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 March 26, 2004
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 3,169,154 shares of its $.01 par value common stock
outstanding as of May 3, 2004.
Form 10-Q
2nd Quarter
INDEX
-------
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
--------------------------------------------
Condensed consolidated balance sheets at
March 2004 (unaudited) and September 2003 3
Condensed consolidated unaudited statements of
operations for the three and six month periods
ended March 2004 and 2003 4
Condensed consolidated unaudited statements of
cash flows for the three and six month periods
ended March 2004 and 2003 5
Notes to unaudited condensed consolidated
financial statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 26
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Balance Sheets
March 2004 and September 2003
- ----------------------------------------------------------------------------------------
(Unaudited)
March 2004 September 2003
------------ --------------
ASSETS
Current assets:
Cash $ 445,546 $ 668,073
Available-for-sale investments 92,250 512,694
Accounts receivable, less allowance for doubtful
accounts of $0.9 million and $0.8 million,
respectively 25,982,129 28,170,129
Inventories 28,955,831 32,489,051
Income tax receivable 944,622 -
Deferred income taxes 1,568,476 1,568,476
Other 623,733 581,950
------------ ------------
Total current assets 58,612,587 63,990,373
Fixed assets, net 16,757,226 16,951,615
Goodwill 6,091,397 6,091,397
Other intangible assets 11,535,389 11,420,542
Other assets 1,035,629 1,045,503
------------ ------------
$ 94,032,228 $ 99,499,430
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,888,996 $ 15,092,091
Accrued expenses 3,952,951 3,715,370
Accrued wages, salaries, bonuses 933,145 1,462,678
Income tax payable - 540,414
Current liabilities of discontinued operations 122,976 117,612
Current portion of long-term debt 10,472,601 15,348,167
Current portion of subordinated debt 7,692,666 7,762,666
------------ ------------
Total current liabilities 40,063,335 44,038,998
------------ ------------
Deferred income taxes 1,223,853 1,367,367
Non-current liabilities of discontinued operations - 161,025
Long-term debt, less current portion 35,479,553 35,654,423
Subordinated debt, less current portion 976,220 976,220
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, 3,169,154 and 3,168,954
issued, respectively 31,692 31,690
Additional paid-in capital 5,998,497 5,997,977
Accumulated other comprehensive income,
net of tax of ($0.01) million and $0.1 million,
respectively (14,324) 220,732
Retained earnings 10,273,402 11,050,998
------------ ------------
Total shareholders' equity 16,289,267 17,301,397
------------ ------------
$ 94,032,228 $ 99,499,430
============ ============
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 six month periods ended March 2004 and 2003
(Unaudited)
- ---------------------------------------------------------------------------------------------------------
For the three months For the six months
ended March ended March
----------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Sales (including excise taxes of
$45.6 million and $38.9 million, and
$90.9 million and $80.6 million,
respectively) $ 193,417,295 $ 177,008,943 $ 386,454,415 $ 374,729,829
Cost of sales 179,813,134 163,177,678 357,785,991 347,054,689
------------- ------------- ------------- -------------
Gross profit 13,604,161 13,831,265 28,668,424 27,675,140
------------- ------------- ------------- -------------
Selling, general and administrative
expenses 14,012,107 12,999,003 27,382,204 25,174,706
Depreciation and amortization 567,332 576,164 1,128,450 1,132,511
------------- ------------- ------------- -------------
14,579,439 13,575,167 28,510,654 26,307,217
------------- ------------- ------------- -------------
Income (loss) from operations (975,278) 256,098 157,770 1,367,923
------------- ------------- ------------- -------------
Other expense (income):
Interest expense 824,233 804,219 1,603,141 1,647,873
Other (16,762) (110,335) (446,866) (282,137)
------------- ------------- ------------- -------------
807,471 693,884 1,156,275 1,365,736
------------- ------------- ------------- -------------
Income (loss) before income taxes (1,782,749) (437,786) (998,505) 2,187
Income tax expense (benefit) (681,000) (164,000) (411,000) 1,000
------------- ------------- ------------- -------------
Net income (loss) $ (1,101,749) $ (273,786) $ (587,505) $ 1,187
============= ============= ============= =============
Earnings (loss) per share:
Basic $ (0.35) $ (0.09) $ (0.19) $ 0.00
============= ============= ============= =============
Diluted $ (0.35) $ (0.09) $ (0.19) $ 0.00
============= ============= ============= =============
Dividends per share $ 0.03 $ 0.03 $ 0.06 $ 0.06
============= ============= ============= =============
Weighted average shares outstanding:
Basic 3,169,154 3,168,961 3,169,071 3,163,361
Diluted 3,169,154 3,168,961 3,169,071 3,227,194
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 six month periods ended March 2004 and 2003
(Unaudited)
- ---------------------------------------------------------------------------------
2004 2003
------------ ------------
Net cash flows from operating activities $ 5,449,122 $ 12,196,844
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (954,119) (1,431,066)
Proceeds from sales of fixed assets 55,700 22,925
Proceeds from sale of available-for-sale
securities 457,053 112,926
------------ ------------
Net cash flows from investing activities (441,366) (1,295,215)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on bank credit agreement (4,838,883) (10,028,872)
Payments on long-term debt and
subordinated debt (296,879) (187,094)
Dividends paid (95,044) (191,923)
Proceeds from short term debt - 7,998
Proceeds from exercise of stock options 523 20,489
Retirement of common stock - (6)
----------- ------------
Net cash flows from financing activities (5,230,283) (10,379,408)
------------ ------------
Net increase (decrease) in cash (222,527) 522,221
Cash, beginning of period 668,073 130,091
------------ ------------
Cash, end of period $ 445,546 $ 652,312
============ ============
SUPPLEMENTAL NONCASH INFORMATION:
Cash paid during the period for interest $ 1,574,921 $ 1,712,957
Cash paid during the period for income taxes 1,131,242 160,531
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
March 2004 and 2003
- ----------------------------------------------------------------------------
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. Certain information and
footnote disclosures normally included in our annual financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted. 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 26, 2003,
which are included in the Company's Annual Report to Shareholders filed with
Form 10-K ("2003 Annual Report"). Results for the interim period are not
necessarily indicative of results to be expected for the entire year.
