EXHIBIT 13.1
Annual Report to Stockholders
for the Fiscal Year Ended
September 30, 1999
TO OUR SHAREHOLDERS:
For fiscal year 1999, your Company reported record sales and record net income
for the fourth consecutive year. Sales increased 31% over comparable year
sales. Net income per share increased 59% over comparable year net income per
share. We, at AMCON, are extremely proud of this. At the same time, we
recognize that diligent effort is required in the current fiscal year to
continue growth. We have "set the bar high", but will not be deterred from
continuing our efforts for success in the future.
We recognize that part of our sales and earnings for the fiscal year 1999 were
aided by extraordinary price increases in some of our basic products. Similar
price increases of the magnitude experienced last year are not anticipated in
the present fiscal year. This means that, for the present fiscal year, we
must not only make up for those price increases but must also work hard in all
areas to continue our growth. Hopefully, some of that growth can be achieved
through strategic acquisitions. The rest must come from growth in our core
businesses. We have accomplished that in the past through the dedicated
efforts of all of our people at AMCON Distributing and Food For Health and its
subsidiaries. We believe that we can continue to achieve results through the
dedication and efforts of our people who continue to be your Company's
greatest assets.
As our success continued through last year, our Board of Directors determined
it was appropriate to return more of our earnings to you, our shareholders.
In December of last year, a $0.02 per share dividend was declared by the
Board. The $0.02 per share dividend continued thereafter on a quarterly
basis. Our Board has now determined that the dividend should be increased to
$0.03 per share on a quarterly basis. Although we cannot predict the future,
nor can we guarantee continuation, it is our hope that dividends will continue
with regularity.
In December of this year, our Board also declared a 10% stock dividend. This
means that, for every 10 shares held by a shareholder, an additional one share
will be received as a dividend. Our hope in declaring the stock dividend is
to increase the number of shares in our Company that are publicly traded. As
the number of shares that are publicly traded grows, we hope to achieve a
market value that, in our opinion, will more accurately reflect the true value
of our Company.
FINANCIAL REVIEW
Our new sales record of $385.5 million (a 31% increase over our previous
annual record) was achieved through the twin engines of growth: growth of our
core businesses; and the addition of companies through acquisition. As noted
earlier, per share income for the year increased 59% (versus the 31% increase
in sales). We believe that this shows success in our efforts to not only grow
the Company but make the Company more efficient and profitable. We will
endeavor to maintain this trend in the future.
STRATEGIES
We continue to seek out opportunities for acquisition both in the traditional
distribution business and in the health food sector.
This last fiscal year, we acquired all of the stock of Chamberlin's Natural
Food, Inc. and Health Food Associates, Inc. ("Akin's"). Both Chamberlin's and
Akin's are retail chains selling in the health food segment. Chamberlin's,
headquartered in Orlando, Florida, operates 7 health and natural food and
product stores in the Orlando area and was designated last year by an industry
trade publication as the #1 health food retail chain in America. Akin's,
headquartered in Tulsa, Oklahoma, is a highly acclaimed chain of 6 health and
natural product stores located in Topeka, Kansas; Springfield, Missouri;
Lincoln, Nebraska; Oklahoma City, Oklahoma; and Tulsa, Oklahoma (2). We
encourage all of our shareholders and friends to visit these locations when
you are in the area. We are certain that these stores and the people working
there will make you proud to be associated with our Company.
As always, both of us are interested in hearing from you with any questions,
suggestions or comments. As you undoubtedly can tell, we are excited about
our future. We appreciate the continuing support you, our shareholders, give
us. We appreciate the support of our suppliers and customers and, as
mentioned earlier, we appreciate the efforts of every single one of our
employees - they are AMCON.
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 Consolidated Financial Statements and Notes thereto included in this
Annual Report.
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Sales................................... $ 385,501 $ 294,281 $ 178,991 $ 176,145 $ 169,790
Cost of sales........................... 343,021 262,633 159,435 155,885 149,756
--------- --------- --------- --------- --------
Gross profit............................ 42,480 31,648 19,556 20,260 20,034
Operating expense....................... 34,615 26,209 16,753 17,504 17,183
--------- --------- --------- --------- ---------
Income from operations.................. 7,865 5,439 2,803 2,756 2,851
Interest expense........................ 1,755 1,814 867 1,149 1,543
Other (income) expense, net............. (72) (276) (1,353) (697) (228)
--------- --------- --------- --------- ---------
Income before income taxes 6,182 3,901 3,289 2,304 1,536
Income taxes 2,346 1,543 1,348 968 614
--------- --------- --------- --------- ---------
Net income.............................. 3,836 2,358 1,941 1,336 922
Accretion of preferred stock /1/ ....... - - - (83) (100)
--------- --------- --------- --------- ---------
Net income.............................. $ 3,836 $ 2,358 $ 1,941 $ 1,253 $ 822
========= ========= ========= ========= =========
Earnings per common and common
equivalent share attributable
to common shareholders:
Basic: $ 1.55 $ 0.96 $ 0.79 $ 0.51 $ 0.33
========= ========= ========= ========= =========
Diluted: $ 1.48 $ 0.93 $ 0.79 $ 0.51 $ 0.33
========= ========= ========= ========= =========
Weighted average shares outstanding:
Basic................................ 2,479,902 2,458,062 2,447,782 2,445,903 2,478,047
Diluted.............................. 2,595,836 2,535,451 2,451,462 2,445,903 2,478,047
2
(Dollars in thousands)
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FISCAL YEAR ENDED SEPTEMBER 30, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Working capital ....................... $ 18,737 $ 18,474 $ 11,158 $ 11,572 $ 12,098
Total assets............................ 68,589 39,644 23,497 23,026 22,919
Long-term obligations and subordinated
debt /2/............................... 38,129 19,207 9,123 10,245 12,705
Shareholders' equity.................... 13,258 /4/ 9,605 7,208 /3/ 6,621 5,122
- ------------------------
/1/ Preferred stock valued at $1,000,000 was issued in partial payment
for repurchase of warrants which were originally issued in conjunction with a
$4 million loan made in 1989 by MLBC Inc. to AMCON. The Company had the right
to redeem the preferred stock at any time after April 1, 1996 for $1,200,000.
The preferred stock accreted to the redemption price in lieu of cash dividends
and was redeemed in December 1996.
/2/ Includes current portion of long-term obligations and subordinated
debt.
/3/ Reflects redemption of preferred stock described in footnote 1 above
for $1,200,000 in December 1996.
/4/ Includes dividends paid of $198,392.
SELECTED QUARTERLY FINANCIAL DATA (unaudited)
The following table sets forth selected financial information for each of the
eight quarters in the two-year period ended September 30, 1999. 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.
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1999 Fourth Third Second First
- --------------------------------------------------------------------------------------------------------
Sales................................... $109,501 $103,651 $90,040 $82,309
Gross profit............................ 11,814 10,665 9,353 /1/ 10,646 /1/
Income before taxes..................... 1,001 1,360 1,425 2,395
Net income.............................. 682 850 861 1,443
Earnings per common and common
equivalent share:
Basic: $ 0.27 $ 0.34 $ 0.35 $ 0.58
======== ======== ======= =======
Diluted: $ 0.26 $ 0.33 $ 0.34 $ 0.56
======== ======== ======= =======
3
(Dollars in thousands)
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FISCAL YEAR ENDED SEPTEMBER 30, 1998 Fourth Third Second First
- --------------------------------------------------------------------------------------------------------
Sales................................... $ 82,735 $ 77,651 $68,946 $64,949
Gross profit............................ 8,733 8,338 7,412 7,166
Income before taxes..................... 1,104 1,236 406 1,155
Net income.............................. 664 754 268 672
Earnings per common and common
equivalent share:
Basic: $ 0.27 $ 0.31 $ 0.11 $ 0.27
======== ======== ======= =======
Diluted: $ 0.26 $ 0.29 $ 0.11 $ 0.27
======== ======== ======= =======
/1/ Gross profit in the first and second quarters include margin from a
significant cigarette price increase which took affect during the first
quarter.
Quarterly earnings 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 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 24, 1999 and September 25, 1998. 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 10, 1999, the Company had approximately 1,000
holders of record of its shares and the Company believes that approximately
1,600 additional persons hold shares beneficially.
COMMON STOCK
---------------------
HIGH LOW
------ ------
Year ended September 24, 1999:
4th Quarter $10.00 $ 7.38
3rd Quarter 10.25 6.00
2nd Quarter 8.50 5.69
1st Quarter 8.13 4.25
Year ended September 25, 1998:
4th Quarter $ 8.25 $ 6.00
3rd Quarter 9.75 4.25
2nd Quarter 5.25 3.25
1st Quarter 4.38 2.75
4
During the fiscal year ended September 24, 1999, the Board of Directors
declared cash dividends of $0.02 per share per quarter or $0.08 per share for
the year. In December 1999, the Board of Directors declared a $0.03 per share
cash dividend and a special 10% stock dividend. The Board of Directors will
evaluate payment of future dividends at their regular meetings. In addition
to possible dividends in the future, retained earnings will be used to finance
acquisitions of other distributing and retail companies, develop new products,
expand markets and for other corporate purposes. The payment of dividends
requires the prior approval of the lender under various borrowing arrangements
entered into by the Company.
