SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 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 July 30, 1999.
Form 10-Q
3rd Quarter
INDEX
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
---------------------
Balance sheets at June 30, 1999
and at September 30, 1998 3
Statements of income for the three and nine-month
periods ended June 30, 1999 and June 30, 1998 4
Statements of cash flows for the nine-month period
ended June 30, 1999 and June 30, 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 6. Exhibits and Reports on Form 8-K 17
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
AMCON Distributing Company
Consolidated Balance Sheets
June 30, 1999 and September 30, 1998
- ---------------------------------------------------------------------------------------
(Unaudited)
June 30, September 30,
1999 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 348,207 $ 38,369
Accounts receivable, less allowance for
doubtful accounts of $558,003 and $460,753 17,289,406 15,229,107
Inventories 18,197,533 16,127,250
Deferred income taxes 702,780 570,743
Other 477,553 327,997
------------ ------------
Total current assets 37,015,479 32,293,466
Fixed assets, net 6,775,333 4,466,707
Investments 622,500 508,375
Other assets 5,997,868 2,375,189
------------ ------------
$ 50,411,180 $ 39,643,737
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,099,091 $ 7,350,645
Accrued expenses 2,023,606 1,329,843
Accrued wages, salaries and bonuses 636,211 675,562
Income taxes payable 1,335,549 1,023,944
Dividends payable 49,600 -
Current portion of long-term debt 6,381,132 3,439,169
------------ ------------
Total current liabilities 21,525,189 13,819,163
------------ ------------
Deferred income taxes 15,600 24,799
Other liabilities 428,697 427,419
Long-term debt, less current portion 15,761,290 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 $183,977
and $139,468 tax 287,761 218,145
Retained earnings 10,096,880 7,090,789
------------ ------------
12,680,719 9,605,012
Less treasury stock, 97 shares at cost (315) (315)
------------ ------------
Total shareholders' equity 12,680,404 9,604,697
------------ ------------
$ 50,411,180 $ 39,643,737
============ ============
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
AMCON Distributing Company
Consolidated Statements of Income
for the three and nine-months ended June 30, 1999 and 1998
(Unaudited)
- ------------------------------------------------------------------------------------
For the three months For the nine months
ended June 30 ended June 30
-------------------------- ---------------------------
1999 1998 1999 1998
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Sales (including excise taxes
of $14.0 million and $13.9 million,
and $39.9 million and $37.7
million, respectively) $103,650,576 $77,650,819 $275,998,896 $211,545,387
Cost of sales 92,985,488 69,312,856 245,334,725 188,629,189
------------ ----------- ------------ ------------
Gross profit 10,665,088 8,337,963 30,664,171 22,916,198
Selling, general and
administrative expenses 8,449,417 6,463,812 23,347,446 18,133,338
Depreciation and amortization 452,401 265,327 1,053,122 797,039
------------ ----------- ------------ ------------
8,901,818 6,729,139 24,400,568 18,930,377
------------ ----------- ------------ ------------
Income from operations 1,763,270 1,608,824 6,263,603 3,985,821
Other expense (income):
Interest expense 409,504 454,595 1,234,745 1,410,052
Other income, net (6,404) (81,796) (151,666) (221,078)
------------ ----------- ------------ ------------
403,100 372,799 1,083,079 1,188,974
------------ ----------- ------------ ------------
Income before income taxes 1,360,170 1,236,025 5,180,524 2,796,847
Income tax expense 510,127 482,405 2,025,633 1,103,207
------------ ----------- ------------ ------------
Net income $ 850,043 $ 753,620 $ 3,154,891 $ 1,693,640
============ =========== ============ ============
Earnings share
Basic $ 0.34 $ 0.31 $ 1.27 $ 0.69
=========== =========== ============ ============
Diluted $ 0.33 $ 0.29 $ 1.23 $ 0.67
=========== =========== ============ ============
Weighted average shares
outstanding:
Basic 2,479,903 2,452,540 2,479,903 2,450,782
=========== =========== ============ ============
Diluted 2,579,915 2,571,660 2,571,997 2,532,464
=========== =========== ============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
AMCON Distributing Company
Consolidated Statements of Cash Flows
for the nine months ended June 30, 1999 and 1998
(Unaudited)
- ------------------------------------------------------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,154,891 $ 1,693,640
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,082,970 797,039
