-----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, MSgRJonAajU9LyQD86mGOlQ++MqUW9BCOC+w+LiTGPzjWmZqDYyraDIGW4g0FDYS oZozgRTrhjtdvEq9ot8RZA== 0000928465-99-000040.txt : 19991224 0000928465-99-000040.hdr.sgml : 19991224 ACCESSION NUMBER: 0000928465-99-000040 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991223 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: 99780214 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, 9/30/99 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED September 30, 1999 --------------------------------- / / 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 10, 1999 was approximately $8,710,600. As of December 10, 1999 there were 2,483,498 shares of common stock outstanding. - Documents Incorporated by Reference - --------------------------------------- Portions of the 1999 Annual Report to Stockholders are incorporated therein by reference into Parts I, II and IV. Portions of the Proxy Statement pertaining to the March 28, 2000 Annual Stockholders' Meeting are incorporated herein by reference into Part III. 1 AMCON DISTRIBUTING COMPANY -------------------------- 1999 FORM 10-K ANNUAL REPORT ---------------------------- Table of Contents Page ---- PART I Item 1. Business.........................................................3 Item 2. Properties.......................................................9 Item 3. Legal Proceedings...............................................10 Item 4. Submission of Matters to Vote of Security Holders...............10 Item 4A. Executive Officers of the Company...............................10 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.............................................11 Item 6. Selected Financial Data.........................................11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................11 Item 7A. Quantitative and Qualitative Disclosures About Market Risk......14 Item 8. Financial Statements and Supplementary Data.....................14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................14 PART III Item 10. Directors and Executive Officers of the Registrant..............14 Item 11. Executive Compensation................................ .........15 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................................15 Item 13. Certain Relationships and Related Transactions....................................................15 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................................15 2 PART I ITEM 1. BUSINESS GENERAL AMCON Distributing Company (together with its wholly-owned subsidiary, Food For Health Co., Inc. and its wholly-owned subsidiaries U.S. Health Distributors, Inc., Chamberlin's Natural Foods, Inc. and Health Food Associates, Inc.) operates 9 distribution centers and 13 retail health food stores in the Great Plains, Rocky Mountain and Southern regions of the United States. As used herein, unless the context indicates otherwise, the term "ADC" means the separate company operations or "traditional distribution business" of AMCON Distributing Company, the term "FFH" means the "natural food distribution business" of Food For Health Co., Inc. and its wholly-owned subsidiary U.S. Health Distributors, Inc. ("USHD"), the terms "CNF" and "HFA" represent the "retail health food stores" operated by Chamberlin's Natural Foods, Inc. and Health Food Associates, Inc., respectively, both wholly-owned subsidiaries of FFH, and the term "AMCON" or the "Company" means AMCON Distributing Company and its subsidiaries. AMCON sells approximately 24,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, natural food and related products, frozen and chilled products and institutional food service products. AMCON has over 8,500 retail customers, the largest of which accounted for less than 6.5% of AMCON's total revenues during fiscal 1999. The Company distributes products primarily to retailers such as convenience stores, discount and general merchandise stores, grocery stores and supermarkets, health food stores, natural food stores, drug stores and gas stations. In addition, the Company services institutional customers, including restaurants and bars, schools, sports complexes and vendors, as well as other wholesalers. AMCON operates seven (7) retail health food stores in Florida and six (6) in the Midwest. These stores carry natural supplements, groceries, health and beauty care products and other food items. While cigarettes accounted for approximately 65% of the Company's sales volume during its most recent fiscal year, AMCON continues to diversify its businesses and product lines in an attempt to lessen its dependence upon cigarette sales. TRADITIONAL DISTRIBUTION 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 seventeenth (17th) largest tobacco, candy and convenience store distributor of approximately 1,000 distributors of such products in the United States based upon 1998 sales volume. From its inception, ADC has pursued a strategy of growth through increased sales and through acquisitions. From 1993 to 1998, ADC focused on increasing operating efficiency in its traditional distribution business by merging smaller branch distribution facilities into larger ones. In addition, ADC grew through expansion of its market area into contiguous regions and by introduction of new product lines to customers. 3 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, frozen and chilled 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, candy products, batteries and film. 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 and introduction in 1999 of internet-based customer maintenance and reporting options. Inventory management has become even more critical due to significant increases in the price of cigarettes over the past two years. 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 to 24.5 times in 1999. Inventory turns for the past five years are as follows: Year Times Inventory Turned ---- ---------------------- 1999 24.5 1998 19.6* 1997 21.8 1996 21.2 1995 17.5 * Inventory turns declined slightly in fiscal 1998 as ADC managed its inventory levels to take advantage of anticipated manufacturers' price increases. 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's main office is in Omaha, Nebraska. ADC has seven distribution centers located in Kansas, Missouri (2), 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 110 delivery vehicles, ranging from over-the-road vehicles with refrigerated trailers to half-ton vans. 4 NATURAL FOOD DISTRIBUTION BUSINESS FFH is a distributor of natural foods and related products serving approximately 1,000 health and natural food retailers in the Southern and 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 snack items. The Company believes that FFH is positioned to provide unequaled service to independent health and natural food retail stores of all sizes and types. 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. FFH's primary distribution location and main office is located in a 132,000 square foot facility located in Phoenix, Arizona. FFH's distribution subsidiary, U.S. Health Distributors, Inc., operates out of a facility in Melbourne, Florida. In addition, FFH also utilized a cross-dock facility located near Dallas, Texas. FFH operates its own fleet of approximately 20 over-the-road and straight trucks equipped to provide full refrigerated, dry and frozen food service. RETAIL HEALTH FOOD STORES FFH's retail health food stores are operated by CNF and HFA as Chamberlin's Market & Cafe ("Chamberlin's") and Akin's Natural Food Market ("Akin's"), respectively. Chamberlin's, which was acquired in March 1999, was first established in 1935, and is an award-winning and highly-acclaimed chain of seven health and natural product retail stores, all offering an extensive selection of natural supplements and herbs, baked goods, dairy products, delicatessen items and organic produce. Chamberlin's was selected the best health food chain in the United States by the trade publication Health Foods Business. Chamberlin's is headquartered in Winter Park, Florida and operates all of its stores in and around Orlando, Florida. Akin's Natural Foods Market, also established in 1935 and headquartered in Tulsa, Oklahoma, is a well-recognized chain of six health and natural product retail stores, each offering an extensive line of natural supplements and herbs, dairy products, delicatessen items and organic produce. Akin's has locations in Tulsa (2 stores) and Oklahoma City, Oklahoma; Lincoln, Nebraska; Springfield, Missouri; and Topeka, Kansas. FFH's new retail health food store segment is being organized to utilize the name recognition of the established health food retail chains that are acquired. Both retail chains are unique in their market areas. The Company plans to maintain the local identity of each chain while providing a means to achieve operating synergies leading to cost savings. 5 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 23 consumer product distributors in the Great Plains, Rocky Mountain and Southern regions of the United States. In June 1993, ADC acquired Sheya Brothers Specialty Beverages, Inc., a beer and "New Age" beverage distribution company. In September 1995, ADC sold the "New Age" beverage business and in October 1996, ADC sold the beer and malt beverage business. 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. In March 1999, FFH purchased all of the outstanding stock of CNF. In September 1999, FFH purchased all of the outstanding stock of HFA. PRINCIPAL PRODUCTS CIGARETTES. Sales of cigarettes and the gross margin derived therefrom for the fiscal years ending September 30, 1999, 1998, and 1997 are set forth below: (Dollars in Millions) Fiscal Year Ended September 30, ------------------------------------ 1999 1998 1997 ------ ------ ------ Sales $251.1 $185.5 $117.6 Sales as a % of Total Sales 65.1% 63.0% 65.7% Gross Margin $ 17.0 $ 13.3 $ 10.8 Gross Margin as a % of Total Gross Margin 40.1% 42.0% 55.2% Gross Margin Percentage 6.8% 7.2% 9.2% Revenues from the sale of cigarettes during fiscal 1999 increased by 35.3% as compared to fiscal 1998, while gross profit from the sale of cigarettes increased by 28.1% during the same period (see "MANAGEMENT'S DISCUSSION AND ANALYSIS-Results of Operations-Year Ended September 30, 1999 Versus Year Ended September 30, 1998" in the Annual Report to Stockholders for the Fiscal Year Ended September 30, 1999). Sales of cigarettes represented approximately 65% of the Company's sales volume during fiscal 1999. This represents a 2% increase from the prior year and related primarily to a significant increase in the price of cigarettes during the first quarter of the year. 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 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. 6 NATURAL FOODS AND RELATED PRODUCTS. Natural foods and related products, which are primarily sold by FFH, CNF and HFA, constitute the Company's second largest-selling product line, representing approximately 12.9% of the Company's total sales volume during fiscal 1999. Sales of natural foods and related products and the gross margin derived therefrom for the fiscal years ending September 30, 1999 and 1998 are set forth below (the Company did not sell natural foods and related products in 1997): (Dollars in Millions) Fiscal Year Ended September 30, ------------------------------- 1999 1998 ------ ------ Sales $ 49.6 $ 31.2 Gross Margin 13.5 7.7 Gross Margin Percentage 27.2% 24.8% CONFECTIONERY. Candy and related confectionery items, which are primarily sold by ADC, constitute the Company's third largest-selling product line, representing approximately 6.2% of the Company's total sales volume during fiscal 1999. Sales of confectionery items and the gross margin derived therefrom for the fiscal years ending September 30, 1999, 1998 and 1997 are set forth below: (Dollars in Millions) Fiscal Year Ended September 30, ------------------------------------ 1999 1998 1997 ------ ------ ------ Sales $ 30.2 $ 29.3 $ 21.8 Gross Margin 3.8 3.6 3.0 Gross Margin Percentage 12.6% 12.3% 13.8% 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 Palmer Candy Company. OTHER PRODUCT LINES. Over the past eight years, ADC's strategy has been to expand its portfolio of consumer products in order to better serve its customer base. ADC's other product lines include cigars and other tobacco products, water and other beverages, groceries, paper products, health and beauty care products, frozen and chilled products and institutional food products. During fiscal 1999, ADC's sales of other products increased $6.4 million or 13.2%. During fiscal 1999 the gross profit margin on these types of products was 14.9%. COMPETITION Both the traditional and natural food distribution businesses are highly competitive. There are many similar distribution companies operating in the same geographical regions as ADC and FFH. Management believes that ADC is one of the largest distribution companies of its type operating in its market 7 area. ADC's principal competitors are national wholesalers such as McLane Co., Inc. (Temple, TX) and regional wholesalers such as Farner-Bocken (Carroll, IA), Merchants Wholesale (Quincy, IL) and Minter-Weisman Co. (Minneapolis, MN) along with a host of smaller grocery and tobacco wholesalers. FFH's principal competitors are national distributors such as Tree of Life and United Natural 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. The natural food retail industry is highly fragmented, with more than 9,000 stores operating independently or as part of small chains. The two leading natural food chains, Whole Foods Market and Wild Oats, continue to expand their geographic markets and acquire smaller independent competitors. In addition, conventional supermarkets and mass market outlets have also begun to increase their emphasis on the sale of natural products. Management believes the Company's retail stores separate themselves from other competitors by offering smaller, friendly, community-oriented settings run by people who share a passion for healthy living and natural foods. 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, 1999, the Company had 1,017 full-time and part-time employees in the following areas: Managerial 20 Administrative 146 Sales & Marketing 485 Warehouse 265 Delivery 101 ----- Total Employees 1,017 ===== None of AMCON's employees are subject to any collective bargaining agreements with the Company and management believes its relations with its employees are good. 8 ITEM 2. PROPERTIES The location and approximate square footage of the nine principal distribution centers and 13 retail stores operated by AMCON as of September 30, 1999 are set forth below: LOCATION SQUARE FEET -------- ----------- DISTRIBUTION ------------ 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 Melbourne, Florida 35,000 ------- Total Distribution 478,100 ------- RETAIL ------ CNF - Florida 43,900 HFA - Kansas, Missouri, Nebraska & Oklahoma 50,800 ------- Total Retail 94,700 ------- Total Square Footage 572,800 ======= AMCON owns its distribution facility in Bismarck, North Dakota. The Company owned one other building that was subsequent to year end. 