Exhibit 13.1
AMCON DISTRIBUTING COMPANY
INDEX TO 2003 ANNUAL REPORT
Letter to Shareholders......................... 1
Selected Financial Data........................ 2
Selected Quarterly Financial Data.............. 3
Market for Common Stock........................ 4
Management's Discussion and Analysis
Forward Looking Statements.................. 5
Company Overview............................ 5
Industry Segment Overview................... 6
Certain Accounting Considerations........... 8
Critical Accounting Policies................ 10
Results of Operations....................... 11
Liquidity and Capital Resources............. 18
Off-Balance Sheet Arrangements.............. 21
Acquisitions and Dispositions............... 22
Quantitative and Qualitative Disclosures
About Market Risk........................ 22
Report of Management........................... 23
Independent Auditors' Report................... F-1
Consolidated Financial Statements ............. F-2
Notes to Consolidated Financial Statements..... F-6
Corporate Directory
December 24, 2003
To Our Shareholders:
In previous letters, we have talked about realigning your Company not only to
maintain profitability but also to reduce our long-term reliance upon our
Wholesale Distribution Segment. Our intention is to continue to remain
profitable while proceeding with the realignment. We remained profitable in
fiscal year 2003, as we were in fiscal year 2002. Accomplishing this was
greatly assisted by the contributions of our Wholesale Distribution Segment,
which had an excellent year in fiscal 2003 despite falling sales and
increasing pressures on tobacco products.
A significant portion of our fiscal 2003 earnings were used to complete the
construction of our facility for Hawaiian Natural Water Company in Hawaii and
to establish The Beverage Group to market and distribute, not only our own
products, but also other upscale beverages nationwide under exclusive
contractual arrangements.
In addition to the construction of our new bottling plant in Hawaii, we
recently completed our packaging and warehousing facility adjoining the
bottling plant. We are now in a position to manufacture and ship significant
quantities of product which, in turn, should allow that Hawaiian Natural
Water Company to attain profitability. Even though most of fiscal year 2003
was occupied by completing the bottling plant and beginning construction of
the packaging and warehousing facility, sales for that Hawaiian Natural Water
Company did increase for the year and sales for fiscal 2004 should increase
significantly.
The Beverage Group spent most of last year securing exclusive distribution
agreements, hiring sales and marketing people, aligning with national and
regional brokers, and negotiating sales agreements with various retailers.
We are now at the point that the substantial background work has been
completed and we anticipate sales for that company also to increase
significantly during fiscal 2004.
The reorganization of the systems and management in the Retail Health Food
Segment continued and its Midwestern stores began to show the positive
results of these efforts. We expect to continue those efforts throughout
fiscal 2004 and, in fact, plan to open at least one new store in the Midwest.
In addition, we expect to focus even greater efforts on our Florida stores to
improve their profitability.
We were happy to welcome John Loyack to our Board of Directors this year.
John is the Chief Financial Officer of PNM Resources, Inc., a New York Stock
Exchange company, and represents the type of individual that we expect to add
to our Board of Directors that is, an independent, hardworking director
whose past experiences should help in contributing to our future successes.
Over the past year, the Securities and Exchange Commission and the American
Stock Exchange have adopted new corporate governance rules. We have been
aggressively working to comply with these requirements and commit to you, our
Stockholders, that we will operate our Company above and beyond any
requirements placed upon public companies. Even though many of those
requirements are extremely expensive and time consuming for a small public
company, we believe that it is important to set an example for our
management, our Directors, our employees and, of course, our Stockholders.
We continue to appreciate your support as Stockholders of our Company. We
believe that you will see the benefits of our reorganization in the future
and, in the interim, hope that our dividend continues to pay you a fair
return on your investment. Our efforts this past year and in prior years
could not have been made without the hardworking, loyal support of our
employees. For that, we are deeply indebted to them.
Very truly yours,
William F. Wright Kathleen M. Evans
Chairman of the Board President
1
SELECTED FINANCIAL DATA
The selected financial data presented below have been derived from AMCON
Distributing Company and its subsidiaries' (the "Company's") audited
financial statements. The information set forth below should be read in
conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS" and with the
Consolidated Financial Statements and Notes thereto included in this Annual
Report.
<Table>
<Caption>
(Dollars in thousands, except per share data)
- ---------------------------------------------------------------------------------------------------
FISCAL YEAR 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------
Sales /1/............................... $ 772,135 $ 847,117 $ 577,589 $ 422,901 $ 341,216
Cost of sales /1/....................... 711,974 785,193 531,903 378,138 309,422
----------------------------------------------------------
Gross profit............................ 60,161 61,924 45,686 44,763 31,794
Operating expense....................... 55,334 54,774 44,706 37,847 23,937
----------------------------------------------------------
Income from operations.................. 4,827 7,150 980 6,916 7,857
Interest expense........................ 3,270 4,273 3,877 2,499 1,282
Other income, net....................... (98) (411) (107) (2,248) (68)
----------------------------------------------------------
Income (loss) from continuing
operations before income taxes.... 1,655 3,288 (2,790) 6,665 6,643
Income tax expense (benefit)............ 629 1,316 (1,018) 2,354 2,521
----------------------------------------------------------
Income (loss) from continuing
operations........................ 1,026 1,972 (1,772) 4,311 4,122
Income (loss) from discontinued
operations, net of income taxes
of $0, $0, $(963), $(239),
and $175 respectively............. - - (1,570) (407) (286)
----------------------------------------------------------
Net income (loss)....................... $ 1,026 $ 1,972 $ (3,342) $ 3,904 $ 3,836
==========================================================
Basic earnings (loss) per share
Continuing operations................. $ 0.32 $ 0.65 $ (0.65) $ 1.58 $ 1.51
Discontinued operations............... - - (0.57) (0.15) (0.10)
----------------------------------------------------------
Net basic earnings (loss) per share..... $ 0.32 $ 0.65 $ (1.22) $ 1.43 $ 1.41
==========================================================
Diluted earnings (loss) per share:
Continuing operations................. $ 0.32 $ 0.63 $ (0.65) $ 1.51 $ 1.44
Discontinued operations............... - - (0.57) (0.14) (0.10)
----------------------------------------------------------
Net diluted earnings (loss) per share $ 0.32 $ 0.63 $ (1.22) $ 1.37 $ 1.34
==========================================================
Weighted average shares outstanding:
Basic................................. 3,166,191 3,032,484 2,738,170 2,734,862 2,727,892
Diluted............................... 3,222,253 3,109,179 2,738,170 2,853,320 2,855,419
Working capital /4/..................... $ 19,439 $ 26,989 $ 33,947 $ 27,023 $ 18,737
Total assets ........................... 99,499 104,586 99,197 73,192 68,589
Long-term obligations and subordinated
debt /2/.............................. 61,270 62,579 62,302 41,399 39,231
Shareholders' equity /3/................ 17,301 16,699 13,363 16,855 13,258
Cash dividends declared per common share $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.08
</Table>
2
/1/ Sales incentives paid to customers have been reclassified from cost of
sales to sales in accordance with Emerging Issues Task Force ("EITF") No.
01-9 "Accounting For Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)" for fiscal years 2001
through 1999. For 2003 and 2002, these sales incentives are recorded in
sales.
/2/ Includes deferred taxes, noncurrent liabilities of discontinued
operations, long-term debt, subordinated debt, and current portion of
long-term and subordinated debt.
/3/ Net of dividends declared of $0.4 million, $0.4 million, $0.3
million, $0.3 million, and $0.2 million in fiscal 2003, 2002, 2001 and
2000 and 1999, respectively.
/4/ Current assets minus current liabilities.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth selected financial information for each of the
eight quarters in the two fiscal years ended September 2003 and 2002. This
information has been prepared by the Company on the same basis as the
consolidated financial statements and includes all normal and recurring
adjustments necessary to present fairly this information when read in
conjunction with the Company's audited Consolidated Financial Statements and
Notes thereto included in this Annual Report.
<Table>
<Caption>
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------
FISCAL YEAR 2003 Fourth Third Second First
- --------------------------------------------------------------------------------------------------------
Sales .................................. $ 207,456 $ 189,949 $ 177,009 $ 197,721
Gross profit............................ 16,462 16,024 13,831 13,844
Income (loss) before income taxes....... 535 1,118 (438) 440
Net income (loss)....................... 334 691 (274) 275
Basic earnings (loss) per share......... $ 0.10 $ 0.22 $ (0.09) $ 0.09
Diluted earnings (loss) per share....... $ 0.10 $ 0.22 $ (0.09) $ 0.09
- --------------------------------------------------------------------------------------------------------
FISCAL YEAR 2002 Fourth Third Second First
- --------------------------------------------------------------------------------------------------------
Sales .................................. $ 224,071 $ 218,733 $ 194,159 $ 210,154
Gross profit............................ 16,529 16,054 14,231 15,110
Income (loss) from continuing operations
before income taxes.................... 1,065 1,377 145 701
Net income ............................. 648 843 90 391
Basic earnings (loss) per share......... $ 0.21 $ 0.27 $ 0.03 $ 0.14
Diluted earnings (loss) per share....... $ 0.20 $ 0.26 $ 0.03 $ 0.14
</Table>
3
Quarterly earnings per share are based on weighted average shares outstanding
for the quarter, therefore, the sum of the quarters may not equal the full
year earnings per share amount.
MARKET FOR COMMON STOCK
The Company's common stock trades on the American Stock Exchange ("AMEX")
under the trading symbol "DIT". The following table reflects the range of
the high and low closing prices per share of the Company's common stock
reported by AMEX for fiscal years 2003 and 2002. As of December 12, 2003,
the closing stock price was $3.76 and there were 3,168,954 common shares
outstanding. The Company has approximately 1,000 common shareholders of
record and the Company believes that approximately 1,800 additional persons
hold shares beneficially.
Fiscal Year 2003 Fiscal Year 2002
---------------------------------------
High Low High Low
4th Quarter $ 5.30 $ 4.34 $ 5.95 $ 3.25
3rd Quarter 4.69 2.95 5.11 4.20
2nd Quarter 5.84 3.41 4.88 4.10
1st Quarter 6.09 4.55 4.80 3.80
During fiscal years 2003 and 2002, the Board of Directors declared cash
dividends of $0.03 per share per quarter or $0.12 per share for each year.
The Board of Directors will evaluate payment of future dividends at their
regular meetings. The Company's revolving credit facility provides that the
Company may not pay dividends in excess of $0.12 per share on an annual
basis.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD LOOKING STATEMENTS
This Annual Report, including the Letter to Shareholders, Management's
Discussion and Analysis, and other sections, contains certain 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(s)," "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 (such as overall business conditions) 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.
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 and a non-alcoholic beverage business that includes a natural
spring water bottling operation in the State of Hawaii and a marketing and
distribution operation which is focused on selling the Company's Hawaiian
natural spring water and other specialty beverages. As used herein, unless
the context indicates otherwise, the term "ADC" means the wholesale
distribution segment and "AMCON" or the "Company" means AMCON Distributing
Company and its consolidated subsidiaries.
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, beverages, groceries, paper products, health and
beauty care products, frozen and chilled products and institutional food
service 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. On June 1, 2001, ADC
acquired substantially all of the distribution business and net assets of
5
Merchants Wholesale, Inc. in Quincy, Illinois. This acquisition
significantly increased the size of ADC's wholesale distribution business and
allowed ADC to close an existing distribution center in Missouri in order to
take advantage of synergies resulting from the acquisition of the Quincy,
Illinois facility.
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, operating
results improved significantly in our Midwest stores in fiscal year 2003.
Realignment of top management was completed in fiscal 2003. The
implementation of a new central point-of-sale inventory control system is
scheduled to be completed in the first quarter of fiscal 2004. Management's
confidence in improved financial performance has resulted in expansion plans
including the addition of at least one new store in fiscal 2004 and one to
two new stores in fiscal 2005.
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 has
recently expanded 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 the second quarter of
fiscal 2003, HNWC began construction of an expanded warehouse and packaging
building at its plant in Hawaii which will be completed in the first quarter
of fiscal 2004. 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 wholly-owned subsidiary, TBG, focuses on marketing and
distribution of HNWC bottled water products and other beverages including
Hype Energy Drink/TM/, Royal Kona Coffee/R/, Bottle Green/R/ and Bahia/R/
drinks and Xterra/R/, a line of sports beverages and energy bars, in the
United States, Canada and Mexico.
AMCON completed the sale of its health and natural foods distribution
business in fiscal 2001. As a result, the Company's financial data for
fiscal year 2001 reflects the former health and natural food distribution
business as a discontinued operation.
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.
6
Although ADC sells a diversified line of products, it remains dependent on
cigarette sales, which represented approximately 73% of total revenue and 37%
of gross profit in 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 help 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 either
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 (9.0%) than the national average as reported in Altria Inc.'s
2002 Annual Report, 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 in fiscal 2003 and prior years remained heavily dependent on sales of
private label cigarettes and the volume discounts it received 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 ADC 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, gross profit related to private
label cigarettes decreased by $1.4 million in fiscal 2003 compared to fiscal
2002. The Company expects that gross profit related to private label
cigarettes will decrease by up to $1.0 million in fiscal 2004, as compared to
fiscal 2003.
7
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. 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 are being marketed as a portfolio of
specialty beverages.