On September 27, 1996, AMCON issued options to purchase 22,000 shares of its
common stock to management employees at an exercise price of $1.63. On
November 10, 1997, options to purchase 140,000 shares of common stock were
issued to management employees at exercise prices of $2.88 and $3.16. During
fiscal 1999, options to purchase 95,000 shares of common stock were issued to
management employees at exercise prices between $6.75 and $9.90. At
September 24, 1999, options to acquire 120,200 shares of common stock were
fully vested and exercisable.
In November 1997, AMCON issued options to acquire 30,000 shares of its common
stock at an exercise price of $2.875 per share. The options were issued to
two independent directors of the Company as consideration for past service to
the Company. The options have a termination date of November 10, 2007 and
vest over a three year period. In December 1998, options to acquire 20,000
shares of AMCON's stock were issued to the Company's four independent
directors at an exercise price of $6.75 per share. The options were fully
vested at the date of grant. In June 1999, AMCON issued options to acquire
8,000 shares of its common stock to its four independent directors at an
exercise price of $9.00 per share. The options were fully vested at the date
of grant. At September 24, 1999, 46,000 options issued to independent
directors were fully vested and exercisable.
MANAGEMENT'S DISCUSSION AND ANALYSIS
AMCON Distributing Company (together with its wholly-owned subsidiary, Food
For Health Co., Inc. and its wholly-owned subsidiaries, U.S. Health
Distributors, Inc., Chamberlin's Natural Foods, Inc. and Health Food
Associates, Inc.) operates 9 distribution centers and 13 retail health food
stores in the Great Plains, Rocky Mountain, Western and Southern regions of
the United States. As used herein, unless the context indicates otherwise,
the term "ADC" means the separate company operations or "traditional
distribution business" of AMCON Distributing Company, the term "FFH" means the
"natural food distribution business" of Food For Health Co., Inc. and its
wholly-owned subsidiary, U.S. Health Distributors, Inc. ("USHD"). The terms
"CNF" and "HFA" represent the "retail health food stores" operated by
Chamberlin's Natural Foods, Inc. and Health Food Associates, Inc.,
respectively, both wholly-owned subsidiaries of FFH, and the term "AMCON" or
the "Company" means AMCON Distributing Company and its subsidiaries.
AMCON'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 24, 1999, September 25, 1998 and September 26, 1997. Each
fiscal year was comprised of 52 weeks.
5
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,
1999, 1998, and 1997:
Fiscal Year Ended September 30,
-------------------------------
1999 1998 1997
-------- -------- --------
Sales.......................................... 100.0% 100.0% 100.0%
Cost of sales.................................. 89.0 89.3 89.1
------- ------- --------
Gross profit................................... 11.0 10.7 10.9
Selling, general and
administrative expense...................... 8.5 8.5 8.9
Depreciation and amortization.................. 0.5 0.4 0.5
------- ------- --------
Income from operations......................... 2.0 1.8 1.5
Interest expense............................... 0.5 0.6 0.5
Other (income) expense, net.................... (0.1) (0.1) (0.8) /1/
------- ------- --------
Income before income taxes..................... 1.6 1.3 1.8
Income tax expense............................. 0.6 0.5 0.7
------- ------- --------
Net income 1.0% 0.8% 1.1%
======= ======== ========
/1/ Other income of $1.4 million or 0.8% of sales for the fiscal year
ended September 30, 1997 was generated primarily by the gain associated with
the sale of the Denver beer distributorship of $1.1 million or 0.6% of sales.
6
YEAR ENDED SEPTEMBER 30, 1999 VERSUS YEAR ENDED SEPTEMBER 30, 1998. Sales for
the year ended September 30, 1999 increased 31% to $385.5 million, compared to
$294.3 million for the year ended September 30, 1998. Sales from the
traditional distribution business through September 30, 1999 were $72.8
million over the prior year. Component increases were as follows: Cigarette
sales increased approximately $65.5 million over the prior year (approximately
61% was due to price increases over the past 12 months and the balance was due
to increased volume). Sales of non-cigarette products increased by $7.3
million primarily due to increased volume. Sales from the health and natural
foods distribution business increased by $11.4 million. This increase was
partially due to $5.8 million of sales generated by USHD which was acquired by
FFH in November 1998. Additionally, since FFH was acquired mid-way through
the first quarter of fiscal 1998, FFH's sales in the first quarter of 1999
were approximately $4.1 million greater than the prior year. New sales
generated by the retail health food stores acquired by FFH during fiscal 1999
totaled $7.0 million. CNF, acquired on March 29, 1999, contributed $6.4
million of new sales and HFA, acquired on September 15, 1999, contributed
$569,000 of new sales.
Gross profit increased 34.2% to $42.5 million for the year ended September 30,
1999 compared to $31.6 million for the prior fiscal year. Gross profit as a
percent of sales increased to 11.0% for the period compared to 10.7% for the
year ended September 30, 1998. The increases in gross profit and gross profit
percentage were primarily attributable to a substantial cigarette price
increase during the first quarter of the year which resulted from a settlement
that was reached between the major tobacco manufacturers and the various
states that had filed liability suits against the industry. This unusual
price increase accounted for approximately $4.2 million in gross margin for
the year ended September 30, 1999 versus $1.5 million in the prior year. It
is expected that profit margins in fiscal 2000 and thereafter will return to
historical levels. Gross margin from the distribution businesses operated by
ADC and FFH increased by $5.2 million due to increases in volume and an
additional 6 weeks of operations by FFH, which was acquired in mid-November
1997. In addition, gross profit generated by USHD and the retail businesses,
CNF & HFA, which were acquired during the current fiscal year, was $4.5
million. These increases in gross profit were partially offset by a $2.0
million LIFO inventory adjustment during the second, third and fourth
quarters.
While sales of cigarettes have increased consistently over the past six years,
sales of the Company's private label cigarettes have declined. Since 1993,
when cigarette manufacturers substantially reduced the price of premium brand
cigarettes, the premium cigarette brands have thrived at the expense of most
generic brands. Also, cigarette price increases since 1993 have been
identical for both premium and the Company's generic brands. In November
1998, an announcement was made that a settlement had been reached between the
major tobacco manufacturers and the various states that had filed liability
suits against the industry. Immediately thereafter, the major cigarette
manufacturers increased the price of cigarettes by 30 - 35% on both premium
and generic brands, including the Company's private label brand. In late
August 1999, prices charged by manufacturers were again increased another
9 - 11%, in advance of the scheduled increase in federal excise tax of $1.00
per carton effective on January 1, 2000. As a result, management anticipates
the volume of the Company's private label cigarettes will continue to decline
7
over the next few years. The gross profit derived from sales of the Company's
private label cigarettes was $549,000 less in fiscal 1999 than in fiscal 1998.
Management estimates that gross profit from private label cigarettes sales
could decrease by another $300,000 to $500,000 in fiscal 2000.
For the year ended September 30, 1999, total operating expense, which includes
selling, general and administrative expenses, depreciation and amortization,
increased 32.1% to $34.6 million compared to fiscal 1998. The increase was
partially due to expenses attributable to USHD, CNF and HFA, which were
acquired during fiscal 1999. These subsidiaries accounted for $4.4 million of
the increase in operating expenses. In addition, since FFH was purchased
midway through the first quarter of fiscal 1998, FFH's operating expenses in
the prior year represent approximately 88% of a full 12 month period. As a
result, FFH's operating expenses were approximately $1.0 million greater in
1999 than 1998. The remaining increase in operating expenses was due to
additional expenses incurred by ADC to support increased volume for the year.
As a percentage of sales, total operating expense increased to 9.0% from 8.9%
during the same period in the prior year. This increase was primarily due to
the acquisition of USHD, CNF and HFA, whose operating expenses as a percent of
sales are much higher than AMCON's historical average.
As a result of the above, income from operations for the fiscal year ended
September 30, 1999 increased by $2.4 million to $7.9 million.
Interest expense for the fiscal year ended September 30, 1999 decreased 3.3%
to $1.75 million compared to $1.81 million during the prior year. The
decrease was primarily due to a 40 to 80 basis point reduction in the average
borrowing rate during the year ended September 30, 1999 combined with a $1.4
million reduction in the average amount borrowed by ADC. These factors more
than offset an increase in the average amount borrowed by FFH during the year
to finance internal growth and the acquisition of USHD.
Other income for the year ended September 30, 1999 of $72,000 was generated by
gains associated with the sale of fixed assets, royalty payments,
miscellaneous industry promotional income and dividends received on investment
securities. Other income for the year ended September 30, 1998 of $276,000
was generated from similar activities as well as the gain associated with the
sale of marketable securities.
As a result of the above factors, net income for the fiscal year ended
September 30, 1999 was $3,835,529 compared to $2,358,186 for fiscal 1998.
The distribution industry is in a state of consolidation as intense
competition and pressure on profit margins continue to affect both large and
small distributors. The retail natural foods industry is highly fragmented,
with more than 9,000 stores operated independently or as part of small chains.
The two leading natural food chains continue to expand their geographic
markets and acquire smaller independent competitors. In addition,
conventional supermarkets and mass market outlets have also begun to increase
their emphasis on the sale of 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
the Company's retail stores. While the Company sells a diversified product
line, it remains dependent on cigarette sales which represented approximately
8
65% of its revenue and 40% of its gross margin in fiscal 1999. Changes in
manufacturers' cigarette pricing affects the market for generic and private
label cigarettes and net income is heavily dependent up 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 other distributing companies and retail stores in
similar business lines and further sales of assets that are no longer
essential to its primary business activities such as investments in equity
securities.