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, 1999). AMCON leases its remaining distribution facilities, retail stores, offices and certain equipment under noncancellable operating leases. Leases for the nine distribution facilities and 13 retail stores leased by the Company have terms expiring from 2000 to 2006. Minimum future lease commitments for these properties and equipment total approximately $14.7 million as of September 30, 1999. Management believes that its existing facilities are adequate for the Company's present level of operations; however, additional cross-dock facilities and retail stores will be required to accommodate the Company's anticipated growth in certain market areas. 9 AMCON owns a condominium in the Cayman Islands that is uses in furtherance of its business marketing strategies. AMCON acquired a portion of its interest in the condominium from its former parent in 1992 under an agreement that provides that 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 the former parent. 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 security holders during the fourth quarter ended September 30, 1999. 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 Company has entered into employment agreements with Mr. Wright, Ms. Evans and Mr. Fleming, each with a term expiring on December 31, 2001. The executive officers of AMCON are as follows: Name Age Position ---- --- -------- William F. Wright 57 Chairman of the Board, Director Kathleen M. Evans 52 President of ADC, Director Jerry Fleming 61 President of FFH, Director Michael D. James 38 Secretary, Treasurer and Chief Financial Officer 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. 10 KATHLEEN M. EVANS became President of the Company in February 1991. Prior to that time she served as Vice President of AMCON Corporation from 1985 to 1991. 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 PricewaterhouseCoopers LLP, 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, 1999 under the heading "Market for Common Stock" on pages 4 and 5. 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, 1999 under the heading "Selected Financial Data" on pages 2 through 4. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. With the exception of the Year 2000 Readiness discussion below, the information required by this item is incorporated by reference from the Annual Report to Stockholders for the fiscal year ended September 30, 1999 under the heading "Managements Discussion and Analysis" on pages 5 through 14. 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, AMCON has business relationships with a number of third parties whose Year 2000 problems could impact the Company. Accordingly, management has recognized the Year 2000 11 issue as a major management and technology project. A task force 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, AMCON has both replaced some systems and upgraded 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 correctly after December 31, 1999. All software conversions affiliated with the Year 2000 issue have been completed and management believes that the Year 2000 problems relating to internal operating systems will be resolved without significant operational difficulties. Baseline testing of all Year 2000 converted software is completed and deployment of the converted software is substantially complete. Verification that the converted software is functioning properly will continue through December 31, 1999. However, there can be no assurance that testing and verification will discover all potential Year 2000 problems or that it will not reveal unanticipated material problems with its systems that will need to be resolved. Management has taken steps to ensure that information technology personnel are on site at each location on January 1, 2000 to monitor the systems and make software modifications, if necessary. Other internal systems have been evaluated by AMCON's own personnel, along with the providers that service and maintain the systems with emphasis placed on critical systems such as telephone systems. Management believes that all of its internal systems are currently Year 2000 compliant. AMCON has no control over the efforts of third parties with which we have 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. COSTS. Through September 30, 1999, cumulative costs relating directly to Year 2000 issues have totaled approximately $163,000. 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. Management estimates that Year 2000 costs to be incurred subsequent to September 30, 1999 will total approximately $30,000 for deployment of Year 2000 converted software. 12 RISKS. Management believes that AMCON will have successfully addressed the Year 2000 problem before December 31, 1999. Therefore, management believes that the most reasonably likely worst-case scenario will be that one or more of the third parties with which AMCON 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 AMCON by eliminating our 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, management does not believe there will be any long-term operating system failures. However, AMCON will continue to monitor these issues as part of its Year 2000 project and will concentrate its efforts on minimizing their impact. CONTINGENCY PLANS. AMCON has not modified any specific contingency plans with respect to internal operating systems. Basic contingency plans are maintained which address short term operating system failure. Management believes these contingency plans will be sufficient to cover possible operating system disruption caused by Year 2000 problems. As AMCON completes deployment of the Year 2000 converted software, these contingency plans will be addressed and modified if necessary. Contingency planning includes, remote dial-up connectivity from remote branches in the event that certain telecommunication services fail to operate, direct faxing of orders to the distribution centers and manual routing. Management currently does not foresee contingency planning in the product receiving, selling, order filling and delivery phases of our business as these areas are very labor intensive. AMCON 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. The Company has terminated relationships with third party service providers that were not able to demonstrate that they had 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 modifications. AMCON's contingency plan only addresses those third parties that are considered critical to its operations. The foregoing Year 2000 discussion contains certain forward-looking statements, including without limitation anticipated costs and the dates by which AMCON 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 AMCON, unanticipated system costs, the need to replace additional hardware, the adequacy of and ability to implement contingency plans and similar uncertainties. 13 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, 1999 under the heading "Managements Discussion and Analysis" on pages 5 through 14. 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, 1999 on pages F-1 through F-24. Supplemental financial information is incorporated by reference from the Annual Report to Stockholders for the fiscal year ended September 30, 1999 under the heading "Selected Quarterly Financial Data" on pages 3 and 4. 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 2000 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. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and certain persons who own more than ten percent of the Company's Common Stock, to file with the Securities and Exchange Commission (the "SEC") reports of their ownership of Company Common Stock. Officers, directors and greater-than-ten-percent shareowners are required by SEC regulation to furnish the Company with copies of such reports received by the 16(a) reports they file. Based solely upon review of the copies of such reports received by the Company and written representations from each such person who did not file an annual report with the SEC (Form 5) that no other reports were required, the Company believes that, except as set forth below, there was compliance for the fiscal year ended September 30, 1999 with all Section 16(a) filing requirements applicable to the Company officers, directors and greater-than-ten-percent beneficial owners. During the fiscal year ended September 30, 1999, the Statement of Changes of Beneficial Ownership (Form 4) was filed late for Susan C. Wright, Wendy M. Wright and Mark A. Wright, all greater-than-ten-percent owners of the Company's outstanding Common Stock. However, all transactions with respect to the Common Stock of the Company were reported by these shareholders. 14 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. 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. 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, 1999 is attached as Exhibit 13. Reference Page Report of Independent Accountants F-1 Consolidated Balance Sheets as of September 30, 1999 and 1998 F-2 Consolidated Statements of Income for the Years Ended September 30, 1999, 1998, and 1997 F-3 Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years Ended September 30, 1999, 1998 and 1997 F-4 Consolidated Statements of Cash Flows for the Years Ended September 30, 1999, 1998 and 1997 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 15 (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 AMCON's Current Report on Form 8-K filed on November 25, 1997) 2.2 Stock Purchase Agreement dated February 24, 1999, between Food For Health Company, Inc. ("FFH"), an Arizona corporation and a wholly-owned subsidiary of AMCON, Chamberlin Natural Foods, Inc.("Chamberlin"), a Florida corporation, Dale C. Bennett, Dale C. Bennett as Trustee of the Alice M. Bennett Irrevocable Trust Dated August 8, 1991, Dale C. Bennett as Trustee of the Dale C. Bennett Revocable Trust dated August 8, 1991, Kirk D. Bennett and Chad W. Bennett as Trustees of the Dale C. Bennett Irrevocable Trust No. 1, Chad W. Bennett and Kirk D. Bennett (incorporated by reference to Exhibit 2.2 of AMCON's Quarterly Report on Form 10-Q filed on May 10, 1999) 2.3 Stock Purchase Agreement dated August 30, 1999, by and among Food For Health Company, Inc., a wholly-owned subsidiary of AMCON Distributing and Health Food Associates, Inc. (incorporated by reference to Exhibit 2.1 of AMCON's Current Report of Form 8-K filed on September 30, 1999) 3.1 Restated Certificate of Incorporation of the Company, as amended March 19, 1998 (incorporated by reference to Exhibit 3.1 of AMCON's Quarterly Report on Form 10-Q filed on May 11, 1998) 3.3 Bylaws of the Company (incorporated by reference to Exhibit 3.2 of AMCON's Registration Statement on Form S-1 (Registration No. 33-82848) filed on August 15, 1994) 4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of AMCON's Registration Statement on Form S-1 (Registration No. 33-82848) filed on August 15, 1994) 10.1 Grant of Exclusive Manufacturing Rights, dated October 1, 1993, between the Company and Famous Value Brands, a division of Philip Morris Incorporated, including Private Label Manufacturing Agreement and Amended and Restated Trademark License Agreement (incorporated by reference to Exhibit 10.1 of Amendment No. 1 to AMCON's Registration Statement on Form S-1 (Registration No. 33-82848) filed on November 8, 1994) 10.2 Amendment No. 1 to Grant of Exclusive Manufacturing Rights, dated October 1, 1998, between the Company and Famous Value Brands, a division of Philip Morris Incorporated, including Amendment No. 1 To Private Label Manufacturing Agreement and Amendment No. 1 to Amended and Restated Trademark License Agreement (incorporated by reference to Exhibit 10.2 of AMCON's Annual Report on Form 10-K filed on December 24, 1998) 10.3 Loan Agreement, dated November 10, 1997, between the Company and LaSalle National Bank (incorporated by reference to Exhibit 10.1 of AMCON's Current Report on Form 8-K filed on November 25, 1997) 16 10.4 Amended Loan Agreement, dated February 25, 1998, between the Company and LaSalle National Bank (incorporated by reference to Exhibit 10.5 of AMCON'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 AMCON'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 AMCON'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 AMCON'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 AMCON'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 AMCON'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 AMCON's Quarterly Report on Form 10-Q filed on May 11, 1998) 10.11 First Amendment to Loan and Security Agreement, dated November 18, 1998, between Food For Health Co., Inc. and LaSalle National Bank (incorporated by reference to Exhibit 10.11 of AMCON's Quarterly Report on Form 10-Q/A filed on August 5, 1999) 10.12 First Amendment and Allonge to Promissory Note, dated November 18, 1998, between Food For Health Co., Inc. and LaSalle National Bank (incorporated by reference to Exhibit 10.12 of AMCON's Quarterly Report on Form 10-Q/A filed on August 5, 1999) 10.13 Unconditional Guarantee, dated February 25, 1998, between the Company and LaSalle National Bank (incorporated by reference to Exhibit 10.12 of AMCON's Quarterly Report on Form 10-Q filed on May 11, 1998) 10.14 8% Convertible Subordinated Note, dated September 15, 1999 by and between Food For Health Company Inc. and Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy Laminsky (incorporated by reference to Exhibit 10.1 of AMCON's Current Report on Form 8-K filed on September 30, 1999) 17 10.15 Secured Promissory Note, dated September 15, 1999, by and between Food For Health Company, Inc. and James C. Hinkefent and Marilyn M. Hinkefent, as trustees of the James C. Hinkefent Trust dated July 11, 1994, as amended, Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy Laminsky (incorporated by reference to Exhibit 10.2 of AMCON's Current Report on Form 8-K filed on September 30, 1999) 10.16 Pledge Agreement, dated September 15, 1999, by and between Food For Health Company, Inc. and James C. Hinkefent and Marilyn M. Hinkefent, as trustees of the James C. Hinkefent Trust dated July 11, 1994, as amended, Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy Laminsky (incorporated by reference to Exhibit 10.3 of AMCON's Current Report on Form 8-K filed on September 30, 1999) 10.17 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) 10.18 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) 10.19 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) 10.20 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) 10.21 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, 1999 21.0 Subsidiaries of the Company 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, 1999. 18 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, 1999. AMCON DISTRIBUTING COMPANY By: /s/ Kathleen M. Evans ---------------------- Kathleen M. Evans, President 19 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, 1999. 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 /s/ William R. Hoppner Director - ------------------------ William R. Hoppner 20 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of AMCON Distributing Company: Our report on the consolidated 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, 1999, 1998 and 1997. 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 24, 1999 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, 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 Oct 1, 1998 460,753 314,720 - (98,672) Sep. 30, 1999 676,801 Allowance for inventory obsolescence 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 Oct 1, 1998 329,864 - - (253,864) Sep. 30, 1999 76,000 /1/ Recorded as a result of the acquisition of Food For Health Co., Inc.
