EXHIBIT 13.1
Annual Report to Stockholders
for the Fiscal Year Ended
September 30, 1997
TO OUR SHAREHOLDERS:
Fiscal 1997 was another year of records for AMCON -- record sales and record
earnings. It was also a year in which your Company continued to demonstrate
its commitment to becoming one of America's premier full-line distributors of
consumer convenience products. Although we remain disappointed in the
financial market's perception of the valuation of the Company, we believe that
will change.
FINANCIAL REVIEW
The new sales record of $179.0 million was achieved despite the sale of our
Denver operation early in the fiscal year. Although much of our increase in
earnings was also attributable to that sale, it is noteworthy that core
earnings were steady despite the ongoing decline in sales and gross margins in
our private label tobacco products. Operating efficiencies improved during
the year as did inventory turnover rates, reflecting management's ongoing
program to enhance productivity throughout the Company's facilities.
STRATEGIES
We have recently made two acquisitions which we expect will add significantly
to our results in fiscal 1998 and beyond. First, in October 1997, we acquired
the assets of Marcus Distributors, Inc., based in St. Louis, Missouri. This
acquisition expands the Company's geographic territory and adds efficiencies
to our existing Springfield, Missouri warehouse. We continue to look for
other acquisition opportunities in our traditional distribution business.
Second, in November 1997, we acquired all of the capital stock of Food For
Health Company, Inc. (FFH), a Phoenix, Arizona-based distributor of health
foods and related products throughout much of the Western United States. This
acquisition represents our entry into a new product category, one that is
growing rapidly as more and more consumers become health-conscious. We are
very pleased with the quality and commitment of the people associated with
FFH. Jerry Fleming, a highly-regarded veteran of the health food distribution
industry and Chief Executive Officer of FFH, was recently added to the
Company's Board of Directors, replacing William Hoppner who resigned to pursue
political office.
THE FUTURE
In conjunction with the FFH acquisition, we are presently in the process of
restructuring the Company by placing our traditional distribution business
into a newly-formed subsidiary. When the restructuring is complete, the
Company will be, in essence, a holding company with two operating
subsidiaries, one focusing on the traditional product categories , and one
focusing on health-related products. At the same time, we will be making some
other changes as well, including the reallocation of responsibilities within
our management team and a possible change in the Company's name to reflect the
new structure. Although change is never easy, we firmly believe that these
moves will best position your Company strategically to grow both the
traditional distribution business and the health food business, while at the
same time allowing us to realize synergies as and when they become apparent.
If we sound excited about our future, its because we are. In addition to
thanking you, our shareholders, for you continuing support, we want to express
our thanks and appreciation to the hundreds of employees at every level of our
operation. As always, dedicated people are our greatest asset.
William F. Wright Kathleen M. Evans
Chairman President
1
SELECTED FINANCIAL DATA
The selected financial data presented below have been derived from 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 Financial Statements and Notes thereto included in this Annual
Report.
(Dollars in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
Sales................................... $ 178,991 $ 176,145 $ 169,790 $ 170,143 $ 150,514
Cost of sales........................... 159,435 155,885 149,756 147,533 130,727
--------- --------- --------- --------- ---------
Gross profit............................ 19,556 20,260 20,034 22,610 19,787
Operating expense....................... 16,753 17,504 17,183 18,859 15,678
--------- --------- --------- --------- ---------
Income from operations.................. 2,803 2,756 2,851 3,751 4,109
Interest expense........................ 867 1,149 1,543 1,553 1,770
Other (income) expense, net............. (1,353) (697) (228) 36 136
--------- --------- --------- --------- ---------
Income before income taxes,
extraordinary item.................... 3,289 2,304 1,536 2,162 2,203
Income before extraordinary item....... 1,941 1,336 922 1,297 1,322
Extraordinary item...................... - - - (295)/1/ -
--------- --------- --------- --------- ---------
Net income.............................. 1,941 1,336 922 1,002 1,322
Accretion of warrants /2/............... - - - (133) (814)
Accretion of preferred stock /3/ ....... - (83) (100) (17) -
--------- --------- --------- --------- ---------
Net income attributable to
common shareholders .................. $ 1,941 $ 1,253 $ 822 $ 852 $ 508
========= ========= ========= ========= =========
Net income per common and
common equivalent share
attributable to common
shareholders:
Income before extraordinary
item (net of accretion)........... $ 0.79 $ 0.51 $ 0.33 $ 0.46 $ 0.22
Extraordinary item.................. $ - $ - $ - $ (0.12) $ -
--------- --------- --------- --------- ---------
Net income.......................... $ 0.79 $ 0.51 $ 0.33 $ 0.34 $ 0.22
========= ========= ========= ========= =========
Weighted average shares
outstanding.......................... 2,452,927 2,445,903 2,478,047 2,491,996 2,260,573
2
(Dollars in thousands)
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FISCAL YEAR ENDED SEPTEMBER 30, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
Working capital ....................... $ 11,158 $ 11,572 $ 12,098 $ 10,971 $ 12,130
Total assets............................ 23,497 23,026 22,919 23,476 24,524
Long-term obligations and subordinated
debt /4/............................... 9,123 10,245 12,705 13,206 14,525
Shareholders' equity.................... 7,208 /7/ 6,621 5,122 4,097 /5/ 1,959 /6/
- ------------------------
/1/ Includes $205,913 of debt issue costs and $86,908 of unamortized
discount on senior secured and subordinated notes which were written off as a
result of extinguishing the related debt in January and July 1994 and a
$200,000 prepayment premium paid in connection with restructuring senior
subordinated notes in July 1994. The extraordinary item is presented net of a
$197,128 related tax benefit.
/2/ Represents the accretion of warrants issued in conjunction with a
$4 million loan made in 1989 by MLBC, Inc. to the Company which entitled MLBC
to acquire 22.84% of the common stock of the Company (19.98% after June 1993).
MLBC also had the right to require the Company to repurchase the warrants
after October 31, 1995 at a formula price based on earnings and indebtedness.
The original fair value of the warrants was recorded at $400,000 and the
Company was accreting the warrants to the highest redemption price over the
period to October 31, 1995. In July 1994, the warrants were repurchased for
$2,000,000.
/3/ Preferred stock was issued in partial payment for repurchase of
warrants described in footnote 2 above and was valued at $1,000,000. The
Company had the right to redeem the preferred stock at any time after April1,
1996 for $1,200,000. The preferred stock accreted to the redemption price in
lieu of cash dividends and was redeemed in December 1996.
/4/ Includes current portion of long-term obligations and subordinated
debt.
/5/ Reflects issuance of preferred stock valued at $1,000,000 to MLBC,
Inc., in connection with partial payment for repurchase of warrants described
in footnote 2 above.
/6/ Reflects a return of capital to AMCON Corporation (the former parent
of the Company) of $3.9 million made in fiscal 1993 in connection with a
contemplated reorganization of AMCON Corporation and its subsidiaries.
/7/ Reflects redemption of preferred stock described in footnote 3 above
for $1,200,000 in December 1996.
3
MARKET FOR COMMON STOCK
The Company's Common Stock trades on the NASDAQ SmallCap Market under the
symbol "DIST". The following table reflects the range of the high and low
prices per share of the Company's Common Stock reported by NASDAQ for the
years ended September 30, 1997 and 1996. These quotations represent
inter-dealer quotations, without adjustment for retail mark-ups, mark-downs
or commissions and may not necessarily represent market transactions. As of
December 12, 1997, the Company had approximately 1,000 holders of record of
its shares and the Company believes that approximately 2,200 additional
persons hold shares beneficially.
