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 29, 2002
OR
/ / Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
------------------------------
COMMISSION FILE NUMBER 0-24708
------------------------------
AMCON DISTRIBUTING COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of Incorporation)
7405 Irvington Road
Omaha, NE 68122
(Address of principal executive offices)
(Zip Code)
47-0702918
(I.R.S. Employer Identification No.)
(402) 331-3727
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
------- -------
The Registrant had 3,112,962 shares of its $.01 par value common stock
outstanding as of April 30, 2002.
Form 10-Q
2nd Quarter
INDEX
-------
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
--------------------------------------------
Condensed consolidated balance sheets at
March 2002 and September 2001 3
Condensed consolidated statements of operations
for the three and six-month periods ended
March 2002 and 2001 4
Condensed consolidated statements of cash flows
for the three and six-month periods ended
March 2002 and 2001 5
Notes to unaudited condensed consolidated
financial statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 26
2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
<Caption>
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Balance Sheets
March 2002 and September 2001
- ----------------------------------------------------------------------------------------
(Unaudited)
March 2002 September 2001
------------ --------------
ASSETS
Current assets:
Cash $ 817,733 $ 296,940
Accounts receivable, less allowance for doubtful
accounts of $0.8 million and $0.6 million,
respectively 28,886,254 31,773,232
Inventories 28,332,008 29,814,545
Income tax receivable 660,167 1,713,644
Deferred income taxes 1,419,432 1,419,432
Current assets from discontinued operations - 173,273
Other 1,034,260 336,850
------------ ------------
Total current assets 61,149,854 65,527,916
Fixed assets, net 16,340,144 14,687,665
Notes receivable - 1,604,483
Available-for-sale investments 1,029,000 789,862
Equity investment in unconsolidated affiliate - 287,065
Other assets 18,821,476 16,300,331
------------ ------------
$ 97,340,474 $ 99,197,322
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,495,409 $ 16,240,541
Accrued expenses 4,025,214 4,892,211
Accrued wages, salaries, bonuses 1,024,565 1,046,832
Dividends payable 11,207 -
Current liabilities of discontinued operations 1,601,606 1,353,017
Current portion of long-term debt 10,705,894 6,189,683
Current portion of subordinated debt 1,820,097 1,858,890
------------ ------------
Total current liabilities 35,683,992 31,581,174
------------ ------------
Deferred income taxes 645,015 633,316
Non-current liabilities of discontinued operations 282,636 1,195,705
Long-term debt, less current portion 34,839,311 42,112,140
Subordinated debt, less current portion 10,305,746 10,312,028
Other liabilities 41,380 -
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, 3,112,962 and 2,739,184
issued, respectively 31,130 27,392
Additional paid-in capital 5,851,582 4,125,127
Accumulated other comprehensive income,
net of tax of $0.2 million and $0.2 million,
respectively 562,412 404,362
Retained earnings 9,097,270 8,806,078
------------ ------------
Total shareholders' equity 15,542,394 13,362,959
------------ ------------
$ 97,340,474 $ 99,197,322
============ ============
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-months ended March 2002 and 2001
(Unaudited)
- ----------------------------------------------------------------------------------------------------------
For the three months For the six months
ended March ended March
----------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Sales (including excise taxes of
$38.4 million and $15.4 million, and
$76.8 million and $33.0 million,
respectively) $ 194,159,299 $ 100,785,157 $ 404,313,146 $ 201,291,992
Cost of sales 179,928,648 91,285,791 374,972,280 181,166,099
------------- ------------- ------------- -------------
Gross profit 14,230,651 9,499,366 29,340,866 20,125,893
------------- ------------- ------------- -------------
Selling, general and administrative
expenses 12,555,713 8,912,414 25,113,067 17,435,334
Depreciation and amortization 734,637 597,236 1,453,921 1,115,853
------------- ------------- ------------- -------------
13,290,350 9,509,650 26,566,988 18,551,187
------------- ------------- ------------- -------------
Income (loss) from operations 940,301 (10,284) 2,773,878 1,574,706
------------- ------------- ------------- -------------
Other expense (income):
Interest expense 823,160 633,256 1,907,258 1,347,316
Other (27,813) (38,030) (74,611) (48,224)
Equity in loss of unconsolidated affiliate - - 95,007 -
------------- ------------- ------------- -------------
795,347 595,226 1,927,654 1,299,092
------------- ------------- ------------- -------------
Income (loss) from continuing operations
before income taxes 144,954 (605,510) 846,224 275,614
Income tax expense (benefit) 54,519 (227,066) 365,146 103,356
------------- ------------- ------------- -------------
Income (loss) from continuing operations 90,435 (378,444) 481,078 172,258
Loss from discontinued operations,
net of income tax benefit of $0.3 million
and $0.6 million, respectively - (506,527) - (894,435)
Loss on disposal of discontinued
operations, net of income tax benefit
of $0.4 million. - (675,416) - (675,416)
------------- ------------- ------------- -------------
Net income (loss) $ 90,435 $ (1,560,387) $ 481,078 $ (1,397,593)
============= ============= ============= =============
Basic earnings (loss) per share:
Continuing operations $ 0.03 $ (0.14) $ 0.16 $ 0.06
Discontinued operations - (0.43) - (0.57)
------------- ------------- ------------- -------------
Net basic earnings (loss) per share $ 0.03 $ (0.57) $ 0.16 $ (0.51)
============= ============= ============= =============
Diluted earnings (loss) per share:
Continuing operations $ 0.03 $ (0.14) $ 0.16 $ 0.06
Discontinued operations - (0.43) - (0.57)
------------- ------------- ------------- -------------
Net diluted earnings (loss) per share $ 0.03 $ (0.57) $ 0.16 $ (0.51)
============= ============= ============= =============
Dividends per share $ 0.03 $ 0.03 $ 0.06 $ 0.06
============= ============= ============= =============
Weighted average shares outstanding:
Basic 3,112,962 2,738,031 2,950,797 2,737,859
Diluted 3,186,858 2,738,031 3,023,067 2,737,859
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
<Caption>
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
for the six months ended March 2002 and 2001
(Unaudited)
- ---------------------------------------------------------------------------------
2002 2001
------------ ------------
Net cash flows from operating activities $ 3,494,149 $ 10,285,816
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets, net (653,405) (693,938)
Advances under note receivable - (400,000)
Purchase of common stock in HNWC - (300,000)
Proceeds from sales of fixed assets 56,682 1,350
Proceeds from disposal of discontinued
operations, net of cash expenditures - 8,200,641
------------ ------------
Net cash flows from investing activities (596,723) 6,808,053
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on bank credit agreement (1,997,547) (14,571,253)
Payments on long-term debt and
subordinated debt (189,544) (2,474,563)
Dividends paid (189,867) (164,280)
Proceeds from exercise of stock options 325 974
Purchase of treasury stock - (85)
------------ ------------
Net cash flows from financing activities (2,376,633) (17,209,207)
------------ ------------
Net increase (decrease) in cash 520,793 (115,338)
Cash, beginning of period 296,940 613,158
------------ ------------
Cash, end of period $ 817,733 $ 497,820
============ ============
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
March 2002 and 2001
- -----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
include the accounts of AMCON Distributing Company and its subsidiaries
("AMCON" or the "Company"). All significant intercompany transactions and
balances have been eliminated in consolidation. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments necessary to fairly present the financial
information included therein, such adjustments consisting of normal recurring
items. It is suggested that these financial statements be read in
conjunction with the audited financial statements and notes thereto for the
fiscal year ended September 2001, which are included in the Company's Annual
Report to Shareholders filed with Form 10-K ("2001 Annual Report"). Results
for the interim period are not necessarily indicative of results to be
expected for the entire year. As more fully described in the Company's 2001
Annual Report, the Company completed the sale of its health food distribution
business effective March 23, 2001. As a result, the Company's fiscal 2001
results have been restated to reflect the health food distribution business
as discontinued operations. Additionally, as more fully described in Note 2
to the unaudited condensed consolidated financial statements, the Company
completed the acquisition of Hawaiian Natural Water Company, Inc. ("HNWC")on
December 17, 2001 and Merchants Wholesale, Inc. ("Merchants") on June 1,
2001.