AMCON's fiscal second quarters ended on March 26, 2004 and March 28, 2003.
For convenience, the fiscal second quarters have been indicated as March 2004
and 2003, respectively. Each fiscal quarter was comprised of 13 weeks.
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 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.
The following table provides required pro forma information regarding net
income and earnings per share assuming the Company recognized expense for its
stock options using the fair value method rather than the intrinsic value
method. The fair value of options was estimated at the date of the grant
using the Black-Scholes option pricing model. See Note 9 to the unaudited
condensed consolidated financial statements for discussion of the proposed
accounting standard related to the treatment of stock options. Pro forma net
income and earnings per share are as follows:
6
For the three months For the six months
ended March ended March
------------------------- ------------------------
2004 2003 2004 2003
----------- ----------- ----------- ----------
Net earnings
- ------------
Net income (loss) as reported $(1,101,749) $ (273,786) $ (587,505) $ 1,187
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of
related tax effects (15,303) (15,512) (30,606) (31,024)
----------- ----------- ----------- ----------
Pro forma net loss $(1,117,052) $ (289,298) $ (618,111) $ (29,837)
=========== =========== =========== ==========
Earnings (loss) per share
- -------------------------
As reported: Basic $ (0.35) $ (0.09) $ (0.19) $ 0.00
=========== =========== =========== ===========
Diluted $ (0.35) $ (0.09) $ (0.19) $ 0.00
=========== =========== =========== ===========
Pro forma: Basic $ (0.35) $ (0.09) $ (0.20) $ (0.01)
=========== =========== =========== ===========
Diluted $ (0.35) $ (0.09) $ (0.20) $ (0.01)
=========== =========== =========== ===========
2. INVENTORIES:
Inventories consisted of the following at March 2004 and September 2003:
March September
2004 2003
------------ ------------
Finished goods $ 32,210,537 $ 35,877,552
Raw materials 653,015 310,242
LIFO reserve (3,907,721) (3,698,743)
------------ ------------
$ 28,955,831 $ 32,489,051
============ ============
The wholesale distribution and retail health food segment inventories consist
of finished products purchased in bulk quantities to be redistributed to the
Company's customers or sold at retail. The wholesale distribution
operation's inventories are stated at the lower of cost (last-in, first-out
or "LIFO" method) or market. The retail health food operation utilizes 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. The
beverage operation's finished goods inventory includes materials, labor and
manufacturing overhead costs. Raw materials inventory consists of pre-forms
used to make bottles, caps, labels and various packaging and shipping
7
materials. The LIFO reserve at March 2004 and September 2003 represents the
amount by which LIFO inventories were less than the amount of such
inventories valued on a first-in, first-out basis, respectively. An
allowance for obsolete inventory is maintained to reflect the expected
unsaleable or unrefundable inventory based on evaluation of slow moving
products.
3. OTHER INTANGIBLE ASSETS:
Other intangible assets at March 2004 and September 2003 consisted of the
following:
March September
2004 2003
------------ ------------
Trademarks and tradenames $ 11,201,609 $ 10,928,793
Covenants not to compete (less accumulated
amortization of $784,916 and $724,625) 135,310 195,600
Favorable leases (less accumulated
amortization of $310,135 and $280,273) 175,865 205,727
Debt issue costs (less accumulated
amortization of $467,159 and $399,347) 22,605 90,422
------------ ------------
$ 11,535,389 $ 11,420,542
============ ============
Trademarks and tradenames are considered to have indefinite useful lives and,
therefore, no amortization is recorded on these assets. In Q1 2004, the
beverage segment purchased the tradename Bahia/R/ for $0.3 million in
connection with the purchase of inventory and other assets from Bahia
Company. Amortization expense for the intangible assets that are considered
to have finite lives was $78,141 and $102,515 and $157,963 and $203,713 for
the three and six months ended March 2004 and 2003, respectively.
Annual amortization expense related to the amortizing intangible assets held
at March 2004 for the current year and each of the next four years is
estimated to be as follows:
Fiscal Fiscal Fiscal Fiscal Fiscal
2004 2005 2006 2007 2008
--------- --------- -------- -------- --------
Covenants not to compete $ 119,000 $ 78,000 $ - $ - $ -
Favorable leases 60,000 40,000 40,000 40,000 27,000
Debt issue costs 90,000 - - - -
--------- --------- -------- -------- --------
$ 269,000 $ 118,000 $ 40,000 $ 40,000 $ 27,000
========= ========= ======== ======== ========
4. DIVIDENDS:
In February 2004, the Company declared a cash dividend of $0.03 per share
payable on March 19, 2004 to shareholders of record as of February 27, 2004.
8
5. 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 March 2004 and 2003,
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 188,640 with an average exercise
price of $6.63 for the three and six months ended March 2004, and 179,340
with an average exercise price of $7.41 for the three months ended March 2003
and 144,340 with an average exercise price of $8.05 for the six month period
ended March 2003.
