-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ec/LrNUbTeB9eM8vBlwXDn7uXEYTM7JDVUhK5TeBESDUIusaSZJh59N6Zgve64vS mhLxeleP8ApqvXg6Qu7U7w== 0000928465-03-000024.txt : 20030811 0000928465-03-000024.hdr.sgml : 20030811 20030811172004 ACCESSION NUMBER: 0000928465-03-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030627 FILED AS OF DATE: 20030811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMCON DISTRIBUTING CO CENTRAL INDEX KEY: 0000928465 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 470702918 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15589 FILM NUMBER: 03835272 BUSINESS ADDRESS: STREET 1: 7405 IRVINGTON ROAD STREET 2: POST OFFICE BOX 641940 (68164-7940) CITY: OMAHA STATE: NE ZIP: 68122 BUSINESS PHONE: 4023313727 MAIL ADDRESS: STREET 1: 7405 IRVINGTON ROAD STREET 2: POST OFFICE BOX 641940 (68164-7940) CITY: OMAHA STATE: NE ZIP: 68122 10-Q 1 june0310q.txt FORM 10-Q FOR JUNE 27, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 27, 2003 OR / / Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ------------------------------ COMMISSION FILE NUMBER 0-24708 ------------------------------ AMCON DISTRIBUTING COMPANY (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of Incorporation) 7405 Irvington Road Omaha, NE 68122 (Address of principal executive offices) (Zip Code) 47-0702918 (I.R.S. Employer Identification No.) (402) 331-3727 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ------- ------- The Registrant had 3,168,954 shares of its $.01 par value common stock outstanding as of August 1, 2003. Form 10-Q 3rd Quarter INDEX ------- PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements: -------------------------------------------- Condensed consolidated balance sheets at June 2003 and September 2002 3 Condensed consolidated statements of operations for the three and nine-month periods ended June 2003 and 2002 4 Condensed consolidated statements of cash flows for the nine-month periods ended June 2003 and 2002 5 Notes to unaudited condensed consolidated financial statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 31 Item 4. Controls and Procedures 32 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 33 2 PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements
AMCON Distributing Company and Subsidiaries Condensed Consolidated Balance Sheets June 2003 and September 2002 - ---------------------------------------------------------------------------------------- (Unaudited) June 2003 September 2002 ------------ -------------- ASSETS Current assets: Cash $ 581,216 $ 130,091 Accounts receivable, less allowance for doubtful accounts of $0.7 million and $0.6 million, respectively 26,438,363 31,216,783 Inventories 23,765,698 35,744,074 Income tax receivable 357,239 981,054 Deferred income taxes 324,369 324,369 Other 560,958 393,365 ------------ ------------- Total current assets 52,027,843 68,789,736 Fixed assets, net 16,181,578 16,096,124 Available-for-sale investments 671,494 562,000 Goodwill 6,091,402 6,091,402 Other intangible assets, net 11,523,058 11,804,284 Other assets 1,403,501 1,242,923 ------------ ------------- $ 87,898,876 $ 104,586,469 ============ ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 14,018,737 $ 19,873,851 Accrued expenses 3,600,878 3,969,164 Accrued wages, salaries, bonuses 1,701,770 1,371,310 Current liabilities of discontinued operations 118,011 93,558 Current portion of long-term debt 7,840,070 14,783,967 Current portion of subordinated debt 1,752,667 1,708,986 ------------ ------------- Total current liabilities 29,032,133 41,800,836 ------------ ------------- Deferred income taxes 763,103 788,316 Non-current liabilities of discontinued operations 170,025 197,024 Long-term debt, less current portion 32,986,445 36,362,099 Subordinated debt, less current portion 7,853,067 8,738,886 Commitments and contingencies Shareholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized, none outstanding - - Common stock, $.01 par value, 15,000,000 shares authorized, 3,168,954 and 3,156,962 issued, respectively 31,690 31,570 Additional paid-in capital 5,997,977 5,977,643 Accumulated other comprehensive income, net of tax of $0.2 million and $0.2 million, respectively 252,880 294,771 Retained earnings 10,811,556 10,395,324 ------------ ------------- Total shareholders' equity 17,094,103 16,699,308 ------------ ------------- $ 87,898,876 $ 104,586,469 ============ ============= The accompanying notes are an integral part of these condensed consolidated financial statements.
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AMCON Distributing Company and Subsidiaries Condensed Consolidated Statements of Operations for the three and nine-months ended June 2003 and 2002 (Unaudited) - ---------------------------------------------------------------------------------------------------------- For the three months For the nine months ended June ended June ----------------------------- ----------------------------- 2003 2002 2003 2002 ------------- ------------- ------------- ------------- Sales (including excise taxes of $42.8 million and $42.7 million, and $123.4 million and $119.5 million, respectively) $ 189,949,079 $ 218,732,361 $ 564,678,909 $ 623,045,508 Cost of sales 173,924,679 202,677,900 520,979,369 577,650,180 ------------- ------------- ------------- ------------- Gross profit 16,024,400 16,054,461 43,699,540 45,395,328 ------------- ------------- ------------- ------------- Selling, general and administrative expenses 13,628,524 12,873,782 38,803,228 37,986,850 Depreciation and amortization 574,332 743,610 1,706,844 2,197,531 ------------- ------------- ------------- ------------- 14,202,856 13,617,392 40,510,072 40,184,381 ------------- ------------- ------------- ------------- Income from operations 1,821,544 2,437,069 3,189,468 5,210,947 ------------- ------------- ------------- ------------- Other expense (income): Interest expense 788,898 1,219,074 2,436,769 3,126,332 Other (85,159) (158,669) (367,294) (233,280) Equity in loss of unconsolidated affiliate - - - 95,007 ------------- ------------- ------------- ------------- 703,739 1,060,405 2,069,475 2,988,059 ------------- ------------- ------------- -------------- Income before income taxes 1,117,805 1,376,664 1,119,993 2,222,888 Income tax expense 427,000 534,071 428,000 899,217 ------------- ------------- ------------- ------------- Net income $ 690,805 $ 842,593 $ 691,993 $ 1,323,671 ============= ============= ============= ============= Earnings per share: Basic $ 0.22 $ 0.27 $ 0.22 $ 0.44 ============= ============= ============= ============= Diluted $ 0.22 $ 0.26 $ 0.22 $ 0.43 ============= ============= ============= ============= Dividends per share $ 0.03 $ 0.03 $ 0.09 $ 0.09 ============= ============= ============= ============= Weighted average shares outstanding: Basic 3,168,955 3,112,962 3,165,270 3,004,852 Diluted 3,209,148 3,190,232 3,221,139 3,078,883 The accompanying notes are an integral part of these condensed consolidated financial statements.
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AMCON Distributing Company and Subsidiaries Condensed Consolidated Statements of Cash Flows for the nine months ended June 2003 and 2002 (Unaudited) - --------------------------------------------------------------------------------- 2003 2002 ------------ ------------ Net cash flows from operating activities $ 13,226,704 $ (3,757,013) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixed assets (1,705,061) (1,962,021) Proceeds from sales of fixed assets 42,425 65,082 Proceeds from sale of available for sale securities 112,926 140,142 ------------ ------------ Net cash flows from investing activities (1,549,710) (1,756,797) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net payments on bank credit agreement (9,857,184) 7,105,271 Payments on long-term debt and subordinated debt (1,110,175) (1,087,182) Dividends paid (286,961) (275,139) Proceeds from short-term debt 7,998 - Proceeds from exercise of stock options 20,489 325 Retirement of common stock (36) - ------------ ------------ Net cash flows from financing activities (11,225,869) 5,743,275 ------------ ------------ Net increase in cash 451,125 229,465 Cash, beginning of period 130,091 296,940 ------------ ------------ Cash, end of period $ 581,216 $ 526,405 ============ ============ SUPPLEMENTAL NONCASH INFORMATION: Business combinations: Fair value of assets acquired $ - $ 6,013,978 Liabilities assumed $ - $ 3,157,087 The accompanying notes are an integral part of these condensed consolidated financial statements.
5 AMCON Distributing Company and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements June 2003 and 2002 - ----------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION: The accompanying unaudited condensed consolidated financial statements include the accounts of AMCON Distributing Company and its subsidiaries ("AMCON" or the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the financial information included therein, such adjustments consisting of normal recurring items. It is suggested that these financial statements be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended September 27, 2002, which are included in the Company's Annual Report to Shareholders filed with Form 10-K ("2002 Annual Report"). The accounting policies and methods of computation followed in these interim financial statements are the same as those followed in the financial statements for the year ended September 27, 2002. Results for the interim period are not necessarily indicative of results to be expected for the entire year. AMCON's fiscal third quarters ended on June 27, 2003 and June 28, 2002. For convenience, the fiscal quarters have been indicated as June 2003 and 2002, respectively. Each quarter and each nine-month period ended comprised 13 weeks and 39 weeks, respectively. Stock-based Compensation - ------------------------ AMCON maintains a stock-based compensation plan which provides that the Compensation Committee of the Board of Directors may grant incentive stock options and non-qualified stock options. AMCON accounts for stock option grants using the intrinsic value method under which compensation cost is measured by the excess, if any, of the deemed fair market value of its common stock on the date of grant over the exercise price of the stock option. Accordingly, stock-based compensation cost related to stock option grants is not reflected in net income as all options granted under the plan had an exercise price equal to the market value of the underlying stock on the date of grant. In December 2002, the FASB issued Statement of Financial Accounting Standard No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123, "Accounting for Stock- Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity=s accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. The disclosure provisions of SFAS No. 148 are effective for financial statements issued for interim periods beginning after December 15, 2002, (Q2 2003 for AMCON), with early adoption encouraged. 6 AMCON does not intend to voluntarily change to the fair value based accounting principle. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:
For the three months For the nine months ended June ended June ------------------------- ------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net earnings ============ Net income as reported $ 690,805 $ 842,593 $ 691,993 $ 1,323,671 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (15,571) (17,646) (46,713) (52,938) ----------- ----------- ----------- ----------- Pro forma net income $ 675,234 $ 824,947 $ 645,280 $ 1,270,733 =========== =========== =========== =========== Income per share ================ As reported: Basic $ 0.22 $ 0.27 $ 0.22 $ 0.44 =========== =========== =========== =========== Diluted $ 0.22 $ 0.26 $ 0.21 $ 0.43 =========== =========== =========== =========== Pro forma: Basic $ 0.21 $ 0.27 $ 0.20 $ 0.42 =========== =========== =========== =========== Diluted $ 0.21 $ 0.26 $ 0.20 $ 0.41 =========== =========== =========== ===========
2. CHANGES IN ACCOUNTING POLICY In June 2002, the FASB issued Statement of Financial Accounting Standard No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by SFAS No. 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Previous accounting guidance was provided by Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 replaces EITF No. 94-3. SFAS 146 is applied prospectively to exit or disposal activities initiated after December 31, 2002 (at Q2 2003 for AMCON). The adoption of SFAS No. 146 had no impact to the Company. 7 In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing certain guarantees. FIN No. 45 also elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The recognition provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN No. 45 are effective for financial statements of interim or annual periods ending after December 15, 2002 (at Q2 2003 for AMCON). The Company did not have any guarantees outstanding at June 2003 and will apply the recognition provisions of FIN No. 45 prospectively to guarantees issued after December 31, 2002. The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") at the beginning of fiscal year 2003. SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead will be reviewed at least annually for impairment and written down and charged to results of operations only in the periods in which the impairment recognition criteria has been met and the recorded value of goodwill and certain intangibles is more than its measured fair value. Upon adoption of SFAS No. 142, goodwill and tradename amortization ceased as it has been considered that they have indefinite useful lives. Management obtained an independent valuation of its goodwill and intangible assets and did not incur an impairment charge upon implementation of SFAS No. 142. As of June 2003, the Company had approximately $6.1 million of goodwill and $10.9 million of tradenames reflected on the accompanying condensed consolidated balance sheet. The following is certain unaudited pro forma information assuming SFAS No. 142 had been in effect for the three and nine months ended June 28, 2002:
Three Months Nine Months Ended June Ended June 2002 2002 --------- ----------- Reported net income $ 842,593 $ 1,323,671 Add goodwill amortization (net of tax) 49,367 145,203 Add tradename amortization (net of tax) 67,555 202,666 --------- ----------- Adjusted net income $ 959,515 $ 1,671,540 ========= =========== Earnings per share-basic: Reported net income $ 0.27 $ 0.44 Add goodwill amortization (net of tax) 0.02 0.05 Add tradename amortization (net of tax) 0.02 0.07 --------- ----------- Adjusted earnings per share-basic $ 0.31 $ 0.56 ========= =========== 8 Earnings per share-diluted: Reported net income $ 0.26 $ 0.43 Add goodwill amortization (net of tax) 0.02 0.05 Add tradename amortization (net of tax) 0.02 0.07 --------- ----------- Adjusted earnings per share-diluted $ 0.30 $ 0.55 ========= ===========
For the three-month period ended June ------------------------------------------------------- 2003 2002 ------------------------- ------------------------- Basic Diluted Basic Diluted ----------- ----------- ----------- ----------- 1. Weighted average common shares outstanding 3,168,955 3,168,955 3,112,962 3,112,962 2. Weighted average of net additional shares outstanding assuming dilutive options and warrants exercised and proceeds used to purchase treasury stock - 40,193 - 77,270 ----------- ----------- ----------- ----------- 3. Weighted average number of shares outstanding 3,168,955 3,209,148 3,112,962 3,190,232 =========== =========== =========== =========== 4. Net income $ 690,805 $ 690,805 $ 842,593 $ 842,593 =========== =========== =========== =========== 5. Net income per share $ 0.22 $ 0.22 $ 0.27 $ 0.26 =========== =========== =========== ===========
For the nine-month period ended June ------------------------------------------------------- 2003 2002 ------------------------- ------------------------- Basic Diluted Basic Diluted ----------- ----------- ----------- ----------- 1. Weighted average common shares outstanding 3,165,270 3,165,270 3,004,852 3,004,852 2. Weighted average of net additional shares outstanding assuming dilutive options and warrants exercised and proceeds used to purchase treasury stock - 55,869 - 74,031 ----------- ----------- ----------- ----------- 3. Weighted average number of shares outstanding 3,165,270 3,221,139 3,004,852 3,078,883 =========== =========== =========== =========== 4. Net income $ 691,993 $ 691,993 $ 1,323,671 $ 1,323,671 =========== =========== =========== =========== 5. Net income per share $ 0.22 $ 0.22 $ 0.44 $ 0.43 =========== =========== =========== ===========
11 7. COMPREHENSIVE INCOME (LOSS): The following is a reconciliation of net income per the accompanying unaudited condensed consolidated statements of operations to comprehensive income for the periods indicated:
For the three months For the nine months ended June ended June ------------------------- ------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net income $ 690,805 $ 842,593 $ 691,993 $ 1,323,671 Other comprehensive income: Unrealized holding gains from investments arising during the period, net of income tax expense (benefit) of $17,000 and $(64,000) for the three months ended June 2003 and 2002 and $83,000 and $30,000 for the nine months ended June 2003 and 2002, respectively 28,194 (105,229) 134,709 52,821 Reclassification adjustments for gains included in net income in prior periods - (78,107) (58,374) (78,107) Interest rate swap valuation adjustment, net of income tax benefit of $72,000 (118,226) - (118,226) - ----------- ----------- ----------- ----------- Comprehensive income $ 600,773 $ 659,257 $ 650,102 $ 1,298,385 =========== =========== =========== ===========