COMMON STOCK
---------------------
HIGH LOW
------ ------
Year ended September 30, 1997:
4th Quarter $ 3.38 $ 1.50
3rd Quarter 2.28 1.50
2nd Quarter 2.75 1.75
1st Quarter 2.75 1.50
Year ended September 30, 1996:
4th Quarter $ 2.50 $ 1.50
3rd Quarter 2.63 1.88
2nd Quarter 3.13 1.75
1st Quarter 3.00 2.25
The Company has never declared or paid a cash dividend on its Common Stock and
does not anticipate a change in this policy in the foreseeable future. The
Board of Directors currently intends to retain earnings to finance
acquisitions of other distributing companies, development of new products,
expansion of markets and for other corporate purposes.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The following table sets forth an analysis of various components of the Income
Statement as a percentage of sales for the fiscal years ended September 30,
1997, 1996, and 1995:
Fiscal Year Ended September 30,
------------------------------------
1997 1996 1995
-------- -------- --------
Sales.......................................... 100.0% 100.0% 100.0%
Cost of sales.................................. 89.1 88.5 88.2
------- -------- --------
Gross profit................................... 10.9 11.5 11.8
Selling, general and administrative expense.... 8.9 9.5 9.7
Depreciation and amortization.................. 0.5 0.4 0.4
-------- -------- --------
Income from operations......................... 1.5 1.6 1.7
Interest expense............................... 0.5 0.7 0.9
Other (income) expense, net.................... (0.8) (0.4) (0.1)
-------- -------- --------
Income before income taxes..................... 1.8 1.3 0.9
Income tax expense............................. 0.7 0.5 0.4
-------- -------- --------
Net income..................................... 1.1 0.8 0.5
Accretion of warrants/
preferred stock........................... 0.0 (0.1) 0.0
-------- -------- --------
Net income attributable to
common shareholders....................... 1.1% 0.7% 0.5%
======== ======== ========
5
YEAR ENDED SEPTEMBER 30, 1997 VERSUS YEAR ENDED SEPTEMBER 30, 1996. Sales for
the year ended September 30, 1997 increased 1.6% to $179.0 million, compared
to $176.1 million for the year ended September 30, 1996. Beer and beverage
sales related to the Denver facility decreased $6.3 million during the year
ended September 30, 1997 as compared to the prior year as a result of
disposing of the operation in October 1996. Sales from the core distribution
business increased by $9.1 million for the year ended September 30, 1997
compared to the prior year as follows: Cigarette sales increased $5.1 million
primarily due to price increases from manufacturers over the prior year. Food
service sales increased $841,000 due to increased sales related to the
Company's branded food program. Tobacco sales increased $1.4 million, candy
sales increased $719,000 and all other product sales increased $1.0 million
due to increase in demand for such products from the customer base.
Gross profit decreased 3.5% to $19.6 million for the year ended September 30,
1997 from $20.3 million in fiscal 1996. Gross profit as a percent of sales
declined to 10.9% for the year ended September 30, 1997 compared to 11.5% for
the prior fiscal year. The decrease in the Company's gross profit margin was
primarily due to the sale of the Denver beer distributorship which accounted
for a $1.3 million reduction in gross profit and a $771,000 or 14.8% reduction
in purchase discounts from manufacturers on the Company's private label
cigarettes. These reductions in gross profit were offset by a $1.4 million
increase in gross profit from the increased sales of cigarette, tobacco, candy
and other products.
Sales of the Company's private label cigarettes have continued to decline
since 1993 when cigarette manufacturers substantially reduced the price of
premium brand cigarettes. Although price increases in cigarettes over the
past two years have had a positive impact on gross profit from premium
cigarettes, sales in the private label category have not shown improvement and
continue to decline. The volume of private label cigarettes declined by 22%
during fiscal 1997. Management anticipates that the volume of private label
cigarettes could continue to decline by as much as 20% to 30%. If such a
decline is realized, gross profit from private label cigarette sales could
decrease annually by $200,000 to $400,000 in fiscal 1998 and 1999.
Total operating expense decreased 4.3% to $16.8 million from $17.5 million
during fiscal 1996. The decrease was primarily due to the sale of the Denver
beer distributorship and the subsequent closing of the Denver facility which
accounted for a reduction in operating expenses of $1.6 million. This
reduction was offset by an increase of $848,000 in operating expense by the
other distribution centers which was incurred to support the increase in
sales. As a percentage of sales, total operating expense declined to 9.4% for
the year ended September 30, 1997 compared to 9.9% for fiscal 1996.
As a result of the above, income from operations for the fiscal year ended
September 30, 1997 increased 1.7% to $2.8 million.
Interest expense for the fiscal year ended September 30, 1997 decreased 24.5%,
or $282,000, compared to fiscal 1996. The decrease was primarily due to a
$3.1 million reduction in the average amount borrowed under the Company's
revolving credit facility with a bank (the "Facility") during the fiscal year
ended September 30, 1997, as compared to fiscal 1996. Notwithstanding the
$499,000 borrowed to finance the purchase and installation of the water
bottling assets from November 1996 through January 1997 and the $1.2 million
borrowed to finance the purchase of the Company's outstanding preferred stock
in December
6
1996, the Company was able to reduce average borrowings under the Facility as
a result of the cash generated from the sale of the Denver beer
distributorship during the first quarter of fiscal 1997 and the sale of a
building in the fourth quarter of fiscal 1996.
Other income for the year ended September 30, 1997 was generated primarily by
the gain associated with the sale of the Denver beer distributorship of $1.1
million.
As a result of the above factors, net income attributable to common
shareholders for the fiscal year ended September 30, 1997 was $1,940,534
compared to net income of $1,253,041 for fiscal 1996.
Competition in the distribution industry is intense and profit margins
continue to be tight. The Company's operating income is subject to a number of
factors which are beyond its control, such as changes in manufacturers'
cigarette pricing which affects the market for generic and private label
cigarettes. While the Company sells a diversified product line, it remains
dependent on cigarette sales which represent approximately 66% of its revenue.
Net income is heavily dependent on sales of the Company's private label
cigarettes and volume discounts received from manufacturers in connection with
such sales. The Company continuously evaluates steps it may take to improve
net income in future periods, including further acquisitions of smaller
distributing companies in similar business lines and further sales of assets
that are no longer essential to its primary business activities such as
marketable securities, investments and certain real estate. An analysis of
such assets held at September 30, 1997 and 1996 is as follows:
ESTIMATE OF GAIN
-----------------------------------------
DESCRIPTION OF ASSET September 30, 1997 September 30, 1996
- -------------------- ------------------ ------------------
Investments (available for sale) $ 409,500 $ 686,200
Condominium & furnishings 480,000 450,000
Investments consisted of 83,000 and 86,500 shares of Cayman Water Company
Limited (CWC) at September 30, 1997 and 1996, respectively, a public company
which is listed on NASDAQ. The Company's basis in the securities was $151,000
and $157,000, and the fair market value of the securities was $560,000 and
$843,000 on September 30, 1997 and September 30, 1996, respectively. During
the fiscal year ended September 30, 1997, the Company sold 3,500 shares of CWC
and recognized a gain of approximately $27,600.
