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 31, 1999
OR
/ / Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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COMMISSION FILE NUMBER 0-24708
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AMCON DISTRIBUTING COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of Incorporation)
10228 "L" Street
Omaha, NE 68127
(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
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The Registrant had 2,479,903 shares of its $.01 par value common stock
outstanding as of April 30, 1999.
Form 10-Q
2nd Quarter
INDEX
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
---------------------
Balance sheets at March 31, 1999
and at September 30, 1998 3
Statements of income for the three and six-month
periods ended March 31, 1999 and March 31, 1998 4
Statements of cash flows for the three and six-month
periods ended March 31, 1999 and March 31, 1998 5
Notes to unaudited financial statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMCON Distributing Company
Consolidated Balance Sheets
March 31, 1999 and September 30, 1998
- ---------------------------------------------------------------------------------------
(Unaudited)
March 31, September 30,
1999 1998
------------ -------------
ASSETS
Current assets:
Cash $ 65,574 $ 38,369
Accounts receivable, less allowance for
doubtful accounts of $544,215 and $460,753 16,077,374 15,229,107
Inventories 18,261,048 16,127,250
Deferred income taxes 719,550 570,743
Other 361,056 327,997
------------ ------------
Total current assets 35,484,602 32,293,466
Fixed assets, net 4,395,780 4,466,707
Investments 560,250 508,375
Other assets 4,307,267 2,375,189
------------ ------------
$ 44,747,899 $ 39,643,737
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,549,880 $ 7,350,645
Accrued expenses 1,528,952 1,329,843
Accrued wages, salaries and bonuses 719,411 675,562
Income taxes payable 1,804,214 1,023,944
Dividends payable 49,600 -
Current portion of long-term debt 5,515,626 3,439,169
------------ ------------
Total current liabilities 21,167,683 13,819,163
------------ ------------
Deferred income taxes 71,760 24,799
Other liabilities 425,438 427,419
Long-term debt, less current portion 11,707,282 15,767,659
Commitments
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized, none outstanding - -
Common stock, $.01 par value, 15,000,000
shares authorized and 2,480,000 issued 24,800 24,800
Additional paid-in capital 2,271,278 2,271,278
Unrealized gain on investments
available-for-sale, net of $159,700
and $139,468 tax 249,788 218,145
Retained earnings 8,830,185 7,090,789
------------ ------------
11,376,051 9,605,012
Less treasury stock, 97 shares at cost (315) (315)
------------ ------------
Total shareholders' equity 11,375,736 9,604,697
------------ ------------
$ 44,747,899 $ 39,643,737
============ ============
The accompanying notes are an integral part of these financial statements
AMCON Distributing Company
Consolidated Statements of Income
for the three and six-months ended March 31, 1999 and 1998
(Unaudited)
- -----------------------------------------------------------------------------------
For the three months For the six months
ended March 31 ended March 31
------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ------------- -----------
Sales (including excise taxes
of $12.6 million and $10.9 million,
and $25.9 million and $23.8
million, respectively) $90,039,560 $68,946,009 $172,348,320 $133,894,568
Cost of sales 80,686,423 61,533,784 152,349,237 119,316,333
----------- ----------- ------------ ------------
Gross profit 9,353,137 7,412,225 19,999,083 14,578,235
Selling, general and
administrative expenses 7,355,628 6,231,594 14,898,029 11,669,525
Depreciation and amortization 305,253 254,970 600,721 531,712
----------- ----------- ------------ ------------
7,660,881 6,486,564 15,498,750 12,201,237
----------- ----------- ------------ ------------
Income from operations 1,692,256 925,661 4,500,333 2,376,998
Other expense (income):
Interest expense 379,072 552,947 825,240 955,457
Other expense (income), net (111,995) (33,032) (145,260) (139,280)
----------- ----------- ------------ ------------
267,077 519,915 679,980 816,177
----------- ----------- ------------ ------------
Income before income taxes 1,425,179 405,746 3,820,353 1,560,821
Income tax expense 563,733 137,502 1,515,507 620,801
----------- ----------- ------------ ------------
Net income $ 861,446 $ 268,244 $ 2,304,846 $ 940,020
=========== =========== ============ ============
Earnings share
Basic $ 0.35 $ 0.11 $ 0.93 $ 0.38
=========== =========== ============ ============
Diluted $ 0.34 $ 0.11 $ 0.90 $ 0.38
=========== =========== ============ ============
Weighted average shares
outstanding:
Basic 2,479,903 2,449,903 2,479,903 2,449,903
=========== =========== ============ ============
Diluted 2,571,471 2,526,365 2,570,001 2,504,195
=========== =========== ============ ============
The accompanying notes are an integral part of these financial statements.