AMCON's fiscal second quarters ended on March 29, 2002 and March 30, 2001.
For convenience, the fiscal quarters have been indicated as March 2002 and
2001, respectively. Each quarter and each six-month period ended comprised
13 weeks and 26 weeks, respectively.
RECLASSIFICATIONS
In accordance with guidance provided in Emerging Issues Task Force No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller
of the Vendor Products," the Company has reflected the costs associated with
sales incentives provided to retailers as a reduction in sales beginning in
the first quarter of fiscal 2002. The reclassification for the three and
six-months ended March 2001 totaled approximately $0.5 million and $1.0
million, respectively. These costs were previously included in cost of
sales. This reclassification had no impact on reported income (loss) from
continuing operations before taxes, net income (loss), or income (loss) per
share amounts.
2. ACQUISITIONS OF BUSINESSES:
On December 17, 2001, the Company completed a merger with HNWC, pursuant to
which HNWC merged with and into, and thereby became, a wholly-owned
subsidiary of AMCON Distributing Company. The merger consideration 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. Each share of HNWC stock was
convertible into 0.052 shares of AMCON common stock. As a result, the
Company issued 373,558 shares of its common stock to outside HNWC
shareholders, or 12.0% of the Company's outstanding shares after giving
effect to the merger. HNWC option holders and warrant holders also received
comparable options and warrants of the Company, but with the exercise price
and number of shares covered thereby being adjusted to reflect the exchange
ratio.
Transaction costs, totaling approximately $0.3 million, were incurred to
complete the merger and consist primarily of fees and expenses for bankers,
attorneys and accountants, SEC filing fees, stock exchange listing fees and
financial printing and other related charges.
6
The merger is expected to qualify as a tax-free reorganization and 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 $3.4 million. The identifiable
intangible asset, the HNWC trade name, is being amortized over 20 years.
Although the amounts are subject to change based on evaluations performed
subsequently, the final purchase price allocation is not expected to
materially differ from those recorded on the accompanying unaudited condensed
balance sheet.
On June 1, 2001, the Company completed the acquisition of substantially all
of the distribution business and net assets of Merchants. The transaction
has been recorded on the Company's books using the purchase method of
accounting. For further details of this transaction, please see Note 2 to
the audited financial statements contained in the Company's 2001 Annual
Report.
Assuming the above acquisitions had occurred on October 1, 2001 and 2000,
unaudited pro forma consolidated sales, net income (loss) from continuing
operations, net income (loss) and net income (loss) per share for the three
and six months ended March 2002 and 2001, respectively, would have been as
follows:
<Caption>
Three months ended Six months ended
---------------------------- ----------------------------
March 2002 March 2001 March 2002 March 2001
------------- ------------- ------------- -------------
Sales $ 194,159,299 $ 211,651,841 $ 404,799,481 $428,291,567
Net income (loss) from continuing
operations $ 1,005,206 $ (412,382) $ 2,252,258 $ 587,889
Net income (loss) $ 90,435 $ (2,252,773) $ 214,596 $ (2,923,429)
Net earnings (loss) per share:
Basic $ 0.03 $ (0.72) $ 0.07 $ (0.94)
Diluted $ 0.03 $ (0.72) $ 0.07 $ (0.94)
Weighted average shares outstanding:
Basic 3,112,962 3,111,589 3,112,946 3,111,417
Diluted 3,186,858 3,111,589 3,185,216 3,111,417
3. INVENTORIES:
Inventories consist of finished products purchased in bulk quantities to be
redistributed to the Company's customers and are accounted for using the
last-in, first-out ("LIFO") method of accounting. The retail health food
operations utilize the retail inventory method of accounting. LIFO
inventories at March 2002 and 2001 were approximately $3.9 million and $3.2
million less than the amount of such inventories valued on a first-in, first-
out basis, respectively.
4. DIVIDENDS:
The Company paid cash dividends totaling $0.03 per share during the quarter
ended March 2002, representing dividends of $0.06 per share for the first and
second quarters of fiscal 2002.
7
5. EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share is calculated by dividing income (loss) from
continuing operations, income (loss) from discontinued operations and net
income (loss) by the weighted average common shares outstanding for each
period. Diluted earnings (loss) per share is calculated by dividing income
(loss)from continuing operations, income (loss) from discontinued operations
and net income (loss) 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 2002 and 2001, which were
not included in the computations of diluted earnings per share because the
option's exercise price was greater than the average market price of the
Company's common shares, totaled 145,390 with an average exercise price of
$8.01 for the three and six month periods ended March 2002, and 172,380 with
an average exercise price of $7.25 for the three and six month periods ended
March 2001.
For the three-month period ended March
-------------------------------------------------------
2002 2001
------------------------- -------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
1. Weighted average common
shares outstanding 3,112,962 3,112,962 2,738,033 2,738,033
2. Weighted average treasury
shares outstanding - - (2) (2)
3. Weighted average of net
additional shares outstanding
assuming dilutive options and
warrants exercised and proceeds
used to purchase treasury stock - 73,896 - 88,973
4. 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 - - - (88,973)
----------- ----------- ----------- -----------
5. Weighted average number of
shares outstanding 3,112,962 3,186,858 2,738,031 2,738,031
=========== =========== =========== ===========
6. Income (loss) from
continuing operations $ 90,435 $ 90,435 $ (378,444) $ (378,444)
=========== =========== =========== ===========
7. Loss from
discontinued operations $ - $ - $ (506,527) $ (506,527)
=========== =========== =========== ===========
8. Loss on disposal of
discontinued operations $ - $ - $ (675,416) $ (675,416)
=========== =========== =========== ===========
9. Net income (loss) $ 90,435 $ 90,435 $(1,560,387) $(1,560,387)
=========== =========== =========== ===========
10. Earnings (loss) per share
from continuing operations $ 0.03 $ 0.03 $ (0.14) $ (0.14)
=========== =========== =========== ===========
11. Loss per share from discontinued
operations $ - $ - $ (0.43) $ (0.43)
=========== =========== =========== ===========
12. Net earnings (loss) per share $ 0.03 $ 0.03 $ (0.57) $ (0.57)
=========== =========== =========== ===========
8
For the six-month period ended March
-------------------------------------------------------
2002 2001
------------------------- -------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
1. Weighted average common
shares outstanding 2,950,797 2,950,797 2,737,860 2,737,860
2. Weighted average treasury
shares outstanding - - (1) (1)
3. Weighted average of net
additional shares outstanding
assuming dilutive options and
warrants exercised and proceeds
used to purchase treasury stock - 72,270 - 85,620
4. 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 - - - (85,620)
----------- ----------- ----------- -----------
5. Weighted average number of
shares outstanding 2,950,797 3,023,067 2,737,859 2,737,859
=========== =========== =========== ===========
6. Income from
continuing operations $ 481,078 $ 481,078 $ 172,258 $ 172,258
=========== =========== =========== ===========
7. Loss from
discontinued operations $ - $ - $ (894,435) $ (894,435)
=========== =========== =========== ===========
8. Loss on disposal of
discontinued operations $ - $ - $ (675,416) $ (675,416)
=========== =========== =========== ===========
9. Net income (loss) $ 481,078 $ 481,078 $(1,397,593) $(1,397,593)
=========== =========== =========== ===========
10. Earnings (loss) per share
from continuing operations $ 0.16 $ 0.16 $ 0.06 $ 0.06
=========== =========== =========== ===========
11. Loss per share from
discontinued operations $ - $ - $ (0.57) $ (0.55)
=========== =========== =========== ===========
12. Net earnings (loss) per share $ 0.16 $ 0.16 $ (0.51) $ (0.49)
=========== =========== =========== ===========
6. COMPREHENSIVE INCOME (LOSS):
The following is a reconciliation of net income (loss) per the accompanying
unaudited condensed consolidated statements of operations to comprehensive
income (loss) for the periods indicated:
For the three months For the six months
ended March ended March
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income (loss) $ 90,435 $(1,560,387) $ 481,078 $(1,397,593)
Other comprehensive income:
Unrealized holding gains from
investments arising during the
period, net of income tax expense
of $0.1 million for the three and
six months ended March 2002 and
2001, respectively 164,107 109,375 158,050 103,688
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 254,542 $(1,451,012) $ 639,128 $(1,293,905)
=========== =========== =========== ===========
9
7. DEBT
In connection with the acquisition of the distribution business and net
assets of Merchants on June 1, 2001, the Company amended its revolving credit
facility to increase amounts available under the facility from $25.0 million
to $55.0 million. The facility originally contained 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 fixed charge ratio of 1.1 to 1.0,
average annual debt service coverage ratio of 1.5 to 1.0, average annual
senior debt to EBITDA ratio of 6.0 to 1.0, and a minimum tangible net worth
of $7.0 million.