Gain on sales of fixed assets and securities (40,772) (45,076)
Proceeds from sale of trading securities - 157,206
Provision for losses on doubtful accounts 197,554 -
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts receivable (2,371,556) (1,034,574)
Inventories (818,906) (6,096,911)
Other current assets (23,510) (23,956)
Other assets 13,705 (203,696)
Accounts payable 2,532,527 3,065,383
Accrued expenses and accrued wages,
salaries, and bonuses 159,999 (190,864)
Income taxes payable and deferred taxes (165,303) 483,866
----------- -----------
Net cash provided by (used in) operating activities 3,721,599 (1,397,943)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (491,837) (711,044)
Acquisitions, net of cash acquired (3,411,450) (7,119,254)
Proceeds from sales of fixed assets 46,830 60,341
----------- -----------
Net cash used in investing activities (3,856,457) (7,769,957)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,080,000 4,500,000
Net (payments) proceeds on bank credit agreement 2,997,695 5,010,364
Payments on long-term debt (3,533,799) (336,865)
Proceeds from issuance of common stock - 3,000
Dividends paid (99,200) -
----------- -----------
Net cash provided by financing activities 444,696 9,176,499
----------- -----------
Net increase (decrease)in cash 309,838 8,599
Cash, beginning of period 38,369 26,973
----------- -----------
Cash, end of period $ 348,207 $ 35,572
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
AMCON Distributing Company
Notes to Consolidated Financial Statements
June 30, 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 June 30, 1999 were approximately $1,446,000 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 nine months ended June 30,
1999 by $889,200 and $0.36, respectively. 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.
<TABLE>
<CAPTION>
For the three-month period ended June 30,
------------------------------------------------
1999 1998
-------------------------- ----------------------
Basic Diluted Basic Diluted
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
1. Weighted average common
shares outstanding 2,480,000 2,480,000 2,452,637 2,452,637
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 - 100,012 - 119,120
----------- ----------- --------- ---------
4. Weighted average number of
shares outstanding 2,479,903 2,579,915 2,452,540 2,571,660
=========== =========== ========= =========
5. Net income $ 850,043 $ 850,043 $ 753,620 $ 753,620
=========== =========== ========= =========
6. Earnings per share $ 0.34 $ 0.33 $ 0.31 $ 0.29
=========== =========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
For the nine-month period ended June, 30,
--------------------------------------------------
1999 1998
------------------------- -------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1. Weighted average common
shares outstanding 2,480,000 2,480,000 2,450,879 2,450,879
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 - 92,094 - 81,682
----------- ----------- ----------- -----------
4. Weighted average number of
shares outstanding 2,479,903 2,571,997 2,450,782 2,532,464
=========== =========== =========== ===========
5. Net income $ 3,154,891 $ 3,154,891 $ 1,693,640 $ 1,693,640
=========== =========== =========== ===========
6. Earnings per share $ 1.27 $ 1.23 $ 0.69 $ 0.67
=========== =========== =========== ===========
</TABLE>
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. In
June 1999, the Board of Directors declared a cash dividend of $0.02 per share
which was paid in July 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:
<TABLE>
<CAPTION>
For the three months For the nine months
ended June 30, ended June 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 850,043 $ 753,620 $ 3,154,891 $ 1,693,640
Other comprehensive income:
Unrealized holding gain (losses)
from investments arising during
the period, net of income taxes
of $24,277, $8,715, $44,509
and $(21,788), respectively 37,973 12,035 69,616 (30,087)
----------- ----------- ----------- -----------
Comprehensive income $ 888,016 $ 765,655 $ 3,224,507 $ 1,663,553
=========== =========== =========== ===========
</TABLE>
6. ACQUISITIONS:
In November 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.
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 million 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. 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Comparison of the three-month and nine-month periods ended June 30, 1999 and
June 30, 1998
Sales for the three months ended June 30, 1999 increased 33.5% to $103.7
million, compared to $77.7 million for the same period in prior fiscal year.