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 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 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 obtained an independent
valuation of its goodwill and intangible assets and the Company did not
recognize an impairment charge in the first quarter of fiscal 2003 due to the
implementation of SFAS No. 142, nor did it incur an impairment charge in
fiscal 2003 upon completion of the annual independent valuation.
8
In March 2003, the Financial Accounting Standards Board ("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 in the first quarter of calendar 2004 and a final
statement could be effective in 2004.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS No. 149). SFAS No. 149
amends SFAS No. 133 for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. 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.
In May 2003, the FASB issued SFAS 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 (the
fourth quarter of fiscal 2003 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.
Management is not aware of any events or circumstances that would create a
significant impact on future operating results upon adoption of SFAS No. 149
and SFAS No. 150.
In the first quarter of fiscal 2002, the Company began to classify costs
associated with sales incentives provided to it by suppliers as a reduction
in net sales in accordance with the guidance provided in Emerging Issues Task
Force ("EITF") No. 01-9, "Accounting For Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor's Products)." These costs were
previously treated by the Company as cost of sales. Results of operations
for periods prior to the implementation of EITF No. 01-9 have been restated
to reflect the reclassification of these sales incentives. However, this
reclassification had no impact on reported net income before taxes, net
income or earnings-per-share amounts reported for those periods.
Years cited herein refer to AMCON's fiscal years. AMCON maintains a 52-53
week fiscal year which ends on the last Friday in September. The actual
years ended September 26, 2003, September 27, 2002, and September 28, 2001.
Fiscal years 2003, 2002, and 2001 each comprised 52 weeks.
9
CRITICAL ACCOUNTING POLICIES
Certain accounting policies used in the preparation of the Company's
financial statements require management to make judgments and estimates and
the financial results reported may vary depending on how management makes
these judgements and estimates. The following are summaries of the most
critical accounting policies relating to the Company's financial statements.
The Company's Audit Committee has reviewed the development, selection and
disclosure of the critical accounting policies.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company maintains an allowance for
doubtful accounts to reflect the expected uncollectibility of accounts
receivable based on past collection history and specific risks identified in
the receivable portfolio.
INVENTORIES. Inventories consist primarily of finished products purchased in
bulk quantities to be sold to the Company's customers. An allowance for
obsolete inventory is maintained to reflect the expected unsaleable or
unrefundable inventory based on an evaluation of slow moving products,
obsolete inventories and discontinued products.
GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS. Goodwill associated with
the excess purchase price over the fair value of assets acquired and other
identifiable intangible assets, such as trademarks and tradenames, with
indefinite useful lives are no longer amortized, but are 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.
REVENUE RECOGNITION. The Company recognizes revenue when products are
delivered to customers, which generally is the same day products are shipped,
or sold to consumers in stores. Sales are shown net of returns, discounts,
and sales incentives to customers.
INSURANCE. The Company's insurance for worker's compensation, general
liability and employee-related health care benefits are provided through
high-deductible or self-insured programs. As a result, the Company accrues
worker's compensation liability based upon the claim reserves established by
a third-party administrator each month. The employee health insurance
benefit liability is based on the Company's historical claims experience
rate. The reserves associated with the exposure to these self-insured
liabilities are reviewed by management for adequacy at the end of each
reporting period.
10
RESULTS OF OPERATIONS
The following table sets forth an analysis of various components of the
Statements of Operations as a percentage of sales for fiscal years 2003,
2002, and 2001:
<Table>
<Caption>
Fiscal Years
----------------------------
2003 2002 2001
----------------------------
Sales.......................................... 100.0% 100.0% 100.0%
Cost of sales.................................. 92.2 92.7 92.1
----------------------------
Gross profit................................... 7.8 7.3 7.9
Selling, general and
administrative expenses..................... 6.9 6.1 7.3
Depreciation and amortization.................. 0.3 0.4 0.4
----------------------------
Income from operations......................... 0.6 0.8 0.2
Interest expense............................... 0.4 0.5 0.7
Other income, net.............................. - (0.1) -
----------------------------
Income (loss) from continuing operations
before income taxes........................... 0.2 0.4 (0.5)
Income tax expense (benefit)................... 0.1 0.2 (0.2)
----------------------------
Income (loss) from continuing operations....... 0.1 0.2 (0.3)
Loss from discontinued operations.............. - - (0.3)
----------------------------
Net income (loss).............................. 0.1% 0.2% (0.6)%
============================
</Table>
11
FISCAL YEAR 2003 VERSUS FISCAL YEAR 2002. Sales for fiscal year 2003
decreased 8.9% to $772.1 million, compared to $847.1 million for fiscal year
2002. Sales increases (decreases) by business segment are as follows
(dollars in millions):
Wholesale distribution segment $ (77.7)
Retail health food stores segment 1.4
Beverage segment 1.5
Intersegment eliminations (0.2)
-------
$ (75.0)
=======
Sales from the wholesale distribution business decreased by $77.7 million for
fiscal 2003 as compared to fiscal 2002. Of the total decrease, $75.6 million
was attributable to a decrease in sales of cigarettes, with $44.0 million of
the decrease related to a decrease in cigarette prices on Philip Morris and
Brown & Williamson brands beginning in the second quarter of 2003. Although
the Philip Morris price reduction program was communicated as a temporary
reduction, Philip Morris has extended the program through January 2004 and
could extend it further. Brown & Williamson stated that their price
reduction program is permanent. The remaining decrease in cigarette sales of
$31.6 million resulted primarily from a 9.0% reduction in carton volume. See
discussion above under INDUSTRY SEGMENT OVERVIEWS for additional information
regarding cigarette sales trends. Sales of tobacco, confectionery and other
products accounted for the remainder of the decrease as sales of these
products decreased by $2.1 million or 1.2% over 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 fiscal 2004 as a result of those
efforts.
Sales from the retail health food segment increased by $1.4 million when
compared to the prior year due in part to increased demand for low
carbohydrate products. Improvements in the Midwest retail stores increased
sales 9.1% over the prior year, more than offsetting lower than expected
sales in the Florida market, which continues to suffer from decreased tourist
trade and general economic depression. Management continues to review
strategies to improve sales in the retail segment including evaluation of the
siting, layout and design of its retail locations, purchasing strategies,
product offerings and presentation and promotional activities.
The beverage segment accounted for $3.7 million of sales for fiscal 2003,
compared to $2.2 million in fiscal 2002. The water bottling operation, which
was acquired during the latter part of the first quarter of fiscal 2002,
generated sales of $3.2 million during fiscal 2003. The marketing and
distribution business, which accounted for $0.5 million of the sales, was
started in the first quarter of 2003.
There were $0.2 million of intersegment sales eliminated in consolidation for
fiscal 2003, all of which related to beverage segment sales to wholesale
distribution. There were no intersegment sales for the same period in 2002.
12
Gross profit decreased 2.8% to $60.2 million for fiscal year 2003 compared to
$61.9 million for the prior fiscal year. Gross profit as a percentage of
sales increased to 7.8% for the year compared to 7.3% for fiscal 2002. Gross
profit by business segment is as follows (dollars in millions):
2003 2002 Incr/(Decr)
-------------------------------
Wholesale distribution segment $ 46.6 $ 48.4 $ (1.8)
Retail health food stores segment 13.2 13.2 -
Beverage segment 0.4 0.3 0.1
-------------------------------
$ 60.2 $ 61.9 $ (1.7)
===============================
Gross profit from our wholesale distribution business for fiscal 2003
decreased approximately $1.8 million, as compared to the prior year,
primarily due to a decrease of $1.6 million in incentive payments received on
our private label cigarettes, the absence of cigarette price increases and
state excise tax increases during fiscal 2003 which together contributed $1.9
million to gross profit in fiscal 2002, and 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). The above decrease in gross profit was partially offset
by a $1.8 million decrease in cost of sales to account for a reduction in the
LIFO reserve and a $1.4 million increase in gross profit from sales of other
products.
Gross profit from our retail health food segment of $13.2 million was
constant compared to the prior year even with a $0.3 million charge to cost
of sales (or a decrease in gross profit) resulting from an increase in the
LIFO reserve. Gross profit increased slightly in our Midwest stores, but was
partially offset by a decrease in gross profit in our Florida stores.
Gross profit from our beverage segment increased by $0.1 million over the
prior year. The increase was due to a full year of sales in the current year
from HNWC compared to nine months in the prior year, and new sales generated
in the segment from the formation of TBG in the first quarter of 2003.
Gross profit as a percentage of sales for fiscal 2003 increased primarily due
to the manufacturers' cigarette price decreases discussed above. Since our
gross profit per cigarette carton sold did not change materially after the
price decrease, gross profit expressed as a percentage of sales increased.
Total operating expense, which includes selling, general and administrative
expenses, depreciation and amortization, increased 1.0% or $0.6 million to
$55.3 million compared to fiscal 2002.
13
Our wholesale distribution segment reduced operating costs by approximately
$2.3 million due to efficiencies gained in its selling, warehousing and
delivery areas, primarily in the Quincy distribution center. In addition,
the absence of goodwill amortization accounted for a reduction of
approximately $0.2 million. Administrative costs increased by approximately
$0.2 million, compared to fiscal 2002, primarily due to increased
professional fees principally related to compliance with the Sarbanes-Oxley
Act, related AMEX listing standards, and SEC rules.
Total operating expense in our retail health food segment decreased by
approximately $0.1 million. Operating costs increased by approximately $0.5
million primarily due to additional labor and travel costs, but were offset
by the absence of tradename and goodwill amortization of approximately $0.6
million.
The beverage segment, which began late in the first quarter of fiscal 2002
with the acquisition of HNWC, incurred $4.5 million in operating expenses
during fiscal 2003, an increase of approximately $2.9 million over the prior
year. The increase was due primarily to $1.7 million of expenses
attributable to TBG which was formed late in the first quarter of fiscal 2003
and a full 12 months of operation for the natural spring water bottling
operation, compared to nine months in the prior year.
As a percentage of sales, total operating expenses increased to 7.2% from
6.5% for the prior year. This increase is primarily the result of the
reduction in sales due to the cigarette manufacturers' price decrease and
other factors discussed above. We did not experience a significant increase
in operating expenses; therefore, since total sales decreased but operating
expenses only increased slightly, operating expense expressed as a percentage
of sales increased.
As a result of the above, income from operations for fiscal 2003 decreased
$2.3 million to $4.8 million, compared to fiscal 2002.
Interest expense for fiscal year 2003 decreased 23.5% to $3.3 million
compared to $4.3 million during the prior year. The decrease was primarily
due to a reduction in average interest rates of approximately 0.65% and a
reduction in average debt outstanding of approximately $5.5 million in the
wholesale segment, partially offset by an increase in average debt
outstanding of approximately $1.2 million in the beverage segment.
Other income for fiscal year 2003 of $0.1 million was comprised primarily of
interest income of $0.1 million, proceeds from a settlement related to a
former distribution facility of $0.1 million, and gains on sales of
available-for-sale securities of $0.3 million. The above items were offset
by losses of $0.4 million associated with writing down nonoperating assets
held for sale to their fair market value. Other income for fiscal 2002 of
$0.5 million was generated primarily by gains of $0.3 million associated with
the sale of available-for-sale securities, $0.2 million related to
forgiveness of certain debts from former suppliers to the natural spring
14
water bottling operation, interest income and dividends received on
available-for-sale securities. Also included in other expense (income) in
fiscal 2002 was $0.1 million equity in losses from our minority investment in
HNWC before we acquired this company in December 2001.
As a result of the above factors, income from continuing operations for
fiscal year 2003 was $1.0 million compared to $2.0 million in fiscal 2002.
FISCAL YEAR 2002 VERSUS FISCAL YEAR 2001. Sales for fiscal year 2002,
increased 46.7% to $847.1 million, compared to $577.6 million for fiscal year
2001. Sales increases (decreases) by business segment are as follows
(dollars in millions):
Wholesale distribution segment $ 267.5
Retail health food stores segment (0.2)
Water bottling operation segment 2.2
-------
$ 269.5
=======
Sales from the wholesale distribution business increased by $267.5 million
for fiscal 2002 as compared to fiscal 2001. Sales from our distribution
business in Quincy, Illinois, which was acquired in the third quarter of
fiscal 2001, accounted for $253.7 million of the increase. The remaining
increase of $13.8 million was attributable primarily to increases in
cigarette sales of approximately $12.3 million over the prior year as a
result of price increases, which more than offset a 1.3% decline in
comparable carton volume. Sales of tobacco, confectionery and other products
accounted for the remainder of the increase as sales of these products
increased by $1.5 million or 1.1% over the prior year where sales growth was
negatively impacted by the unusually severe winter in the Midwest that
inhibited travel and other outdoor activities. Pricing strategies
implemented by several competitors beginning in 2001 negatively impacted
sales growth.
Sales from the retail health food segment decreased by $0.2 million when
compared to the prior year due to the closing of a store during the fourth
quarter of fiscal 2001. Sales at this store totaled approximately $0.7
million during fiscal 2001. Same store sales increased by $0.5 million, or
1.8% over the prior year. Competition by national chains who have opened
stores in the same markets as AMCON's stores and an overall softening of the
natural food retail market in past years hampered sales growth in the retail
health food segment.
The natural spring water bottling operation in Hawaii, which was acquired
during the latter part of the first quarter of fiscal 2002, generated sales
of $2.2 million during fiscal 2002. The operating results of the water
bottling operation are included in the Company's consolidated financial
statements from the date of acquisition.