At fiscal year end 2001, the Company was not in compliance with certain of
its debt covenants under the revolving credit facility. As a result, in
December 2001, the Company received waivers to its debt covenant violations.
In addition, the financial covenants were amended to: (i) remove the fixed
charge and the senior debt to EBITDA ratios, (ii) reduce the debt service
coverage ratio from 1.5:1.0 to 1.0:1.0, to be measured at fiscal year end
2002 and quarterly thereafter, (iii) amend the definition of tangible net
worth and (iv) remove the London Interbank Offering Rate borrowing rate
option effective January 1, 2002. After giving effect to the waiver and
amendments discussed herein, the Company is in compliance with its revolving
credit facility as of March 2002. As of March 2002, the outstanding balance
under the facility is $36.2 million.
In January 2002, we negotiated a $1.5 million credit facility with a bank, at
the bank's base rate plus 1.0%, to be used to fund operating activities at
our natural spring water bottling operation in Hawaii, referred to herein as
the Water Facility. As of March 2002, the outstanding balance under the
Water Facility was $1.2 million.
In connection with the purchase of the Quincy, Illinois distribution business
in June 2001, we assumed an interest rate swap agreement with a bank. Under
the agreement, we agree to exchange, at specified intervals, fixed interest
amounts for variable interest amounts calculated by reference to an agreed-
upon notional principal amount of $25.0 million. The interest rate swap
effectively converts $25.0 million of our variable-rate senior debt to fixed-
rate debt (before accounting for the impact of the change in market value of
the interest rate swap derivative financial instrument) at a rate of 8.33%,
through the maturity of the swap agreement on May 27, 2003.
In June 2001, we negotiated a $2.0 million credit facility with a bank, at
the bank's base rate plus 1.0%, to be used to fund the expansion and
remodeling of our retail health food stores, referred to herein as the Retail
Facility. As of March 2002, there was no balance on the Retail Facility.
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.
The Company disposed of its health food distribution segment during the
second quarter of fiscal 2001. Prior period segment data has been restated to
conform to the current presentation. The segments are evaluated on revenue,
operating income (loss) and income (loss) before taxes.
10
Wholesale Bottled
Distribution Retail Water Consolidated
------------- ------------ ------------ -------------
QUARTER ENDED MARCH 2002:
External revenue:
Cigarettes $ 147,331,556 $ - $ $ 147,331,556
Confectionery 11,968,700 - - 11,968,700
Health food - 8,336,450 - 8,336,450
Tobacco, beverage & other 25,869,955 - 652,638 26,522,593
------------- ----------- ------------ -------------
Total external revenue 185,170,211 8,336,450 652,638 194,159,299
Depreciation and amortization 342,752 377,109 14,776 734,637
Operating income (loss) 999,515 275,132 (334,346) 940,301
Interest expense 464,196 306,833 52,131 823,160
Income (loss) before taxes 577,871 (89,705) (343,212) 144,954
Total assets 71,348,246 19,663,030 6,329,198 97,340,474
Capital expenditures, net 223,890 37,745 148,410 410,045
QUARTER ENDED MARCH 2001:
External revenue:
Cigarettes $ 70,841,860 $ - $ - $ 70,841,860
Health food - 8,575,770 - 8,575,770
Confectionery 6,859,648 - - 6,859,648
Tobacco, beverage & other 14,507,879 - - 14,507,879
------------- ------------ ------------ -------------
Total external revenue 92,209,387 8,575,770 - 100,785,157
Depreciation and amortization 158,624 438,612 - 597,236
Operating income (loss) 130,594 (140,878) - (10,284)
Interest expense 394,765 238,491 - 633,256
Income (loss) before taxes (37,781) (567,729) - (605,510)
Total assets, excluding
discontinued operations 31,972,823 20,706,351 - 52,649,174
Capital expenditures, excluding
discontinued operations, net 21,170 413,244 - 434,414
SIX MONTHS ENDED MARCH 2002:
External revenue:
Cigarettes $ 307,031,452 $ - $ - $ 307,031,452
Confectionery 25,307,747 - - 25,307,747
Health food - 15,603,032 15,603,032
Tobacco, beverage & other 55,647,944 - 722,971 56,370,915
------------- ------------ ------------ -------------
Total external revenue 387,987,143 15,603,032 722,971 404,313,146
Depreciation and amortization 673,959 750,627 29,335 1,453,921
Operating income (loss) 2,783,673 373,203 (382,998) 2,773,878
Interest expense 1,172,690 673,158 61,409 1,907,257
Income (loss) before taxes 1,595,845 (348,479) (401,142) 846,224
Total assets 71,348,246 19,663,030 6,329,198 97,340,474
Capital expenditures, net 394,785 110,210 148,410 653,405
SIX MONTHS ENDED MARCH 2001:
External revenue:
Cigarettes $ 142,043,191 $ - $ - $ 142,043,191
Health food - 16,042,531 16,042,531
Confectionery 13,459,793 - - 13,459,793
Tobacco, beverage & other 29,746,477 - - 29,746,477
------------- ------------ ------------ -------------
Total external revenue 185,249,461 16,042,531 - 201,291,992
Depreciation and amortization 359,086 756,767 - 1,115,853
Operating income (loss) 2,008,776 (434,070) - 1,574,706
Interest expense 693,888 653,428 - 1,347,316
Income (loss) before taxes 1,549,122 (1,273,508) - 275,614
Total assets, excluding
discontinued operations 31,972,823 20,706,351 - 52,679,174
Capital expenditures, excluding
discontinued operations, net 113,452 580,486 - 693,938
There are no intersegment sales between the three operating segments.
Operating income (loss) and income (loss) before taxes from the retail
segment includes general corporate overhead expenses that were previously
allocated to the discontinued health food distribution operations but were
not eliminated as a result of the sale.