The condominium and furnishings consist of a condominium in the Cayman Islands
which is used in the furtherance of the Company's business marketing
strategies. Under a profit sharing agreement with AMCON, the greater of
$400,000 of the net gain or one-half of the net gain from the ultimate sale of
the real estate will be allocated to AMCON. The Company estimates the amount
of gain payable to AMCON had the real estate sold on September 30, 1997 would
have been $480,000. The costs and benefits associated with retaining the
condominium are being evaluated in relation to the current business strategies
of the Company.
The Company relies heavily on technology to operate in an efficient manner.
As the millennium approaches, the Company is preparing all of its computer
systems to be Year 2000 compliant. A taskforce has been assembled to review
all systems to ensure that they do not malfunction as a result of the Year
2000. In this process, the Company expects to both replace some systems and
upgrade others. The current cost of this effort is still being evaluated.
7
While this is a substantial effort, it will give the Company the benefit of
new technology and further improve the efficiency of the operational and
office systems.
YEAR ENDED SEPTEMBER 30, 1996 VERSUS YEAR ENDED SEPTEMBER 30, 1995. Sales for
the year ended September 30, 1996 increased 3.7% to $176.1 million, compared
to $169.8 million for the year ended September 30, 1995. This increase in
sales was principally due to an increased customer base and a cigarette price
increase in April 1996. For fiscal 1996, cigarette sales increased $3.8
million, confectionery sales increased $1.2 million, tobacco sales increased
$1.2 million, beer sales increased $607,000 and other product sales were up
$2.2 million. These increases, offset by a decline in nonalcoholic beverage
sales of $2.1 million due to downsizing of the Denver facility, accounted for
the net increase in sales.
Gross profit increased 1.1% to $20.3 million for the year ended September 30,
1996 from $20.0 million in fiscal 1995. The increase in the Company's gross
profit was primarily due to the 3.7% increase in sales. The increase in sales
effected an increase in premium and generic cigarette gross profit of
$611,000, confectionery gross profit of $472,000 and beer gross profit of
$270,000. Gross profit as a percentage of sales declined to 11.5% in fiscal
1996 compared to 11.8% in fiscal 1995 primarily due to the decline in the
Company's private label cigarette business. Gross profit from sales of the
Company's private label cigarettes declined $1.2 million or 19.9% due to the
heightened competition in the generic and private label cigarette markets.
The Company believes that there will be a continued demand for the Company's
private label cigarettes and that its cigarettes have established brand
loyalty among consumers, however, it is anticipated that the volume of private
label cigarette sales could decline by as much as 10% to 20% in fiscal 1997.
The continued downsizing of the Denver facility caused a $520,000 decrease in
nonalcoholic beverages profit margin. Gross profit, from other products
including beer, health and beauty care, store supplies, tobacco and food-
service, increased $618,000 on improved gross profit margin percentages.
Total operating expense, which includes selling, general and administrative
expenses and depreciation and amortization, increased 1.9% to $17.5 million in
fiscal 1996 from $17.2 million in fiscal 1995. However, total operating
expense as a percentage of sales decreased to 9.9% compared to 10.1% during
fiscal 1995. This decrease is primarily attributable to the continued
efficiencies gained from the consolidation of five smaller branch facilities
into two existing branch facilities in fiscal 1995.
As a result of the above, income from operations for fiscal 1996 decreased
3.3% to approximately $2.8 million.
Interest expense decreased 25.5% in fiscal 1996 to approximately $1,149,000
from $1,543,000 in fiscal 1995. The decrease was primarily the result of
lower interest rates on the Company's revolving credit line and a $2.2 million
decrease in average subordinated debt outstanding.
Other income increased primarily due to gains of $43,000 on sales of trading
securities, realized gains of $282,000 on investments which were sold in
fiscal 1996, and gains of $215,000 on sales of nonessential fixed assets.
As a result of the above factors, net income increased by 45.0% to $1,336,374
during fiscal 1996, compared to net income of $921,560 in fiscal 1995. Net
income attributable to common shareholders was $1,253,041 for the year ended
September 30, 1996, compared to $821,560 for fiscal 1995.
8
LIQUIDITY AND CAPITAL RESOURCES
The Company makes capital expenditures primarily for additional equipment for
its distribution facilities including computers, delivery vehicles and other
equipment. The Company has historically financed its working capital
requirements with a combination of internally generated funds and bank
borrowings. Cash provided by operations equaled approximately $1,120,000 and
$2,566,000 for the fiscal years ended September 30, 1997 and 1996, respectively.
Capital expenditures during those periods equaled approximately $892,000 and
$723,000, respectively. The remaining cash provided by operations was applied
to debt service. The Company anticipates that capital expenditures during
fiscal 1998 will be approximately $1,900,000 and will be used for construction
of an addition to the Bismarck, ND distribution facility and for the purposes
stated above.
The Company had working capital of approximately $11.1 million as of September
30, 1997. The Company's ratio of debt to equity was 2.26 at September 30,
1997 compared to 2.48 at September 30, 1996.
The Company has a revolving credit facility (the "Facility") with a bank
allowing the Company to borrow up to $10 million at any time with the option
to borrow up to an additional $3 million for a period of 90 days. The Company
may exercise this option up to twice per year. Advances made under the
Facility are limited to a "borrowing base" determined by various percentages
of eligible accounts receivable and inventories. As of September 30, 1997,
the Company had borrowed approximately $8.1 million under the Facility. The
Facility is collateralized by all equipment, general intangibles, inventories
and receivables of the Company, except as noted below, along with first
mortgages on the Company's distribution centers and other real estate. The
Facility expires on January 31, 1998.
The Facility was amended effective October 10, 1997 in order to provide
financing to support the operation of a new distribution facility in St.
Louis, Missouri (See Note 13). The amendment increased the borrowing limit to
$15,000,000 with an option to borrow an additional $3,000,000 for a 90-day
period twice a year. The amendment also provided for an additional $10
million facility which expires in April 1998 and is collateralized by specific
inventory. In addition, the credit agreement was extended to expire January
2000.
The Facility contains covenants which, among other things, set forth certain
financial ratios and net income requirements which adjust semiannually or
annually as specified in the Facility. For fiscal 1998 and 1997, the Facility
includes covenants that (i) restrict capital expenditures to $1,250,000 during
the year, except for expenditures related to the construction of the addition
to the Bismarck, ND distribution facility, (ii) restrict the incurrence of
debt, (iii) restrict payments, prepayments and repurchases of subordinated
debt or capital stock, (iv) restrict mergers and acquisitions and changes in
business or conduct of business and (v) require the maintenance of certain
financial ratios and net income levels including an average annual fixed
charge ratio of 1.1 to 1.0 (1.15 to 1.0 from February 1, 1998 through January
31, 1999), an average annual interest coverage ratio of 1.5 to 1.0, a debt to
equity ratio of 4.0 to 1.0 and minimum annual net income of $1,000,000. In
addition, the Company may not pay dividends with respect to its Common Stock
without the consent of the lender of the Facility. As of September 30, 1997
the Company was in compliance with all covenants under the Facility.
9
In October 1994, the Company negotiated a $500,000 non-revolving line of
credit, bearing interest at the bank's base rate, to finance the purchase of
delivery vehicles. In July 1995, the line of credit was increased to
$1,250,000. The bank's base rate at September 30, 1997 was 8.50%. The non-
revolving line of credit was amended effective December 1, 1996 to change the
interest rate from the bank's base rate to two hundred basis points above the
five-year U.S. Treasury Note rate on the date of each advance. As the Company
takes advances, a note is drawn and is payable in monthly installments from 36
to 60 months.