15
Gross profit increased 35.5% to $61.9 million for fiscal year 2002 compared
to $45.7 million for the prior fiscal year. Gross profit as a percentage of
sales decreased to 7.3% for the year compared to 7.9% for fiscal 2001. Gross
profit by business segment was as follows (dollars in millions):
2002 2001 Incr/(Decr)
-------------------------------
Wholesale distribution $ 48.4 $ 33.8 $ 14.6
Retail health food stores 13.2 11.9 1.3
Water bottling operation 0.3 - 0.3
-------------------------------
$ 61.9 $ 45.7 $ 16.2
===============================
Gross profit from our wholesale distribution business for fiscal 2002 was
favorably impacted by our acquisition of the new Quincy distribution facility
that contributed $11.9 million of the increase in gross profit. Excluding
Quincy, gross profit for the year increased approximately $2.7 million as
compared to the prior year. This increase was primarily due to a favorable
margin impact of approximately $0.7 million resulting from inventory levels
at the time of price increases turning at a lower cost relative to the new
sales price, a $0.8 million lower charge to cost of sales to account for the
LIFO reserve, and increases in the sales of cigarettes and other products
which produced an increase in gross profit of $2.3 million when compared to
the prior year. The above increases were partially offset by a decrease of
$0.6 million in gross profit from sales of our private label cigarettes and
increases in incentive allowances of approximately $0.5 million paid to
customers, net of amounts received from manufacturers, as compared to the
prior year.
The retail health food segment increased gross profits by $1.3 million
compared to the prior year. The increase was primarily the result of a
realignment of top management which resulted in better inventory management
and purchasing strategies.
Gross profit from the natural spring water bottling operation, which was
acquired at the end of the first quarter of the year, was $0.3 million for
fiscal 2002.
Gross profit as a percentage of sales for fiscal 2002 declined primarily due
to cigarette sales increasing as a percentage of total sales. Although the
price of cigarettes continued to increase, our gross margin dollars remained
relatively constant and even decreased in certain markets due to competitive
pressures.
For fiscal year 2002, total operating expense, which includes selling,
general and administrative expenses, depreciation and amortization, increased
22.5% or $10.1 million to $54.8 million compared to fiscal 2001. The
increase was primarily due to expenses associated with the new Quincy
distribution business which accounted for $9.7 million of the increase
compared to fiscal 2001. The rest of the wholesale distribution segment
maintained operating costs consistent with the prior year primarily due to
16
efficiencies gained through closure of one distribution center and
integration of the customer base between other distribution centers. Total
operating expenses in our retail health food business declined by $1.2
million during fiscal 2002, as compared to the prior year, due to the closure
of one retail store and realignment of the management overhead structure
which eliminated significant overhead expenses. Our Hawaiian water bottling
business, which was acquired in the first quarter of fiscal 2002, incurred
$1.6 million in operating expenses and accounted for the remaining increase
in operating expenses for fiscal 2002 as compared to fiscal 2001.
As a percentage of sales, total operating expenses decreased to 6.5% from
7.7% for the prior year. This decrease was primarily due to the acquisition
of the Quincy distribution business which brought the wholesale distribution
segment's operating costs as a percentage of sales down to 5.0% for fiscal
2002 compared to 5.6% for fiscal 2001.
As a result of the above, income from operations for fiscal 2002 increased
$6.2 million to $7.2 million, compared to fiscal 2001.
Interest expense for fiscal year 2002 increased 10.2% to $4.3 million
compared to $3.9 million during the prior year. The increase was due to debt
incurred in the third quarter of fiscal 2001 to acquire the Quincy, IL
distribution business and distribution facility, net interest paid under an
interest rate swap contract that was assumed in the Quincy acquisition
totaling $1.9 million over the prior year, and $0.2 million related to the
Hawaiian water bottling operation. These increases in interest expense were
offset by reductions in interest of $0.6 million related to a decline in the
remaining average debt balances and $1.1 million related to valuation
adjustments on the interest rate swap contract, which are included in
interest expense.
Other income for fiscal year 2002 of $0.5 million was generated primarily by
gains of $0.3 million associated with the sale of available-for-sale
securities, $0.2 million related to forgiveness of certain debts from former
suppliers to the Hawaiian water bottling operation, and interest income and
dividends received on investment securities. Other income for fiscal year
2001 of $0.2 million was generated primarily by interest income and dividends
received on investment securities.
Included in other expense (income) is equity in loss of an unconsolidated
affiliate of $0.1 million, respectively for 2002 and 2001, which represented
AMCON's ownership interest in the losses of HNWC prior to acquiring the
company in December 2001.
The Company's effective tax rate was 40.0% in fiscal 2002, compared to 36.5%
in fiscal 2001. The higher rate in fiscal 2002 was primarily attributable to
state tax benefits not being recognized in states where separate tax returns
are filed for subsidiaries that incur losses.
As a result of the above factors, income from continuing operations for
fiscal year 2002 was $2.0 million compared to a loss from continuing
operations of $1.8 million for fiscal 2001.
17
LIQUIDITY AND CAPITAL RESOURCES
As of September 2003, our liquidity was provided by cash on hand of $0.7
million and approximately $17.0 million available under a revolving credit
facility with a capacity of $55.0 million. During fiscal year 2003, AMCON
generated cash flow of approximately $5.5 million from operating activities
primarily through net income and decreases in accounts receivable and
inventory. Cash of $3.2 million was utilized in investing activities during
the year for capital expenditures and cash of $0.4 million was provided by
investing activities through sales of fixed assets and available-for-sale
securities. Cash provided by financing activities includes $0.9 million in
net proceeds from long term debt which was used primarily to purchase fixed
assets. In addition, $2.8 million of cash was used in financing activities
to pay down long-term and subordinated debt and $0.4 million was used for
payment of dividends to shareholders.
The Company makes capital expenditures primarily for equipment for its
distribution facilities including computers, delivery vehicles and warehouse
equipment, remodeling of existing retail health food stores, and equipment
and leasehold improvements for its natural spring water bottling operation.
The Company has historically financed its working capital requirements with a
combination of internally generated funds and bank borrowings. Cash provided
by operating activities approximated $5.5 million in fiscal 2003, compared to
cash provided of approximately $2.1 million in fiscal 2002 and $5.7 million
in fiscal 2001. Capital expenditures during those periods were approximately
$3.1 million, $2.7 million and $1.2 million, respectively. Any remaining
cash provided by operations was applied to debt service.
The Company had working capital (current assets less current liabilities) of
approximately $19.4 million as of fiscal year end 2003 compared to $27.0
million at fiscal year end 2002. The decrease in working capital was
primarily attributable to $6.0 million of subordinated debt becoming current
as of year end 2003, financing leasehold improvements and other capital asset
acquisitions related to the Hawaii natural spring water bottling operation,
and funding the cash needs of the beverage marketing and distribution
business with short term borrowings. The Company's ratio of debt to equity
decreased to 3.45 at fiscal year end 2003 compared to 3.69 at fiscal year end
2002. This decrease in debt to equity ratio is due primarily to net income
earned by the Company during fiscal 2003 which resulted in an increase to
equity.
18
The following table summarizes our outstanding contractual obligations and
commitments as of fiscal year end 2003:
<Table>
<Caption>
Payments Due By Period
------------------------------------------------------------------------------------------
Contractual Fiscal Fiscal Fiscal Fiscal Fiscal
Obligations Total 2004 2005 2006 2007 2008 Thereafter
------------------------------------------------------------------------------------------
Long-term debt $ 49,301 $ 14,927 $ 28,180 $ 6,194 $ - $ - $ -
Subordinated debt 8,739 7,763 976 - - - -
Capital lease 1,701 421 489 486 284 21 -
Operating leases 22,981 5,150 4,616 3,829 2,269 1,617 5,500
------------------------------------------------------------------------
Total $ 82,722 $ 28,261 $ 34,261 $ 10,509 $ 2,553 $ 1,638 $ 5,500
========================================================================
Total
Other Commercial Amounts Fiscal Fiscal Fiscal Fiscal Fiscal
Obligations Committed 2004 2005 2006 2007 2008 Thereafter
------------------------------------------------------------------------------------------
Lines of credit $ 59,750 $ 4,750 $ 55,000 $ - $ - $ - $ -
Letters of credit 967 967 - - - - -
------------------------------------------------------------------------
Total $ 60,717 $ 5,717 $ 55,000 $ - $ - $ - $ -
========================================================================
</Table>
ADC maintains a revolving credit facility (the "Facility") with LaSalle Bank
which allows it to borrow up to $55.0 million at any time, subject to
eligible accounts receivable and inventory requirements. As of fiscal year
end 2003, the outstanding balance on the Facility was $38.0 million. The
Facility bears interest at a variable rate equal to the bank's base rate,
which was 4.00% at September 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 a fixed
rate 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. In December 2003, the due date of the
Facility was extended to June 2005.
19
The Facility contains covenants which, among other things, set certain
financial ratios and net worth requirements. The Facility includes 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 $9.0 million for fiscal 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 September 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 "Beverage Facility"). Borrowings under the Beverage Facility
bear interest at the bank's base rate plus 1.0%, which equaled 6.75% at
September 2003. As of September 2003, the outstanding balance under the
Beverage Facility was $2.8 million. The Beverage 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 September 2003. As of September 2003, the outstanding
balance under the Retail Facility was $2.0 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. The Real Estate Loan is amortized
on a 20 year basis with a balloon payment due on June 1, 2006. The Real
Estate Loan is collateralized by the Company's two owned distribution
facilities. As of September 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. As of September 2003,
the outstanding obligation to the seller was approximately $1.8 million.
20
The Company has borrowings under an 8% Convertible Subordinated Note (the
"Convertible Note") and a Collateralized Promissory Note (the "Collateralized
Note"), in addition to borrowings under the Facility which were used to
purchase all of the common stock of Health Food Associates, Inc. Both the
Convertible Note and the Collateralized Note have five-year terms and bear
interest at 8% per annum. Principal on the Convertible Note is due in a
single payment at maturity. Principal on the Collateralized Note is payable
in installments of $0.8 million per year with the balance due at maturity.
The Collateralized Note is collateralized by a pledge of the stock of Health
Food Associates, Inc. The principal balance of the Convertible Note may be
converted into stock of The Healthy Edge, Inc. (formerly Food For Health Co.,
Inc.) under circumstances set forth in the Convertible Note. As of September
2003, the outstanding balances of the Convertible Note and the Collateralized
Note were $2.0 million and $4.8 million, respectively. Both the Convertible
Note and the Collateralized Note are due in September 2004. The Company is
currently considering various restructuring alternatives for these notes.
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 fiscal year end 2003, the outstanding balance of those notes
was approximately $0.2 million.
In connection with the purchase of the Quincy distribution business and HNWC,
the Company assumed several capital leases for office equipment, automobiles
and warehouse equipment. In addition, the Company entered into a new capital
lease in September 2003 in connection with the acquisition of new water
bottling and packaging equipment. As of September 2003, the outstanding
balances on the capital leases totaled approximately $1.7 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 expires 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.
The Company believes that funds generated from operations, supplemented as
necessary with funds available under the revolving credit facilities, will
provide sufficient liquidity to cover debt service and any reasonably
foreseeable future working capital and capital expenditure requirements
associated with existing operations.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that have or are
reasonably expected to have a material effect on the Company's financial
position or results of operations.
21
ACQUISITIONS AND DISPOSITIONS
On June 1, 2001, AMCON completed the acquisition of substantially all of the
distribution business and net assets of Merchant's Wholesale, Inc. located in
Quincy, Illinois (the "Quincy" distribution business). In addition, the
Company purchased a 206,000 square foot building occupied by Merchants and
owned by Merchants' sole stockholder.
On December 17, 2001, the Company completed a merger with HNWC, pursuant to
which HNWC merged with and into, and thereby became, a wholly-owned
subsidiary of AMCON Distributing Company. The merger consideration valued
the entire common equity interest in HNWC at approximately $2.9 million,
which was paid in cash of $0.8 million during fiscal 2001 and in common stock
of the Company valued at $2.1 million. As a result, the Company issued
373,558 shares of its common stock to outside HNWC shareholders, representing
12.0% of the Company's outstanding shares after giving effect to the merger.
HNWC option holders and warrant holders also received comparable options and
warrants of the Company, but with the exercise price and number of shares
covered thereby being adjusted to reflect the exchange ratio.
On March 23, 2001, AMCON sold the assets of Food For Health Co. Inc. for
$10.3 million, subject to certain adjustments. That sale is reflected as
discontinued operations in AMCON's consolidated financial statements.
Results from the discontinued operations have been excluded from income from
continuing operations in the accompanying consolidated statements of
operations. The effects of the discontinued operations on net income and per
share data are reflected within the accompanying consolidated statements of
operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk on its variable rate debt. At
September 2003, we had $27.7 million of variable rate debt outstanding
(excluding $15.0 million variable rate debt which is fixed through the swaps
described below), with maturities through June 2005. The interest rates on
this debt ranged from 3.49% to 6.75% at September 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 in April 2003. We estimate that our annual cash flow
exposure relating to interest rate risk based on our current borrowings is
approximately $0.2 million for each 1% change in our lender's prime interest
rate.