11
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141")and Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles
being classified as goodwill, or alternatively, amounts initially recorded as
goodwill may be separately identified and recognized apart from goodwill.
SFAS 142 requires the use of a nonamortization approach to account for
purchased goodwill and certain intangibles. Under a nonamortization
approach, goodwill instead would be reviewed for impairment and written down
and charged to results of operations only in the periods in which the
impairment recognition criteria had been met and the recorded value of
goodwill and certain intangibles is more than its measured fair value. The
provisions of each statement, which apply to goodwill and intangible assets
acquired prior to June 30, 2001, must be adopted by the Company on October 1,
2002.
Early application of SFAS 142 is permitted for the Company's fiscal year
beginning October 1, 2001, however the Company plans to adopt SFAS 142 for
the fiscal year beginning October 1, 2002. As of March 2002, the Company had
approximately $6.3 million of goodwill reflected on the accompanying
condensed consolidated balance sheet. Amortization of goodwill for the three
and six months ended March 2002 totaled approximately $0.1 million and $0.1
million, respectively.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143
requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the long-
lived asset. The liability is discounted and accretion expense is recognized
using the credit-adjusted risk-free interest rate in effect when the
liability was initially recognized. SFAS 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002 (for the
fiscal year beginning October 1, 2002 for AMCON).
In August 2001, the FASB issued Statement of Financial Accounting Standard
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets to be held and used, to be
disposed of other than by sale and to be disposed of by sale. Although the
statement retains certain of the requirements of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), it
supercedes SFAS 121 and Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring
Events and Transactions", for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS 144 also amends Accounting
Research Bulletin No. 51, "Consolidated Financial Statements", to eliminate
the exception to consolidation for a subsidiary for which control is likely
to be temporary. SFAS 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within
those years (fiscal year beginning October 1, 2002 for AMCON), with early
adoption encouraged.
Management is still addressing the financial statement impact on future
periods resulting from the adoption of these statements.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
COMPANY OVERVIEW
AMCON Distributing Company, together with its wholly-owned subsidiaries,
referred to herein as "AMCON," operates six distribution centers and 13
retail health food stores in the Great Plains, Rocky Mountain, and Southern
regions of the United States and a natural spring water bottling operation in
the State of Hawaii.
Our wholesale distribution segment sells approximately 9,000 different
consumer products, including cigarettes and tobacco products, candy and other
confectionery, beverages, groceries, paper products, health and beauty care
products, frozen and chilled products, and institutional food service
products. We distribute products primarily to retailers such as convenience
stores, discount and general merchandise stores, grocery stores and
supermarkets, drug stores and gas stations. In addition, we also service
institutional customers, including restaurants and bars, schools, sports
complexes and vendors, as well as other wholesalers.
Our retail segment operates seven retail health food stores in Florida under
the name Chamberlin's Market & Cafe and six in the Midwest under the name
Akin's Natural Foods Market. These stores carry a comprehensive line of high
quality, value priced natural and gourmet foods, supplements, herbs, natural
cosmetics, homeopathic and sports nutrition products. Our stores are family
oriented and customer friendly, and are staffed by highly trained, personal
service oriented employees.
Our natural spring water bottling segment was acquired during the first
quarter of fiscal 2002. This operation bottles, markets and distributes
Hawaiian natural spring water primarily in the State of Hawaii, with plans to
market the product internationally and on the mainland United States.
RESULTS OF OPERATIONS
As more fully described in our 2001 Annual Report to Shareholders on Form 10-
K for the fiscal year ended September 2001, we completed the sale of our
wholesale health food distribution business effective March 23, 2001.
Accordingly, our fiscal 2001 results have been restated to reflect the
wholesale health food distribution business as discontinued operations. The
discussions and amounts below are based on the restated presentation.
Additionally, as more fully described under "Acquisitions" in the
accompanying notes to the unaudited condensed consolidated financial
statements, we also completed the acquisition of Hawaiian Natural Water
Company, Inc., referred to herein as "HNWC," on December 17, 2001 and
Merchants Wholesale, Inc., referred to herein as "Merchants" or "Quincy
Illinois," on June 1, 2001. The results of operations for these acquisitions
are included in the accompanying unaudited condensed consolidated statements
of operations from their date of acquisition.
AMCON's fiscal second quarters ended on March 29, 2002 and March 30, 2001.
For ease of discussion, the fiscal quarters are referred to herein as March
2002 and 2001, respectively or Q2 2002 and Q2 2001, respectively.
The distribution industry continues to be in a state of consolidation.
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.
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 continue to increase their emphasis on the sale of
13
natural products. This business climate subjects operating income to a
number of factors that are beyond the control of management, such as
competing retail stores opening in close proximity to our retail stores and
manufacturers changing prices and promotional programs.
HNWC historically incurred operating losses prior to our acquisition of the
company in December 2001. We are currently upgrading the bottling equipment
in order to improve production capacity and our marketing department is
currently focusing on expanding the market for our premium Hawaiian Springs
product. We expect this segment will continue to incur operating losses
until these projects are complete.
Statistics indicate that cigarette consumption is declining on a national
basis and many retailers, such as grocery stores and general merchandise
stores, have discontinued the sale of cigarettes. As a result, convenience
stores, which represent our largest customer base, have increased their share
of the cigarette market which enables us to maintain, and slightly increase,
our cigarette carton volume. While we sell a diversified product line, we
remain dependent on cigarette sales, which represented approximately 76% of
our revenue and 41% of our gross margin in Q2 2002.
Changes in manufacturers' cigarette pricing over the past decade have greatly
affected the market for generic and private label cigarettes. Although sales
of our private label cigarettes have steadily declined over the past eight
years due to the relatively small price differential between our private
label brands and national brands, and the increasing price differential
between our brands and new generic and import brands, our net income is still
heavily dependent upon sales of these products and volume discounts received
from manufacturers in connection with such sales.
We continuously evaluate steps we may take to improve net income in future
periods, including expansion into new business lines, acquisitions, closure
or relocation of distribution centers and health food retail stores. During
the fourth quarter of fiscal 2001, we closed one retail location in the
Florida market due to poor performance and one distribution center in
Missouri due to synergies resulting from the acquisition of the Quincy,
Illinois distribution center.
Comparison of the three and six-month periods ended March 2002 and 2001
- -----------------------------------------------------------------------
SALES
Sales for Q2 2002 increased 92.6% to $194.2 million, compared to $100.8
million in Q2 2001. Sales are reported net of costs associated with sales
incentives provided to retailers, totaling $1.9 million and $0.5 million in
Q2 2002 and Q2 2001, respectively. Sales increase by business segment is as
follows:
Wholesale distribution $ 93.0 million
Retail health food stores (0.2)million
Bottled water 0.6 million
------
$ 93.4 million
======
Sales from the wholesale distribution business increased by $93.0 million
from Q2 2001 to Q2 2002. Sales from our distribution facility in Quincy,
Illinois, which was acquired in Q3 2001, accounted for $90.8 million of the
increase. The remaining increase of $2.2 million was attributable primarily
to increases in cigarette sales of approximately $1.0 million over the prior
year as a result of increases in selling prices. Sales of tobacco,
confectionary and other products, which accounted for the remainder of the
increase as sales of these products, increased by $1.2 million or 4.5% over
the prior year where sales growth was slowed due to severe winter weather in
the Midwest that inhibited travel and other outdoor activities, as well as by
pricing strategies implemented by several competitors.
