-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MfuA/ABBfu2OXII1kQLZSkFom9m8cBMJCAd5T932/9L+tYs6bbSGaGQ4GIYnN0yZ l0w07DjVH8n/wMvpUdS5Xw== 0000928465-98-000027.txt : 19981228 0000928465-98-000027.hdr.sgml : 19981228 ACCESSION NUMBER: 0000928465-98-000027 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMCON DISTRIBUTING CO CENTRAL INDEX KEY: 0000928465 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 470702918 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24708 FILM NUMBER: 98775603 BUSINESS ADDRESS: STREET 1: 10228 L ST STREET 2: POST OFFICE BOX 241230 CITY: OMAHA STATE: NE ZIP: 68127 BUSINESS PHONE: 4023313727 MAIL ADDRESS: STREET 1: 10228 L STREET STREET 2: POST OFFICE 241230 CITY: OMAHA STATE: NE ZIP: 68127 10-K 1 AMCON DISTRIBUTING COMPANY FORM 10-K, 9/30/98 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K /X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED September 30, 1998 ----------------------------------- / / TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM to ------- ------- Commission File Number 0-24708 -------- AMCON Distributing Company - ----------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 47-0702918 - -------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) identification No.) 10228 "L" Street, Omaha NE 68127 - ----------------------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (402) 331-3727 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None ---------------- ----------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value - ----------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any other amendment to this Form 10-K. / / The aggregate market value of equity securities held by non-affiliates of the Registrant on December 11, 1998 was approximately $6,262,000. As of December 11, 1998 there were 2,479,903 shares of common stock outstanding. - Documents Incorporated by Reference - --------------------------------------- Portions of the 1998 Annual Report to Stockholders are incorporated therein by reference into Parts I, II and IV. Portions of the Proxy Statement pertaining to the March 18, 1999 Annual Stockholders' Meeting are incorporated herein by reference into Part III. 1 AMCON DISTRIBUTING COMPANY -------------------------- 1998 FORM 10-K ANNUAL REPORT ---------------------------- Table of Contents Page ---- PART I Item 1. Business.........................................................3 Item 2. Properties.......................................................8 Item 3. Legal Proceedings................................................9 Item 4. Submission of Matters to Vote of Security Holders................9 Item 4A. Executive Officers of the Company................................9 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.............................................10 Item 6. Selected Financial Data.........................................10 Item 7. Management's Discussion of Analysis of Financial Condition and Results of Operations.............................10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk......11 Item 8. Financial Statements and Supplementary Data.....................11 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................11 PART III Item 10. Directors and Executive Officers of the Registrant..............11 Item 11. Executive Compensation................................ .........11 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................................12 Item 13. Certain Relationships and Related Transactions....................................................12 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................................13 2 PART I ITEM 1. BUSINESS GENERAL AMCON Distributing Company (together with its wholly-owned subsidiary, Food For Health Co., Inc.) is a distributor of consumer products in the Great Plains, Rocky Mountain and Southwest regions of the United States. As used herein, unless the context indicates otherwise, the term "ADC" means the separate company operations or "traditional business" of AMCON Distributing Company, the term "FFH" means Food For Health Co., Inc. and the term "AMCON" or the "Company" means AMCON Distributing Company and its subsidiary. The Company distributes 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 and institutional food service products. The Company has over 8,500 customers and no single account represented more than 7% of AMCON's total revenues during fiscal 1998. 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. While cigarettes accounted for approximately 63% of the Company's sales volume during its most recent fiscal year, the Company continues to diversify its businesses and product lines in an attempt to lessen the Company's dependence on cigarette sales. TRADITIONAL BUSINESS ADC serves approximately 7,500 retail outlets in the Great Plains and Rocky Mountain regions and was ranked by the U.S. Distribution Journal as the twenty-seventh largest tobacco, candy and convenience store distributor of approximately 1,000 distributors of such products in the United States based on 1997 sales volume. From its inception, ADC pursued a strategy of growth through acquisition. From 1993 to 1998, ADC focused on increasing operating efficiency in its traditional business by merging smaller branch distribution facilities into larger ones. In addition, ADC controlled growth through expansion of its market area into contiguous regions and by introduction of new product lines to customers. In fiscal 1998, ADC continued its growth-by- acquisition strategy by acquiring a candy and tobacco distribution business in St. Louis, Missouri. ADC distributes approximately 9,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products and institutional food service products. ADC's principal suppliers include Philip Morris, RJR Nabisco, Brown & Williamson, Proctor & Gamble, Hershey, Mars, William Wrigley and Planters-Lifesavers. ADC also markets private label lines of cigarettes, tobacco, snuff, water and candy products. 3 ADC has sought to increase sales to convenience stores and petroleum marketers by adopting a number of operating strategies which it believes gives it a competitive advantage with these types of retailers. One key operating strategy is a commitment to customer service. In a continuing effort to provide better service than its competitors, ADC carries a broad and diverse product line which allows ADC to offer "one-stop shopping" to its customers. ADC offers self-service health and beauty programs, grocery products and custom food service programs which have proven to be profitable to convenience store customers. In addition, ADC has a policy of next-day delivery and employs a concept of selling products in cut-case quantities or "by the each" (i.e., individual units). ADC also offers planograms to convenience store customers to assist in the design of their store and display of products within the store. ADC has worked to improve its operating efficiency by investing in the latest in systems technology, including computerization of buying and financial control functions. ADC has also sought to reduce inventory expenses by improving the number of times its inventory is renewed during a period ("inventory turns") for the same level of sales. Inventory turns improved from 16.3 times in fiscal 1994 to 17.5 times in fiscal 1995 and 21.2 times in fiscal 1996 to 21.8 times in fiscal 1997. Inventory turns declined slightly to 19.6 times in fiscal 1998 as ADC managed its inventory levels to take advantage of manufacturers price increases anticipated by management. By keeping its operating costs down, ADC is better able to price its products in such a manner to achieve an advantage over less efficient distributors in its market areas. ADC has seven distribution centers located in Kansas, Missouri, Nebraska, North Dakota, South Dakota, and Wyoming. These distribution centers contain a total of approximately 311,100 square feet of floor space and employ state-of-the-art equipment for the efficient distribution of the large and diverse product mix sold by ADC. ADC also operates a fleet of approximately 90 delivery vehicles, ranging from half-ton vans to over-the-road vehicles with refrigerated trailers. NATURAL FOOD BUSINESS FFH is a distributor of natural foods and related products serving approximately 1,000 health and natural food retailers in the western United States. FFH distributes approximately 15,000 different products consisting of national brands, regional brands, private label and master distribution products including vitamin and mineral supplements, herbal preparations, skin and hair care, dairy and dairy substitutes, frozen foods, general grocery and organic produce. FFH's suppliers number approximately 600 and include well known national brands such as Twin Labs, Schiff Bio Foods, Weider, Hain Pure Foods, Arrowhead Mills, Knudsen, Nature's Way and Health Valley. FFH also markets proprietary brand products under the trade names Healthy Edge and Nutri-Value . The products offered are consumer packages of nuts, seeds, grains, pastas, sweeteners, cereals and snacks items. The Company believes that FFH is positioned to provide unequaled service to independent health and natural food retail stores of all size and type. FFH pays particular attention to the ongoing needs of its customers and is forward looking in developing progressive marketing programs such as the Nutri-Value Retailers Association which provides co-operative and preferential buying advantages beyond those generally available through other types of programs offered in the market. 4 FFH's primary distribution location and main office is located in a 132,000 square foot facility located in Phoenix, Arizona. Since August 1998, FFH has also operated out of cross-dock facility located near Dallas, Texas. FFH operates its own fleet of over-the-road and straight trucks equipped to provide full refrigerated, dry and frozen food service. ACQUISITIONS ADC was incorporated in Delaware in 1986 to carry on the business of General Tobacco and Candy Company ("General Tobacco"), a Nebraska corporation which was the predecessor to ADC. Since 1981, the Company has acquired 22 consumer product distributors in the Great Plains, Rocky Mountain and Southwest regions of the United States. In June 1993, ADC acquired Sheya Brothers Specialty Beverages, Inc., a beer, malt beverage and "New Age" beverage distribution company. In September 1995, ADC sold the "New Age" beverage distribution business and in October 1996, ADC sold the beer and malt beverage business. In November 1996, ADC purchased a water bottling business from American Star Water Company, Inc. In October 1997, ADC purchased the assets of a traditional candy and tobacco distribution company in St. Louis, Missouri, thereby expanding ADC's market area to include eastern Missouri, Illinois and Indiana. In November 1997, ADC purchased all of the outstanding stock of FFH. In November 1998, FFH purchased all of the outstanding stock of U.S. Health Distributors, Inc. PRINCIPAL PRODUCTS CIGARETTES. Sales of cigarettes and the gross margin derived therefrom for the fiscal years ending September 30, 1998, 1997, and 1996 are set forth below: (Dollars in Millions) Fiscal Year Ended September 30, ------------------------------------ 1998 1997 1996 ------ ------ ------ Sales $185.5 $117.6 $112.5 Gross Margin 13.3 10.8 10.8 Gross Margin Percentage 7.2% 9.2% 9.6% Revenues from the sale of cigarettes during fiscal 1998 increased by 57.8% as compared to fiscal 1997, while gross profit from the sale of cigarettes increased by 23.1% during the same period (see "MANAGEMENT'S DISCUSSION AND ANALYSIS-Results of Operations-Year Ended September 30, 1998 Versus Year Ended September 30, 1997" in the Annual Report to Stockholders for the Fiscal Year Ended September 30, 1998). Sales of cigarettes represented approximately 63% of the Company's sales volume during fiscal 1998. ADC has sought to position itself to capitalize on consumer demand for discount or value-priced cigarettes by marketing its own private label cigarette. Substantial price increases implemented by manufacturers of premium cigarettes during the late 1980's and early 1990's resulted in a demand for private label cigarettes, which are sold at lower prices than premium brands. The Company began marketing private label cigarettes in 1983 as a high-quality, value-priced alternative to premium cigarettes. Since 5 1988, ADC's private label cigarettes have been manufactured under an exclusive agreement with Philip Morris Incorporated. This agreement was renewed in October 1998 for a term of three years. NATURAL FOODS AND RELATED PRODUCTS. Natural foods and related products, which are primarily sold by FFH, constitute the Company's second largest-selling product line, representing approximately 10.6% of the Company's total sales volume during fiscal 1998. Sales of natural food items for the period from November 10, 1998 through September 30, 1998, the period after the acquisition of FFH, was $31.2 million. Gross margin and the gross margin percentage derived therefrom was $7.7 million and 24.8%, respectively. CONFECTIONERY. Candy and related confectionery items, which are primarily sold by ADC, constitute the Company's third largest-selling product line, representing approximately 10.0% of the Company's total sales volume during fiscal 1998. Sales of confectionery items and the gross margin derived therefrom for the fiscal years ending September 30, 1998, 1997 and 1996 are set forth below: (Dollars in Millions) Fiscal Year Ended September 30, ------------------------------------- 1998 1997 1996 ------ ------ ------ Sales $29.3 $21.8 $20.6 Gross Margin 3.6 3.0 3.0 Gross Margin Percentage 12.3% 13.8% 14.6% ADC supplies customers with over 1,900 different types of candy and related products, including chocolate bars, cookies, chewing gum, nuts and other snack items. Major brand names include products manufactured by Hershey (Reese's, Kit Kat, and Hershey), Mars (Snickers, M&M's, and Milky Way), William Wrigley and Planters-Lifesavers. The Company also markets its own private label candy under a manufacturing agreement with Willmar Cookie & Nut Company. OTHER PRODUCT LINES. Over the past eight years, AMCON's strategy has been to expand its portfolio of consumer products in order to better serve its customer base. AMCON's other product lines include cigars and other tobacco products, water and other beverages, groceries, paper products, health and beauty care products and institutional food products. During fiscal 1998, AMCON's sales of other products increased $9.1 million or 23.3%. During fiscal 1998 the gross profit margin on these types of products was 14.5%, compared to a 7.2% margin on cigarettes. COMPETITION Both the traditional distribution and natural food distribution businesses are highly competitive. There are many distribution companies operating in the same geographical regions as the Company, and competition in the distribution industry is intense. ADC's principal competitors are national wholesalers such as McLane Co., Inc. (Temple, Texas) and regional wholesalers such as Farner-Bocken (Carroll, Iowa), Merchants Wholesale (Quincy, IL) and Minter-Weisman Co. (Minneapolis, Minnesota) along with a host of smaller grocery and tobacco wholesalers. FFH's principal competitors are national distributors such as Tree of Life Distribution and United Natural 6 Foods and regional distributors such as Nature's Best along with numerous smaller specialty distributors of natural products. Most of these competitors generally offer a wide range of products at prices comparable to the Company's. Therefore, the Company seeks to distinguish itself from its competitors by offering a higher level of customer service. GOVERNMENT REGULATION Various state government agencies regulate the distribution of cigarettes and tobacco products in several ways, including the imposition of excise taxes, licensing and bonding requirements. Complying with these regulations is a very time-consuming, expensive and labor-intensive undertaking. For example, each state (as