S-2 EX-13.1 2 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13.1 Annual Report to Stockholders for the Fiscal Year Ended September 30, 1999 TO OUR SHAREHOLDERS: For fiscal year 1999, your Company reported record sales and record net income for the fourth consecutive year. Sales increased 31% over comparable year sales. Net income per share increased 59% over comparable year net income per share. We, at AMCON, are extremely proud of this. At the same time, we recognize that diligent effort is required in the current fiscal year to continue growth. We have "set the bar high", but will not be deterred from continuing our efforts for success in the future. We recognize that part of our sales and earnings for the fiscal year 1999 were aided by extraordinary price increases in some of our basic products. Similar price increases of the magnitude experienced last year are not anticipated in the present fiscal year. This means that, for the present fiscal year, we must not only make up for those price increases but must also work hard in all areas to continue our growth. Hopefully, some of that growth can be achieved through strategic acquisitions. The rest must come from growth in our core businesses. We have accomplished that in the past through the dedicated efforts of all of our people at AMCON Distributing and Food For Health and its subsidiaries. We believe that we can continue to achieve results through the dedication and efforts of our people who continue to be your Company's greatest assets. As our success continued through last year, our Board of Directors determined it was appropriate to return more of our earnings to you, our shareholders. In December of last year, a $0.02 per share dividend was declared by the Board. The $0.02 per share dividend continued thereafter on a quarterly basis. Our Board has now determined that the dividend should be increased to $0.03 per share on a quarterly basis. Although we cannot predict the future, nor can we guarantee continuation, it is our hope that dividends will continue with regularity. In December of this year, our Board also declared a 10% stock dividend. This means that, for every 10 shares held by a shareholder, an additional one share will be received as a dividend. Our hope in declaring the stock dividend is to increase the number of shares in our Company that are publicly traded. As the number of shares that are publicly traded grows, we hope to achieve a market value that, in our opinion, will more accurately reflect the true value of our Company. FINANCIAL REVIEW Our new sales record of $385.5 million (a 31% increase over our previous annual record) was achieved through the twin engines of growth: growth of our core businesses; and the addition of companies through acquisition. As noted earlier, per share income for the year increased 59% (versus the 31% increase in sales). We believe that this shows success in our efforts to not only grow the Company but make the Company more efficient and profitable. We will endeavor to maintain this trend in the future. STRATEGIES We continue to seek out opportunities for acquisition both in the traditional distribution business and in the health food sector. This last fiscal year, we acquired all of the stock of Chamberlin's Natural Food, Inc. and Health Food Associates, Inc. ("Akin's"). Both Chamberlin's and Akin's are retail chains selling in the health food segment. Chamberlin's, headquartered in Orlando, Florida, operates 7 health and natural food and product stores in the Orlando area and was designated last year by an industry trade publication as the #1 health food retail chain in America. Akin's, headquartered in Tulsa, Oklahoma, is a highly acclaimed chain of 6 health and natural product stores located in Topeka, Kansas; Springfield, Missouri; Lincoln, Nebraska; Oklahoma City, Oklahoma; and Tulsa, Oklahoma (2). We encourage all of our shareholders and friends to visit these locations when you are in the area. We are certain that these stores and the people working there will make you proud to be associated with our Company. As always, both of us are interested in hearing from you with any questions, suggestions or comments. As you undoubtedly can tell, we are excited about our future. We appreciate the continuing support you, our shareholders, give us. We appreciate the support of our suppliers and customers and, as mentioned earlier, we appreciate the efforts of every single one of our employees - they are AMCON. William F. Wright Kathleen M. Evans Chairman President 1 SELECTED FINANCIAL DATA The selected financial data presented below have been derived from the Company's audited financial statements. The information set forth below should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS" and with the Consolidated Financial Statements and Notes thereto included in this Annual Report.
(Dollars in thousands, except per share data) - -------------------------------------------------------------------------------------------------------- FISCAL YEAR ENDED SEPTEMBER 30, 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- Sales................................... $ 385,501 $ 294,281 $ 178,991 $ 176,145 $ 169,790 Cost of sales........................... 343,021 262,633 159,435 155,885 149,756 --------- --------- --------- --------- -------- Gross profit............................ 42,480 31,648 19,556 20,260 20,034 Operating expense....................... 34,615 26,209 16,753 17,504 17,183 --------- --------- --------- --------- --------- Income from operations.................. 7,865 5,439 2,803 2,756 2,851 Interest expense........................ 1,755 1,814 867 1,149 1,543 Other (income) expense, net............. (72) (276) (1,353) (697) (228) --------- --------- --------- --------- --------- Income before income taxes 6,182 3,901 3,289 2,304 1,536 Income taxes 2,346 1,543 1,348 968 614 --------- --------- --------- --------- --------- Net income.............................. 3,836 2,358 1,941 1,336 922 Accretion of preferred stock /1/ ....... - - - (83) (100) --------- --------- --------- --------- --------- Net income.............................. $ 3,836 $ 2,358 $ 1,941 $ 1,253 $ 822 ========= ========= ========= ========= ========= Earnings per common and common equivalent share attributable to common shareholders: Basic: $ 1.55 $ 0.96 $ 0.79 $ 0.51 $ 0.33 ========= ========= ========= ========= ========= Diluted: $ 1.48 $ 0.93 $ 0.79 $ 0.51 $ 0.33 ========= ========= ========= ========= ========= Weighted average shares outstanding: Basic................................ 2,479,902 2,458,062 2,447,782 2,445,903 2,478,047 Diluted.............................. 2,595,836 2,535,451 2,451,462 2,445,903 2,478,047
2
(Dollars in thousands) - -------------------------------------------------------------------------------------------------------- FISCAL YEAR ENDED SEPTEMBER 30, 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- Working capital ....................... $ 18,737 $ 18,474 $ 11,158 $ 11,572 $ 12,098 Total assets............................ 68,589 39,644 23,497 23,026 22,919 Long-term obligations and subordinated debt /2/............................... 38,129 19,207 9,123 10,245 12,705 Shareholders' equity.................... 13,258 /4/ 9,605 7,208 /3/ 6,621 5,122
- ------------------------ /1/ Preferred stock valued at $1,000,000 was issued in partial payment for repurchase of warrants which were originally issued in conjunction with a $4 million loan made in 1989 by MLBC Inc. to AMCON. The Company had the right to redeem the preferred stock at any time after April 1, 1996 for $1,200,000. The preferred stock accreted to the redemption price in lieu of cash dividends and was redeemed in December 1996. /2/ Includes current portion of long-term obligations and subordinated debt. /3/ Reflects redemption of preferred stock described in footnote 1 above for $1,200,000 in December 1996. /4/ Includes dividends paid of $198,392. SELECTED QUARTERLY FINANCIAL DATA (unaudited) The following table sets forth selected financial information for each of the eight quarters in the two-year period ended September 30, 1999. This information has been prepared by the Company on the same basis as the consolidated financial statements and includes all normal and recurring adjustments necessary to present fairly this information when read in conjunction with the Company's audited Consolidated Financial Statements and Notes thereto included in this Annual Report.