14
Sales from the retail health food segment during Q2 2002 declined by $0.2
million, or 2.8%, when compared to Q2 2001 due to the closing of a store
during Q4 2001. Sales at this store totaled approximately $0.2 million in Q2
2001. Increased competition by national chains who have opened 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.
The bottled water segment, which accounted for $0.6 million in sales for the
quarter, was acquired during the latter part of Q1 2002. The operating
results are included in the accompanying unaudited consolidated statements of
operations from the date of acquisition.
Sales for the six months ended March 2002 increased 100.9% to $404.3 million,
compared to $201.3 million for the same period in the prior fiscal year.
Sales increase by business segment is as follows:
Wholesale distribution $ 202.7 million
Retail health food stores (0.4) million
Bottled water 0.7 million
-------
$ 203.0 million
=======
Sales from the wholesale distribution business increased by $202.7 million
for the six months ended March 2002 as compared to the same period in the
prior year. Sales from our distribution facility in Quincy, Illinois, which
was acquired in Q3 2001, accounted for $191.2 million of the increase. The
remaining increase of $11.5 million was attributable primarily to increases
in cigarette sales of approximately $8.1 million over the prior year as a
result of increases in selling prices since the same period of the prior
year. Sales of tobacco, confectionary and other products accounted for the
remainder of the increase as sales of these products increased by $3.4
million or 8.0% over the prior year where sales growth was slowed due to
severe winter weather in the Midwest that inhibited travel and other outdoor
activities, as well as by pricing strategies implemented by several
competitors.
Sales from the retail health food segment declined by $0.4 million, or 2.7%,
when compared to the six months ended March 2001 due to the closing of a
store during Q4 2001. Sales at this store totaled approximately $0.4 million
for the six months ended March 2001. Increased competition by national
chains who have opened 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.
The bottled water segment, which was acquired during the latter part of Q1
2002, generated sales of $0.7 million for the six months ended March 2002.
The operating results are included in the accompanying unaudited consolidated
statements of operations from the date of acquisition.
GROSS PROFIT
Gross profit increased 49.8% to $14.2 million in Q2 2002 from $9.5 million in
Q2 2001. Gross profit as a percent of sales declined to 7.3% in Q2 2002
compared to 9.4% in Q2 2001. Gross profit by business segment is as follows
(dollars in millions):
15
Quarter ended
March
----------------
2002 2001 Incr
------ ------ -----
Wholesale distribution $ 10.7 $ 6.0 $ 4.7
Retail health food stores 3.5 3.5 -
Bottled water - - -
------ ------ -----
$ 14.2 $ 9.5 $ 4.7
====== ====== =====
Gross profit from our wholesale distribution business for Q2 2002 was
favorably impacted by our acquisition of the Quincy, Illinois distribution
business, which contributed approximately $3.6 million in gross profit.
Excluding Quincy, gross profit for Q2 2002 increased approximately $1.1
million as compared to Q2 2001 as follows: (1) a reduction to cost of sales
of $1.0 million to account for the decrease in the LIFO reserve as compared
toQ2 2001, and (2) an increase of $0.5 million in gross profit due to
increased sales of other products. The above gross profit increases were
partially offset by decreases in incentive allowances of approximately $0.4
million received from manufacturers, net of amounts paid to customers, as
compared to Q2 2001.
Gross profit for the retail health food segment was relatively flat compared
with Q2 2001. We closed one retail store in Q4 2001 and completed the
realignment of the management team within this segment at the end of Q1 2002,
the results of which should be realized throughout the remainder of fiscal
2002.
Gross profit from the bottled water segment was negligible for Q2 2002.
For the six months ended March 2002, gross profit increased 45.8% to $29.3
million from $20.1 million for the same period during the prior fiscal year.
Gross profit as a percent of sales declined to 7.3% for the six month period
ended March 2002 compared to 10.0% for the six month period ended March 2001.
Gross profit by business segment is as follows (dollars in millions):
Six months ended
March
----------------
2002 2001 Incr
------ ------ -----
Wholesale distribution $ 22.7 $ 13.6 $ 9.1
Retail health food stores 6.6 6.5 0.1
Bottled water - - -
------ ------ -----
$ 29.3 $ 20.1 $ 9.2
====== ====== =====
Gross profit from our wholesale distribution business for the six months
ended March 2002 was favorably impacted by our acquisition of the Quincy,
Illinois distribution business, which contributed approximately $8.3 million
in gross profit. Excluding Quincy, gross profit for the six months ended
March 2002 increased approximately $0.8 million as compared to the same
period in the prior year as follows: (1) a reduction to cost of sales of $0.8
million to account for the decrease in the LIFO reserve as compared to the
same period in the prior year, and (2) an increase of $1.0 million in gross
profit due to increased sales of cigarettes and other products. The above
increases in
16
gross profit were partially offset by (3) a decrease of $0.4 million in gross
profit from cigarette price increases and sales of private label cigarettes,
as compared to Q2 2001, and (4) increases in incentive allowances of
approximately $0.6 million paid to customers, net of amounts, received from
manufacturers as compared to Q2 2001,
Gross profit for the retail health food segment was relatively flat compared
with the six months ended March 2001. We closed one retail store in Q4 2001
and completed the realignment of the management team within this segment at
the end of Q1 2002, the results of which should be realized throughout the
remainder of fiscal 2002.
Gross profit from the bottled water segment was negligible for the six months
ended March 2002.
Gross profit as a percentage of sales for the three and six months ended
March 2002 declined primarily due to the cigarette sales increasing as a
percentage of total sales. Although the price of cigarettes continues to
increase, our gross margin dollars remain relatively constant and have even
decreased in certain markets due to competitive pressures.
OPERATING EXPENSE
Total operating expense, which includes selling, general and administrative
expenses and depreciation and amortization, increased 39.8% or approximately
$3.8 million to $13.3 million in Q2 2002 compared to Q2 2001. The increase
was primarily due to expenses associated with the new Quincy, Illinois
distribution business, which accounted for $3.7 million of the increase. The
remainder of the wholesale distribution segment incurred $0.1 million of
operating costs in excess of Q2 2001 primarily due to increases in general
labor costs and insurance. Total operating expense in our retail segment
declined by $0.4 million in Q2 2002, compared to the same period in the prior
year, due to the closure of one retail store and realignment of the
management overhead structure. Our bottled water segment, which was acquired
in Q1 2002, incurred $0.4 million in operating expenses in Q2 2002.
For the six month period ended March 2002, total operating expense increased
43.2% or approximately $8.0 million to $26.6 million compared to the same
period in the prior fiscal year. The increase was primarily due to expenses
associated with the new Quincy distribution business, which accounted for
$7.7 million of the increase. The remainder of the wholesale distribution
segment incurred $0.6 million of operating costs in excess those incurred in
the same period in the prior year, primarily due to increases in general
labor costs and insurance. Total operating expense in our retail segment
declined by $0.7 million for the six months ended March 2002, compared to the
same period in the prior year, due to the closure of one retail store and
realignment of the management overhead structure. Our bottled water segment,
which was acquired in Q1 2002, incurred $0.4 million in operating expenses
for the six months ended March 2002.
As a result of the above, income from operations for Q2 2002 increased by
$1.0 million to $1.0 million, as compared to Q2 2001. Income from operations
for the six months ended March 2002 increased by $1.3 million to $2.8
million.