AMCON Distributing Company
Consolidated Statements of Cash Flows
for the six months ended March 31, 1999 and 1998
(Unaudited)
- ------------------------------------------------------------------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,304,847 $ 940,020
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 665,959 531,712
Gain on sales of fixed assets and securities (39,022) (39,844)
Proceeds from sale of trading securities - 157,206
Provision for losses on doubtful accounts 204,591 72,221
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts receivable (968,100) (246,855)
Inventories (1,037,515) (1,935,676)
Other current assets 14,082 23,746
Other assets (12,758) (199,452)
Accounts payable 2,129,558 322,931
Dividends payable 49,600 -
Accrued expenses and accrued wages,
salaries, and bonuses 90,021 (119,053)
Income taxes payable and deferred taxes (48,685) 362,309
----------- -----------
Net cash provided by (used in) operating activities 3,352,578 (130,735)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (378,617) (591,751)
Acquisitions, net of cash acquired (1,258,836) (7,119,254)
Proceeds from sales of fixed assets 38,600 41,708
----------- -----------
Net cash provided by (used in) investing activities (1,598,853) (7,669,297)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,080,000 4,500,000
Net (payments) proceeds on bank credit agreement (1,939,819) 3,666,595
Payments on long-term debt (767,501) (374,084)
Dividends paid (99,200) -
----------- -----------
Net cash provided by (used in) financing activities (1,726,520) 7,792,511
----------- -----------
Net increase (decrease)in cash 27,205 (7,521)
Cash, beginning of period 38,369 26,973
----------- -----------
Cash, end of period $ 65,574 $ 19,452
=========== ===========
The accompanying notes are an integral part of these financial statements.
AMCON Distributing Company
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying unaudited financial statements of AMCON Distributing Company
and its subsidiaries (the "Company") have been prepared on the same basis as
the audited financial statements for the year ended September 30, 1998, and,
in the opinion of management, contain all adjustments necessary to fairly
present the financial information included therein, such adjustments consist
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 30, 1998, which are included in the
Company's Annual Report to Stockholders filed with Form 10-K. Results for the
interim period are not necessarily indicative of results to be expected for
the entire year.
2. INVENTORIES:
Inventories consist of finished products purchased in bulk quantities to be
redistributed to the Company's customers. Effective in fiscal 1999, the
Company changed the method of accounting for inventory from the first-in,
first-out ("FIFO") method to the last-in, first-out ("LIFO") method. LIFO
inventories at March 31, 1999 were approximately $1,428,000 less than the
amount of such inventories valued on a FIFO basis.
3. CHANGE IN ACCOUNTING METHOD:
In fiscal 1999, the Company changed from the FIFO method of valuing inventory
to the LIFO method. The change in the inventory valuation method was made to
better match current costs with current revenue. The change to LIFO reduced
net income and basic earnings per share for the quarter and for the six months
ended March 31, 1999 by $870,900 and $0.35, respectively. There was no
significant impact on the quarter ended December 31, 1998 for the LIFO change
because of the timing of cigarette price increases. Pro forma effects of
retroactive application of LIFO are not determinable and there is no
cumulative effect on retained earnings at the beginning of the year.
4. EARNINGS PER SHARE:
Earnings per share was computed as presented below in accordance with
Statement of Financial Accounting Standards No. 128, "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.
For the three-month period ended March, 31,
------------------------------------------------
1999 1998
-------------------------- ----------------------
Basic Diluted Basic Diluted
----------- ----------- --------- ---------
1. Weighted average common
shares outstanding 2,480,000 2,480,000 2,450,000 2,450,000
2. Weighted average treasury
shares outstanding (97) (97) (97) (97)
3. Weighted average of net
additional shares outstanding
assuming dilutive options and
warrants exercised and proceeds
used to purchase treasury stock - 91,568 - 76,462
----------- ----------- --------- ---------
4. Weighted average number of
shares outstanding 2,479,903 2,571,471 2,449,903 2,526,365
=========== =========== ========= =========
5. Net income $ 861,446 $ 861,446 $ 268,244 $ 268,244
=========== =========== ========= =========
6. Earnings per share $ 0.35 $ 0.34 $ 0.11 $ 0.11
=========== =========== ========= =========
For the six-month period ended March, 31,
------------------------------------------------
1999 1998
-------------------------- ----------------------
Basic Diluted Basic Diluted
----------- ----------- --------- ---------
1. Weighted average common
shares outstanding 2,480,000 2,480,000 2,450,000 2,450,000
2. Weighted average treasury
shares outstanding (97) (97) (97) (97)
3. Weighted average of net
additional shares outstanding
assuming dilutive options and
warrants exercised and proceeds
used to purchase treasury stock - 90,098 - 54,292
----------- ----------- --------- ---------
4. Weighted average number of
shares outstanding 2,479,903 2,570,001 2,449,903 2,504,195
=========== =========== ========= =========
5. Net income $ 2,304,846 $ 2,304,846 $ 940,020 $ 940,020
=========== =========== ========= =========
6. Earnings per share $ 0.93 $ 0.90 $ 0.38 $ 0.38
=========== =========== ========= =========
In December 1998, the Board of Directors declared a cash dividend of $0.02 per
share which was paid in January 1999. In March 1999, the Board of Directors
declared a cash dividend of $0.02 per share which was paid in April 1999.