Advances against the line were approximately $811,000 at September 30, 1997.
The line of credit is collateralized by a first lien on the delivery vehicles
purchased with the loan proceeds.
In 1989, MLBC, Inc. ("MLBC") lent $4 million to the Company (the "MLBC Loan")
and, in connection therewith, the Company issued a 14% senior subordinated
note, due 1995, to MLBC (the "Subordinated Note"). In July 1994, the Company
and AMCON Corporation entered into a restructuring agreement with MLBC (the
"Restructuring Agreement") under which ADC agreed to prepay the Subordinated
Note and issued to MLBC 250,000 shares of the Company's Series A Cumulative
Redeemable Convertible Preferred Stock. The Subordinated Note was repaid in
full on November 1, 1995. The preferred stock was redeemed on December 23,
1996 at a price of $4.80 per share or $1,200,000. The redemption was financed
through the Facility.
As of September 30, 1997, the Company had additional outstanding long-term
indebtedness of approximately $190,000 consisting of a capital lease for
computer equipment, the current portion of which equaled approximately
$47,000. The interest rate on the note relating to such indebtedness is 9.5%
per annum.
On November 10, 1997, the Company purchased all of the outstanding stock of
Food For Health Company, Inc. ("FFH"), a distributor of health and natural
foods based in Phoenix, AZ, for $4.4 million in cash. The acquisition was
funded by a $4.5 million five year term loan from a bank. The loan bears
interest at LIBOR plus 1.75% and requires monthly payments of $75,000 plus
accrued interest. The loan is collateralized by the common stock of FFH.
The Company believes that funds generated from operations, supplemented as
necessary with funds available under the Facility, will provide sufficient
liquidity to cover its debt service and any reasonably foreseeable future
working capital and capital expenditure requirements.
CONCERNING FORWARD LOOKING STATEMENTS
This Annual Report, including the Letter to Shareholders, Management's
Discussion and Analysis and other sections, contains forward looking
statements that are subject to risks and uncertainties and which reflect
management's current beliefs and estimates of future economic circumstances,
industry conditions, company performance and financial results. Forward
looking statements include information concerning the possible or assumed
future results of operations of the Company and those statements preceded by,
followed by or include the words "future", "position", "anticipate(s)",
"expect", "believe(s)", "see", "plan", "further improve", "outlook", "should"
or similar expressions. For these statements, we claim the protection of the
safe harbor for forward looking statements contained in the Private Securities
10
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 thoses results
to differ materially from those expressed in our forward looking statements:
changing market conditions with regard to cigarettes and the demand for the
Company's products, domestic regulatory risks, competitive and other risks
over which the Company has little or no control. Any changes in such factors
could result in significantly different results. Consequently, future results
may differ from management's expectations. Moreover, past financial
performance should not be considered a reliable indicator of future
performance.
11
REPORT OF MANAGEMENT
Management is responsible for the preparation of the accompanying financial
statements. The financial statements and the notes thereto have been prepared
in accordance with generally accepted accounting principles to reflect, in all
material aspects, the substance of financial events and transactions occurring
during the year. Coopers & Lybrand L.L.P., independent certified public
accountants, have audited our financial statements as described in their
report.
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.
Kathleen M. Evans
President and Chief Executive Officer
Michael D. James
Treasurer and Chief Financial Officer
December 1, 1997
12
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of AMCON Distributing Company:
We have audited the accompanying balance sheets of AMCON Distributing Company
as of September 30, 1997 and 1996, and the related statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended September 30, 1997. 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 generally accepted auditing
standards. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of AMCON Distributing Company as
of September 30, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Omaha, Nebraska
December 1, 1997
F-1
BALANCE SHEETS
AMCON Distributing Company
- ------------------------------------------------------------------------------------------------------------
September 30, 1997 1996
- ------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 26,973 $ 21,497
Marketable securities 127,786 148,113
Accounts receivable, less allowance for
doubtful accounts of $206,249 and $195,961 10,788,979 10,344,002
Note and interest receivable from officer 130,795 144,695
Inventories 7,183,245 6,849,515
Deferred income taxes 119,017 75,209
Other 84,616 164,777
------------- -------------
Total current assets 18,461,411 17,747,808
Fixed assets, net 3,608,891 3,033,257
Investments 560,250 843,375
Other assets 866,749 1,401,153
------------- -------------
$ 23,497,301 $ 23,025,593
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 4,764,816 $ 4,102,868
Accrued expenses 906,282 675,958
Accrued wages, salaries and bonuses 719,962 459,873
Income taxes payable 579,802 643,568
Current portion of long-term debt 332,338 293,665
------------- -------------
Total current liabilities 7,303,200 6,175,932
------------- -------------
Deferred income taxes 195,458 276,556
Long-term debt, less current portion 8,790,524 9,951,495
Commitments (Note 12)
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none and 250,000 shares outstanding
as of September 30, 1997 and 1996, respectively - 2,500
Common stock, $.01 par value, 5,000,000 shares
authorized, 2,450,000 shares issued 24,500 24,500
Additional paid-in capital 2,213,828 3,411,328
Unrealized gain on investments available-for-sale,
net of $171,985 and $288,227 tax 237,503 398,028
Retained earnings 4,732,603 2,798,569
------------- -------------
7,208,434 6,634,925
Less treasury stock, 97 shares and 4,097 shares,
respectively, at cost (315) (13,315)
------------- -------------
Total shareholders' equity 7,208,119 6,621,610
------------- -------------
$ 23,497,301 $ 23,025,593
============= =============
The accompanying notes are an integral part of these financial statements
F-2
STATEMENTS OF INCOME
AMCON Distributing Company
- -----------------------------------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
Sales (including excise taxes of $40.1 million, $ 178,990,978 $ 176,144,966 $ 169,790,387
$40.7 million and $40.5 million, respectively)
Cost of sales 159,434,631 155,885,022 149,756,786
------------- ------------- -------------
Gross profit 19,556,347 20,259,944 20,033,601
Selling, general and administrative expenses 15,883,969 16,682,845 16,421,558
Depreciation and amortization 868,744 820,672 761,356
------------- ------------- -------------
16,752,713 17,503,517 17,182,914
------------- ------------- -------------
Income from operations 2,803,634 2,756,427 2,850,687
Other expense (income):
Interest expense 867,327 1,149,162 1,543,297
Other (income) expense, net (1,352,733) (696,828) (228,543)
------------- ------------- -------------
(485,406) 452,334 1,314,754
------------- ------------- -------------
Income before income taxes 3,289,040 2,304,093 1,535,933
Income tax expense 1,348,506 967,719 614,373
------------- ------------- -------------
Net income 1,940,534 1,336,374 921,560
Accretion of preferred stock - (83,333) (100,000)
------------- ------------- -------------
Net income attributable to common shareholders $ 1,940,534 $ 1,253,041 $ 821,560
============= ============= =============
Income (loss) per common and common equivalent
share attributable to common shareholders: $ 0.79 $ .51 $ .33
============= ============= =============
Weighted average common and
common equivalent shares outstanding 2,452,927 2,445,903 2,478,047
============= ============= =============
The accompanying notes are an integral part
of these financial statements
F-3
STATEMENTS OF SHAREHOLDERS' EQUITY
AMCON Distributing Company
- ----------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
------------------- ---------------------- Paid-In
Shares Amount Shares Amount Capital
- ---------------------------------------------------------------------------------------------------------------
Balance, September 30, 1994 250,000 $ 2,500 2,450,000 $ 24,500 $ 3,227,995
Investments available-for-sale
reclassified to trading securities,
net of tax - - - - -
Unrealized gain on investments
available- for-sale, net of tax - - - - -
Accretion of preferred stock - - - - 100,000
Receipt of treasury stock - - - - -
Net income - - - - -
-------- ------- --------- -------- -----------
Balance, September 30, 1995 250,000 2,500 2,450,000 24,500 3,327,995
Unrealized gain on investments
available-for-sale, net of tax - - - - -
Accretion of preferred stock - - - - 83,333
Net income - - - - -
-------- ------- --------- -------- -----------
Balance, September 30, 1996 250,000 $ 2,500 2,450,000 $ 24,500 $ 3,411,328
Unrealized gain on investments
available-for-sale, net of tax - - - - -
Redemption of preferred stock (250,000) $(2,500) - - (1,197,500)
Issuance of treasury stock - - - - -
Net income - - - - -
-------- ------- --------- -------- -----------
Balance, September 30, 1997 - - 2,450,000 $ 24,500 $ 2,213,828
======== ======= ========= ======== ===========
The accompanying notes are an integral part of these financial statements.