INTEREST EXPENSE
Interest expense for Q2 2002 increased 30.0% to approximately $0.8 million
compared to approximately $0.6 million during Q2 2001. Interest expense for
the six months ended March 2002 increased by 41.6% to $1.9 million compared
to $1.3 million for the same period in the prior fiscal year. The increase
was due to (1) debt incurred to acquire the new Quincy, Illinois distribution
business, net assets and distribution facility during Q3 of fiscal 2001, (2)
net interest paid under an interest rate swap contract that was assumed in
the Merchants acquisition, totaling $0.3 million and $0.6 million for the
three and six months ended March 2002, respectively, and (3) debt incurred to
17
provide advances to and investments in HNWC. This was partially offset by a
positive valuation adjustment on the interest rate swap contract, totaling
$0.3 million and $0.5 million for the three and six months ended March 2002,
respectively, and interest rate reductions compared to the prior year.
OTHER
Other income for the three and six month ended March 2002 of approximately
$28,000 and 75,000, respectively, was generated primarily by interest income
and dividends received on investment securities. Other income of
approximately $38,000 and $48,000 for the three and six months ended March
2001, respectively, was generated primarily by dividends received on
investment securities.
Included in other expense (income)for the six months ended March 2002 is
equity in loss of an unconsolidated affiliate of $0.1 million, which
represents our ownership interest in the loss of HNWC up to the date of
acquisition.
As a result of the above factors, income from continuing operations for the
three and six months ended March 2002 was approximately $0.1 million and $0.5
million, respectively, compared to a Q2 2001 loss from continuing operations
totaling approximately $0.4 million, and income from continuing operations
totaling approximately $0.2 million for the six months ended March 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of March 2002, our liquidity was provided by cash on hand of approximately
$0.8 million and approximately $18.8 million available under a revolving
credit facility with a capacity of $55.0 million. In addition, we have
approximately $2.0 million available under a revolving credit facility in our
retail segment. Amounts available under this facility are limited to 50
percent of existing inventory levels. During the six months ended March
2002, we generated approximately $3.5 million in cash through operating
activities primarily through reductions in accounts receivable. Our working
capital of approximately $25.5 million as of March 2002 declined
approximately $7.3 million during the six months ended March 2002 primarily
due to the acquisition of HNWC, lower inventory and accounts receivable
levels and an increase in the current portion of the Facility.
Our debt to equity ratio declined to 3.71 at March 2002, compared to 4.52 at
September 2001, primarily due to a decrease in our revolving lines of credit
of approximately $2.0 million and the acquisition of HNWC, which increased
equity by approximately $1.7 million. Investing activities required cash of
approximately $0.6 million during the six month period ended March 2002 and
primarily represents the purchases of fixed assets. Financing activities
utilized cash of approximately $2.4 million to reduce amounts outstanding
under the revolving credit facilities and long-term debt.
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.
The following table summarizes our outstanding contractual obligations and
commitments as of fiscal year end September 2001 and includes contractual
obligations and commercial commitments of HNWC, which was acquired in
December 2001. There have been no significant changes to debt or other
obligations, other than for HNWC and the revolving credit facility, since
September 2001. (amounts in thousands):
18
Payments Due By Period
---------------------------------------------------------------------
Contractual Fiscal Fiscal Fiscal Fiscal Fiscal
Obligations Total 2002 2003 2004 2005 2006 Thereafter
- ------------------ --------- -------- -------- -------- ------- ------- ----------
Long-Term Debt $ 9,201 $ 1,509 $ 348 $ 416 $ 470 $ 6,418 $ 40
Subordinated Debt 12,171 1,859 1,770 7,710 832 - -
Capital Lease 1,423 265 245 296 307 270 40
Obligations
Operating Leases/1/ 25,072 4,636 4,072 3,578 3,176 2,531 7,079
Total
Other Commercial Amounts Fiscal Fiscal Fiscal Fiscal Fiscal
Commitments Committed 2002 2003 2004 2005 2006 Thereafter
- ------------------ --------- -------- -------- -------- ------- ------- ----------
Lines of Credit /2/ $ 58,320 $ 58,320 $ 56,230 $ 55,000 $ - $ - $ -
Letters of Credit 950 950 - - - - -
Purchase Obligations/3/ 1,200 1,200 - - - - -
- ------------------
/1/ Includes lease commitment associated with the new Omaha distribution facility and for
natural spring water bottling equipment, both of which are expected to commence in Q3
2002.
/2/ Includes credit facility of 1.2 million negotiated in Q2 2002 associated with the water
bottling operation.
/3/ Represents capital expenditures associated with the new Omaha distribution facility, which
is expected to be completed in Q3 2002.
We maintain a revolving credit facility, referred to herein as the
"Facility," that allows us to borrow up to $55.0 million at any time, subject
to eligible accounts receivable and inventory requirements. The interest
rate on the facility is the bank's base rate, which is Prime. 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 at fiscal year end 2002
and quarterly thereafter, and minimum tangible net worth of $7.0 million for
fiscal year 2002.
At fiscal year end 2001, we were not in compliance with certain of our debt
covenants under the Facility. As a result, in December 2001, we received
waivers to our debt covenant violations. In addition, the financial
covenants were amended. After giving effect to the waiver and amendments, we
are in compliance with the covenants under the Facility as of March 2002. As
of March 2002, we had borrowing outstanding of approximately $36.2 million
under the Facility.
In January 2002, we negotiated a $1.5 million credit facility with a bank, at
the bank's base rate plus 1.0%, to be used to fund operating activities at
our natural spring water bottling operation in Hawaii, referred to herein as
the Water Facility. As of March 2002, the outstanding balance under the
Water Facility was $1.2 million.
In connection with the purchase of the Quincy, Illinois distribution business
in June 2001, we assumed an interest rate swap agreement with a bank. Under
the agreement, we agree to exchange, at specified intervals, fixed interest
amounts for variable interest amounts calculated by reference to an agreed-
upon notional principal amount of $25.0 million. The interest rate swap
effectively converts $25.0 million of our variable-rate senior debt to fixed-
rate debt (before accounting for the impact of the change in market value of
the interest rate swap derivative financial instrument) at a rate of 8.33%,
through the maturity of the swap agreement on May 27, 2003.
19
During the third quarter of fiscal 2001, we borrowed $6.9 million from a
bank, at a fixed rate of 7.5%, to purchase the distribution facility utilized
by Merchants, which was owned by Merchants' sole stockholder, referred to
herein as the Real Estate Loan, and to retire term debt. As of March 2002,
the outstanding balance on the Real Estate Loan was approximately $6.8
million.
The asset purchase agreement with Merchants provides for deferred payments to
be made to the seller totaling $3.6 million, which is required to be paid on
the first through fourth anniversaries of the closing date of the transaction
in installments of $0.9 million. In addition, we entered into a
noncompetition agreement with the seller totaling $0.4 million that requires
us to make payments of $0.1 million annually on the first through fourth
anniversary dates of the closing of the transaction. As of March 2002, the
carrying value, which represents the present value recorded upon acquisition,
of the outstanding obligations to the seller were approximately $3.4 million.
In connection with the purchase of Merchants, we assumed several capital
leases for office equipment, automobiles and warehouse equipment. As of
March 2002, the outstanding balances on the capital leases totaled
approximately $1.0 million.
In June 2001, we negotiated a $2.0 million credit facility with a bank, at
the bank's base rate plus 1.0%, to be used to fund the expansion and
remodeling of our retail health food stores, referred to herein as the Retail
Facility. As of March 2002, there was no balance on the Retail Facility.
In August 2000, borrowings of $0.6 million under the Facility, in addition to
$0.3 million under a subordinated note, at a fixed rate of 7.0%, referred to
herein as the TINK Note, were utilized to purchase all of the outstanding
common stock of TINK, Inc. As of March 2002, the outstanding balance of the
TINK Note was $0.3 million.