5. COMPREHENSIVE INCOME:
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 establishes reporting standards for reporting and display of
comprehensive income and its components in the financial statements.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The following is a reconciliation of net
income per the accompanying consolidated statements of income to comprehensive
income for the periods indicated:
For the three months For the six months
ended March 31 ended March 31
------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
Net income $ 861,446 $ 268,244 $ 2,304,846 $ 940,020
Other comprehensive income:
Unrealized holding gain (losses)
from investments arising during
the period, net of income taxes
of $(32,370), $4,358, $20,232
and $(30,502), respectively (50,631) 6,018 31,643 (42,122)
----------- ----------- ------------ ------------
Comprehensive income $ 810,815 $ 274,262 $ 2,336,489 $ 897,898
=========== =========== ============ ============
6. ACQUISITIONS:
On November 20, 1998, Food For Health Company, Inc., a wholly-owned subsidiary
of AMCON Distributing Company ("FFH"), purchased all of the outstanding stock
of U.S. Health Distributors, Inc. ("USHD"), a distributor of health and
natural foods based in Melbourne, Florida, for $1.3 million in cash. The
acquisition was funded by a $1.1 million, five and one-half year, term loan
from a bank. The loan bears interest at the bank's prime rate less 0.5%,
requires payments of interest only for the first six months and monthly
principal and interest payments for remaining the term of the loan. The loan
is collateralized by the common stock of USHD. The acquisition was accounted
for using the purchase method. Based on a preliminary allocation of the
purchase price, goodwill is estimated to be $1.7 million and will be amortized
over 25 years. Operating results since the acquisition were not material.
7. NEW ACCOUNTING PRONOUNCEMENTS:
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes
reporting standards for reporting disclosures about segments of an enterprise
and related information about different types of business activities in which
an enterprise engages and the different economic environments in which it
operates. This statement is effective for fiscal years beginning after
December 15, 1997, but is not required to be adopted in interim periods.
Therefore, the Company will adopt SFAS 131 in its annual report for the fiscal
year ended September 30, 1999.
8. SUBSEQUENT EVENTS:
In April, 1999, FFH purchased all of the outstanding stock of Chamberlin
Natural Foods, Inc. (d/b/a Chamberlin's Market & Cafe), a chain of six health
and natural food product retail stores based in Winter Park, Florida, for $2.2
million in cash. The acquisition was funded through the Company's revolving
line of credit. In addition, Chamberlin's existing short and long-term debt
of $2.8 was paid in full through borrowings under the "Facility." Costs and
expenses associated with the acquisition will be paid in the ordinary course
of business.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Comparison of the three-month and six-month periods ended March 31, 1999 and
March 31, 1998
Sales for the three months ended March 31, 1999 increased 30.6% to $90.0
million, compared to $68.9 million for the same period in prior fiscal year.
Sales from the traditional distribution business increased by $19.6 million
during the second quarter over the prior year as follows: Cigarette sales
increased approximately $18.2 million over the prior year(approximately 58%
was due to price increases over the past 12 months and the balance was due to
increased volume). Sales of non-cigarette products increased by $1.4 million
primarily due to increased volume. Sales from the health and natural foods
business, Food For Health, Co. Inc. and its subsidiary ("FFH"), increased by
$1.5 million as a result of sales generated by US Health Distributors, Inc.,
which was acquired by FFH in November 1998.
Sales for the six months ended March 31, 1999 increased 28.7% to $172.3
million, compared to $133.9 million for the same period in prior fiscal year.
Sales from the traditional distribution business through March 31, 1999 were
$32.3 million over the prior year as follows: Cigarette sales increased
approximately $29.7 million over the prior year(approximately 61% was due to
price increases over the past 12 months and the balance was due to increased
volume). Sales of non-cigarette products increased by $2.6 million primarily
due to increased volume. Sales from the health and natural foods business
increased by $6.1 million. This increase was due to FFH sales in the first
quarter being greater than the prior year and of sales generated by US Health
Distributors, Inc., which was acquired in November 1998. Since FFH was
acquired in November 1997, FFH's sales in the first quarter of the prior year
represented approximately one-half of the quarter.
Gross profit increased 26.2% to $9.4 million for the three months ended March
31, 1999 from $7.4 million over the same period during the prior year. Gross
profit as a percent of sales decreased to 10.4% for the quarter ended March
31, 1999 compared to 10.7% for the quarter ended March 31, 1998. The increase
in gross profit was primarily attributable to a substantial cigarette price
increase during the first quarter of the year which resulted from a settlement
that was reached between the major tobacco manufacturers and the various
states that had filed liability suits against the industry. This price
increase allowed the Company to achieve higher than normal profit margins on
cigarettes which were in inventory at the time of the price increase and sold
during the second quarter. The cigarette price increase accounted for
approximately $1.6 million in additional gross profit during the quarter as
compared to the prior year. In addition, gross profit increased by
approximately $1.8 million due to the increase in sales from both the
traditional and health and natural food businesses. These increases in gross
profit were partially offset by a $1.4 million LIFO inventory adjustment
during the second quarter.