Investments in equity securities at September 30, 1999 and 1998 consisted
primarily of 83,000 shares of Consolidated Water Company Limited ("CWC,"
formally Cayman Water Company Limited), a public company which is listed on
NASDAQ. The Company's basis in the securities is $151,000 and the fair market
value of the securities was $540,000 and $508,000 on September 30, 1999 and
September 30, 1998, respectively. The unrealized gain on CWC shares was
approximately $389,000 and $358,000 on September 30, 1999 and 1998,
respectively. The fair market value of the CWC shares on December 10, 1999
was $539,500.
YEAR ENDED SEPTEMBER 30, 1998 VERSUS YEAR ENDED SEPTEMBER 30, 1997. Sales for
the year ended September 30, 1998 increased 64.4% to $294.3 million, compared
to $179.0 million for the year ended September 30, 1997. Sales attributable
to the new St. Louis distribution center, which was purchased in October 1997,
and to FFH, a distributor of health and natural food products, which was
purchased in November 1997, were $76.3 million, of which $36.2 million related
to cigarette sales. Excluding the effects of these acquisitions, sales from
the traditional distribution business increased by 21.8% or $39.0 million over
the prior year. Component increases were as follows: Cigarette sales
increased approximately $31.7 million over the prior year, with approximately
$13.3 million due to price increases and $18.4 million due to increased
volume. Sales of other products increased by $7.2 million primarily due to
increased volume. There were no sales of beer products during the fiscal year
ended September 30, 1998 due to the sale of the Denver beer distributorship in
October 1996. This accounted for a $538,000 decrease in sales of beer
products as compared to the prior year.
Gross profit increased 61.8% to $31.6 million for the fiscal year ended
September 30, 1998 compared to $19.6 million for the prior fiscal year. The
increase in gross profit was primarily attributable to the new St. Louis
distribution center and FFH which accounted for $10.1 million of the $12.1
million increase in gross profit for the year. Cigarette price increases
during the fiscal year accounted for an additional $485,000 in gross profit as
compared to the prior year and partially offset a decrease of $935,000 in
purchase discounts received from cigarette manufacturers.
Gross profit as a percent of sales declined slightly from 10.9% in fiscal 1997
to 10.7% in fiscal 1998. The decline was due to a decrease of approximately
1.8% in profit margin from the Company's traditional distribution business
resulting from a large increase in sales of lower-margin products (principally
cigarettes) primarily in the Company's new St. Louis market. Because of lower
margins realized on cigarettes, a large increase in cigarette sales adversely
affected the profit margin percentage. The decrease in profit margin was also
9
attributable to a reduction in purchase discounts received from cigarette
manufacturers which had the effect of increasing the cost of goods sold for
cigarettes. Purchase discount programs vary by manufacturer and, although all
of the purchase discount programs offered by cigarette manufacturers are
computed on a cents-per-carton-sold basis, the criteria necessary for meeting
higher purchase discount brackets, such as market share by cigarette category,
vary from year to year as well. Therefore, it is possible to have increased
sales in certain product categories, but receive less purchase discounts.
This was the case for the Company in fiscal 1998. The decline in profit
margin from the Company's traditional distribution business was substantially
offset by additional profit margin realized by FFH, which added approximately
1.6% to the Company's profit margin percentage. In general, FFH products have
a higher profit margin than cigarettes and many of the Company's other
products.
Total operating expense, which includes selling, general and administrative
expenses and depreciation and amortization, increased 56.4% or $9.5 million
compared to fiscal 1997. The increase was primarily due to expenses
associated with the new St. Louis distribution center and FFH which accounted
for $9.2 million of the increase. As a percentage of sales, total operating
expense decreased to 8.9% from 9.4% during the same period in the prior year.
The decrease in operating expenses as a percentage of sales is due to
efficiencies gained through increased volume in the traditional distribution
business which were partially offset by the proportionately higher operating
costs incurred by FFH during the period.
As a result of the above, income from operations for the fiscal year ended
September 30, 1998 increased 94% to $5.4 million.
Interest expense for the fiscal year ended September 30, 1998 increased
109.2%, or $947,000, compared to the prior fiscal year. The increase was
primarily due to a new $4.5 million acquisition loan utilized to purchase FFH,
a $5.3 million increase in the average amount borrowed under the Company's
revolving credit facility with a bank during fiscal 1998, and interest expense
of $249,000 associated with FFH's revolving credit facility. The Company's
revolving credit facility was also utilized to finance the acquisition of the
new St. Louis distribution center, the expansion of the Bismarck, ND
distribution center, and to finance an increase in inventory during the
period.
Other income of $276,000 for the fiscal year ended September 30, 1998 was
generated from gains on the sale of marketable securities and fixed assets,
royalty payments associated with the sale of the Denver non-alcoholic beverage
business, and rent and interest income. Other income of $1.4 million for the
fiscal 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 for the fiscal year ended
September 30, 1998 was $2,358,186 compared to $1,940,534 for fiscal 1997.
10
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended September 30, 1999, AMCON utilized cash flow in
operating activities to finance increases in accounts receivable due to the
significant increase in the selling price of cigarettes and to support
increases in non-tobacco related inventory from both traditional and health
food businesses. Additionally, cash was provided by operating activities
through increased accounts payable related to the increases in inventory.
Cash was utilized in investing activities during the fiscal year to purchase
the common stock of USHD in November 1998, to purchase the common stock of CNF
in April 1999, and to purchase the common stock of HFA in September 1999 for
$1.3 million, $2.2 million and $3.4 million, respectively. In addition, cash
was utilized to repay CNF's existing short and long-term debt of $2.8 million.
Cash was provided by financing activities through increases in the FFH
revolving credit facility of $1.9 million, from term notes to finance the
purchase of USHD and HFA totaling $11.1 million, and through increases in
ADC's revolving credit facility to finance the purchase of CNF and HFA of $8.9
million. Cash of $149,000 was also used to pay dividends to common
shareholders.
The Company makes capital expenditures primarily for equipment for its
distribution facilities including computers, delivery vehicles and warehouse
equipment. The Company has historically financed its working capital
requirements with a combination of internally generated funds and bank
borrowings. Cash provided by operations approximated $2,373,000 and $688,000
for the fiscal years ended September 30, 1999 and 1998, respectively. Capital
expenditures during those periods equaled approximately $762,000 and $782,000,
respectively. The remaining cash provided by operations was applied to debt
service. The Company anticipates that capital expenditures during fiscal 2000
will be approximately $850,000 and will be used for the purposes stated above.
The Company had working capital of approximately $18.7 million as of September
30, 1999. The Company's ratio of debt to equity was 4.17 at September 30,
1999 compared to 3.13 at September 30, 1998.
AMCON maintains two revolving credit facilities, the ADC revolving credit
facility (the "Facility") and the FFH revolving credit facility (the "FFH
Facility"). The Facility was amended in September 1999 to increase the
primary borrowing limit from $20 million to $25 million and remove the
additional $10 million facility which was collateralized by specific
inventory. The Facility allows ADC to borrow up to $25 million at any time,
subject to eligible accounts receivable and inventory requirements, and
provides for an additional $1.5 million facility to be used for transportation
equipment purchases. The Facility bears interest at the bank's base rate
("Prime") less 0.5% or LIBOR plus 1.75%, as selected by ADC. As of September
30, 1999, ADC had borrowed approximately $18.3 million under the Facility.
The Facility is collateralized by all equipment, general intangibles,
inventories and accounts receivable, and with a first mortgage on the owned
distribution center. The Facility expires on February 25, 2002.
The Facility contains covenants which, among other things, set forth certain
financial ratios and net worth requirements which adjust semiannually or
annually as specified in the Facility. For fiscal 2000 and 1999, the Facility
includes covenants that (i) restrict the incurrence of additional debt, (ii)
11
restrict payments, prepayments and repurchases of subordinated debt or capital
stock, (iii) restrict mergers and acquisitions and changes in business or
conduct of business and (iv) require the maintenance of certain financial
ratios and net worth levels including an average annual fixed charge ratio of
1.1 to 1.0, an average annual debt service coverage ratio of 1.50 to 1.0, a
debt to equity ratio of 4.0 to 1.0 (excluding debt associated with the
acquisition of FFH) and minimum tangible net worth of $4,500,000. In
addition, AMCON may not pay dividends with respect to its Common Stock without
the consent of the lender of the Facility. In December 1998, AMCON received
consent to pay cash dividends of up to $0.02 per share per quarter.
The FFH Facility, which includes a separate revolving line of credit of up to
$1.0 million for USHD, was amended in November 1999 to increase the amount
provided for maximum borrowings from $6 million to $8 million. Borrowings
under the FFH Facility are collateralized by the assets of FFH and are
guaranteed by AMCON. Amounts under the FFH Facility bear interest at Prime
less 0.5% or LIBOR plus 2.00%, as selected by FFH. A commitment fee of .25%
of the annual average unutilized amount of the commitment is required. As of
September 30, 1999, FFH had borrowed approximately $5.3 million under the FFH
Facility. The FFH Facility expires on February 25, 2002.