In November 1999, borrowings under a $0.2 million subordinated note, at a
fixed rate of 7.0%, referred to herein as the MDF Note, were used to purchase
the assets of MDF Health, Inc. As of March 2002, the outstanding balance of
the MDF Note was $0.1 million.
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 Facility were used to purchase all of the common stock
of Health Food Associates. Both the Convertible Note and the Collateralized
Note have five-year terms and bear interest at 8% per annum. Principal on
the Convertible Note is due in a single payment at maturity. Principal on
the Collateralized Note is payable in installments of $0.8 million per year
with the balance due at maturity. The principal balance of the Convertible
Note may be converted into stock of The Health Edge, Inc., formerly known as
Food for Health Co., under circumstances set forth in the Convertible Note.
As of March 2002, the outstanding balances of the Convertible Note and the
Collateralized Note were $2.0 million and $6.4 million, respectively.
AMCON has entered into a lease for a new distribution facility in Omaha,
Nebraska, which became effective in May 2002 when the lease on its former
Omaha, Nebraska distribution facility expired. AMCON expects capital
expenditures relating to equipment purchases and office build-out to be
approximately $1.2 million. It is anticipated that the source of funds
needed to complete these expenditures will be provided by a combination of
leasing and funding through the Facility.
20
CRITICAL ACCOUNTING POLICIES
Certain accounting policies used in the preparation of our financial
statements require us to make judgments and estimates and the financial
results we report may vary depending on how we make these judgements and
estimates. The following are the most critical accounting policies relating
to our financial statements.
Accounts receivable
- -------------------
Accounts receivable consist primarily of amounts due to us from our normal
business activities. We maintain an allowance for doubtful accounts to
reflect the expected uncollectibility of accounts receivable based on past
collection history and specific risks identified in the portfolio.
Inventories
- -----------
Inventories consist of finished products purchased in bulk quantities to be
sold to our customers. An allowance for obsolete inventory is maintained to
reflect the expected unsaleable or unrefundable inventory based on an
evaluation of slow moving products.
Goodwill and other identifiable intangible assets
- -------------------------------------------------
Goodwill associated with the excess purchase price over the fair value of
assets acquired and other identifiable intangible assets, such as trademarks
and trade names, favorable leases, and covenants not to compete, are
currently amortized on the straight-line method over their estimated useful
lives.
These assets are currently reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable.
As discussed herein, the FASB issued SFAS 141 and SFAS 142 in June 2001.
SFAS 141 requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting and broadens the
criteria for recording intangible assets separate from goodwill. SFAS 142
requires the use of a nonamortization approach to account for purchased
goodwill and certain intangibles. We plan to adopt these pronouncements
effective October 1, 2002. At such time we anticipate that amortization
associated with purchased goodwill will cease. For the six months ended
March 2002, goodwill amortization totaled approximately $0.1 million.
Revenue recognition
- -------------------
We recognize revenue when products are delivered to retail customers, which
generally is the same day products are shipped, or sold to consumers in
retail stores. Sales are shown net of returns, discounts, and sales
incentives.
Insurance
- ---------
Our insurance for worker's compensation, general liability, vehicle liability
and employee-related health care benefits are effectively self-insured. A
third-party administrator is used to process all such claims. We require all
worker's compensation claims to be reported within 24 hours. As a result, we
accrue our worker's compensation liability based upon the claim reserves
established by the third-party administrator each month. Our employee health
insurance benefit liability is based on our historical claims experience
rate. Our reserves associated with the exposure to these self-insured
liabilities are reviewed by management for adequacy at the end of each
reporting period.
21
ACQUISITIONS AND DISPOSITIONS
On December 17, 2001, the Company completed a merger with HNWC, pursuant to
which HNWC merged with and into, and thereby became, a wholly-owned
subsidiary of AMCON Distributing Company. The merger consideration 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. Each share of HNWC stock was
convertible into 0.052 shares of AMCON common stock. As a result, the
Company issued 373,558 shares of its common stock to outside HNWC
shareholders, or 12.0% of the Company's outstanding shares after giving
effect to the merger. HNWC option holders and warrant holders also received
comparable options and warrants of the Company, but with the exercise price
and number of shares covered thereby being adjusted to reflect the exchange
ratio.
Transaction costs, totaling approximately $0.3 million, were incurred to
complete the merger and consist primarily of fees and expenses for bankers,
attorneys and accountants, SEC filing fees, stock exchange listing fees and
financial printing and other related charges.
The merger is expected to qualify as a tax-free reorganization and 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 $3.4 million. The identifiable
intangible asset, the HNWC trade name, is being amortized over 20 years.
Although the amounts are subject to change based on evaluations performed
subsequently, the final purchase price allocation is not expected to
materially differ from those recorded on the accompanying unaudited condensed
balance sheet.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141")and Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles
being classified as goodwill, or alternatively, amounts initially recorded as
goodwill may be separately identified and recognized apart from goodwill.
SFAS 142 requires the use of a nonamortization approach to account for
purchased goodwill and certain intangibles. Under a nonamortization
approach, goodwill instead would be reviewed for impairment and written down
and charged to results of operations only in the periods in which the
impairment recognition criteria had been met and the recorded value of
goodwill and certain intangibles is more than its measured fair value. The
provisions of each statement, which apply to goodwill and intangible assets
acquired prior to June 30, 2001, must be adopted by the Company on October 1,
2002. Early application of SFAS 142 is permitted for the Company's fiscal
year beginning October 1, 2001, however the Company plans to adopt SFAS 142
for the fiscal year beginning October 1, 2002. As of March 2002, the Company
had approximately $6.3 million of goodwill reflected on the accompanying
condensed consolidated balance sheet. Amortization of goodwill for the six
months ended March 2002 totaled approximately $0.1 million.
22
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143
requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the long-
lived asset. The liability is discounted and accretion expense is recognized
using the credit-adjusted risk-free interest rate in effect when the
liability was initially recognized. SFAS 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002 (for the
fiscal year beginning October 1, 2002 for AMCON).
In August 2001, the FASB issued Statement of Financial Accounting Standard
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets to be held and used, to be
disposed of other than by sale and to be disposed of by sale. Although the
statement retains certain of the requirements of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), it
supercedes SFAS 121 and Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring
Events and Transactions", for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS 144 also amends Accounting
Research Bulletin No. 51, "Consolidated Financial Statements", to eliminate
the exception to consolidation for a subsidiary for which control is likely
to be temporary. SFAS 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within
those years (fiscal year beginning October 1, 2002 for AMCON), with early
adoption encouraged.
Management is still addressing the financial statement impact on future
periods resulting from the adoption of these statements.
RELATED PARTY TRANSACTIONS
During the three and six months ended March 2002, we were charged $15,000 and
$30,000, 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 outside directors for consulting services in connection with
its retail health food operations during the six months ended March 2002.
The amount paid for consulting services for the three and six months ended
March 2002 was $22,500 and $45,000, respectively, plus reimbursement of
expenses.
In addition, effective October 1, 2001, the president of the wholesale health
food distribution business, which was sold in March 2001, was terminated and
we entered into a four-year consulting agreement with him at the rate of
$104,000 per year. The total amount to be paid under the agreement
approximates the amount of our obligation under his employment agreement.
The amount paid for consulting services during the three and six months ended
March 2002 was $26,000 and $52,000, respectively.