8. DEBT The Company maintains a revolving credit facility (the "Facility") with a bank that allows the Company to borrow up to $55.0 million at any time, subject to eligible accounts receivable and inventory requirements. As of June 2003, the outstanding balance on the Facility was $28.2 million. The Facility bears interest at a variable interest rate equal to the bank's base rate, which was 4.00% at June 2003 or LIBOR plus 2.50% as selected by the Company. However, as discussed below, a notional amount of $15.0 million is subject to two interest rate swap agreements which have the effect of converting this amount to fixed rates ranging between 4.38% and 4.87%. In addition, the Company is required to pay an unused commitment fee equal to 0.25% per annum on the difference between the maximum loan limit and the average monthly borrowing for the month. The Facility is collateralized by all of the wholesale distribution segment's equipment, intangibles, inventories and accounts receivable. The Facility contains covenants which, among other things, (i) restrict permitted investments, (ii) restrict intercompany advances to HNWC, (iii) restrict incurrence of additional debt, (iv) restrict mergers and acquisitions and changes in business or conduct of business and (v) require the maintenance of certain financial ratios and net worth levels including, average annual debt service coverage ratio of 1.0 to 1.0, to be measured quarterly, and minimum tangible net worth of $8.0 million for fiscal year 2003. In addition, the Company must maintain a fill rate percentage of not 12 less than 93% calculated on a weekly basis. The fill rate percentage is determined by dividing the total dollar amount of inventory delivered to the Company's customers each week into the total amount of orders which correspond to such deliveries. The Facility also provides that the Company may not pay dividends in excess of $0.12 per share on an annual basis. The Company was in compliance with its debt covenants at June 2003. In connection with the purchase of the Quincy, Illinois distribution business in June 2001, the Company assumed an interest rate swap agreement with a bank. Under the agreement, which expired on May 27, 2003, the Company agreed to exchange, at specified intervals, fixed interest amounts for variable interest amounts calculated by reference to an agreed-upon notional principal amount of $25.0 million. The interest rate swap effectively converted $25.0 million of variable-rate senior debt to fixed-rate debt (before accounting for the impact of the change in market value of the interest rate swap derivative financial instrument) at a rate of 8.33%, through the maturity of the swap agreement on May 27, 2003. The Company did not renew this swap agreement. This interest rate swap agreement was not designated as a hedge. In June 2003, the Company entered into two interest rate swap agreements with a bank. Under the agreements, the Company agrees to exchange, at specified intervals, fixed interest amounts for variable interest amounts calculated by reference to agreed-upon notional principal amounts of $10.0 million and $5.0 million. The interest rate swaps effectively convert $15.0 million of variable-rate senior debt to fixed-rate debt at rates of 4.87% and 4.38% on the $10.0 million and $5.0 million notional amounts through the maturity of the swap agreements on June 2, 2006 and 2005, respectively. These interest rate swap agreements have been designated as hedges and will be accounted for as such for financial accounting purposes. The Company has a $2.8 million credit facility with a bank to be used to fund operating activities at our natural spring water bottling operation in Hawaii, (the "Water Facility"). Borrowings under the Water Facility bear interest at the bank=s base rate plus 1.0%, which equaled 6.75% at June 2003. As of June 2003, the outstanding balance under the Water Facility was $2.8 million. The Water Facility is guaranteed by the Company=s Chairman. The Company has a $2.0 million credit facility with a bank collateralized by inventories of the Retail segment (the "Retail Facility "). Borrowings under the Retail Facility bear interest at the bank=s base rate plus 1.0%, which equaled 6.75% at June 2003. As of June 2003, the outstanding balance under the Retail Facility was $1.9 million. 13 9. BUSINESS SEGMENTS: AMCON has three reportable business segments: the wholesale distribution of consumer products, the retail sale of health and natural food products, and the bottling, marketing and distribution of Hawaiian natural spring water and other beverage products. Prior to the first quarter of fiscal 2003, the Beverage segment consisted of the bottling, marketing and distribution of Hawaiian natural spring water. Due to the formation of the new beverage marketing and distribution company during the first quarter of fiscal 2003, the Beverage segment now includes the marketing and distribution of other beverage products, as well as, Hawaiian natural spring water. Intersegment sales have been recorded at amounts approximating market. The segments are evaluated on revenue, operating income (loss) and income (loss) before taxes.
Wholesale Eliminate Distribution Retail Beverage Intersegment Consolidated ------------- ----------- ----------- ------------ ------------- QUARTER ENDED JUNE 2003: External revenue: Cigarettes $ 135,446,471 $ - $ - $ - $ 135,446,471 Confectionery 14,150,458 - - - 14,150,458 Health food - 8,315,500 - - 8,315,500 Tobacco, beverage & other 31,010,861 - 1,025,880 (91) 32,036,650 ------------- ----------- ----------- ---------- ------------- Total external revenue 180,607,790 8,315,500 1,025,880 (91) 189,949,079 Depreciation and amortization 311,977 244,683 46,365 - 603,025 Operating income (loss) 2,988,164 176,946 (1,349,753) 6,187 1,821,544 Interest expense 333,456 338,128 117,314 - 788,898 Income (loss) before taxes 2,730,841 (153,725) (1,465,498) 6,187 1,117,805 Total assets 60,933,876 17,661,428 9,303,572 - 87,898,876 Capital expenditures 121,064 60,172 92,759 - 273,995 QUARTER ENDED JUNE 2002: External revenue: Cigarettes $ 164,602,322 $ - $ - - $ 164,602,322 Confectionery 13,882,660 - - - 13,882,660 Health food - 8,065,582 - - 8,065,582 Tobacco, beverage & other 31,462,945 - 718,852 - 32,181,797 ------------- ----------- ------------ ---------- ------------- Total external revenue 209,947,927 8,065,582 718,852 - 218,732,361 Depreciation and amortization 349,463 376,473 17,674 - 743,610 Operating income (loss) 2,753,246 32,925 (349,102) - 2,437,069 Interest expense 865,695 290,617 62,762 - 1,219,074 Income (loss) before taxes 1,968,442 (313,552) (278,226) - 1,376,664 Total assets 84,631,285 19,038,198 6,479,991 - 110,149,474 Capital expenditures 1,036,430 57,347 214,839 - 1,308,616 14 NINE MONTHS ENDED JUNE 2003: External revenue: Cigarettes $ 414,575,090 $ - $ - $ - $ 414,575,090 Confectionery 37,390,510 - - - 37,390,510 Health food - 24,713,813 - - 24,713,813 Tobacco, beverage & other 85,567,462 - 2,585,125 (153,091) 87,999,496 ------------- ------------ ----------- ---------- ------------- Total external revenue 537,533,062 24,713,813 2,585,125 (153,091) 564,678,909 Depreciation and amortization 949,931 706,950 136,038 - 1,792,919 Operating income (loss) 5,225,925 453,590 (2,443,362) (46,685) 3,189,468 Interest expense 1,090,500 1,049,157 297,112 - 2,436,769 Income (loss) before taxes 4,462,954 (586,167) (2,710,109) (46,685) 1,119,993 Total assets 60,933,876 17,661,428 9,303,572 - 87,898,876 Capital expenditures 575,578 369,046 760,437 - 1,705,061 NINE MONTHS ENDED JUNE 2002: External revenue: Cigarettes $ 471,633,774 $ - $ - - $ 471,633,774 Confectionery 39,190,407 - - - 39,190,407 Health food - 23,668,614 - - 23,668,614 Tobacco, beverage & other 87,110,890 - 1,441,823 - 88,552,713 ------------- ------------ ------------ ---------- ------------- Total external revenue 597,935,071 23,668,614 1,441,823 - 623,045,508 Depreciation and amortization 1,023,422 1,127,100 47,009 - 2,197,531 Operating income (loss) 5,536,919 406,128 (732,100) - 5,210,947 Interest expense 2,038,386 963,775 124,171 - 3,126,332 Income (loss) before taxes 3,564,287 (662,031) (679,368) - 2,222,888 Total assets 84,631,285 19,038,198 6,479,991 - 110,149,474 Capital expenditures 1,431,215 167,557 363,249 - 1,962,021
10. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In November 2002, the FASB's EITF reached a consensus on EITF Issue No. 00- 21, "Revenue Arrangements with Multiple Deliverables". EITF Issue No. 00-21 provides guidance for revenue arrangements that involve the delivery or performance of multiple products or services where performance may occur at different points or over different periods of time. EITF Issue No. 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003 (i.e., the Company's fiscal 2004). The Company does not believe that adoption of EITF Issue No. 00-21 will have a material impact on its results from operations. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 clarifies when variable interest entities are consolidated by business enterprises where the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, or, where equity investors lack certain characteristics of a controlling financial interest. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company did not have any investments in any variable interest entities at June 2003 and will apply the provisions of FIN No. 46 prospectively to investments in variable interest entities made after February 1, 2003. 15 In March 2003, the FASB added a project to address issues related to share- based payments. In April 2003, the FASB decided that goods and services, including employee stock options, received in exchange for stock-based compensation should be recognized in the income statement as an expense, with the cost measured at fair value. An exposure draft is expected by the end of this year and a final statement could be effective in 2004. In April 2003, the FASB issued Statement of Financial Accounting Standard No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS No. 149). SFAS No. 149 amends FASB No. 133 for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 149 also amends certain other existing pronouncements. It will require contracts with comparable characteristics to be accounted for similarly. In particular, SFAS No. 149 clarifies when a contract with an initial net investment meets the characteristic of a derivative and clarifies when a derivative that contains a financing component will require special reporting in the statement of cash flows. SFAS No. 149 is effective for AMCON for contracts entered into or modified after June 30, 2003. AMCON and its subsidiaries are evaluating the impact of adopting the requirements of SFAS No. 149. In April 2003, the FASB issued Statement of Financial Accounting Standard No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS No. 150). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires an issuer to classify a financial instrument that is within its scope as a liability (or asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for AMCON for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 (Q4 for AMCON). It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. AMCON and its subsidiaries are evaluating the impact of adopting the requirements of SFAS No. 150. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations COMPANY OVERVIEW AMCON Distributing Company ("AMCON" or the "Company") is primarily engaged in the wholesale distribution business in the Great Plains and Rocky Mountain regions of the United States. In addition, AMCON operates 13 retail health food stores as well as a beverage division consisting of a natural spring water bottling operation and a newly formed beverage marketing and distribution business. As used herein, unless the context indicates otherwise, the term "ADC" means the wholesale distribution segment and "AMCON" or the "Company" means AMCON Distributing Company and its consolidated subsidiaries. ADC operates six distribution centers located in Illinois, Missouri, Nebraska, North Dakota, South Dakota and Wyoming. ADC sells approximately 13,000 consumer products, including cigarettes and tobacco products, candy and other confectionery, food service products, beverages, groceries, paper products, health and beauty care products and frozen and chilled products. ADC distributes products primarily to retailers such as convenience stores, discount and general merchandise stores, grocery stores and supermarkets, drug stores and gas stations. In addition, ADC services institutional customers, such as restaurants and bars, schools, sports complexes and vendors, as well as other wholesalers. Our retail health food segment operates seven stores in Florida under the name Chamberlin's Market & Cafe and six stores in Oklahoma, Kansas, Missouri and Nebraska under the name Akin's Natural Foods Market. These stores carry a comprehensive line of approximately 35,000 natural and gourmet foods, supplements, herbs, natural cosmetics, homeopathic and sports nutrition products. Although this segment has not achieved profitability, with the realignment of top management, development of a new marketing department, increased focus on in-store staff training and the implementation of a new central point-of-sale inventory control system during the fiscal year, management expects financial performance of the retail segment to continue to improve. If financial performance of this segment improves consistent with our expectations, it lays the foundation for future expansion in the number of retail stores. Our beverage segment consists of Hawaiian Natural Water Company, Inc. ("HNWC") and The Beverage Group Inc. ("TBG"). HNWC bottles natural spring water from an exclusive source located on the Big Island of Hawaii. HNWC currently markets its products primarily in the State of Hawaii, but is in the process of expanding marketing to the mainland United States and certain international markets. HNWC was acquired during the first quarter of fiscal 2002 and completed an upgrade of its bottling equipment in fiscal 2002 in order to increase its production capacity. During Q2 2003, HNWC began construction of an expanded warehouse and packaging building at its plant in Hawaii which is expected to be completed late in Q4 2003. HNWC has historically operated at a loss and is expected to continue to do so until it is able to complete the planned expansion of its markets. AMCON's newly formed wholly-owned subsidiary, TBG will focus on marketing and distribution of HWNC bottled water products and other beverages including Hype Energy Drink/TM/, Royal Kona Coffee/R/, Bottle Green/R/ drinks and Xterra/R/, a line of sports beverages in the United States, Canada and Mexico. 17 INDUSTRY SEGMENT OVERVIEWS The wholesale distribution industry continues to consolidate as larger distribution companies acquire smaller companies. Competition and pressure on profit margins continue to affect both large and small distributors and demands that distributors consolidate in order to become more efficient. Although ADC sells a diversified line of products, it remains dependent on cigarette sales, which represented approximately 71% of total revenue and 39% of gross margin of the Company in the third quarter of fiscal 2003. Overall cigarette consumption in the United States continues to decline and many retailers, such as grocery stores and general merchandise stores, have discontinued the sale of cigarettes. As a result, convenience stores and tobacco stores, which represent ADC's largest customer base, have increased their share of the cigarette market. This trend has partially mitigated the effect of lower overall cigarette consumption on the Company's sales. However, over the past few years as prices for national cigarette brands have increased, primarily to cover payments to states in accordance with the Master Settlement Agreement signed in 1998, and state excise taxes have increased to fund state budget deficits, sales of national cigarette brands have decreased at a more rapid rate than for all cigarettes. For example, as reported in Altria Inc.'s 2002 Annual Report, U.S. cigarette industry shipment volume in 2002 declined 3.7%, while shipments from Philip Morris declined 7.5%. At the same time, sales of value-priced cigarettes have actually increased. Generally, wholesale cigarette distributors align themselves as national brand distributors or value-priced distributors. Since a national brand distributor derives a significant amount of its gross profit from selling national cigarette brands, it is generally a detriment to gross profit to focus sales efforts on value-priced brands. The loss of one key customer that was acquired and several smaller customers due to competitive pricing strategies, combined with ADC's alignment as primarily a national brand distributor has resulted in a higher rate of decline in cigarette carton sales (11.2%) than the national average, when compared to the prior year. Changes in manufacturers' cigarette pricing over the past decade and increases in state excise taxes over the past year have greatly affected the market for value-priced, generic and private label cigarettes. Although sales of ADC's private label cigarettes have steadily declined over the past nine years due to the relatively small price differential between its private label brands and national brands, and the increasing price differential between our brands and new value-priced, generic and import brands, ADC's net income is still heavily dependent on sales of private label cigarettes and the volume discounts it receives from manufacturers in connection with these sales. The Company entered into a new private label cigarette manufacturing agreement with Philip Morris effective October 1, 2002. The new agreement ends on December 31, 2004, and has two one-year renewal options. However, given the current cigarette industry environment, terms of the new agreement are not as favorable to the Company as the prior agreement, and, as a result, the Company expects that gross margin related to private label cigarettes will decrease by up to $1.4 million in fiscal 2003, as compared to fiscal 2002. 