Q1
2003.
24
There was a $0.1 million decrease in gross profit from intersegment sales
eliminated in consolidation for the nine months ended June 2003, all of which
related to beverage segment sales to wholesale distribution. There were no
intersegment sales for the same period in 2002.
Gross profit as a percentage of sales for the three and nine months ended
June 2003 increased primarily due to the manufacturers' cigarette price
decrease discussed under SALES above. Our gross profit per cigarette carton
sold did not change materially after the price decrease. Therefore, since
total sales decreased, but gross profit remained constant, gross profit
expressed as a percentage of sales increased.
OPERATING EXPENSE
Total operating expense, which includes selling, general and administrative
expenses and depreciation and amortization, increased 4.3% or approximately
$0.6 million to $14.2 million in Q3 2003 compared to Q3 2002. Operating
expenses in the wholesale segment decreased by $0.6 million due to a
reduction in warehousing, delivery and administrative costs of approximately
$0.7 million. These reductions were offset by an increase of approximately
$0.1 million in selling expenses. Total operating expense in the retail
segment remained fairly constant compared to the same period in the prior
fiscal year. The beverage segment's operating expenses increased by
approximately $1.2 million primarily due to the formation of the marketing
and distribution business in Q1 2003.
For the nine month period ended June 2003, total operating expense increased
0.1% or approximately $0.3 million to $40.5 million compared to the same
period in the prior fiscal year. The wholesale distribution segment reduced
operating costs in its selling, warehousing and delivery areas by
approximately $1.8 million and the absence of goodwill amortization accounted
for a reduction of approximately $0.2 million. Administrative costs
increased by $0.1 million primarily due to increased professional fees and
insurance, as compared to the nine months ended June 2002.
Total operating expenses in our retail segment increased approximately $0.1
million for the nine months ended June 2003, compared to the same period in
the prior year. Operating costs increased by approximately $0.4 million
primarily due to additional labor and travel costs, but were offset by the
absence of tradename amortization of approximately $0.3 million. Our
beverage segment, which began in Q1 2002 with the acquisition of a natural
spring water bottling operation, incurred $3.0 million in operating expenses
for the nine months ended June 2003, an increase of approximately $2.1
million over the prior year, due primarily to $1.7 million of expenses
attributable to the marketing and distribution business which was formed late
in Q1 2003.
As a result of the above, income from operations for Q3 2003 decreased by
$0.7 million to $1.8 million, as compared to Q3 2002. Income from operations
for the nine months ended June 2003 decreased by $2.0 million to $3.2
million.
25
INTEREST EXPENSE
Interest expense for Q3 2003 decreased 35.3% to $0.8 million compared to Q3
2002. The decrease was primarily due to a reduction in average interest
rates of approximately 0.5% and a reduction in total average debt outstanding
of approximately $7.3 million in the wholesale segment.
Interest expense for the nine months ended June 2003 decreased by 22.1% to
$2.4 million compared to $3.1 million for the same period in the prior fiscal
year. The decrease was primarily due to a reduction in average interest
rates of approximately 0.6% and a reduction in total average debt outstanding
of approximately $3.4 million in the wholesale segment.
OTHER
Other income for Q3 2003 of approximately $0.1 million was generated
primarily from interest income on income tax refunds and dividends received
on investment securities. Other income of approximately $0.2 million for Q3
2002 was generated primarily from vendor debt forgiveness, interest income
and dividends received on investment securities.
Included in other income for the nine months ended June 2003 of approximately
$0.4 million is $0.1 million received from a settlement related to a former
distribution facility, $0.1 million from gains on sales of available-for-sale
securities and $0.1 million in interest income on income tax refunds, as well
as dividends on investment securities. Other income for the nine months
ended June 2002 was approximately $0.2 million and included approximately
$0.1 million of interest income and dividends received on investment
securities. Equity in loss of an unconsolidated affiliate of $0.1 million
represented our ownership interest in the loss of HNWC up to the date of
acquisition.