well as certain cities and counties) requires the Company to collect excise taxes ranging from $1.20 to $5.80 per carton on all cigarettes sold by it in the state. Such excise taxes must be paid in advance and, in most states, is evidenced by a stamp which must be affixed to each package of cigarettes. The Company is also subject to regulation by state and local health departments, the U.S. Department of Agriculture, the Food and Drug Administration and the Drug Enforcement Administration. These agencies generally impose standards for product quality and sanitation, as well as for setting security and distribution policies. EMPLOYEES As of September 30, 1998, the Company had 554 full-time and part-time employees in the following areas: Managerial 15 Administrative 68 Sales & Marketing 112 Warehouse 260 Delivery 99 --- Total Employees 554 === None of the Company's employees are subject to any collective bargaining agreements with the Company and management believes its relations with its employees are good. 7 ITEM 2. PROPERTIES The location and approximate square footage of the eight principal distribution centers operated by AMCON as of September 30, 1998 are set forth below: Location Square Feet -------- ----------- ADC - ----- Bismarck, North Dakota 28,100 Casper, Wyoming 19,100 Olathe, Kansas 5,000 Omaha, Nebraska 70,300 Rapid City, South Dakota 21,600 Springfield, Missouri 97,000 St. Louis, Missouri 70,000 FFH - ----- Phoenix, Arizona 132,000 ------- Total 443,100 ======= The Company owns its distribution facility in Bismarck, North Dakota. The Company owns one other building that is no longer used as a distribution facility and is leased to a third party. Each of these facilities is subject to a first mortgage securing borrowings under the Company's revolving credit facility (see "MANAGEMENT'S DISCUSSION AND ANALYSIS-Liquidity and Capital Resources" in the Annual Report to Stockholders for the Fiscal Year Ended September 30, 1998). The Company leases its remaining distribution facilities and offices and certain equipment under noncancellable operating leases. Leases for the seven distribution facilities leased by the Company have terms expiring from 1999 to 2006. Minimum future lease commitments for these properties and equipment total approximately $10.0 million as of September 30, 1998. During fiscal 1998, the Company completed construction of an 18,500 square foot addition to its Bismarck, ND distribution facility. The Company then combined its Aberdeen, SD facility with Bismarck, ND and now operates Aberdeen as a cross-dock distribution point serviced by the Bismarck facility. Effective October 10, 1997, the Company leased a 70,000 square foot facility in St. Louis, Missouri in connection with the asset purchase of a distribution business in St. Louis. Also, effective November 10, 1997, the Company purchased all of the outstanding stock of FFH which operates in a 132,000 square foot leased facility in Phoenix, AZ. Management believes that its existing facilities, are adequate for the Company's present level of operations and will be capable of accommodating the Company's anticipated growth. 8 In addition, the Company owns, in fee simple, a condominium in the Cayman Islands which had a book value of approximately $732,100 as of September 30, 1998. The Company uses the condominium in furtherance of its business strategies and is evaluating the costs and benefits associated with retaining the condominium. The Company and AMCON Corporation, the former parent of the Company, purchased the condominium in 1990 for total consideration of $1,099,250. AMCON Corporation transferred its ownership interest in the condominium to the Company as of September 30, 1992 at its net book value of $591,596 in partial payment of an intercompany debt owed by AMCON Corporation to the Company. Under an agreement with AMCON Corporation, the greater of the first $400,000 of the net gain or one-half of the net gain from the ultimate sale of this property will be allocated to AMCON Corporation. See Item 13 - "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." ITEM 3. LEGAL PROCEEDINGS. The Company is subject to claims and litigation in the ordinary course of its business. However, in the opinion of management, no currently pending legal proceedings or claims against the Company will, individually or in the aggregate, have a material adverse effect on the Company's financial condition or results of operations. The Company believes that all of its real property is in compliance with all regulations regarding the discharge of toxic substances into the environment and is not aware of any condition at its properties that could have a material adverse affect on its financial condition or results of operations. In that regard, the Company has not been notified by any governmental authority of any potential liability or other claim in connection with any of its properties. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of all security holders during the fourth quarter ended September 30, 1998. ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY. The Company's day-to-day affairs are managed by its executive officers, who are appointed by the Board of Directors for terms of one year. The executive officers of AMCON are as follows: Name Age Position ---- --- -------- William F. Wright 56 Chairman of the Board, Director Kathleen M. Evans 51 President of ADC, Director Jerry Fleming 60 President of FFH, Director Michael D. James 37 Secretary, Treasurer and Chief Financial Officer 9 WILLIAM F. WRIGHT has served as the Chairman and Chief Executive Officer of AMCON Corporation (the former parent of ADC) since 1976 and as Chairman of the Company since 1981. From 1968 to 1984, Mr. Wright practiced corporate and securities law in Lincoln, Nebraska. Mr. Wright is a graduate of the University of Nebraska and Duke University School of Law and is a certified public accountant. Mr. Wright is also a director of Gold Banc Corporation, Inc., a NASDAQ company. KATHLEEN M. EVANS became President of the Company in February 1991. Prior to that time she served as Vice President of AMCON Corporation since 1985. From 1978 until 1985, Ms. Evans acted in various capacities with AMCON Corporation and its operating subsidiaries. JERRY FLEMING became President of FFH in 1992. Mr. Fleming is a 36 year veteran of the health and natural foods industry and prior to joining FFH, served as President of Nature's Way (Murdock Health Care),a leading manufacturer of herbal remedies; Vice President of the Natural Foods Group for Tree of Life, Inc.; President of the South East division of Tree of Life; President of Collegedale Distributors; President of Healthway Specialty Foods, Inc.; Vice President of Landstrom Specialty Foods, Inc. and served eight years on the board of directors of the National Nutritional Foods Association. MICHAEL D. JAMES became Treasurer and Chief Financial Officer of the Company in June 1994. In November 1997, he assumed the responsibilities of Secretary of the Company. He is a certified public accountant and is responsible for all financial and reporting functions within the Company. Prior to joining AMCON, Mr. James practiced accounting for ten years with the firm of Price Waterhouse, serving as the senior tax manager of the Omaha, Nebraska office from 1992 until 1994. Mr. James graduated from Kansas State University in 1983. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The information required by this item is incorporated by reference from the Annual Report to Stockholders for the fiscal year ended September 30, 1998 under the heading "Market for Common Stock" on page 4. ITEM 6. SELECTED FINANCIAL DATA. The information required by this item is incorporated by reference from the Annual Report to Stockholders for the fiscal year ended September 30, 1998 under the heading "Selected Financial Data" on pages 2 and 3. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this item is incorporated by reference from the Annual Report to Stockholders for the fiscal year ended September 30, 1998 under the heading "Managements Discussion and Analysis" on pages 5 through 11. 10 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information required by this item is incorporated by reference from the Annual Report to Stockholders for the fiscal year ended September 30, 1998 under the heading "Managements Discussion and Analysis" on pages 5 through 11. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and accompanying notes, together with the report of independent accountants are incorporated by reference from the Annual Report to Stockholders for the fiscal year ended September 30, 1998 on pages F-1 through F-17. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The Registrant's Proxy Statement to be used in connection with the 1999 Annual Meeting of Stockholders (the "Proxy Statement") contains under the caption "Election of Directors" certain information required by Item 10 of Form 10-K and such information is incorporated herein by this reference. The information required by Item 10 of Form 10-K as to executive officers is set forth in Item 4A of Part I hereof. During the Company's most recent fiscal year, Mark A. Wright, a more than ten percent owner of the Company's outstanding Common Stock, failed to file, on a timely basis, Statement of Changes of Beneficial Ownership (Form 4), as required by Section 16(a) of the Securities Exchange Act of 1934, as amended. In addition, Timothy R. Pestotnik, a director of the Company, failed to file, on a timely basis, Initial Statement of Beneficial Ownership of Securities (Form 3), as required by Section 16(a) of the Securities Exchange Act of 1934, as amended. None of these failures resulted in any transactions with respect to the Common Stock of the Company being unreported. ITEM 11. EXECUTIVE COMPENSATION. The Proxy Statement contains under the captions "Compensation of Directors", "Compensation of Executive Officers" and "Compensation Committee Interlocks and Insider Participation", the information required by Item 11 of Form 10-K, and such information is incorporated herein by this reference. The information set forth under the captions "Report of Compensation Committee on Executive Compensation" and "Company Performance" is expressly excluded from such incorporation. 11 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The Proxy Statement contains under the caption "Voting Securities and Beneficial Ownership Thereof by Principal Stockholders, Directors and Officers" the information required by Item 12 of Form 10-K and such information is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Proxy Statement contains under the caption "Certain Relationships and Related Transactions" the information required by Item 13 of Form 10-K and such information is incorporated herein by this reference. 12 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) FINANCIAL STATEMENTS The following financial statements of AMCON Distributing Company are incorporated by reference under Item 8. The Annual Report to Stockholders for the Fiscal Year Ended September 30, 1998 is attached as Exhibit 13. Reference Page Annual Stockholders Report Report of Independent Accountants F-1 Consolidated Balance Sheets as of September 30, 1998 and 1997 F-2 Consolidated Statements of Income for the Years Ended September 30, 1998, 1997, and 1996 F-3 Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 1998, 1997 and 1996 F-4 Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, 1997 and 1996 F-6 Notes to Consolidated Financial Statements F-7 (2) FINANCIAL STATEMENT SCHEDULES Report of Independent Accountants S-1 Schedule II - Valuation and Qualifying Accounts S-2 (3) EXHIBITS 2.1 Stock Purchase Agreement dated November 3, 1997, between the Company and FFH Holdings, Inc. (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed on November 25, 1997) 3.1 Restated Certificate of Incorporation of the Company, as amended March 19, 1998 (incorporated by reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q filed on May 11, 1998) 3.3 Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1 (Registration No. 33-82848) filed on August 15, 1994) 4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-1 (Registration No. 33-82848) filed on August 15, 1994) 10.1 Grant of Exclusive Manufacturing Rights, dated October 1, 1993, between the Company and Famous Value Brands, a division of Philip Morris Incorporated, including Private Label Manufacturing Agreement and Amended and Restated Trademark License Agreement (incorporated by reference to Exhibit 10.1 of Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-82848) filed on November 8, 1994) 13 10.2 Amendment No. 1 to Grant of Exclusive Manufacturing Rights, dated October 1, 1998, between the Company and Famous Value Brands, a division of Philip Morris Incorporated, including Amendment No. 1 To Private Label Manufacturing Agreement and Amendment No. 1 to Amended and Restated Trademark License Agreement (Portions of Exhibit 10.2 have been omitted pursuant to request for confidential treatment and such omitted portions have been filed with the Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934) 10.3 Loan Agreement, dated November 10, 1997, between the Company and LaSalle National Bank (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on November 25, 1997) 10.4 Amended Loan Agreement, dated February 25, 1998, between the Company and LaSalle National Bank (incorporated by reference to Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q filed on May 11, 1998) 10.5 Note, dated November 10, 1997, between the Company and LaSalle National Bank (incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K filed on November 25, 1997) 10.6 First Allonge to Note, dated February 25, 1998, between the Company and LaSalle National Bank (incorporated by reference to Exhibit 10.7 of the Company's Quarterly Report on Form 10-Q filed on May 11, 1998) 10.7 Loan and Security Agreement, dated February 25, 1998, between the Company and LaSalle National Bank (incorporated by reference to Exhibit 10.8 of the Company's Quarterly Report on Form 10-Q filed on May 11, 1998) 10.8 Promissory Note, dated February 25, 1998, between the Company and LaSalle National Bank (incorporated by reference to Exhibit 10.9 of the Company's Quarterly Report on Form 10-Q filed on May 11, 1998) 10.9 Loan and Security Agreement, dated February 25, 1998, between Food For Health Co., Inc. and LaSalle National Bank (incorporated by reference to Exhibit 10.10 of the Company's Quarterly Report on Form 10-Q filed on May 11, 1998) 10.10 Promissory Note, dated February 25, 1998, between Food For Health Co., Inc. and LaSalle National Bank (incorporated by reference to Exhibit 10.11 of the Company's Quarterly Report on Form 10-Q filed on May 11, 1998) 10.11 Unconditional Guarantee, dated February 25, 1998, between the Company and LaSalle National Bank (incorporated by reference to Exhibit 10.12 of the Company's Quarterly Report on Form 10-Q filed on May 11, 1998) 14 10.12 AMCON Distributing Company 1994 Stock Option Plan (incorporated by reference to Exhibit 10.7 of the Company's Registration Statement on Form S-1 (Registration No. 33-82848) filed on August 15, 1994) 10.13 AMCON Distributing Company Profit Sharing Plan (incorporated by reference to Exhibit 10.8 of Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-82848) filed on November 8, 1994) 10.14 Employment Agreement, dated May 22, 1998, between the Company and William F. Wright (incorporated by reference to Exhibit 10.14 of the Company's Quarterly Report on Form 10-Q filed on August 6, 1998) 10.15 Employment Agreement, dated May 22, 1998, between the Company and Kathleen M. Evans (incorporated by reference to Exhibit 10.15 of the Company's Quarterly Report on Form 10-Q filed on August 6, 1998) 10.16 Employment Agreement, dated May 22, 1998, between the Food For Health Co., Inc. and Jerry Fleming (incorporated by reference to Exhibit 10.16 of the Company's Quarterly Report on Form 10-Q filed on August 6, 1998) 11.1 Statement re: computation of per share earnings (incorporated by reference to footnote 3 to the financial statements included in Item 13 herein) 13.1 Annual Report to Stockholders for the Fiscal Year Ended September 30, 1998 23.1 Consent of PricewaterhouseCoopers LLP 27.0 Financial Data Schedules (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Company during the fourth quarter ended September 30, 1998. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of 1934, the Registrant, AMCON Distributing Company, a Delaware corporation, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Omaha, State of Nebraska, on the 23rd day of December, 1998. AMCON DISTRIBUTING COMPANY By: /s/ Kathleen M. Evans ---------------------- Kathleen M. Evans, President 16 Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons in the capacities indicated on the 23rd day of December, 1998. Signature Title --------- ----- /s/ William F. Wright Chairman of the Board, Director - ------------------------ William F. Wright /s/ Kathleen M. Evans President (Principal Executive - ------------------------ Officer) and Director Kathleen M. Evans /s/ Michael D. James Treasurer, Chief Financial Officer - ------------------------ and Secretary (Principal Financial Michael D. James and Accounting Officer) /s/ J. Tony Howard Director - ------------------------ J. Tony Howard /s/ Allen D. Petersen Director - ------------------------ Allen D. Petersen /s/ Jerry Fleming Director - ------------------------ Jerry Fleming /s/ Timothy R. Pestotnik Director - ------------------------ Timothy R. Pestotnik Director - ------------------------ William R. Hoppner 17 EX-10.2 2 AMENDMENT NO. 1 TO GRANT OF EXCLUSIVE MANUFACTURING RIGHTS, INCLUDING AMENDMENT NO. 1 TO PRIVATE LABEL MANUFACTURING AGREEMENT AND AMENDMENT NO. 1 TO AMENDED AND RESTATED TRADEMARK LICENSE AGREEMENT AMENDMENT NO. 1 TO GRANT OF EXCLUSIVE MANUFACTURING RIGHTS THIS AMENDMENT NO. 1 is made as of the 1st day of October, 1998 (this "Amendment"), between FAMOUS VALUE BRANDS, a division of PHILIP MORRIS INCORPORATED, a Virginia corporation with offices at 120 Park Avenue, New York, New York 10017 ("Manufacturer"), and AMCON DISTRIBUTING COMPANY, a Delaware corporation with offices at 10228 L Street, Omaha, Nebraska 68127 (together with its successors, permitted assigns and affiliates, "Grantor"). PRELIMINARY STATEMENTS A. Manufacturer and Grantor entered into that certain Grant of Exclusive Manufacturing Rights dated as of October 1, 1993 (the "Grant Agreement"), providing for, among other things, Grantor to grant and convey to Manufacturer exclusive rights to manufacture for Grantor any and all proprietary private label brand cigarettes for sale and distribution in the United States, including cigarettes utilizing the trademark(s) and package designs identified on EXHIBIT A attached thereto. B. Manufacturer and Grantor desire to amend certain provisions of the Grant Agreement as more particularly described herein, and to continue the Grant Agreement, as amended hereby, the Private Label Manufacturing Agreement, dated as of October 1, 1993, as amended by Amendment No. 1 dated as of the date hereof, between Manufacturer and Grantor (the "Private Label Manufacturing Agreement"), and the Amended and Restated Trademark License Agreement, dated as of October 1, 1993, as amended by Amendment No. 1 dated as of the date hereof, between Manufacturer and Grantor (the "Amended and Restated Trademark License Agreement"), in full force and effect on the terms contained therein and herein. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE I AMENDMENTS SECTION 1.1 AMENDMENT TO SECTION 1.1. The Grant Agreement is hereby amended by deleting Section 1.1 thereof in its entirety and inserting in lieu thereof the following new Section 1.1: "SECTION 1.1 GRANT OF EXCLUSIVE MANUFACTURING RIGHTS. Subject to the terms and provisions of Section 2.1(b), Grantor does hereby grant, sell, convey, transfer, assign and deliver to Manufacturer and its successors and assigns, free and clear of all liens, charges, claims, encumbrances or rights or interests of third parties of any nature and description whatsoever, exclusive rights to manufacture all and any private label brand cigarettes bearing the trademarks or any other trademarks or trade names owned, used or licensed now or hereafter by the Grantor ("Private Label Products") for a period commencing on the date hereof and continuing until the expiration of the Initial Term. (as defined in Section 4.1) or any later date to which this Agreement is extended pursuant to Section 4.1 hereof." SECTION 1.2 AMENDMENT TO SECTION 1.2. The Grant Agreement is hereby amended by deleting the words "Section 4.2(b) or" from the fourth sentence appearing in Section 1.2. SECTION 1.3 AMENDMENT TO SECTION 1.3. The Grant Agreement is hereby amended by deleting Section 1.3 in its entirety and inserting in lieu thereof the following new Section 1.3: "SECTION 1.3 EXCLUSIVE RELATIONSHIPS. Grantor has advised Manufacturer, and Manufacturer acknowledges, that Grantor has certain pre-existing agreements pursuant to which certain Private Label Products listed on Schedule A hereto (as the same may be amended or supplemented from time to time with the consent of the parties) are manufactured for and sold exclusively by Grantor within certain prescribed geographical areas to retail and wholesale customers (as and to the extent the same are in effect on the date hereof, the "Pre-existing Agreements"). Manufacturer hereby grants the Grantor, effective as of the date Grantor acquired such rights under the Pre-existing Agreements, a license and interest in the exclusive manufacturing rights granted to Manufacturer hereby, for a period equal to the applicable term of each Pre-existing Agreement. Manufacturer further agrees that the exercise of the Grantor's rights and the performance of the Grantor's obligations under the Pre-existing Agreements shall not constitute a breach of any provision of this Agreement or entitle Manufacturer to reduce Manufacturer's Annual Payment pursuant to Section 1.2. Except as expressly contemplated by this Section 1.3, Grantor will not enter into any agreements, arrangements or understandings with respect to the exclusive distribution within any regional or national geographic area within the United States of any brand of cigarettes manufactured by any manufacturer other than Manufacturer, and Grantor hereby represents to Manufacturer that Grantor is not on the date hereof a party to any such agreements, arrangements or understandings. Without limiting the generality of the foregoing, Grantor will only distribute Private Label Products manufactured by Manufacturer, other than Private Label Products that Manufacturer has declined to manufacture pursuant to the terms of this Agreement. For purposes of this Agreement, Private Label Products shall also include without limitation any private label brand cigarettes for which Grantor becomes the supplier to two or more competing retail customers." SECTION 1.4 AMENDMENT TO SECTION 4.1. The Grant Agreement is hereby amended by deleting Section 4.1 in its entirety and inserting in lieu thereof the following new Section 4.1: "SECTION 4.1 TERM. Unless earlier terminated pursuant to Section 4.2 of this Agreement, this Agreement shall continue for an initial term (the "Initial Term") of eight (8) years following the date of this Agreement, beginning on October 1, 1993 and ending on September 30, 2001, and thereafter this Agreement shall continue in effect upon the same terms and conditions for one or more additional one-year periods (each a "Renewal Period") unless, at least ninety (90) days prior to the end of the Initial Term, or any successive Renewal Period, either party provides the other with written notice of its intent not to renew this Agreement." SECTION 1.5 AMENDMENT TO SECTION 4.2. The Grant Agreement is hereby amended by deleting clause (3) of paragraph (a) of Section 4.2 in its entirety and by deleting paragraph (b) of section 4.2 in its entirety. SECTION 1.6 AMENDMENT TO SECTION 4.3. Section 4.3 of the Grant Agreement is hereby amended as follows: (a) By replacing the reference in clause (1) of Section 4.3(a) to "thirty (30)" with a reference to "sixty (60)"; (b) By deleting the words "the expiration of the Non-Exclusive Period" in the fourth sentence of Section 4.3(a) and inserting in lieu thereof "delivery to Manufacturer of the Offer;" and (c) By deleting the words "which is thirty (30) days following the Scheduled Expiration Date" appearing at the end of the penultimate sentence in Section 4.3(a). ARTICLE II GENERAL PROVISIONS SECTION 2.1 GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of New York (other than the choice of law provisions thereof). SECTION 2.2 ENTIRE AGREEMENT. The Grant Agreement, as amended by this Amendment, constitutes the entire agreement between the parties with respect to the subject matter hereof and supercedes all prior and contemporaneous agreements, contracts, negotiations and understandings between them (other than the Private Label Manufacturing Agreement and the Amended and Restated Trademark License Agreement). This Agreement does not constitute a waiver or the relinquishment of any right, claim or interest of the parties other than those based on facts and circumstances known to the parties. SECTION 2.3 NO FURTHER MODIFICATION. The Grant Agreement, the Private Label Manufacturing Agreement and the Amended and Restated Trademark License Agreement shall remain in full force and effect on the terms and conditions contained therein and herein. The Grant Agreement shall not be deemed to be amended, modified or supplemented in any respect except as expressly set forth in this Amendment. For purposes of this Amendment, each of the representations and warranties of Manufacturer in Section 3.1 of the Grant Agreement shall be deemed to be made by Manufacturer on and as of the date hereof, and each of the representations and warranties of Grantor in Section 3.2 of the Grant Agreement shall be deemed to be made by Grantor on and as of the date hereof. SECTION 2.4 SEVERABILITY. If any provision of this Amendment is determined to be invalid or unenforceable, the provision shall be deemed to be severable from the remainder of this Amendment and shall not cause the invalidity or unenforceability of the remainder of this Amendment. SECTION 2.5 COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, this Amendment No. 1 to the Grant Agreement has been duly executed as of the date first above written. FAMOUS VALUE BRANDS, a division of PHILIP MORRIS INCORPORATED, a Virginia corporation By: Norma Suter ----------- Name: Norma Suter Title: VP Marketing, Discount Brands Dated: 6/28/98 AMCON DISTRIBUTING COMPANY By: Kathleen M. Evans ----------------- Name: Kathleen M. Evans Title: President Dated: 6/25/98 SCHEDULE A "EAGLE" "VEGAS" "BUZ" "GUNSMOKE" Tabacalera's "FIRST CLASS" and "ULTRA BUY" AMENDMENT NO. 1 TO PRIVATE LABEL MANUFACTURING AGREEMENT THIS AMENDMENT NO. 1 is made as of the 1st day of October, 1998 (this "Amendment"), between FAMOUS VALUE BRANDS, a division of PHILIP MORRIS INCORPORATED, a Virginia corporation with offices at 120 Park Avenue, New York, New York 10017 ("Manufacturer"), and AMCON DISTRIBUTING COMPANY, a Delaware corporation with offices at 10228 L Street, Omaha, Nebraska 68127 (together with its successors, permitted assigns and affiliates, "Customer"). PRELIMINARY STATEMENTS A. Manufacturer and Customer entered into that certain Private Label Manufacturing Agreement dated as of October 1, 1993 (the "Manufacturing Agreement"), providing for, among other things, Manufacturer to manufacture and sell to Customer certain private label brand cigarettes utilizing the Trademarks (as defined in the Manufacturing Agreement). B. Manufacturer and Customer desire to amend certain provisions of the Manufacturing Agreement as more particularly described herein, and, except as amended hereby, the Manufacturing Agreement shall continue in full force and effect on the terms contained therein and herein. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE I AMENDMENTS SECTION 1.1 AMENDMENT TO SECTION 1.4. The Manufacturing Agreement is hereby amended by deleting Section 1.4 in its entirety and inserting in lieu thereof the following new Section 1.4: "SECTION 1.4 FORCE MAJEURE. Manufacturer's obligation to manufacture and deliver the Products under this Agreement shall be to use its reasonable efforts to satisfy the requirements of Customer for the Products. Without limiting the generality of the preceding sentence, this Agreement shall not require that Manufacturer produce any packing of the Products which is uneconomical for Manufacturer to produce due to the unreasonably low level of sales of such packing relative to other Products. Furthermore, without limiting the generality of the foregoing or other provisions in this Agreement with respect to the limitation of Manufacturer's obligations or liabilities hereunder, Manufacturer shall have no obligation or liability for satisfying the requirements of Customer or any Associate Distributor, and shall have no liability for the consequences of (including without limitation for consequential damages for) any failure to perform, or default in performing, any of its obligations under this Article I of this Agreement if that failure arises out of, is based upon or results from Force Majeure (as defined below). For purposes of this Agreement, "Force Majeure" shall mean war (whether declared or not); revolution; invasion; insurrection; riot; civil commotion; mob violence; sabotage; blockade; military or usurped power; lightning; serious destruction; explosion; fire; storm; high winds; drought or other shortage of water; flood; earthquake; strike; labor disturbances; acts or restraints of governmental or quasi-governmental authorities (including any changes in applicable laws and regulations); or any act of God beyond the control of the Manufacturer. To the extent that a Force Majeure condition or conditions exists which prevents Manufacturer from manufacturing and delivering to Customer its full requirement of the Products, Customer shall have the right to purchase such Products from other manufacturers for so long as Manufacturer is unable to fulfill Customer's requirements for Products under this Agreement." SECTION 1.2 AMENDMENT TO SECTION 3.1. The Manufacturing Agreement is hereby amended by deleting Section 3.1 thereof in its entirety and inserting in lieu thereof the following new Section 3.1: "SECTION 3.1 TERM. This Agreement shall continue for an initial term (the "Initial Term") of eight (8) years following the date of this Agreement, beginning on October 1, 1993 and ending on September 30, 2001. Following the Initial Term, this Agreement shall continue in effect upon the same terms and conditions for one or more additional one-year periods (each "Renewal Period") unless, at least ninety (90) days prior to the end of the Initial Term, or any successive Renewal Period, either party provides the other with written notice of its intent not to renew this Agreement. Notwithstanding the foregoing, this Agreement shall be extended to any Extended Expiration Date (as defined in the Grant of Exclusive Manufacturing Rights, dated the date hereof (the "Grant Agreement"), between Manufacturer and Customer)." SECTION 1.3 AMENDMENT TO SECTION 3.2. The Manufacturing Agreement is hereby amended by deleting Section 3.2 in its entirety and inserting in lieu thereof the following new Section 3.2: "SECTION 3.2 OBLIGATION OF CUSTOMER UPON TERMINATION. Upon termination of this Agreement, Customer and Manufacturer shall negotiate in good faith the costs and expenses, if any, to be borne by Customer that are or have been incurred by the Manufacturer with regard to finished and unfinished Product and packaging inventory; provided that, Manufacturer shall be entitled to sell and dispose of all such finished and unfinished Product and packaging inventory that Customer shall not have agreed to purchase from Manufacturer." ARTICLE II GENERAL PROVISIONS SECTION 2.1 NO FURTHER MODIFICATION. The Manufacturing Agreement shall remain in full force and effect