(Dollars in thousands) - -------------------------------------------------------------------------------------------------------- FISCAL YEAR ENDED SEPTEMBER 30, 1999 Fourth Third Second First - -------------------------------------------------------------------------------------------------------- Sales................................... $109,501 $103,651 $90,040 $82,309 Gross profit............................ 11,814 10,665 9,353 /1/ 10,646 /1/ Income before taxes..................... 1,001 1,360 1,425 2,395 Net income.............................. 682 850 861 1,443 Earnings per common and common equivalent share: Basic: $ 0.27 $ 0.34 $ 0.35 $ 0.58 ======== ======== ======= ======= Diluted: $ 0.26 $ 0.33 $ 0.34 $ 0.56 ======== ======== ======= =======
3
(Dollars in thousands) - -------------------------------------------------------------------------------------------------------- FISCAL YEAR ENDED SEPTEMBER 30, 1998 Fourth Third Second First - -------------------------------------------------------------------------------------------------------- Sales................................... $ 82,735 $ 77,651 $68,946 $64,949 Gross profit............................ 8,733 8,338 7,412 7,166 Income before taxes..................... 1,104 1,236 406 1,155 Net income.............................. 664 754 268 672 Earnings per common and common equivalent share: Basic: $ 0.27 $ 0.31 $ 0.11 $ 0.27 ======== ======== ======= ======= Diluted: $ 0.26 $ 0.29 $ 0.11 $ 0.27 ======== ======== ======= =======
/1/ Gross profit in the first and second quarters include margin from a significant cigarette price increase which took affect during the first quarter. Quarterly earnings are based on weighted average shares outstanding for the quarter, therefore, the sum of the quarters may not equal the full year earnings per share amount. MARKET FOR COMMON STOCK The Company's Common Stock trades on the NASDAQ SmallCap Market under the symbol "DIST". The following table reflects the range of the high and low prices per share of the Company's Common Stock reported by NASDAQ for the years ended September 24, 1999 and September 25, 1998. These quotations represent inter-dealer quotations, without adjustment for retail mark-ups, mark-downs or commissions and may not necessarily represent market transactions. As of December 10, 1999, the Company had approximately 1,000 holders of record of its shares and the Company believes that approximately 1,600 additional persons hold shares beneficially. COMMON STOCK --------------------- HIGH LOW ------ ------ Year ended September 24, 1999: 4th Quarter $10.00 $ 7.38 3rd Quarter 10.25 6.00 2nd Quarter 8.50 5.69 1st Quarter 8.13 4.25 Year ended September 25, 1998: 4th Quarter $ 8.25 $ 6.00 3rd Quarter 9.75 4.25 2nd Quarter 5.25 3.25 1st Quarter 4.38 2.75 4 During the fiscal year ended September 24, 1999, the Board of Directors declared cash dividends of $0.02 per share per quarter or $0.08 per share for the year. In December 1999, the Board of Directors declared a $0.03 per share cash dividend and a special 10% stock dividend. The Board of Directors will evaluate payment of future dividends at their regular meetings. In addition to possible dividends in the future, retained earnings will be used to finance acquisitions of other distributing and retail companies, develop new products, expand markets and for other corporate purposes. The payment of dividends requires the prior approval of the lender under various borrowing arrangements entered into by the Company. On September 27, 1996, AMCON issued options to purchase 22,000 shares of its common stock to management employees at an exercise price of $1.63. On November 10, 1997, options to purchase 140,000 shares of common stock were issued to management employees at exercise prices of $2.88 and $3.16. During fiscal 1999, options to purchase 95,000 shares of common stock were issued to management employees at exercise prices between $6.75 and $9.90. At September 24, 1999, options to acquire 120,200 shares of common stock were fully vested and exercisable. In November 1997, AMCON issued options to acquire 30,000 shares of its common stock at an exercise price of $2.875 per share. The options were issued to two independent directors of the Company as consideration for past service to the Company. The options have a termination date of November 10, 2007 and vest over a three year period. In December 1998, options to acquire 20,000 shares of AMCON's stock were issued to the Company's four independent directors at an exercise price of $6.75 per share. The options were fully vested at the date of grant. In June 1999, AMCON issued options to acquire 8,000 shares of its common stock to its four independent directors at an exercise price of $9.00 per share. The options were fully vested at the date of grant. At September 24, 1999, 46,000 options issued to independent directors were fully vested and exercisable. MANAGEMENT'S DISCUSSION AND ANALYSIS AMCON Distributing Company (together with its wholly-owned subsidiary, Food For Health Co., Inc. and its wholly-owned subsidiaries, U.S. Health Distributors, Inc., Chamberlin's Natural Foods, Inc. and Health Food Associates, Inc.) operates 9 distribution centers and 13 retail health food stores in the Great Plains, Rocky Mountain, Western and Southern regions of the United States. As used herein, unless the context indicates otherwise, the term "ADC" means the separate company operations or "traditional distribution business" of AMCON Distributing Company, the term "FFH" means the "natural food distribution business" of Food For Health Co., Inc. and its wholly-owned subsidiary, U.S. Health Distributors, Inc. ("USHD"). The terms "CNF" and "HFA" represent the "retail health food stores" operated by Chamberlin's Natural Foods, Inc. and Health Food Associates, Inc., respectively, both wholly-owned subsidiaries of FFH, and the term "AMCON" or the "Company" means AMCON Distributing Company and its subsidiaries. AMCON's fiscal year ends on the last Friday in September. For convenience, the fiscal years have been indicated as September 30, whereas the actual year ends were September 24, 1999, September 25, 1998 and September 26, 1997. Each fiscal year was comprised of 52 weeks. 5 RESULTS OF OPERATIONS The following table sets forth an analysis of various components of the Income Statement as a percentage of sales for the fiscal years ended September 30, 1999, 1998, and 1997:
Fiscal Year Ended September 30, ------------------------------- 1999 1998 1997 -------- -------- -------- Sales.......................................... 100.0% 100.0% 100.0% Cost of sales.................................. 89.0 89.3 89.1 ------- ------- -------- Gross profit................................... 11.0 10.7 10.9 Selling, general and administrative expense...................... 8.5 8.5 8.9 Depreciation and amortization.................. 0.5 0.4 0.5 ------- ------- -------- Income from operations......................... 2.0 1.8 1.5 Interest expense............................... 0.5 0.6 0.5 Other (income) expense, net.................... (0.1) (0.1) (0.8) /1/ ------- ------- -------- Income before income taxes..................... 1.6 1.3 1.8 Income tax expense............................. 0.6 0.5 0.7 ------- ------- -------- Net income 1.0% 0.8% 1.1% ======= ======== ========
/1/ Other income of $1.4 million or 0.8% of sales for the fiscal year ended September 30, 1997 was generated primarily by the gain associated with the sale of the Denver beer distributorship of $1.1 million or 0.6% of sales. 6 YEAR ENDED SEPTEMBER 30, 1999 VERSUS YEAR ENDED SEPTEMBER 30, 1998. Sales for the year ended September 30, 1999 increased 31% to $385.5 million, compared to $294.3 million for the year ended September 30, 1998. Sales from the traditional distribution business through September 30, 1999 were $72.8 million over the prior year. Component increases were as follows: Cigarette sales increased approximately $65.5 million over the prior year (approximately 61% was due to price increases over the past 12 months and the balance was due to increased volume). Sales of non-cigarette products increased by $7.3 million primarily due to increased volume. Sales from the health and natural foods distribution business increased by $11.4 million. This increase was partially due to $5.8 million of sales generated by USHD which was acquired by FFH in November 1998. Additionally, since FFH was acquired mid-way through the first quarter of fiscal 1998, FFH's sales in the first quarter of 1999 were approximately $4.1 million greater than the prior year. New sales generated by the retail health food stores acquired by FFH during fiscal 1999 totaled $7.0 million. CNF, acquired on March 29, 1999, contributed $6.4 million of new sales and HFA, acquired on September 15, 1999, contributed $569,000 of new sales. Gross profit increased 34.2% to $42.5 million for the year ended September 30, 1999 compared to $31.6 million for the prior fiscal year. Gross profit as a percent of sales increased to 11.0% for the period compared to 10.7% for the year ended September 30, 1998. The increases in gross profit and gross profit percentage were primarily attributable to a substantial cigarette price increase during the first quarter of the year which resulted from a settlement that was reached between the major tobacco manufacturers and the various states that had filed liability suits against the industry. This unusual price increase accounted for approximately $4.2 million in gross margin for the year ended September 30, 1999 versus $1.5 million in the prior year. It is expected that profit margins in fiscal 2000 and thereafter will return to historical levels. Gross margin from the distribution businesses operated by ADC and FFH increased by $5.2 million due to increases in volume and an additional 6 weeks of operations by FFH, which was acquired in mid-November 1997. In addition, gross profit generated by USHD and the retail businesses, CNF & HFA, which were acquired during the current fiscal year, was $4.5 million. These increases in gross profit were partially offset by a $2.0 million LIFO inventory adjustment during the second, third and fourth quarters. While sales of cigarettes have increased consistently over the past six years, sales of the Company's private label cigarettes have declined. Since 1993, when cigarette manufacturers substantially reduced the price of premium brand cigarettes, the premium cigarette brands have thrived at the expense of most generic brands. Also, cigarette price increases since 1993 have been identical for both premium and the Company's generic brands. In November 1998, an announcement was made that a settlement had been reached between the major tobacco manufacturers and the various states that had filed liability suits against the industry. Immediately thereafter, the major cigarette manufacturers increased the price of cigarettes by 30 - 35% on both premium and generic brands, including the Company's private label brand. In late August 1999, prices charged by manufacturers were again increased another 9 - 11%, in advance of the scheduled increase in federal excise tax of $1.00 per carton effective on January 1, 2000. As a result, management anticipates the volume of the Company's private label cigarettes will continue to decline 7 over the next few years. The gross profit derived from sales of the Company's private label cigarettes was $549,000 less in fiscal 1999 than in fiscal 1998. Management estimates that gross profit from private label cigarettes sales could decrease by another $300,000 to $500,000 in fiscal 2000. For the year ended September 30, 1999, total operating expense, which includes selling, general and administrative expenses, depreciation and amortization, increased 32.1% to $34.6 million compared to fiscal 1998. The increase was partially due to expenses attributable to USHD, CNF and HFA, which were acquired during fiscal 1999. These subsidiaries accounted for $4.4 million of the increase in operating expenses. In addition, since FFH was purchased midway through the first quarter of fiscal 1998, FFH's operating expenses in the prior year represent approximately 88% of a full 12 month period. As a result, FFH's operating expenses were approximately $1.0 million greater in 1999 than 1998. The remaining increase in operating expenses was due to additional expenses incurred by ADC to support increased volume for the year. As a percentage of sales, total operating expense increased to 9.0% from 8.9% during the same period in the prior year. This increase was primarily due to the acquisition of USHD, CNF and HFA, whose operating expenses as a percent of sales are much higher than AMCON's historical average. As a result of the above, income from operations for the fiscal year ended September 30, 1999 increased by $2.4 million to $7.9 million. Interest expense for the fiscal year ended September 30, 1999 decreased 3.3% to $1.75 million compared to $1.81 million during the prior year. The decrease was primarily due to a 40 to 80 basis point reduction in the average borrowing rate during the year ended September 30, 1999 combined with a $1.4 million reduction in the average amount borrowed by ADC. These factors more than offset an increase in the average amount borrowed by FFH during the year to finance internal growth and the acquisition of USHD. Other income for the year ended September 30, 1999 of $72,000 was generated by gains associated with the sale of fixed assets, royalty payments, miscellaneous industry promotional income and dividends received on investment securities. Other income for the year ended September 30, 1998 of $276,000 was generated