Sales from the traditional distribution business increased by $20.2 million
during the third quarter over the prior year as follows: Cigarette sales
increased approximately $18.3 million over the prior year(approximately 78%
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 $1.9 million
primarily due to increased volume. Sales from our health and natural foods
business, Food For Health, Co. Inc. and its subsidiaries ("FFH"), increased by
$5.8 million primarily as a result of $3.2 million in sales generated by
Chamberlin Natural Foods, Inc. ("CNF") which was acquired by FFH in April 1999
and $1.7 million is sales from US Health Distributors, Inc., ("USHD")which was
acquired by FFH in November 1998. In addition, FFH's separate company sales
increased by approximately $1.0 million due to increased business attributable
to the Texas facility.
Sales for the nine months ended June 30, 1999 increased 30.5% to $276.0
million, compared to $211.5 million for the same period in prior fiscal year.
Sales from the traditional distribution business through June 30, 1999 were
$52.5 million over the prior year as follows: Cigarette sales increased
approximately $48.0 million over the prior year(approximately 67% 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 $4.6 million primarily
due to increased volume. Sales from the health and natural foods business
increased by $11.9 million. This increase was primarily due to $3.2 million
in sales generated by CNF which was acquired by FFH in April 1999 and $4.1
million of sales generated by USHD which was acquired in November 1998.
Additionally, because FFH was acquired mid-way through the first quarter of
fiscal 1998, FFH's sales in the first quarter were approximately $4.1 greater
than the prior year.
Gross profit increased 27.9% to $10.7 million for the three months ended June
30, 1999 from $8.3 million over the same period during the prior year. Gross
profit as a percent of sales decreased to 10.3% for the quarter ended June 30,
1999 compared to 10.7% for the quarter ended June 30, 1998. The increase in
gross profit dollars for the quarter was primarily attributable to the health
and natural foods business which contributed $2.0 million of the increase in
gross profit as compared to the third quarter of the prior year.
Approximately $1.8 million of the gross profit increase in the health and
natural foods business was generated by CNF and USHD, which were both acquired
during the current fiscal year. Gross profit from our traditional business in
the third quarter of the prior year included $570,000 attributable to price
increases from cigarette manufacturers during the quarter. Excluding these
price increases, gross profit from our traditional business grew approximately
$916,000 when compared to the third quarter of fiscal 1998. The decrease in
gross profit percentage is the result of a significant price increase in
cigarettes during the first quarter of the current fiscal year. Since
cigarettes sales represent approximately 65% of our total sales, but generate
a lower gross profit percentage than our other products, a significant
increase in the price adversely affects our gross profit percentage.
Gross profit increased 33.8% to $30.7 million for the nine months ended June
30, 1999 from $22.9 million over the same period during the prior year. Gross
profit as a percent of sales increased to 11.1% for the period compared to
10.8% for the nine months ended June 30, 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 nine months ended June 30, 1999 compared to $930,000 in the
prior year. In addition, gross profit increased by approximately $3.0 million
due to the increase in sales from both the traditional and health and natural
food businesses and $2.5 million from CNF and USHD, which were both acquired
during the current fiscal year. These increases in gross profit were
partially offset by a $1.4 million LIFO inventory adjustment during the second
and third quarters.
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. Management estimates that
gross profit from private label cigarettes will be approximately $400,000 less
in fiscal 1999 than in fiscal 1998. In addition, gross profit from private
label cigarettes could decrease by $200,000 to $400,000 in fiscal 2000.
Total operating expense, which includes selling, general and administrative
expenses and depreciation and amortization, increased 32.3% to $8.9 million
for the quarter ended June 30, 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 and CNF
and USHD, which were acquired during the current fiscal year. Operating
expenses incurred by CNF and USHD, accounted for $1.5 million of the increase.
As a percentage of sales, total operating expense decreased to 8.6% from 8.7%
during the same period in the prior year. This decrease was primarily the
result of the substantial increase in sales attributable to the cigarette
price increase during the first quarter of the current fiscal year, without a
corresponding increase in expenses and additional expenses incurred by FFH
which were related to the operations of CNF and USHD.