F-4
STATEMENTS OF SHAREHOLDERS' EQUITY
AMCON Distributing Company
- ---------------------------------------------------------------------------------------------------------------
Unrealized
Gain on
Investments
Available- Retained Treasury Stock
for-sale Earnings Shares Amount Total
- ---------------------------------------------------------------------------------------------------------------
Balance, September 30, 1994 $ 118,256 $ 723,968 - $ - $ 4,097,219
Investments available-for-sale
reclassified to trading securities,
net of tax (65,756) - - - (65,756)
Unrealized gain on investments
available- for-sale, net of tax 182,400 - - - 182,400
Accretion of preferred stock - (100,000) - - -
Receipt of treasury stock - - (4,097) (13,315) (13,315)
Net income - 921,560 - - 921,560
--------- ----------- ------ --------- -----------
Balance, September 30, 1995 234,900 1,545,528 (4,097) (13,315) 5,122,108
Unrealized gain on investments
available-for-sale, net of tax 163,128 - - - 163,128
Accretion of preferred stock - (83,333) - - -
Net income - 1,336,374 - - 1,336,374
--------- ----------- ------ --------- -----------
Balance, September 30, 1996 $ 398,028 $ 2,798,569 (4,097) $ (13,315) $ 6,621,610
Unrealized gain on investments
available-for-sale, net of tax (160,525) - - - (160,525)
Redemption of preferred stock - - - - (1,200,000)
Issuance of treasury stock - (6,500) 4,000 13,000 6,500
Net income - 1,940,534 - - 1,940,534
--------- ----------- ------ --------- -----------
Balance, September 30, 1997 $ 237,503 $ 4,732,603 97 $ 315 $ 7,208,119
========= =========== ====== ========= ===========
The accompanying notes are an integral part of these financial statements.
F-5
STATEMENTS OF CASH FLOWS
AMCON Distributing Company
- ------------------------------------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,940,534 $ 1,336,374 $ 921,560
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 868,744 820,672 761,356
Treasury stock received as a dividend - - (13,315)
Gain on sales of fixed assets, land held for sale
and securities (112,520) (588,659) (111,693)
Gain on sale of Denver beer distributorship (1,102,205) - -
Proceeds from sales of trading securities 92,548 147,993 -
Purchases of trading securities - (14,825) -
Deferred income taxes (8,664) 36,948 181,700
Changes in assets and liabilities:
Accounts and interest receivable (912,323) (404,090) (711,771)
Inventories (771,978) 477,021 1,700,526
Other current assets 80,161 (23,885) (71,008)
Other assets (42,648) (78,397) (104,911)
Accounts payable 661,948 340,933 (27,592)
Accrued expenses and accrued wages, salaries and
bonuses 490,413 191,207 (367,457)
Income taxes payable (63,766) 324,265 (751,896)
----------- ----------- -----------
Net cash provided by operating activities 1,120,244 2,565,557 1,405,499
----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (891,783) (723,308) (942,808)
Purchase of water bottling assets (499,109) - -
Proceeds from sales of fixed assets 160,961 516,162 63,417
Advances to officer - - (125,000)
Proceeds from repayment of advance to officer 25,000 - -
Proceeds from sale of Denver beer distributorship 2,371,994 - -
Proceeds from sales of available-for-sale securities 33,967 357,170 64,182
----------- ----------- -----------
Net cash provided by (used in) investing
activities 1,201,030 150,024 (940,209)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings of long-term debt 516,741 188,615 726,267
Net (payments) proceeds on bank credit agreement (1,239,484) (2,082,930) 1,409,642
Payments on long-term and subordinated debt (399,555) (814,366) (2,637,033)
Redemption of preferred stock (1,200,000) - -
Proceeds from issuance of treasury stock 6,500 - -
----------- ----------- -----------
Net cash used in financing activities (2,315,798) (2,708,681) (501,124)
----------- ----------- -----------
Net increase (decrease) in cash 5,476 6,900 (35,834)
Cash, beginning of year 21,497 14,597 50,431
----------- ----------- -----------
Cash, end of year $ 26,973 $ 21,497 $ 14,597
=========== =========== ===========
Supplemental cash flow information:
Cash paid during the year for interest $ 868,378 $1,199,396 $ 1,543,591
Cash paid during the year for income taxes 1,420,936 714,696 1,139,620
Supplemental noncash information:
Accretion of preferred stock - 83,333 100,000
Unrealized gain on available-for-sale securities, net (160,525) 163,128 182,400
Fixed assets acquired through capital lease - 248,928 -
The accompanying notes are an integral part
of these financial statements.
F-6
NOTES TO FINANCIAL STATEMENTS
AMCON Distributing Company
1. Summary of Significant Accounting Policies:
Company Operations:
AMCON Distributing Company ("the Company") is a leading wholesale distributor
of consumer products in the Great Plains and Rocky Mountain Regions. The
Company distributes a broad portfolio of consumer products including
beverages, candy, cigarettes, groceries and health and beauty care products
through its distribution centers located in Kansas, Missouri, Nebraska, North
Dakota, South Dakota and Wyoming.
Competition in the distribution industry is intense and profit margins
continue to be tight. The Company's operating income is subject to a number of
factors which are beyond its control, such as changes in manufacturers'
cigarette pricing which affects the market for generic and private label
cigarettes. While the Company sells a diversified product line, it remains
dependent on cigarette sales which represent approximately 66% of its revenue.
Net income is heavily dependent on sales of the Company's private label
cigarettes and volume discounts received from manufacturers in connection with
such sales. The Company continuously evaluates steps it may take to improve
net income in future periods, including further acquisitions of smaller
distributing companies in similar business lines and further sales of assets
that are no longer essential to its primary business activities such as
marketable securities, investments and certain real estate.