from similar activities as well as the gain associated with the sale of marketable securities. As a result of the above factors, net income for the fiscal year ended September 30, 1999 was $3,835,529 compared to $2,358,186 for fiscal 1998. The distribution industry is in a state of consolidation as intense competition and pressure on profit margins continue to affect both large and small distributors. The retail natural foods industry is highly fragmented, with more than 9,000 stores operated independently or as part of small chains. The two leading natural food chains continue to expand their geographic markets and acquire smaller independent competitors. In addition, conventional supermarkets and mass market outlets have also begun to increase their emphasis on the sale of natural products. This business climate subjects operating income to a number of factors which are beyond the control of management, such as competing retail stores opening in close proximity to the Company's retail stores. While the Company sells a diversified product line, it remains dependent on cigarette sales which represented approximately 8 65% of its revenue and 40% of its gross margin in fiscal 1999. Changes in manufacturers' cigarette pricing affects the market for generic and private label cigarettes and net income is heavily dependent up on sales of the Company's private label cigarettes and volume discounts received from manufacturers in connection with such sales. The Company continuously evaluates steps it may take to improve net income in future periods, including further acquisitions of other distributing companies and retail stores in similar business lines and further sales of assets that are no longer essential to its primary business activities such as investments in equity securities. Investments in equity securities at September 30, 1999 and 1998 consisted primarily of 83,000 shares of Consolidated Water Company Limited ("CWC," formally Cayman Water Company Limited), a public company which is listed on NASDAQ. The Company's basis in the securities is $151,000 and the fair market value of the securities was $540,000 and $508,000 on September 30, 1999 and September 30, 1998, respectively. The unrealized gain on CWC shares was approximately $389,000 and $358,000 on September 30, 1999 and 1998, respectively. The fair market value of the CWC shares on December 10, 1999 was $539,500. YEAR ENDED SEPTEMBER 30, 1998 VERSUS YEAR ENDED SEPTEMBER 30, 1997. Sales for the year ended September 30, 1998 increased 64.4% to $294.3 million, compared to $179.0 million for the year ended September 30, 1997. Sales attributable to the new St. Louis distribution center, which was purchased in October 1997, and to FFH, a distributor of health and natural food products, which was purchased in November 1997, were $76.3 million, of which $36.2 million related to cigarette sales. Excluding the effects of these acquisitions, sales from the traditional distribution business increased by 21.8% or $39.0 million over the prior year. Component increases were as follows: Cigarette sales increased approximately $31.7 million over the prior year, with approximately $13.3 million due to price increases and $18.4 million due to increased volume. Sales of other products increased by $7.2 million primarily due to increased volume. There were no sales of beer products during the fiscal year ended September 30, 1998 due to the sale of the Denver beer distributorship in October 1996. This accounted for a $538,000 decrease in sales of beer products as compared to the prior year. Gross profit increased 61.8% to $31.6 million for the fiscal year ended September 30, 1998 compared to $19.6 million for the prior fiscal year. The increase in gross profit was primarily attributable to the new St. Louis distribution center and FFH which accounted for $10.1 million of the $12.1 million increase in gross profit for the year. Cigarette price increases during the fiscal year accounted for an additional $485,000 in gross profit as compared to the prior year and partially offset a decrease of $935,000 in purchase discounts received from cigarette manufacturers. Gross profit as a percent of sales declined slightly from 10.9% in fiscal 1997 to 10.7% in fiscal 1998. The decline was due to a decrease of approximately 1.8% in profit margin from the Company's traditional distribution business resulting from a large increase in sales of lower-margin products (principally cigarettes) primarily in the Company's new St. Louis market. Because of lower margins realized on cigarettes, a large increase in cigarette sales adversely affected the profit margin percentage. The decrease in profit margin was also 9 attributable to a reduction in purchase discounts received from cigarette manufacturers which had the effect of increasing the cost of goods sold for cigarettes. Purchase discount programs vary by manufacturer and, although all of the purchase discount programs offered by cigarette manufacturers are computed on a cents-per-carton-sold basis, the criteria necessary for meeting higher purchase discount brackets, such as market share by cigarette category, vary from year to year as well. Therefore, it is possible to have increased sales in certain product categories, but receive less purchase discounts. This was the case for the Company in fiscal 1998. The decline in profit margin from the Company's traditional distribution business was substantially offset by additional profit margin realized by FFH, which added approximately 1.6% to the Company's profit margin percentage. In general, FFH products have a higher profit margin than cigarettes and many of the Company's other products. Total operating expense, which includes selling, general and administrative expenses and depreciation and amortization, increased 56.4% or $9.5 million compared to fiscal 1997. The increase was primarily due to expenses associated with the new St. Louis distribution center and FFH which accounted for $9.2 million of the increase. As a percentage of sales, total operating expense decreased to 8.9% from 9.4% during the same period in the prior year. The decrease in operating expenses as a percentage of sales is due to efficiencies gained through increased volume in the traditional distribution business which were partially offset by the proportionately higher operating costs incurred by FFH during the period. As a result of the above, income from operations for the fiscal year ended September 30, 1998 increased 94% to $5.4 million. Interest expense for the fiscal year ended September 30, 1998 increased 109.2%, or $947,000, compared to the prior fiscal year. The increase was primarily due to a new $4.5 million acquisition loan utilized to purchase FFH, a $5.3 million increase in the average amount borrowed under the Company's revolving credit facility with a bank during fiscal 1998, and interest expense of $249,000 associated with FFH's revolving credit facility. The Company's revolving credit facility was also utilized to finance the acquisition of the new St. Louis distribution center, the expansion of the Bismarck, ND distribution center, and to finance an increase in inventory during the period. Other income of $276,000 for the fiscal year ended September 30, 1998 was generated from gains on the sale of marketable securities and fixed assets, royalty payments associated with the sale of the Denver non-alcoholic beverage business, and rent and interest income. Other income of $1.4 million for the fiscal year ended September 30, 1997 was generated primarily by the gain associated with the sale of the Denver beer distributorship of $1.1 million. As a result of the above factors, net income for the fiscal year ended September 30, 1998 was $2,358,186 compared to $1,940,534 for fiscal 1997. 10 LIQUIDITY AND CAPITAL RESOURCES During the fiscal year ended September 30, 1999, AMCON utilized cash flow in operating activities to finance increases in accounts receivable due to the significant increase in the selling price of cigarettes and to support increases in non-tobacco related inventory from both traditional and health food businesses. Additionally, cash was provided by operating activities through increased accounts payable related to the increases in inventory. Cash was utilized in investing activities during the fiscal year to purchase the common stock of USHD in November 1998, to purchase the common stock of CNF in April 1999, and to purchase the common stock of HFA in September 1999 for $1.3 million, $2.2 million and $3.4 million, respectively. In addition, cash was utilized to repay CNF's existing short and long-term debt of $2.8 million. Cash was provided by financing activities through increases in the FFH revolving credit facility of $1.9 million, from term notes to finance the purchase of USHD and HFA totaling $11.1 million, and through increases in ADC's revolving credit facility to finance the purchase of CNF and HFA of $8.9 million. Cash of $149,000 was also used to pay dividends to common shareholders. The Company makes capital expenditures primarily for equipment for its distribution facilities including computers, delivery vehicles and warehouse equipment. The Company has historically financed its working capital requirements with a combination of internally generated funds and bank borrowings. Cash provided by operations approximated $2,373,000 and $688,000 for the fiscal years ended September 30, 1999 and 1998, respectively. Capital expenditures during those periods equaled approximately $762,000 and $782,000, respectively. The remaining cash provided by operations was applied to debt service. The Company anticipates that capital expenditures during fiscal 2000 will be approximately $850,000 and will be used for the purposes stated above. The Company had working capital of approximately $18.7 million as of September 30, 1999. The Company's ratio of debt to equity was 4.17 at September 30, 1999 compared to 3.13 at September 30, 1998. AMCON maintains two revolving credit facilities, the ADC revolving credit facility (the "Facility") and the FFH revolving credit facility (the "FFH Facility"). The Facility was amended in September 1999 to increase the primary borrowing limit from $20 million to $25 million and remove the additional $10 million facility which was collateralized by specific inventory. The Facility allows ADC to borrow up to $25 million at any time, subject to eligible accounts receivable and inventory requirements, and provides for an additional $1.5 million facility to be used for transportation equipment purchases. The Facility bears interest at the bank's base rate ("Prime") less 0.5% or LIBOR plus 1.75%, as selected by ADC. As of September 30, 1999, ADC had borrowed approximately $18.3 million under the Facility. The Facility is collateralized by all equipment, general intangibles, inventories and accounts receivable, and with a first mortgage on the owned distribution center. The Facility expires on February 25, 2002. The Facility contains covenants which, among other things, set forth certain financial ratios and net worth requirements which adjust semiannually or annually as specified in the Facility. For fiscal 2000 and 1999, the Facility includes covenants that (i) restrict the incurrence of additional debt, (ii) 11 restrict payments, prepayments and repurchases of subordinated debt or capital stock, (iii) restrict mergers and acquisitions and changes in business or conduct of business and (iv) require the maintenance of certain financial ratios and net worth levels including an average annual fixed charge ratio of 1.1 to 1.0, an average annual debt service coverage ratio of 1.50 to 1.0, a debt to equity ratio of 4.0 to 1.0 (excluding debt associated with the acquisition of FFH) and minimum tangible net worth of $4,500,000. In addition, AMCON may not pay dividends with respect to its Common Stock without the consent of the lender of the Facility. In December 1998, AMCON received consent to pay cash dividends of up to $0.02 per share per quarter. The FFH Facility, which includes a separate revolving line of credit of up to $1.0 million for USHD, was amended in November 1999 to increase the amount provided for maximum borrowings from $6 million to $8 million. Borrowings under the FFH Facility are collateralized by the assets of FFH and are guaranteed by AMCON. Amounts under the FFH Facility bear interest at Prime less 0.5% or LIBOR plus 2.00%, as selected by FFH. A commitment fee of .25% of the annual average unutilized amount of the commitment is required. As of September 30, 1999, FFH had borrowed approximately $5.3 million under the FFH Facility. The FFH Facility expires on February 25, 2002. The FFH Facility contains covenants which, among other things, set forth certain financial ratios and net worth requirements which adjust semiannually or annually as specified in the FFH Facility. For fiscal 2000 and 1999, the FFH Facility includes covenants that (i) restrict the incurrence of additional debt, (ii) restrict payments, prepayments and repurchases of subordinated debt or capital stock, (iii) restrict mergers and acquisitions and changes in business or conduct of business and (iv) require the maintenance of certain financial ratios and net worth levels including a debt to equity ratio of 4.0 to 1.0 and minimum tangible net worth of $200,000. In addition, FFH may not pay dividends with respect to its Common Stock without the consent of the lender of the FFH Facility. As of September 30, 1999, FFH was not in compliance with the debt to equity ratio or the net worth covenant due to the acquisition of HFA in September 1999. However, FFH received waivers from the lender for these covenant violations at September 30, 1999. In November 1997, AMCON borrowed $4.5 million from a bank to finance the purchase of the common stock of FFH (the "Acquisition Loan"). The Acquisition Loan has a term of five years, bears interest at Prime less 0.5% or LIBOR plus 1.75%, as selected by AMCON, and requires monthly payments equal to accrued interest plus principal payments of $85,096, which began in August 1998. As of September 30, 1999, the outstanding balance of the Acquisition Loan was $3.2 million. On November 20, 1998, FFH purchased all of the outstanding stock of U.S. Health Distributors, Inc. ("USHD"), a distributor of health and natural foods based in Melbourne, FL, for $1.3 million in cash. The acquisition was funded by a $1.1 million five and one-half year term loan from a bank (the "USHD Acquisition Loan"). The loan bears interest at Prime less 0.5%, requires payments of interest only for the first six months and monthly principal payments for the term of the loan. The loan is collateralized by the common stock of USHD. As of September 30, 1999, the outstanding balance of the USHD Acquisition Loan was $1.0 million. 