Gross profit increased 37.2% to $20.0 million for the six months ended March
31, 1999 from $14.6 million over the same period during the prior year. Gross
profit as a percent of sales increased to 11.6% for the period compared to
10.9% for the six months ended March 31, 1998. The increases in gross profit
and gross profit percentage were primarily attributable to a substantial
cigarette price increase during the first quarter of the year which resulted
from a settlement that was reached between the major tobacco manufacturers and
the various states that had filed liability suits against the industry. This
price increase accounted for approximately $3.7 million in additional gross
margin for the six months ended March 31, 1999 as compared to the prior year.
In addition, gross profit increased by approximately $3.1 million due to the
increase in sales from both the traditional and health and natural food
businesses. These increases in gross profit were partially offset by a $1.4
million LIFO inventory adjustment during the second quarter. Margin
percentages are expected to return to historical levels throughout the
remainder of the fiscal year.
While sales of cigarettes have increased over the past five years, sales of
the Company's private label cigarettes have continued to decline since 1993
when cigarette manufacturers substantially reduced the price of premium brand
cigarettes. Since that time, the premium cigarette brands have thrived at the
expense of most generic brands. Also, cigarette price increases since 1993
have been identical for both premium and generic brands. Therefore, the price
differential between premium and major generic brands has not increased in the
past five years. The percentage difference between the prices of premium and
generic brands has actually declined. Most recently, in November 1998, an
announcement was made that a settlement had been reached between the major
tobacco manufacturers and the various states that had filed liability suits
against the industry. Immediately thereafter, the major cigarette
manufacturers increased the price of cigarettes by 30 - 35% on both premium
and generic brands, including the Company's private label brand. As a result,
management anticipates the volume of the Company's private label cigarettes
will continue to decline over the next few years. If such a decline is
realized, gross profit from private label cigarettes could decrease annually
by $300,000 to $500,000 in fiscal 1999 and 2000.
Total operating expense, which includes selling, general and administrative
expenses and depreciation and amortization, increased 18.1% or $1.2 million to
$7.7 million for the quarter ended March 31, 1999 compared to the same period
in fiscal 1998. The increase was primarily due to expenses associated with
increases in sales in both the traditional and health and natural foods
businesses. Operating expenses incurred by US Health Distributors, Inc.,
which was acquired in November 1998, accounted for $500,000 of the increase.
As a percentage of sales, total operating expense decreased to 8.5% from 9.4%
during the same period in the prior year. This decrease was primarily the
result of the substantial increase in sales, which occurred after cigarette
prices increased during the first quarter, without a corresponding increase in
expenses.
For the six month period ended March 31, 1999, total operating expense
increased 27.0% or $3.3 million to $15.5 million compared to the same period
in fiscal 1998. The increase was primarily due to expenses associated with the
health and natural food business which accounted for $2.0 million of the
increase in operating expenses. FFH was purchased midway through the first
quarter of fiscal 1998, therefore, FFH's operating expenses in the prior year
represent approximately 75% of the six month period. In addition, US Health
Distributors, Inc., which was purchased in November 1998, accounted for
approximately $670,000 of health and natural food business increase. As a
percentage of sales, total operating expense decreased to 9.0% from 9.1%
during the same period in the prior year. This decrease was primarily the
result of the substantial increase in sales which occurred after cigarette
prices increased during the first quarter.
As a result of the above, income from operations for the second quarter ended
March 31, 1999 increased by $767,000 or 82.8% to $1,692,000. Income from
operations for the six month period ended March 31, 1999 increased $2.1
million to $4.5 million.
Interest expense for the three months ended March 31, 1999 decreased 31.4% to
$379,000 compared to $553,000 during the same period in the prior year.
Interest expense for the six month period ended March 31, 1999 decreased 13.6%
to $825,000 compared to $955,000 during the prior year. The decreases were
primarily due to a reduction of $6.3 million and $3.0 million, respectively,
in the average amounts borrowed under the Company's revolving credit facility
when compared to the same periods in the prior year. In addition, the Company
was able to reduce its effective borrowing rate by approximately 1.0% by
refinancing its revolving credit facilities during the second quarter of the
prior year.
Other income for the three and six month periods ended March 31, 1999 of
$112,000 and $145,000, respectively, was generated by gains associated with
the sale of fixed assets, royalty payments associated with the sale of the
Denver non-alcoholic beverage business, miscellaneous industry promotional
income and dividends received on investment securities. Other income for the
three months ended March 31, 1998 of $33,000 was generated from royalty
payments, rent income and gains on sales of fixed assets. Other income for
the six months ended March 31, 1998 of $139,000 was generated from similar
activities as well as the gain associated with the sale of marketable
securities.
As a result of the above factors, net income during the three months ended
March 31, 1999 was $861,000 compared to $268,000 for the three months ended
March 31, 1998. Net income during the six months ended March 31, 1999 was
$2,305,000 compared to $940,000 for the first six months of the prior year.