Accounting Period:
The Company's fiscal year ends on the last Friday in September. For
convenience, the fiscal years have been indicated as September 30, whereas the
actual year ends were September 26, 1997, September 27, 1996 and September 29,
1995. Each fiscal year was comprised of 52 weeks.
Cash and Accounts Payable:
The Company 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 which were $1,988,915 and $1,797,734 at
September 30, 1997 and 1996, respectively, reflect the 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 the credit agreement (see Note 5).
Marketable Securities and Investments:
In 1994, the Company adopted Statement of Financial Accounting Standards No.
115 (SFAS No. 115), "Accounting for Certain Investments in Debt and Equity
Securities," pursuant to which the Company has classified marketable
securities and investments as either available-for-sale or trading securities.
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 reported as a separate
component of shareholders' equity, net of tax. For trading securities, net
unrealized holding gains and losses are included in the determination of net
income.
F-7
Accounts Receivable:
Accounts receivable consist of amounts due to the Company from its normal
business activities. The Company's customers are retailers, institutions and
other wholesalers located throughout the Great Plains and Rocky Mountain
regions. 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 portfolio.
Inventories:
Inventories consist of finished products purchased in bulk quantities to be
redistributed to the Company's customers. Inventories are valued at the lower
of first-in, first-out ("FIFO") cost or market.
Fixed Assets:
Fixed assets are stated at cost. Major renewals and improvements are
capitalized and charged to expense through depreciation charges. Repairs and
maintenance are charged to expense as incurred. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
depreciable assets. Estimated useful lives are 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 income.
Revenue Recognition:
The Company recognizes revenue when products are shipped. Sales are shown net
of returns and discounts.
Income Taxes:
Deferred income taxes are determined based on temporary differences between
the financial reporting and tax basis of the Company's assets and liabilities,
using enacted tax rates in effect during the years in which the differences
are expected to reverse.
Earnings Per Share:
Earnings per share attributable to common shareholders have been computed
using the weighted average number of common and common equivalent shares
outstanding. Common stock equivalents include dilutive options, using the
treasury stock method. Earnings used in the calculation are reduced by
accretion on preferred stock. (See Note 6). Fully-diluted earnings per share
are not presented since the dilutive effect is less that 3% of primary
earnings per share.
Financial Accounting Standards No. 128, EARNINGS PER SHARE (FASB 128):
FASB 128 was issued in February 1997 and is effective for financial statements
issued for fiscal periods ending after December 15, 1997. The standard
revises the calculation and presentation of earnings per share and requires
the presentation of "basic earnings per share" and "diluted earnings per
F-8
share." Management believes the amount reported as earnings per share in the
accompanying income statement would approximate basic earnings per share under
FASB 128 and that diluted earnings per share would be less than 1% dilutive.
Long Lived Assets:
The Company reviews goodwill and other long lived assets whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Impairments would be recognized in operating results if a
permanent diminution in value were to occur based on discounted cash flows.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
2. Fixed Assets, Net:
Fixed assets at September 30, 1997 and 1996 consisted of the following:
1997 1996
----------- -----------
Land and buildings $ 490,955 $ 130,676
Condominium and furnishings 1,228,801 1,210,859
Warehouse equipment 2,283,580 1,727,834
Furniture, fixtures and
leasehold improvements 1,288,773 1,335,777
Vehicles 1,775,999 1,820,370
----------- -----------
7,068,108 6,225,516
Less accumulated depreciation 3,459,217 3,192,259
----------- -----------
$ 3,608,891 $ 3,033,257
=========== ===========
Included in land and buildings is a warehouse leased to a third party. Future
minimum rentals are $14,205 and $7,103 in fiscal 1998 and 1999, respectively.
3. Marketable Securities and Investments:
Investments in equity securities at September 30, 1997 and 1996 consisted of
the following:
September 30, 1997
------------------------------------
Unrealized Market
Cost Gain Value
--------- --------- ---------
Marketable securities(trading) $ 39,700 $ 88,086 $ 127,786
========= ========= =========
Investments (available-for-sale) $ 150,762 $ 409,488 $ 560,250
========= ========= =========
F-9
September 30, 1996
------------------------------------
Unrealized Market
Cost Gain Value
--------- --------- ---------
Marketable securities (trading) $ 69,700 $ 78,413 $ 148,113
========= ========= =========
Investments (available-for sale) $ 157,119 $ 686,256 $ 843,375
========= ========= =========
The Company realized gains on the sale of available-for-sale investments of
$27,600, $281,789 and $26,882 in fiscal 1997, 1996 and 1995, respectively. At
September 30, 1995, the Company transferred securities with a market value of
$237,926 from available-for-sale investments to trading marketable securities
and recognized a gain of $95,950 which was included in the determination of
net income for the period. The Company recognized gains of $72,222 and
$42,455 on trading securities during 1997 and 1996, respectively. Subsequent
to fiscal year end, the Company sold the balance of its trading securities for
$157,200, recognizing a gain of $29,400.
4. Other Assets:
Other assets at September 30, 1997 and 1996 consisted of the following:
1997 1996
--------- -----------
Goodwill (less accumulated amortization
of $238,810 and $335,794) $ 585,238 $ 985,716
Covenants not to compete (less
accumulated amortization of $232,666
and $169,041) 2,333 65,959
Cash surrender value of life
insurance policies 279,178 236,529
Buildings held for sale - 112,949
--------- -----------
$ 866,749 $ 1,401,153
========= ===========
Goodwill arose from the acquisition of certain businesses and is amortized
using the straight-line method over periods ranging from 5 to 25 years.
Amortization expense was $41,926, $68,381 and $68,299 for the years ended
September 30, 1997, 1996, and 1995, respectively. During 1997, the Company
disposed of goodwill in the amount of $358,553 (net) in connection with the
sale of the Denver beer distributorship.
The covenants not to compete are amortized using the straight-line method over
2-5 year terms of the related agreements. Amortization expense was $63,625,
$65,500 and $53,000 for the years ended September 30, 1997, 1996 and 1995,
respectively.
The building held for sale was leased to a third party during 1997 and
transferred to fixed assets on the balance sheet.
F-10
5. Long-term Obligations:
Long-term obligations at September 30, 1997 and 1996 consisted of the
following:
1997 1996
----------- -----------
Credit agreement with a bank,
interest payable monthly at the
bank's base rate (8.50 at
September 30, 1997);
principal due January 2000 $ 8,122,086 $ 9,361,570
Nonrevolving line of credit,
interest payable monthly (at rates
ranging between 8.00% and 8.50% at
September 30, 1997); principal due
in monthly installments through
December 2001 collateralized by
delivery vehicles 810,859 637,320
Promissory note, interest payable
quarterly at 8%; principal due in
quarterly installments through
February 1997 - 16,422
Obligations under capital lease, payable
in monthly installments at 9.5% through
April 2001 (Note 11) 189,917 228,967
Other - 881
----------- -----------
9,122,862 10,245,160
Less current portion 332,338 293,665
----------- -----------
$ 8,790,524 $ 9,951,495
=========== ===========
Under the terms of the credit agreement, all of the Company's assets have been
pledged as collateral to the lenders. The credit agreement allows for
borrowings of up to $10,000,000 ($15,000,000 in 1996) with an option to borrow
an additional $3,000,000 for a 90-day period twice a year. Advances made
under the Facility are limited to a "borrowing base" determined by various
percentages of eligible accounts receivable and inventory. The agreement
bears interest at the bank's base rate. At September 30, 1997 and 1996, the
unused portion of the credit agreement was $1,877,914 and $5,638,430,
respectively. The Company is required to pay a commitment fee of 0.25% of the
unused amount of the primary commitment.