The FFH Facility contains covenants which, among other things, set forth
certain financial ratios and net worth requirements which adjust semiannually
or annually as specified in the FFH Facility. For fiscal 2000 and 1999, the
FFH Facility includes covenants that (i) restrict the incurrence of additional
debt, (ii) restrict payments, prepayments and repurchases of subordinated debt
or capital stock, (iii) restrict mergers and acquisitions and changes in
business or conduct of business and (iv) require the maintenance of certain
financial ratios and net worth levels including a debt to equity ratio of 4.0
to 1.0 and minimum tangible net worth of $200,000. In addition, FFH may not
pay dividends with respect to its Common Stock without the consent of the
lender of the FFH Facility. As of September 30, 1999, FFH was not in
compliance with the debt to equity ratio or the net worth covenant due to the
acquisition of HFA in September 1999. However, FFH received waivers from the
lender for these covenant violations at September 30, 1999.
In November 1997, AMCON borrowed $4.5 million from a bank to finance the
purchase of the common stock of FFH (the "Acquisition Loan"). The Acquisition
Loan has a term of five years, bears interest at Prime less 0.5% or LIBOR plus
1.75%, as selected by AMCON, and requires monthly payments equal to accrued
interest plus principal payments of $85,096, which began in August 1998. As
of September 30, 1999, the outstanding balance of the Acquisition Loan was
$3.2 million.
On November 20, 1998, FFH purchased all of the outstanding stock of U.S.
Health Distributors, Inc. ("USHD"), a distributor of health and natural foods
based in Melbourne, FL, for $1.3 million in cash. The acquisition was funded
by a $1.1 million five and one-half year term loan from a bank (the "USHD
Acquisition Loan"). The loan bears interest at Prime less 0.5%, requires
payments of interest only for the first six months and monthly principal
payments for the term of the loan. The loan is collateralized by the common
stock of USHD. As of September 30, 1999, the outstanding balance of the USHD
Acquisition Loan was $1.0 million.
12
In January 1999, ADC utilized proceeds from the Facility to satisfy its
obligation associated with a $1,250,000 non-revolving line of credit with a
bank which was used to finance the purchase of trucks and delivery equipment.
In March, 1999, FFH, purchased all of the outstanding stock of CNF (d/b/a
Chamberlin's Market & Cafe), a chain of six health and natural food product
retail stores based in Winter Park, Florida, for $2.2 million in cash. The
acquisition was funded through borrowings on the Facility. In addition, CNF's
existing short and long-term debt of $2.8 was paid in full through borrowings
under the Facility.
In September, 1999, FFH purchased of all of the outstanding stock of HFA for a
purchase price of $13.4 million. Funding for the acquisition was provided as
follows: $4.0 million through borrowings under the Facility; $2.0 million
through borrowings under an 8% Convertible Subordinated Note (the "Convertible
Note") from FFH to the sellers; and $8.0 million through borrowings under a
Collateralized Promissory Note (the "Collateralized Note") from FFH to the
sellers. A receivable of approximately $600,000 is due from the sellers based
upon purchase price adjustments outlined in the purchase agreement.
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 $800,000 per year with the balance due at maturity. The
Collateralized Note is collateralized by a pledge of the stock of HFA. The
principal balance of the Convertible Note may be converted into stock of FFH
under circumstances set forth in the Convertible Note. As of September 30,
1999, the outstanding balances of the Convertible Note and the Collateralized
Note were $2.0 million and $8.0 million, respectively.
As of September 30, 1999, the Company had additional outstanding long-term
indebtedness of approximately $318,000 consisting of capital leases for
computer equipment, the current portion of which equaled approximately
$144,000. The interest rates on the notes relating to such indebtedness range
from 6.9% to 9.5% per annum.
Management believes that funds generated from operations, supplemented as
necessary with funds available under the Facility and the FFH Facility, will
provide sufficient liquidity to cover its debt service and any reasonably
foreseeable future working capital and capital expenditure requirements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
AMCON does not utilize financial instruments for trading purposes and holds no
derivative financial instruments which could expose the Company to significant
market risk. AMCON's exposure to market risk relates primarily to its
investment in the common stock of Consolidated Water Company (formerly Cayman
Water Company), a public company traded on the Nasdaq National Market system,
and to changes in interest rates on its long-term obligations. At September
30, 1999, the Company held 83,000 shares of common stock of Consolidated Water
13
Company valued at $540,000. AMCON values this investment at market and
records price fluctuations in equity as unrealized gain or loss on
investments. At September 30, 1999, AMCON had $27.8 million of variable rate
debt outstanding, with maturities through May 2004. The interest rates on
this debt ranged from 6.81 to 7.75% at September 30, 1999. The Company has
the ability to select the bases on which its variable interest rates are
calculated and may select an interest rate based upon the lender's base
interest rate or based upon LIBOR. This provides management with some control
of AMCON's variable interest rate risk. Management estimates that AMCON's
cash flow exposure relating to interest rate risk based upon its current
borrowings is approximately $175,000 annually for each 1% change in the
lender's base interest rate or LIBOR, as applicable.
CONCERNING 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", "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.
14
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 generally accepted accounting
principles to reflect, in all material aspects, the substance of financial
events and transactions occurring during the year. PricewaterhouseCoopers
LLP, independent certified public accountants, have audited our consolidated
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
Michael D. James
Treasurer and Chief Financial Officer
November 24, 1999
15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of AMCON Distributing Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and shareholders' equity and comprehensive
income and of cash flows present fairly, in all material respects, the
consolidated financial position of AMCON Distributing Company and its
subsidiaries as of September 30, 1999 and 1998, and the consolidated results
of their operations and their consolidated cash flows for each of the three
years in the period ended September 30, 1999, in conformity with accounting
principles generally accepted in the United States. 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 of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for inventory in fiscal 1999.
PRICEWATERHOUSECOOPERS LLP
Omaha, Nebraska
November 24, 1999, except for
Note 16, for which the date is
December 20, 1999
F-1
CONSOLIDATED BALANCE SHEETS
AMCON Distributing Company
- ------------------------------------------------------------------------------------------------------------
September 30, 1999 1998
- ------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 1,728,042 $ 38,369
Accounts receivable, less allowance for
doubtful accounts of $676,801 and $460,753 18,345,816 15,229,107
Inventories 23,979,639 16,127,250
Deferred income taxes 717,022 570,743
Other 1,000,189 327,997
------------- -------------
Total current assets 45,770,708 32,293,466
Fixed assets, net 7,502,927 4,466,707
Investments 550,691 508,375
Other assets 14,764,890 2,375,189
------------- -------------
$ 68,589,216 $ 39,643,737
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 11,953,546 $ 7,350,645
Accrued expenses 3,173,231 1,329,843
Accrued wages, salaries and bonuses 640,933 675,562
Income taxes payable 283,111 1,023,944
Current portion of long-term debt 10,133,393 3,439,169
Current portion of subordinated debt 800,000 -
Dividends payable 49,598 -
------------- -------------
Total current liabilities 27,033,812 13,819,163
------------- -------------
Deferred income taxes 678,455 24,799
Other liabilities 423,574 427,419
Long-term debt, less current portion 17,995,432 15,767,659
Subordinated debt, less current portion 9,200,000 -
Commitments (Note 13)
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none outstanding - -
Common stock, $.01 par value, 15,000,000 shares
authorized and 2,480,000 issued at September 30, 1999
and 1998 24,800 24,800
Additional paid-in capital 2,271,278 2,271,278
Accumulated other comprehensive income,
net of $149,664 and $139,468 tax 234,299 218,145
Retained earnings 10,727,926 7,090,789
------------- -------------
13,258,303 9,605,012
Less treasury stock, 102 shares at cost at
September 30, 1999; 97 shares at cost
at September 30, 1998 (360) (315)
------------- -------------
Total shareholders' equity 13,257,943 9,604,697
------------- -------------
$ 68,589,216 $ 39,643,737
============= =============
The accompanying notes are an integral part of these financial statements
F-2
CONSOLIDATED STATEMENTS OF INCOME
AMCON Distributing Company
- ------------------------------------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
Sales (including excise taxes of $54.5 million, $ 385,501,178 $ 294,281,323 $ 178,990,978
$52.9 million and $40.1 million, respectively)
Cost of sales 343,021,443 262,632,767 159,434,631
------------- ------------- -------------
Gross profit 42,479,735 31,648,556 19,556,347
Selling, general and administrative expenses 32,754,406 25,088,767 15,883,969
Depreciation and amortization 1,861,364 1,120,482 868,744
------------- ------------- -------------
34,615,770 26,209,249 16,752,713
------------- ------------- -------------
Income from operations 7,863,965 5,439,307 2,803,634
Other expense (income):
Interest expense 1,754,837 1,814,555 867,327
Other (income) expense, net (72,325) (276,287) (1,352,733)
------------- ------------- -------------
1,682,512 1,538,268 (485,406)
------------- ------------- -------------
Income before income taxes 6,181,453 3,901,039 3,289,040
Income tax expense 2,345,924 1,542,853 1,348,506
------------- ------------- -------------
Net income $ 3,835,529 $ 2,358,186 $ 1,940,534
============= ============= =============
Earnings per common and
common equivalent share:
Basic $ 1.55 $ 0.96 $ 0.79
============= ============= =============
Diluted $ 1.48 $ 0.93 $ 0.79
============= ============= =============
Weighted average shares outstanding:
Basic 2,479,902 2,458,062 2,447,782
============= ============= =============
Diluted 2,595,836 2,535,451 2,451,462
============= ============= =============
The accompanying notes are an integral part
of these financial statements
F-3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
AMCON Distributing Company
- ----------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
------------------- ---------------------- Paid-In
Shares Amount Shares Amount Capital
- ---------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 250,000 $ 2,500 2,450,000 $ 24,500 $ 3,411,328
Redemption of preferred stock (250,000) (2,500) - - (1,197,500)
Exercise of stock options - - - - -
Net income - - - - -
Unrealized gain (loss) on investments
available-for-sale, net of tax - - - - -
Less: reclassification adjustments
for gains included in net income - - - - -
Total comprehensive income
-------- ------- --------- -------- -----------
Balance, September 30, 1997 - - 2,450,000 24,500 2,213,828
Issuance and exercise of warrants - - 30,000 300 57,450
Net income - - - - -
Unrealized gain (loss) on investments
available-for-sale, net of tax - - - - -
Total comprehensive income
-------- ------- --------- -------- -----------
Balance, September 30, 1998 - - 2,480,000 24,800 2,271,278
Purchase of treasury stock - - - - -
Dividends - - - - -
Net income - - - - -
Unrealized gain on investments
available-for-sale, net of tax - - - - -
Total comprehensive income
-------- ------- --------- -------- -----------
Balance, September 30, 1999 - - 2,480,000 $ 24,800 $ 2,271,278
======== ======= ========= ======== ===========
The accompanying notes are an integral part of these financial statements.