The Company remains dependent on cigarette sales which represent approximately
66% of its revenue. As described in Management's Discussion and Analysis in
the Company's Annual Report to Shareholders for the Fiscal Year Ended
September 30, 1998, the convenience store distribution industry is very
competitive and the Company's operating income is subject to a number of
factors which are beyond the control of management. For example, changes in
manufacturers' cigarette pricing may affect the market for generic and private
label cigarettes as well as impact distributor's carrying costs of inventory
and accounts receivable and increase exposure to bad debt losses. Net income
is also dependent on sales of the Company's private label cigarettes. The
Company continues to evaluate various steps it may take to improve net income
in future periods, including acquisitions of distributing companies such as
the St. Louis distribution center and FFH, which were purchased in October and
November 1997, and US Health Distributors, Inc. which was purchased in
November of 1998, and continued sales of assets that are no longer essential
to its primary business activities, such as, investments and certain real
estate. An analysis of such assets held at March 31, 1999 is as follows:
ESTIMATE OF GAIN
-------------------------------
March 31, September 30,
DESCRIPTION OF ASSET 1999 1998
-------------------- ------------ -------------
Investments (available-for-sale) $409,000 $358,000
Condominium & furnishings 500,000 500,000
Investments consist of 83,000 shares of Consolidated Water Company Limited
(formerly Cayman Water Company Limited), a public company which is listed on
NASDAQ, at March 31, 1999 and September 30, 1998, respectively. The Company's
basis in the securities was $151,000 and the fair market value of the
securities was $560,000 and $508,000 on March 31, 1999 and September 30, 1998,
respectively. The fair market value of the securities on April 30, 1999 was
$622,000.
The condominium and furnishings consist of a condominium in the Cayman Islands
which is used in furtherance of the Company's business marketing strategies.
The Company is continuing to evaluate the costs and benefits associated with
retaining the condominium in relation to the current business strategies of
the Company.
YEAR 2000 READINESS
STATE OF READINESS. The Year 2000 computer issue is real and does impact the
way the Company's systems perform. In addition, the Company has business
relationships with a number of third parties whose Year 2000 problems could
impact the Company. Accordingly, the Company has recognized the Year 2000
issue as a major management and technology project. A taskforce has been
assembled to review all systems to ensure that they do not malfunction as a
result of the Year 2000 issue. The Year 2000 project includes review of
internal operating systems and equipment, other internal systems and equipment
(such as telephones, copiers and fax machines) and external services and
systems that are depended upon to operate the Company's business. In this
process, the Company expects to both replace some systems and upgrade others.
AMCON's internal operating system consists of midrange computers which are
used for the sales, accounts receivable and inventory systems. With the
exception of the accounts receivable system, the software operating on the
midrange computers does not generally operate or depend upon any date
structure, but rather the day-of-week and week-of-month. Therefore, software
risk to the Year 2000 issue is considered low. The remaining accounting
systems and other record keeping functions performed by the Company are
conducted on personal computers which are connected by a local area network.
AMCON has engaged third party computer consultants to review, test and modify
the midrange computer hardware and software to ensure they will function
correctly after December 31, 1999. The Company expects the critical portions
of this process will be completed by June 30, 1999 and believes that the Year
2000 problems relating to its internal operating systems will be resolved
without significant operational difficulties. However, there can be no
assurance that testing will discover all potential Year 2000 problems or that
it will not reveal unanticipated material problems with the Company's systems
that will need to be resolved.
Other internal systems are being evaluated by AMCON personnel, along with the
providers that service and maintain the systems with emphasis placed on
critical systems such as telephone systems. AMCON believes that the critical
systems are currently Year 2000 compliant and expects to have non-critical
systems modified or replaced by June 30, 1999.
AMCON has no control over the efforts of third parties with which it has
material business relationships. AMCON has undertaken the process of
contacting each major third party to determine their state of readiness for
Year 2000. Such parties include, but are not limited to, AMCON's suppliers of
inventory, customers, financial institutions and utility companies. AMCON has
received initial assurances from its major suppliers and financial
institutions that they will not be adversely affected by Year 2000 problems.
AMCON will continue to request updated information from these third parties in
order to assess their Year 2000 readiness.
COSTS. Through March 31, 1999, cumulative costs relating directly to Year
2000 issues have totaled approximately $68,000. A portion of the estimated
total costs include the cost of existing personnel who have been deployed to
work on various phases of the Year 2000 project. These costs do not include
system upgrades and replacements that were made in the normal course of
business. The deployment of internal resources to the Year 2000 project has
not resulted in significant delays to other major technology projects which
were planned by the Company. The Company estimates that remaining Year 2000
costs will total approximately $130,000, of which approximately $20,000, will
be capitalized and depreciated over a five year period.
RISKS. The Company believes that its will have successfully addressed the
Year 2000 problem before December 31, 1999. Therefore, the Company believes
that the most reasonably likely worst-case scenario will be that one or more
of the third parties with which the Company has a material business
relationship will not have successfully dealt with its Year 2000 issues. A
critical third party failure (such as telecommunication, utilities or
financial institutions) could have a material adverse affect on the Company by
eliminating the Company's ability to order and pay for products from suppliers
and receive orders and payments from customers. It is also possible that one
or more of the internal operating systems will not function properly and make
it difficult to complete routine tasks, such as accounting and other record
keeping duties. Based on information currently available, the Company does
not believe there will be any long-term operating system failures. However,
the Company will continue to monitor these issues as part of its Year 2000
project and will concentrate its efforts on minimizing their impact.