22
In June 2003, the Company entered into two interest rate swap agreements with
a bank in order to mitigate the Company's exposure to interest rate risk on
this variable rate debt. Under the agreements, the Company agrees to
exchange, at specified intervals, fixed interest amounts for variable
interest amounts calculated by reference to agreed-upon notional principal
amounts of $10.0 million and $5.0 million. The interest rate swaps
effectively convert $15.0 million of variable-rate senior debt to fixed-rate
debt at rates of 4.87% and 4.38% on the $10.0 million and $5.0 million
notional amounts through the maturity of the swap agreements on June 2, 2006
and 2005, respectively. These interest rate swap agreements have been
designated as hedges and are accounted for as such for financial accounting
purposes.
We do not utilize financial instruments for trading purposes and hold no
derivative financial instruments other than the interest rate swaps which
could expose us to significant market risk.
In addition, we are exposed to market risk relating to our available-for-sale
investment in the common stock of Consolidated Water Company Limited
("CWCO"), a public company traded on the NASDAQ National Market. At
September 2003 and 2002 we held 30,000 and 50,000 shares, respectively, of
common stock of CWCO valued at approximately $0.5 million and $0.6 million.
We value this investment at market and record price fluctuations in
shareholders' equity as unrealized gain or loss on investments. The
unrealized gain on CWCO shares was approximately $0.5 million at September
2003 and 2002, respectively. We sold 20,000 shares of CWCO common stock in
fiscal 2003 and realized a gain of $0.3 million on the sale.
REPORT OF MANAGEMENT
Management is responsible for the preparation of the accompanying
consolidated financial statements. The consolidated financial statements and
the notes thereto have been prepared in accordance with accounting principles
generally accepted in the United States of America to reflect, in all
material aspects, the substance of financial events and transactions
occurring during the year. Deloitte & Touche LLP, independent auditor, has
audited our consolidated financial statements as of and for the fiscal years
ended September 26, 2003, September 27, 2002 and September 28, 2001.
The Company maintains financial control systems designed to provide
reasonable assurance that assets are safeguarded and that transactions are
executed and recorded in accordance with management authorization. The
control systems are evaluated annually by the Company.
William F. Wright Kathleen M. Evans Michael D. James
Chairman President Secretary, Treasurer and
Chief Financial Officer
December 24, 2003
23
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of AMCON Distributing Company:
We have audited the accompanying consolidated balance sheets of AMCON
Distributing Company and its subsidiaries (the "Company") as of September 26,
2003 and September 27, 2002, and the related consolidated statements of
operations, shareholders' equity and comprehensive income (loss) and cash
flows for each of the three years in the period ended September 26, 2003.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of AMCON Distributing Company and
its subsidiaries as of September 26, 2003 and September 27, 2002, and the
results of their operations and their cash flows for each of the three years
in the period ended September 26, 2003 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, in 2003 the
Company changed its method of accounting for goodwill and other intangible
assets.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
December 24, 2003
F-1
CONSOLIDATED BALANCE SHEETS
AMCON Distributing Company and Subsidiaries
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------
Fiscal Year End September 2003 2002
- -----------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 668,073 $ 130,091
Accounts receivable, less allowance for
doubtful accounts of $0.8 million and $0.6 28,170,129 31,216,783
million in 2003 and 2002, respectively
Inventories 32,489,051 35,744,074
Income tax receivable - 981,054
Deferred income taxes 1,568,476 324,369
Other 581,950 393,365
------------- ------------
Total current assets 63,477,679 68,789,736
Fixed assets, net 16,951,615 16,096,124
Available-for-sale investments 512,694 562,000
Goodwill 6,091,397 6,091,397
Other Intangible Assets 11,420,542 11,804,289
Other assets 1,045,503 1,242,923
------------- ------------
$ 99,499,430 $104,586,469
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,092,091 $ 19,873,851
Accrued expenses 3,715,370 3,969,164
Accrued wages, salaries, bonuses 1,462,678 1,371,310
Income tax payable 540,414 -
Current liabilities of discontinued operations 117,612 93,558
Current portion of long-term debt 15,348,167 14,783,967
Current portion of subordinated debt 7,762,666 1,708,986
------------- -------------
Total current liabilities 44,038,998 41,800,836
Deferred income taxes 1,367,367 788,316
Noncurrent liabilities of discontinued operations 161,025 197,024
Long-term debt, less current portion 35,654,423 36,362,099
Subordinated debt, less current portion 976,220 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, in 2003
and 2002, respectively 31,690 31,570
Additional paid-in capital 5,997,977 5,977,643
Accumulated other comprehensive income, net of $0.1 million
and $0.2 million tax in 2003 and 2002, respectively 220,732 294,771
Retained earnings 11,050,998 10,395,324
------------- -------------
17,301,397 16,669,308
------------- -------------
$ 99,499,430 $ 104,586,469
============= -============
The accompanying notes are an integral part of these consolidated financial statements
</Table>
F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
AMCON Distributing Company and Subsidiaries
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------
Fiscal Years Ended September 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------
Sales (including excise taxes of $172.2 million,
$166.5 million and $100.5 million, respectively) $ 772,135,351 $ 847,116,997 $ 577,589,485
Cost of sales 711,974,154 785,192,882 531,903,086
------------- ------------- -------------
Gross profit 60,161,197 61,924,115 45,686,399
Selling, general and administrative expenses 53,049,723 51,610,419 42,186,916
Depreciation and amortization 2,284,608 3,163,549 2,519,377
------------- ------------- -------------
55,334,331 54,773,968 44,706,293
------------- ------------- -------------
Income from operations 4,826,866 7,150,147 980,106
Other expense (income):
Interest expense 3,269,777 4,272,783 3,876,606
Other income, net (98,384) (505,712) (200,504)
Equity in loss of unconsolidated affiliate - 95,007 94,445
------------- ------------- ------------
3,171,393 3,862,078 3,770,547
------------- ------------- ------------
Income (loss) from continuing operations
before income taxes 1,655,473 3,288,069 (2,790,441)
Income tax expense (benefit) 629,000 1,316,000 (1,018,411)
------------- ------------- -----------
Income (loss) from continuing operations 1,026,473 1,972,069 (1,772,030)
Loss from discontinued operations, net
of income tax benefit of $0, $0 and
$0.6 million in 2001 - - (894,434)
Loss on disposal of discontinued operations,
net of income tax benefit of $0, $0 and
$0.4 million in 2001 - - (675,415)
------------- ------------- -------------
Net income (loss) $ 1,026,473 $ 1,972,069 $ (3,341,879)
============= ============= =============
Basic earnings (loss) per share:
Continuing operations $ 0.32 $ 0.65 $ (0.65)
Discontinued operations - - (0.57)
------------- ------------- -------------
Net basic earnings (loss) per share $ 0.32 $ 0.65 $ (1.22)
============= ============= =============
Diluted earnings (loss) per share:
Continuing operations $ 0.32 $ 0.63 $ (0.65)
Discontinued operations - - (0.57)
------------- ------------- -------------
Net diluted earnings (loss) per share $ 0.32 $ 0.63 $ (1.22)
============= ============= =============
Weighted average shares outstanding:
Basic 3,166,191 3,032,484 2,738,170
Diluted 3,222,253 3,109,179 2,738,170
The accompanying notes are an integral part of these consolidated financial statements
</Table>
F-3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
AMCON Distributing Company and Subsidiaries
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other Treasury Stock
-------------- Paid-In Comprehensive Retained --------------
Shares Amount Capital Income Earnings Shares Amount Total
- ----------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 29, 2000 2,737,551 $27,376 $4,121,981 $228,924 $12,476,624 - $ - $16,854,905
Exercise of options 1,633 16 3,146 - (62) 17 85 3,185
Purchase of treasury stock - - - - - (17) (85) (85)
Dividends - - - - (328,605) - - (328,605)
Net loss - - - - (3,341,879) - - (3,341,879)
Unrealized gain on
investments available-
for-sale, net of tax of
$0.1 million - - - 175,438 - - - 175,438
-----------
Total comprehensive loss (3,166,441)
--------- ------- ----------- -------- ----------- ----- ----- -----------
BALANCE, SEPTEMBER 28, 2001 2,739,184 27,392 4,125,127 404,362 8,806,078 - - 13,362,959
Exercise of options 44,220 442 126,383 - - - - 126,825
Issuance of common stock
from acquisition 373,558 3,736 1,726,133 - - - - 1,729,869
Dividends - - - - (382,823) - - (382,823)
Net income - - - - 1,972,069 - - 1,972,069
Unrealized loss on
investments available-
for-sale, net of tax of
$0.1 million - - - (109,591) - - - (109,591)
-----------
Total comprehensive income 1,862,478
--------- ------- ----------- -------- ----------- ----- ----- -----------
BALANCE, SEPTEMBER 27, 2002 3,156,962 31,570 5,977,643 294,771 10,395,324 - - 16,699,308
Exercise of options 12,000 120 20,370 - - - - 20,490
Retirement of common stock (8) - (36) - - - - (36)
Dividends - - - - (370,799) - - (370,799)
Net income - - - - 1,026,473 - - 1,026,473
Unrealized loss on
investments available-
for-sale, net of tax of
$0.04 million - - - (74,039) - - - (74,039)
-----------
Total comprehensive income 952,434
--------- ------- ----------- -------- ----------- ----- ----- -----------
BALANCE, SEPTEMBER 26, 2003 3,168,954 $31,690 $5,997,977 $220,732 $11,050,998 - $ - $17,301,397
========= ======= =========== ======== =========== ===== ===== ===========
The accompanying notes are an integral part of these consolidated financial statements
</Table>
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMCON Distributing Company and Subsidiaries
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------
Fiscal Years Ended September 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) from continuing operations $ 1,026,473 $ 1,972,069 $ (1,772,030)
Adjustments to reconcile net income (loss) from continuing
operations to net cash flows from operating activities:
Net loss from discontinued operations - - (894,434)
Net loss on disposition of discontinued operations - - (675,415)
Depreciation and amortization 2,520,058 3,453,268 2,519,377
(Gain) loss on sales of fixed assets, intangibles,
land held for sale and securities (207,950) (62,843) 70,646
Equity in loss of affiliate - 95,007 94,445
Deferred income taxes (660,306) 1,368,445 (542,973)
Provision for losses on doubtful accounts, inventory
obsolescence and assets held for aale 675,828 45,681 509,993
Changes in assets and liabilities, net of effect
of acquisitions:
Accounts receivable 2,852,512 768,582 1,608,381
Inventories 3,204,987 (5,710,095) 2,452,459
Other current assets (188,585) (29,514) 281,971
Other assets (144,869) 147,490 (39,170)
Accounts payable (4,781,760) 2,506,111 6,379,513
Accrued expenses, wages, salaries and bonuses (269,421) (1,094,380) 1,696,118
Income taxes payable and receivable 1,521,468 769,087 (2,503,562)
Net cash flows from operating activities -
discontinued operations (11,947) (2,084,866) (3,521,200)
----------- ------------ ------------
Net cash flows from operating activities 5,536,488 2,144,042 5,664,119
Cash flows from investing activities:
Purchases of fixed assets (3,228,711) (2,680,214) (1,197,708)
Acquisitions, net of cash acquired - (95,321) (32,918,646)
Proceeds from sales of fixed assets and intangibles 129,994 93,082 38,000
Proceeds from sales of available-for-sale securities 303,018 303,911 -
Purchase of debt security - - (1,254,483)
Purchase of equity security - - (300,000)
Proceeds from disposal of discontinued operations - - 8,200,641
----------- ----------- ------------
Net cash flows from investing activities (2,795,699) (2,378,542) (27,432,196)
Cash flows from financing activities:
Proceeds from borrowings of long-term debt 919,864 - 1,595,000
Net (payments) proceeds on bank credit agreements (536,538) 3,827,287 (9,727,012)
Net proceeds on bank credit agreement for acquisition - - 26,678,649
Proceeds from long-term debt for acquisition - - 6,240,000
Payments on long-term and subordinated debt (2,235,788) (3,163,994) (3,238,545)
Debt issue costs - - (305,846)
Dividends paid (370,799) (382,823) (328,605)
Purchase of treasury stock (36) - (85)
Proceeds from exercise of stock options 20,490 126,825 3,185
Payment of registration costs - (339,644) -
----------- ----------- ------------
Net cash flows from financing activities (2,202,807) 67,651 20,916,741
Net increase (decrease) in cash 537,982 (166,849) (851,336)
Cash, beginning of year 130,091 296,940 1,148,276
----------- ----------- ------------
Cash, end of year $ 668,073 $ 130,091 $ 296,940
=========== =========== ============
Supplemental cash flow information:
Cash paid during the year for interest $ 4,244,482 $ 5,029,754 $ 2,217,801
Cash paid during the year for income taxes 454,110 187,815 361,343
Supplemental non-cash information:
Business combinations:
Fair value of assets acquired - 5,972,598 42,353,735
Subordinated debt assumed - 457,905 4,541,751
Other liabilities assumed - 1,508,435 4,893,337
Issuance of common stock - 2,069,511 -
Conversion of notes receivable and acquisition costs - 692,058 -
The accompanying notes are an integral part of these consolidated financial statements
</Table>
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) General:
As more fully described in Note 2 to the consolidated financial statements,
AMCON Distributing Company and its wholly-owned subsidiaries ("AMCON" or the
"Company") completed the sale of its health food distribution business
effective March 23, 2001. As a result, the Company's fiscal year 2001
results reflect the health food distribution business as discontinued
operations.