F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (continued)
AMCON Distributing Company
- ---------------------------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive Retained Treasury Stock
Income Earnings Shares Amount Total
- ---------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 $ 398,028 $ 2,798,569 (4,097) $ (13,315) $ 6,621,610
Redemption of preferred stock - - - - (1,200,000)
Exercise of stock options - (6,500) 4,000 13,000 6,500
Net income - 1,940,534 - - 1,940,534
Unrealized gain (loss) on investments
available-for-sale, net of tax (144,517) - - - (144,517)
Less: reclassification adjustments
for gains included in net income (16,008) - - - (16,008)
--------- -----------
(160,525) (160,525
-----------
Total comprehensive income 1,780,009
--------- ----------- ------ --------- -----------
Balance, September 30, 1997 237,503 4,732,603 (97) (315) 7,208,119
Issuance and exercise of warrants - - - - 57,750
Net income - 2,358,186 - - 2,358,186
Unrealized gain (loss) on investments
available-for-sale, net of tax (19,358) - - - (19,358)
-----------
Total comprehensive income 2,338,828
--------- ----------- ------ --------- -----------
Balance, September 30, 1998 218,145 7,090,789 (97) (315) 9,604,697
Purchase of treasury stock - - (5) (45) (45)
Dividends - (198,392) - - (198,392)
Net income - 3,835,529 - - 3,835,529
Unrealized gain on investments
available-for-sale, net of tax 16,154 - - - 16,154
-----------
Total comprehensive income 3,851,683
--------- ----------- ------ --------- -----------
Balance, September 30, 1999 $234,299 $10,727,926 (102) $ (360) $13,257,943
========= =========== ====== ========= ===========
The accompanying notes are an integral part of these financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMCON Distributing Company
- ------------------------------------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 3,835,529 $ 2,358,186 $ 1,940,534
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,861,364 1,120,482 868,744
(Gain) loss on sales of fixed assets, land held
for sale and securities 259 (46,955) (112,520)
Gain on sale of Denver beer distributorship - - (1,102,205)
Proceeds from sales of trading securities - 157,207 92,548
Deferred income taxes (89,875) 11,167 (8,664)
Provision for losses on doubtful accounts and
inventory obsolescence 314,720 640,494 33,836
Changes in assets and liabilities, net of effect
of acquisitions:
Accounts receivable (3,303,670) (1,629,334) (916,159)
Inventories (2,082,434) (2,554,073) (801,978)
Other current assets (537,548) (180,622) 80,161
Other assets (119,505) (45,366) (42,648)
Accounts payable 2,632,025 432,398 661,948
Accrued expenses and accrued wages, salaries and
bonuses 720,564 (44,771) 490,413
Income taxes payable (858,360) 471,985 (63,766)
Other liabilities - (2,577) -
----------- ----------- -----------
Net cash provided by operating activities 2,373,069 688,221 1,120,244
----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (761,706) (782,440) (891,783)
Acquisitions, net of cash acquired (5,879,143) (7,119,254) (499,109)
Proceeds from sales of fixed assets 54,880 86,887 160,961
Proceeds from repayment of advance to officer - 100,000 25,000
Proceeds from sale of Denver beer distributorship - - 2,371,994
Proceeds from sales of available-for-sale securities - - 33,967
----------- ----------- -----------
Net cash (used in) provided by investing
activities (6,585,969) (7,714,807) 1,201,030
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings of long-term debt 1,100,000 4,500,000 516,741
Net (payments) proceeds on bank credit agreement 9,599,775 3,483,241 (1,239,484)
Payments on long-term (4,648,363) (766,025) (399,555)
Debt issue costs - (182,234) -
Proceeds from exercise of warrants - 3,000 -
Dividends paid (148,794) - -
Purchase of treasury stock (45) - -
Redemption of preferred stock - - (1,200,000)
Proceeds from exercise of stock options - - 6,500
----------- ----------- -----------
Net cash provided by (used in) financing
activities 5,902,573 7,037,982 (2,315,798)
----------- ----------- -----------
Net increase in cash 1,689,673 11,396 5,476
Cash, beginning of year 38,369 26,973 21,497
----------- ----------- -----------
Cash, end of year $ 1,728,042 $ 38,369 $ 26,973
=========== =========== ===========
Supplemental cash flow information:
Cash paid during the year for interest $ 1,675,323 $ 1,745,609 $ 868,378
Cash paid during the year for income taxes 3,166,246 1,145,770 1,420,936
Supplemental noncash information:
Issuance of warrants in connection with acquisition - 54,750 -
Unrealized gain (loss)on available-for-sale
securities, net 16,154 (19,358) (160,525)
Acquisition of equipment through capital leases 80,676 - -
Acquisition financed with subordinated debt $10,000,000 - -
The accompanying notes are an integral part
of these financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMCON Distributing Company
1. Summary of Significant Accounting Policies:
Company Operations:
AMCON Distributing Company (together with its wholly-owned subsidiary, Food
For Health Co., Inc. and its wholly-owned subsidiaries, U.S. Health
Distributors, Inc., Chamberlin's Natural Foods, Inc. and Health Food
Associates, Inc.) operates 9 distribution centers and 13 retail health food
stores in the Great Plains, Rocky Mountain, Western and Southern regions of
the United States. AMCON sells approximately 24,000 different consumer
products, including cigarettes and tobacco products, candy and other
confectionery, beverages, groceries, paper products, health and beauty care
products, natural food and related 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, health food stores, natural food stores, 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 (7) retail health food stores in Florida under the
name Chamberlin's Market & Cafe and six (6) in the Midwest under the name
Akin's Natural Foods Market. These stores, which were acquired during fiscal
1999, carry natural supplements, groceries, health and beauty care products
and other food items.
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 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 diversified product line, it remains
dependent upon cigarette sales which represented approximately 65% of its
revenue and 40% of its gross margin in fiscal 1999. 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.
Accounting Period:
AMCON'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 24, 1999, September 25, 1998 and September 26, 1997. Each
fiscal year was comprised of 52 weeks.
Principles of Consolidation:
The consolidated financial statements include the accounts of AMCON and its
subsidiaries. Intercompany accounts and transactions have been eliminated.
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 which were $4,423,433 and $2,972,303 at September 30, 1999
and 1998, 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 its revolving credit facilities (see Note 7).
F-7
1. Summary of Significant Accounting Policies (continued):
Marketable Securities and Investments:
AMCON 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.
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.
Inventories:
Inventories consist of finished products purchased in bulk quantities to be
sold to the Company's customers. Effective in fiscal 1999, AMCON changed the
method of accounting for inventory from the first-in, first-out, ("FIFO")
method to the last-in, first-out ("LIFO") method. LIFO inventories at
September 30, 1999 were approximately $2.0 million less than the amount of
such inventories valued on a FIFO basis. The change in the inventory
valuation method was made to better match current costs with current revenue.
The change to LIFO reduced net income and basic earnings per share for the
year ended September 30, 1999 by $1,284,000 and $0.52, respectively. Pro
forma effects of retroactive application of LIFO are not determinable and
there is no cumulative effect on retained earnings at the beginning of the
year.
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:
AMCON recognizes revenue when products are shipped from distribution centers
or sold to consumers in retail stores. Sales are shown net of returns and
discounts.
F-8
1. Summary of Significant Accounting Policies (continued):
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.
Comprehensive Income:
In 1999, AMCON adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130). SFAS 130 requires the display
and reporting of comprehensive income, which includes all changes in stock
holders' equity with the exception of additional investments by shareholders
or distributions to shareholders. Comprehensive income for the Company
includes net income and the changes in net unrealized holding gains on
investments charged or credited to stockholders' equity. The adoption of SFAS
130 had no impact on total shareholders' equity.
Long Lived Assets:
Management 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 reduction 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. Acquisitions:
In November 1998, Food For Health Company, Inc. ("FFH"), a wholly-owned
subsidiary of AMCON Distributing Company, purchased all of the outstanding
stock of U.S. Health Distributors, Inc. ("USHD"), a distributor of health and
natural foods based in Melbourne, Florida, for $1.3 million in cash. The
acquisition was funded by a $1.1 million term loan. The acquisition was
accounted for using the purchase method. Based on an independent valuation,
the portion of the purchase price allocated to goodwill and other intangibles
is $1.5 million and will be amortized over 20 years.