12 In January 1999, ADC utilized proceeds from the Facility to satisfy its obligation associated with a $1,250,000 non-revolving line of credit with a bank which was used to finance the purchase of trucks and delivery equipment. In March, 1999, FFH, purchased all of the outstanding stock of CNF (d/b/a Chamberlin's Market & Cafe), a chain of six health and natural food product retail stores based in Winter Park, Florida, for $2.2 million in cash. The acquisition was funded through borrowings on the Facility. In addition, CNF's existing short and long-term debt of $2.8 was paid in full through borrowings under the Facility. In September, 1999, FFH purchased of all of the outstanding stock of HFA for a purchase price of $13.4 million. Funding for the acquisition was provided as follows: $4.0 million through borrowings under the Facility; $2.0 million through borrowings under an 8% Convertible Subordinated Note (the "Convertible Note") from FFH to the sellers; and $8.0 million through borrowings under a Collateralized Promissory Note (the "Collateralized Note") from FFH to the sellers. A receivable of approximately $600,000 is due from the sellers based upon purchase price adjustments outlined in the purchase agreement. Both the Convertible Note and the Collateralized Note have five-year terms and bear interest at 8% per annum. Principal on the Convertible Note is due in a single payment at maturity. Principal on the Collateralized Note is payable in installments of $800,000 per year with the balance due at maturity. The Collateralized Note is collateralized by a pledge of the stock of HFA. The principal balance of the Convertible Note may be converted into stock of FFH under circumstances set forth in the Convertible Note. As of September 30, 1999, the outstanding balances of the Convertible Note and the Collateralized Note were $2.0 million and $8.0 million, respectively. As of September 30, 1999, the Company had additional outstanding long-term indebtedness of approximately $318,000 consisting of capital leases for computer equipment, the current portion of which equaled approximately $144,000. The interest rates on the notes relating to such indebtedness range from 6.9% to 9.5% per annum. Management believes that funds generated from operations, supplemented as necessary with funds available under the Facility and the FFH Facility, will provide sufficient liquidity to cover its debt service and any reasonably foreseeable future working capital and capital expenditure requirements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AMCON does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the Company to significant market risk. AMCON's exposure to market risk relates primarily to its investment in the common stock of Consolidated Water Company (formerly Cayman Water Company), a public company traded on the Nasdaq National Market system, and to changes in interest rates on its long-term obligations. At September 30, 1999, the Company held 83,000 shares of common stock of Consolidated Water 13 Company valued at $540,000. AMCON values this investment at market and records price fluctuations in equity as unrealized gain or loss on investments. At September 30, 1999, AMCON had $27.8 million of variable rate debt outstanding, with maturities through May 2004. The interest rates on this debt ranged from 6.81 to 7.75% at September 30, 1999. The Company has the ability to select the bases on which its variable interest rates are calculated and may select an interest rate based upon the lender's base interest rate or based upon LIBOR. This provides management with some control of AMCON's variable interest rate risk. Management estimates that AMCON's cash flow exposure relating to interest rate risk based upon its current borrowings is approximately $175,000 annually for each 1% change in the lender's base interest rate or LIBOR, as applicable. CONCERNING FORWARD LOOKING STATEMENTS This Annual Report, including the Letter to Shareholders, Management's Discussion and Analysis, and other sections, contains certain forward looking statements that are subject to risks and uncertainties and which reflect management's current beliefs and estimates of future economic circumstances, industry conditions, company performance, and financial results. Forward looking statements include information concerning the possible or assumed future results of operations of the Company and those statements preceded by, followed by or that include the words "future", "position", "anticipate(s)", "expect", "believe(s)", "see", "plan", "further improve", "outlook", "should" or similar expressions. For these statements, we claim the protection of the safe harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. You should understand that the following important factors, in addition to those discussed elsewhere in this document, could affect the future results of the Company and could cause those results to differ materially from those expressed in our forward looking statements: changing market conditions with regard to cigarettes and the demand for the Company's products, domestic regulatory risks, and competitive and other risks (such as overall business conditions) over which the Company has little or no control. Any changes in such factors could result in significantly different results. Consequently, future results may differ from management's expectations. Moreover, past financial performance should not be considered a reliable indicator of future performance. 14 REPORT OF MANAGEMENT Management is responsible for the preparation of the accompanying consolidated financial statements. The consolidated financial statements and the notes thereto have been prepared in accordance with generally accepted accounting principles to reflect, in all material aspects, the substance of financial events and transactions occurring during the year. PricewaterhouseCoopers LLP, independent certified public accountants, have audited our consolidated financial statements as described in their report. The Company maintains financial control systems designed to provide reasonable assurance that assets are safeguarded and that transactions are executed and recorded in accordance with management authorization. The control systems are evaluated annually by the Company. Kathleen M. Evans President Michael D. James Treasurer and Chief Financial Officer November 24, 1999 15 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of AMCON Distributing Company: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and shareholders' equity and comprehensive income and of cash flows present fairly, in all material respects, the consolidated financial position of AMCON Distributing Company and its subsidiaries as of September 30, 1999 and 1998, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended September 30, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for inventory in fiscal 1999. PRICEWATERHOUSECOOPERS LLP Omaha, Nebraska November 24, 1999, except for Note 16, for which the date is December 20, 1999 F-1 CONSOLIDATED BALANCE SHEETS AMCON Distributing Company
- ------------------------------------------------------------------------------------------------------------ September 30, 1999 1998 - ------------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash $ 1,728,042 $ 38,369 Accounts receivable, less allowance for doubtful accounts of $676,801 and $460,753 18,345,816 15,229,107 Inventories 23,979,639 16,127,250 Deferred income taxes 717,022 570,743 Other 1,000,189 327,997 ------------- ------------- Total current assets 45,770,708 32,293,466 Fixed assets, net 7,502,927 4,466,707 Investments 550,691 508,375 Other assets 14,764,890 2,375,189 ------------- ------------- $ 68,589,216 $ 39,643,737 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 11,953,546 $ 7,350,645 Accrued expenses 3,173,231 1,329,843 Accrued wages, salaries and bonuses 640,933 675,562 Income taxes payable 283,111 1,023,944 Current portion of long-term debt 10,133,393 3,439,169 Current portion of subordinated debt 800,000 - Dividends payable 49,598 - ------------- ------------- Total current liabilities 27,033,812 13,819,163 ------------- ------------- Deferred income taxes 678,455 24,799 Other liabilities 423,574 427,419 Long-term debt, less current portion 17,995,432 15,767,659 Subordinated debt, less current portion 9,200,000 - Commitments (Note 13) Shareholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized, none outstanding - - Common stock, $.01 par value, 15,000,000 shares authorized and 2,480,000 issued at September 30, 1999 and 1998 24,800 24,800 Additional paid-in capital 2,271,278 2,271,278 Accumulated other comprehensive income, net of $149,664 and $139,468 tax 234,299 218,145 Retained earnings 10,727,926 7,090,789 ------------- ------------- 13,258,303 9,605,012 Less treasury stock, 102 shares at cost at September 30, 1999; 97 shares at cost at September 30, 1998 (360) (315) ------------- ------------- Total shareholders' equity 13,257,943 9,604,697 ------------- ------------- $ 68,589,216 $ 39,643,737 ============= ============= The accompanying notes are an integral part of these financial statements
F-2 CONSOLIDATED STATEMENTS OF INCOME AMCON Distributing Company
- ------------------------------------------------------------------------------------------------------------ Fiscal Year Ended September 30, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ Sales (including excise taxes of $54.5 million, $ 385,501,178 $ 294,281,323 $ 178,990,978 $52.9 million and $40.1 million, respectively) Cost of sales 343,021,443 262,632,767 159,434,631 ------------- ------------- ------------- Gross profit 42,479,735 31,648,556 19,556,347 Selling, general and administrative expenses 32,754,406 25,088,767 15,883,969 Depreciation and amortization 1,861,364 1,120,482 868,744 ------------- ------------- ------------- 34,615,770 26,209,249 16,752,713 ------------- ------------- ------------- Income from operations 7,863,965 5,439,307 2,803,634 Other expense (income): Interest expense 1,754,837 1,814,555 867,327 Other (income) expense, net (72,325) (276,287) (1,352,733) ------------- ------------- ------------- 1,682,512 1,538,268 (485,406) ------------- ------------- ------------- Income before income taxes 6,181,453 3,901,039 3,289,040 Income tax expense 2,345,924 1,542,853 1,348,506 ------------- ------------- ------------- Net income $ 3,835,529 $ 2,358,186 $ 1,940,534 ============= ============= ============= Earnings per common and common equivalent share: Basic $ 1.55 $ 0.96 $ 0.79 ============= ============= ============= Diluted $ 1.48 $ 0.93 $ 0.79 ============= ============= ============= Weighted average shares outstanding: Basic 2,479,902 2,458,062 2,447,782 ============= ============= ============= Diluted 2,595,836 2,535,451 2,451,462 ============= ============= ============= The accompanying notes are an integral part of these financial statements
F-3 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME AMCON Distributing Company
- ---------------------------------------------------------------------------------------------------------------- Preferred Stock Common Stock Additional ------------------- ---------------------- Paid-In Shares Amount Shares Amount Capital - --------------------------------------------------------------------------------------------------------------- Balance, September 30, 1996 250,000 $ 2,500 2,450,000 $ 24,500 $ 3,411,328 Redemption of preferred stock (250,000) (2,500) - - (1,197,500) Exercise of stock options - - - - - Net income - - - - - Unrealized gain (loss) on investments available-for-sale, net of tax - - - - - Less: reclassification adjustments for gains included in net income - - - - - Total comprehensive income -------- ------- --------- -------- ----------- Balance, September 30, 1997 - - 2,450,000 24,500 2,213,828 Issuance and exercise of warrants - - 30,000 300 57,450 Net income - - - - - Unrealized gain (loss) on investments available-for-sale, net of tax - - - - - Total comprehensive income -------- ------- --------- -------- ----------- Balance, September 30, 1998 - - 2,480,000 24,800 2,271,278 Purchase of treasury stock - - - - - Dividends - - - - - Net income - - - - - Unrealized gain on investments available-for-sale, net of tax - - - - - Total comprehensive income -------- ------- --------- -------- ----------- Balance, September 30, 1999 - - 2,480,000 $ 24,800 $ 2,271,278 ======== ======= ========= ======== =========== The accompanying notes are an integral part of these financial statements.