For the three-month period ended March
-------------------------------------------------------
2004 2003
------------------------- -------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
1. Weighted average common
shares outstanding 3,169,154 3,169,154 3,168,961 3,168,961
2. Weighted average of net
additional shares outstanding
assuming dilutive options and
warrants exercised and proceeds
used to purchase treasury stock - 44,974 - 53,787
3. Exclusion of the weighted average
of net additional shares
outstanding assuming dilutive
options and warrants exercised
and proceeds used to purchase
treasury stock as their
inclusion would be anti-dilutive - (44,974) - (53,787)
----------- ----------- ----------- -----------
4. Weighted average number of
shares outstanding 3,169,154 3,169,154 3,168,961 3,168,961
=========== =========== =========== ===========
5. Net loss $(1,101,749) $(1,101,749) $ (273,786) $ (273,786)
=========== =========== =========== ===========
6. Net loss per share $ (0.35) $ (0.35) $ (0.09) $ (0.09)
=========== =========== =========== ===========
9
For the six-month period ended March
-------------------------------------------------------
2004 2003
------------------------- -------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
1. Weighted average common
shares outstanding 3,169,071 3,169,071 3,163,361 3,163,361
2. Weighted average of net
additional shares outstanding
assuming dilutive options and
warrants exercised and proceeds
used to purchase treasury stock - 44,631 - 63,833
3. Exclusion of the weighted average
of net additional shares
outstanding assuming dilutive
options and warrants exercised
and proceeds used to purchase
treasury stock as their
inclusion would be anti-dilutive - (44,631) - -
----------- ----------- ----------- -----------
4. Weighted average number of
shares outstanding 3,169,071 3,169,071 3,163,361 3,227,194
=========== =========== =========== ===========
5. Net income (loss) $ (587,505) $ (587,505) $ 1,187 $ 1,187
=========== =========== =========== ===========
6. Net earnings (loss) per share $ (0.19) $ (0.19) $ 0.00 $ 0.00
=========== =========== =========== ===========
10
6. 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 six months
ended March ended March
------------------------- ------------------------
2004 2003 2004 2003
----------- ----------- ----------- ----------
Net income (loss) $(1,101,749) $ (273,786) $ (587,505) $ 1,187
Other comprehensive income (loss):
Unrealized holding gains (loss) from
investments arising during the
period, net of income tax expense
(benefit) of $(2,000) and $9,000
for the three months ended March
2004 and 2003 and $3,000 and
$65,000 for the six months ended
March 2004 and 2003, respectively (3,255) 14,389 4,216 106,515
Reclassification adjustments for
gains included in net income
in prior periods, net of income
tax expense of $0 and $36,000 for
the three months ended March 2004
and 2003 and $145,000 and $36,000
for the six months ended March 2004
and 2003, respectively - (58,374) (236,741) (58,374)
Interest rate swap valuation
adjustment, net of income tax
benefit of $33,000 and $1,000
for the three and six months
ended March 2004 (53,233) - (2,531) -
----------- ----------- ----------- ----------
Comprehensive income (loss) $(1,158,237) $ (317,771) $ (822,561) $ 49,328
=========== =========== =========== ==========
7. DEBT
The Company maintains a revolving credit facility (the "Facility") with
LaSalle Bank which allows it to borrow up to $55.0 million at any time,
subject to eligible accounts receivable and inventory requirements. As of
March 2004, the outstanding balance on the Facility was $33.1 million. The
Facility bears interest at the bank's base rate, which was 4.00% at March
2004, or LIBOR plus 2.50%, as selected by the Company. 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.
11
The Company hedges its variable rate interest risk on a portion of its
borrowings under the Facility by use of interest rate swap agreements. The
variable interest payable on notional amounts 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%. The interest rate swaps are
accounted for as cash flow hedges and resulted in no recognition of
ineffectiveness in the unaudited condensed consolidated financials statements
as the interest rate swaps' provisions matched the applicable provisions of
the hedged debt.
8. 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. The segments are evaluated on revenue, income
(loss) from operations and income (loss) before taxes.
Wholesale
Distribution Retail Beverage Other /2/ Consolidated
------------- ----------- ----------- ---------- -------------
QUARTER ENDED MARCH 2004:
External revenue:
Cigarettes $ 141,409,400 $ - $ - $ - $ 141,409,400
Confectionery 12,529,455 - - - 12,529,455
Health food - 8,654,830 - - 8,654,830
Tobacco, beverage & other 30,072,013 - 843,678 (92,081) 30,823,610
------------- ----------- ----------- ---------- -------------
Total external revenue 184,010,868 8,654,830 843,678 (92,081) 193,417,295
Depreciation and amortization /1/ 321,067 215,484 58,793 - 595,344
Operating income (loss) 503,582 222,376 (1,667,282) (33,954) (975,278)
Interest expense 332,733 283,643 207,857 - 824,233
Income (loss) before taxes 179,177 (52,952) (1,875,020) (33,954) (1,782,749)
Total assets 63,938,403 16,903,524 13,024,118 166,183 94,032,228
Capital expenditures, net 147,966 133,144 250,886 - 531,996
QUARTER ENDED MARCH 2003:
External revenue:
Cigarettes $ 129,966,273 $ - $ - $ - $ 129,966,273
Confectionery 11,377,683 - - - 11,377,683
Health food - 8,702,457 - - 8,702,457
Tobacco, beverage & other 26,113,218 - 1,002,312 (153,000) 26,962,530
------------- ----------- ----------- ---------- -------------
Total external revenue 167,457,174 8,702,457 1,002,312 (153,000) 177,008,943
Depreciation and amortization /1/ 318,422 240,465 45,969 - 604,856
Operating income (loss) 668,735 312,923 (672,688) (52,872) 256,098
Interest expense 353,077 352,824 98,318 - 804,219
Income (loss) before taxes 424,817 (47,232) (762,499) (52,872) (437,786)
Total assets 63,227,691 17,982,455 8,392,271 - 89,602,417
Capital expenditures, net 194,362 167,997 562,073 - 924,432
12
SIX MONTHS ENDED MARCH 2004:
External revenue:
Cigarettes $ 282,644,067 $ - $ - $ - $ 282,644,067
Confectionery 24,915,812 - - - 24,915,812
Health food - 16,823,830 - - 16,823,830
Tobacco, beverage & other 60,172,836 - 2,036,138 (138,268) 62,070,706
------------- ------------ ----------- ---------- -------------