In March 1999, FFH purchased all of the outstanding stock of Chamberlin
Natural Foods, Inc. (d/b/a Chamberlin's Market & Cafe), a chain of six health
and natural food product retail stores based in Winter Park, Florida, for $2.2
million in cash. The acquisition was funded through the Company's revolving
line of credit (the "Facility"). In addition, Chamberlin's existing short and
long-term debt of $2.8 million was paid in full through borrowings under the
"Facility." The acquisition was accounted for using the purchase method.
Based on an independent valuation, the portion of the purchase price allocated
to trademark and tradenames, goodwill and other intangibles is $2.0 million
and will be amortized over 20 years.
F-9
2. Acquisitions (continued):
In September, 1999, FFH purchased all of the outstanding stock of Health Food
Associates, Inc. (d/b/a Akin's Natural Foods Market) for a purchase price of
$13.4 million. Funding for the acquisition was provided as follows: $4.0
million through borrowings under the Facility; $2.0 million through borrowings
under an 8% Convertible Subordinated Note (the "Convertible Note") from FFH to
the sellers; and $8.0 million through borrowings under a Collateralized
Promissory Note (the "Collateralized Note") from FFH to the sellers. A
receivable of approximately $600,000 is due from the sellers based on purchase
price adjustments outlined in the purchase agreement and is included in other
current assets. The acquisition was accounted for using the purchase method.
Based on an independent valuation, the portion of the purchase price allocated
to trademark and tradenames, goodwill and other intangibles is $7.7 million
and will be amortized over 20 years.
Operating results for each of these acquisitions are included in the
accompanying consolidated statements of operations from the respective
acquisition dates. Assuming the above described companies had been acquired
on October 1, 1997, unaudited pro forma consolidated revenues, net income and
net income per share would have been as follows:
1999 1998
------------- -------------
Sales $ 418,792,000 $ 340,308,000
Net income $ 4,121,000 $ 2,702,000
Earnings per share:
Basic $1.66 $1.10
Diluted $1.59 $1.07
The pro forma information provided above is based on assumptions that
management deems appropriate, but does not purport to be indicative of the
results that would have actually occurred had the acquisitions taken place on
October 1, 1997.
F-10
3. Earnings Per Share:
Basic earnings per share is calculated by dividing net income by the weighted
average common shares outstanding for each period. Diluted earnings per share
is calculated by dividing net income by the sum of the weighted average common
shares outstanding and the weighted average dilutive options and warrants,
using the treasury stock method.
For the years ended September 30,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
Basic Basic Basic
----------- ----------- -----------
Weighted average common
shares outstanding 2,480,000 2,458,159 2,450,474
Weighted average treasury
shares (98) (97) (2,692)
----------- ----------- -----------
Weighted average number of
shares outstanding 2,479,902 2,458,062 2,447,782
=========== =========== ===========
Net income $ 3,835,529 $ 2,358,186 $ 1,940,534
=========== =========== ===========
Earnings per share $ 1.55 $ 0.96 $ 0.79
=========== =========== ===========
Diluted Diluted Diluted
----------- ----------- -----------
Weighted average common
shares outstanding 2,480,000 2,458,159 2,450,474
Weighted average treasury
shares (98) (97) (2,692)
Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds
used to purchase treasury stock 115,934 77,389 3,680
----------- ----------- -----------
Weighted average number of
shares outstanding 2,595,836 2,535,451 2,451,462
=========== =========== ===========
Net income $ 3,835,529 $ 2,358,186 $ 1,940,534
=========== =========== ===========
Earnings per share $ 1.48 $ 0.93 $ 0.79
=========== =========== ===========
F-11
4. Fixed Assets, Net:
Fixed assets at September 30, 1999 and 1998 consisted of the following:
1999 1998
----------- -----------
Land and buildings $ 725,597 $ 750,809
Condominium and furnishings 1,246,625 1,237,065
Warehouse equipment 5,238,860 4,106,245
Furniture, fixtures and
leasehold improvements 4,667,681 2,066,191
Vehicles 1,733,182 1,764,763
Capital equipment leases 482,701 248,928
----------- -----------
14,094,646 10,174,001
Less accumulated depreciation & amortization:
Owned equipment 6,405,944 5,582,829
Capital equipment leases 185,775 124,465
----------- -----------
$ 7,502,927 $ 4,466,707
=========== ===========
Included in land and buildings is a warehouse held for sale. At September 30,
1999, the warehouse held for sale was recorded at its net realizable fair
value. The property was sold in November 1999.
5. Marketable Securities and Investments:
Investments in equity securities at September 30, 1999 and 1998 consisted of
the following:
September 30, 1999
------------------------------------
Unrealized Market
Cost Gain(Loss) Value
--------- ---------- ---------
Investments (available-for-sale) $ 164,370 $ 386,321 $ 550,691
========= ========= =========
September 30, 1998
------------------------------------
Unrealized Market
Cost Gain Value
--------- --------- ---------
Investments (available-for-sale) $ 150,762 $ 357,613 $ 508,375
========= ========= =========
The Company did not sell any available-for-sale investments in 1999 or 1998.
The Company realized gains on the sale of available-for-sale investments of
$27,600 in fiscal 1997. The Company recognized gains of $29,400 and $72,222
on trading securities during 1998 and 1997, respectively.
F-12
6. Other Assets:
Other assets at September 30, 1999 and 1998 consisted of the following:
1999 1998
------------ -----------
Trademarks and tradenames (less
accumulated amortization of $13,542) $ 8,686,458 $ -
Goodwill (less accumulated amortization
of $534,440 and $335,728) 4,279,235 1,832,008
Covenants not to compete (less
accumulated amortization of $153,850
and $262,374) 724,615 27,375
Favorable leases (less accumulated
(amortization of $56,375) 552,625 -
Cash surrender value of life
insurance policies 382,044 353,920
Debt issue costs (less accumulated
amortization of $66,062 and $29,376) 116,172 152,858
Other 23,741 9,028
------------ -----------
$ 14,764,890 $ 2,375,189
============ ===========
Trademarks and tradenames arose from the acquisitions of CNF and HFA during
1999 and are amortized using the straight-line method over 20 years.
Goodwill arose from the acquisition of certain businesses and is amortized
using the straight-line method over periods ranging from 20 to 25 years.
Amortization expense was $198,712, $96,919 and $41,926 for the years ended
September 30, 1999, 1998, and 1997, 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
periods ranging from 2 to 5 years. Amortization expense was $126,475, $29,708
and $63,625 for the years ended September 30, 1999, 1998 and 1997,
respectively.
Favorable leases arose from the acquisitions of USHD and HFA during fiscal
1999 and represent lease agreements in which the lease rates were below market
value on the acquisition date. The leases are amortized over periods ranging
from 3 to 11 years.
F-13
7. Long-term Obligations:
Long-term obligations at September 30, 1999 and 1998 consisted of the
following:
1999 1998
------------ -----------
Revolving credit facility with a bank,
interest payable monthly at the bank's
base rate less 0.5% or LIBOR plus 1.75%,
as selected by the Company (ranging from
6.81% to 7.75% at September 30, 1999);
principal due February 2002 $ 18,317,309 $10,964,888
FFH revolving credit facility with a
bank, interest payable monthly at the
bank's base rate less 0.5% or LIBOR
plus 2.00%, as selected by FFH
(approximately 7.75% at September 30,
1999); principal due February 2002 5,252,110 3,361,355
Note payable to a bank, interest
payable monthly at the bank's base
rate less 0.5% or LIBOR plus 1.75%
(ranging from 7.13% to 7.19% at
September 30, 1999); principal
payments of $85,096 due monthly
through November 2002 3,233,653 4,254,808
Note payable to bank, interest payable
monthly at the bank's base rate less
0.5% (7.75% at September 30, 1999);
principal payments of $18,000 due
monthly through May 2004 1,008,000 -
Non-revolving line of credit; paid
in full in January 1999 - 482,479
Obligations under capital leases, payable
in monthly installments with interest
ranging from 6.9% to 9.5% through
April 2001 (Note 13) 317,753 143,298
------------ -----------
28,128,825 19,206,828
Less current portion 10,133,393 3,439,169
------------ -----------
$ 17,995,432 $15,767,659
============ ===========
F-14
7. Long-term Obligations (continued):
In March 1998, ADC entered into a revolving credit facility with a bank (the
"Facility"). The Facility was amended in September 1999 to increase the
primary borrowing limit from $20 million to $25 million and remove the
additional $10 million facility which was collateralized by specific
inventory. The Facility allows ADC to borrow up to $25 million at any time,
subject to eligible accounts receivable and inventory requirements, and
provides for an additional $1.5 million facility to be used for transportation
equipment purchases. The Facility bears interest at the bank's base rate
("Prime") less 0.5% or LIBOR plus 1.75%, as selected by ADC. The Facility is
collateralized by all equipment, general intangibles, inventories and accounts
receivable, and with a first mortgage on the owned distribution center. As of
September 30, 1999 the unused portion of the credit agreement was $6,682,691.
The Facility expires on February 25, 2002.