18 The retail natural foods industry is highly fragmented, with more than 9,000 stores operated independently or as part of small chains. The two leading natural food chains continue to expand their geographic markets and acquire smaller independent competitors. In addition, conventional supermarkets and mass market outlets have increased their emphasis on natural products. This business climate subjects operating income to a number of factors which are beyond the control of management, such as competing retail stores opening in close proximity to AMCON's retail stores and manufacturers' changing prices and promotional programs. The natural bottled water and beverage business is also highly competitive. All of the popular national brands of natural water, plus several local brands, are sold in Hawaii, which is presently HNWC's primary market. HNWC competes primarily by differentiating its products from those of its competitors due to the fact that it is the only producer of natural spring water bottled in Hawaii. In addition to marketing HNWC=s natural spring water products, TBG has acquired exclusive licenses to market and distribute several premium beverage products which will be marketed as a portfolio. CERTAIN ACCOUNTING CONSIDERATIONS During fiscal 2002 the Company acquired HNWC. In accordance with Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations," the Company used the purchase method of accounting to record the business combination. Recorded intangibles, primarily the HNWC tradename, were separately identified and recognized. No goodwill was recognized in the acquisition. SFAS No. 142, "Goodwill and Other Intangible Assets," requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead will be reviewed at least annually for impairment and written down and charged to results of operations only in the periods in which the impairment recognition criteria has been met and the recorded value of goodwill and certain intangibles is more than its measured fair value. Due to the adoption of SFAS No. 142 by the Company at the beginning of fiscal 2003, the Company no longer amortizes goodwill, tradenames and other intangible assets considered to have indefinite useful lives. Goodwill, tradenames and other intangible assets not subject to amortization are now reviewed periodically (at least annually) to determine if their recorded values exceed their fair values. If the recorded value of these assets is determined to be impaired, it will be written down to fair value and the write down will be charged to operations during the period in which the impairment is recognized. Management has obtained an independent valuation of its goodwill and intangible assets and did not incur an impairment charge due to the implementation of SFAS No. 142. In March 2003, the FASB added a project to address issues related to share- based payments. In April 2003, the FASB decided that goods and services, including employee stock options, received in exchange for stock-based compensation should be recognized in the income statement as an expense, with the cost measured at fair value. An exposure draft is expected by the end of this year and a final statement could be effective in 2004. 19 On April 30, 2003, the FASB issued Statement of Financial Accounting Standard No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS No. 149). SFAS No. 149 amends FASB No. 133 for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 149 also amends certain other existing pronouncements. It will require contracts with comparable characteristics to be accounted for similarly. In particular, SFAS No. 149 clarifies when a contract with an initial net investment meets the characteristic of a derivative and clarifies when a derivative that contains a financing component will require special reporting in the statement of cash flows. SFAS No. 149 is effective for AMCON for contracts entered into or modified after June 30, 2003. AMCON and its subsidiaries are evaluating the impact of adopting the requirements of SFAS No. 149. In April 2003, the FASB issued Statement of Financial Accounting Standard No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS No. 150). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires an issuer to classify a financial instrument that is within its scope as a liability (or asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for AMCON for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 (Q4 for AMCON). It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. AMCON and its subsidiaries are evaluating the impact of adopting the requirements of SFAS No. 150. CRITICAL ACCOUNTING POLICIES Certain accounting policies used in the preparation of the Company's financial statements require us to make judgments and estimates and the financial results we report may vary depending on how we make these judgements and estimates. In addition to the critical accounting policies previously discussed in the Company's 2002 Annual Report to Shareholders on Form 10-K for the fiscal year ended September 27, 2002, the Company adopted SFAS No. 142 in Q1 2003 and believes its accounting policy with respect to goodwill and other identifiable intangible assets is a critical accounting policy. The following is a summary of this critical accounting policy. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS. Goodwill associated with the excess purchase price over the fair value of assets acquired and other identifiable intangible assets, such as trademarks and tradenames, with indefinite useful lives are no longer amortized, but will be reviewed periodically (at least annually) to determine if the recorded values exceed the fair market values of the assets. If impairment exists, the impairment write-down will be charged to operations during the period in which the impairment is recognized. Identifiable intangible assets that are considered to have definite useful lives are amortized on the straight-line method over their estimated useful lives. 20 RESULTS OF OPERATIONS As more fully described in our 2002 Annual Report to Shareholders on Form 10- K for the fiscal year ended September 27, 2002, we completed the acquisition of HNWC on December 17, 2001. Accordingly, the results of operations for this acquisition are included in the accompanying unaudited condensed consolidated statements of operations from the date of acquisition. AMCON's fiscal third quarters ended on June 27, 2003 and June 28, 2002. For ease of discussion, the fiscal quarters are referred to herein as June 2003 and 2002, respectively or Q3 2003 and Q3 2002, respectively. Comparison of the three and nine-month periods ended June 2003 and 2002 - ----------------------------------------------------------------------- SALES Three Months - ------------ Sales for Q3 2003 decreased 13.2% to $189.9 million, compared to $218.7 million in Q3 2002. Sales are reported net of costs associated with sales incentives provided to retailers, totaling $1.9 million in both Q3 2003 and Q3 2002, respectively. Sales changes by business segment are as follows: Wholesale distribution $(29.3) million Retail health food stores 0.2 million Beverage 0.3 million ------ $(28.8) million ====== Sales from the wholesale distribution business decreased by $29.3 million from Q3 2002 to Q3 2003. Of the total decrease, $29.2 million related to cigarettes, with $16.9 million attributable to a decrease in cigarette prices on Philip Morris and Brown & Williamson brands during Q3 2003. Although the Philip Morris price reduction program was communicated as a temporary reduction, Philip Morris has extended the program through September 2003 and could extend it further. The Brown & Williamson price reduction program is permanent. The remaining decrease in cigarette sales of $12.3 million was the result of a 12.2% reduction in carton volume. See discussion above under INDUSTRY SEGMENT OVERVIEWS for additional information regarding cigarette sales trends. Sales of tobacco, confectionary and other products accounted for the remainder of the decrease as sales of these products fell by $0.1 million over the prior year primarily due to the loss of a key customer, however, we believe the Company is positioned to increase our customer base in certain geographic regions and continue to market our full service capabilities in an effort to differentiate our Company from competitors who utilize pricing as their primary marketing tool. Sales from the retail health food segment during Q3 2003 increased by $0.2 million, or 3.1%, when compared to Q3 2002, due primarily to improvements in the Midwest retail stores. The Florida market continues to suffer from lower tourist trade and general economic depression. Competition by national chains who have stores in the same markets as our stores and an overall softening of the natural food retail market over the past two years continue to hamper sales growth in the retail health food segment. 21 Sales from the beverage segment during Q3 2003 increased by $0.3 million or 42.7% when compared to Q3 2002, due to increases in the customer base in Hawaii and Japan. The marketing and distribution business, which was started in Q1 2003, accounted for $0.1 million of the increase in sales. Management continues to seek out new ways of increasing the customer base and is currently establishing a nationwide broker network to get the beverage products into distribution companies to sell to retail stores. There were no material intersegment sales eliminated in consolidation for Q3 2003 or Q3 2002. Nine Months - ----------- Sales for the nine months ended June 2003 decreased 9.4% to $564.7 million, compared to $623.1 million for the same period in the prior fiscal year. Sales changes by business segment are as follows: Wholesale distribution $ (60.3) million Retail health food stores 1.0 million Beverage 1.1 million Intersegment eliminations (0.2) million ------- $ (58.4) million ======= Sales from the wholesale distribution business decreased by $60.3 million for the nine months ended June 2003 as compared to the same period in the prior year. Of the total decrease, $57.1 million was attributable to a decrease in sales of cigarettes, with $25.7 million related to a decrease in cigarette prices on Philip Morris and Brown & Williamson brands during the second and third quarters of 2003. Although the Philip Morris price reduction program was communicated as a temporary reduction, Philip Morris has extended the program through September 2003 and could extend it further. The Brown & Williamson price reduction program is permanent. The remaining decrease in cigarette sales of $31.4 million resulted primarily from a 11.2% reduction in carton volume. See discussion above under INDUSTRY SEGMENT OVERVIEWS for additional information regarding cigarette sales trends. Sales of tobacco, confectionary and other products accounted for the remainder of the decrease as sales of these products decreased by $3.2 million or 3.0% from the prior year due to loss of several key customers during the year. We continue to market our full service capabilities in an effort to differentiate our Company from competitors who utilize pricing as their primary marketing tool and anticipate increases to our customer base in the fourth quarter as a result of these efforts. Sales from the retail health food segment increased by $1.0 million, or 4.4%, when compared to the nine months ended June 2002 due primarily to the improvements in the Midwest retail stores in which same store sales increased by 9.5% over the prior year. The Florida market continues to suffer from lower tourist trade and general economic depression. 22 The beverage segment accounted for $2.6 million in sales for the nine months ended June 2003, compared to $ 1.5 million for the same period in 2002. The water bottling operation was acquired during the latter part of Q1 2002. The marketing and distribution business, which accounted for $0.2 million of the sales, was started in Q1 2003. There were $0.2 million of intersegment sales eliminated in consolidation for the nine months ended June 2003, all of which related to beverage segment sales to wholesale distribution. There were no intersegment sales for the same period in 2002. GROSS PROFIT Three Months - ------------ Gross profit decreased 0.2% to $16.0 million in Q3 2003 from $16.1 million in Q3 2002. Gross profit as a percent of sales increased to 8.4% in Q3 2003 compared to 7.3% in Q3 2002. Gross profit by business segment is as follows (dollars in millions):
Quarter ended June ---------------- Incr 2003 2002 (Decr) ------ ------ ----- Wholesale distribution $ 12.3 $ 12.8 $(0.5) Retail health food stores 3.4 3.2 0.2 Beverage segment 0.3 0.1 0.2 ------ ------ ----- $ 16.0 $ 16.1 $(0.1) ====== ====== =====
Gross profit from our wholesale distribution business for Q3 2003 decreased approximately $0.5 million as compared to Q3 2002. This is primarily due to the absence of a cigarette price increase in Q3 2003 as compared to the same period last year, which accounted for $1.0 million in gross profit, and a decrease of $0.5 million in incentive payments received on our private label cigarettes. These items were offset by a $1.9 million decrease in cost of sales to account for a reduction in the LIFO reserve, as compared to Q3 2002. The decrease in the LIFO reserve was primarily attributable to the cigarette price decreases discussed in the SALES section above. Gross profit was further impacted by a decrease in incentive allowances received primarily from cigarette manufacturers on products other than private label cigarettes of approximately $1.5 million (net of amounts paid to customers) which was partially offset by an increase of $0.6 million in gross profit from sales of other products. Gross profit for the retail health food segment increased by $0.2 million compared with Q3 2002. An increase in gross profit from increased sales volume in Q3 2003 of $0.3 million was offset by a decrease of $0.1 million in gross profit due to a larger charge to cost of sales to account for the increase in the LIFO reserve in Q3 2003, as compared to Q3 2002. 23 Gross profit of $0.3 million was generated from the beverage segment in Q3 2003, compared to $0.1 million in Q3 2002. The increase was primarily due to new sales generated in the segment from the formation of the marketing and distribution business in Q1 2003. There was no impact on gross profit from intersegment sales eliminated in consolidation for Q3 2003 or Q3 2002. Nine Months - ----------- For the nine months ended June 2003, gross profit decreased 3.7% to $43.7 million from $45.4 million for the same period during the prior fiscal year. Gross profit as a percent of sales increased to 7.7% for the nine month period ended June 2003 compared to 7.3% for the nine month period ended June 2002. Gross profit by business segment is as follows (dollars in millions):
Nine months ended June ---------------- 2003 2002 Incr (Decr) ------ ------ ----- Wholesale distribution $ 33.3 $ 35.4 $ (2.1) Retail health food stores 9.9 9.8 0.1 Beverage segment 0.6 0.2 0.4 Intersegment elimination (0.1) - (0.1) ------ ------ ----- $ 43.7 $ 45.4 $ (1.7) ====== ====== =====
Gross profit from our wholesale distribution business for the nine months ended June 2003 decreased approximately $2.1 million, as compared to the prior year, primarily due to a decrease of $1.2 million in incentive payments received on our private label cigarettes, the absence of a cigarette price increase during the first nine months of fiscal 2003 which accounted for a $1.5 million decrease in gross profit, and a decrease in incentive allowances received primarily from cigarette manufacturers on products other than private label cigarettes of approximately $1.9 million (net of amounts paid to customers). The above decrease in gross profit was partially offset by a $1.7 million decrease in cost of sales to account for the reduction in the LIFO reserve, and a $0.8 million decrease related to sales of other products. The decrease in the LIFO reserve was primarily attributable to the cigarette price decreases discussed in the SALES section above. Gross profit for the retail health food segment increased approximately $0.1 million compared with the nine months ended June 2002 due to increased sales. Gross profit from the beverage segment increased by $0.4 million over the same period in the prior year. The increase was due to a full nine months of sales in the current year from the natural spring water bottling operation compared to six months in the prior year, and new sales generated in the segment from the formation of the marketing and distribution business in Q1 2003. 24 There was a $0.1 million decrease in gross profit from intersegment sales eliminated in consolidation for the nine months ended June 2003, all of which related to beverage segment sales to wholesale distribution. There were no intersegment sales for the same period in 2002. Gross profit as a percentage of sales for the three and nine months ended June 2003 increased primarily due to the manufacturers' cigarette price decrease discussed under SALES above. Our gross profit per cigarette carton sold did not change materially after the price decrease. Therefore, since total sales decreased, but gross profit remained constant, gross profit expressed as a percentage of sales increased. OPERATING EXPENSE Total operating expense, which includes selling, general and administrative expenses and depreciation and amortization, increased 4.3% or approximately $0.6 million to $14.2 million in Q3 2003 compared to Q3 2002. Operating expenses in the wholesale segment decreased by $0.6 million due to a reduction in warehousing, delivery and administrative costs of approximately $0.7 million. These reductions were offset by an increase of approximately $0.1 million in selling expenses. Total operating expense in the retail segment remained fairly constant compared to the same period in the prior fiscal year. The beverage segment's operating expenses increased by approximately $1.2 million primarily due to the formation of the marketing and distribution business in Q1 2003. For the nine month period ended June 2003, total operating expense increased 0.1% or approximately $0.3 million to $40.5 million compared to the same period in the prior fiscal year. The wholesale distribution segment reduced operating costs in its selling, warehousing and delivery areas by approximately $1.8 million and the absence of goodwill amortization accounted for a reduction of approximately $0.2 million. Administrative costs increased by $0.1 million primarily due to increased professional fees and insurance, as compared to the nine months ended June 2002. Total operating expenses in our retail segment increased approximately $0.1 million for the nine months ended June 2003, compared to the same period in the prior year. Operating costs increased by approximately $0.4 million primarily due to additional labor and travel costs, but were offset by the absence of tradename amortization of approximately $0.3 million. Our beverage segment, which began in Q1 2002 with the acquisition of a natural spring water bottling operation, incurred $3.0 million in operating expenses for the nine months ended June 2003, an increase of approximately $2.1 million over the prior year, due primarily to $1.7 million of expenses attributable to the marketing and distribution business which was formed late in Q1 2003. As a result of the above, income from operations for Q3 2003 decreased by $0.7 million to $1.8 million, as compared to Q3 2002. Income from operations for the nine months ended June 2003 decreased by $2.0 million to $3.2 million. 