As a result of the above factors, net income (loss) for the three and nine
months ended June 2003 was $0.7 million and $0.7 million, respectively
compared to $0.8 million and $1.3 million for the three and nine months ended
June 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of June 2003, our liquidity was provided by cash on hand of approximately
$0.6 million and approximately $26.8 million available under a revolving
credit facility with a capacity of $55.0 million. During the nine months
ended June 2003, we generated approximately $13.2 million in cash through
operating activities primarily through reductions in accounts receivable and
inventory, resulting from the cigarette price decrease discussed in SALES.
Our working capital was approximately $23.0 million as of June 2003 compared
to approximately $27.0 million at September 2002. Our debt to equity ratio
decreased 20.0% to 2.95 at June 2003, compared to 3.69 at September 2002,
primarily due to a net decrease in our three revolving lines of credit of
approximately $9.9 million as inventory was reduced and cash was used to pay
down debt on the wholesale segment's revolving credit facility. Investing
activities required cash of approximately $1.5 million during the nine month
period ended June 2003 and primarily represents the purchases of fixed
assets. Financing activities utilized cash of approximately $11.2 million to
reduce amounts outstanding under the revolving credit facilities and
long-term debt.
26
The following table summarizes our outstanding contractual obligations and
commitments as of fiscal year end September 2002. Other than the paydown of
approximately $12.7 million on the wholesale segment's revolving credit
facility and $2.4 million in additional borrowings on the retail and HNWC
revolving credit facilities, there have been no significant changes to debt
or contractual obligations since September 2002. Changes applicable to other
commercial commitments are footnoted and described below. (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
Obligations 938 150 228 266 254 40 -
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 /1/ 967 967 837 - - - -
Purchase Obligations/2/ 1,000 1,000 - - - - -
--------- -------- -------- ------- ------- ------- ----------
$ 61,030 $ 61,030 $ 55,400 $ - $ - $ - $ -
========= ======== ======== ======= ======= ======= ==========
- ------------------
/1/ In April 2003, we were required to increase the letter of credit
issued to our property and casualty insurance carrier from $0.4 million to
$0.8 million as part of our loss control arrangement.
/2/ Represents capital expenditures associated with the warehouse
expansion and new equipment purchases for our water bottling operation in
Hawaii which is expected to be completed in Q4 2003.
ADC maintains 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 June 2003, the outstanding
balance on the Facility was $28.2 million. The Facility bears interest at a
variable rate equal to the bank's base rate, which was 4.00% at June 2003 or
LIBOR plus 2.50%, as selected by the Company. As discussed under
"Qualitative and Quantitative Disclosures about Market Risk", a notional
amount of $15.0 million is subject to interest rate swap agreements which
have the effect of converting this amount to fixed rates ranging between
4.38% and 4.87%. 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.
27
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 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. The Company was in compliance with
its debt covenants at June 2003.
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 June 2003.
As of June 2003, the outstanding balance under the Water Facility was $2.8
million. The Water Facility is guaranteed by the Company=s Chairman.
The Company has a $2.0 million credit facility with a bank collateralized by
inventories of the Retail segment (the "Retail Facility "). Borrowings under
the Retail Facility bear interest at the bank=s base rate plus 1.0%, which
equaled 6.75% at June 2003. As of June 2003, the outstanding balance under
the Retail Facility was $1.9 million.
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 June 2003, the outstanding
balance on the Real Estate Loan was approximately $6.6 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 $1.8 million as of June 2003.
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.
28
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 June 2003, 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 June 2003, the outstanding balance of the notes was
approximately $0.3 million.
In connection with the purchase of the Quincy distribution business and HNWC,
we assumed capital leases for office equipment, automobiles and warehouse
equipment. As of June 2003, the outstanding balances on the capital leases
totaled approximately $0.8 million.
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 was extended during March
2003 to expire in March 2004. In addition, AMCON has a letter of credit in
the amount of approximately $0.8 million that is required to be issued to our
workers compensation insurance carrier as part of our self-insured loss
control program.