F-4 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (continued) AMCON Distributing Company
- --------------------------------------------------------------------------------------------------------------- Accumulated Other Comprehensive Retained Treasury Stock Income Earnings Shares Amount Total - --------------------------------------------------------------------------------------------------------------- Balance, September 30, 1996 $ 398,028 $ 2,798,569 (4,097) $ (13,315) $ 6,621,610 Redemption of preferred stock - - - - (1,200,000) Exercise of stock options - (6,500) 4,000 13,000 6,500 Net income - 1,940,534 - - 1,940,534 Unrealized gain (loss) on investments available-for-sale, net of tax (144,517) - - - (144,517) Less: reclassification adjustments for gains included in net income (16,008) - - - (16,008) --------- ----------- (160,525) (160,525 ----------- Total comprehensive income 1,780,009 --------- ----------- ------ --------- ----------- Balance, September 30, 1997 237,503 4,732,603 (97) (315) 7,208,119 Issuance and exercise of warrants - - - - 57,750 Net income - 2,358,186 - - 2,358,186 Unrealized gain (loss) on investments available-for-sale, net of tax (19,358) - - - (19,358) ----------- Total comprehensive income 2,338,828 --------- ----------- ------ --------- ----------- Balance, September 30, 1998 218,145 7,090,789 (97) (315) 9,604,697 Purchase of treasury stock - - (5) (45) (45) Dividends - (198,392) - - (198,392) Net income - 3,835,529 - - 3,835,529 Unrealized gain on investments available-for-sale, net of tax 16,154 - - - 16,154 ----------- Total comprehensive income 3,851,683 --------- ----------- ------ --------- ----------- Balance, September 30, 1999 $234,299 $10,727,926 (102) $ (360) $13,257,943 ========= =========== ====== ========= =========== The accompanying notes are an integral part of these financial statements.
F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS AMCON Distributing Company
- ------------------------------------------------------------------------------------------------------------ Fiscal Year Ended September 30, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 3,835,529 $ 2,358,186 $ 1,940,534 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,861,364 1,120,482 868,744 (Gain) loss on sales of fixed assets, land held for sale and securities 259 (46,955) (112,520) Gain on sale of Denver beer distributorship - - (1,102,205) Proceeds from sales of trading securities - 157,207 92,548 Deferred income taxes (89,875) 11,167 (8,664) Provision for losses on doubtful accounts and inventory obsolescence 314,720 640,494 33,836 Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable (3,303,670) (1,629,334) (916,159) Inventories (2,082,434) (2,554,073) (801,978) Other current assets (537,548) (180,622) 80,161 Other assets (119,505) (45,366) (42,648) Accounts payable 2,632,025 432,398 661,948 Accrued expenses and accrued wages, salaries and bonuses 720,564 (44,771) 490,413 Income taxes payable (858,360) 471,985 (63,766) Other liabilities - (2,577) - ----------- ----------- ----------- Net cash provided by operating activities 2,373,069 688,221 1,120,244 ----------- ----------- ----------- Cash flows from investing activities: Purchases of fixed assets (761,706) (782,440) (891,783) Acquisitions, net of cash acquired (5,879,143) (7,119,254) (499,109) Proceeds from sales of fixed assets 54,880 86,887 160,961 Proceeds from repayment of advance to officer - 100,000 25,000 Proceeds from sale of Denver beer distributorship - - 2,371,994 Proceeds from sales of available-for-sale securities - - 33,967 ----------- ----------- ----------- Net cash (used in) provided by investing activities (6,585,969) (7,714,807) 1,201,030 ----------- ----------- ----------- Cash flows from financing activities: Proceeds from borrowings of long-term debt 1,100,000 4,500,000 516,741 Net (payments) proceeds on bank credit agreement 9,599,775 3,483,241 (1,239,484) Payments on long-term (4,648,363) (766,025) (399,555) Debt issue costs - (182,234) - Proceeds from exercise of warrants - 3,000 - Dividends paid (148,794) - - Purchase of treasury stock (45) - - Redemption of preferred stock - - (1,200,000) Proceeds from exercise of stock options - - 6,500 ----------- ----------- ----------- Net cash provided by (used in) financing activities 5,902,573 7,037,982 (2,315,798) ----------- ----------- ----------- Net increase in cash 1,689,673 11,396 5,476 Cash, beginning of year 38,369 26,973 21,497 ----------- ----------- ----------- Cash, end of year $ 1,728,042 $ 38,369 $ 26,973 =========== =========== =========== Supplemental cash flow information: Cash paid during the year for interest $ 1,675,323 $ 1,745,609 $ 868,378 Cash paid during the year for income taxes 3,166,246 1,145,770 1,420,936 Supplemental noncash information: Issuance of warrants in connection with acquisition - 54,750 - Unrealized gain (loss)on available-for-sale securities, net 16,154 (19,358) (160,525) Acquisition of equipment through capital leases 80,676 - - Acquisition financed with subordinated debt $10,000,000 - - The accompanying notes are an integral part of these financial statements.
F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMCON Distributing Company 1. Summary of Significant Accounting Policies: Company Operations: AMCON Distributing Company (together with its wholly-owned subsidiary, Food For Health Co., Inc. and its wholly-owned subsidiaries, U.S. Health Distributors, Inc., Chamberlin's Natural Foods, Inc. and Health Food Associates, Inc.) operates 9 distribution centers and 13 retail health food stores in the Great Plains, Rocky Mountain, Western and Southern regions of the United States. AMCON sells approximately 24,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, natural food and related products, frozen and chilled products, and institutional food service products. The Company distributes products primarily to retailers such as convenience stores, discount and general merchandise stores, grocery stores and supermarkets, health food stores, natural food stores, drug stores and gas stations. In addition, the Company services institutional customers, including restaurants and bars, schools, sports complexes and vendors, as well as other wholesalers. AMCON also operates seven (7) retail health food stores in Florida under the name Chamberlin's Market & Cafe and six (6) in the Midwest under the name Akin's Natural Foods Market. These stores, which were acquired during fiscal 1999, carry natural supplements, groceries, health and beauty care products and other food items. The Company's operating income is subject to a number of factors which are beyond the control of management, such as changes in manufacturers' cigarette pricing which affects the market for generic and private label cigarettes and competing retail stores opening in close proximity to the Company's retail stores. While the Company sells a diversified product line, it remains dependent upon cigarette sales which represented approximately 65% of its revenue and 40% of its gross margin in fiscal 1999. Net income is heavily dependent on sales of the Company's private label cigarettes and volume discounts received from manufacturers in connection with such sales. Accounting Period: AMCON's fiscal year ends on the last Friday in September. For convenience, the fiscal years have been indicated as September 30, whereas the actual year ends were September 24, 1999, September 25, 1998 and September 26, 1997. Each fiscal year was comprised of 52 weeks. Principles of Consolidation: The consolidated financial statements include the accounts of AMCON and its subsidiaries. Intercompany accounts and transactions have been eliminated. Cash and Accounts Payable: AMCON uses a cash management system under which an overdraft is the normal book balance in the primary disbursing accounts. The overdrafts included in accounts payable which were $4,423,433 and $2,972,303 at September 30, 1999 and 1998, respectively, reflect the checks drawn on the disbursing accounts that have been issued but have not yet cleared through the banking system. The Company's policy has been to fund these outstanding checks as they clear with borrowings under its revolving credit facilities (see Note 7). F-7 1. Summary of Significant Accounting Policies (continued): Marketable Securities and Investments: AMCON has classified marketable securities and investments as either available-for-sale or trading securities. The carrying amounts of the securities used in computing unrealized and realized gains and losses are determined by specific identification. Fair values are determined using quoted market prices. For available-for-sale securities, net unrealized holding gains and losses are reported as a separate component of shareholders' equity, net of tax. For trading securities, net unrealized holding gains and losses are included in the determination of net income. Accounts Receivable: Accounts receivable consist primarily of amounts due to the Company from its normal business activities. An allowance for doubtful accounts is maintained to reflect the expected uncollectibility of accounts receivable based on past collection history and specific risks identified in the portfolio. Inventories: Inventories consist of finished products purchased in bulk quantities to be sold to the Company's customers. Effective in fiscal 1999, AMCON changed the method of accounting for inventory from the first-in, first-out, ("FIFO") method to the last-in, first-out ("LIFO") method. LIFO inventories at September 30, 1999 were approximately $2.0 million less than the amount of such inventories valued on a FIFO basis. The change in the inventory valuation method was made to better match current costs with current revenue. The change to LIFO reduced net income and basic earnings per share for the year ended September 30, 1999 by $1,284,000 and $0.52, respectively. Pro forma effects of retroactive application of LIFO are not determinable and there is no cumulative effect on retained earnings at the beginning of the year. Fixed Assets: Fixed assets are stated at cost. Major renewals and improvements are capitalized and charged to expense through depreciation charges. Repairs and maintenance are charged to expense as incurred. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of depreciable assets. Estimated useful lives are as follows: Years -------- Buildings 7 - 40 Warehouse equipment 5 - 7 Furniture, fixtures and leasehold improvements 5 - 18 Vehicles 5 Costs and accumulated depreciation applicable to assets retired or sold are eliminated from the accounts, and the resulting gains or losses are reported in the statement of income. Revenue Recognition: AMCON recognizes revenue when products are shipped from distribution centers or sold to consumers in retail stores. Sales are shown net of returns and discounts. F-8 1. Summary of Significant Accounting Policies (continued): Income Taxes: Deferred income taxes are determined based on temporary differences between the financial reporting and tax basis of the Company's assets and liabilities, using enacted tax rates in effect during the years in which the differences are expected to reverse. Comprehensive Income: In 1999, AMCON adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 requires the display and reporting of comprehensive income, which includes all changes in stock holders' equity with the exception of additional investments by shareholders or distributions to shareholders. Comprehensive income for the Company includes net income and the changes in net unrealized holding gains on investments charged or credited to stockholders' equity. The adoption of SFAS 130 had no impact on total shareholders' equity. Long Lived Assets: Management reviews goodwill and other long lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairments would be recognized in operating results if a permanent reduction in value were to occur based on discounted cash flows. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Acquisitions: In November 1998, Food For Health Company, Inc. ("FFH"), a wholly-owned subsidiary of AMCON Distributing Company, purchased all of the outstanding stock of U.S. Health Distributors, Inc. ("USHD"), a distributor of health and natural foods based in Melbourne, Florida, for $1.3 million in cash. The acquisition was funded by a $1.1 million term loan. The acquisition was accounted for using the purchase method. Based on an independent valuation, the portion of the purchase price allocated to goodwill and other intangibles is $1.5 million and will be amortized over 20 years. In March 1999, FFH purchased all of the outstanding stock of Chamberlin Natural Foods, Inc. (d/b/a Chamberlin's Market & Cafe), a chain of six health and natural food product retail stores based in Winter Park, Florida, for $2.2 million in cash. The acquisition was funded through the Company's revolving line of credit (the "Facility"). In addition, Chamberlin's existing short and long-term debt of $2.8 million was paid in full through borrowings under the "Facility." The acquisition was accounted for using the purchase method. Based on an independent valuation, the portion of the purchase price allocated to trademark and tradenames, goodwill and other intangibles is $2.0 million and will be amortized over 20 years. F-9 2. Acquisitions (continued): In September, 1999, FFH purchased all of the outstanding stock of Health Food Associates, Inc. (d/b/a Akin's Natural Foods Market) for a purchase price of $13.4 million. Funding for the acquisition was provided as follows: $4.0 million through borrowings under the Facility; $2.0 million through borrowings under an 8% Convertible Subordinated Note (the "Convertible Note") from FFH to the sellers; and $8.0 million through borrowings under a Collateralized Promissory Note (the "Collateralized Note") from FFH to the sellers. A receivable of approximately $600,000 is due from the sellers based on purchase price adjustments outlined in the purchase agreement and is included in other current assets. The acquisition was accounted for using the purchase method. Based on an independent valuation, the portion of the purchase price allocated to trademark and tradenames, goodwill and other intangibles is $7.7 million and will be amortized over 20 years. Operating results for each of these acquisitions are included in the accompanying consolidated statements of operations from the respective acquisition dates. Assuming the above described companies had been acquired on October 1, 1997, unaudited pro forma consolidated revenues, net income and net income per share would have been as follows: 1999 1998 ------------- ------------- Sales $ 418,792,000 $ 340,308,000 Net income $ 4,121,000 $ 2,702,000 Earnings per share: Basic $1.66 $1.10 Diluted $1.59 $1.07 The pro forma information provided above is based on assumptions that management deems appropriate, but does not purport to be indicative of the results that would have actually occurred had the acquisitions taken place on October 1, 1997. F-10 3. Earnings Per Share: Basic earnings per share is calculated by dividing net income by the weighted average common shares outstanding for each period. Diluted earnings per share is calculated by dividing net income by the sum of the weighted average common shares outstanding and the weighted average dilutive options and warrants, using the treasury stock method.