25 INTEREST EXPENSE Interest expense for Q3 2003 decreased 35.3% to $0.8 million compared to Q3 2002. The decrease was primarily due to a reduction in average interest rates of approximately 0.5% and a reduction in total average debt outstanding of approximately $7.3 million in the wholesale segment. Interest expense for the nine months ended June 2003 decreased by 22.1% to $2.4 million compared to $3.1 million for the same period in the prior fiscal year. The decrease was primarily due to a reduction in average interest rates of approximately 0.6% and a reduction in total average debt outstanding of approximately $3.4 million in the wholesale segment. OTHER Other income for Q3 2003 of approximately $0.1 million was generated primarily from interest income on income tax refunds and dividends received on investment securities. Other income of approximately $0.2 million for Q3 2002 was generated primarily from vendor debt forgiveness, interest income and dividends received on investment securities. Included in other income for the nine months ended June 2003 of approximately $0.4 million is $0.1 million received from a settlement related to a former distribution facility, $0.1 million from gains on sales of available-for-sale securities and $0.1 million in interest income on income tax refunds, as well as dividends on investment securities. Other income for the nine months ended June 2002 was approximately $0.2 million and included approximately $0.1 million of interest income and dividends received on investment securities. Equity in loss of an unconsolidated affiliate of $0.1 million represented our ownership interest in the loss of HNWC up to the date of acquisition. As a result of the above factors, net income (loss) for the three and nine months ended June 2003 was $0.7 million and $0.7 million, respectively compared to $0.8 million and $1.3 million for the three and nine months ended June 2002. LIQUIDITY AND CAPITAL RESOURCES As of June 2003, our liquidity was provided by cash on hand of approximately $0.6 million and approximately $26.8 million available under a revolving credit facility with a capacity of $55.0 million. During the nine months ended June 2003, we generated approximately $13.2 million in cash through operating activities primarily through reductions in accounts receivable and inventory, resulting from the cigarette price decrease discussed in SALES. Our working capital was approximately $23.0 million as of June 2003 compared to approximately $27.0 million at September 2002. Our debt to equity ratio decreased 20.0% to 2.95 at June 2003, compared to 3.69 at September 2002, primarily due to a net decrease in our three revolving lines of credit of approximately $9.9 million as inventory was reduced and cash was used to pay down debt on the wholesale segment's revolving credit facility. Investing activities required cash of approximately $1.5 million during the nine month period ended June 2003 and primarily represents the purchases of fixed assets. Financing activities utilized cash of approximately $11.2 million to reduce amounts outstanding under the revolving credit facilities and long-term debt. 26 The following table summarizes our outstanding contractual obligations and commitments as of fiscal year end September 2002. Other than the paydown of approximately $12.7 million on the wholesale segment's revolving credit facility and $2.4 million in additional borrowings on the retail and HNWC revolving credit facilities, there have been no significant changes to debt or contractual obligations since September 2002. Changes applicable to other commercial commitments are footnoted and described below. (Amounts in thousands):
Payments Due By Period -------------------------------------------------------------------- Contractual Fiscal Fiscal Fiscal Fiscal Fiscal Obligations Total 2003 2004 2005 2006 2007 Thereafter - ------------------ --------- -------- -------- ------- ------- ------- ---------- Long-Term Debt $ 50,208 $ 14,634 $ 29,181 $ 200 $ 6,193 $ - $ - Subordinated Debt 10,448 1,709 7,763 976 - - - Capital Lease Obligations 938 150 228 266 254 40 - Operating Leases 24,877 5,091 4,451 3,956 3,213 1,698 6,468 --------- -------- -------- ------- ------- ------- ---------- $ 86,471 $ 21,584 $ 41,623 $ 5,398 $ 9,660 $ 1,738 $ 6,468 ========= ======== ======== ======= ======= ======= ========== Total Other Commercial Amounts Fiscal Fiscal Fiscal Fiscal Fiscal Commitments Committed 2003 2004 2005 2006 2007 Thereafter - ------------------ --------- -------- -------- ------- ------- ------- ---------- Lines of Credit $ 59,500 $ 59,500 $ 55,000 $ - $ - $ - $ - Letters of Credit /1/ 967 967 837 - - - - Purchase Obligations/2/ 1,000 1,000 - - - - - --------- -------- -------- ------- ------- ------- ---------- $ 61,030 $ 61,030 $ 55,400 $ - $ - $ - $ - ========= ======== ======== ======= ======= ======= ==========
- ------------------ /1/ In April 2003, we were required to increase the letter of credit issued to our property and casualty insurance carrier from $0.4 million to $0.8 million as part of our loss control arrangement. /2/ Represents capital expenditures associated with the warehouse expansion and new equipment purchases for our water bottling operation in Hawaii which is expected to be completed in Q4 2003. ADC maintains a revolving credit facility, ("the Facility") that allows us to borrow up to $55.0 million at any time, subject to eligible accounts receivable and inventory requirements. As of June 2003, the outstanding balance on the Facility was $28.2 million. The Facility bears interest at a variable rate equal to the bank's base rate, which was 4.00% at June 2003 or LIBOR plus 2.50%, as selected by the Company. As discussed under "Qualitative and Quantitative Disclosures about Market Risk", a notional amount of $15.0 million is subject to interest rate swap agreements which have the effect of converting this amount to fixed rates ranging between 4.38% and 4.87%. In addition, the Company is required to pay an unused commitment fee equal to 0.25% per annum on the difference between the maximum loan limit and average monthly borrowing for the month. The Facility is collateralized by all of ADC's equipment, intangibles, inventories, and accounts receivable. 27 The Facility contains covenants which, among other things, set certain financial ratios and net worth requirements, including covenants that (i) restrict permitted investments, (ii) restrict intercompany advances to HNWC, (iii) restrict incurrence of additional debt, (iv) restrict mergers and acquisitions and changes in business or conduct of business and (v) require the maintenance of certain financial ratios and net worth levels including an average annual debt service coverage ratio of 1.0 to 1.0, and a minimum tangible net worth of $8.0 million for fiscal year 2003. In addition, the Company must maintain a fill rate percentage of not less than 93% calculated on a weekly basis. The fill rate percentage is determined by dividing the total dollar amount of inventory delivered to the Company's customers each week into the total amount of orders which correspond to such deliveries. The Facility also provides that the Company may not pay dividends in excess of $0.12 per share on an annual basis. The Company was in compliance with its debt covenants at June 2003. The Company has a $2.8 million credit facility with a bank to be used to fund operating activities at our natural spring water bottling operation in Hawaii, (the "Water Facility"). Borrowings under the Water Facility bear interest at the bank=s base rate plus 1.0%, which equaled 6.75% at June 2003. As of June 2003, the outstanding balance under the Water Facility was $2.8 million. The Water Facility is guaranteed by the Company=s Chairman. The Company has a $2.0 million credit facility with a bank collateralized by inventories of the Retail segment (the "Retail Facility "). Borrowings under the Retail Facility bear interest at the bank=s base rate plus 1.0%, which equaled 6.75% at June 2003. As of June 2003, the outstanding balance under the Retail Facility was $1.9 million. The Company borrowed $6.9 million from a bank, at a fixed rate of 7.5%, to purchase the distribution facility in Quincy, IL, referred to herein as the Real Estate Loan, and to retire term debt. As of June 2003, the outstanding balance on the Real Estate Loan was approximately $6.6 million. The acquisition of the Quincy distribution business provides for deferred payments to be made to the seller totaling $3.4 million (plus interest). These deferred payments are subordinate to the Facility and the Real Estate Loan and are due in installments of $0.9 million (including interest) on the first, second, third and fourth anniversaries of the closing date of the transaction. In addition, the Company entered into a noncompetition agreement with the seller that requires the Company to make payments of $0.1 million annually on the first through fourth anniversary dates of the closing of the transaction. The Company has recorded the seller obligations at their fair values utilizing a 6% effective interest rate which was determined based on the Company's approximate average borrowing rate. The outstanding obligation to the seller was approximately $1.8 million as of June 2003. In September 1999, borrowings under an 8% Convertible Subordinated Note, referred to herein as the Convertible Note, and a Collateralized Promissory Note, referred to herein as the Collateralized Note, in addition to borrowings under the revolving credit facility were used to purchase all of the common stock of Health Food Associates. Both the Convertible Note and the Collateralized Note have five-year terms and bear interest at 8% per annum. Principal on the Convertible Note is due in a single payment at maturity. 28 Principal on the Collateralized Note is payable in installments of $0.8 million per year with the balance due at maturity. The principal balance of the Convertible Note may be converted into stock of The Healthy Edge, Inc., formerly known as Food for Health Co., Inc., under circumstances set forth in the Convertible Note. As of June 2003, the outstanding balances of the Convertible Note and the Collateralized Note were $2.0 million and $5.6 million, respectively. The Company has borrowings under various notes to purchase the assets of health food stores and water bottling equipment. The notes have terms ranging from three to five years with principal and interest payments due monthly. As of June 2003, the outstanding balance of the notes was approximately $0.3 million. In connection with the purchase of the Quincy distribution business and HNWC, we assumed capital leases for office equipment, automobiles and warehouse equipment. As of June 2003, the outstanding balances on the capital leases totaled approximately $0.8 million. In connection with the discontinued operations of the health and natural foods distribution business, AMCON is obligated on a letter of credit issued to the buyer in the amount of $0.1 million which was extended during March 2003 to expire in March 2004. In addition, AMCON has a letter of credit in the amount of approximately $0.8 million that is required to be issued to our workers compensation insurance carrier as part of our self-insured loss control program. We have entered into commitments for capital expenditures of approximately $1.0 million related to expansion of the water bottling operation's warehouse and new packaging equipment. We expect these expenditures to be completed in Q4 2003. It is anticipated that the source of funds needed to complete these expenditures will be provided by a combination of leasing and debt financing. We believe that funds generated from operations, supplemented as necessary with funds available under our revolving credit facilities, will provide sufficient liquidity to cover our debt service and any reasonably foreseeable future working capital and capital expenditure requirements associated with existing operations. RELATED PARTY TRANSACTIONS During the three and nine months ended June 2003, we were charged $15,000 and $45,000, respectively by AMCON Corporation, the former parent of the Company, as consideration for office rent and management services, which is included in selling, general and administrative expenses. We also contracted with one of our directors for consulting services in connection with our retail health food operations during the nine months ended June 2003. The amount paid for consulting services during the three and nine months ended June 2003 was $22,500 and $67,500, respectively, plus reimbursement of expenses. 29 CONCERNING FORWARD LOOKING STATEMENTS This Quarterly Report, including the Management's Discussion and Analysis and other sections, contains forward looking statements that are subject to risks and uncertainties and which reflect management's current beliefs and estimates of future economic circumstances, industry conditions, company performance and financial results. Forward looking statements include information concerning the possible or assumed future results of operations of the Company and those statements preceded by, followed by or that include the words "future," "position," "anticipate(s)," "expect," "believe(s)," "see," "plan," "further improve," "outlook," "should" or similar expressions. For these statements, we claim the protection of the safe harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. You should understand that the following important factors, in addition to those discussed elsewhere in this document, could affect the future results of the Company and could cause those results to differ materially from those expressed in our forward looking statements: changing market conditions with regard to cigarettes and the demand for the Company's products, domestic regulatory risks, and competitive and other risks over which the Company has little or no control. Any changes in such factors could result in significantly different results. Consequently, future results may differ from management's expectations. Moreover, past financial performance should not be considered a reliable indicator of future performance. 30 Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company is exposed to interest rate risk on its variable rate debt. At June 2003, we had $17.9 million of variable rate debt outstanding (excluding $15.0 million variable rate debt which is fixed through the swaps described below), with maturities through May 2004. The interest rates on this debt ranged from 3.49% to 6.75% at June 2003. Through December 31, 2001, we had the ability to select the bases on which our variable interest rates were calculated by selecting an interest rate based on our lender's base interest rate or based on LIBOR. This provided management with some control of our variable interest rate risk. Effective January 1, 2002, the LIBOR borrowing rate option was removed. We negotiated reinstatement of the LIBOR borrowing option which became available in April 2003. We estimate that our annual cash flow exposure relating to interest rate risk based on our current borrowings is approximately $0.1 million for each 1% change in our lender's prime interest rate. In June 2003, the Company entered into two interest rate swap agreements with a bank in order to mitigate the Company's exposure to interest rate risk on this variable rate debt. Under the agreements, the Company agrees to exchange, at specified intervals, fixed interest amounts for variable interest amounts calculated by reference to agreed-upon notional principal amounts of $10.0 million and $5.0 million. The interest rate swaps effectively convert $15.0 million of variable-rate senior debt to fixed-rate debt at rates of 4.87% and 4.38% on the $10.0 million and $5.0 million notional amounts through the maturity of the swap agreements on June 2, 2006 and 2005, respectively. These interest rate swap agreements have been designated as hedges and will be accounted for as such for financial accounting purposes. We do not utilize financial instruments for trading purposes and hold no derivative financial instruments other than the interest rate swap which could expose us to significant market risk. In addition, we are exposed to market risk relating to our available-for-sale investment in the common stock of Consolidated Water Company Limited ("CWCO") a public company traded on the NASDAQ National Market system. At June 2003 and 2002 we held 42,500 and 60,300 shares, respectively, of common stock of CWCO valued at approximately $0.7 million and $0.7 million. We value this investment at market and record price fluctuations in shareholders' equity as unrealized gain or loss on investments. The unrealized gain on CWCO shares was approximately $0.6 million and $0.7 million at June 2003 and 2002, respectively. We sold 7,500 shares of CWCO common stock in Q3 2003 and realized a gain of $0.1 million on the sale. 31 Item 4. Controls and Procedures A review and evaluation was performed by the Company's management, including the Company's Principal Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that review and evaluation, the Principal Executive Officer and Chief Financial Officer have concluded that the Company's current disclosure controls and procedures, as designed and implemented, were effective. There were no changes in the Company's internal controls over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. 