For the nine month period ended June 30, 1999, total operating expense
increased 28.9% to $24.4 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 $3.7 million of the increase in
operating expenses. CNF and USHD, which were acquired during the current
fiscal year accounted for $2.2 million of the increase. In addition, since
FFH was purchased midway through the first quarter of fiscal 1998, FFH's
operating expenses in the prior year represent approximately 83% of the nine
month period. As a percentage of sales, total operating expense decreased to
8.8% from 8.9% 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 and additional expenses
incurred by FFH which were related to the operations of CNF and USHD.
As a result of the above, income from operations for the third quarter ended
June 30, 1999 increased by $150,000 to $1.8 million. Income from operations
for the nine month period ended June 30, 1999 increased $2.3 million to $6.3
million.
Interest expense for the three months ended June 30, 1999 decreased 9.9% to
$410,000 compared to $455,000 during the same period in the prior year.
Interest expense for the nine month period ended June 30, 1999 decreased 12.4%
to $1.2 million compared to $1.4 million during the prior year. The decreases
were primarily due to a 60 to 90 basis point reduction in our average
borrowing rate during the quarter and nine-months ended June 30, 1999.
Other income for the three months ended June 30, 1999 of $6,400 was primarily
attributable to gains associated with the sale of fixed assets, royalty
payments and dividends received on investment securities. Other income for
the nine months ended June 30, 1999 of $152000 was generated by gains
associated with the sale of fixed assets, royalty payments, miscellaneous
industry promotional income and dividends received on investment securities.
Other income for the nine months ended June 30, 1998 of $221,000 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
June 30, 1999 was $850,000 compared to $754,000 for the three months ended
June 30, 1998. Net income during the nine months ended June 30, 1999 was
$3,155,000 compared to $1,694,000 for the first nine months of the prior year.
AMCON remains dependent on cigarette sales which represent approximately 65%
of its revenue. As described in Management's Discussion and Analysis in our
Annual Report to Shareholders for the Fiscal Year Ended September 30, 1998,
the convenience store distribution industry is very competitive and the our
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 AMCON's private label cigarettes. We continue to evaluate
various steps we may take to improve net income in future periods, including
acquisitions of distributing and retail companies such as the St. Louis
distribution center and FFH, which were purchased in October and November
1997, and USHD and CNF which were purchased in November 1998 and April 1999,
respectively, and continued sales of assets that are no longer essential to
our primary business activities, such as, investments and certain real estate.
An analysis of such assets held at June 30, 1999 is as follows:
ESTIMATE OF GAIN
-------------------------------
June 30, September 30,
DESCRIPTION OF ASSET 1999 1998
-------------------- ------------ -------------
Investments (available-for-sale) $472,000 $358,000
Condominium & furnishings 500,000 500,000
Investments at June 30, 1999 and September 30, 1998, respectively, consisted
of 83,000 shares of Consolidated Water Company Limited (formerly Cayman Water
Company Limited), a public company which is listed on NASDAQ. The Company's
basis in the securities was $151,000 and the fair market value of the
securities was $623,000 and $508,000 on June 30, 1999 and September 30, 1998,
respectively. The fair market value of the securities on July 30, 1999 was
$612,000.
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, AMCON has business
relationships with a number of third parties whose Year 2000 problems could
impact our Company. Accordingly, we have 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, we have
both replaced some systems and upgraded 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. We have completed all software conversions
affiliated with the Year 2000 issue and believe that the Year 2000 problems
relating to our internal operating systems will be resolved without
significant operational difficulties. Testing of all Year 2000 converted
software is currently in process and is expected to be completed by September
30, 1999. 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 our systems that will need to be resolved.
Other internal systems have been evaluated by our own personnel, along with
the providers that service and maintain the systems with emphasis placed on
critical systems such as telephone systems. We believe that all of our
internal systems are currently Year 2000 compliant.
AMCON has no control over the efforts of third parties with which we have
material business relationships. We have 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. We will continue
to request updated information from these third parties in order to assess
their Year 2000 readiness.
COSTS. Through June 30, 1999, cumulative costs relating directly to Year 2000
issues have totaled approximately $120,000. 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. Management estimates that remaining Year 2000 costs will total
approximately $40,000, of which approximately $20,000, will be capitalized and
depreciated over a five year period.