The credit agreement contains covenants which, among other things, (i) restrict
capital expenditures to $1,250,000, (ii) restrict the incurrence of debt,
(iii) restrict payments, prepayments, and repurchases of subordinated debt or
capital stock, (iv) restrict mergers and acquisitions and changes of business
or conduct of business, and (v) require the maintenance of certain financial
ratios and net income levels including an average annual fixed charge ratio of
1.1 to 1.0 (1.15 to 1.0 from February 1, 1998 through January 31, 1999), an
F-11
average annual interest coverage ratio of 1.5 to 1.0, a debt to equity ratio
of 4.0 to 1.0 and minimum annual net income of $1,000,000. In addition, the
Company must receive consent from the lender prior to the declaration or
payment of any dividends. At September 30, 1997, the Company was in
compliance with all covenants described above.
The credit agreement was amended effective October 10, 1997 in order to
provide financing to support the operation of a new distribution facility in
St. Louis, Missouri (See Note 13). The amendment increased the borrowing
limit to $15,000,000 with an option to borrow an additional $3,000,000 for a
90-day period twice a year. The amendment also provided for an additional
$10 million facility which expires in April 1998 and is collateralized by
specific inventory. In addition, the credit agreement was extended to expire
January 2000.
The above long-term obligations, excluding obligations under the capital
lease, have the maturities as follows (See Note 11):
Year ending September 30
- ------------------------
1998 $ 285,639
1999 258,656
2000 8,281,209
2001 98,819
2002 8,622
----------
$8,932,945
==========
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 September 30, 1997 and 1996.
6. Preferred Stock:
In June 1994, the Company issued 250,000 shares of Series A Cumulative
Redeemable Convertible Preferred Stock (the "Preferred Stock") to the holder
of a senior subordinated note. The note was repaid in November 1995.
Dividends related to the preferred stock were to begin to accrue on February
4, 1997, at an annual rate of $.576 per share and were to be payable as and
when declared by the Board of Directors. The Company could redeem the
Preferred Stock at any time after April 1, 1996 at a price of $4.80 per share
or $1,200,000. The Preferred Stock was accreted to the redemption price in
lieu of cash dividends. The Preferred Stock was convertible by the holders
thereof into 250,000 shares of fully paid and nonassessable common stock of
the Company, subject to certain anti-dilution adjustments. The Company
redeemed all 250,000 shares of the Preferred Stock on December 23, 1996 for
$1,200,000.
F-12
7. Other (Income) Expense:
Other (income) expense consisted of the following for the years ended
September 30, 1997, 1996 and 1995:
1997 1996 1995
---------- ---------- ----------
Dividends $ (13,909) $ (8,658) $ (31,321)
Rent income (14,462) (12,462) (15,886)
Royalties (34,568) (34,628) -
Gain on marketable
securities and
investments (99,831) (324,244) (122,832)
Loss (gain) from
disposition of fixed
assets (12,689) (264,516) 11,140
Gain on sale of beer
distributorship and
distribution rights (1,102,205) - (35,000)
Other (75,069) (52,320) (34,644)
----------- ---------- ----------
$(1,352,733) $ (696,828) $ (228,543)
=========== ========== ==========
On October 4, 1996, the Company sold all beverage products and inventory
manufactured or supplied to Stroh Brewing Company (successor in interest to
G. Heileman Brewing Company) and Minnesota Brewing Company (together the
"Suppliers"), the distributorship agreements with the Suppliers, accounts
receivable and certain equipment for a purchase price of $2.4 million, subject
to post-closing adjustments as defined in the Asset Purchase Agreement. The
gain associated with disposition of the assets was $1,102,205. The Company
then closed the Denver distribution facility.
8. Income Taxes:
Components of income tax expense (benefit) for the fiscal years ended
September 30, 1997, 1996 and 1995 consisted of the following:
1997 1996 1995
----------- ---------- ----------
Current:
Federal $ 1,201,058 $ 865,764 $ 385,077
State 156,112 65,003 47,596
----------- ---------- ----------
1,357,170 930,767 432,673
----------- ---------- ----------
Deferred:
Federal (7,689) 34,215 161,712
State (975) 2,737 19,988
----------- ---------- ----------
(8,664) 36,952 181,700
----------- ---------- ----------
Provision for income
taxes $ 1,348,506 $ 967,719 $ 614,373
=========== ========== ==========
F-13
The difference between the Company's income tax expense as reported 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 September 30, 1997, 1996 and 1995:
1997 1996 1995
----------- ---------- ----------
Tax at statutory rate $ 1,118,274 $ 783,392 $ 522,217
Amortization of
goodwill 14,255 21,300 22,692
Nondeductible business
expenses 15,207 17,504 17,040
State income taxes, net of
federal tax benefit 102,397 44,708 44,605
Other 98,373 100,815 7,819
----------- ---------- ----------
$ 1,348,506 $ 967,719 $ 614,373
=========== ========== ==========
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities giving rise to the net deferred tax asset at
September 30, 1997 and 1996 relate to the following:
1997 1996
---------- ----------
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 75,892 $ 71,939
Accrued vacation 29,896 32,330
Net operating loss carryforwards 36,796 36,640
Inventory 64,458 27,138
Other 16,174 16,136
---------- ----------
223,216 184,183
Noncurrent:
Net operating loss carryforwards 146,388 182,759
---------- ----------
Total deferred tax assets $ 369,604 $ 366,942
========== ==========
Deferred tax liabilities:
Current:
Unrealized gains on marketable
securities $ 32,412 $ 28,785
Excess book over tax trade discounts 71,787 80,189
---------- ----------
104,199 108,974
---------- ----------
Noncurrent:
Excess tax over book depreciation 169,861 161,923
Unrealized gains on investments
available-for-sale 171,985 288,227
Other - 9,165
---------- ----------
341,846 459,315
---------- ----------
Total deferred tax liabilities $ 446,045 $ 568,289
========== ==========
F-14
Net deferred tax assets (liabilities):
Current $ 119,017 $ 75,209
Noncurrent (195,458) (276,556)
---------- ----------
$ (76,441) $ (201,347)
========== ==========
The Company did not record any valuation allowances against deferred tax
assets at September 30, 1997 or 1996 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 Sheya Brothers in 1993. The utilization of the net operating
loss of $498,000 at September 30, 1997 is limited (by Internal Revenue Code
Section 382) to approximately $100,000 per year through 2002.
9. Profit Sharing Plan:
The Company has a profit sharing plan covering substantially all full-time
employees. The Company makes contributions of not less than 1% of qualified
employees' gross wages. Employees may also make additional voluntary
contributions of which the first 6% contributed is matched 50% by the Company.
The Company contributed $143,098, $196,552 and $181,343, (net of employee
forfeitures) to the profit sharing plan during the years ended September 30,
1997, 1996, and 1995, respectively.
10. Related Party Transactions:
In 1995, the Company made an advance of $125,000 to an officer of the Company.
The balance of the note receivable, plus accrued interest was $130,795 and
$144,695 at September 30, 1997 and 1996, respectively. Total interest
recognized on the advance was $11,100 and $19,695 in fiscal 1997 and 1996,
respectively. The note was paid in full in December 1997. Based on
discounted cash flows using current estimated market rates of similar
arrangements, the fair value of the note approximates carrying value at
September 30, 1997.