32 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) EXHIBITS 2.1 Fifth Amended and Restated Agreement and Plan of Merger dated September 27, 2001 by and between AMCON Distributing Company, AMCON Merger Sub, Inc. and Hawaiian Natural Water Company Inc. (incorporated by reference to Exhibit 2.1 of AMCON's Registration Statement on Form S-4(Registration No. 333-71300) filed on November 13, 2001) 2.2 Assets Purchase and Sale Agreement by and between Food For Health Company, Inc., AMCON Distributing Company and Tree of Life, Inc. dated March 8, 2001 (incorporated by reference to Exhibit 2.1 of AMCON's Current Report on Form 8-K filed on April 10, 2001) 2.3 Amendment to Assets Purchase and Sale Agreement by and between Food For Health Company, Inc., AMCON Distributing Company and Tree of Life, Inc. effective March 23, 2001 (incorporated by reference to Exhibit 2.2 of AMCON's Current Report on Form 8-K filed on April 10, 2001) 2.4 Asset Purchase Agreement, dated February 8, 2001, between AMCON Distributing Company, Merchants Wholesale Inc. and Robert and Marcia Lansing (incorporated by reference to Exhibit 2.1 of AMCON's Current Report on Form 8-K filed on June 18, 2001) 2.5 Addendum to Asset Purchase Agreement, dated May 30, 2001, between AMCON Distributing Company, Merchants Wholesale Inc. and Robert and Marcia Lansing (incorporated by reference to Exhibit 2.2 of AMCON's Current Report on Form 8-K filed on June 18, 2001) 2.6 Real Estate Purchase Agreement, dated February 8, 2001, between AMCON Distributing Company and Robert and Marcia Lansing (incorporated by reference to Exhibit 2.3 of AMCON's Current Report on Form 8-K filed on June 18, 2001) 2.7 Addendum to Real Estate Purchase Agreement, dated May 30, 2001, between AMCON Distributing Company and Robert and Marcia Lansing (incorporated by reference to Exhibit 2.4 of AMCON's Current Report on Form 8-K filed on June 18, 2001) 3.1 Restated Certificate of Incorporation of the Company, as amended March 19, 1998 (incorporated by reference to Exhibit 3.1 of AMCON's Quarterly Report on Form 10-Q filed on May 11, 1998) 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 of AMCON's Registration Statement on Form S-1 (Registration No. 33-82848) filed on August 15, 1994) 4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of AMCON's Registration Statement on Form S-1 (Registration No. 33-82848) filed on August 15, 1994) 33 10.1 Grant of Exclusive Manufacturing Rights, dated October 1, 1993, between the Company and Famous Value Brands, a division of Philip Morris Incorporated, including Private Label Manufacturing Agreement and Amended and Restated Trademark License Agreement (incorporated by reference to Exhibit 10.1 of Amendment No. 1 to AMCON's Registration Statement on Form S-1 (Registration No. 33-82848) filed on November 8, 1994) 10.2 Amendment No. 1 to Grant of Exclusive Manufacturing Rights, dated October 1, 1998, between the Company and Famous Value Brands, a division of Philip Morris Incorporated, including Amendment No. 1 To Private Label Manufacturing Agreement and Amendment No. 1 to Amended and Restated Trademark License Agreement (incorporated by reference to Exhibit 10.2 of AMCON's Annual Report on Form 10-K filed on December 24, 1998) 10.3 Loan and Security Agreement, dated June 1, 2001, between the Company and LaSalle National Bank (incorporated by reference to Exhibit 10.3 on Form 10-Q filed on August 13, 2001) 10.4 ISDA Master Agreement, dated as of December 22, 2000 between LaSalle Bank National Association and Merchants Wholesale Inc., as assumed by the Company on June 1, 2001 (incorporated by reference to Exhibit 10.4 on Form 10-Q/A filed on October 4, 2001) 10.5 Secured Promissory Note, dated as of May 30, 2001 between the Company and Gold Bank (incorporate by reference to Exhibit 10.5 on Form 10-Q/A filed on October 4, 2001) 10.6 8% Convertible Subordinated Note, dated September 15, 1999 by and between Food For Health Company Inc. and Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy Laminsky (incorporated by reference to Exhibit 10.1 of AMCON's Current Report on Form 8-K filed on September 30, 1999) 10.7 Secured Promissory Note, dated September 15, 1999, by and between Food For Health Company, Inc. and James C. Hinkefent and Marilyn M. Hinkefent, as trustees of the James C. Hinkefent Trust dated July 11, 1994, as amended, Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy Laminsky (incorporated by reference to Exhibit 10.2 of AMCON's Current Report on Form 8-K filed on September 30, 1999) 10.8 Pledge Agreement, dated September 15, 1999, by and between Food For Health Company, Inc. and James C. Hinkefent and Marilyn M. Hinkefent, as trustees of the James C. Hinkefent Trust dated July 11, 1994, as amended, Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy Laminsky (incorporated by reference to Exhibit 10.3 of AMCON's Current Report on Form 8-K filed on September 30, 1999) 10.9 First Amended and Restated AMCON Distributing Company 1994 Stock Option Plan (incorporated by reference to Exhibit 10.17 of AMCON's Current Report on Form 10-Q filed on August 4, 2000) 34 10.10 AMCON Distributing Company Profit Sharing Plan (incorporated by reference to Exhibit 10.8 of Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-82848) filed on November 8, 1994) 10.11 Employment Agreement, dated May 22, 1998, between the Company and William F. Wright (incorporated by reference to Exhibit 10.14 of AMCON's Quarterly Report on Form 10-Q filed on August 6, 1998) 10.12 Employment Agreement, dated May 22, 1998, between the Company and Kathleen M. Evans incorporated by reference to Exhibit 10.15 of AMCON's Quarterly Report on Form 10-Q filed on August 6, 1998) 10.13 ISDA Master Agreement, dated as of May 12, 2003 between the Company and LaSalle Bank National Association 10.14 Swap Transaction Confirmation ($10,000,000) dated as of May 23, 2003 between the Company and LaSalle Bank National Association. 10.15 Swap Transaction Confirmation ($5,000,000) dated as of May 23, 2003 between the Company and LaSalle Bank National Association 11.1 Statement re: computation of per share earnings (incorporated by reference to footnote 3 to the financial statements which are incorporated herein by reference to Item 1 of Part I herein) 31.1 Certification by William F. Wright, Chairman and Principal Executive Officer, furnished pursuant to section 302 of the Sarbanes-Oxley Act. 31.2 Certification by Michael D James, Vice President and Chief Financial Officer, furnished pursuant to section 302 of the Sarbanes-Oxley Act. 32.1 Certification by William F. Wright, Chairman and Principal Executive Officer, furnished pursuant to section 906 of the Sarbanes-Oxley Act. 32.2 Certification by Michael D. James, Vice President and Chief Financial Officer, furnished pursuant to section 906 of the Sarbanes-Oxley Act. (b) REPORTS ON FORM 8-K: The Company filed a report on Form 8-K dated May 12, 2003 reporting its earnings for the second quarter ended March 28, 2003 under Item 12, Results of Operations and Financial Condition. Reference was made to a press release furnished therewith as Exhibit 99.1 35 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. AMCON DISTRIBUTING COMPANY (registrant) Date: August 11, 2003 /s/ William F. Wright ----------------- ----------------------------- William F. Wright Chairman of the Board and Principal Executive Officer Date: August 11, 2003 /s/ Michael D. James ----------------- ----------------------------- Michael D. James Treasurer & CFO and Principal Financial and Accounting Officer EX-10.13 3 ex1013isda.txt EXHIBIT 10.13 ISDA MASTER AGREEMENT EXHIBIT 10.13 ISDA /R/ International Swap Dealers Association, Inc. MASTER AGREEMENT dated as of MAY 12, 2003 LASALLE BANK NATIONAL ASSOCIATION AND AMCON DISTRIBUTING COMPANY have entered and/or anticipate entering into one or more transactions (each a "Transaction") that are or will be governed by this Master Agreement, which includes the schedule (the "Schedule"), and the documents and other confirming evidence (each a "Confirmation") exchanged between the parties confirming those Transactions. Accordingly, the parties agree as follows: 1. Interpretation (a) Definitions. The terms defined in Section 12 and in the Schedule will have the meanings therein specified for the purpose of this Master Agreement. (b) Inconsistency. In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement (including the Schedule), such Confirmation will prevail for the purpose of the relevant Transaction. (c) Single Agreement. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this "Agreement"), and the parties would not otherwise enter into any Transactions. 2. Obligations (a) General Conditions. (i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement. (ii) Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement. (iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement. (b) Change of Account. Either party may change its account for receiving a payment or delivery by giving notice to the other party at least five Local Business Days prior to the scheduled date for the payment or delivery to which such change applies unless such other party gives timely notice of a reasonable objection to such change. (c) Netting. If on any date amounts would otherwise be payable: (i) in the same currency; and (ii) in respect of the same Transaction, by each party to the other, then, on such date, each party's obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount. The parties may elect in respect of two or more Transactions that a net amount will be determined in respect of all amounts payable on the same date in the same currency in respect of such Transactions, regardless of whether such amounts are payable in respect of the same Transaction. The election may be made in the Schedule or a Confirmation by specifying that subparagraph (ii) above will not apply to the Transactions identified as being subject to the election, together with the starting date (in which case subparagraph (ii) above will not, or will cease to, apply to such Transactions from such date). This election may be made separately for different groups of Transactions and will apply separately to each pairing of branches or offices through which the parties make and receive payments or deliveries. (d) Default Interest; Other Amounts. Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party that defaults in the performance of any payment obligation will, to the extent permitted by law and subject to Section 6(c), be required to pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as such overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment, at the Default Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. If, prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party defaults in the performance of any obligation required to be settled by delivery, it will compensate the other party on demand if and to the extent provided for in the relevant Confirmation or elsewhere in this Agreement. 3. Representations Each party represents to the other party (which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into) that: (a) Basic Representations. (i) Status. It is duly organised and validly existing under the laws of the jurisdiction of its organisation or incorporation and, if relevant under such laws, in good standing; (ii) Powers. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action to authorise such execution, delivery and performance; (iii) No Violation or Conflict. Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets; (iv) Consents. All governmental and other consents that are required to have been obtained by it with respect to this Agreement or any Credit Support Document to which it is a party have been obtained and are in full force and effect and all conditions of any such consents have been complied with; and (v) Obligations Binding. Its obligations under this Agreement and any Credit Support Document to which it is a party constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganisation, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)). (b) Absence of Certain Events. No Event of Default or Potential Event of Default or, to its knowledge, Termination Event with respect to it has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement or any Credit Support Document to which it is a party. (c) Absence of Litigation. There is not pending or, to its knowledge, threatened against it or any of its Affiliates any action, suit or proceeding at law or in equity or before any court, tribunal, governmental body, agency or official or any arbitrator that is likely to affect the legality, validity or enforceability against it of this Agreement or any Credit Support Document to which it is a party or its ability to perform its obligations under this Agreement or such Credit Support Document. (d) Accuracy of Specified information. All applicable information that is furnished in writing by or on behalf of it to the other party and is identified for the purpose of this Section 3(d) in the Schedule is, as of the date of the information, true, accurate and complete in every material respect. 4. Agreements Each party agrees with the other that, so long as either party has or may have any obligation under this Agreement or under any Credit Support Document to which it is a party: (a) Furnish Specified Information. It will deliver to the other party any forms, documents or certificates specified in the Schedule or any Confirmation by the date specified in the Schedule or such Confirmation or, if none is specified, as soon as reasonably practicable. (b) Maintain Authorisations. It will use all reasonable efforts to maintain in full force and effect all consents of any governmental or other authority that are required to be obtained by it with respect to this Agreement or any Credit Support Document to which it is a party and will use all reasonable efforts to obtain any that may become necessary in the future. (c) Comply with Laws. It will comply in all material respects with all applicable laws and orders to which it may be subject if failure so to comply would materially impair its ability to perform its obligations under this Agreement or any Credit Support Document to which it is a party. 5. Events of Default and Termination Events (a) Events of Default. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an "Event of Default") with respect to such party: (i) Failure to Pay or Deliver. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a)(i) or 2(d) required to be made by it if such failure is not remedied on or before the third Local Business Day after notice of such failure is given to the party; (ii) Breach of Agreement. Failure by the party to comply with or perform any agreement or obligation (other than an obligation to make any payment under this Agreement or delivery under Section 2(a)(i) or 2(d) or to give notice of a Termination Event) to be complied with or performed by the party in accordance with this Agreement if such failure is not remedied on or before the thirtieth day after notice of such failure is given to the party; (iii) Credit Support Default. (1) Failure by the party or any Credit Support Provider of such party to comply with or perform any agreement or obligation to be complied with or performed by it in accordance with any Credit Support Document if such failure is continuing after any applicable grace period has elapsed; (2) the expiration or termination of such Credit Support Document or the failing or ceasing of such Credit Support Document to be in full force and effect for the purpose of this Agreement (in either case other than in accordance with its terms) prior to the satisfaction of all obligations of such party under each Transaction to which such Credit Support Document relates without the written consent of the other party; or (3) the party or such Credit Support Provider disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, such Credit Support Document; (iv) Misrepresentation. A representation made or repeated or deemed to have been made or repeated by the party or any Credit Support Provider of such party in this Agreement or any Credit Support Document proves to have been incorrect or misleading in any material respect when made or repeated or deemed to have been made or repeated; (v) Default under Specified Transaction. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party (1) defaults under a Specified Transaction and, after giving effect to any applicable notice requirement or grace period, there occurs a liquidation of, an acceleration of obligations under, or an early termination of, that Specified Transaction, (2) defaults, after giving effect to any applicable notice requirement or grace period, in making any payment or delivery due on the last payment, delivery or exchange date of, or any payment on early termination of, a Specified Transaction (or such default continues for at least three Local Business Days if there is no applicable notice requirement or grace period) or (3) disaffirms, disclaims, repudiates or rejects, in whole or in part, a Specified Transaction (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf); (vi) Cross Default. If "Cross Default" is specified in the Schedule as applying to the party, the occurrence or existence of (1) a default, event of default or other similar condition or event (however described) in respect of such party, any Credit Support Provider of such party or any applicable Specified Entity of such party under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) in an aggregate amount of not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments, before it would otherwise have been due and payable or (2) a default by such party, such Credit Support Provider or such Specified Entity (individually or collectively) in making one or more payments on the due date thereof in an aggregate amount of not less than the applicable Threshold Amount under such agreements or instruments (after giving effect to any applicable notice requirement or grace period); (vii) Bankruptcy. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party: (1) is dissolved (other than pursuant to a consolidation, amalgamation or merger); (2) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due; (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights, or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or (B) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof; (5) has a resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger); (6) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets; (7) has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 30 days thereafter; (8) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (7) (inclusive); or (9) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts; or (viii) Merger Without Assumption. The party or any Credit Support Provider of such party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and, at the time of such consolidation, amalgamation, merger or transfer:- (1) the resulting, surviving or transferee entity fails to assume all the obligations of such party or such Credit Support Provider under this Agreement or any Credit Support Document to which it or its predecessor was a party by operation of law or pursuant to an agreement reasonably satisfactory to the other party to this Agreement; or (2) the benefits of any Credit Support Document fail to extend (without the consent of the other party) to the performance by such resulting, surviving or transferee entity of its obligations under this Agreement. (b) Termination Events. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any event specified below constitutes an Illegality if the event is specified in (i) below, and, if specified to be applicable, a Credit Event Upon Merger if the event is specified pursuant to (ii) below or an Additional Termination Event if the event is specified pursuant to (iii) below: (i) Illegality. Due to the adoption of, or any change in, any applicable law after the date on which a Transaction is entered into, or due to the promulgation of, or any change in, the interpretation by any court, tribunal or regulatory authority with competent jurisdiction of any applicable law after such date, it becomes unlawful (other than as a result of a breach by the party of Section 4(b)) for such party (which will be the Affected Party): (1) to perform any absolute or contingent obligation to make a payment or delivery or to receive a payment or delivery in respect of such Transaction or to comply with any other material provision of this Agreement relating to such Transaction; or (2) to perform, or for any Credit Support Provider of such party to perform, any contingent or other obligation which the party (or such Credit Support Provider) has under any Credit Support Document relating to such Transaction; (ii) Credit Event Upon Merger. If "Credit Event Upon Merger" is specified in the Schedule as applying to the party, such party ("X"), any Credit Support Provider of X or any applicable Specified Entity of X consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and such action does not constitute an event described in Section 5(a)(viii) but the creditworthiness of the resulting, surviving or transferee entity is materially weaker than that of X, such Credit Support Provider or such Specified Entity, as the case may be, immediately prior to such action (and, in such event, X or its successor or transferee, as appropriate, will be the Affected Party); or (iii) Additional Termination Event. If any "Additional Termination Event" is specified in the Schedule or any Confirmation as applying, the occurrence of such event (and, in such event, the Affected Party or Affected Parties shall be as specified for such Additional Termination Event in the Schedule or such Confirmation). (c) Event of Default and Illegality. If an event or circumstance which would otherwise constitute or give rise to an Event of Default also constitutes an Illegality, it will be treated as an Illegality and will not constitute an Event of Default. 6. Early Termination (a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non-defaulting Party") may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, "Automatic Early Termination" is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8). (b) Right to Terminate Following Termination Event. (i) Notice. If a Termination Event occurs, an Affected Party will, promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Event and each Affected Transaction and will also give such other information about that Termination Event as the other party may reasonably require. (ii) Two Affected Parties. If an Illegality under Section 5(b)(i)(1) occurs and there are two Affected Parties, each party will use all reasonable efforts to reach agreement within 30 days after notice thereof is given under Section 6(b)(i) on action to avoid that Termination Event. (iii) Right to Terminate. If: (1) an agreement under Section 6(b)(ii) has not been effected with respect to all Affected Transactions within 30 days after an Affected Party gives notice under Section 6(b)(i); or (2)an Illegality other than that referred to in Section 6(b)(ii), a Credit Event Upon Merger or an Additional Termination Event occurs, either party in the case of an Illegality, any Affected Party in the case of an Additional Termination Event if there is more than one Affected Party, or the party which is not the Affected Party in the case of a Credit Event Upon Merger or an Additional Termination Event if there is only one Affected Party may, by not more than 20 days notice to the other party and provided that the relevant Termination Event is then continuing, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions. (c) Effect of Designation. (i) If notice designating an Early Termination Date is given under Sect ion 6(a) or (b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing. (ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 2(d) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e). (d) Calculations. (i) Statement. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including all relevant quotations and specifying any amount payable under Section 6(e)) and (2) giving details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation obtained in determining a Market Quotation, the records of the party obtaining such quotation will be conclusive evidence of the existence and accuracy of such quotation. (ii) Payment Date. An amount calculated as being due in respect of any Early Termination Date under Section 6(e) will be payable on the day that notice of the amount payable is effective (in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default) and on the day which is two Local Business Days after the day on which notice of the amount payable is effective (in the case of an Early Termination Date which is designated as a result of a Termination Event). Such amount will be paid together with (to the extent permitted under applicable law) interest thereon (before as well as after judgment), from (and including) the relevant Early Termination Date to (but excluding) the date such amount is paid, at the Applicable Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. (e) Payments on Early Termination. If an Early Termination Date occurs, the following provisions shall apply based on the parties' election in the Schedule of a payment measure, either "Market Quotation" or "Loss", and a payment method, either the "First Method" or the "Second Method". If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that "Market Quotation" or the "Second Method", as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off. (i) Events of Default. If the Early Termination Date results from an Event of Default: (1) First Method and Market Quotation. If the First Method and Market Quotation apply, the Defaulting Party will pay to the Non- defaulting Party the excess, if a positive number, of (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Unpaid Amounts owing to the Non-defaulting Party over (B) the Unpaid Amounts owing to the Defaulting Party. (2) First Method and Loss. If the First Method and Loss apply, the Defaulting Party will pay to the Non-defaulting Party, if a positive number, the Non-defaulting Party's Loss in respect of this Agreement. (3) Second Method and Market Quotation. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Unpaid Amounts owing to the Non-defaulting Party less (B) the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. (4) Second Method and Loss. If the Second Method and Loss apply, an amount will be payable equal to the Non-defaulting Party's Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. (ii) Termination Events. If the Early Termination Date results from a Termination Event: (1) One Affected Party. If there is one Affected Party, the amount payable will be determined in accordance with Section 6(e)(i)(3), if Market Quotation applies, or Section 6(e)(i)(4), if Loss applies, except that, in either case, references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and the party which is not the Affected Party, respectively, and, if Loss applies and fewer than all the Transactions are being terminated, Loss shall be calculated in respect of all Terminated Transactions. (2) Two Affected Parties. If there are two Affected Parties: (A) if Market Quotation applies, each party will determine a Settlement Amount in respect of the Terminated Transactions, and an amount will be payable equal to (I) the sum of (a) one-half of the difference between the Settlement Amount of the party with the higher Settlement Amount ("X") and the Settlement Amount of the party with the lower Settlement Amount ("Y") and (b) the Unpaid Amounts owing to X less (II) the Unpaid Amounts owing to Y; and (B) if Loss applies, each party will determine its Loss in respect of this Agreement (or, if fewer than all the Transactions are being terminated, in respect of all Terminated Transactions) and an amount will be payable equal to one-half of the difference between the Loss of the party with the higher Loss ("X") and the Loss of the party with the lower Loss ("Y"). If the amount payable is a positive number, Y will pay it to X; if it is a negative number, X will pay the absolute value of that amount to Y. (iii) Adjustment for Bankruptcy. In circumstances where an Early Termination Date occurs because "Automatic Early Termination" applies in respect of a party, the amount determined under this Section 6(e) will be subject to such adjustments as are appropriate and permitted by law to reflect any payments or deliveries made by one party to the other under this Agreement (and retained by such other party) during the period from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii). (iv) Pre-Estimate. The parties agree that if Market Quotation applies an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks and except as otherwise provided in this Agreement neither party will be entitled to recover any additional damages as a consequence of such losses. 7. Transfer Neither this Agreement nor any interest or obligation in or under this Agreement may be transferred (whether by way of security or otherwise) by either party without the prior written consent of the other party, except that: (a) a party may make such a transfer of this Agreement pursuant to a consolidation amalgamation with, or merger with or into, or transfer of all or substantially all its assets to, another entity (but without prejudice to any other right or remedy under this Agreement); and (b) a party may make such a transfer of all or any part of its interest in any amount payable to it from a Defaulting Party under Section 6(e). Any purported transfer that is not in compliance with this Section will be void. 8. Miscellaneous (a) Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto. (b) Amendments. No amendment, modification or waiver in respect of this Agreement will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or confirmed by an exchange of telexes or electronic messages on an electronic messaging system. (c) Survival of Obligations. Without prejudice to Sections 2(a)(iii) and 6(c)(ii), the obligations of the parties under this Agreement will survive the termination of any Transaction. (d) Remedies Cumulative. Except as provided in this Agreement, the rights, powers, remedies and privileges provided in this Agreement are cumulative and not exclusive of any rights, powers, remedies and privileges provided by law. (e) Counterparts and Confirmations. (i) This Agreement (and each amendment, modification and waiver in respect of it) may be executed and delivered in counterparts (including by facsimile transmission), each of which will be deemed an original. (ii) The parties intend that they are legally bound by the terms of each Transaction from the moment they agree to those terms (whether orally or otherwise). A Confirmation shall be entered into as soon as practicable and may be executed and delivered in counterparts (including by facsimile transmission) or be created by an exchange of telexes or by an exchange of electronic messages on an electronic messaging system, which in each case will be sufficient for all purposes to evidence a binding supplement to this Agreement. The parties will specify therein or through another effective means that any such counterpart, telex or electronic message constitutes a Confirmation. (f) No Waiver of Rights. A failure or delay in exercising any right, power or privilege in respect of this Agreement will not be presumed to operate as a waiver, and a single or partial exercise of any right, power or privilege will not be presumed to preclude any subsequent or further exercise, of that right, power or privilege or the exercise of any other right, power or privilege. (g) Headings. The headings used in this Agreement are for convenience of reference only and are not to affect the construction of or to be taken into consideration in interpreting this Agreement. 9. Expenses A Defaulting Party will, on demand, indemnify and hold harmless the other party for and against all reasonable out-of-pocket expenses, including legal fees, incurred by such other party by reason of the enforcement and protection of its rights under this Agreement or any Credit Support Document to which the Defaulting Party is a party or by reason of the early termination of any Transaction, including, but not limited to, costs of collection. 10. Notices (a) Effectiveness. Any notice or other communication in respect of this Agreement may be given in any manner set forth below (except that a notice or other communication under Section 5 or 6 may not be given by facsimile transmission or electronic messaging system) to the address or number or in accordance with the electronic messaging system details provided (see the Schedule) and will be deemed effective as indicated: (i) if in writing and delivered in person or by courier, on the date it is delivered; (ii) if sent by telex, on the date the recipient's answerback is received; (iii) if sent by facsimile transmission, on the date that transmission is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender's facsimile machine); (iv) if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the date that mail is delivered or its delivery is attempted; or (v) if sent by electronic messaging system, on the date that electronic message is received, unless the date of that delivery (or attempted delivery) or that receipt, as applicable, is not a Local Business Day or that communication is delivered (or attempted) or received, as applicable, after the close of business on a Local Business Day, in which case that communication shall be deemed given and effective on the first following day that is a Local Business Day. (b) Change of Addresses. Either party may by notice to the other change the address, telex or facsimile number or electronic messaging system details at which notices or other communications are to be given to it. 11. Governing Law and Jurisdiction (a) Governing Law. This Agreement will be governed by and construed in accordance with the law specified in the Schedule. (b) Jurisdiction. With respect to any suit, action or proceedings relating to this Agreement ("Proceedings"), each party irrevocably: (i) submits to the jurisdiction of the English courts, if this Agreement is expressed to be governed by English law, or to the non- exclusive jurisdiction of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City, if this Agreement is expressed to be governed by the laws of the State of New York; and (ii) waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party. Nothing in this Agreement precludes either party from bringing Proceedings in any other jurisdiction (outside, if this Agreement is expressed to be governed by English law, the Contracting States, as defined in Section 1(3) of the Civil Jurisdiction and Judgments Act 1982 or any modification, extension or re-enactment thereof for the time being in force) nor will the bringing of Proceedings in any one or more jurisdictions preclude the bringing of Proceedings in any other jurisdiction. (c) Waiver of Immunities. Each party irrevocably waives, to the fullest extent permitted by applicable law, with respect to itself and its revenues and assets (irrespective of their use or intended use), all immunity on the grounds of sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any court, (iii) relief by way of injunction, order for specific performance or for recovery of property, (iv) attachment of its assets (whether before or after judgment) and (v) execution or enforcement of any judgment to which it or its revenues or assets might otherwise be entitled in any Proceedings in the courts of any jurisdiction and irrevocably agrees, to the extent permitted by applicable law, that it will not claim any such immunity in any Proceedings. 12. Definitions As used in this Agreement: "Additional Termination Event" has the meaning specified in Section 5(b). "Affected Party" has the meaning specified in Section 5(b). "Affected Transactions" means (a) with respect to any Termination Event consisting of an Illegality, all Transactions affected by the occurrence of such Termination Event and (b) with respect to any other Termination Event, all Transactions. "Affiliate" means, subject to the Schedule, in relation to any person, any entity controlled, directly or indirectly, by the person, any entity that controls, directly or indirectly, the person or any entity directly or indirectly under common control with the person. For this purpose, "control" of any entity or person means ownership of a majority of the voting power of the entity or person. "Applicable Rate" means: (a) in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii))by a Defaulting Party, the Default Rate; (b) in respect of an obligation to pay an amount under Section 6(e) of either party from and after the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable, the Default Rate; (c) in respect of all other obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Non-defaulting Party, the Non-default Rate; and (d) in all other cases, the Termination Rate. "Consent" includes a consent, approval, action, authorisation, exemption, notice, filing, registration or exchange control consent. "Credit Event Upon Merger" has the meaning specified in Section 5(b). "Credit Support Document" means any agreement or instrument that is specified as such in this Agreement. "Credit Support Provider" has the meaning specified in the Schedule. "Default Rate" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1% per annum. "Defaulting Party" has the meaning specified in Section 6(a). "Early Termination Date" means the date determined in accordance with Section 6(a) or 6(b)(iii). "Event of Default" has the meaning specified in Section 5(a) and, if applicable, in the Schedule. "Illegality" has the meaning specified in Section 5(b). "Law" includes any treaty, law, rule or regulation and "lawful" and "unlawful" will be construed accordingly. "Local Business Day" means, subject to the Schedule, a day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) (a) in relation to any obligation under Section 2(a)(i), in the place(s) specified in the relevant Confirmation or, if not so specified, as otherwise agreed by the parties in writing or determined pursuant to provisions contained, or incorporated by reference, in this Agreement, (b) in relation to any other payment, in the place where the relevant account is located, (c) in relation to any notice or other communication, including notice contemplated under Section 5(a)(i), in the city specified in the address for notice provided by the recipient and, in the case of a notice contemplated by Section 2(b), in the place where the relevant new account is to be located and (d) in relation to Section 5(a)(v)(2), in the relevant locations for performance with respect to such Specified Transaction. "Loss" means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing any hedge or related trading position (or any gain resulting from any of them). Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made, except, so as to avoid duplication, if Section 6(e)(i)(1) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a party's legal fees and out-of-pocket expenses referred to under Section 9. A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets. "Market Quotation" means, with respect to one or more Terminated Transactions and a party making the determination, an amount determined on the basis of quotations from Reference Market-makers. Each quotation will be for an amount, if any, that would be paid to such party (expressed as a negative number) or by such party (expressed as a positive number) in consideration of an agreement between such party (taking into account any existing Credit Support Document with respect to the obligations of such party) and the quoting Reference Market-maker to enter into a transaction (the "Replacement Transaction") that would have the effect of preserving for such party the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the satisfaction of each applicable condition precedent) by the parties under Section 2(a)(i) in respect of such Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date. For this purpose, Unpaid Amounts in respect of the Terminated Transaction or group of Terminated Transactions are to be excluded but, without limitation, any payment or delivery that would, but for the relevant Early Termination Date, have been required (assuming satisfaction of each applicable condition precedent) after that Early Termination Date is to be included. The Replacement Transaction would be subject to such documentation as such party and the Reference Market-maker may, in good faith, agree. The party making the determination (or its agent) will request each Reference Market-maker to provide its quotation to the extent reasonably practicable as of the same day and time (without regard to different time zones) on or as soon as reasonably practicable after the relevant Early Termination Date. The day and time as of which those quotations are to be obtained will be selected in good faith by the party obliged to make a determination under Section 6(e), and, if each party is so obliged, after consultation with the other. If more than three quotations are provided, the Market Quotation will be the arithmetic mean of the quotations, without regard to the quotations having the highest and lowest values. If exactly three such quotations are provided, the Market Quotation will be the quotation remaining after disregarding the highest and lowest quotations. For this purpose, if more than one quotation has the same highest value or lowest value, then one of such quotations shall be disregarded. If fewer than three quotations are provided, it will be deemed that the Market Quotation in respect of such Terminated Transaction or group of Terminated Transactions cannot be determined. "Non-default Rate" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the Non-defaulting Party (as certified by it) if it were to fund the relevant amount. "Non-defaulting Party" has the meaning specified in Section 6(a). "Potential Event of Default" means any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default. "Reference Market-makers" means four leading dealers in the relevant market selected by the party determining a Market Quotation in good faith (a) from among dealers of the highest credit standing which satisfy all the criteria that such party applies generally at the time in deciding whether to offer or to make an extension of credit and (b) to the extent practicable, from among such dealers having an office in the sane city. "Scheduled Payment Date" means a date on which a payment or delivery is to be made under Section 2(a)(i) with respect to a Transaction. "Set-off" means set-off, offset, combination of accounts, right of retention or withholding or similar right or requirement to which the payer of an amount under Section 6 is entitled or subject (whether arising under this Agreement, another contract, applicable law or otherwise) that is exercised by, or imposed on, such payer. "Settlement Amount" means, with respect to a party and any Early Termination Date, the sum of: (a) the Market Quotations (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation is determined; and (b) such party's Loss (whether positive or negative and without reference to any Unpaid Amounts) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation cannot be determined or would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result. "Specified Entity" has the meaning specified in the Schedule. "Specified Indebtedness" means, subject to the Schedule, any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise) in respect of borrowed money. "Specified Transaction" means, subject to the Schedule, (a) any transaction (including an agreement with respect thereto) now existing or hereafter entered into between one party to this Agreement (or any Credit Support Provider of such party or any applicable Specified Entity of such party) and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other party) which is a rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions), (b) any combination of these transactions and (c) any other transaction identified as a Specified Transaction in this Agreement or the relevant confirmation. "Terminated Transactions" means with respect to any Early Termination Date (a) if resulting from a Termination Event, all Affected Transactions and (b) if resulting from an Event of Default, all Transactions (in either case) in effect immediately before the effectiveness of the notice designating that Early Termination Date (or, if "Automatic Early Termination" applies, immediately before that Early Termination Date). "Termination Event" means an Illegality or, if specified to be applicable, a Credit Event Upon Merger or an Additional Termination Event. "Termination Rate" means a rate per annum equal to the arithmetic mean of the cost (without proof or evidence of any actual cost) to each party (as certified by such party) if it were to fund or of funding such amounts. "Unpaid Amounts" owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date and (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market value of that which was (or would have been) required to be delivered as of the originally scheduled date for delivery, in each case together with (to the extent permitted under applicable law) interest, in the currency of such amounts, from (and including) the date such amounts or obligations were or would have been required to have been paid or performed to (but excluding) such Early Termination Date, at the Applicable Rate. Such amounts of interest will be calculated on the basis of daily compounding and the actual number of days elapsed. The fair market value of any obligation referred to in clause (b) above shall be reasonably determined by the party obliged to make the determination under Section 6(e) or, if each party is so obliged, it shall be the average of the fair market values reasonably determined by both parties. IN WITNESS WHEREOF the parties have executed this document on the respective dates specified below with effect from the date specified on the first page of this document. LASALLE BANK NATIONAL ASSOCIATION By: Susan Proctor Name: Susan Proctor Title: Vice President Date: August 8, 2003 AMCON DISTRIBUTING COMPANY By: Michael D. James Name: Michael D. James Title: Vice President and CFO Date: August 6, 2003 SCHEDULE to the Master Agreement dated as of May 12, 2003 between LASALLE BANK NATIONAL ASSOCIATION ("Party A") and AMCON DISTRIBUTING COMPANY ("Party B") Part 1 Termination Provisions In this Agreement - (a) "Specified Entity" means in relation to Party A for the purpose of: Section 5(a)(v), Not applicable Section 5(a)(vi), Not applicable Section 5(a)(vii), Not applicable Section 5(b)(ii), Not applicable and in relation to Party B for the purpose of: Section 5(a)(v), All Affiliates Section 5(a)(vi), All Affiliates Section 5(a)(vii), All Affiliates Section 5(b)(ii), All Affiliates (b) "Specified Transaction" will have the meaning specified in Section 12 of this Agreement. (c) The "Cross Default" provisions of Section 5(a)(vi) will not apply to Party A will apply to Party B, provided, however, that is shall not constitute an Evene of Default under this Section 5(a)(vi) if (I) such event, condition or failure arises in the ordinary course of business by mistake, oversight or transfer difficulties in the payment of money, (ii) such event, condition or failure is remedied on or before the third Business Day after the occurrence or existence of such event, condition or failure, and (iii) no Specified Indebtedness in an aggregate amount equal to or in excess of the Threshold Amount is accelerated as a result of such event, condition or failure. "Specified Indebtedness" shall mean any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise ) (i) in respect of borrowed money (which, for the avoidance of doubt, shall include, without limitation, bonds, notes, commercial paper or similar instruments issued or guaranteed by the relevant party; and shall exclude deposits received), (ii) any amount due and payable in respect of any Specified Transaction (except that, for this purpose only, the words "and any other entity" shall be substituted for the words "and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other party)" where they appear in the definition of Specified Transaction), any repo transaction, any reverse repo transaction and any stock loan transaction and (iii) with respect to Party B shall include, without limitation, and without regard to the Threshold Amount the obligations of Party B under that certain Loan and Security Agreement dated as of June 1, 2001 between Party B, as Borrower, and Party A, as a Lender and Agent, and the Lenders party thereto from time to time as the same may be amended, modified or supplemented from time to time (the "Credit Agreement:). Section 5(a)(vi) is amended by insertion of the following words after the words "due and payable on line 8: "or, in the case of Specified Indebtedness in respect of any Specified Transaction, any repo transaction, any reverse repo transaction and any stock loan transaction, which has resulted in such Specified Indebtedness becoming due and payable as a result of the early termination of the relevant Specified Transaction, repo transaction, reverse repo transaction or stock lending transaction, as the case may be." "Threshold Amount" means, in relation to Party A, not applicable, and in relation to Party B, zero. (d) The "Credit Event Upon Merger" provisions of Section 5(b)(ii) will not apply to Party A and will apply to Party B. (e) The "Automatic Early Termination" provision of Section 6(a) will not apply to either party. (f) Payments on Early Termination. For the purpose of Section 6(c) of this Agreement: (i) Market Quotation* will apply. (ii) The Second Method will apply. (g) Additional Termination Event will apply. The following shall constitute an Additional Termination Event: If (i) the Credit Agreement shall be paid or prepaid in full, expire, terminate, or otherwise cease to be in full force and effect, other than because of an Event of Default (as defined in the Credit Agreement) with respect to Party B, or (ii) Party A shall cease (a) to be a party to, or (b) to have any commitments under the Credit Agreement, Party A or Party B shall have the right, at its sole discretion to terminate any Transaction under this Agreement. For purposes hereof, each such terminated Transaction shall constitute and Affected Transaction under the Agreement. For the purpose of the foregoing Termination Event, the Affected Party or Affected Parties shall be Party A and Party B. Part 2 Documents to be delivered For the purpose of Section 4(a: Documents to be delivered are: (i) Each party shall promptly deliver to the other party, certified evidence of the authority, incumbency and specimen signature of each authorized person executing any document on its behalf in connection with this Agreement upon execution of each document by any person. Covered by Section 3(d) representation. (ii) Each party upon request shall promptly deliver to the other party, a copy of its most recent Annual Report containing consolidated financial statements, prepared in accordance with accounting principles that are generally accepted for institutions of its type in the jurisdiction of its organization and certified by independent public accountants. Covered by Section 3(d) representation. (iii) Each party upon request shall promptly deliver to the other party, a copy of its most recent unaudited interim consolidated financial statements prepared in accordance with accounting principles that are generally accepted for institutions of its type in the jurisdiction of its organization in each case consistently applied. Covered by Section 3(d) representation. (iv) Party B shall promptly deliver to Party A an opinion of counsel substantially in the form of Annex A. Not covered by Section 3(d) representation. (v) Party B shall promptly deliver to Party A such other information with respect to its condition, or operations, financial or otherwise, as Party A may reasonably request from time to time. Covered by Section 3(d) representation. Part 3 Miscellaneous (a) Addresses for Notices. For the purpose of Section 10(a): Address for notices or communications to Party A: Address: LaSalle Bank National Association 208 South LaSalle Street, Suite 200 Chicago, IL 60604-1003 Attention: Treasury Operation Facsimile No.: 312-855-5852 Telephone No.: 312-855-5815 Address for notices or communications to Party B: Address: AMCON Distributing Company 7405 Irvington Road Omaha, NE 68122 Attention: Michael D. James Facsimile No.: 402-331-4834 Telephone No.: 402-331-3727 (b) Calculation Agent. The Calculation Agent shall be Party A. (c) Credit Support Document. Details of any Credit Support Document: Credit Support Document means, in relation to Party A, the Credit Agreement. (d) Credit Support Provider. Credit Support Provider means in relation to Party B, none. (e) Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of New York without reference to choice of law doctrine. (f) Netting of Payments. Subparagraph (ii) of Section 2(c) of this Agreement will not apply to any Transactions. (g) "Affiliate" will have the meaning specified in Section 12. Part 4 Other Provisions (a) ISDA Definitions. The 2000 ISDA Definitions, as supplemented by the Supplement to the 2000 ISDA Definitions (the "Definitions"), as published by the International Swaps and Derivatives Association, Inc., shall be deemed a part of this Agreement as if fully set forth herein. The Definitions and the provisions of Section 12 of this Agreement shall be deemed a part of each Confirmation as if set forth in full therein. (b) Interpretation. In the event of any inconsistency between the provisions of this Schedule and the Definitions, this Schedule will prevail. In the event of any inconsistency between the provisions of this Schedule and the printed Agreement of which it forms a part, this Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Schedule, such Confirmation will prevail for the purpose of the relevant Transaction. (c) Financial Condition. Party B represents and warrants to Party A (which representation will be deemed to be repeated on each date on which a Transaction is entered into) that there has been no material adverse change in its financial condition since the last day of the one year period covered by its most recently prepared year end financial statement that is likely to affect its ability to perform its obligations under this Agreement. (d) Affected Parties. For the purposes of Section 6(e) (Payments on Early Termination), both parties shall be deemed to be Affected Parties in connection with the Termination Events described in Section 5(b)(i), so that payments on early termination shall be calculated as provided in Section 6(e)(ii). (e) Additional Representations. Each party represents and warrants to the other that (i) it is entering into this Agreement, any Credit Support Document to which it is a party, each Transaction, and any other documentation relating to this Agreement that it is required by the Agreement to deliver as principal (and not as agent or in any other capacity, fiduciary or otherwise) and (ii) it is an "eligible contract participant" under, and as defined in, Section 1a of the Commodity Exchange Act (7 USC 1a), amended from time to time. (f) Consent to Recording. Each party (i) consents to the recording of the telephone conversations of trading, marketing and other relevant personnel of the parties in connection with this Agreement or any potential Transaction and (ii) agrees that such recording may be submitted in evidence to any court or in any proceedings with respect to this Agreement or any Transaction thereunder. (g) Transfer. Each party agrees that with regard to the transfer provisions set forth in Section 7, consent to any such transfer shall not be unreasonably withheld. (h) Waiver of Jury Trial. Each Party irrevocably waives any and all right to trial by jury in any legal proceeding instituted in connection with this Agreement or any Transaction to the fullest extent permitted by law. As to any matter for which a jury trial cannot be waived, each party agrees not to assert any such matter as a cross claim or counterclaim in, nor move to consolidate the same with, any legal proceeding in which a jury trial is waived. (i) Setoff. Each party agrees that the following provision shall be added as Section 6(f) of this Agreement: "(f) Setoff. Any amount (the "Early Termination Amount") payable to one party (the "Payee") by the other party (the "Payer") under Section 6(e) of this Agreement, in circumstances where there is a Defaulting Party or one Affected Party in the case where a Termination Event under this Agreement has occurred, will, at the option of the party ("X") other than the Defaulting Party or the Affected Party (and without prior notice to the Defaulting Party or the Affected Party), be reduced by its setoff against any amount(s) (the "Other Agreement Amount") payable (whether at such time or in the future or upon the occurrence of a contingency) by the Payee to the Payer (irrespective of the currency, place of payment or booking office of the obligation) under any other agreement(s) between the Payee and the Payer or instrument(s) or undertaking(s) issued or executed by one party