Total external revenue 367,732,715 16,823,830 2,036,138 (138,268) 386,454,415
Depreciation and amortization /1/ 638,190 435,480 110,804 - 1,184,474
Operating income (loss) 2,583,303 500,250 (2,852,123) (73,660) 157,770
Interest expense 627,482 582,324 393,335 - 1,603,141
Income (loss) before taxes 2,386,319 (65,843) (3,245,321) (73,660) (998,505)
Total assets 63,938,403 16,903,524 13,024,118 166,183 94,032,228
Capital expenditures, net 242,060 243,712 468,347 - 954,119
SIX MONTHS ENDED MARCH 2003:
External revenue:
Cigarettes $ 279,128,620 $ - $ - $ - $ 279,128,620
Confectionery 23,240,052 - - - 23,240,052
Health food - 16,398,313 - - 16,398,313
Tobacco, beverage & other 54,556,599 - 1,559,245 (153,000) 55,962,844
------------- ------------ ----------- ---------- -------------
Total external revenue 356,925,271 16,398,313 1,559,245 (153,000) 374,729,829
Depreciation and amortization /1/ 637,954 462,267 89,673 - 1,189,894
Operating income (loss) 2,237,760 276,644 (1,093,609) (52,872) 1,367,923
Interest expense 757,046 711,029 179,798 - 1,647,873
Income (loss) before taxes 1,732,112 (432,442) (1,244,611) (52,872) 2,187
Total assets 63,227,691 17,982,455 8,392,271 - 89,602,417
Capital expenditures, net 454,514 308,874 667,678 - 1,431,066
/1/ Includes depreciation reported in cost of sales for the Beverage segment.
/2/ Includes charges to operations incurred by discontinued operations and
intercompany eliminations. Intersegment sales have been recorded at amounts
approximating market.
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN
46"), to address perceived weaknesses in accounting for entities commonly
known as special-purpose or off-balance-sheet. In addition to numerous FASB
Staff Positions written to clarify and improve the application of FIN 46, the
FASB recently announced a deferral for certain entities, and an amendment to
FIN 46 entitled FASB Interpretation No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46R"). Since the Company
does not have any variable interest entities, this revision had no impact on
the Company.
In March 2004, the FASB issued an Exposure Draft, "Share-Based Payment - an
amendment of Statements No. 123 and 95," that addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity
instruments. The proposed Statement would eliminate the ability to account
for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees." If finalized as drafted, the
13
Company would be required to record compensation expense based on the fair
value of the awards granted to employees for stock options issued after
October 1, 2005 (fiscal 2006 for the Company). Fair value will be measured
using an acceptable fair value based pricing model. The comment period for
the exposure draft ends on June 30, 2004. We are currently assessing the
impact that this standard will have on the Company.
In January 2004, the FASB issued FASB Staff Position 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003" ("FSP 106-1"), which permits a
sponsor of a post-retirement health care plan that provides a prescription
drug benefit to make a one-time election to defer accounting for the effects
of the Act. Regardless of whether a sponsor elects that deferral, FSP 106-1
requires certain disclosures pending further consideration of the underlying
accounting issues. The Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law on December 8, 2003
and introduced a prescription drug benefit under Medicare (Medicare Part D)
and a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D.
The Company does not provide post-retirement health care benefits for its
retirees, therefore, FSP 106-1 has no impact on the Company.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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. Forward-looking statements are not guarantees of future performance
or results. They involve risks, uncertainties and assumptions. 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,
- changes in promotional and incentive programs offered by cigarette
manufacturers,
- the demand for the Company's products,
- new business ventures,
- domestic regulatory risks,
- competition,
- other risks over which the Company has little or no control, and
- any other factors not identified herein could also have such an effect.
Changes in these 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. Any forward looking statement contained
herein is made as of the date of this document. The Company undertakes no
obligation to publicly update or correct any of these forward looking
statements in the future to reflect changed assumptions, the occurrence of
material events or changes in future operating results, financial conditions
or business over time.
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 Company's critical accounting policies are
discussed in the Company's 2003 Annual Report to Shareholders on Form 10-K
for the fiscal year ended September 26, 2003. There have been no significant
changes with respect to these policies during the Company's second quarter of
fiscal 2004.
15
COMPANY OVERVIEW - SECOND FISCAL QUARTER 2004
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 and a non-alcoholic beverage business that includes a natural
spring water bottling operation in the State of Hawaii and a marketing and
distribution operation which is focused on selling the Company's Hawaiian
natural spring water and other specialty beverages. 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.
During the second quarter of fiscal 2004, the Company:
- experienced a 9.3% increase in sales compared to the second quarter of
2003 primarily due to increases in the customer base in the wholesale
segment.
- incurred a $1.9 million loss before income taxes in our beverage segment
as the beverage marketing and distribution division, which was formed in
fiscal 2003, continued to focus its efforts on developing a customer base in
which to sell the Company's specialty beverage products.
- recognized a diluted loss per share of $0.35 compared to a loss of $0.19
per diluted share in the same period of the prior year.
- declared a $0.03 per share cash dividend.
INDUSTRY SEGMENT OVERVIEWS
Wholesale Distribution Segment
- ------------------------------
The wholesale distribution of cigarettes has been significantly affected
during the past year due to changing promotional programs implemented by the
major cigarette manufacturers. Reductions in these promotional programs have
caused wholesalers to react by increasing cigarette prices to retailers.