RISKS. We believe that we will have successfully addressed the Year 2000
problem before December 31, 1999. Therefore, we believe that the most
reasonably likely worst-case scenario will be that one or more of the third
parties with which AMCON 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 us by eliminating our 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, we do not believe there will be any long-term operating system
failures. However, we will continue to monitor these issues as part of our
Year 2000 project and will concentrate our efforts on minimizing their impact.
CONTINGENCY PLANS. AMCON has not modified any specific contingency plans with
respect to our internal operating systems. We maintain basic contingency
plans which address short term operating system failure. We believe these
contingency plans will be sufficient to cover possible operating system
disruption caused by Year 2000 problems. As we complete migration to, and
testing of, new system hardware and operating systems which are Year 2000
compliant and complete the final phases of our 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 telecommunication services fail to operate, direct faxing
of orders to the distribution centers and manual routing. Management
currently does not foresee contingency planning in the product receiving,
selling, order filling and delivery phases of our business as these areas are
very labor intensive. We 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. We also plan 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. Our contingency plan only addresses those
third parties that are considered critical to our operations.
The foregoing Year 2000 discussion contains certain forward-looking
statements, including without limitation anticipated costs and the dates by
which AMCON 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 AMCON, 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 nine months ended June 30, 1999, AMCON utilized cash flow in
operating activities to finance increases in accounts receivable due to the
significant increase in the selling price of cigarettes and to support
increases in non-tobacco related inventory from both traditional and health
food businesses. Additionally, cash was provided by operating activities
through increased accounts payable related to the increases in inventory.
Cash was utilized in investing activities during the nine month period ended
June 30, 1999 primarily to purchase the common stock of USHD in November 1998
for $1.3 million and CNF in April 1999 for 2.2 million. In addition, cash was
utilized to repay CNF's existing short and long-term debt of $2.8 million.
Cash was provided by financing activities through increases in the FFH
revolving credit facility, from a term note to finance the purchase of USHD
and through increases in AMCON's revolving credit facility to finance the
purchase of CNF.
AMCON had working capital of approximately $15.5 million as of June 30, 1999
compared to $18.5 million as of September 30, 1998. Our debt to equity ratio
was 2.98 to 1 at June 30, 1999 compared to 3.13 to 1 at September 30, 1998.
Although accounts payable and amounts borrowed under our revolving credit
facilities were greater at June 30, 1999 than at September 30, 1999, these
increases in debt were more than offset by the increase in equity related to
net income earned year-to-date.
AMCON 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 AMCON 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 June 30, 1999, AMCON had
borrowed approximately $12.1 million under the Facility. The Facility is
collateralized by all of our equipment, general intangibles, inventories and
accounts receivable, and with first mortgages on our 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 FFH. As of June 30, 1999, FFH had borrowed
approximately $5.3 million under the FFH Facility. The FFH Facility expires
on February 25, 2002.
AMCON 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 ending on November 10, 2002, bears interest at
Prime less 0.5% or LIBOR plus 1.75%, as selected by us and requires monthly
payments equal to accrued interest plus principal payments of $85,096, which
began in August 1998. As of June 30, 1999, the outstanding balance of the
Acquisition Loan was $3.5 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 "USHD Acquisition Loan"). The loan
bears interest at Prime less 0.5%, requires payments of interest only for the
first nine months and monthly principal and interest payments for the term of
the loan. The loan is collateralized by the common stock of USHD. As of June
30, 1999, the outstanding balance of the USHD Acquisition Loan was $1.1
million.
In January 1999, AMCON 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 were paid in the ordinary course of business.
AMCON's has additional indebtedness of approximately $105,000 consisting of a
capital lease for computer equipment. The capital lease has an effective
interest rate of 9.50% and matures in May 2001.
Management 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 our future results 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 our products, domestic regulatory risks, competitive and other
risks over which we have 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.