(b) Company Operations:
AMCON is primarily engaged in the wholesale distribution of consumer products
in the Midwest and Rocky Mountain regions. In addition, the Company operates
thirteen retail health food stores in Florida and the Midwest and a non-
alcoholic beverage business that includes a natural spring water bottling
operation in the State of Hawaii and a marketing and distribution operation
which is focused on selling the Company's Hawaiian natural spring water and
other specialty beverages.
AMCON's wholesale distribution business ("ADC") includes six distribution
centers that sell approximately 13,000 different consumer products, including
cigarettes and tobacco products, candy and other confectionery, beverages,
groceries, paper products, health and beauty care products, frozen and
chilled products and institutional food service products. The Company
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, the Company services
institutional customers, including restaurants and bars, schools, sports
complexes and vendors, as well as other wholesalers.
AMCON also operates seven retail health food stores in Florida under the name
Chamberlin's Market & Cafe and six in the Midwest under the name Akin's
Natural Foods Market. These stores carry natural supplements, groceries,
health and beauty care products and other food items.
In addition, AMCON operates a non-alcoholic beverage business which 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 has expanded marketing to the mainland United
States and certain international markets. AMCON's newly formed wholly-owned
subsidiary, TBG is focused on the marketing and distribution of HNWC bottled
water products and other beverages including Hype Energy Drink/TM/, Royal
Kona Coffee/R/, Bottle Green/R/ and Bahia/R/ drinks and Xterra/R/, a line of
sports beverages and energy bars in the United States, Canada and Mexico.
The Company's operating income is subject to a number of factors which are
beyond the control of management, such as changes in manufacturers' cigarette
pricing and state excise tax increases which affects the market for generic
and private label cigarettes, and competing retail stores opening in close
proximity to the Company's retail stores. While the Company sells a
F-6
diversified product line, it remains dependent upon cigarette sales which
represented approximately 73% of its revenue and 37% of its gross profit in
fiscal 2003 compared to 76% of its revenue and 39% of its gross profit in
fiscal 2002 and 73% of its revenue and 40% of its gross profit in fiscal
2001. The Company's net income in fiscal 2003 and prior years was heavily
dependent on sales of the Company's private label cigarettes and volume
discounts received from manufacturers in connection with such sales.
(c) Accounting Period:
AMCON maintains a 52-53 week fiscal year which ends on the last Friday in
September. The actual years ended September 26, 2003, September 27, 2002 and
September 28, 2001. Fiscal 2003, 2002 and 2001 were comprised of 52 weeks.
Years cited herein refer to AMCON's fiscal years.
(d) Principles of Consolidation:
The consolidated financial statements include the accounts of AMCON and its
wholly-owned subsidiaries. The investments in and the operating results of
50%-or-less-owned entities are included in the consolidated financial
statements on the basis of the equity method of accounting. All significant
intercompany accounts and transactions have been eliminated.
(e) Cash and Accounts Payable:
AMCON uses a cash management system under which an overdraft is the normal
book balance in the primary disbursing accounts. The overdrafts included in
accounts payable of $4.8 million and $5.6 million at fiscal year end 2003 and
2002, respectively, reflect checks drawn on the disbursing accounts that have
been issued but have not yet cleared through the banking system. The
Company's policy has been to fund these outstanding checks as they clear with
borrowings under its revolving credit facility (see Note 10).
(f) Debt and Equity Investments:
AMCON classifies marketable securities, debt securities and investments as
held to maturity, available-for-sale or trading securities. Investments
classified as available-for-sale or trading are stated at fair value.
Investments classified as held-to-maturity are stated at amortized cost. The
carrying amounts of the securities used in computing unrealized and realized
gains and losses are determined by specific identification. Fair values are
determined using quoted market prices. For available-for-sale securities,
net unrealized holding gains and losses are excluded from net income and
reported in other comprehensive income, net of tax. For trading securities,
net unrealized holding gains and losses are included in the determination of
net income.
(g) Accounts Receivable:
Accounts receivable consist primarily of amounts due to the Company from its
normal business activities. An allowance for doubtful accounts is maintained
to reflect the expected uncollectibility of accounts receivable based on past
collection history and specific risks identified in the portfolio.
(h) Inventories:
The wholesale distribution segment inventories consist of finished products
purchased in bulk quantities to be redistributed to ADC's customers and are
stated at the lower of cost (last-in, first-out or "LIFO" method) or market.
The retail health food operation utilizes the retail LIFO inventory method of
accounting stated at lower of cost (LIFO) or market. The beverage
F-7
operation's inventories are stated at lower of cost (LIFO) or market and
consist of raw materials and finished goods. Finished goods inventory of
$35.9 million includes materials, labor and manufacturing overhead costs.
Raw materials inventory of $0.3 million consists of pre-forms used to make
bottles, caps, labels and various packaging and shipping materials. LIFO
inventories at fiscal year end 2003 and 2002 were approximately $3.7 million
and $4.5 million less than the amount of such inventories valued on a FIFO
basis, respectively. The liquidation of certain LIFO layers decreased cost
of goods sold by $1.5 million during fiscal 2003. An allowance for obsolete
inventory is maintained to reflect the expected unsaleable or unrefundable
inventory based on evaluation of slow moving products.
(i) Fixed Assets:
Fixed assets are stated at cost less accumulated depreciation or
amortization. Major renewals and improvements are capitalized and charged to
expense over their useful lives through depreciation or amortization charges.
Repairs and maintenance are charged to expense in the period incurred. The
straight-line method of depreciation is used to depreciate assets over the
estimated useful lives as follows:
Years
--------
Buildings 7 - 40
Warehouse equipment 5 - 7
Furniture, fixtures and
leasehold improvements 5 - 18
Vehicles 5
Costs and accumulated depreciation applicable to assets retired or sold are
eliminated from the accounts, and the resulting gains or losses are reported
in the statement of operations.
(j) Long-Lived Assets:
During fiscal 2003, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of such asset may not be recoverable. Long-lived assets classified as held
for sale, are reviewed annually for impairment and are reported at the lower
of the carrying amount or fair value less the cost to sell.
(k) Goodwill, Intangible and Other Assets:
Goodwill consists of the excess purchase price paid in business acquisitions
over the fair value of assets acquired. Intangible assets consist primarily
of tradenames, covenants not to compete and favorable leases assumed in
acquisitions. These assets are initially recorded at an amount equal to the
purchase price paid or allocated to them. Other assets consist primarily of
the cash surrender value of life insurance policies and equipment held for
sale.
During fiscal 2003, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142).
SFAS No. 142 requires the use of a nonamortization approach to account for
purchased goodwill and intangible assets having indefinite useful lives.
F-8
Under a nonamortization approach, goodwill and intangible assets having
indefinite useful lives are not amortized into results of operations, but
instead are reviewed at least annually for impairment. If the recorded value
of goodwill and intangible assets having indefinite useful lives is
determined to exceed their fair value, the asset will be written down to fair
value and a charge taken against results of operations in the period. AMCON
considers its tradenames to have indefinite lives. Therefore, upon adoption
of SFAS No. 142, goodwill and tradename amortization ceased. Management has
obtained an independent valuation of its goodwill and tradename assets and
the Company did not incur an impairment charge upon implementation of SFAS
No. 142, nor did the Company incur an impairment charge during fiscal 2003
upon completion of the annual review. During fiscal 2002, the Company
recognized goodwill amortization of $0.3 million and tradename amortization
of $0.6 million.
Intangible assets that are considered to have definite useful lives continue
to be charged to expense through amortization on the straight-line method
over their estimated useful lives as follows:
Years
-----
Covenants not to compete 2 - 5
Favorable leases 3 - 7
The benefit related to increases in the cash surrender value of split dollar
life insurance policies is recorded as a reduction to insurance expense. The
cash surrender value of life insurance policies is limited to the lesser of
the cash value or premiums paid by the Company through September 2002.
(l) Debt Issue Costs:
The costs related to the issuance of debt are capitalized in other assets and
amortized on an effective interest method to interest expense over the terms
of the related debt agreements.
(m) Derivative Instruments
The Company uses derivatives (e.g. interest rate swaps) for the purpose of
hedging its exposure to changes in interest rates. The fair value of each
derivative is shown on the balance sheet as a current asset or current
liability. Changes in the fair value of derivatives are recognized
immediately in the income statement for derivatives that do not qualify for
hedge accounting. For derivatives designated as hedges and used to hedge an
existing asset or liability, both the derivative and hedged item are
recognized at fair value within the balance sheet with the changes in both of
these fair values being recognized immediately in the income statement. For
derivatives designated as a hedge and used to hedge an anticipated
transaction or event (e.g. increases or decreases in interest rates), changes
in the fair value of the derivatives are deferred in the balance sheet within
accumulated other comprehensive income to the extent the hedge is effective
in mitigating the exposure to the related anticipated event. Any
ineffectiveness associated with the hedge is recognized immediately in the
income statement. Amounts deferred within accumulated other comprehensive
income are recognized in the income statement in the same period during which
the hedged transaction affects earnings (e.g. when interest payments are
made).
F-9
(n) Revenue Recognition:
AMCON recognizes revenue in its wholesale distribution and beverage divisions
when products are delivered to customers (which generally is the same day
products are shipped) and in its retail health food business when products
are sold to consumers. Sales are shown net of returns and discounts. In
accordance with the guidance provided in Emerging Issues Task Force ("EITF")
No. 01-9, "Accounting For Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)," beginning in the first
quarter of fiscal 2002, the Company classified the costs associated with
sales incentives provided to customers as a reduction in net sales. These
costs were previously included in cost of goods sold. This reclassification
had no impact on reported net income before taxes, net income or earnings-
per-share amounts.
(o) Insurance:
The Company's insurance for worker's compensation, general liability and
employee-related health care benefits are provided through high-deductible or
self-insurance programs. As a result, the Company accrues its worker's
compensation and general liability based upon the claim reserves established
by a third-party administrator each month. The employee health care benefit
liability is based on the Company's historical claims experience rate. The
reserves associated with the exposure to these liabilities are reviewed by
management for adequacy at the end of each reporting period.
(p) Income Taxes:
Deferred income taxes are determined based on temporary differences between
the financial reporting and tax bases of the Company's assets and
liabilities, using enacted tax rates in effect during the years in which the
differences are expected to reverse.
(q) Comprehensive Income (Loss):
Comprehensive income (loss) includes all changes in shareholders' equity with
the exception of additional investments by shareholders or distributions to
shareholders. Comprehensive income (loss) for the Company includes net
income or loss the changes in net unrealized holding gains or losses on
investments and changes in the valuation of interest rate swap contracts
treated as hedging instruments that are charged or credited to shareholders'
equity.
(r) 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.
F-10
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, (fiscal 2003
for AMCON), with early adoption encouraged.
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:
<Table>
<Caption>
2003 2002 2001
----------- ----------- ------------
Net earnings from continuing operations
---------------------------------------
Net income from continuing operations
as reported $ 1,026,473 $ 1,972,069 $ (1,772,030)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (68,021) (87,617) (88,723)
----------- ----------- ------------
Pro forma net income from continuing
operations $ 958,452 $ 1,884,452 $ (1,860,753)
=========== =========== ============
Income per share from continuing operations
-------------------------------------------
As reported: Basic $ 0.32 $ 0.65 $ (0.65)
=========== =========== ============
Diluted $ 0.32 $ 0.63 $ (0.65)
=========== =========== ============
Pro forma: Basic $ 0.30 $ 0.62 $ (0.68)
=========== =========== ============
Diluted $ 0.30 $ 0.61 $ (0.68)
=========== =========== ============
</Table>
The pro forma results are not likely to be representative of the effects on
reported net income for future years since additional awards are made
periodically.
The fair value of the weighted average of each year's option grants is
estimated as of the date of grant using the Black-Scholes option-pricing
model using the following weighted-average assumptions: dividend yield of
3.0% for 2003 and 3.0% for 2002; expected volatility of 50.68% for 2003 and
51.65% for 2002; risk free interest rate based on U.S. Treasury strip yield
at the date of grant of 3.68% - 4.12% for 2003 and 4.49% for 2002; and
expected lives of 5 to 10 years. No options were granted in fiscal 2001.
F-11
(s) Per-share results:
Basic earnings per share data are based on the weighted-average number of
common shares outstanding during each period. Diluted earnings per share
data are based on the weighted-average number of common shares outstanding
and the effect of all dilutive potential common shares including stock
options.
(t) Reclassifications:
Certain reclassifications have been made to prior years' financial statements
to conform with the current year presentation.
(u) Use of Estimates:
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(v) Recently Issued Accounting Standards:
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS 145 rescinds Statement of Financial Accounting Standard
No. 4, "Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, Financial Accounting Standard No.64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements. SFAS 145
also rescinds Financial Accounting Standard No. 44, "Accounting For
Intangible Assets of Motor Carriers. SFAS 145 amends Financial Accounting
Standard No. 13, "Accounting for Leases," to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. SFAS 145 is generally effective for financial statements issued
after May 15, 2002, and interim periods within those years (fiscal 2003 for
AMCON), with early adoption encouraged.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 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 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 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 146
replaces EITF No. 94-3. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.
F-12
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 fourth quarter of fiscal 2003). The
adoption of EITF Issue No. 00-21 did not have a material impact on the
Company's results from operations.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantors's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN No. 45"). The initial
recognition and measurement provisions of FIN No. 45 are effective for
guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN No. 45 are effective for interim or annual reports ending
after December 15, 2002. There was not impact on the Company's consolidated
financial statements as a result of adopting FIN No. 45.