23
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 and in our Annual
Report on Form 10-K, 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, 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.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In connection with the purchase of the Quincy, Illinois distribution business
in June 2001, we assumed an interest rate swap agreement with a bank. Under
the agreement, we agree to exchange, at specified intervals, fixed interest
amounts for variable interest amounts calculated by reference to an agreed-
upon notional principal amount of $25.0 million. The interest rate swap
effectively converts $25.0 million of our variable-rate senior debt to fixed-
rate debt (before accounting for the impact of the change in market value of
the interest rate swap derivative financial instrument) at a rate of 8.33%,
through the maturity of the swap agreement on May 27, 2003.
Due to the significant decline in variable interest rates from the date the
swap agreement was initially entered into, the negative fair value of the
swap instrument recorded as a liability on our balance sheet at the closing
date was approximately $0.9 million. Upon assuming the swap liability, we
did not designate the swap transaction as a hedge and therefore, we recognize
changes in the fair value of the instrument in current earnings (interest
expense). At March 2002, the swap instrument had a negative fair value of
approximately $1.0 million. The change in fair value of the swap instrument
from a negative fair value of $1.4 million as of fiscal year end 2001 to a
negative fair value of $1.0 million at March 2002 was recorded as a reduction
to interest expense in Q1 and Q2 2002.
We do not utilize financial instruments for trading purposes and hold no
derivative financial instruments which could expose us to significant market
risk. Our exposure to market risk relates primarily to our investment in the
common stock of Consolidated Water Company, a public company traded on the
NASDAQ National Market system, and for changes in interest rates on our long-
term obligations. At March 2002, we held 70,000 shares of common stock of
Consolidated Water Company valued at approximately $1.0 million. We value
this investment at market and record price fluctuations in equity as
unrealized gain or loss on investments. At March 2002, we had approximately
$12.4 million of variable rate debt outstanding, excluding $25.0 million in
debt offset by a fixed rate interest rate swap contract, with maturities
through May 2004. The interest rates on this debt ranged from 4.8% to 6.8%
at March 2002 We estimate that our annual cash flow exposure for each 1%
change in our lender's prime interest rate on our variable rate debt is
approximately $77,000.
Other than the changes noted above, there have been no material changes in
our market risk during Q2 2002. For additional information, refer to the
subsection "Market Risk" in "Management's Discussion and Analysis" set forth
in Item 1 of our 2001 Annual Report to Shareholders on Form 10-K for the
fiscal year ended September 2001.
25
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on March 21, 2002 for the
purpose of electing two directors and ratifying the appointment of its
auditors.
The following sets forth the results of the election of directors:
NAME OF NOMINEE FOR WITHHELD
J. Tony Howard 2,377,720 99.7% 6,991 0.3%
Allen D. Petersen 2,378,237 99.7% 6,474 0.3%
There was no solicitation in opposition to the nominees proposed to be
elected by the Stockholders in the Proxy Statement. In addition to the
directors elected at the Annual Meeting, the following directors continued
their term of office: Kathleen M. Evans, Timothy R. Pestotnik, William F.
Wright, William R. Hoppner and Stanley Mayer.
The ratification of the appointment of Deloitte & Touche LLP as independent
auditors for the Company for the fiscal year ending September 27, 2002 was
approved by the Stockholders with 2,381,582 votes FOR (99.9%), 3,030 votes
AGAINST, and 99 votes ABSTAINED OR BROKER NON-VOTES.
Further information regarding these matters is contained in the Company's
Proxy Statement dated February 14, 2002.
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)
26
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)
2.8 Stock Purchase Agreement dated August 30, 1999, by and among
Food For Health Company, Inc., Health Food Associates, Inc. and
its shareholders (incorporated by reference to Exhibit 2.1 of
AMCON's Current Report of Form 8-K filed on September 30, 1999)
2.9 Stock Purchase Agreement dated February 24, 1999, between Food
For Health Company, Inc., Chamberlin Natural Foods, Inc. and its
shareholders (incorporated by reference to Exhibit 2.2 of
AMCON's Quarterly Report on Form 10-Q filed on May 10, 1999)
3.1 Restated Certificate of Incorporation of the Company, as amended
March 19, 1998 (incorporated by reference to Exhibit 3.1 of
AMCON's Quarterly Report on Form 10-Q filed on May 11, 1998)
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2
of AMCON's Registration Statement on Form S-1 (Registration
No. 33-82848) filed on August 15, 1994)
4.1 Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 of AMCON's Registration Statement on Form S-1
(Registration No. 33-82848) filed on August 15, 1994)
10.1 Grant of Exclusive Manufacturing Rights, dated October 1, 1993,
between the Company and Famous Value Brands, a division of
Philip Morris Incorporated, including Private Label
Manufacturing Agreement and Amended and Restated Trademark
License Agreement (incorporated by reference to Exhibit 10.1 of
Amendment No. 1 to AMCON's Registration Statement on Form S-1
(Registration No. 33-82848) filed on November 8, 1994)
10.2 Amendment No. 1 to Grant of Exclusive Manufacturing Rights,
dated October 1, 1998, between the Company and Famous Value
Brands, a division of Philip Morris Incorporated, including
Amendment No. 1 To Private Label Manufacturing Agreement and
Amendment No. 1 to Amended and Restated Trademark License
Agreement (incorporated by reference to Exhibit 10.2 of AMCON's
Annual Report on Form 10-K filed on December 24, 1998)
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 (incorporated 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)
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10.7 Secured Promissory Note, dated September 15, 1999, by and
between Food For Health Company, Inc. and James C. Hinkefent
and Marilyn M. Hinkefent, as trustees of the James C. Hinkefent
Trust dated July 11, 1994, as amended, Eric Hinkefent, Mary Ann
O'Dell, Sally Sobol, and Amy Laminsky (incorporated by
reference to Exhibit 10.2 of AMCON's Current Report on Form 8-K
filed on September 30, 1999)
10.8 Pledge Agreement, dated September 15, 1999, by and between Food
For Health Company, Inc. and James C. Hinkefent and Marilyn M.
Hinkefent, as trustees of the James C. Hinkefent Trust dated
July 11, 1994, as amended, Eric Hinkefent, Mary Ann O'Dell,
Sally Sobol, and Amy Laminsky (incorporated by reference to
Exhibit 10.3 of AMCON's Current Report on Form 8-K filed on
September 30, 1999)
10.9 First Amended and Restated AMCON Distributing Company 1994
Stock Option Plan (incorporated by reference to Exhibit 10.17
of AMCON's Current Report on Form 10-Q filed on August 4, 2000)
10.10 AMCON Distributing Company Profit Sharing Plan (incorporated by
reference to Exhibit 10.8 of Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-82848)
filed on November 8, 1994)
10.11 Employment Agreement, dated May 22, 1998, between the Company
and William F. Wright (incorporated by reference to Exhibit
10.14 of AMCON's Quarterly Report on Form 10-Q filed on
August 6, 1998)
10.12 Employment Agreement, dated May 22, 1998, between the Company
and Kathleen M. Evans (incorporated by reference to Exhibit
10.15 of AMCON's Quarterly Report on Form 10-Q filed on
August 6, 1998)
11.1 Statement re: computation of per share earnings (incorporated by
reference to footnote 5 to the financial statements which are
incorporated herein by reference to Item 1 of Part I herein)
(b) REPORTS ON FORM 8-K:
The company filed a current report on Form 8-K under Items 2 and 7 on
January 2, 2002, which was amended on March 1, 2002, announcing the
completion of the merger transaction with Hawaiian Natural Water
Company, Inc.
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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, 2002 /s/ William F. Wright
----------------- -----------------------------
William F. Wright
Chairman of the Board and
Principal Executive Officer
Date: May 10, 2002 /s/ Michael D. James
----------------- -----------------------------
Michael D. James
Treasurer & CFO and
Principal Financial and
Accounting Officer
29