AMCON does not utilize financial instruments for trading purposes and holds 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 (formerly Cayman Water Company), a
public company traded on the Nasdaq National Market system, and for changes in
interest rates to our long-term obligations. At June 30, 1999, we held 83,000
shares of common stock of Consolidated Water Company valued at $623,000. We
value this investment at market and record price fluctuations in equity as
unrealized gain or loss on investments. At June 30, 1999, we had $22,037,000
of variable rate debt outstanding, with maturities through May 2004. The
interest rates on this debt ranged from 6.875% to 7.50% at June 30, 1999. We
have the ability to select the base on which our variable interest rates are
calculated and may select an interest rate based on the lenders prime interest
rate or based on LIBOR. This provides management with some control of AMCON's
variable interest rate risk. Management estimates that AMCON's cash flow
exposure relating to interest rate risk based on our current borrowings is
approximately $136,000 annually for each 1% change in the lender's prime
interest rate or LIBOR, as applicable.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBITS
2.1 Stock Purchase Agreement dated November 3, 1997, between the
AMCON Distributing Company ("AMCON") and FFH Holdings, Inc.
(incorporated by reference to Exhibit 2.1 of the AMCON'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, 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 (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 AMCON, 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)
3.3 Bylaws of AMCON (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 AMCON 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 AMCON 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 Agreement, dated November 10, 1997, between AMCON and
LaSalle National Bank (incorporated by reference to Exhibit 10.1
of AMCON's Current Report on Form 8-K filed on November 25, 1997)
10.4 Amended Loan Agreement, dated February 25, 1998, between AMCON
and LaSalle National Bank (incorporated by reference to Exhibit
10.5 of AMCON's Quarterly Report on Form 10-Q filed on May 11,
1998)
10.5 Note, dated November 10, 1997, between AMCON and LaSalle
National Bank (incorporated by reference to Exhibit 10.2 of
AMCON's Current Report on Form 8-K filed on November 25, 1997)
10.6 First Allonge to Note, dated February 25, 1998, between AMCON and
LaSalle National Bank (incorporated by reference to Exhibit 10.7
of AMCON's Quarterly Report on Form 10-Q filed on May 11, 1998)
10.7 Loan and Security Agreement, dated February 25, 1998, between
AMCON and LaSalle National Bank (incorporated by reference to
Exhibit 10.8 of AMCON's Quarterly Report on Form 10-Q filed
on May 11, 1998)
10.8 Promissory Note, dated February 25, 1998, between AMCON and
LaSalle National Bank (incorporated by reference to Exhibit 10.9
of AMCON'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 AMCON'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 AMCON's Quarterly Report on
Form 10-Q filed on May 11, 1998)
10.11 First Amendment to Loan and Security Agreement, dated November
18, 1998, between Food For Health Co., Inc. and LaSalle National
Bank (incorporated by reference to Exhibit 10.11 of AMCON's
Quarterly Report on Form 10-Q/A filed on August 5, 1999)
10.12 First Amendment and Allonge to Promissory Note, dated November
18, 1998, between Food For Health Co., Inc. and LaSalle National
Bank (incorporated by reference to Exhibit 10.12 of AMCON's
Quarterly Report on Form 10-Q/A filed on August 5, 1999)
10.13 Unconditional Guarantee, dated February 25, 1998, between the
Company and LaSalle National Bank (incorporated by reference to
Exhibit 10.12 of AMCON'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 AMCON'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 AMCON'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 AMCON 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)
10.17 Employment Agreement, dated May 22, 1998, between AMCON and
Kathleen M. Evans (incorporated by reference to Exhibit 10.15
of AMCON's Quarterly Report on Form 10-Q filed on August 6,
1998)
10.18 Employment Agreement, dated May 22, 1998, between the Food For
Health Co., Inc. and Jerry Fleming (incorporated by reference to
Exhibit 10.16 of 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 4 to the financial statements included in
Item 1 of Part I herein)
18.0 Letter Regarding Change in Accounting Principles (incorporated by
reference to Exhibit 18.0 of AMCON's Quarterly Report on Form
10-Q filed on May 10, 1999)
27.0 Financial Data Schedules
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the third
quarter ended June 30, 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: August 6, 1999 Kathleen M. Evans
----------------- -------------------------
Kathleen M. Evans
President & Principal
Executive Officer
Date: August 6, 1999 Michael D. James
----------------- -------------------------
Michael D. James
Treasurer & CFO and
Principal Financial and
Accounting Officer
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This schedule contains summary financial information extracted from the
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Ended June 30, 1999 (Unaudited) and is qualified in its entirety by reference
to such financial statements.
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