and shall not be deemed to be amended, modified or supplemented in any respect except as expressly set forth in this Amendment. For purposes of this Amendment, each of the representations and warranties of Manufacturer in Section 2.1 of the Manufacturing Agreement shall be deemed to be made by Manufacturer on and as of the date hereof, and each of the representations and warranties of Customer in Section 2.2 of the Manufacturing Agreement shall be deemed to be made by Customer on and as of the date hereof. SECTION 2.2 SEVERABILITY. If any provision of this Amendment is determined to be invalid or unenforceable, the provision shall be deemed to be severable from the remainder of this Amendment and shall not cause the invalidity or unenforceability of the remainder of this Amendment. SECTION 2.3 GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of New York (other than the choice of law provisions thereof). SECTION 2.4 ENTIRE AGREEMENT. The Manufacturing Agreement, as amended by this Amendment, constitutes the entire agreement between the parties with respect to the Products (as defined in the Manufacturing Agreement) and supersedes all prior and contemporaneous agreements, contracts, negotiations and understandings between them (other than the Grant of Exclusive Manufacturing Rights, dated as of October 1, 1993, between Manufacturer and Customer, as Amended by Amendment No. 1 dated the date hereof, and the Amended and Restated Trademark License Agreement, dated as of October 1, 1993, between Manufacturer and Customer, as amended by Amendment No. 1 dated the date hereof). SECTION 2.5 COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, this Amendment No. 1 has been duly executed as of the date first above written. FAMOUS VALUE BRANDS, a division of PHILIP MORRIS INCORPORATED, a Virginia corporation By: Norma Suter ----------- Name: Norma Suter Title: VP Marketing, Discount Brands Dated: 6/28/98 AMCON DISTRIBUTING COMPANY By: Kathleen M. Evans ----------------- Name: Kathleen M. Evans Title: President Dated: 6/25/98 AMENDMENT NO.1 TO AMENDED AND RESTATED TRADEMARK LICENSE AGREEMENT THIS AMENDMENT NO. 1 is made as of the 1st day of October, 1998 (this "Amendment"), between FAMOUS VALUE BRANDS, a division of PHILIP MORRIS INCORPORATED, a Virginia corporation with offices at 120 Park Avenue, New York, New York 10017 ("Manufacturer"), and AMCON DISTRIBUTING COMPANY, a Delaware corporation with offices at 10228 L Street, Omaha, Nebraska 68127 (together with its successors, permitted assigns and affiliates, "AMCON"). WHEREAS, this Amendment is an amendment to that certain Amended and Restated Trademark and License Agreement, dated as of October 1, 1993 (the "Amended and Restated Trademark and License Agreement"), between Manufacturer and AMCON. NOW, THEREFORE, Manufacturer and AMCON agree as follows: ARTICLE I AMENDMENTS SECTION 1.1 AMENDMENT TO SECTION 2. The Amended and Restated Trademark and License Agreement is hereby amended by deleting Section 2 thereof in its entirety and inserting in lieu thereof the following new Section 2: THIS SECTION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED WITH THE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934. SECTION 1.2 AMENDMENT TO SECTION 4. The Amended and Restated Trademark License Agreement is hereby amended by deleting Section 4 thereof in its entirety and inserting in lieu thereof the following Section 4: "4. The term of this Agreement shall be for an initial term (the "Initial Term") of eight (8) years following the date of this Agreement, beginning on and as of October 1, 1993 and ending on and as of September 30, 2001. Not withstanding the foregoing, this Agreement shall be extended to any Extended Expiration Date (as defined in the Grant of Exclusive Manufacturing Rights, dated the date hereof (the "Grant Agreement"), between Manufacturer and AMCON). Following the Initial Term, this Agreement shall continue in effect upon the same terms and conditions for one or more additional one- year periods (each a "Renewal Period") unless, at least ninety (90) days prior to the end of the Initial Term, or any successive Renewal Period, either party provides the other with written notice of its intent not to renew this Agreement. This Agreement may also be terminated in its entirety upon not less than thirty (30) days' written notice by either party if the other is in material breach of any provision hereof not cured within ten (10) days of written notice of such breach. Upon any expiration or termination of this Agreement, Manufacturer shall have the right to exhaust, in the ordinary course of business, its existing stock of cigarettes bearing the Trademark, unless such stock is otherwise disposed of in accordance with the Manufacturing Agreement." ARTICLE II GENERAL PROVISIONS SECTION 2.1 NO FURTHER MODIFICATION. The Amended and Restated Trademark License Agreement shall remain in full force and effect on the terms and conditions contained therein and herein, and shall not be deemed to be amended, modified or supplemented in any respect except as expressly set forth in this Amendment. SECTION 2.2 SEVERABILITY. If any provision of this Amendment is determined to be invalid or unenforceable, the provision shall be deemed to be severable from the remainder of this Amendment and shall not cause the invalidity or unenforceability of the remainder of this Amendment. SECTION 2.3 GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the state of New York (other than the choice of law provisions thereof). SECTION 2.4 ENTIRE AGREEMENT. This Amendment constitutes the entire agreement between the parties with respect to the subject matter hereof. IN WITNESS WHEREOF the parties have duly executed this Amendment as of the date first set out above. FAMOUS VALUE BRANDS, a division of PHILIP MORRIS INCORPORATED, a Virginia corporation By: Norma Suter ----------- Name: Norma Suter Title: VP Marketing, Discount Brands Dated: 6-28-98 AMCON DISTRIBUTING COMPANY By: Kathleen M. Evans ------------------ Name: Kathleen M. Evans Title: President Dated: 6-25-98 SCHEDULE A THIS SECTION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED WITH THE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934. EX-13.1 3 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13.1 Annual Report to Stockholders for the Fiscal Year Ended September 30, 1998 TO OUR SHAREHOLDERS: Fiscal 1998, like fiscal 1997, was another record year for your Company - record sales and record earnings. In fiscal 1997, a significant part of our earnings came from the sale of our Denver operation. In fiscal 1998, we showed significant growth in operating earnings (a 94% increase) which allowed us to increase our overall earnings by 21% despite the fact that we did not have any one-time benefit from a sale such as Denver. We believe this is extremely significant, as we continue to build a solid base of operating earnings. We continue to be committed to becoming one of America's premiere full-line distributors of consumer convenience and health food products. At the same time, our Board of Directors has deemed it appropriate to begin to return some of our earnings to you, our Shareholders. In December 1998, a $0.02 per share dividend was declared by the Board. Although we cannot predict the future, we hope that dividends will continue with regularity. Financial Review Our new sales record of $294 million (a 64% increase from our previous annual record) was achieved through the growth of our basic businesses and the addition of Food for Health for much of the year. Record earnings were achieved through the increases in sales and the continuing efforts of your management to enhance productivity. For continuing to achieve these efficiencies, we are deeply grateful to all of our people at both AMCON Distributing and its subsidiary, Food For Health. We continue to believe that it is these dedicated people who are your Company's greatest asset. Strategies We continue to seek out opportunities for acquisition both in the traditional distribution business and in the health food sector. In doing so, we will not neglect our existing business and customers. Recently, we acquired all of the capital stock of U.S. Health Distributors, Inc. This acquisition not only brought to us some fine, committed people, but also allows us to further extend our geographic coverage. Although U.S. Health does business nationwide, a large part of its business is presently done in the southeast sector of the United States from their Melbourne, Florida location. In addition, earlier this year, we established a cross-dock facility near Dallas, Texas to handle our health food products. The Future Last year at this time, we anticipated creating a holding company with two operating subsidiaries: one focusing on traditional product categories; and the other focusing on health-related products. We no longer believe that a holding company is necessary. Within our present structure, with the parent handling traditional product categories and a wholly-owned subsidiary handling health-related products, both companies can be operated efficiently. This allows us to eliminate potential duplicate costs and operate on a very streamlined basis. Recently, Bill Hoppner returned to our Board of Directors. His addition allowed us to achieve a majority of outside Directors on our Board. We continue to be committed to that concept and hope that, in the future, additional outside directors can be added to our Board. We are excited about our future and we assure you that we will do our best to maintain our growth pattern in the years to come. We wish to thank you, our Shareholders, for your continuing support. In addition, we are grateful for the loyal support of our suppliers and customers and, as mentioned earlier, are deeply thankful for the efforts of every 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 Financial Statements and Notes thereto included in this Annual Report.
(Dollars in thousands, except per share data) - -------------------------------------------------------------------------------------------------------- FISCAL YEAR ENDED SEPTEMBER 30, 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------- Sales................................... $ 294,281 $ 178,991 $ 176,145 $ 169,790 $ 170,143 Cost of sales........................... 262,633 159,435 155,885 149,756 147,533 --------- --------- --------- --------- --------- Gross profit............................ 31,648 19,556 20,260 20,034 22,610 Operating expense....................... 26,209 16,753 17,504 17,183 18,859 --------- --------- --------- --------- --------- Income from operations.................. 5,439 2,803 2,756 2,851 3,751 Interest expense........................ 1,814 867 1,149 1,543 1,553 Other (income) expense, net............. (276) (1,353) (697) (228) 36 --------- --------- --------- --------- --------- Income before income taxes, extraordinary item.................... 3,901 3,289 2,304 1,536 2,162 Income before extraordinary item....... 2,358 1,941 1,336 922 1,297 Extraordinary item...................... - - - - (295)/1/ --------- --------- --------- --------- --------- Net income.............................. 2,358 1,941 1,336 922 1,002 Accretion of warrants /2/............... - - - - (133) Accretion of preferred stock /3/ ....... - - (83) (100) (17) --------- --------- --------- --------- --------- Net income attributable to common shareholders .................. $ 2,358 $ 1,941 $ 1,253 $ 822 $ 852 ========= ========= ========= ========= ========= Earnings per common and common equivalent share attributable to common shareholders: Basic: Income before extraordinary item (net of accretion)........... $ 0.96 $ 0.79 $ 0.51 $ 0.33 $ 0.46 Extraordinary item.................. $ - $ - $ - $ - $ (0.12) --------- --------- --------- --------- --------- Net income.......................... $ 0.96 $ 0.79 $ 0.51 $ 0.33 $ 0.34 ========= ========= ========= ========= ========= Diluted: Income before extraordinary item (net of accretion)........... $ 0.93 $ 0.79 $ 0.51 $ 0.33 $ 0.46 Extraordinary item.................. $ - $ - $ - $ - $ (0.12) --------- --------- --------- --------- --------- Net income.......................... $ 0.93 $ 0.79 $ 0.51 $ 0.33 $ 0.34 ========= ========= ========= ========= ========= Weighted average shares outstanding: Basic................................ 2,458,062 2,447,782 2,445,903 2,478,047 2,491,996 Diluted.............................. 2,535,451 2,451,462 2,445,903 2,478,047 2,491,996
2
(Dollars in thousands) - -------------------------------------------------------------------------------------------------------- FISCAL YEAR ENDED SEPTEMBER 30, 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------- Working capital ....................... $ 18,474 $ 11,158 $ 11,572 $ 12,098 $ 10,971 Total assets............................ 39,644 23,497 23,026 22,919 23,476 Long-term obligations and subordinated debt /4/............................... 19,207 9,123 10,245 12,705 13,206 Shareholders' equity.................... 9,605 7,208 /5/ 6,621 5,122 4,097
- ------------------------ /1/ Includes $205,913 of debt issue costs and $86,908 of unamortized discount on senior secured and subordinated notes which were written off as a result of extinguishing the related debt in January and July 1994 and a $200,000 prepayment premium paid in connection with restructuring senior subordinated notes in July 1994. The extraordinary item is presented net of a $197,128 related tax benefit. /2/ Represents the accretion of warrants issued in conjunction with a $4 million loan made in 1989 by MLBC, Inc. to the Company which entitled MLBC to acquire 22.84% of the common stock of the Company (19.98% after June 1993). MLBC also had the right to require the Company to repurchase the warrants after October 31, 1995 at a formula price based on earnings and indebtedness. The original fair value of the warrants was recorded at $400,000 and the Company was accreting the warrants to the highest redemption price over the period to October 31, 1995. In July 1994, the warrants were repurchased for $2,000,000. /3/ Preferred stock was issued in partial payment for repurchase of warrants described in footnote 2 above and was valued at $1,000,000. The Company had the right to redeem the preferred stock at any time after 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. /4/ Includes current portion of long-term obligations and subordinated debt. /5/ Reflects redemption of preferred stock described in footnote 3 above for $1,200,000 in December 1996. 3 MARKET FOR COMMON STOCK The Company's Common Stock trades on the NASDAQ SmallCap Market under the symbol "DIST". The following table reflects the range of the high and low prices per share of the Company's Common Stock reported by NASDAQ for the years ended September 30, 1998 and 1997. 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 11, 1998, the Company had approximately 1,000 holders of record of its shares and the Company believes that approximately 2,200 additional persons hold shares beneficially. COMMON STOCK --------------------- HIGH LOW ------ ------ Year ended September 30, 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 Year ended September 30, 1997: 4th Quarter $ 3.38 $ 1.50 3rd Quarter 2.28 1.50 2nd Quarter 2.75 1.75 1st Quarter 2.75 1.50 The Company has not declared or paid a cash dividend on its Common Stock in the past. However, the Board of Directors declared a dividend of $0.02 per share in December 1998. 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 companies, develop of 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, the Company issued options to purchase 22,000 shares 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. At September 25, 1998, 42,000 options were fully vested and exercisable. On October 10, 1997, the Company issued warrants to acquire 30,000 shares of its common stock at an exercise price of $0.10 per share. The warrants were issued as consideration for covenants not to compete entered into with the two individuals from whom the Company acquired the assets of Marcus Distributors, Inc. The warrants were exercised in full in June 1998. In November 1997, the Company 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. At September 25, 1998, 12,000 options were fully vested and exercisable. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS The following table sets forth an analysis of various components of the Income Statement as a percentage of sales for the fiscal years ended September 30, 1998, 1997, and 1996:
Fiscal Year Ended September 30, ------------------------------------ 1998 1997 1996 -------- -------- -------- Sales.......................................... 100.0% 100.0% 100.0% Cost of sales.................................. 89.3 89.1 88.5 ------- -------- -------- Gross profit................................... 10.7 10.9 11.5 Selling, general and administrative expense.... 8.5 8.9 9.5 Depreciation and amortization.................. 0.4 0.5 0.4 -------- -------- -------- Income from operations......................... 1.8 1.5 1.6 Interest expense............................... 0.6 0.5 0.7 Other (income) expense, net.................... (0.1) (0.8) /1/ (0.4) -------- -------- -------- Income before income taxes..................... 1.3 1.8 1.3 Income tax expense............................. 0.5 0.7 0.5 -------- -------- -------- Net income..................................... 0.8 1.1 0.8 Accretion of warrants/ preferred stock........................... 0.0 0.0 (0.1) -------- -------- -------- Net income attributable to common shareholders....................... 0.8% 1.1% 0.7% ======== ======== ========
/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. 5 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 Food For Health Company, Inc. ("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 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 purchased discounts received from cigarette manufacturers. Gross profit as a percent of sales declined slightly from 10.9% in fiscal 1997 to 10.7% in the 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 affects the profit margin percentage. The decrease in profit margin was also 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 martin 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. While sales of cigarettes have increased over the past five years, sales of the Company's private label cigarettes have continued to decline since 1993 when cigarette manufacturers substantially reduced the price of premium brand cigarettes. Since that time, the premium cigarette brands have thrived at the expense of most generic brands. Also, cigarette price increases since 1993 have been identical for both premium and generic brands. Therefore, the price differential between premium and major generic brands has not increased in the past five years. Most recently, in November 1998, an announcement was made that a settlement had been reached 6 between the major tobacco manufacturers and the various states that had filed liability suits against the industry. Immediately thereafter, the major cigarette manufacturers increased the price of cigarettes by 30 - 35% on both premium and generic brands, including the Company's private label brand. As a result, management anticipates the volume of the Company's private label cigarettes will continue to decline over the next few years. If such a decline is realized, gross profit from private label cigarettes could decrease annually by $300,000 to $500,000 in fiscal 1999 and 2000. 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 (the "Facility") during fiscal 1998 and interest expense of $249,000 associated with FFH's revolving credit facility (the "FFH Facility"). The Facility was 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, 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. The Company continues to remain dependent on cigarette sales which represented approximately 63% of its revenue in fiscal 1998 (66% in fiscal 1997). Competition within the convenience store distribution industry puts immense pressure on profit margins. In addition a number of other factors which are beyond the control of management, such as manufacturers' cigarette pricing which affect the market for generic and private label cigarettes, impact the Company's operating income. For example, the cigarette price increase of $4.50 per carton in November 1998, was a major increase by industry standards. The immediate impact of this increase will vary across the industry. However, most convenience store distributors, including ADC, will experience lower profit margins, higher carrying costs for inventory and accounts receivable and greater exposure to bad debt losses. 7 The Company continues to evaluate various steps it may take to improve net income in future periods, including acquisitions of distributing companies such as the new St. Louis distribution center and FFH which were purchased in the first quarter of fiscal 1998 and continued sales of assets that are no longer essential to its primary business activities. An analysis of such assets held at September 30, 1998 is as follows: ESTIMATE OF GAIN ------------------------------- September 30, September 30, DESCRIPTION OF ASSET 1998 1997 -------------------- ------------- ------------- Investments (available-for-sale) $358,000 $409,500 Condominium & furnishings 500,000 480,000 Investments at September 30, 1998 and 1997 consisted of 83,000 shares of Cayman Water Company Limited (CWC), 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 $508,000 and $560,000 on September 30, 1998 and September 30, 1997, respectively. The fair market value of the securities on December 11, 1998 was $664,000. The condominium and furnishings consist of a condominium in the Cayman Islands which is used in furtherance of the Company's business marketing strategies. Under a profit sharing agreement with the Company's former parent corporation, AMCON Corporation, 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 Corporation. The Company estimates the amount of gain payable to AMCON Corporation had the real estate sold on September 30, 1998 would have been approximately $500,000. The costs and benefits associated with retaining the condominium are being evaluated in relation to the current business strategies of the Company. YEAR ENDED SEPTEMBER 30, 1997 VERSUS YEAR ENDED SEPTEMBER 30, 1996. Sales for the year ended September 30, 1997 increased 1.6% to $179.0 million, compared to $176.1 million for the year ended September 30, 1996. Beer and beverage sales related to the Denver facility decreased $6.3 million during the year ended September 30, 1997 as compared to the prior year as a result of disposing of the operation in October 1996. Sales from the traditional distribution business increased by $9.1 million for the year ended September 30, 1997 compared to the prior year as follows: Cigarette sales increased $5.1 million primarily due to price increases from manufacturers over the prior year. However, the volume of private label cigarettes declined by 22% during fiscal 1997. Sales of other products increased by $4.0 million principally due to increased volume. Gross profit decreased 3.5% to $19.6 million for the year ended September 30, 1997 from $20.3 million in fiscal 1996. Gross profit as a percent of sales declined to 10.9% for the year ended September 30, 1997 compared to 11.5% for the prior fiscal year. The decrease in the Company's gross profit margin was primarily due to the sale of the Denver beer distributorship which accounted for a $1.3 million reduction in gross profit and a $771,000 or 14.8% reduction in purchase discounts from manufacturers on the Company's private label cigarettes. These reductions in gross profit were offset by a $1.4 million increase in gross profit from the increased sales of cigarettes, tobacco, candy and other products. 8 Total operating expense decreased 4.3% to $16.8 million from $17.5 million during fiscal 1996. The decrease was primarily due to the sale of the Denver beer distributorship and the subsequent closing of the Denver facility which accounted for a reduction in operating expenses of $1.6 million. This reduction was offset by an increase of $848,000 in operating expense by the other distribution centers which was incurred to support the increase in sales. As a percentage of sales, total operating expense declined to 9.4% for the year ended September 30, 1997 compared to 9.9% for fiscal 1996. As a result of the above, income from operations for the fiscal year ended September 30, 1997 increased 1.7% to $2.8 million. Interest expense for the fiscal year ended September 30, 1997 decreased 24.5%, or $282,000, compared to fiscal 1996. The decrease was primarily due to a $3.1 million reduction in the average amount borrowed under the Company's prior revolving credit facility with a bank (the "Prior Facility") during the fiscal year ended September 30, 1997, as compared to fiscal 1996. Notwithstanding the $499,000 borrowed to finance the purchase and installation of the water bottling assets from November 1996 through January 1997 and the $1.2 million borrowed to finance the purchase of the Company's outstanding preferred stock in December 1996, the Company was able to reduce average borrowings under the Prior Facility as a result of the cash generated from the sale of the Denver beer distributorship during the first quarter of fiscal 1997 and the sale of a building in the fourth quarter of fiscal 1996. Other income for the year ended September 30, 1997 was generated primarily from the gain associated with the sale of the Denver beer distributorship of $1.1 million. As a result of the above factors, net income attributable to common shareholders for the fiscal year ended September 30, 1997 was $1,940,534 compared to net income of $1,253,041 for fiscal 1996. YEAR 2000 READINESS STATE OF READINESS. The Year 2000 computer issue is real and does impact the way the Company's systems perform. In addition, the Company has business relationships with a number of third parties whose Year 2000 problems could impact the Company. Accordingly, the Company has recognized the Year 2000 issue as a major management and technology project. A taskforce has been assembled to review all systems to ensure that they do not malfunction as a result of the Year 2000 issue. The Year 2000 project includes review of internal operating systems and equipment, other internal systems and equipment (such as telephones, copiers and fax machines) and external services and systems that are depended upon to operate the Company's business. In this process, the Company expects to both replace some systems and upgrade others. AMCON's internal operating system consists of midrange computers which are used for the sales, accounts receivable and inventory systems. With the exception of the accounts receivable system, the software operating on the midrange computers does not generally operate or depend upon any date structure, but rather the day-of-week and week-of-month. Therefore, software risk to the Year 2000 issue is considered low. The remaining accounting systems and other record keeping functions performed by the Company are conducted on personal computers which are connected by a local area network. AMCON has engaged third party computer consultants to review, test and modify the midrange computer hardware and software to ensure they will function 9 correctly after December 31, 1999. The Company expects the critical portions of this process will be completed by June 30, 1999 and believes that the Year 2000 problems relating to its internal operating systems will be resolved without significant operational difficulties. However, there can be no assurance that testing will discover all potential Year 2000 problems or that it will not reveal unanticipated material problems with the Company's systems that will need to be resolved. Other internal systems are being evaluated by AMCON personnel, along with the providers that service and maintain the systems with emphasis placed on critical systems such as telephone systems. AMCON believes that the critical systems are currently Year 2000 compliant and expects to have non-critical systems modified or replaced by June 30, 1999. AMCON has no control over the efforts of third parties with which it has material business relationships. AMCON has undertaken the process of contacting each major third party to determine their state of readiness for Year 2000. Such parties include, but are not limited to, AMCON's suppliers of inventory, customers, financial institutions and utility companies. AMCON has received initial assurances from its major suppliers and financial institutions that they will not be adversely affected by Year 2000 problems. AMCON will continue to request updated information from these third parties in order to assess their Year 2000 readiness. COSTS. Through September 30, 1998, cumulative costs relating directly to Year 2000 issues have totaled approximately $12,000. A portion of the estimated total costs include the cost of existing personnel who have been deployed to work on various phases of the Year 2000 project. These costs do not include system upgrades and replacements that were made in the normal course of business. The deployment of internal resources to the Year 2000 project has not resulted in significant delays to other major technology projects which were planned by the Company. The Company estimates that remaining Year 2000 costs will total approximately $135,000, of which approximately $90,000, will be capitalized and depreciated over a five year period. RISKS. The Company believes that its internal operating systems will be Year 2000 compliant before December 31, 1999. Therefore, the Company believes that the most reasonably likely worst-case scenario will be that one or more of the third parties with which the Company has a material business relationship will not have successfully dealt with its Year 2000 issues. A critical third party failure (such as telecommunication, utilities or financial institutions) could have a material adverse affect on the Company by eliminating the Company's ability to order and pay for products from suppliers and receive orders and payments from customers. It is also possible that one or more of the internal operating systems will not function properly and make it difficult to complete routine tasks, such as accounting and other record keeping duties. Based on information currently available, the Company does not believe there will be any long-term operating system failures. However, the Company will continue to monitor these issues as part of its Year 2000 project and will concentrate its efforts on minimizing their impact. CONTINGENCY PLANS. The Company has not yet made any specific contingency plans with respect to its internal operating systems. The Company will begin developing contingency plans during the first few months of 1999 as certain phases on its Year 2000 project reach completion. These contingency plans will be modified throughout 1999 as the final phases of the Year 2000 project are completed or if it becomes apparent that they will not be completed by December 31, 1999. The Company currently does not foresee contingency 10 planning in the product receiving, selling, order filling and delivery phases of the Company's business as these areas are very labor intensive. The Company may be required to perform certain accounting and other record keeping functions manually should a Year 2000 problem become apparent in one or more of those areas. Additionally, remote dial-up connectivity from remote branches has been put in place in the event that certain telecommunication services fail to operate. AMCON also plans to terminate relationships with third party service providers that are not able to demonstrate that they have successfully resolved their Year 2000 problems in a timely manner. There will inevitably be some third parties who will not have made proper Year 2000 modification. The Company's contingency plan only addresses those third parties that are considered critical to the Company's operation. The foregoing Year 2000 discussion contains certain forward-looking statements, including without limitation anticipated costs and the dates by which the Company expects to substantially complete the modifications and testing of systems and are based upon management's best current estimates, which were derived utilizing numerous assumptions about future events, including the continued availability of certain resources, representations received from third parties and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific matters that might cause such material differences include, but are not limited to, the availability and cost of trained personnel, the ability to identify and convert all relevant computer systems, results of Year 2000 testing, adequate identification and resolution of Year 2000 issues by third party service providers, suppliers or customers of the Company, unanticipated system costs, the need to replace additional hardware, the adequacy of and ability to implement contingency plans and similar uncertainties. LIQUIDITY AND CAPITAL RESOURCES During the fiscal year ended September 30, 1998, the Company utilized cash flow in operating activities to finance increases in inventory and accounts receivable to support an increase in business. Cash was utilized in investing activities during the fiscal year to construct an addition to the Bismarck, ND distribution center, purchase the assets of Marcus Distributors, Inc. in St. Louis, MO in October 1997 and purchase of the stock of FFH in November 1997 for $750,000, $2.7 million and $4.5 million, respectively. Cash was provided in financing activities through increases in the Facility and from a term note to finance the purchase of FFH. 