CONTINGENCY PLANS. The Company has not modified any specific contingency
plans with respect to its internal operating systems. The Company maintains
basic contingency plans which address short term operating system failure.
The Compay believes these contingency plans will be sufficient to cover
possible operating system distruption caused by Year 2000 problems. As the
Company completes installation and migration to new system hardware and
operating systems which are Year 2000 compliant and completes various phases
of the Year 2000 project, these contingency plans will be addressed and
modified if necessary. Contingency planning includes remote dial-up
connectivity from remote branches in the event that certain telecommunications
services fail to operate, direct faxing of orders to the distribution centers
and manual routing. The Company currently does not foresee contingency
planning in the product receiving, selling, order filling and delivery phases
of the Company's business as these areas are very labor intensive. The
Company may be required to perform certain accounting and other record keeping
functions manually should a Year 2000 problem become apparent in one or more
of those areas. AMCON also plans to terminate relationships with third party
service providers that are not able to demonstrate that they have successfully
resolved their Year 2000 problems in a timely manner. There will inevitably
be some third parties who will not have made proper Year 2000 modification.
The Company's contingency plan only addresses those third parties that are
considered critical to the Company's operation.
The foregoing Year 2000 discussion contains certain forward-looking
statements, including without limitation anticipated costs and the dates by
which the Company expects to substantially complete the modifications and
testing of systems and are based upon management's best current estimates,
which were derived utilizing numerous assumptions about future events,
including the continued availability of certain resources, representations
received from third parties and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results could
differ materially from those anticipated. Specific matters that might cause
such material differences include, but are not limited to, the availability
and cost of trained personnel, the ability to identify and convert all
relevant computer systems, results of Year 2000 testing, adequate
identification and resolution of Year 2000 issues by third party service
providers, suppliers or customers of the Company, unanticipated system costs,
the need to replace additional hardware, the adequacy of and ability to
implement contingency plans and similar uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended March 31, 1999, the Company utilized cash flow in
operating activities to finance increases in inventory in all branches in
anticipation of calendar year-end price increases and to finance accounts
receivable. Cash was utilized in investing activities during the three month
period ended March 31, 1999 primarily to purchase the common stock of U.S.
Health Distributors, Inc. ("USHD") in Melbourne, FL in November 1998 for $1.3
million. Cash was provided in financing activities through increases in the
FFH revolving credit facility and from a term note to finance the purchase of
USHD.
The Company had working capital of approximately $14.6 million as of March 31,
1999 compared to $18.5 million as of September 30, 1998. The Company's debt
to equity ratio was 2.88 to 1 at March 31, 1999 compared to 3.13 at September
30, 1998. The decrease was due to a reduction in the amount borrowed under
the Company's revolving credit facility.
The Company maintains two revolving credit facilities, the AMCON Distributing
Company revolving credit facility (the "Facility") and the FFH revolving
credit facility (the "FFH Facility"). The Facility allows the Company to
borrow up to $20 million at any time, subject to eligible accounts receivable
and inventory requirements. The Facility also provides for an additional $10
million facility which would be collateralized by specific inventory and a
$1.5 million facility to be used for transportation equipment purchases. The
Facility bears interest at the bank's prime rate ("Prime") less 0.5% or LIBOR
plus 1.75%, as selected by the Company. As of March 31, 1999, the Company had
borrowed approximately $7.4 million under the Facility. The Facility is
collateralized by all equipment, general intangibles, inventories and accounts
receivable of the Company, and with first mortgages on the Company's owned
distribution center and certain other real estate. The Facility expires on
February 25, 2002.
The FFH Facility provides for maximum borrowings of $6,000,000. Amounts under
the FFH facility bear interest at Prime less 0.5% or LIBOR plus 2.00%, as
selected by FFH. The borrowings under the FFH Facility are secured by the
assets of FFH and guaranteed by the Company. As of March 31, 1999, FFH had
borrowed approximately $4.9 million under the FFH Facility. The FFH Facility
expires on February 25, 2002.
The Company has an outstanding term loan from a bank which was used to finance
the purchase of the common stock of FFH (the "Acquisition Loan"). The
Acquisition Loan has a term of five years, bears interest at Prime less 0.5%
or LIBOR plus 1.75%, as selected by the Company and requires monthly payments
equal to accrued interest plus principal payments of $85,096, which began in
August 1998. As of March 31, 1999, the outstanding balance of the Acquisition
Loan was $3.7 million.
On November 20, 1998, FFH purchased all of the outstanding stock of USHD for
$1.3 million in cash. The acquisition was funded by a $1.1 million, five and
one-half year, term loan from a bank. The loan bears interest at Prime less
0.5%, requires payments of interest only for the first six months and monthly
principal and interest payments for the term of the loan. The loan is
collateralized by the common stock of USHD.