The Facility contains covenants which, among other things, set forth certain
financial ratios and net worth requirements which adjust semiannually or
annually as specified in the Facility. For fiscal 2000 and 1999, the Facility
includes covenants that (i) restrict the incurrence of additional debt, (ii)
restrict payments, prepayments and repurchases of subordinated debt or capital
stock, (iii) restrict mergers and acquisitions and changes in business or
conduct of business and (iv) require the maintenance of certain financial
ratios and net worth levels including an average annual fixed charge ratio of
1.1 to 1.0, an average annual debt service coverage ratio of 1.50 to 1.0, a
debt to equity ratio of 4.0 to 1.0 (excluding debt associated with the
acquisition of FFH) and minimum tangible net worth of $4,500,000. In
addition, AMCON may not pay dividends with respect to its Common Stock without
the consent of the lender of the Facility. In December 1998, AMCON received
consent to pay cash dividends of up to $0.02 per share per quarter.
In March 1998, FFH entered into a revolving credit facility with a bank (the
"FFH Facility") which includes a separate revolving line of credit of up to
$1.0 million for USHD. The FFH Facility was amended in November 1999 to
increase the amount provided for maximum borrowings from $6 million to $8
million. Borrowings under the FFH Facility are collateralized by the assets
of FFH and are guaranteed by AMCON. Amounts under the FFH Facility bear
interest at Prime less 0.5% or LIBOR plus 2.00%, as selected by FFH. A
commitment fee of .25% of the annual average unutilized amount of the
commitment is required. As of September 30, 1999, FFH had borrowed
approximately $5.3 million under the FFH Facility. The FFH Facility expires
on February 25, 2002.
The FFH Facility contains covenants which, among other things, set forth
certain financial ratios and net worth requirements which adjust semiannually
or annually as specified in the FFH Facility. For fiscal 2000 and 1999, the
FFH Facility includes covenants that (i) restrict the incurrence of additional
debt, (ii) restrict payments, prepayments and repurchases of subordinated debt
or capital stock, (iii) restrict mergers and acquisitions and changes in
business or conduct of business and (iv) require the maintenance of certain
financial ratios and net worth levels including a debt to equity ratio of 4.0
F-15
7. Long-term Obligations (continued):
to 1.0 and minimum tangible net worth of $200,000. In addition, FFH may not
pay dividends with respect to its Common Stock without the consent of the
lender of the FFH Facility. As of September 30, 1999, FFH was not in
compliance with the debt to equity ratio or the net worth covenant due to the
acquisition of HFA in September 1999. However, FFH received waivers from the
lender for these covenant violations at September 30, 1999. The balance
outstanding at September 30, 1999 is classified as current.
In November 1997, the Company borrowed $4.5 million from a bank to finance the
purchase of the common stock of FFH (the "Acquisition Loan"). The Acquisition
Loan has a term of five years, bears interest at Prime less 0.5% or LIBOR plus
1.75%, as selected by the Company, and requires monthly payments equal to
accrued interest plus principal payments of $85,096, which began in August
1998. The loan is collateralized by the common stock of FFH.
In November 1998, FFH borrowed $1.1 million from a bank to finance the
purchase of the common stock of US Health Distributors, Inc. ("USHD"). The
loan has a term of five and one-half years, bears interest at Prime less 0.5%,
requires interest payments only for the first six months and monthly principal
payments of $18,000 for the term of the loan. The loan is collateralized by
the common stock of USHD.
At September 30, 1998, ADC maintained a $1,250,000 non-revolving line of
credit with a bank used to finance the purchase of trucks and delivery
equipment. In January 1999, ADC utilized proceeds from the Facility to
satisfy its obligation associated with the non-revolving line of credit.
The above long-term obligations, excluding obligations under the revolving
credit facilities, have contractual maturities as follows:
Year ending September 30
------------------------
2000 $ 1,381,283
2001 1,333,025
2002 1,310,967
2003 390,131
2004 144,000
-----------
$ 4,559,406
===========
Borrowings under the revolving credit facilities in the amount of $14,817,309
have been classified as long-term based on expected borrowing levels. 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, 1999 and 1998.
F-16
8. Subordinated Debt:
Subordinated debt at September 30, 1999 and September 30, 1998 consisted of
the following:
1999 1998
------------ ----------
Convertible subordinated note payable,
interest payable quarterly at 8% per
annum; principal due at maturity of
the note, September 15, 2004 $ 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 8,000,000 -
------------ ----------
10,000,000 -
Less current portion 800,000 -
------------ ----------
$ 9,200,000 $ -
============ ==========
In September, 1999, FFH issued subordinated debt of $10.0 million, in addition
to $4.0 million borrowed on the Facility, to purchase all of the outstanding
stock of HFA. The subordinated debt is comprised of the following: a $2.0
million 8% Convertible Subordinated Note (the "Convertible Note") from FFH to
the sellers; and an $8.0 million Collateralized Promissory Note (the
"Collateralized Note") from FFH to the sellers. The Collateralized Note is
collateralized by a pledge of the stock of HFA. The principal balance of the
Convertible Note may be converted into stock of FFH if AMCON distributes its
interest in FFH to its shareholders (the "Spin-Off") at which time FFH would
become a publicly held corporation. The Convertible Note must be converted
within 60 days of any announcement regarding a Spin-Off of FFH. The number of
shares of FFH stock to be received upon conversion is determined based upon a
formula that takes into account FFH's consolidated gross sales, the
outstanding balance of the Convertible Note and the number of shares of FFH's
common stock outstanding at the time a Spin-Off is announced.
As of September 30, 1999, principal payments are due on subordinated debt as
follows:
Year ending September 30
------------------------
2000 $ 800,000
2001 800,000
2002 800,000
2003 800,000
2004 6,800,000
-----------
$10,000,000
===========
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, 1999 and 1998.
F-17
9. Other (Income) Expense:
Other (income) expense consisted of the following for the years ended
September 30, 1999, 1998 and 1997:
1999 1998 1997
--------- ---------- -----------
Interest income $ (2,468) $ (61,398) $ (42,671)
Dividends (17,850) (14,941) (13,909)
Rent income (18,880) (24,880) (14,462)
Royalties (15,924) (41,710) (34,568)
Gain on marketable
securities and
investments - (29,420) (99,831)
Gain from disposition
of fixed assets (22,119) (22,312) (12,689)
Gain on sale of beer
distributorship and
distribution rights - - (1,102,205)
Other 4,916 (81,626) (32,398)
--------- ---------- -----------
$ (72,325) $ (276,287) $(1,352,733)
========= ========== ===========
On October 4, 1996, the Company sold its beer distributorship for a purchase
price of $2.4 million. The gain associated with disposition of the assets was
$1,102,205. The Company then closed the Denver distribution facility.
10. Income Taxes:
Components of income tax expense (benefit) for the fiscal years ended
September 30, 1999, 1998 and 1997 consisted of the following:
1999 1998 1997
----------- ----------- ----------
Current:
Federal $ 2,125,264 $ 1,325,618 $1,201,058
State 310,535 206,068 156,112
----------- ----------- ----------
2,435,799 1,531,686 1,357,170
----------- ----------- ----------
Deferred:
Federal (78,417) 9,735 (7,689)
State (11,458) 1,432 (975)
----------- ----------- ----------
(89,875) 11,167 (8,664)
----------- ----------- ----------
Provision for income
taxes $ 2,345,924 $ 1,542,853 $1,348,506
=========== =========== ==========
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, 1999, 1998 and 1997:
F-18
10. Income Taxes (continued):
1999 1998 1997
----------- ----------- ----------
Tax at statutory rate $ 2,101,694 $ 1,326,353 $1,118,274
Amortization of
goodwill 70,462 42,742 14,255
Nondeductible business
expenses 21,741 26,351 15,207
State income taxes, net of
federal tax benefit 205,811 156,551 102,397
Other (53,784) (9,144) 98,373
----------- ----------- ----------
$ 2,345,924 $ 1,542,853 $1,348,506
=========== =========== ==========
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, 1999 and 1998 relate to the following:
1999 1998
----------- -----------
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 260,509 $ 175,157
Accrued expenses 144,575 64,785
Net operating loss carryforwards 96,145 123,809
Inventory 276,053 309,391
Other 14,930 -
----------- -----------
792,212 673,142
Noncurrent:
Net operating loss carryforwards 211,138 382,434
Other liabilities 169,458 166,693
Other 24,530 8,437
----------- -----------
405,126 557,564
----------- -----------
Total deferred tax assets $ 1,197,338 $ 1,230,706
=========== ===========
Deferred tax liabilities:
Current:
Trade discounts $ 75,190 $ 102,399
----------- -----------
Noncurrent:
Fixed assets 373,318 442,895
Tradenames 514,583 -
Leases 46,016 -
Unrealized gains on available-for-sale
investments 149,664 139,468
----------- -----------
1,083,581 582,363
----------- -----------
Total deferred tax liabilities $ 1,158,771 $ 684,762
=========== ===========
F-19
10. Income Taxes (continued):
Net deferred tax assets (liabilities):
Current $ 717,022 $ 570,743
Noncurrent (678,455) (24,799)
----------- -----------
$ 38,567 $ 545,944
=========== ===========
The Company did not record any valuation allowances against deferred tax
assets at September 30, 1999 or 1998 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 and FFH in 1997. The utilization of the
net operating loss related to Sheya Brothers of $298,000 at September 30, 1999
is limited (by Internal Revenue Code Section 382) to approximately $100,000
per year through 2002. The utilization of the net operating loss related to
FFH of $919,000 at September 30, 1999 is limited (by Internal Revenue Code
Section 382) to approximately $232,000 per year through 2009.