This occurred for the first time at the beginning of fiscal 2004 without a
corresponding price increase from manufacturers and occurred again at the
beginning of the second quarter of fiscal 2004. Due to timing of recognition
of manufacturer program incentive payments, the price increase in the first
quarter provided the Company with a $0.8 million non-recurring boost in gross
profit during the first six months of fiscal 2004. Certain manufacturers
changed their promotional programs again for the second quarter of fiscal
2004; therefore, it is difficult to predict how these changes will impact the
Company and the industry in the future.
As a result of one of the manufacturer programs changes discussed above,
certain small wholesalers filed suit against Philip Morris and RJ Reynolds
alleging unfair trade practices. In addition, due to the heightened level of
competition in the marketplace from both a wholesale and retail perspective,
a number of wholesalers and retailers have sought bankruptcy protection, been
acquired or are on the market to be sold. Therefore, we expect that
competition and pressure on profit margins will continue to affect both large
and small distributors and demand that distributors consolidate in order to
become more efficient.
16
Retail Health Food Segment
- --------------------------
Although this segment has not achieved profitability, realignment of top
management and development of a new marketing department was completed in
fiscal 2003, and operating results improved significantly in our Midwest
stores in fiscal year 2003. Further progress was made in the first two
quarters of 2004 as the segment incurred a minimal loss. The implementation
of a new central point-of-sale inventory control system was also completed in
the first quarter of fiscal 2004. Management is confident that financial
performance will continue to improve and, as a result, one new store was
opened in the Midwest in April 2004, and one or two new stores are planned in
fiscal 2005.
Beverage Segment
- ----------------
Construction of an expanded warehouse and packaging building at our plant in
Hawaii, which began in the second quarter of 2003, was completed in the first
quarter of fiscal 2004. Our water bottling operation in Hawaii has
historically operated at a loss, which management expects to eliminate during
the present fiscal year as the Company expands its markets and takes
advantage of its new operations. The beverage marketing and distribution
business continued to incur significant losses during the second quarter as
significant expenditures were made for product development, distribution
network development and marketing efforts to promote our portfolio of
specialty beverages. The resulting sales were less than expected due, in
part, to grocery strikes on the West Coast and longer than anticipated time
frame for market penetration of our new beverage products. We continue to
expect incremental increases in sales throughout the remainder of the fiscal
year which will allow us to adjust our on-going operating expenses to our
revenue.
17
RESULTS OF OPERATIONS
AMCON's fiscal second quarters ended on March 26, 2004 and March 28, 2003.
For ease of discussion, the fiscal quarters are referred to herein as March
2004 and 2003, respectively or Q2 2004 and Q2 2003, respectively.
Comparison of the three and six month periods ended March 2004 and 2003
- -----------------------------------------------------------------------
SALES
Sales for Q2 2004 increased 9.3% to $193.4 million, compared to $177.0
million in Q2 2003. Sales are reported net of costs associated with sales
incentives provided to retailers, totaling $3.4 million and $1.8 million, for
Q2 2004 and Q2 2003, respectively. The change in sales by business segment
from Q2 2003 to Q2 2004 is as follows:
Incr
(Decr)
------
Wholesale distribution $ 16.6 million
Retail health food stores 0.0 million
Beverage (0.2) million
Intersegment eliminations 0.0 million
------
$ 16.4 million
======
Sales from the wholesale distribution business increased by $16.6 million
from Q2 2003 to Q2 2004. Cigarette sales increased by $11.4 million compared
to Q2 2003, and sales of tobacco, confectionary and other products increased
by $5.2 million during the period. Of the increase in sales of cigarettes,
$1.5 million related to price increases implemented by the Company in
response to the elimination of vendor program incentives, and $16.3 million
related to increased sales from a 11.4% increase in carton volume, primarily
from sales to new customers through expansion of our market area. These
increases were offset by a $6.4 million decrease in sales related to a
decrease in cigarette prices on Philip Morris and Brown & Williamson brands
which began in Q2 2003. Although the Philip Morris price reduction program
was communicated as a temporary reduction, Philip Morris has extended the
program through June 2004 and could extend it further. Brown & Williamson
stated that their price reduction program is permanent.
The $5.2 million increase in sales of tobacco, confectionary and other
products was attributable primarily to new business obtained through
expansion of our market area. 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 Q2 2004 were flat when
compared to Q2 2003. Continued strong growth in the grocery categories,
which resulted from stronger demand in low-carbohydrate products and
increases in advertising, offset decreases in other categories.
18
The beverage segment sales decreased $0.2 million from Q2 2003 to Q2 2004.
Of the decrease, $0.1 million related to sales from a home and office
delivery division in Hawaii that was disposed of in Q4 2003, and therefore
did not generate any sales during Q2 2004. The remaining decrease in sales
of $0.1 million was primarily due to reductions in selling prices of our
Hawaiian Springs natural spring water due to competitive pressures.
Sales for the six months ended March 2004 increased to $386.4 million,
compared to $374.7 million for the same period in the prior fiscal year.
Sales changes by business segment are as follows:
Incr
(Decr)
------
Wholesale distribution $ 10.8 million
Retail health food stores 0.4 million
Beverage 0.5 million
Intersegment eliminations 0.0 million
------
$ 11.7 million
======
Sales from the wholesale distribution business increased by $10.8 million for
the six months ended March 2004 as compared to the same period in the prior
year. Cigarette sales increased by $3.5 million compared to the first six
months of fiscal 2003, and sales of tobacco, confectionary and other products
increased by $7.3 million during the period. Of the increase in sales of
cigarettes, $2.5 million related to price increases implemented by the
Company in response to the elimination of vendor program incentives, and
$23.7 million in increased sales related to a 6.6% increase in carton volume,
primarily to new customers through expansion of our market area. These
increases were offset by a $22.7 million decrease in cigarette sales related
to a decrease in prices on Philip Morris and Brown & Williamson brands which
began in Q2 2003.