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 equaled approximately $688,000 and $1,120,000 for the fiscal years ended September 30, 1998 and 1997, respectively. Capital expenditures during those periods equaled approximately $782,000 and $892,000, respectively. The remaining cash provided by operations was applied to debt service. The Company anticipates that capital expenditures during fiscal 1999 will be approximately $950,000 and will be used for the purposes stated above. The Company had working capital of approximately $18.5 million as of September 30, 1998. The Company's ratio of debt to equity was 3.13 at September 30, 1998 compared to 2.26 at September 30, 1997. 11 In March 1998, ADC refinanced the Facility with a new bank in order to obtain more favorable lending terms to support operations and to finance any future acquisitions. The refinancing of the Facility increased the Company's borrowing limit, which is determined by various percentages of eligible accounts receivable and inventory, to $15 million and decreased the interest rate on borrowings to the bank's prime rate ("Prime") less 0.5% or LIBOR plus 1.75%, as selected by the Company. The Facility also provided for an additional $10 million facility collateralized by specific inventory and a $1.5 million facility to be used for transportation equipment purchases. As of September 30, 1998, the Company had borrowed approximately $11.0 million under the Facility. The Facility is collateralized by all equipment, general intangibles, inventories and accounts receivable of the Company, and with first mortgages on the Company's owned distribution center and certain other real estate. 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 1999 and 1998, 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 1.25 to 1.0 (1.50 to 1.0 after September 26, 1998), a debt to equity ratio of 4.0 to 1.0 and minimum tangible net worth of $4,500,000. In addition, the Company may not pay dividends with respect to its Common Stock without the consent of the lender of the Facility. In December 1998, the Company received consent to pay a cash dividend of $0.02 per share. As of September 30, 1998 the Company was in compliance with all covenants under the Facility. In March 1998, FFH refinanced its revolving credit facility with a new bank (the "FFH Facility") in order to obtain more favorable lending terms to support operations. The borrowings under the FFH Facility are secured by the assets of FFH and are guaranteed by the Company. The FFH Facility established a borrowing limit of $5 million and decreased the interest rate on the FFH Facility to Prime less 0.5% or LIBOR plus 2.00%, as selected by FFH. FFH is required to pay a commitment fee of .25% of the unused amount of the commitment. As of September 30, 1998, FFH had borrowed approximately $3.4 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 1999 and 1998, 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 an average annual fixed charge ratio of 1.5 to 1.0, an average annual debt service coverage ratio of 2.00 to 1.0, a debt to equity ratio of 4.0 to 1.0 and minimum tangible net worth of $2,000,000. In addition, the 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, 1998 the Company was not in compliance with the net worth covenant, however, the lender waived the covenant violation and subsequently amended the FFH Facility to reduce the net worth requirement. 12 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. As of September 30, 1998, the outstanding balance of the Acquisition Loan was $4.3 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 $1.1 million in cash. The acquisition was funded by a $1.1 million five and one-half year term loan from a bank. The loan bears interest at 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. The Company also maintains a $1,250,000 non-revolving line of credit with a bank used to finance the purchase of trucks and delivery equipment. The line of credit bears interest at two hundred basis points above the five-year U.S. Treasury Note rate on the date of each advance. As the Company takes advances, a note is drawn and is payable in monthly installments from 36 to 60 months. Advances against the non-revolving line of credit were $482,000 through September 30, 1998. The amount available on the non-revolving line of credit was $768,000 at September 30, 1998. The line of credit is secured by a first lien on the delivery vehicles purchased with the loan proceeds. As of September 30, 1998, the Company had additional outstanding long-term indebtedness of approximately $143,000 consisting of a capital lease for computer equipment, the current portion of which equaled approximately $51,000. The interest rate on the note relating to such indebtedness is 9.5% per annum. The Company believes that funds generated from operations, supplemented as necessary with funds available under ADC's Facility, the FFH Facility and the non-revolving line of credit, will provide sufficient liquidity to cover its debt service and any reasonably foreseeable future working capital and capital expenditure requirements. CONCERNING FORWARD LOOKING STATEMENTS This Annual Report, including the Letter to Shareholders, Management's Discussion and Analysis and other sections, contains 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 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, competitive and other risks 13 (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. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes reporting standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that displays an amount representing total comprehensive income for the period. Adoption is effective for fiscal years beginning after December 15, 1997, the Company's fiscal 1999. In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segment of an Enterprise and Related Information" (SFAS 131). SFAS 131 establishes reporting standards for reporting disclosures about segments of an enterprise and related information about different types of business activities in which an enterprise engages and the different economic environments in which it operates. The statement requires that public business enterprises' report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public business enterprises report certain information about their products and services, the geographic areas in which they operate, and their major customers. Adoption is effective for fiscal years beginning after December 15, 1997, the Company's fiscal 1999. 14 REPORT OF MANAGEMENT Management is responsible for the preparation of the accompanying financial statements. The financial statements and the notes thereto have been prepared in accordance with generally accepted accounting principles to reflect, in all material aspects, the substance of financial events and transactions occurring during the year. PricewaterhouseCoopers LLP, independent certified public accountants, have audited our financial statements as described in their report. The Company maintains financial control systems designed to provide reasonable assurance that assets are safeguarded and that transactions are executed and recorded in accordance with management authorization. The control systems are evaluated annually by the Company. Kathleen M. Evans President Michael D. James Treasurer and Chief Financial Officer November 20, 1998 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 retained earnings and of cash flows present fairly, in all material respects, the consolidated financial position of AMCON Distributing Company and its subsidiary as of September 30, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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. PRICEWATERHOUSECOOPERS LLP Omaha, Nebraska November 20, 1998 F-1 CONSOLIDATED BALANCE SHEETS AMCON Distributing Company
- ------------------------------------------------------------------------------------------------------------ September 30, 1998 1997 - ------------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash $ 38,369 $ 26,973 Marketable securities - 127,786 Accounts receivable, less allowance for doubtful accounts of $460,753 and $206,249 15,229,107 10,788,979 Note and interest receivable from officer - 130,795 Inventories 16,127,250 7,183,245 Deferred income taxes 570,743 119,017 Other 327,997 84,616 ------------- ------------- Total current assets 32,293,466 18,461,411 Fixed assets, net 4,466,707 3,608,891 Investments 508,375 560,250 Other assets 2,375,189 866,749 ------------- ------------- $ 39,643,737 $ 23,497,301 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 7,350,645 $ 4,764,816 Accrued expenses 1,329,843 906,282 Accrued wages, salaries and bonuses 675,562 719,962 Income taxes payable 1,023,944 579,802 Current portion of long-term debt 3,439,169 332,338 ------------- ------------- Total current liabilities 13,819,163 7,303,200 ------------- ------------- Deferred income taxes 24,799 195,458 Other liabilities 427,419 - Long-term debt, less current portion 15,767,659 8,790,524 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, 1998; 5,000,000 shares authorized and 2,450,000 shares issued at September 30, 1997 24,800 24,500 Additional paid-in capital 2,271,278 2,213,828 Unrealized gain on investments available-for-sale, net of $139,468 and $171,985 tax 218,145 237,503 Retained earnings 7,090,789 4,732,603 ------------- ------------- 9,605,012 7,208,434 Less treasury stock, 97 shares at cost (315) (315) ------------- ------------- Total shareholders' equity 9,604,697 7,208,119 ------------- ------------- $ 39,643,737 $ 23,497,301 ============= =============
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, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ Sales (including excise taxes of $52.9 million, $ 294,281,323 $ 178,990,978 $ 176,144,966 $40.1 million and $40.7 million, respectively) Cost of sales 262,632,767 159,434,631 155,885,022 ------------- ------------- ------------- Gross profit 31,648,556 19,556,347 20,259,944 Selling, general and administrative expenses 25,088,767 15,883,969 16,682,845 Depreciation and amortization 1,120,482 868,744 820,672 ------------- ------------- ------------- 26,209,249 16,752,713 17,503,517 ------------- ------------- ------------- Income from operations 5,439,307 2,803,634 2,756,427 Other expense (income): Interest expense 1,814,555 867,327 1,149,162 Other (income) expense, net (276,287) (1,352,733) (696,828) ------------- ------------- ------------- 1,538,268 (485,406) 452,334 ------------- ------------- ------------- Income before income taxes 3,901,039 3,289,040 2,304,093 Income tax expense 1,542,853 1,348,506 967,719 ------------- ------------- ------------- Net income 2,358,186 1,940,534 1,336,374 Accretion of preferred stock - - (83,333) ------------- ------------- ------------- Net income attributable to common shareholders $ 2,358,186 $ 1,940,534 $ 1,253,041 ============= ============= ============= Earnings per common and common equivalent share attributable to common shareholders: Basic $ 0.96 $ 0.79 $ .51 ============= ============= ============= Diluted $ 0.93 $ 0.79 $ .51 ============= ============= ============= Weighted average shares outstanding: Basic 2,458,062 2,447,782 2,445,903 ============= ============= ============= Diluted 2,535,451 2,451,462 2,445,903 ============= ============= =============
The accompanying notes are an integral part of these financial statements F-3 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AMCON Distributing Company
- ---------------------------------------------------------------------------------------------------------------- Preferred Stock Common Stock Additional ------------------- ---------------------- Paid-In Shares Amount Shares Amount Capital - --------------------------------------------------------------------------------------------------------------- Balance, September 30, 1995 250,000 $ 2,500 2,450,000 $ 24,500 $ 3,327,995 Unrealized gain on investments available-for-sale, net of tax - - - - - Accretion of preferred stock - - - - 83,333 Net income - - - - - -------- ------- --------- -------- ----------- Balance, September 30, 1996 250,000 2,500 2,450,000 24,500 3,411,328 Unrealized gain (loss) on investments available-for-sale, net of tax - - - - - Redemption of preferred stock (250,000) (2,500) - - (1,197,500) Exercise of stock options - - - - - Net income - - - - - -------- ------- --------- -------- ----------- Balance, September 30, 1997 - - 2,450,000 24,500 2,213,828 Unrealized gain on investments available-for-sale, net of tax - - - - - Issuance and exercise of warrants - - 30,000 300 57,450 Net income - - - - - -------- ------- --------- -------- ----------- Balance, September 30, 1998 - $ - 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 AMCON Distributing Company
- --------------------------------------------------------------------------------------------------------------- Unrealized Gain on Investments Available- Retained Treasury Stock for-sale Earnings Shares Amount Total - --------------------------------------------------------------------------------------------------------------- Balance, September 30, 1995 $ 234,900 $ 1,545,528 (4,097) $ (13,315) $ 5,122,108 Unrealized gain on investments available-for-sale, net of tax 163,128 - - - 163,128 Accretion of preferred stock - (83,333) - - - Net income - 1,336,374 - - 1,336,374 --------- ----------- ------ --------- ----------- Balance, September 30, 1996 398,028 2,798,569 (4,097) (13,315) 6,621,610 Unrealized gain (loss) on investments available-for-sale, net of tax (160,525) - - - (160,525) 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 --------- ----------- ------ --------- ----------- Balance, September 30, 1997 237,503 4,732,603 (97) (315) 7,208,119 Unrealized gain on investments available-for-sale, net of tax (19,358) - - - (19,358) Issuance and exercise of warrants - - - - 57,750 Net income - 2,358,186 - - 2,358,186 --------- ----------- ------ --------- ----------- Balance, September 30, 1998 $ 218,145 $ 7,090,789 (97) $ (315) $ 9,604,697 ========= =========== ====== ========= ===========