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 February 2003
and will apply the provisions of FIN No. 46 prospectively to investments in
variable interest entities made in the future.
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 in the first
quarter of calendar 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.
F-13
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 (fiscal 2003 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.
Management is not aware of any events or circumstances that would create a
significant impact on future operating results upon adoption of SFAS No. 145,
SFAS No. 146, EITF No. 00-21, FIN No. 45, FIN No. 46, SFAS No. 149, and SFAS
150.
2. CHANGES IN ACCOUNTING POLICY:
The Company adopted SFAS No. 142 at the beginning of fiscal year 2003. Upon
adoption of SFAS No. 142, goodwill and tradename amortization ceased as these
assets are considered to 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
September 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 years ended September 26, 2003:
<Table>
<Caption>
2003 2002 2001
----------- ----------- ------------
Reported net income from continuing operations $ 1,026,473 $ 1,972,069 $ (1,772,030)
Add goodwill amortization, net of tax - 194,567 138,143
Add tradename amortization, net of tax - 356,653 270,220
----------- ----------- ------------
Adjusted net income from continuing operations $ 1,026,473 $ 2,523,289 $ (1,363,667)
=========== =========== ============
Earnings per share - basic:
Reported net income from continuing operations $ 0.32 $ 0.65 $ (0.65)
Add goodwill amortization, net of tax - 0.06 0.05
Add tradename amortization, net of tax - 0.12 0.10
----------- ----------- ------------
Adjusted net income from continuing operations $ 0.32 $ 0.83 $ (0.50)
=========== =========== ============
Earnings per share -diluted:
Reported net income from continuing operations $ 0.32 $ 0.63 $ (0.65)
Add goodwill amortization, net of tax - 0.06 0.05
Add tradename amortization, net of tax - 0.12 0.10
----------- ----------- ------------
Adjusted net income from continuing operations $ 0.32 $ 0.81 $ (0.50)
=========== =========== ============
</Table>
F-14
3. ACQUISITIONS AND DISPOSITION OF BUSINESSES:
HAWAIIAN NATURAL WATER COMPANY, INC.
- ------------------------------------
On December 17, 2001, the Company completed a merger with HNWC, pursuant to
which HNWC merged with and into, and thereby became, a wholly-owned
subsidiary of AMCON Distributing Company. The merger consideration valued
the entire common equity interest in HNWC at approximately $2.9 million,
which was paid in cash of $0.8 million during fiscal 2001 and in common stock
of the Company valued at $2.1 million. As a result, the Company issued
373,558 shares of its common stock to outside HNWC shareholders, representing
12.0% of the Company's outstanding shares after giving effect to the merger.
HNWC option holders and warrant holders also received comparable options and
warrants of the Company, but with the exercise price and number of shares
covered thereby being adjusted to reflect the exchange ratio. Transaction
costs, totaling approximately $0.3 million, were incurred to complete the
merger and consist primarily of fees and expenses for bankers, attorneys and
accountants, SEC filing fees, stock exchange listing fees and financial
printing and other related charges.
The merger has been recorded on the Company's books using the purchase method
of accounting. The purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values. The following
table summarizes the estimated fair values of the assets acquired and
liabilities assumed, including a note payable of $1.1 million due to the
Company, at the date of acquisition:
At December 17, 2001
(Dollars in millions)
----------------------------------
Current assets $ 0.4
Fixed assets 1.7
Intangible assets 3.8
Other assets 0.1
-----
Total assets acquired 6.0
-----
Current liabilities 2.9
Long-term liabilities 0.2
-----
Total liabilities assumed 3.1
-----
Net assets acquired $ 2.9
=====
The portion of the purchase price in excess of the fair value of the net
assets acquired to be allocated to other identifiable assets is approximately
$3.5 million. The identifiable intangible asset, the HNWC tradename, is
considered to have an indefinite useful life.
Prior to the acquisition, the Company accounted for its initial common stock
investment in HNWC under the equity method. The charge to the Company's
results of operations to record its equity in the losses of HNWC from the
investment date was approximately $0.1 million in fiscal 2002 and 2001,
respectively.
F-15
MERCHANTS WHOLESALE, INC.
- -------------------------
On June 1, 2001, the Company completed the acquisition of substantially all
of the distribution business and net assets of Merchants Wholesale, Inc.
("Merchants") located in Quincy, IL. In addition, the Company purchased a
206,000 square foot building occupied by Merchants and owned by Merchants'
sole shareholder. The net purchase price of $36.7 million (including $0.3
million of debt issue costs), net of assumed liabilities of $6.0 million, was
based on assets held at the closing date, including the real estate. Funding
for the acquisition was provided as follows: $27.0 million (including $0.3
million of debt issue costs) through borrowings under a revolving loan
agreement with LaSalle Bank (the "Facility"); $6.2 million through a real
estate loan with Gold Bank (the "Real Estate Loan"); and $3.4 million of
deferred payments to the sole stockholder of Merchants. Costs and expenses
associated with the acquisition were paid from the Facility. The Facility is
secured by all of AMCON's assets, excluding real estate. The Real Estate
Loan is secured by AMCON's two owned distribution facilities.
The transaction was accounted for using the purchase method of accounting
under which the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values. The portion of the
purchase price in excess of the fair value of the net assets acquired to be
allocated to goodwill and other identifiable assets was approximately $3.8
million and $0.3 million, respectively. The goodwill was amortized over 25
years through fiscal year 2002, however, under Statement of Financial
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
amortization of goodwill has ceased and will periodically be reviewed for
impairment. A convenant not to compete agreement with the sole shareholder
of Merchants is being amortized over the period covered by the agreement of
four years.
The results of operations for each of the above are included in the
accompanying financial statements from the date of acquisition.
HEALTH FOOD DISTRIBUTION BUSINESS
- ---------------------------------
Effective March 23, 2001, the Company's subsidiary, The Healthy Edge, Inc.
(formerly Food For Health Co., Inc.), completed the sale of the assets of
its health food distribution business for $10.3 million, subject to certain
adjustments. The purchase price was paid in cash and the assumption by the
purchaser of approximately $2.1 million in indebtedness. The sale resulted
in a pre-tax loss of approximately $1.1 million ($0.7 million after taxes) in
fiscal year 2001. This loss included an accrual for estimated costs,
including rent and related expenses associated with the remaining lease
commitments on the two distribution facilities that were retained by the
Company of $2.5 million and contractual consulting agreements of $0.4
million, which provide no future economic benefit to the Company. The
Company negotiated a termination settlement during fiscal 2002 on its Arizona
facility and obtained a subtenant for its Florida facility. The remaining
accrual for estimated costs related to the discontinued operations was $0.3
million at fiscal year end 2003. Any differences between these expense
estimates and their actual settlement will change the loss accordingly. In
connection with the sale of the health food distribution business, the
Company also entered into a five year supply agreement with the purchaser
under which the purchaser will supply products to the Company's retail health
food stores at market prices.
F-16
The sale of the Company's health food distribution business has been
reflected as discontinued operations in the consolidated financial
statements in accordance with Accounting Principles Board ("APB") Opinion No.
30," Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Revenues from the discontinued
operations, which have been excluded from income from continuing operations
in the accompanying consolidated statements of operations for fiscal years
2003, 2002 and 2001, are presented below. The effects of the discontinued
operations on net income (loss) and per share data are reflected within the
accompanying consolidated statements of operations (dollars in millions).
Fiscal Years
----------------------------
2003 2002 2001
----------------------------
Revenue $ - $ - $ 13.7
4. EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share is calculated by dividing income (loss) from
continuing operations, income (loss) from discontinued operations and net
income (loss) by the weighted average common shares outstanding for each
period. Diluted earning (loss) per share is calculated by dividing income
from continuing operations, income (loss) from discontinued operations and
net income (loss) by the sum of the weighted average common shares
outstanding and the weighted average dilutive options, using the treasury
stock method. Stock options outstanding at fiscal year end 2003, 2002 and
2001, respectively, which were not included in the computations of diluted
earnings per share because the option's exercise price was greater than the
average market price of the common shares totaled 178,640, 144,350 and
145,390 with average exercise prices of $6.74, $8.05 and $8.01 respectively.
F-17
<Caption>
For Fiscal Years
-------------------------------------------
2003 2002 2001
----------- ----------- -----------
Basic Basic Basic
----------- ----------- -----------
Weighted average common
shares outstanding 3,166,191 3,032,484 2,738,170
Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds used
to purchase treasury stock/1/ - - -
----------- ----------- -----------
Weighted average number of
shares outstanding 3,166,191 3,032,484 2,738,170
=========== =========== ===========
Income (loss) from continuing
operations $ 1,026,473 $ 1,972,069 $(1,772,030)
Loss from discontinued operations - - (1,569,849)
----------- ----------- -----------
Net income (loss) $ 1,026,473 $ 1,972,069 $(3,341,879)
=========== =========== ===========
Earnings (loss) per share from
continuing operations $ 0.32 $ 0.65 $ (0.65)
Loss per share from
discontinued operations - - (0.57)
----------- ----------- -----------
Earnings (loss) per share $ 0.32 $ 0.65 $ (1.22)
=========== ============ ===========
Diluted Diluted Diluted
----------- ----------- -----------
Weighted average common
shares outstanding 3,166,191 3,032,484 2,738,170
Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds used
to purchase treasury stock/1/ 56,062 76,695 -
----------- ----------- -----------
Weighted average number of
shares outstanding 3,222,253 3,109,179 2,738,170
=========== =========== ===========
Income (loss) from continuing
operations $ 1,026,473 $ 1,972,069 $(1,772,030)
Loss from discontinued operations - - (1,569,849)
----------- ----------- -----------
Net income (loss) $ 1,026,473 $ 1,972,069 $(3,341,879)
=========== =========== ===========
Earnings (loss) per share from
continuing operations $ 0.32 $ 0.63 $ (0.65)
Loss per share from
discontinued operations - - (0.57)
----------- ----------- -----------
Earnings (loss) per share $ 0.32 $ 0.63 $ (1.22)
=========== =========== ===========
</Table>
F-18
/1/ Weighted average of net additional shares not included for fiscal
2001 as such shares are anti-dilutive due to the net loss incurred during
the year.
5. COMPREHENSIVE INCOME (LOSS):
The components of other comprehensive income (loss) were as follows:
<Caption>
2003 2002 2001
--------- ---------- ---------
Unrealized holding gains (losses)
during the period:
Unrealized gains $ 255,975 $ 71,565 $ 280,700
Related tax expense (97,271) (27,194) (105,262)
--------- ---------- ---------
Net 158,704 44,371 175,438
--------- ---------- ---------
Less reclassification adjustments for
gains which were included in comprehensive
income in prior periods:
Realized net gains 268,948 249,491 -
Related tax expense (102,200) (95,529) -
--------- ---------- ---------
Net 166,748 153,962 -
--------- ---------- ---------
Interest rate swap valuation adjustment
during the period:
Unrealized loss (106,995) - -
Related tax benefit 41,000 - -
--------- ---------- ---------
Net (65,995) - -
--------- ---------- ---------
Total other comprehensive income (loss) $ (74,039) $ (109,591) $ 175,438
========= ========== =========
</Table>
6. FIXED ASSETS, NET:
Fixed assets at fiscal year ends 2003 and 2002 consisted of the following:
2003 2002
------------ ------------
Land and buildings $ 8,417,228 $ 8,417,228
Warehouse equipment 5,332,937 5,180,232
Furniture, fixtures and
leasehold improvements 8,435,242 7,686,552
Vehicles 1,301,710 1,398,033
Capital equipment leases 2,017,488 1,095,000
------------ ------------
25,504,605 23,777,045
Less accumulated depreciation:
Owned equipment (8,121,020) (7,422,143)
Capital equipment leases (431,970) (258,778)
------------ ------------
$ 16,951,615 $ 16,096,124
============ ============
F-19
7. DEBT AND EQUITY INVESTMENTS:
Available-for-sale investments at fiscal year ends 2003 and 2002 consisted of
the following:
2003 2002
--------- ---------
Cost $ 54,492 $ 90,820
Unrealized Gain 458,202 471,180
--------- ---------
Fair Value $ 512,694 $ 562,000
========= =========
The Company sold 20,000 shares of its available-for-sale investments in
fiscal 2003 and 2002, respectively. The Company realized gains on these
sales of $266,690 and $257,521 in fiscal 2003 and fiscal 2002, respectively.
8. OTHER INTANGIBLE ASSETS:
Other intangible assets at fiscal year ends 2003 and 2002 consisted of the
following:
2003 2002
------------ ------------
Trademarks and tradenames $ 10,928,793 $ 10,928,793
Covenants not to compete (less accumulated
amortization of $724,625 and $519,256) 195,600 400,969
Favorable leases (less accumulated
amortization of $280,273 and $211,195) 205,727 274,805
Debt issue costs (less accumulated
amortization of $399,347 and $290,040) 90,422 199,722
------------ ------------
$ 11,420,542 $ 11,804,289
============ ============
Trademarks and tradenames are considered to have indefinite useful lives and
no amortization of these assets was taken during fiscal 2003 in accordance
with SFAS No. 142. Amortization expense associated with trademarks and
tradenames was $575,247, and $435,838, for the fiscal years ended 2002 and
2001, respectively.