The $7.3 million increase in sales of tobacco, confectionary and other
products was attributable primarily to new business obtained through
expansion of our market area.
Sales from the retail health food segment increased by $0.4 million, or 2.6%,
when compared to the six months ended March 2003 due primarily to strong
growth in the grocery categories which resulted from stronger demand for low-
carbohydrate products, resetting the floor plans of stores in fiscal 2003 and
increases in advertising.
The beverage segment accounted for $2.0 million in sales for the six months
ended March 2004, compared to $1.5 million for the same period in 2003. The
improvement is primarily due to increases in case volume of Hawaiian Natural
spring water, which was possible due to completion of plant construction and
a change to a new distributor in the Hawaii market in October 2003 and sales
of other premium beverage products which were developed or licensed for sale
late in fiscal 2003.
Intersegment sales for the six months ended March 2004 were flat compared to
the six months ended March 2003. Intersegment sales were eliminated in
consolidation, all of which related to beverage segment sales to wholesale
distribution.
19
GROSS PROFIT
Gross profit decreased 1.6% to $13.6 million in Q2 2004 from $13.8 million in
Q2 2003. Gross profit as a percent of sales decreased to 7.0% in Q2 2004
compared to 7.8% in Q2 2003. Gross profit by business segment is as follows:
(dollars in millions)
Quarter ended
March
---------------- Incr
2004 2003 (Decr)
------ ------ -----
Wholesale distribution $ 10.2 $ 10.2 $ 0.0
Retail health food stores 3.4 3.4 0.0
Beverage 0.0 0.2 (0.2)
------ ------ -----
$ 13.6 $ 13.8 $(0.2)
====== ====== =====
Gross profit from our wholesale distribution business for Q2 2004 remained
flat compared to Q2 2003. Gross profit increased by $1.5 million in Q2 2004,
compared to Q2 2003, from cigarette price increases implemented during Q1 and
Q2 2004 in response to the elimination of vendor program incentive payments
that the Company has historically received. In addition, gross profit
increased in Q2 2004 by $0.6 million due to increased sales of all products
to new customers and by $0.2 million due to a smaller charge to cost of sales
to account for the LIFO reserve, as compared to Q2 2003. These increases in
gross profit were almost entirely offset by decreases in incentive allowances
received primarily from cigarette manufacturers of $2.3 million.
Gross profit for the retail health food segment was consistent with Q2 2003
levels.
Gross profit for the beverage segment was $0.0 million in Q2 2004 compared to
$0.2 million in Q2 2003. The decrease is primarily the result of the lack of
sales sufficient to cover related inventory carrying costs that are charged
to cost of sales as incurred and reductions in selling prices of our Hawaiian
Springs natural spring water due to competitive pressures.
Gross profit as a percentage of sales decreased primarily due to a reduction
in manufacturer incentive payments in the wholesale segment, the disposal of
slow moving inventory that was replaced with new product selections in the
retail businesses and significant inventory carrying costs in the beverage
business.
20
For the six months ended March 2004, gross profit increased 3.6% to $28.7
million from $27.7 million for the same period during the prior fiscal year.
Gross profit as a percent of sales remained at 7.4% for the six month period
ended March 2004 as compared for the six month period ended March 2003.
Gross profit by business segment is as follows (dollars in millions):
Six months ended
March
---------------- Incr
2004 2003 (Decr)
------ ------ -----
Wholesale distribution $ 21.7 $ 20.9 $ 0.8
Retail health food stores 6.8 6.6 0.2
Beverage segment 0.2 0.3 (0.1)
Intersegment elimination (0.0) (0.1) 0.1
------ ------ -----
$ 28.7 $ 27.7 $ 1.0
====== ====== =====
Gross profit from our wholesale distribution business for the six months
ended March 2003 increased approximately $0.8 million, as compared to the
prior year. Gross profit of $2.2 million was generated from cigarette price
increases during Q1 and Q2 2004 in response to the elimination of vendor
program incentive payments that the Company historically received. Because
vendor programs incentive payments are generally received and recognized by
the Company in the quarter following the period in which the related
cigarette sales were made, gross profit during the six months ended March
2004 includes both the normal program incentive payments relating to Q4 2003
but received during Q1 2004 of approximately $0.8 million, and the amount
earned from the price increases that were implemented to replace vendor
program incentive payments. This increase in gross profit was partially
offset by a decrease of $0.5 million in incentive payments received on our
private label cigarettes and a decrease in incentive allowances received from
manufacturers of approximately $2.9 million (net of amounts paid to
customers). The remainder of the increase in gross profit of $2.0 million
was primarily due to increased sales in all products to new customers and a
smaller charge to cost of sales to account for the LIFO reserve, as compared
to the first six months of fiscal 2003. The Company expects that gross
profit related to private label cigarettes will decrease by up to $1.0
million in fiscal 2004, as compared to fiscal 2003 and will no longer
represent a significant source of gross profit for the Company.
Gross profit for the retail health food segment increased $0.2 million
compared with the six months ended March 2003. The increase in gross profit
was driven by increased sales volume during the six months ended March 2004
as compared to the same period in the prior year.
Gross profit from the beverage segment decreased $0.1 million during the six
months ended March 2003, compared to the six months ended March 2002,
primarily due to significant inventory carrying costs incurred during Q2
2004.
21
There was $0.1 million in gross profit from intersegment sales eliminated in
consolidation for the six months ended 2003, all of which related to beverage
segment sales to wholesale distribution. There were no intersegment sales
for the same period in 2004.