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, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 2,358,186 $ 1,940,534 $ 1,336,374 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,120,482 868,744 820,672 Gain on sales of fixed assets, land held for sale and securities (46,955) (112,520) (588,659) Gain on sale of Denver beer distributorship - (1,102,205) - Proceeds from sales of trading securities 157,207 92,548 147,993 Purchases of trading securities - - (14,825) Deferred income taxes 11,167 (8,664) 36,948 Provision for losses on doubtful accounts and inventory obsolescence 640,494 33,836 11,357 Changes in assets and liabilities, net of effect of acquisitions: Accounts and interest receivable (1,629,334) (916,159) (415,447) Inventories (2,554,073) (801,978) 477,021 Other current assets (180,622) 80,161 (23,885) Other assets (45,366) (42,648) (78,397) Accounts payable 432,398 661,948 340,933 Accrued expenses and accrued wages, salaries and bonuses (44,771) 490,413 191,207 Income taxes payable 471,985 (63,766) 324,265 Other liabilities (2,577) - - ----------- ----------- ----------- Net cash provided by operating activities 688,221 1,120,244 2,565,557 ----------- ----------- ----------- Cash flows from investing activities: Purchases of fixed assets (782,440) (891,783) (723,308) Acquisitions, net of cash acquired (7,119,254) (499,109) - Proceeds from sales of fixed assets 86,887 160,961 516,162 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 - 33,967 357,170 ----------- ----------- ----------- Net cash provided by (used in) investing activities (7,714,807) 1,201,030 150,024 ----------- ----------- ----------- Cash flows from financing activities: Proceeds from borrowings of long-term debt 4,500,000 516,741 188,615 Net (payments) proceeds on bank credit agreement 3,483,241 (1,239,484) (2,082,930) Payments on long-term and subordinated debt (766,025) (399,555) (814,366) Debt issue costs (182,234) - - Proceeds from exercise of warrants 3,000 - - Redemption of preferred stock - (1,200,000) - Proceeds from exercise of stock options - 6,500 - ----------- ----------- ----------- Net cash provided by (used in) financing activities 7,037,982 (2,315,798) (2,708,681) ----------- ----------- ----------- Net increase in cash 11,396 5,476 6,900 Cash, beginning of year 26,973 21,497 14,597 ----------- ----------- ----------- Cash, end of year $ 38,369 $ 26,973 $ 21,497 =========== =========== =========== Supplemental cash flow information: Cash paid during the year for interest $ 1,745,609 $ 868,378 $1,199,396 Cash paid during the year for income taxes 1,145,770 1,420,936 714,696 Supplemental noncash information: Issuance of warrants in connection with acquisition 54,750 - - Unrealized gain on available-for-sale securities, net (19,358) (160,525) 163,128 Accretion of preferred stock - - 83,333 Fixed assets acquired through capital lease - - 248,928
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 ("AMCON"), together with its wholly-owned subsidiary, Food For Health Co., Inc. ("FFH"), collectively referred to as "the Company," is a leading wholesale distributor of consumer products in the Great Plains, Rocky Mountain and Southwest regions of the United States. The Company distributes a broad portfolio of consumer products including beverages, candy, cigarettes, groceries, natural food products and health and beauty care products through its distribution centers located in Arizona, Kansas, Missouri, Nebraska, North Dakota, South Dakota and Wyoming. 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 Company's operating income is subject to a number of factors which are beyond its control, such as changes in manufacturers' cigarette pricing which affects the market for generic and private label cigarettes. While the Company sells a diversified product line, it remains dependent on cigarette sales which represent approximately 63% of its revenue. Net income is heavily dependent on sales of the Company's private label cigarettes and volume discounts received from manufacturers in connection with such sales. The Company continuously evaluates steps it may take to improve net income in future periods, including further acquisitions of smaller distributing companies in similar business lines and further sales of assets that are no longer essential to its primary business activities such as investments and certain real estate. Accounting Period: The Company's fiscal year ends on the last Friday in September. For convenience, the fiscal years have been indicated as September 30, whereas the actual year ends were September 25, 1998, September 26, 1997 and September 27, 1996. Each fiscal year was comprised of 52 weeks. Principles of Consolidation: The consolidated financial statements include the accounts of AMCON and its subsidiary. Intercompany accounts and transactions have been eliminated. Cash and Accounts Payable: The Company uses a cash management system under which an overdraft is the normal book balance in the primary disbursing accounts. The overdrafts included in accounts payable which were $2,972,303 and $1,988,915 at September 30, 1998 and 1997, respectively, reflect the checks drawn on the disbursing accounts that have been issued but have not yet cleared through the banking system. The Company's policy has been to fund these outstanding checks as they clear with borrowings under the credit agreement (see Note 7). Marketable Securities and Investments: The Company has classified marketable securities and investments as either available-for-sale or trading securities. The carrying amounts of the securities used in computing unrealized and realized gains and losses are determined by specific identification. Fair values are determined using quoted market prices. For available-for-sale securities, net unrealized F-7 1. Summary of Significant Accounting Policies (continued): 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 of amounts due to the Company from its normal business activities. The Company's customers are retailers, institutions and other wholesalers located throughout the Great Plains, Rocky Mountain and Southwest regions of the United States. The Company maintains an allowance for doubtful accounts to reflect the expected uncollectibility of accounts receivable based on past collection history and specific risks identified in the portfolio. Inventories: Inventories consist of finished products purchased in bulk quantities to be redistributed to the Company's customers. Inventories are valued at the lower of first-in, first-out ("FIFO") cost or market. Fixed Assets: Fixed assets are stated at cost. Major renewals and improvements are capitalized and charged to expense through depreciation charges. Repairs and maintenance are charged to expense as incurred. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of depreciable assets. Estimated useful lives are as follows: Years -------- Buildings 7 - 40 Warehouse equipment 5 - 7 Furniture, fixtures and leasehold improvements 5 - 18 Vehicles 5 Costs and accumulated depreciation applicable to assets retired or sold are eliminated from the accounts, and the resulting gains or losses are reported in the statement of income. Revenue Recognition: The Company recognizes revenue when products are shipped. Sales are shown net of returns and discounts. Income Taxes: Deferred income taxes are determined based on temporary differences between the financial reporting and tax basis of the Company's assets and liabilities, using enacted tax rates in effect during the years in which the differences are expected to reverse. Long Lived Assets: The Company reviews goodwill and other long lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairments would be recognized in operating results if a permanent reduction in value were to occur based on discounted cash flows. F-8 1. Summary of Significant Accounting Policies (continued): 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 October 1997, the Company acquired certain assets from Marcus Distributors, Inc. ("Marcus") of St. Louis, Missouri for $2.7 million in cash and warrants to acquire 30,000 shares of the Company's common stock at an exercise price of $0.10 per share. The acquisition was accounted for under the purchase method of accounting. In November 1997, the Company acquired all of the outstanding stock of Food For Health Company, Inc. ("FFH"), a distributor of health and natural foods based in Phoenix, Arizona, for $4.4 million in cash. The acquisition was accounted for under the purchase method of accounting. Approximately $1.3 million of the purchase price was allocated to goodwill which is being amortized over 25 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, 1996, unaudited pro forma consolidated revenues, net income and net income per share would have been as follows: 1998 1997 ------------- ------------- Sales $ 300,663,000 $ 270,373,000 Net income $ 2,444,000 $ 2,079,000 Earnings per share: Basic $0.99 $0.85 Diluted $0.96 $0.84 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, 1996. 3. Earnings Per Share: Earnings per share, as presented below, was computed in accordance with Statement of Accounting Standards No. 128, Earnings Per Share. Prior years amounts have been restated to conform to the new standard. 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. F-9 3. Earnings Per Share (continued):
For the years ended September 30, ------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Basic Basic Basic ----------- ----------- ----------- Weighted average common shares outstanding 2,458,159 2,450,474 2,450,000 Weighted average treasury shares (97) (2,692) (4,097) ----------- ----------- ----------- Weighted average number of shares outstanding 2,458,062 2,447,782 2,445,903 =========== =========== =========== Net income $ 2,358,186 $ 1,940,534 $ 1,253,041 =========== =========== =========== Earnings per share $ 0.96 $ 0.79 $ 0.51 =========== =========== =========== Diluted Diluted Diluted ----------- ----------- ----------- Weighted average common shares outstanding 2,458,159 2,450,474 2,450,000 Weighted average treasury shares (97) (2,692) (4,097) Weighted average of net additional shares outstanding assuming dilutive options and warrants exercised and proceeds used to purchase treasury stock 77,389 3,680 - ----------- ----------- ----------- Weighted average number of shares outstanding 2,535,451 2,451,462 2,445,903 =========== =========== =========== Net income $ 2,358,186 $ 1,940,534 $ 1,253,041 =========== =========== =========== Earnings per share $ 0.93 $ 0.79 $ 0.51 =========== =========== ===========
F-10 4. Fixed Assets, Net: Fixed assets at September 30, 1998 and 1997 consisted of the following: 1998 1997 ----------- ----------- Land and buildings $ 750,809 $ 490,955 Condominium and furnishings 1,237,065 1,228,801 Warehouse equipment 4,106,245 2,283,580 Furniture, fixtures and leasehold improvements 2,315,119 1,288,773 Vehicles 1,764,763 1,775,999 ----------- ----------- 10,174,001 7,068,108 Less accumulated depreciation 5,707,294 3,459,217 ----------- ----------- $ 4,466,707 $ 3,608,891 =========== =========== Included in land and buildings is a warehouse leased to a third party. Future minimum rentals are $7,103 in fiscal 1999. 5. Marketable Securities and Investments: Investments in equity securities at September 30, 1998 and 1997 consisted of the following: September 30, 1998 ------------------------------------ Unrealized Market Cost Gain Value --------- --------- --------- Investments (available-for-sale) $ 150,762 $ 357,613 $ 508,375 ========= ========= ========= September 30, 1997 ------------------------------------ Unrealized Market Cost Gain Value --------- --------- --------- Marketable securities (trading) $ 39,700 $ 88,086 $ 127,786 ========= ========= ========= Investments (available-for sale) $ 150,762 $ 409,488 $ 560,250 ========= ========= ========= The Company did not sell any available-for-sale investments in 1998. The Company realized gains on the sale of available-for-sale investments of $27,600 and $281,789 in fiscal 1997 and 1996, respectively. The Company recognized gains of $29,400, $72,222 and $42,455 on trading securities during 1998, 1997 and 1996, respectively. F-11 6. Other Assets: Other assets at September 30, 1998 and 1997 consisted of the following: 1998 1997 ----------- ---------- Goodwill (less accumulated amortization of $295,023 and $238,810) $ 1,832,008 $ 585,238 Covenants not to compete (less accumulated amortization of $262,374 and $232,666) 27,375 2,333 Cash surrender value of life insurance policies 353,920 279,178 Debt issue costs (less accumulated amortization of $29,376) 152,858 - Other 9,028 - ----------- ---------- $ 2,375,189 $ 866,749 =========== ========== Goodwill arose from the acquisition of certain businesses and is amortized using the straight-line method over periods ranging from 5 to 25 years. Amortization expense was $56,213, $41,926 and $68,381 for the years ended September 30, 1998, 1997, and 1996, respectively. During 1997, the Company disposed of goodwill in the amount of $358,553 (net) in connection with the sale of the Denver beer distributorship. The covenants not to compete are amortized using the straight-line method over 2-5 year terms of the related agreements. Amortization expense was $29,708, $63,625 and $65,500 for the years ended September 30, 1998, 1997 and 1996, respectively. 7. Long-term Obligations: Long-term obligations at September 30, 1998 and 1997 consisted of the following: 1998 1997 ------------ ----------- 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 (approximately 7.50% at September 30, 1998; principal due February 2002 $ 10,964,888 $ 8,122,086 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, 1998); principal due February 2002 3,361,355 - F-12 7. Long-term Obligations (continued): 1998 1997 ------------ ----------- Note payable to a bank, interest payable monthly at the bank's base rate less 0.5% or LIBOR plus 1.75% (approximately 7.50% at September 30, 1998); principal payments of $85,096 due monthly through November 2002; 4,254,808 - Nonrevolving line of credit, interest payable monthly (at rates ranging between 8.00% and 8.50% at September 30, 1998); principal due in monthly installments through December 2001 collateralized by delivery vehicles 482,479 810,859 Obligations under capital lease, payable in monthly installments at 9.5% through April 2001 (Note 13) 143,298 189,917 ------------ ----------- 19,206,828 9,122,862 Less current portion 3,439,169 332,338 ------------ ----------- $ 15,767,659 $ 8,790,524 ============ =========== In March 1998, AMCON entered into a revolving credit facility with a bank (the "Facility") in order to obtain more favorable lending terms than those available under the prior revolving credit facility with another bank. The Facility increased the Company's borrowing limit from $10 million to $15 million and decreased the interest rate on borrowing to the lender's prime rate ("Prime") less 0.5% or LIBOR plus 1.75%, as selected by the Company. The Facility also provided for an additional $10 million facility to be collateralized by specific inventory and a $1.5 million facility to be used for transportation equipment purchases. Under the terms of the credit agreement, all of the Company's assets have been pledged as collateral to the lenders. Advances made under the Facility are limited to a "borrowing base" determined by various percentages of eligible accounts receivable and inventory. At September 30, 1998 and 1997, the unused portion of the credit agreement was $14,035,111 and $1,877,914, respectively. 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 1999 and 1998, 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 1.25 to 1.0 (1.50 to 1.0 after September 26, 1998), a debt to equity ratio of 4.0 to 1.0 and minimum tangible net worth of $4,500,000. In addition, the Company may not F-13 7. Long-term Obligations (continued): pay dividends with respect to its Common Stock without the consent of the lender of the Facility. As of September 30, 1998 the Company was in compliance with all covenants under the Facility. In March 1998, FFH entered into a revolving credit facility with a bank (the "FFH Facility") in order to obtain more favorable lending terms than those available under the prior revolving credit facility with another bank. The borrowings under the FFH Facility are secured by the assets of FFH and are guaranteed by the Company. The FFH Facility established a borrowing limit of $5 million and decreased the interest rate on the FFH Facility to Prime less 0.5% or LIBOR plus 2.00%, as selected by FFH. Advances made under the Facility are limited to a "borrowing base" determined by various percentages of eligible accounts receivable and inventory. As of September 30, 1998, FFH had borrowed approximately $3.4 million under the FFH Facility. FFH is required to pay a commitment fee of .25% of the unused amount of the commitment. 