The covenants not to compete arose from business acquisitions and are
amortized using the straight-line method over their terms which range from
two to five years. Amortization expense of $205,370, $205,370, and $145,679
was recorded for these assets for the fiscal years ended 2003, 2002 and 2001,
respectively.
Favorable leases represent the amount by which the lease rates of acquired
leases were below fair market lease rates for the leased properties on the
acquisition date. The favorable variances between the contract lease rates
and the fair market lease rates on the acquisition date are recorded as
assets which are then amortized over the remaining terms of the leases which
ranged from three to seven years. Amortization expense was $69,068, $69,068,
and $69,073, for the fiscal years ended 2003, 2002 and 2001, respectively.
F-20
Debt issue costs represent fees incurred to obtain the ADC revolving credit
facility and real estate loan and are amortized over the terms of the
respective loan agreements. Amortization expense was $109,307, $119,833 and
$67,459 for the fiscal years ended 2003, 2002 and 2001, respectively.
9. OTHER ASSETS:
Other assets at fiscal year ends 2003 and 2002 consisted of the following:
2003 2002
----------- -----------
Cash surrender value of life
insurance policies $ 697,035 $ 530,228
Equipment held for sale 200,000 500,000
Other 148,468 212,695
----------- -----------
$ 1,045,503 $ 1,242,923
=========== ===========
10. LONG-TERM OBLIGATIONS:
Long-term obligations at fiscal year end 2003 and 2002 consisted of the
following:
<Caption>
2003 2002
------------ ------------
Revolving credit facility with a bank (the "Facility"),
interest payable monthly at the bank's base rate (4.00%
at fiscal year end 2003) or LIBOR plus 2.50%, as
selected by the Company; principal due June 2005 $ 37,981,281 $ 40,977,992
Note payable to a bank ("Real Estate Loan"), interest
payable at a fixed rate of 7.5% with monthly
installments of principal and interest of $56,531 per
month through June 2006; remaining principal due June
2006, collateralized by two owned distribution
facilities 6,576,243 6,747,508
Revolving credit facility with a bank, interest payable
monthly at the bank's base rate plus 1% (6.75% at fiscal
year end 2003); principal due April 2004 2,750,000 2,278,233
Obligations under capital leases, payable in monthly
installments with interest rates from 8% to 16.3%
through December 2006 1,701,449 937,781
Revolving credit facility with a bank, interest payable
monthly at the bank's base rate plus 1% (6.75 % at
fiscal year end 2003); principal due April 2004 1,988,403 -
Notes payable on equipment, payable in monthly
installments with interest rates from 9.4% to 10% through
October 2004, collateralized by HNWC equipment 5,214 204,552
------------ ------------
51,002,590 51,146,066
Less current portion 15,348,167 14,783,967
------------ ------------
$ 35,654,423 $ 36,362,099
============ ============
</Table>
F-21
The Company maintains a revolving credit facility (the "Facility") with
LaSalle Bank which allows it to borrow up to $55.0 million at any time,
subject to eligible accounts receivable and inventory requirements. 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.
The Facility contains covenants which, among other things, set certain
financial ratios and net worth requirements. The Facility includes 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 $9.0 million for fiscal 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 hedges its variable rate risk on a portion of its borrowings
under the Facility by use of interest rate swap agreements. The variable
interest payable on notional amounts of $15.0 million is subject to interest
rate swap agreements which have the effect of converting this amount to fixed
rates ranging between 4.38% and 4.87%.
The 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 "Beverage Facility"). Borrowings under the Beverage Facility
bear interest at the bank's base rate plus 1.0%, which equaled 6.75% at
September 2003. As of September 2003, the outstanding balance under the
Beverage Facility was $2.8 million. The Beverage 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 September 2003. As of September 2003, the outstanding
balance under the Retail Facility was $2.0 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. The Real Estate Loan is amortized
on a 20 year basis with a balloon payment due on June 1, 2006. The Real
Estate Loan is collateralized by the Company's two owned distribution
facilities. As of September 2003, the outstanding balance on the Real Estate
Loan was approximately $6.6 million.
F-22
In connection with the purchase of the Quincy distribution business and HNWC,
we assumed several capital leases for office equipment, automobiles and
warehouse equipment. In addition, we entered into a new capital lease in
September 2003 in connection with the acquisition of new water bottling and
packaging equipment. As of September 2003, the outstanding balances on the
capital leases totaled approximately $1.7 million.
The above long-term obligations, excluding obligations under the Facility,
have contractual maturities as follows:
Fiscal Year Ending
------------------
2004 $ 5,348,167
2005 688,094
2006 6,680,167
2007 283,906
2008 20,975
Thereafter -
-----------
$13,021,309
===========
Borrowings under the Facility in the amount of $28.0 million have been
classified as long-term based on expected borrowing levels. Market rate risk
for fixed rate debt is estimated as the potential increase in fair value of
debt obligations resulting from decreases in interest rates. Based on
discounted cash flows using current market rates for similar agreements, the
fair value of the Company's long-term debt obligations approximated carrying
value at fiscal year end 2003.
In connection with the discontinued operation 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 expires 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 the Company's workers compensation
insurance carrier as part of a self-insured loss control.
F-23
11. SUBORDINATED DEBT:
Subordinated debt at fiscal year end 2003 and 2002 consisted of the
following:
<Caption>
2003 2002
----------- -----------
Note payable, interest (imputed at 6%) and
principal payable annually through June 2005 $ 1,788,886 $ 2,631,025
Convertible subordinated note payable,
interest payable quarterly at 8%per annum;
principal due at maturity of the note on
September 15, 2004,convertible into The
Healthy Edge, Inc. stock 2,000,000 2,000,000
Collateralized subordinated promissory note
payable, interest payable quarterly at 8%
per annum; annual principal payments of
$800,000 due annually through September 2004
with balance of $4,000,000 due September 2004,
collateralized by Health Food Associates, Inc.
stock 4,800,000 5,600,000
Collateralized subordinated promissory note
payable bearing interest at 8% per annum;
principal and interest payments due monthly
through October 2002 - 6,847
Collateralized subordinated promissory note
payable, interest payable monthly at 7.0%
per annum; annual principal payments ranging
from $40,000 to $80,000 due annually from August
2001 through August 2005 150,000 210,000
----------- -----------
8,738,886 10,447,872
Less current portion 7,762,666 1,708,986
----------- -----------
$ 976,220 $ 8,738,886
=========== ===========
</Table>
The asset purchase agreement with Merchants provides for deferred payments to
be made to the seller totaling $3.4 million. The 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 covenant not to compete 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. As of fiscal year end
2003, the outstanding obligation to the seller was approximately $1.8
million.
F-24
As of fiscal year end 2003, principal payments are due on subordinated debt
as follows:
Fiscal Year Ending
-------------------
2004 $ 7,762,666
2005 976,220
------------
$ 8,738,886
============
Market rate risk for fixed rate subordinated debt is estimated as the
potential increase in fair value of debt obligations resulting from decreases
in interest rates. Based on discounted cash flows using current market rates
for similar agreements, the fair value of the Company's long-term debt
obligations approximated carrying value at fiscal year end 2003.
12. OTHER INCOME, NET:
Other income, net consisted of the following for fiscal years 2003, 2002 and
2001:
2003 2002 2001
---------- ---------- ----------
Interest income $ (94,704) $ (45,091) $ (32,183)
Dividends (18,900) (27,682) (26,600)
Rent income (5,272) (4,382) (4,843)
Gain from sale of investments (266,690) (257,521) -
Fee income - - (26,166)
Provision for nonoperating
asset impairment 399,435 - -
Settlement proceeds on former
leased facility (131,558) - -
Debt forgiveness - (176,809) -
Other 19,305 5,773 (110,712)
---------- ---------- ----------
$ (98,384) $ (505,712) $ (200,504)
========== ========== ==========
F-25
13. INCOME TAXES:
Components of income tax expense (benefit) for the fiscal years ended 2003,
2002 and 2001 consisted of the following:
2003 2002 2001
----------- ----------- -----------
Current:
Federal $ 1,247,543 $ 63,095 $ (527,834)
State 41,763 (115,540) 52,396
----------- ----------- -----------
1,289,306 (52,445) (475,438)
----------- ----------- -----------
Deferred:
Federal (674,010) 1,327,951 (473,656)
State 13,704 40,494 (69,317)
----------- ----------- -----------
660,306 1,368,445 (542,973)
----------- ----------- -----------
Income tax expense (benefit)
- continuing operations 629,000 1,316,000 (1,018,411)
Income tax (benefit)
- discontinued operations - - (962,648)
----------- ----------- -----------
$ 629,000 $ 1,316,000 $(1,981,059)
=========== =========== ===========
The difference between the Company's income tax expense (benefit)
attributable to continuing operations in the accompanying financial
statements and that which would be calculated using the statutory income tax
rate of 34% on income before taxes is as follows for the fiscal years ended
2003, 2002 and 2001:
2003 2002 2001
----------- ----------- -----------
Tax at statutory rate $ 562,861 $ 1,117,943 $ (948,750)
Amortization of goodwill
and other intangibles (4,777) 54,155 77,064
Nondeductible business
expenses (21,081) 17,229 3,908
State income taxes, net of
federal tax benefit (29,494) 73,716 28,908
Benefit of loss on disposal - - (424,743)
Valuation allowance for
loss on disposal - - 212,371
Equity in loss of
unconsolidated affiliate - 32,302 32,111
Other 121,491 20,655 720
----------- ----------- -----------
$ 629,000 $ 1,316,000 $(1,018,411)
=========== =========== ===========
F-26
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities giving rise to the net deferred tax asset
at fiscal year ends 2003 and 2002 relate to the following:
2003 2002
----------- -----------
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 306,050 $ 232,122
Allowance for impairment of assets
held for sale 151,757 -
Accrued expenses 446,719 417,109
Net operating loss carryforwards 51,449 194,028
Inventory 759,910 -
Other 46,050 122,480
----------- -----------
1,761,935 965,739
Noncurrent:
Net operating loss carryforwards 887,492 1,028,977
Other 85,533 38,250
----------- -----------
973,025 1,067,227
----------- -----------
Total deferred tax assets $ 2,734,960 $ 2,032,966
=========== ===========
Deferred tax liabilities:
Current:
Trade discounts $ 193,459 $ 211,843
Other - 429,527
----------- ----------
193,459 641,370
Noncurrent:
Fixed assets 345,018 162,936
Tradenames 1,659,594 1,461,914
Goodwill 167,974 58,654
Unrealized gains on available-for-sale
investments 167,806 172,039
----------- -----------
2,340,392 1,855,543
----------- -----------
Total deferred tax liabilities $ 2,533,851 $ 2,496,913
=========== ===========
Net deferred tax assets (liabilities):
Current $ 1,568,476 $ 324,369
Noncurrent (1,367,367) (788,316)
----------- -----------
$ 201,109 $ (463,947)
=========== ===========
The Company did not record any valuation allowances against deferred tax
assets at fiscal year ends 2003 or 2002 because management believes future
taxable income will more likely than not be sufficient to realize such
amounts. The net operating loss was acquired in connection with the
acquisition of HNWC in 2002. The utilization of the net operating loss of
$2,471,000 at fiscal year end 2003 is limited (by Internal Revenue Code
Section 382) to approximately $135,000 per year through 2022.
F-27
14. PROFIT SHARING PLAN:
AMCON maintains a profit sharing plan (i.e. a section 401(k) plan) covering
substantially all full-time employees. The plan allows employees to make
voluntary contributions up to 100% of their compensation, subject to Internal
Revenue Service limits. The Company matches 50% of the first 4% contributed
and 100% of the next 2% contributed for a maximum match of 4% of employee
compensation. The Company contributed $0.5 million, $0.5 million, and $0.3
million, (net of employee forfeitures) to the profit sharing plans during the
fiscal years ended 2003, 2002 and 2001, respectively.
15. RELATED PARTY TRANSACTIONS:
For each of the fiscal years ended 2003, 2002 and 2001, the Company was
charged $60,000 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. The Company also contracted
with one of its outside directors for consulting services in connection with
its retail health food operations during fiscal years 2003, 2002 and 2001.
The amount paid for consulting services was $90,000, $90,000 and $150,000,
respectively, plus reimbursement of expenses.
Effective October 1, 2001, the president of the wholesale health food
distribution business, which was sold in March 2001, was terminated and the
Company entered into a four-year consulting agreement with him at the rate of
$104,000 per year. The total amount to be paid under the agreement
approximates the amount of the Company's obligation under its employment
agreement with the former president. The amount paid for consulting services
during fiscal 2003 and 2002 was $104,000, respectively.
16. COMMITMENTS AND CONTINGENCIES:
Future Lease Obligations
- ------------------------
The Company leases certain office and warehouse equipment under capital
leases. The carrying value of these assets was approximately $1.6 million
and $0.8 million as of fiscal year ends 2003 and 2002, respectively, net of
accumulated amortization of $0.4 million and $0.3 million, respectively.