OPERATING EXPENSE
Total operating expense, which includes selling, general and administrative
expenses and depreciation and amortization, increased 7.4% or approximately
$1.0 million to $14.6 million in Q2 2004 compared to Q2 2003. The increase
was primarily related to the beverage segment which incurred an additional
$0.8 million in operating expenses. The beverage marketing and distribution
business, which was formed late in the first quarter of Q1 2003, incurred the
majority of the increase in operating expense as the business was still in
the start-up phase in Q2 2003. The wholesale business incurred higher
operating expenses of $0.2 million relating to new business and higher
delivery and health insurance costs. The retail health food segment's
operating expense was flat as compared to the Q1 2003.
For the six month period ended March 2004, total operating expense increased
8.4% or approximately $2.2 million to $28.5 million compared to the same
period in the prior fiscal year. The increase was primarily due to expenses
associated with the beverage segment which accounted for $1.8 million of the
increase. 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 six months ended March 2004, primarily due to the
formation of the beverage marketing and distribution business late in Q1
2003. The wholesale distribution segment incurred additional operating costs
of $0.4 million, primarily related to additional new business and increased
delivery costs, health insurance and bad debts, as compared to the six months
ended March 2004. Total operating expenses in our retail segment were
relatively flat for the six months ended March 2004, compared to the same
period in the prior year.
As a result of the above, income (loss) from operations for Q2 2004 decreased
by $1.2 million to ($1.0) million, as compared to Q2 2003. Income from
operations for the six months ended March 2004 decreased by $1.2 million to
$0.2 million.
INTEREST EXPENSE
Interest expense for Q2 2004 increased 2.5%, or $0.02 million, to
approximately $0.8 million when compared to Q2 2003. The increase was
primarily due to additional borrowing on the Company's revolving line of
credit to support operations.
Interest expense of $1.6 million for the six months ended March 2004
represented a decrease of 2.7% from the same period in the prior fiscal year.
The decrease was primarily due to the Company's ability to select LIBOR as a
borrowing rate being reinstated in Q3 2003, which lead to a reduction in
average interest rates of approximately 0.30% verses the first six months of
fiscal 2003.
22
OTHER
Other income for Q2 2004 of approximately $0.02 million was generated
primarily from interest income, dividends and royalty payments. Other income
of approximately $0.1 million for Q2 2003 was generated primarily from gains
from sales of available for sale securities, interest income and dividends.
Other income for the six months ended March 2004 of approximately $0.4
million was generated primarily from gains on sales of available for sale
securities, as well as, interest income, dividends and royalty payments.
Included in other income for the six months ended March 2003 of approximately
$0.3 million is $0.1 million received from a settlement related to a former
distribution facility and $0.1 million from gains on sales of available-for-
sale securities, as well as, interest income and dividends on investment
securities.
As a result of the above factors, net income (loss) for the three and six
months ended March 2004 was ($1.1) million and ($0.6) million, respectively
compared to $0.3 million and $0.0 million for the three and six months ended
March 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires cash to pay its operating expenses, purchase inventory,
make capital investments and pay dividends. In general, the Company finances
these cash needs from the cash flow generated by its operating activities and
from borrowings, as necessary. During the six months ended March 2004, the
Company generated cash flow of approximately $5.4 million from operating
activities, primarily through decreases in accounts receivable and
inventories, and increases in accounts payable resulting from extended terms
received on product promotions and vendor payment incentives. Cash of $1.0
million was utilized during the six months ended March 2004 for capital
expenditures. These expenditures were partially offset by the sales of
certain fixed assets and securities which generated a net cash inflow during
the period of $0.5 million. The Company also used $5.1 million to pay down
long-term debt and subordinated debt during the period and $0.1 million to
pay dividends.
The Company's primary source of borrowing for liquidity purposes is its $55.0
million revolving credit facility with LaSalle Bank (the "Facility"). The
Facility allows ADC to borrow up to $55.0 million at any time through June
2005, subject to eligible accounts receivable and inventory requirements. As
of March 2004, the outstanding balance on the Facility was $33.1 million.
The Facility bears interest at a variable rate equal to the bank's base rate,
which was 4.00% at March 2004, or LIBOR plus 2.50%, as selected by the
Company. The Company hedges its variable rate risk on $15.0 million of its
borrowings under the Facility by use of interest rate swap agreements. These
swap agreements have the effect of converting the interest on this amount of
debt to a fixed rate ranging between 4.38% and 4.87% per annum.
As of March 2004, the Company had cash on hand of $0.4 million and working
capital (current assets less current liabilities) of approximately $18.5
million. This compares to cash on hand of $0.7 million and working capital
of $20.0 million as of September 2003. The Company's ratio of debt to equity
decreased to 3.35 at March 2004 compared to 3.45 at September 2003 primarily
due to paying down the balance on the Facility.
23
The Company believes that funds generated from operations, supplemented as
necessary with funds available under the Facility will provide sufficient
liquidity for the operation of its wholesale distribution and retail health
food segments. The Company will be required to repay $6.8 million of
subordinated debt in September 2004 and is currently negotiating a private
placement of its securities to refinance or retire this debt, as well as,
provide liquidity for its beverage business.