to, or in favor of, the other party (and the Other Agreement Amount will be discharged promptly and in all respects to the extent it is so setoff). X will give notice to the other party of any setoff effected under this Section 6(f). For this purpose, either the Early Termination Amount or the Other Agreement Amount (or the relevant portion of such amounts) may be converted by X into the currency in which the other is denominated at the rate of exchange at which such party would be able, acting in a reasonable manner and in good faith, to purchase the relevant amount of such currency. The term "rate of exchange" includes, without limitation, any premiums and costs of exchange payable in connection with the purchase of or conversion into the relevant currency. If an obligation is unascertained, X may in good faith estimate that obligation and setoff in respect of the estimate, subject to the relevant party accounting to the other when the obligation is ascertained. Nothing in Section 6(f) shall be effective to create a charge or other security interest. This Section shall be without prejudice and in addition to any right of setoff, combination of accounts, lien or other right to which any party is at any time otherwise entitled (whether by operation of law, contract or otherwise)." (j) Relationship between the Parties. This Agreement is hereby amended by the addition of a new Section 13 as follows: "13. Relationship between the Parties. Each party will be deemed to represent to the other party on the date on which it enters into a Transaction (absent a written agreement between the parties that expressly imposes affirmative obligations to the contrary for that Transaction): (a) Non Reliance. It is acting for its own account, and it has made its own independent decisions to enter into that Transaction and as to whether that Transaction is appropriate or proper for it based upon its own judgment and upon advice from such advisors as it has deemed necessary. It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into that Transaction; it being understood that information and explanations related to the terms and conditions of a Transaction shall not be considered investment advice or a recommendation to enter into that Transaction. No communication (written or oral) received from the other party shall be deemed to be an assurance or guarantee as to the expected results of that Transaction. (b) Assessment and Understanding. It is capable of assessing the merits of and understanding (on its own behalf or through independent professional advice), and understands and accepts, the terms, conditions and risks of that Transaction. (c) Status of Parties. The other party is not acting as a fiduciary for or an advisor to it in respect of that Transaction." (k) Incorporation by Reference of Covenants. Party B covenants and agrees that, from and after the date hereof and thereafter until all obligations of Party B hereunder are paid in full and this Agreement is terminated, it shall duly keep, perform and observe each and every covenant set forth in the Credit Agreement. All of such covenants, together with related definitions and ancillary provisions, are hereby incorporated into this Agreement by reference, mutatis mutandis, as if such terms were set forth in this Agreement in full, without regard to any termination of such Credit Agreement, without regard to any expiration of any commitment thereunder and without regard to the final payment in full of any obligations of Party B or any other person or entity thereunder, provided, that no such covenant set forth above shall be incorporated herein by reference if such incorporation, by itself, would be a breach of the Credit Agreement. If an event is the subject of both a covenant incorporated herein by reference and another covenant set forth in this Agreement, Party B shall comply with the covenant that imposes on it the stricter requirement. To the extent that any covenant incorporated herein by reference is inconsistent with the other terms of this Agreement, Party A shall not be deemed to have waived any rights hereunder by virtue of such inconsistency. If the Credit Agreement terminates, any commitment thereunder expires or any obligations of Party B thereunder are paid in full and any covenant incorporated herein by reference requires Party B to obtain the consent of any agent, lender or lenders, then, for the purpose of this Agreement, Party B shall be required to obtain the consent of Party A. IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized officers as of the date hereof. LASALLE BANK NATIONAL ASSOCIATION AMCON DISTRIBUTING COMPANY By: Susan Proctor By: Michael D. James ------------------------------ ----------------------- Name: Susan Proctor Name: Michael D. James Title: Vice Presidetn Title: Vice President & CFO EX-10.14 4 ex1014swap10mil.txt EXHIBIT 10.14 SWAP CONFIRMATION $10 MILLION EXHIBIT 10.14 ISDA MASTER AGREEMENT LaSalle Bank N.A. - ---------------------------------------------------------------------------- LaSalle Banks CONFIRMATION - ---------------------------------------------------------------------------- Date: May 9, 2003 To: AMCON DISTRIBUTING COMPANY 7405 Irvington Road Omaha, NE 68122 ATTN: Mr. Mike James, CFO Phone: 402-331-3727 Fax: 402-331-4834 From: LASALLE BANK NATIONAL ASSOCIATION 208 South LaSalle Street, 2nd Floor Chicago, IL 60604 Fax: 312-855-5847/5852 Re: Swap Transaction (No. INF 17293/23506) - ---------------------------------------------------------------------------- Ladies/Gentlemen: The purpose of this letter agreement is to set forth the terms and conditions of the Swap Transaction entered into between us on the Trade Date specified below (the "Swap Transaction"). This letter agreement constitutes a "Confirmation" as referred to in the ISDA Master Agreement specified below. The definitions and provisions contained in the 1991 ISDA Definitions (as published by the International Swaps and Derivatives Association, Inc. ("ISDA"), without regard to subsequent amendments or revisions thereto, are incorporated into this Confirmation. In the event of any inconsistency between those and provisions of this Confirmation, this Confirmation will govern. Each party represents and warrants to the other that (i) it is duly authorized to enter into this Swap Transaction and to perform its obligations hereunder and (ii) the person executing this Confirmation is duly authorized to execute and deliver it. 1. This Confirmation supplements, forms a part of, and is subject to, the ISDA Master Agreement in the form published by ISDA ( the "Agreement") as if you and we had executed that agreement (but without any Schedule thereto) and the Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to choice of law doctrine. In addition, you and we agree to use our best efforts to promptly negotiate, execute, and deliver an ISDA Mater Agreement (as published by ISDA). Upon execution and delivery by you and us of that agreement (1) this letter agreement shall constitute a "Confirmation" as referred to in that agreement and shall supplement, form part of, and be subject to that agreement and (ii) all provisions contained or incorporated by reference in that agreement shall govern this Confirmation as expressly modified below. 2. The terms of the particular Swap Transaction to which this Confirmation relates are as follows: Notional Amount: USD 10,000,000 Trade Amount: May 9 2003 Effective Date: June 2, 2003 Termination Date: June 2, 2006 Fixed Amounts: Fixed Rate Payer: AMCON DISTRIBUTING COMPANY Fixed Rate: 2.37% Fixed Rate Payer Payment Dates: The 23rd day of each month, commencing on June 23, 2003 to and including the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention. Fixed Rate Day Count Fraction: Actual/360 Floating Amounts: Floating Rate Payer: LASALLE BANK NATIONAL ASSOCIATION Floating Rate Payer Payment Dates: The 23rd day of each month, commencing on June, 2003 to and including the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention. Floating Rate Option: USD-LIBOR-BBA Designated Maturity: 1 month Initial Floating Rate: To be determined Spread: none Floating Rate Day Count Fraction: Actual/360 Reset Dates: The first day of each Calculation Period Method of Averaging: Inapplicable Compounding: Inapplicable Business Days: London and New York Calculation Agent: LASALLE BANK NATIONAL ASSOCIATION 3. Offices: (a) The Office of the Fixed Rate Payer for this Swap Transaction is Omaha. (b) The Office of the Floating Rate Payer for this Swap Transaction is Chicago. 4. Account Details Payments to LASALLE BANK NATIONAL ASSOCIATION: LaSalle Bank National Association will debit your DDA# 5800239294 Payments to AMCON DISTRIBUTING COMPANY: LaSalle Bank National Association will credit you DDA# 5800239294 5. Other Provisions: Assignment: This Swap Transaction may be assigned only with prior written consent Netting: The parties hereto hereby agree that subparagraph (ii) of Part 2(c) of the Agreement shall not apply to any Swap Transaction Please confirm that the foregoing correctly sets forth the terms and conditions of our agreement by responding within ten (10) Business Days by either, (i), returning via telecopier an executed copy of this Confirmation to the attention of Tina Peters (fax number: (312) 855-5823, or sending a telex to Tina Peters (telex no. 62734, answerback: ABN UW) substantially to the following effect: "We acknowledge receipt of your fax dated December 22,2000 with respect to a Swap Transaction between AMCON DISTRIBUTING COMPANY and LASALLE BANK NATIONAL ASSOCIATION with an Effective Date of May 23, 2003 and a Termination Date of May 23, 2006 and confirm that such fax correctly sets forth the terms of our agreement relating to the Swap Transaction described therein. Very truly yours ---------------------------, by (specify name and title of authorized officer)." Failure to respond within such period shall not affect the validity or enforceability of the Swap Transaction, and shall be deemed to be an affirmation of the terms and conditions contained herein, absent manifest error. Yours Sincerely, LASALLE BANK NATIONAL ASSOCIATION By: /s/ Lily Levin By: /s/ Paul A. Ulmer ----------------------------- ------------------------------- Name: Lily Levin Name: Paul A. Ulmer --------------------------- ---------------------------- Title: Assistant Vice President Title: Vice President -------------------------- --------------------------- Confirmed as of the date first written: AMCON DISTRIBUTING COMPANY By: /s/ Michael D. James ----------------------------- Name: Michael D. James --------------------------- Title: Vice President & CFO -------------------------- EX-10.15 5 ex1015swap5mil.txt EXHIBIT 10.15 SWAP CONFIRMATINO $5 MILLION EXHIBIT 10.15 ISDA MASTER AGREEMENT LaSalle Bank N.A. - ---------------------------------------------------------------------------- LaSalle Banks CONFIRMATION - ---------------------------------------------------------------------------- Date: May 9, 2003 To: AMCON DISTRIBUTING COMPANY 7405 Irvington Road Omaha, NE 68122 ATTN: Mr. Mike James, CFO Phone: 402-331-3727 Fax: 402-331-4834 From: LASALLE BANK NATIONAL ASSOCIATION 208 South LaSalle Street, 2nd Floor Chicago, IL 60604 Fax: 312-855-5847/5852 Re: Swap Transaction (No. INF 17294/23508) - ---------------------------------------------------------------------------- Ladies/Gentlemen: The purpose of this letter agreement is to set forth the terms and conditions of the Swap Transaction entered into between us on the Trade Date specified below (the "Swap Transaction"). This letter agreement constitutes a "Confirmation" as referred to in the ISDA Master Agreement specified below. The definitions and provisions contained in the 1991 ISDA Definitions (as published by the International Swaps and Derivatives Association, Inc. ("ISDA"), without regard to subsequent amendments or revisions thereto, are incorporated into this Confirmation. In the event of any inconsistency between those and provisions of this Confirmation, this Confirmation will govern. Each party represents and warrants to the other that (i) it is duly authorized to enter into this Swap Transaction and to perform its obligations hereunder and (ii) the person executing this Confirmation is duly authorized to execute and deliver it. 1. This Confirmation supplements, forms a part of, and is subject to, the ISDA Master Agreement in the form published by ISDA ( the "Agreement") as if you and we had executed that agreement (but without any Schedule thereto) and the Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to choice of law doctrine. In addition, you and we agree to use our best efforts to promptly negotiate, execute, and deliver an ISDA Mater Agreement (as published by ISDA). Upon execution and delivery by you and us of that agreement (1) this letter agreement shall constitute a "Confirmation" as referred to in that agreement and shall supplement, form part of, and be subject to that agreement and (ii) all provisions contained or incorporated by reference in that agreement shall govern this Confirmation as expressly modified below. 2. The terms of the particular Swap Transaction to which this Confirmation relates are as follows: Notional Amount: USD 5,000,000 Trade Amount: May 9 2003 Effective Date: June 2, 2003 Termination Date: June 2, 2005 Fixed Amounts: Fixed Rate Payer: AMCON DISTRIBUTING COMPANY Fixed Rate: 1.88% Fixed Rate Payer Payment Dates: The 23rd day of each month, commencing on June 23, 2003 to and including the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention. Fixed Rate Day Count Fraction: Actual/360 Floating Amounts: Floating Rate Payer: LASALLE BANK NATIONAL ASSOCIATION Floating Rate Payer Payment Dates: The 23rd day of each month, commencing on June, 2003 to and including the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention. Floating Rate Option: USD-LIBOR-BBA Designated Maturity: 1 month Initial Floating Rate: To be determined Spread: none Floating Rate Day Count Fraction: Actual/360 Reset Dates: The first day of each Calculation Period Method of Averaging: Inapplicable Compounding: Inapplicable Business Days: London and New York Calculation Agent: LASALLE BANK NATIONAL ASSOCIATION 3. Offices: (a) The Office of the Fixed Rate Payer for this Swap Transaction is Omaha. (b) The Office of the Floating Rate Payer for this Swap Transaction is Chicago. 4. Account Details Payments to LASALLE BANK NATIONAL ASSOCIATION: LaSalle Bank National Association will debit your DDA# 5800239294 Payments to AMCON DISTRIBUTING COMPANY: LaSalle Bank National Association will credit you DDA# 5800239294 5. Other Provisions: Assignment: This Swap Transaction may be assigned only with prior written consent Netting: The parties hereto hereby agree that subparagraph (ii) of Part 2(c) of the Agreement shall not apply to any Swap Transaction Please confirm that the foregoing correctly sets forth the terms and conditions of our agreement by responding within ten (10) Business Days by either, (i), returning via telecopier an executed copy of this Confirmation to the attention of Tina Peters (fax number: (312) 855-5823, or sending a telex to Tina Peters (telex no. 62734, answerback: ABN UW) substantially to the following effect: "We acknowledge receipt of your fax dated December 22,2000 with respect to a Swap Transaction between AMCON DISTRIBUTING COMPANY and LASALLE BANK NATIONAL ASSOCIATION with an Effective Date of May 23, 2003 and a Termination Date of May 23, 2006 and confirm that such fax correctly sets forth the terms of our agreement relating to the Swap Transaction described therein. Very truly yours ---------------------------, by (specify name and title of authorized officer)." Failure to respond within such period shall not affect the validity or enforceability of the Swap Transaction, and shall be deemed to be an affirmation of the terms and conditions contained herein, absent manifest error. Yours Sincerely, LASALLE BANK NATIONAL ASSOCIATION By: /s/ Lily Levin By: /s/ Paul A. Ulmer ----------------------------- ------------------------------- Name: Lily Levin Name: Paul A. Ulmer --------------------------- ---------------------------- Title: Assistant Vice President Title: Vice President -------------------------- --------------------------- Confirmed as of the date first written: AMCON DISTRIBUTING COMPANY By: /s/ Michael D. James ----------------------------- Name: Michael D. James --------------------------- Title: Vice President & CFO -------------------------- EX-31.1 6 ex311wfwcert.txt EXHIBIT 31.1 WILLIAM F. WRIGHT CERTIFICATION EXHIBIT 31.1 ------------ CERTIFICATION I, William F. Wright, certify that: 1. I have reviewed this quarterly report on Form 10-Q of AMCON Distributing Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 11, 2003 William F. Wright, Chairman and --------------- ------------------------------- Principal Executive Officer --------------------------- EX-31.2 7 ex312mdjcert.txt EXHIBIT 31.2 MICHAEL D. JAMES CERTIFICATION EXHIBIT 31.2 ------------ CERTIFICATION I, Michael D. James, certify that: 1. I have reviewed this quarterly report on Form 10-Q of AMCON Distributing Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 11, 2003 Michael D James --------------- --------------- Vice President and Chief ------------------------ Financial Officer ----------------- EX-32.1 8 ex321wfwcert.txt EXHIBIT 32.1 WILLIAM F. WRIGHT CERTIFICATION EXHIBIT 32.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Quarterly Report on Form 10-Q (the "Report") of AMCON Distributing Company (the "Company") for the fiscal quarter ended June 27, 2003, I, William F. Wright, Chariman and Principal Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that: (1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 11, 2003 /s/ William F. Wright ------------------------- Title: Chairman and Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to AMCON Distributing Company and will be retained by AMCON Distributing Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 9 ex322mdjcert.txt EXHBITI 32.2 MICHAEL D. JAMES CERTIFICATION EXHIBIT 32.2 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Quarterly Report on Form 10-Q (the "Report") of AMCON Distributing Company (the "Company") for the fiscal quarter ended June 27, 2003, I, Michael D. James, Vice President and Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that: (1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 11, 2003 /s/ Michael D. James ------------------------- Title: Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to AMCON Distributing Company and will be retained by AMCON Distributing Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----