In January 1999, the Company utilized proceeds from the Facility to satisfy
its obligation associated with a $1,250,000 non-revolving line of credit with
a bank which was used to finance the purchase of trucks and delivery
equipment.
In April, 1999, FFH, purchased all of the outstanding stock of Chamberlin
Natural Foods, Inc. (d/b/a Chamberlin's Market & Cafe), a chain of six health
and natural food product retail stores based in Winter Park, Florida, for $2.2
million in cash. The acquisition was funded through borrowings on the
Facility. In addition, Chamberlin's existing short and long-term debt of $2.8
was paid in full through borrowings under the "Facility." Costs and expenses
associated with the acquisition will be paid in the ordinary course of
business.
The Company believes that funds generated from operations, supplemented as
necessary with funds available under the Facility and the FFH Facility, will
provide sufficient liquidity to cover its debt service and any reasonably
foreseeable future working capital and capital expenditure requirements.
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 include the words "future," "position,"
"anticipate(s)," "expect," "believe(s)," "see," "plan," "further improve,"
"outlook," "should" or similar expressions. For these statements, we claim
the protection of the safe harbor for forward looking statements contained in
the Private Securities Litigation Reform Act of 1995. You should understand
that the following important factors, in addition to those discussed elsewhere
in this document, could affect the future results of the Company and could
cause those results to differ materially from those expressed in our forward
looking statements: changing market conditions with regard to cigarettes and
the demand for the Company's products, domestic regulatory risks, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not utilize financial instruments for trading purposes and
holds no derivative financial instruments which could expose the Company to
significant market risk. The Company's exposure to market risk relates
primarily to its investment in the common stock of Consolidated Water Company
(formerly Cayman Water Company), a public company traded on the Nasdaq
National Market system, and for changes in interest rates to its long-term
obligations. At March 31, 1999, the Company held 83,000 shares of common
stock of Consolidated Water Company valued at $560,000. The Company values
this investment at market and records price fluctuations in equity as
unrealized gain or loss on investments. At March 31, 1999, the Company had
$17,105,000 of variable rate debt outstanding, with maturities through May
2004. The interest rates on this debt ranged from 6.875% to 7.25% at March
31, 1999. The Company's remaining obligation of $118,000 consists of a
capital lease maturing in May 2001 with an effective interest rate of 9.50%.
The Company has the ability to select the base on which its variable interest
rates are calculated. The Company may select an interest rate based on its
lenders prime interest rate or based on LIBOR. This provides the Company with
some control of its variable interest rate risk. The Company estimates that
its cash flow exposure relating to interest rate risk based on its current
borrowings is approximately $104,000 annually for each 1% change in its
lender's prime interest rate or LIBOR, as applicable.
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 18, 1999 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 1,613,591 65.1% 271 0.01%
Allen D. Petersen 1,613,585 65.1% 277 0.01%
There was no solicitation in opposition to the nominees proposed to be elected
by the Stockholders in the Proxy Statement.
The ratification of the appointment of PricewaterhouseCoopers as independent
auditors for the Company for the fiscal year ending September 24, 1999 was
approved by the Stockholders with 1,613,564 votes FOR (65.1%), 162 votes
AGAINST, and 136 votes ABSTAINED OR BROKER NON-VOTES.
Further information regarding these matters is contained in the Company's
Proxy Statement dated February 22, 1999.
Item 5. Other Information.
Food For Health Company, Inc. ("FFH"), an Arizona corporation and a wholly-
owned subsidiary of AMCON Distributing Company ("AMCON"), Chamberlin Natural
Foods, Inc.("Chamberlin"), a Florida corporation, Dale C. Bennett, Dale C.
Bennett as Trustee of the Alice M. Bennett Irrevocable Trust Dated August 8,
1991, Dale C. Bennett as Trustee of the Dale C. Bennett Revocable Trust dated
August 8, 1991, Kirk D. Bennett and Chad W. Bennett as Trustees of the Dale C.
Bennett Irrevocable Trust No. 1, Chad W. Bennett and Kirk D. Bennett
(collectively the "Bennetts")are parties to a Stock Purchase Agreement dated
February 24, 1999 (the "Stock Purchase Agreement").
On March 29, 1999, the Company's fiscal month of April 1999, upon terms set
forth in the Stock Purchase Agreement, FFH completed its purchase of all of
the outstanding stock of Chamberlin for a purchase price of $2.2 million.
There are no material relationships between FFH, Chamberlin and the Bennetts
and the purchase price was determined by arm's-length negotiations. Funding
for the acquisition was provided through borrowings under the Company's
revolving credit facility with LaSalle National Bank (the "Facility"). In
addition, Chamberlin's existing short and long-term debt of $2.8 was paid in
full through borrowings under the "Facility." Costs and expenses associated
with the acquisition will be paid in the ordinary course of business.