The following table summarizes our outstanding contractual obligations and
commitments as of fiscal year end 2003. Other than the pay down of
approximately $4.8 million on the Facility, there have been no significant
changes to debt or contractual obligations since September 2003. (Amounts in
thousands):
Payments Due By Period
--------------------------------------------------------------------
Contractual Fiscal Fiscal Fiscal Fiscal Fiscal
Obligations Total 2004 2005 2006 2007 2008 Thereafter
- ------------------ --------- -------- -------- ------- ------- ------- ----------
Long-term debt $ 49,301 $ 14,927 $ 28,180 $ 6,194 $ - $ - $ -
Subordinated debt 8,739 7,763 976 - - - -
Capital lease 1,701 421 489 486 284 21 -
Operating leases 22,981 5,150 4,616 3,829 2,269 1,617 5,500
--------- -------- -------- ------- ------- ------- ---------
Total $ 82,722 $ 28,261 $ 34,261 $10,509 $ 2,553 $ 1,638 $ 5,500
========= ======== ======== ======= ======= ======= =========
Total
Other Commercial Amounts Fiscal Fiscal Fiscal Fiscal Fiscal
Commitments Committed 2004 2005 2006 2007 2008 Thereafter
- ------------------ --------- -------- -------- ------- ------- ------- ----------
Lines of credit $ 59,750 $ 4,750 $ 55,000 $ - $ - $ - $ -
Letters of credit 967 967 - - - - -
--------- -------- -------- ------- ------- ------- ---------
Total $ 60,717 $ 5,717 $ 55,000 $ - $ - $ - $ -
========= ======== ======== ======= ======= ======= =========
24
CERTAIN ACCOUNTING CONSIDERATIONS
In March 2004, the FASB issued an Exposure Draft, "Share-Based Payment - an
amendment of Statements No. 123 and 95 ", that addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity
instruments. The proposed Statement would eliminate the ability to account
for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees." If finalized as drafted, the
Company would be required to record compensation expense based on the fair
value of the awards granted to employees for stock options issued after
October 1, 2005 (fiscal 2006 for the Company). Fair value will be measured
using an acceptable fair value based pricing model. The comment period for
the exposure draft ends on June 30, 2004. We are currently assessing the
impact that this standard will have on the Company.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that have or are
reasonably expected to have a material effect on the Company's financial
position or results of operations.
RELATED PARTY TRANSACTIONS
During the three and six months ended March 2004, we were charged $16,500 and
$33,000 respectively by AMCON Corporation as consideration for office rent
and management services, which is included in selling, general and
administrative expenses. AMCON Corporation is owned by certain directors and
executive officers of the Company. We also contracted with one of our
directors for consulting services in connection with our retail health food
operations during Q1 and Q2 2004. The amount paid for consulting services
during the three and six months ended March 2004 was $22,500 and $37,500,
respectively, plus reimbursement of expenses. The director was hired by the
Company in Q2 2004; therefore, the consulting services have ended. Each of
these related party transactions has been reviewed and approved by the
Company's Audit Committee.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to interest rate risk on its variable rate debt. At
March 2004, we had $22.8 million of variable rate debt outstanding (excluding
$15.0 million variable rate debt which is fixed through the swaps described
below), with maturities through June 2005. The interest rates on this debt
ranged from 3.60% to 6.75% at March 2004. We have the ability to select the
bases on which our variable interest rates are calculated by selecting an
interest rate based on our lender's base interest rate or based on LIBOR.
This provides management with some control of our variable interest rate
risk. 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.
25
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 are 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 swaps 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. At March
2004 and 2003 we held 5,000 and 42,500 shares, respectively, of common stock
of CWCO valued at approximately $0.1 million and $0.6 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 $0.1 million at March 2004 and $0.5 million at March 2003,
respectively. We sold 25,000 shares of CWCO common stock in Q1 2004 and
realized a gain of $0.4 million on the sale. We did not sell any shares of
CWCO common stock in Q2 2004.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure
that information required to be disclosed in the Company's reports under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission, and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures. Any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives. The Company's management, including the
Company's Principal Executive Officer and Chief Financial Officer, reviewed
and evaluated 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 report. Based on that evaluation and subject to the foregoing, the
Principal Executive Officer and Chief Financial Officer have concluded that
the Company's current disclosure controls and procedures, as designed and
implemented provided reasonable assurance that the disclosure controls and
procedures are effective as of the end of the period covered by this report.
There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect 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.
26
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)
27
10.1 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)
10.2 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)
10.3 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)
10.4 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)
10.5 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)
10.6 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)
10.7 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)
10.8 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)
10.9 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)
10.10 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)
10.11 ISDA Master Agreement, dated as of May 12, 2003 between the Company
and LaSalle Bank National Association (incorporated by reference to
Exhibit 10.13 of AMCON's Quarterly Report on Form 10-Q filed on
August 11, 2003)
28
10.12 Swap Transaction Confirmation ($10,000,000) dated as of May 23, 2003
between the Company and LaSalle Bank National Association
(incorporated by reference to Exhibit 10.14 of AMCON's Quarterly
Report on Form 10-Q filed on August 11, 2003)
10.13 Swap Transaction Confirmation ($5,000,000) dated as of May 23, 2003
between the Company and LaSalle Bank National Association
(incorporated by reference to Exhibit 10.15 of AMCON's Quarterly
Report on Form 10-Q filed on August 11, 2003)
11.1 Statement re: computation of per share earnings (incorporated by
reference to footnote 4 to the financial statements which are
incorporated herein by reference to Item 1 of Part I herein)
14.1 Code of Ethics for Principal Executive and Financial Officers
(incorporated by reference to Exhibit 14.1 of AMCON's Annual Report on
Form 10-K filed on December 24, 2003)
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 furnished a report on Form 8-K dated February 9, 2004 reporting
its earnings for the first quarter ended December 26, 2003 under Item 12,
Results of Operations and Financial Condition. Reference was made to a press
release furnished therewith as Exhibit 99.1.
29
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: May 10, 2004 /s/ William F. Wright
---------------- -----------------------------
William F. Wright
Chairman of the Board and
Principal Executive Officer
Date: May 10, 2004 /s/ Michael D. James
---------------- -----------------------------
Michael D. James
Treasurer & CFO and
Principal Financial and
Accounting Officer
30