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 1999 and 1998, the FFH Facility includes covenants applicable to FFH 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 1.5 to 1.0, an average annual debt service coverage ratio of 2.00 to 1.0, a debt to equity ratio of 4.0 to 1.0 and minimum tangible net worth of $2,000,000. In addition, the 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, 1998 the Company was not in compliance with the net worth covenant, however, the lender waived the covenant violation and subsequently amended the FFH Facility to reduce the net worth requirement. 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. As of September 30, 1998, the outstanding balance of the Acquisition Loan was $4.3 million. The loan in collateralized by the common stock of FFH. In connection with the Acquisition Loan, an officer of the Company was paid $130,000 as compensation for a personal guarantee required by the lender. The personal guarantee was subsequently released during fiscal 1998. The Company also maintains a $1,250,000 non-revolving line of credit with a bank used to finance the purchase of trucks and delivery equipment. The line of credit bears interest at two hundred basis points above the five-year U.S. Treasury Note rate on the date of each advance. As the Company takes advances, a note is drawn and is payable in monthly installments from 36 to 60 months. Advances against the non-revolving line of credit were $482,000 through September 30, 1998. The amount available on the non-revolving line of credit was $768,000 at September 30, 1998. The line of credit is secured by a first lien on the delivery vehicles purchased with the loan proceeds. F-14 7. Long-term Obligations (continued): The above long-term obligations, excluding obligations under the capital lease, have the maturities as follows (See Note 13): Year ending September 30 - ------------------------ 1999 $ 3,387,804 2000 1,182,865 2001 1,090,572 2002 13,232,090 2003 170,201 ------------ $ 19,063,532 ============ $12,208,290 of borrowings under the revolving credit facilities 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, 1998 and 1997. 8. Preferred Stock: In June 1994, the Company issued 250,000 shares of Series A Cumulative Redeemable Convertible Preferred Stock (the "Preferred Stock") to the holder of a senior subordinated note. The note was repaid in November 1995. The Preferred Stock was accreted to the redemption price in lieu of cash dividends. The Company redeemed all 250,000 shares of the Preferred Stock on December 23, 1996 for $1,200,000. 9. Other (Income) Expense: Other (income) expense consisted of the following for the years ended September 30, 1998, 1997 and 1996: 1998 1997 1996 ---------- ----------- ---------- Interest income $ (61,398) $ (42,671) $ (52,102) Dividends (14,941) (13,909) (8,658) Rent income (24,880) (14,462) (12,462) Royalties (41,710) (34,568) (34,628) Gain on marketable securities and investments (29,420) (99,831) (324,244) Gain from disposition of fixed assets (22,312) (12,689) (264,516) Gain on sale of beer distributorship and distribution rights - (1,102,205) - Other (81,626) (32,398) (218) ----------- ----------- ---------- $ (276,287) $(1,352,733) $ (696,828) =========== =========== ========== F-15 9. Other (Income) Expense (continued): On October 4, 1996, the Company sold its beer distributorship for a purchase price of $2.4 million, subject to post-closing adjustments as defined in the Asset Purchase Agreement. The gain associated with disposition of the assets was $1,102,205. The Company then closed the Denver distribution facility. 10. Income Taxes: Components of income tax expense (benefit) for the fiscal years ended September 30, 1998, 1997 and 1996 consisted of the following: 1998 1997 1996 ----------- ----------- ---------- Current: Federal $ 1,325,618 $ 1,201,058 $ 865,764 State 206,068 156,112 65,003 ----------- ----------- ---------- 1,531,686 1,357,170 930,767 ----------- ----------- ---------- Deferred: Federal 9,735 (7,689) 34,215 State 1,432 (975) 2,737 ----------- ----------- ---------- 11,167 (8,664) 36,952 ----------- ----------- ---------- Provision for income taxes $ 1,542,853 $ 1,348,506 $ 967,719 =========== =========== ========== 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, 1998, 1997 and 1996: 1998 1997 1996 ----------- ----------- ---------- Tax at statutory rate $ 1,326,353 $ 1,118,274 $ 783,392 Amortization of goodwill 42,742 14,255 21,300 Nondeductible business expenses 26,351 15,207 17,504 State income taxes, net of federal tax benefit 156,551 102,397 44,708 Other (9,144) 98,373 100,815 ----------- ----------- ---------- $ 1,542,853 $ 1,348,506 $ 967,719 =========== =========== ========== F-16 10. Income Taxes (continued): 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, 1998 and 1997 relate to the following: 1998 1997 ----------- ---------- Deferred tax assets: Current: Allowance for doubtful accounts $ 175,157 $ 75,892 Accrued vacation 64,785 29,896 Net operating loss carryforwards 123,809 36,796 Inventory 309,391 64,458 Other - 16,174 ----------- ---------- 673,142 223,216 Noncurrent: Net operating loss carryforwards 382,434 146,388 Other liabilities 166,693 - Other 8,437 - ----------- ---------- 557,564 146,388 ----------- ---------- Total deferred tax assets $ 1,230,706 $ 369,604 =========== ========== Deferred tax liabilities: Current: Unrealized gains on marketable securities $ - $ 32,412 Excess book over tax on trade discounts 102,399 71,787 ----------- ---------- 102,399 104,199 ----------- ---------- Noncurrent: Excess tax over book depreciation 442,895 169,861 Unrealized gains on available-for-sale investments 139,468 171,985 ----------- ---------- 582,363 341,846 ----------- ---------- Total deferred tax liabilities $ 684,762 $ 446,045 =========== ========== Net deferred tax assets (liabilities): Current $ 570,743 $ 119,017 Noncurrent (24,799) (195,458) ----------- ---------- $ 545,944 $ (76,441) =========== ========== The Company did not record any valuation allowances against deferred tax assets at September 30, 1998 or 1997 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 F-17 10. Income Taxes (continued): acquisition of Sheya Brothers in 1993 and FFH in 1997. The utilization of the net operating loss related to Sheya Brothers of $398,000 at September 30, 1998 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, 1998 is limited (by Internal Revenue Code Section 382) to approximately $232,000 per year through 2009. 11. Profit Sharing Plan: The Company has a profit sharing plan covering substantially all full-time employees. The Company makes contributions of not less than 1% of qualified employees' gross wages. Employees may also make additional voluntary contributions of which the first 6% contributed is matched 50% by the Company. The Company contributed $235,713, $143,098 and $196,552, (net of employee forfeitures) to the profit sharing plan during the years ended September 30, 1998, 1997, and 1996, respectively. Additionally, FFH contributed $5,296 to its profit sharing plan during the year ended September 30, 1998. 12. Related Party Transactions: In 1995, the Company made an advance of $125,000 to an officer of the Company. The note was paid in full in December 1997. The balance of the note receivable, plus accrued interest was $130,795 at September 30, 1997. Total interest recognized on the advance was $1,980 and $11,100 in fiscal 1998 and 1997, respectively. The Company was charged $60,000 by AMCON Corporation, the former parent of the Company for each of the years ended September 30, 1998, 1997 and 1996, as consideration for office rent and management services, which is included in selling, general and administrative expenses. The remaining interest in a condominium and furnishings and related mortgage loan, was transferred from AMCON Corporation to the Company in 1992, as partial settlement of intercompany balances. The condominium is used by the Company in furtherance of its business strategies. Under a profit sharing agreement with AMCON, the greater of $400,000 of the net gain or one-half of the net gain from the ultimate sale of the real estate will be allocated to AMCON. The Company estimates the amount of gain payable to AMCON had the real estate sold on September 30, 1998 would have been $500,000. 13. Commitments: The Company leases certain office equipment under a capital lease. The carrying value of these assets was $143,218 and $189,917 as of September 30, 1998 and 1997, respectively, net of accumulated amortization of $110,642 and $63,943. The Company leases various office and warehouse facilities and equipment under noncancellable operating leases. Rent charged to expense during the years ended September 30, 1998, 1997 and 1996 under such lease agreements was F-18 13. Commitments (continued): $2,138,042], $644,753 and $731,944, respectively. As of September 30, 1998, minimum future lease commitments are as follows: Year ending September 30, Capital Operating Lease Leases ---------- ------------ 1999 $ 62,735 $ 1,991,940 2000 62,735 1,784,233 2001 36,590 1,601,712 2002 - 1,333,269 2003 - Thereafter - 3,318,820 ---------- ------------ Total minimum lease payments 162,060 $ 10,029,974 Less amount representing interest 18,762 ============ ---------- Present value of net minimum lease payments $ 143,298 ========== 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 December 15, 1995, options to purchase 22,000 shares of common stock were issued to management employees at an exercise price of $2.78. On September 27, 1996, such options were canceled and reissued at an exercise price of $1.63. 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. At September 25, 1998, 42,000 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 $2.88. These options were not issued pursuant to the Stock Option Plan. The options have varying vesting schedules ranging up to five years and expire ten years after the date of grant. 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: F-19 14. Stock Option Plan (continued): 1998 1997 1996 ----------- ----------- ----------- Net income - as reported $ 2,358,187 $ 1,940,534 $ 1,253,041 Net income - pro forma $ 2,293,014 $ 1,940,534 $ 1,240,451 Basic EPS - as reported $ 0.96 $ 0.79 $ 0.51 Basic EPS - pro forma $ 0.93 $ 0.79 $ 0.51 Diluted EPS - as reported $ 0.93 $ 0.79 $ 0.51 Diluted EPS - pro forma $ 0.90 $ 0.79 $ 0.51 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 1.8% for 1998 and 0% for 1996; expected volatility of 60.30% for 1998 and 58.91% for 1996; risk free interest rate based on U.S. Treasury strip yield at the date of grant of 5.90% for 1998 and 6.74% for 1996; 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, 1998 September 30, 1997 September 30, 1996 ------------------ ------------------ ------------------ Weighted Weighted Weighted Average Exercise Average Exercise Average Exercise ------------------ ------------------ ------------------ Shares Price Shares Price Shares Price --------- ------- --------- ------- --------- ------- Outstanding at beginning of period 16,000 $1.63 22,000 $1.63 - - Granted 170,000 2.95 - - 44,000 $2.21 Exercised - - (4,000) $1.63 - - Forfeited/Expired (4,000) $2.26 (2,000) $1.63 (22,000) $2.78 --------- ------- --------- ------- --------- ------- Outstanding at end of period 182,000 $2.84 16,000 $1.63 22,000 $1.63 ========= ======= ========= ======= ========= ======= Shares available for options that may be granted 144,000 280,000 278,000 ========= ========= ========= Weighted-average grant date fair value of options granted during the period - exercise price equals stock market price at grant $1.71 $1.08 ======= ======= Weighted-average grant date fair value of options granted during the period - exercise price exceeds stock market price at grant $1.38 =======
F-20 14. Stock Option Plan (continued): The following summarizes options outstanding at September 30, 1998:
Exercisable ----------------------------- Exercise Number Weighted-Average Weighted-Average Number Weighted-Average Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price - ------------- ----------- ---------------- ---------------- ----------- ---------------- $1.63 14,000 7.3 years $1.63 14,000 $1.63 $2.88 - $3.16 168,000 9.1 years $2.94 40,000 $2.99
15. Subsequent Events 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 $1.1 million in cash. The acquisition was funded by a $1.1 million five and one-half year term loan from a bank. The loan bears interest at 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. F-21 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 First National Bank of Omaha One First National Center Omaha, Nebraska 68102-1596 INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP 1299 Landmark Center Omaha, Nebraska 68102 ANNUAL STOCKHOLDERS' MEETING Thursday, March 18, 1999 9:00 a.m. Four Points Sheraton Hotel Omaha, Nebraska 68137 ADDITIONAL INFORMATION The Form 10-K Annual Report to the Securities and Exchange Commission provides certain additional information and is available upon request to Michael D. James, Secretary, Treasurer and Chief Financial Officer of the Company. STOCK INFORMATION AMCON Distributing Company's Common Shares are traded on the NASDAQ SmallCap Market. The symbol for the Common Stock is "DIST". WEB SITE http://www.amcon-dist.com REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of AMCON Distributing Company: Our report on the financial statements of AMCON Distributing Company is included in this Form 10-K. In connection with our audit of such financial statements, we have also audited the related financial statement schedule listed in Item 14 for the years ended September 30, 1998, 1997 and 1996. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. PRICEWATERHOUSECOOPERS LLP Omaha, Nebraska November 20, 1998 S-1 AMCON Distributing Company Financial Statement Schedule SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - -----------------------------------------------
Net Amounts Balance at Provision Other (Written Off) Balance at Description Beginning of Period (Benefit) /1/ Recovered End of Period - ------------------ --------------------- --------- ------- ------------- ----------------------- Allowance for doubtful accounts Oct 1, 1995 177,331 3,836 - 14,794 Sep. 30, 1996 195,961 Oct 1, 1996 195,961 11,357 - (1,069) Sep. 30, 1997 206,249 Oct 1, 1997 206,249 386,630 339,545 (471,671) Sep. 30, 1998 460,753 Allowance for inventory obsolescence Oct 1, 1995 - - - - Sep. 30, 1996 - Oct 1, 1996 - 30,000 - - Sep. 30, 1997 30,000 Oct 1, 1997 30,000 253,864 76,000 (30,000) Sep. 30, 1998 329,864 /1/ Recorded as a result of the acquisition of Food For Health Co., Inc.
S-2 EX-23.1 4 CONSENT OF PRICEWATERHOUSECOOPERS LLP CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of AMCON Distributing Company on Form S-8 of our report dated November 20, 1998, on our audits of the financial statements and financial statement schedules of AMCON Distributing Company as of September 30, 1998 and 1997, and for each of the three years in the period ended September 30, 1998, which report is incorporated by reference in this Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS LLP Omaha, Nebraska December 23, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Balance Sheet at September 30, 1998 and the Statement of Income for the Year Ended September 30, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS SEP-30-1998 OCT-01-1997 SEP-30-1998 38 0 15,690 461 16,127 32,293 10,174 5,707 39,644 13,819 15,768 0 0 25 9,580 39,644 294,281 294,281 262,633 262,633 0 0 1,815 3,901 1,543 2,358 0 0 0 2,358 .96 .93
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