11. Profit Sharing Plan:
AMCON maintains profit sharing plans covering substantially all full-time
employees. The plans provide for AMCON to make profit sharing contributions
of up to 1% of qualified employees' gross wages. Employees may also make
additional voluntary contributions which may be matched 50% by the Company up
to the first 6% contributed. The Company contributed $272,234, $241,009 and
$143,098 (net of employee forfeitures) to the profit sharing plans during the
years ended September 30, 1999, 1998, and 1997, respectively.
12. Related Party Transactions:
The Company was charged $60,000 by AMCON Corporation, the former parent of the
Company for each of the years ended September 30, 1999, 1998 and 1997, 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. 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, 1999 would have been $500,000.
13. Commitments:
The Company leases certain office equipment under a capital lease. The
carrying value of these assets was $316,242 and $143,218 as of September 30,
1999 and 1998, respectively, net of accumulated amortization of $211,036 and
$110,642.
F-20
13. Commitments (continued):
The Company leases various office and warehouse facilities and equipment under
noncancellable operating leases. Rent charged to expense during the years
ended September 30, 1999, 1998 and 1997 under such lease agreements was
$2,974,431, $2,138,042 and $644,753, respectively. As of September 30, 1999,
minimum future lease commitments are as follows:
Year ending September 30,
Capital Operating
Leases Leases
---------- ------------
2000 $ 150,847 $ 3,433,573
2001 120,151 2,903,694
2002 76,973 2,342,927
2003 2,108 1,789,172
2004 - 1,588,217
Thereafter - 2,715,848
---------- ------------
Total minimum lease payments 350,079 $ 14,773,431
Less amount representing interest 32,326 ============
----------
Present value of net minimum
lease payments $ 317,753
==========
14. 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. 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. On November 10,
1997, options to purchase 140,000 shares of common stock were issued to
management employees at exercise prices of $2.88 and $3.16. During fiscal
1999, options to purchase 105,000 shares of common stock were issued to
management employees at exercise prices between $6.75 and $9.90. At September
24, 1999, 120,200 options were fully vested and exercisable. In addition,
options to purchase 30,000 shares of common stock were issued to certain
directors at an exercise price of $2.875 in fiscal 1998 and options to
purchase 28,000 shares of common stock were issued to outside directors at
exercise prices ranging from $6.75 to $9.00 in fiscal 1999. These options
were not issued pursuant to the Stock Option Plan. At September 24, 1999,
46,000 shares issued to certain directors were fully vested and exercisable.
The options have varying vesting schedules ranging up to five years and expire
ten years after the date of grant.
F-21
14. Stock Option Plan (continued):
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:
1999 1998 1997
----------- ----------- -----------
Net income - as reported $ 3,835,529 $ 2,358,187 $ 1,940,534
Net income - pro forma $ 3,657,477 $ 2,293,014 $ 1,940,534
Basic EPS - as reported $ 1.55 $ 0.96 $ 0.79
Basic EPS - pro forma $ 1.47 $ 0.93 $ 0.79
Diluted EPS - as reported $ 1.48 $ 0.93 $ 0.79
Diluted EPS - pro forma $ 1.42 $ 0.90 $ 0.79
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.
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 1.0% for
1999 and 1.8% for 1998; expected volatility of 58.31% for 1999 and 60.30% for
1998; risk free interest rate based on U.S. Treasury strip yield at the date
of grant of 5.68% for 1999 and 5.90% for 1998; and expected lives of 5 to 10
years.
The table below summarizes information about stock options outstanding as of
the following fiscal year ends:
September 30, 1999 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Exercise Average Exercise Average Exercise
------------------ ------------------ ------------------
Shares Price Shares Price Shares Price
--------- ------- --------- ------- --------- -------
Outstanding at beginning of period 182,000 $2.84 16,000 $1.63 22,000 $1.63
Granted 133,000 8.41 170,000 2.95 - -
Exercised - - - - (4,000) 1.63
Forfeited/Expired - - (4,000) $2.26 (2,000) $1.63
--------- ------- --------- ------- --------- -------
Outstanding at end of period 315,000 $5.19 182,000 $2.84 16,000 $1.63
========= ======= ========= ======= ========= =======
Shares available for options
that may be granted 39,000 144,000 280,000
========= ========= =========
Weighted-average grant date fair value
of options granted during the
period - exercise price equals stock
market price at grant $5.20 $1.71
======= =======
Weighted-average grant date fair value
of options granted during the
period - exercise price exceeds stock
market price at grant $4.47 $1.38
======= =======
F-22
14. Stock Option Plan (continued):
The following summarizes options outstanding at September 30, 1999:
Exercisable
Remaining -----------------------------
Exercise Number Weighted-Average Weighted-Average Number Weighted-Average
Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------- ----------- ---------------- ---------------- ----------- ----------------
1995 Options $1.63 14,000 6.3 years $1.63 14,000 $1.63
1997 Options $2.88 - $3.16 168,000 8.1 years $2.94 81,600 $3.00
1999 Options $6.50 - $6.75 45,000 9.2 years $6.69 20,000 $6.75
1999 Options $8.38 - $9.90 88,000 9.8 years $9.28 23,000 $9.00
15. Business Segments:
AMCON operates within two business segments; the wholesale distribution of
consumer products by ADC and FFH and the retail sale of health and natural
food products. The business units within each segment are evaluated on
revenues, operating income and income before taxes and extraordinary items.
The following table represents AMCON's adoption of Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information."
Wholesale
Distribution Retail Consolidated
------------- ----------- -------------
Year ended September 30, 1999:
External revenues:
Cigarettes $ 251,076,045 $ - $ 251,076,045
Health food 42,637,607 6,961,742 49,599,349
Confectionery 30,191,317 - 30,191,317
Tobacco, beverage & other 54,634,467 - 54,634,467
------------- ----------- -------------
Total external revenues 378,539,436 6,961,742 385,501,178
Intersegment sales:
Health food 701,101 - 701,101
------------- ----------- -------------
Total intersegment sales 701,101 - 701,101
Depreciation and amortization 1,560,222 301,142 1,861,364
Operating income 7,664,526 199,439 7,863,965
Interest expense 1,564,096 190,741 1,754,837
Income before taxes 5,994,405 187,048 6,181,453
Total assets 47,965,695 20,623,521 68,589,216
Capital expenditures 740,919 20,787 761,706
F-23
15. Business Segments (continued):
Wholesale
Distribution Retail Consolidated
------------- ----------- -------------
Year ended September 30, 1998:
External revenues:
Cigarettes $ 185,524,096 $ - $ 185,524,096
Health food 31,197,993 - 31,197,993
Confectionery 29,286,831 - 29,286,831
Tobacco, beverage & other 48,272,403 - 48,272,403
------------- ----------- -------------
Total external revenues 294,281,323 - 294,281,323
Intersegment sales - - -
Depreciation and amortization 1,120,482 - 1,120,482
Operating Income 5,439,307 - 5,439,307
Interest expense 1,814,555 - 1,814,555
Income before taxes 3,901,039 - 3,901,039
Total assets 39,643,737 - 39,643,737
Capital expenditures 782,440 - 782,440
Year ended September 30, 1997:
External revenues:
Cigarettes $ 117,598,733 $ - $ 117,598,733
Confectionery 21,726,956 - 21,726,956
Tobacco, beverage & other 39,665,289 - 39,665,289
------------- ----------- -------------
Total external revenues 178,990,978 - 178,990,978
Intersegment sales - - -
Depreciation and amortization 868,744 - 868,744
Operating Income 2,803,634 - 2,803,634
Interest expense 867,327 - 867,327
Income before taxes 3,289,040 - 3,289,040
Total assets 23,497,301 - 23,497,301
Capital expenditures 891,783 - 891,783
Intersegment sales are at cost plus a nominal markup and are eliminated in the
consolidated statements of income. The retail segment was acquired in fiscal
1999, therefore no segment information is presented for the retail segment in
fiscal years 1998 and 1997. Segment information for the retail segment
presented in fiscal 1999 represents approximately six months of operations of
CNF and two weeks of operations of HFA.
16. Subsequent Event:
In December 1999, the Board of Directors declared a $0.03 per share cash
dividend and a special ten percent (10%) stock dividend. The cash dividend
will be paid on January 21, 2000 to shareholders of record on December 31,
1999. The stock dividend will be paid in February 2000 to shareholders of
record on January 25, 2000. Fractional shares will not be issued, but will be
paid in cash. The cash paid will not be material in amount.
F-24
DIRECTORS AND CORPORATE OFFICERS
DIRECTORS
William F. Wright
Chairman
Kathleen M. Evans
President
Jerry Fleming
President of
Food For Health Company, Inc.
J. Tony Howard /2/
President of Nebraska Distributing Company
Allen D. Petersen /1/
Chairman and Chief Executive Officer of
American Tool Companies, Inc.
Timothy R. Pestotnik /1/
Partner with the law firm
Luce Forward Hamilton & Scripps
William R. Hoppner /2/
Consultant
/1/ Audit Committee
/2/ Compensation Committee
CORPORATE OFFICERS
William F. Wright
Chairman
Kathleen M. Evans
President
Jerry Fleming
President of
Food For Health Company, Inc.
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
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1299 Landmark Center
Omaha, Nebraska 68102
ANNUAL STOCKHOLDERS' MEETING
Tuesday, March 28, 2000
9:00 a.m.
Embassy Suites Hotel
Omaha, Nebraska 68102
ADDITIONAL INFORMATION
The Form 10-K Annual Report 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 NASDAQ SmallCap Market. The
symbol for the Common Stock is "DIST".
WEB SITE
http://www.amcon-dist.com