The Company was charged $60,000 by AMCON Corporation ("AMCON"), the former
parent of the Company for each of the years ended September 30, 1997, 1996
and 1995, as consideration for office rent and management services, which is
included in selling, general and administrative expenses.
The remaining interest in a condominium and furnishings and related mortgage
loan, was transferred from AMCON Corporation to the Company in 1992, as
partial settlement of intercompany balances. The condominium is used by the
Company in furtherance of its business strategies. Under a profit sharing
agreement with AMCON, the greater of $400,000 of the net gain or one-half of
the net gain from the ultimate sale of the real estate will be allocated to
AMCON. The Company estimates the amount of gain payable to AMCON had the real
estate sold on September 30, 1997 would have been $480,000.
11. Commitments:
The Company leases certain office equipment under a capital lease. The
carrying value of these assets was $ 189,917 and $228,967 as of September 30,
1997 and 1996, respectively, net of accumulated amortization of $63,943 and
$24,893.
F-15
The Company leases various office and warehouse facilities and equipment under
noncancelable operating leases. Rent charged to expense during the years
ended September 30, 1997, 1996 and 1995 under such lease agreements was
$644,753, $731,944 and $892,202, respectively. As of September 30, 1997,
minimum future lease commitments are as follows:
Year ending September 30,
Capital Operating
Lease Lease
---------- ----------
1998 $ 62,735 $ 546,835
1999 62,735 374,303
2000 62,735 290,093
2001 36,590 248,422
2002 - 15,850
Thereafter - 224,450
---------- ----------
Total minimum lease payments 224,795 $1,699,953
Less amount representing interest 34,878 ==========
----------
Present value of net minimum
lease payments $ 189,917
==========
12. Stock Option Plan:
In June 1994, the Company adopted the 1994 Stock Option Plan (the "Stock
Option Plan"). The maximum number of shares of common stock which may be
issued pursuant to the Stock Option Plan is 300,000. On December 15, 1995,
options to purchase 22,000 shares of common stock were issued to management
employees at an exercise price of $2.78. On September 27, 1996, such options
were canceled and reissued at an exercise price of $1.63. All of the options
were fully vested and exercisable at September 27, 1996 and expire ten years
after the initial grant date.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). Accordingly, no compensation cost has been
recognized for the stock option plan. Had compensation cost for the Company's
stock option plan been determined on the fair value at the grant date for
awards issued in or subsequent to 1995 consistent with the provisions of SFAS
123, the Company's net income and earnings per share on a pro forma basis
would have been as follows:
1997 1996 1995
----------- ----------- -----------
Net income - as reported $ 1,940,534 $ 1,253,041 $ 821,560
Net income - pro forma $ 1,940,534 $ 1,240,451 $ 821,560
Earnings per share - as reported $ 0.79 $ 0.51 $ 0.33
Earnings per share - pro forma $ 0.79 $ 0.50 $ 0.33
The above 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.
F-16
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
with the following weighted-average assumptions used for grants in 1996:
dividend yield of 0%; expected volatility of 58.91%; risk free interest rate
based on U.S. Treasury strip yield at the date of grant of 6.74%; and expected
lives of 7.0 years.
The table below summarizes information about stock options outstanding at of
the following fiscal year ends:
September 30, 1997 September 30, 1996 September 30, 1995
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Exercise Average Exercise Average Exercise
------------------ ------------------ ------------------
Shares Price Shares Price Shares Price
--------- ------- --------- ------- --------- -------
Outstanding beginning of period 22,000 $1.63 - - - -
Granted - - 44,000 $2.21 - -
Exercised (4,000) $1.63 - - - -
Forfeited/Expired (2,000) $1.63 (22,000) $2.78 - -
--------- ------- --------- ------- --------- -------
Outstanding exercisable at end
of period 16,000 $1.63 22,000 $1.63 - -
========= ======= ========= ======= ========= =======
Shares available for options
that may be granted 280,000 278,000 300,000
========= ========= =========
Weighed-average grant date fair value
of options, granted during the
period - exercise price equals stock
market price at grant - $1.08 -
======= ======= =======
As of September 30, 1997, the weighted-average remaining contractual life of
the options was 8.3 years.
13. Subsequent Events
On October 10, 1997, the Company purchased certain inventory and fixed assets
from Marcus Distributors, Inc. ("Marcus") of St. Louis, Missouri for $2.8
million in cash. In addition, the Company entered into a five year lease
agreement with Marcus to lease a distribution facility in St. Louis, Missouri.
The acquisition was funded through borrowings on the Facility, which was
increased in October 1997 to accommodate the purchase.
On November 10, 1997, the Company purchased all of the outstanding stock of
Food For Health Company, Inc. ("FFH"), a distributor of health and natural
foods based in Phoenix, AZ, for $4.4 million in cash. The acquisition was
funded by a $4.5 million five year term loan from a bank. The loan bears
interest at LIBOR plus 1.75% and requires monthly payments of $75,000 plus
accrued interest. The loan is collateralized by the common stock of FFH.
F-17
DIRECTORS AND CORPORATE OFFICERS
DIRECTORS
William F. Wright /1/
Chairman and Chief Corporate Officer
Kathleen M. Evans
President and Chief Executive Officer
Jerry Fleming
President and Chief Executive Officer of
Food For Health Company, Inc.
J. Tony Howard /1/ /2/
President of Nebraska Distributing Company
Allen D. Petersen /1/ /2/
Chairman and Chief Executive Officer of
American Tool Companies, Inc.
/1/ Audit Committee
/2/ Compensation Committee
CORPORATE OFFICERS
William F. Wright
Chairman and Chief Corporate Officer
Kathleen M. Evans
President and Chief Executive Officer
Michael D. James
Secretary, Treasurer and
Chief Financial Officer
AMCON DISTRIBUTING COMPANY
CORPORATE HEADQUARTERS
AMCON Distributing Company
10228 L Street
Omaha, Nebraska 68127
(402) 331-3727
TRANSFER AGENT
First National Bank of Omaha
One First National Center
Omaha, Nebraska 68102-1596
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
1299 Landmark Center
Omaha, Nebraska 68102
ANNUAL STOCKHOLDERS' MEETING
To be determined
ADDITIONAL INFORMATION
The Form 10-K Annual Report to the Securities and
Exchange Commission provides certain additional
information and is available 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 NASDAQ SmallCap Market. The
symbol for the Common Stock is "DIST".
WEB SITE
http://www.amcon-dist.com
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of AMCON Distributing Company:
Our report on the financial statements of AMCON Distributing Company is
included in this Form 10-K. In connection with our audit of such financial
statements, we have also audited the related financial statement schedule
listed in Item 14 for the years ended September 30, 1997, 1996 and 1995.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Omaha, Nebraska
December 1, 1997
S-1
AMCON Distributing Company
Financial Statement Schedule
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------
Net
Amounts
Balance at Provision (Written Off) Balance at
Description Beginning of Period (Benefit) Other Recovered End of Period
- ------------------ --------------------- --------- ----- ------------- -----------------------
Allowance for
doubtful accounts Oct 1, 1994 $177,044 $(32,775) - $ 33,062 Sep. 30, 1995 $177,331
Oct 1, 1995 177,331 3,836 - 14,794 Sep. 30, 1996 195,961
Oct 1, 1996 195,961 11,357 - (1,069) Sep. 30, 1997 206,249
S-2