We have entered into commitments for capital expenditures of approximately
$1.0 million related to expansion of the water bottling operation's warehouse
and new packaging equipment. We expect these expenditures to be completed in
Q4 2003. It is anticipated that the source of funds needed to complete these
expenditures will be provided by a combination of leasing and debt financing.
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.
RELATED PARTY TRANSACTIONS
During the three and nine months ended June 2003, we were charged $15,000 and
$45,000, respectively 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 directors for consulting services in connection with our retail health
food operations during the nine months ended June 2003. The amount paid for
consulting services during the three and nine months ended June 2003 was
$22,500 and $67,500, respectively, plus reimbursement of expenses.
29
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.
30
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to interest rate risk on its variable rate debt. At
June 2003, we had $17.9 million of variable rate debt outstanding (excluding
$15.0 million variable rate debt which is fixed through the swaps described
below), with maturities through May 2004. The interest rates on this debt
ranged from 3.49% to 6.75% at June 2003. 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 negotiated reinstatement of the LIBOR borrowing
option which became available in April 2003. 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 June 2003, the Company entered into two interest rate swap agreements with
a bank in order to mitigate the Company's exposure to interest rate risk on
this variable rate debt. Under the agreements, the Company agrees to
exchange, at specified intervals, fixed interest amounts for variable
interest amounts calculated by reference to agreed-upon notional principal
amounts of $10.0 million and $5.0 million. The interest rate swaps
effectively convert $15.0 million of variable-rate senior debt to fixed-rate
debt at rates of 4.87% and 4.38% on the $10.0 million and $5.0 million
notional amounts through the maturity of the swap agreements on June 2, 2006
and 2005, respectively. These interest rate swap agreements have been
designated as hedges and will be accounted for as such for financial
accounting purposes.
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.
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 June 2003
and 2002 we held 42,500 and 60,300 shares, respectively, of common stock of
CWCO valued at approximately $0.7 million and $0.7 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 $0.7 million at June 2003 and 2002,
respectively. We sold 7,500 shares of CWCO common stock in Q3 2003 and
realized a gain of $0.1 million on the sale.
31
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 the end of the period covered by 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 were no changes in the Company's internal controls over financial
reporting that occurred during the fiscal quarter covered by this report that
have materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
32
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
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)
33
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)
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)
34
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)
10.13 ISDA Master Agreement, dated as of May 12, 2003 between the Company
and LaSalle Bank National Association
10.14 Swap Transaction Confirmation ($10,000,000) dated as of May 23, 2003
between the Company and LaSalle Bank National Association.
10.15 Swap Transaction Confirmation ($5,000,000) dated as of May 23, 2003
between the Company and LaSalle Bank National Association
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)
31.1 Certification by William F. Wright, Chairman and Principal Executive
Officer, furnished pursuant to section 302 of the Sarbanes-Oxley Act.
31.2 Certification by Michael D James, Vice President and Chief Financial
Officer, furnished pursuant to section 302 of the Sarbanes-Oxley Act.
32.1 Certification by William F. Wright, Chairman and Principal Executive
Officer, furnished pursuant to section 906 of the Sarbanes-Oxley Act.
32.2 Certification by Michael D. James, Vice President and Chief Financial
Officer, furnished pursuant to section 906 of the Sarbanes-Oxley Act.
(b) REPORTS ON FORM 8-K:
The Company filed a report on Form 8-K dated May 12, 2003
reporting its earnings for the second quarter ended March 28, 2003
under Item 12, Results of Operations and Financial Condition.
Reference was made to a press release furnished therewith as
Exhibit 99.1
35
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: August 11, 2003 /s/ William F. Wright
----------------- -----------------------------
William F. Wright
Chairman of the Board and
Principal Executive Officer
Date: August 11, 2003 /s/ Michael D. James
----------------- -----------------------------
Michael D. James
Treasurer & CFO and
Principal Financial and
Accounting Officer