F-28
The Company leases various office and warehouse facilities and equipment
under noncancellable operating leases. Rent charged to expense during fiscal
years 2003, 2002 and 2001 under such lease agreements was $5.4 million, $5.3
million and $3.2 million, respectively. As of fiscal year end 2003, minimum
future lease commitments are as follows:
Fiscal Year Capital Operating
Ending Leases Leases
----------- ----------- ------------
2004 $ 493,028 $ 5,149,587
2005 535,732 4,616,153
2006 501,469 3,828,601
2007 284,371 2,268,986
2008 20,977 1,617,456
Thereafter - 5,500,113
----------- ------------
Total minimum lease payments $ 1,835,577 $ 22,980,896
Less amount representing interest 134,128 ============
-----------
Present value of net minimum lease payments $ 1,701,449
===========
The Company also has future lease obligations for facilities and equipment
related to the discontinued operations of its former health food distribution
business. The Company estimated its ultimate liabilities related to these
leases and recorded a charge to earnings during fiscal 2001. The Company
terminated the lease on one facility during fiscal 2002 for a termination fee
of $1.5 million and subleased the Florida facility. The sub-tenant of the
Florida facility was in default as of fiscal year end 2003 and the Company
began eviction proceedings. The Company incurred approximately $0.1 million
of expenses associated with the facility during fiscal 2003. The Company
expects there will be further liability on the Florida facility in fiscal
2004 prior to finding another sub-tenant for the property. Any differences
between these expense estimates and their actual settlement will change the
loss accordingly.
Liability Insurance
- -------------------
The Company carries property, general liability, vehicle liability, directors
and officers liability and workers compensation, as well as umbrella
liability policies to provide excess coverage over the underlying limits
contained in these primary policies. The Company's insurance programs for
worker's compensation, general liability and employee related health care
benefits are provided through high-deductible or self-insured programs.
Claims in excess of self-insurance levels are fully insured. Accruals are
based on claims filed and estimates of claims incurred but not reported.
F-29
The Company's liabilities for unpaid and incurred but not reported claims at
fiscal year end 2003 and 2002 was $1.0 million and $0.8 million,
respectively, under its current risk management program and are included in
other current liabilities in the accompanying consolidated balance sheets.
While the ultimate amount of claims incurred are dependent on future
developments, in management's opinion, recorded reserves are adequate to
cover the future payment of claims. However, it is reasonably possible that
recorded reserves may not be adequate to cover the future payment of claims.
Adjustments, if any, to estimates recorded resulting from the ultimate claim
payments will be reflected in operations in the periods in which such
adjustments are known.
17. STOCK OPTION PLAN:
In June 1994, the Company adopted the 1994 Stock Option Plan (the "Stock
Option Plan") which was subsequently amended to increase the maximum number
of shares of common stock which may be issued pursuant to the Stock Option
Plan from 300,000 to 550,000. Option shares and prices are adjusted for
common stock splits and dividends. Options are generally granted at the
stock's fair market value at date of grant. Options issued to shareholders
holding 10% or more of the Company's stock are generally issued at 110% of
the stock's fair market value at date of grant. At fiscal year end 2003,
there were 177,492 options fully vested and exercisable under the Stock
Option Plan. Options issued and outstanding to management employees pursuant
to the Stock Option Plan are summarized below:
Number of Number
Date Exercise Price Options Outstanding Exercisable
------------ ---------------- ------------------- -----------
Fiscal 1997 $2.62 - $2.87 88,210 88,210
Fiscal 1999 $6.14 - $9.00 82,390 72,512
Fiscal 2000 $5.75 27,950 16,770
Fiscal 2003 $4.60 - $4.80 32,500 -
------- -------
231,050 177,492
At fiscal year end 2003, there were 83,800 options fully vested and
exercisable issued to management employees and outside directors outside the
Stock Option Plan as summarized as follows:
Number of Number
Date Exercise Price Options Outstanding Exercisable
------------ ---------------- ------------------- -----------
Fiscal 1997 $2.62 33,000 33,000
Fiscal 1999 $6.14 - $8.18 30,800 30,800
Fiscal 2002 $3.94 - $4.49 15,000 15,000
Fiscal 2003 $4.71 5,000 5,000
------- -------
83,800 83,800
The stock options have varying vesting schedules ranging up to five years and
expire ten years after the date of grant.
F-30
The table below summarizes information about stock options outstanding as of
the following fiscal years:
<Table>
<Caption>
2003 2002 2001
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Exercise Average Exercise Average Exercise
------------------ ------------------ ------------------
Shares Price Shares Price Shares Price
--------- ------- --------- ------- --------- -------
Outstanding at beginning
of period 294,750 $ 4.94 325,020 $ 4.70 360,480 $ 4.83
Granted 40,000 4.79 15,000 4.31 - -
Exercised (12,000) 1.71 (44,220) 2.87 (1,650) 1.93
Forfeited/Expired (7,900) 5.35 (1,050) 7.20 (33,810) 6.20
--------- ------- --------- ------- --------- -------
Outstanding at end of period 314,850 $ 4.95 294,750 $ 4.94 325,020 $ 4.70
========= ======= ========= ======= ========= =======
Options exercisable at end
of period 261,292 248,384 234,756
========= ========= =========
Shares available for options
that may be granted 246,780 273,880 272,830
========= ========= =========
Weighted-average grant date
fair value of options granted
during the period - exercise
price equals stock market
price at grant $ 1.94 $ 2.58 $ -
======= ======= =======
Weighted-average grant date
fair value of options granted
during the period - exercise
price exceeds stock market
price at grant $ - $ - $ -
======= ======= =======
</Table>
The following summarizes all stock options outstanding at fiscal year end
2003:
<Table>
<Caption>
Exercisable
Remaining ----------------------------
Exercise Number Weighted-Average Weighted-Average Number Weighted-Average
Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------- ----------- ---------------- ---------------- ----------- ----------------
1997 Options $2.62 - $2.87 121,210 2.9 years $2.61 121,210 $2.61
1999 Options $6.14 - $9.00 113,190 5.4 years $7.64 103,312 $7.56
2000 Options $5.75 27,950 6.7 years $5.75 16,770 $5.75
2002 Options $3.94 - $4.49 15,000 8.9 years $4.31 15,000 $4.31
2003 Options $4.60 - $4.80 37,500 9.1 years $4.79 5,000 $4.71
----------- ---------------- ----------- ---------------
314,850 $4.95 261,292 $4.91
</Table>
F-31
18. DERIVATIVE INSTRUMENTS:
The Company borrows money at variable interest rates which exposes it to risk
that interest expense will increase if the benchmark interest rate used to
set the variable rates increases. In order to reduce its exposure to this
risk, the Company may use derivative instruments (i.e. interest rate swaps
agreements) pursuant to established Company policies. As of September 2003
and 2002, the Company had interest rate swap agreements outstanding with
notional amounts totaling $15 million and $25 million, respectively, related
to borrowings on the Facility. Theses interest rate swaps were used to
effectively convert certain of the Company's floating rate debt to fixed rate
debt. The interest rate swaps outstanding at September 2003 are accounted
for as cash flow hedges with gains and losses deferred in accumulated other
comprehensive income, to the extent the hedge is effective. Any
ineffectiveness associated with the interest rate swaps is immediately
recognized in earnings within interest expense. The interest rate swap
outstanding as of September 2002 was not accounted for as a hedge
transaction.
19. BUSINESS SEGMENTS:
AMCON has three reportable business segments: the wholesale distribution of
consumer products, the retail sale of health and natural food products, and a
beverage division consisting of HNWC and TBG. The results of the acquired
Merchants distribution business are included in the wholesale distribution of
consumer products segment due to similar economic characteristics shared by
AMCON's existing distribution business and Merchants distribution business,
as well as similar characteristics with respect to nature of products
distributed, the type and class of customers for the distribution products,
and the methods used to distribute the products. The results of the retail
health food stores comprise the retail segment due to similar economic
characteristics, as well as similar characteristics with respect to nature of
products sold, the type and class of customers for the health food products,
and the methods used to sell the products. The results of the HNWC and TBG
comprise the beverage segment due to their unique economic characteristics
and the nature of the products, as well as the methods used to sell and
distribute the products. The segments are evaluated on revenues, gross
margins, operating income and income before taxes.
<Table>
<Caption>
Wholesale
Distribution Retail Beverage Other/2/ Consolidated
---------------------------------------------------------------------------
FISCAL YEAR ENDED 2003:
External revenues:
Cigarettes $ 564,804,865 $ - $ - $ - $ 564,804,865
Health food - 33,110,706 - - 33,110,706
Confectionery 51,400,977 - - - 51,400,977
Tobacco, beverage & other 119,310,355 - 3,695,318 (186,870) 122,818,803
---------------------------------------------------------------------------
Total external revenues 735,516,197 33,110,706 3,695,318 (186,870) 772,135,351
Depreciation and
amortization /1/ 1,388,081 937,880 194,097 - 2,520,058
Operating income (loss) 8,538,065 503,799 (4,099,116) (115,882) 4,826,866
Interest expense 1,397,631 1,384,295 487,851 - 3,269,777
Income (loss) before taxes 7,645,028 (847,604) (5,026,069) (115,882) 1,655,473
Total assets 72,589,504 16,778,236 10,085,641 46,049 99,499,430
Capital expenditures 732,411 475,775 2,020,525 - 3,228,711
F-32
Wholesale
Distribution Retail Beverage Other/2/ Consolidated
---------------------------------------------------------------------------
FISCAL YEAR ENDED 2002:
External revenues:
Cigarettes $ 640,359,587 $ - $ - $ - $ 640,359,587
Health food - 31,655,388 - - 31,655,388
Confectionery 52,566,991 - - - 52,566,991
Tobacco, beverage & other 120,297,206 - 2,237,825 - 122,535,031
---------------------------------------------------------------------------
Total external revenues 813,223,784 31,655,388 2,237,825 - 847,116,997
Depreciation and
amortization /1/ 1,589,745 1,489,186 374,337 - 3,453,268
Operating income (loss) 7,969,125 382,332 (1,201,310) - 7,150,147
Interest expense 2,786,389 1,265,678 220,716 - 4,272,783
Income (loss) before taxes 6,128,297 (1,595,011) (1,245,217) - 3,288,069
Total assets, excluding
discontinued operations 79,392,521 18,452,752 6,741,196 - 104,586,469
Capital expenditures 1,569,981 674,310 435,923 - 2,680,214
FISCAL YEAR ENDED 2001:
External revenues:
Cigarettes $ 420,096,403 $ - $ - $ - $ 420,096,403
Health food - 31,843,339 - - 31,843,339
Confectionery 39,311,698 - - - 39,311,698
Tobacco, beverage & other 86,338,045 - - - 86,338,045
---------------------------------------------------------------------------
Total external revenues 545,746,146 31,843,339 - - 577,589,485
Depreciation and
amortization 994,028 1,525,349 - - 2,519,377
Operating income (loss) 3,159,167 (2,179,061) - - 980,106
Interest expense 2,233,278 1,643,328 - - 3,876,606
Income (loss) before taxes 912,940 (3,703,381) - - (2,790,441)
Total assets, excluding
discontinued operations 78,998,414 20,025,635 - 173,273 99,197,322
Capital expenditures 412,455 785,253 - - 1,197,708
</Table>
/1/ Includes depreciation reported in cost of sales for beverage segment.
/2/ Includes charges to operations incurred by discontinued operations
and intercompany eliminations.
F-33
CORPORATE DIRECTORY
DIRECTORS AND CORPORATE OFFICERS
DIRECTORS
William F. Wright
Chairman
Kathleen M. Evans
President
Raymond F. Bentele
Retired, Former Chairman and CEO of
Mallinckrodt, Inc.
William R. Hoppner /2/
Consultant
J. Tony Howard /2/
President of Nebraska Distributing Company
John R. Loyack /1/
Sr. Vice President and CFO of
PNM Resources, LLP
Stanley Mayer /1/
Consultant
Timothy R. Pestotnik /1/
Partner with the law firm
Luce, Forward, Hamilton & Scripps, LLP
Allen D. Petersen
Chairman of Draupnir LLP, Former Chairman
and CEO of American Tool Companies, Inc.
/1/ Audit Committee
/2/ Compensation Committee
CORPORATE OFFICERS
William F. Wright
Chairman
Kathleen M. Evans
President
Michael D. James
Secretary, Treasurer and
Chief Financial Officer
Patrick Medinger
Assistant Secretary and Controller
SUBSIDIARY OFFICERS
Eric J. Hinkefent
President and Chief Executive Officer of
Chamberlin Natural Foods, Inc. and
Health Food Associates, Inc.
Willard Irwin
President and Chief Executive Officer of
Hawaiian Natural Water Co., Inc.
Stephen O. Sparks
President and Chief Executive Officer of
The Beverage Group, Inc.
CORPORATE HEADQUARTERS
AMCON Distributing Company
7405 Irvington Road
Omaha, Nebraska 68122
(402) 331-3727
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
INDEPENDENT AUDITORS
Deloitte & Touche LLP
First National Tower
1601 Dodge Street, Suite 3100
Omaha, Nebraska 68102
ANNUAL STOCKHOLDERS' MEETING
Thursday, March 11, 2004
10:00 a.m.
LaSalle Bank
135 South LaSalle, 43rd Floor
Chicago, IL 60603
ADDITIONAL INFORMATION
The Annual Report on Form 10-K to the Securities and
Exchange Commission provides certain additional
information and is available without charge upon
request to Michael D. James, Secretary, Treasurer
and Chief Financial Officer of the Company.
STOCK INFORMATION
AMCON Distributing Company's Common Shares
are traded on the American Stock Exchange. The
symbol for the Common Stock is "DIT."
WEB SITE
http://www.amcon.com