On March 30, 1999, AMCON and FFH issued a press release announcing that the
acquisition of Chamberlin pursuant to the Stock Purchase Agreement had been
completed. The press release is filed herewith as an exhibit and incorporated
herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBITS
2.1 Stock Purchase Agreement dated November 3, 1997, between the
Company and FFH Holdings, Inc. (incorporated by reference to
Exhibit 2.1 of the Company's Current Report on Form 8-K filed on
November 25, 1997)
2.2 Stock Purchase Agreement dated February 24, 1999, between Food
For Health Company, Inc. ("FFH"), an Arizona corporation and a
wholly-owned subsidiary of AMCON Distributing Company ("AMCON"),
Chamberlin Natural Foods, Inc.("Chamberlin"), a Florida
corporation, Dale C. Bennett, Dale C. Bennett as Trustee of the
Alice M. Bennett Irrevocable Trust Dated August 8, 1991, Dale C.
Bennett as Trustee of the Dale C. Bennett Revocable Trust dated
August 8, 1991, Kirk D. Bennett and Chad W. Bennett as Trustees
of the Dale C. Bennett Irrevocable Trust No. 1, Chad W. Bennett
and Kirk D. Bennett
3.1 Restated Certificate of Incorporation of the Company, as amended
March 19, 1998 (incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q filed on May 11, 1998)
3.3 Bylaws of the Company (incorporated by reference to Exhibit 3.2
of the Company'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 the Company'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
the Company'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 the Company's Annual Report on Form
10-K filed on December 24,
10.3 Loan Agreement, dated November 10, 1997, between the Company and
LaSalle National Bank (incorporated by reference to Exhibit 10.1
of the Company's Current Report on Form 8-K filed on November 25,
1997)
10.4 Amended Loan Agreement, dated February 25, 1998, between the
Company and LaSalle National Bank (incorporated by reference to
Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q
filed on May 11, 1998)
10.5 Note, dated November 10, 1997, between the Company and LaSalle
National Bank (incorporated by reference to Exhibit 10.2 of the
Company's Current Report on Form 8-K filed on November 25, 1997)
10.6 First Allonge to Note, dated February 25, 1998, between the
Company and LaSalle National Bank (incorporated by reference to
Exhibit 10.7 of the Company's Quarterly Report on Form 10-Q filed
on May 11, 1998)
10.7 Loan and Security Agreement, dated February 25, 1998, between the
Company and LaSalle National Bank (incorporated by reference to
Exhibit 10.8 of the Company's Quarterly Report on Form 10-Q filed
on May 11, 1998)
10.8 Promissory Note, dated February 25, 1998, between the Company and
LaSalle National Bank (incorporated by reference to Exhibit 10.9
of the Company's Quarterly Report on Form 10-Q filed on May 11,
1998)
10.9 Loan and Security Agreement, dated February 25, 1998, between
Food For Health Co., Inc. and LaSalle National Bank (incorporated
by reference to Exhibit 10.10 of the Company's Quarterly Report
on Form 10-Q filed on May 11, 1998)
10.10 Promissory Note, dated February 25, 1998, between Food For
Health Co., Inc. and LaSalle National Bank (incorporated by
reference to Exhibit 10.11 of the Company's Quarterly Report on
Form 10-Q filed on May 11, 1998)
10.11 Loan and Security Agreement, dated November 20, 1998, between
Food For Health Co., Inc. and LaSalle National Bank (to be
supplied by amendment)
10.12 Promissory Note, dated November 20, 1998, between Food For
Health Co., Inc. and LaSalle National Bank (to be supplied by
amendment)
10.13 Unconditional Guarantee, dated February 25, 1998, between the
Company and LaSalle National Bank (incorporated by reference to
Exhibit 10.12 of the Company's Quarterly Report on Form 10-Q
filed on May 11, 1998)
10.14 AMCON Distributing Company 1994 Stock Option Plan (incorporated
by reference to Exhibit 10.7 of the Company's Registration
Statement on Form S-1 (Registration No. 33-82848) filed on
August 15, 1994)
10.15 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)
10.16 Employment Agreement, dated May 22, 1998, between the Company
and William F. Wright (incorporated by reference to Exhibit
10.14 of the Company's Quarterly Report on Form 10-Q filed on
August 6, 1998)
10.17 Employment Agreement, dated May 22, 1998, between the Company
and Kathleen M. Evans (incorporated by reference to Exhibit
10.15 of the Company's Quarterly Report on Form 10-Q filed on
August 6, 1998)
10.18 Employment Agreement, dated May 22, 1998, between the Food For
Health Co., Inc. and Jerry Fleming (incorporated by reference to
Exhibit 10.16 of the Company'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 4 to the financial statements included in
Item 1 of Part I herein)
18.0 Letter Regarding Change in Accounting Principles
27.0 Financial Data Schedules
99.1 Press release, dated March 30, 1999, issued by AMCON
Distributing Company and Food For Health Company, Inc.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the first
quarter ended March 31, 1999.
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, 1999 Kathleen M. Evans
----------------- -------------------------
Kathleen M. Evans
President & Principal
Executive Officer
Date: May 10, 1999 Michael D. James
----------------- -------------------------
Michael D. James
Treasurer & CFO and
Principal Financial and
Accounting Officer