For the years ended September 30, ------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Basic Basic Basic ----------- ----------- ----------- Weighted average common shares outstanding 2,480,000 2,458,159 2,450,474 Weighted average treasury shares (98) (97) (2,692) ----------- ----------- ----------- Weighted average number of shares outstanding 2,479,902 2,458,062 2,447,782 =========== =========== =========== Net income $ 3,835,529 $ 2,358,186 $ 1,940,534 =========== =========== =========== Earnings per share $ 1.55 $ 0.96 $ 0.79 =========== =========== =========== Diluted Diluted Diluted ----------- ----------- ----------- Weighted average common shares outstanding 2,480,000 2,458,159 2,450,474 Weighted average treasury shares (98) (97) (2,692) Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock 115,934 77,389 3,680 ----------- ----------- ----------- Weighted average number of shares outstanding 2,595,836 2,535,451 2,451,462 =========== =========== =========== Net income $ 3,835,529 $ 2,358,186 $ 1,940,534 =========== =========== =========== Earnings per share $ 1.48 $ 0.93 $ 0.79 =========== =========== ===========
F-11 4. Fixed Assets, Net: Fixed assets at September 30, 1999 and 1998 consisted of the following: 1999 1998 ----------- ----------- Land and buildings $ 725,597 $ 750,809 Condominium and furnishings 1,246,625 1,237,065 Warehouse equipment 5,238,860 4,106,245 Furniture, fixtures and leasehold improvements 4,667,681 2,066,191 Vehicles 1,733,182 1,764,763 Capital equipment leases 482,701 248,928 ----------- ----------- 14,094,646 10,174,001 Less accumulated depreciation & amortization: Owned equipment 6,405,944 5,582,829 Capital equipment leases 185,775 124,465 ----------- ----------- $ 7,502,927 $ 4,466,707 =========== =========== Included in land and buildings is a warehouse held for sale. At September 30, 1999, the warehouse held for sale was recorded at its net realizable fair value. The property was sold in November 1999. 5. Marketable Securities and Investments: Investments in equity securities at September 30, 1999 and 1998 consisted of the following: September 30, 1999 ------------------------------------ Unrealized Market Cost Gain(Loss) Value --------- ---------- --------- Investments (available-for-sale) $ 164,370 $ 386,321 $ 550,691 ========= ========= ========= September 30, 1998 ------------------------------------ Unrealized Market Cost Gain Value --------- --------- --------- Investments (available-for-sale) $ 150,762 $ 357,613 $ 508,375 ========= ========= ========= The Company did not sell any available-for-sale investments in 1999 or 1998. The Company realized gains on the sale of available-for-sale investments of $27,600 in fiscal 1997. The Company recognized gains of $29,400 and $72,222 on trading securities during 1998 and 1997, respectively. F-12 6. Other Assets: Other assets at September 30, 1999 and 1998 consisted of the following: 1999 1998 ------------ ----------- Trademarks and tradenames (less accumulated amortization of $13,542) $ 8,686,458 $ - Goodwill (less accumulated amortization of $534,440 and $335,728) 4,279,235 1,832,008 Covenants not to compete (less accumulated amortization of $153,850 and $262,374) 724,615 27,375 Favorable leases (less accumulated (amortization of $56,375) 552,625 - Cash surrender value of life insurance policies 382,044 353,920 Debt issue costs (less accumulated amortization of $66,062 and $29,376) 116,172 152,858 Other 23,741 9,028 ------------ ----------- $ 14,764,890 $ 2,375,189 ============ =========== Trademarks and tradenames arose from the acquisitions of CNF and HFA during 1999 and are amortized using the straight-line method over 20 years. Goodwill arose from the acquisition of certain businesses and is amortized using the straight-line method over periods ranging from 20 to 25 years. Amortization expense was $198,712, $96,919 and $41,926 for the years ended September 30, 1999, 1998, and 1997, respectively. During 1997, the Company disposed of goodwill in the amount of $358,553 (net) in connection with the sale of the Denver beer distributorship. The covenants not to compete are amortized using the straight-line method over periods ranging from 2 to 5 years. Amortization expense was $126,475, $29,708 and $63,625 for the years ended September 30, 1999, 1998 and 1997, respectively. Favorable leases arose from the acquisitions of USHD and HFA during fiscal 1999 and represent lease agreements in which the lease rates were below market value on the acquisition date. The leases are amortized over periods ranging from 3 to 11 years. F-13 7. Long-term Obligations: Long-term obligations at September 30, 1999 and 1998 consisted of the following: 1999 1998 ------------ ----------- Revolving credit facility with a bank, interest payable monthly at the bank's base rate less 0.5% or LIBOR plus 1.75%, as selected by the Company (ranging from 6.81% to 7.75% at September 30, 1999); principal due February 2002 $ 18,317,309 $10,964,888 FFH revolving credit facility with a bank, interest payable monthly at the bank's base rate less 0.5% or LIBOR plus 2.00%, as selected by FFH (approximately 7.75% at September 30, 1999); principal due February 2002 5,252,110 3,361,355 Note payable to a bank, interest payable monthly at the bank's base rate less 0.5% or LIBOR plus 1.75% (ranging from 7.13% to 7.19% at September 30, 1999); principal payments of $85,096 due monthly through November 2002 3,233,653 4,254,808 Note payable to bank, interest payable monthly at the bank's base rate less 0.5% (7.75% at September 30, 1999); principal payments of $18,000 due monthly through May 2004 1,008,000 - Non-revolving line of credit; paid in full in January 1999 - 482,479 Obligations under capital leases, payable in monthly installments with interest ranging from 6.9% to 9.5% through April 2001 (Note 13) 317,753 143,298 ------------ ----------- 28,128,825 19,206,828 Less current portion 10,133,393 3,439,169 ------------ ----------- $ 17,995,432 $15,767,659 ============ =========== F-14 7. Long-term Obligations (continued): In March 1998, ADC entered into a revolving credit facility with a bank (the "Facility"). The Facility was amended in September 1999 to increase the primary borrowing limit from $20 million to $25 million and remove the additional $10 million facility which was collateralized by specific inventory. The Facility allows ADC to borrow up to $25 million at any time, subject to eligible accounts receivable and inventory requirements, and provides for an additional $1.5 million facility to be used for transportation equipment purchases. The Facility bears interest at the bank's base rate ("Prime") less 0.5% or LIBOR plus 1.75%, as selected by ADC. The Facility is collateralized by all equipment, general intangibles, inventories and accounts receivable, and with a first mortgage on the owned distribution center. As of September 30, 1999 the unused portion of the credit agreement was $6,682,691. The Facility expires on February 25, 2002. The Facility contains covenants which, among other things, set forth certain financial ratios and net worth requirements which adjust semiannually or annually as specified in the Facility. For fiscal 2000 and 1999, the Facility includes covenants that (i) restrict the incurrence of additional debt, (ii) restrict payments, prepayments and repurchases of subordinated debt or capital stock, (iii) restrict mergers and acquisitions and changes in business or conduct of business and (iv) require the maintenance of certain financial ratios and net worth levels including an average annual fixed charge ratio of 1.1 to 1.0, an average annual debt service coverage ratio of 1.50 to 1.0, a debt to equity ratio of 4.0 to 1.0 (excluding debt associated with the acquisition of FFH) and minimum tangible net worth of $4,500,000. In addition, AMCON may not pay dividends with respect to its Common Stock without the consent of the lender of the Facility. In December 1998, AMCON received consent to pay cash dividends of up to $0.02 per share per quarter. In March 1998, FFH entered into a revolving credit facility with a bank (the "FFH Facility") which includes a separate revolving line of credit of up to $1.0 million for USHD. The FFH Facility was amended in November 1999 to increase the amount provided for maximum borrowings from $6 million to $8 million. Borrowings under the FFH Facility are collateralized by the assets of FFH and are guaranteed by AMCON. Amounts under the FFH Facility bear interest at Prime less 0.5% or LIBOR plus 2.00%, as selected by FFH. A commitment fee of .25% of the annual average unutilized amount of the commitment is required. As of September 30, 1999, FFH had borrowed approximately $5.3 million under the FFH Facility. The FFH Facility expires on February 25, 2002. The FFH Facility contains covenants which, among other things, set forth certain financial ratios and net worth requirements which adjust semiannually or annually as specified in the FFH Facility. For fiscal 2000 and 1999, the FFH Facility includes covenants that (i) restrict the incurrence of additional debt, (ii) restrict payments, prepayments and repurchases of subordinated debt or capital stock, (iii) restrict mergers and acquisitions and changes in business or conduct of business and (iv) require the maintenance of certain financial ratios and net worth levels including a debt to equity ratio of 4.0 F-15 7. Long-term Obligations (continued): to 1.0 and minimum tangible net worth of $200,000. In addition, FFH may not pay dividends with respect to its Common Stock without the consent of the lender of the FFH Facility. As of September 30, 1999, FFH was not in compliance with the debt to equity ratio or the net worth covenant due to the acquisition of HFA in September 1999. However, FFH received waivers from the lender for these covenant violations at September 30, 1999. The balance outstanding at September 30, 1999 is classified as current. In November 1997, the Company borrowed $4.5 million from a bank to finance the purchase of the common stock of FFH (the "Acquisition Loan"). The Acquisition Loan has a term of five years, bears interest at Prime less 0.5% or LIBOR plus 1.75%, as selected by the Company, and requires monthly payments equal to accrued interest plus principal payments of $85,096, which began in August 1998. The loan is collateralized by the common stock of FFH. In November 1998, FFH borrowed $1.1 million from a bank to finance the purchase of the common stock of US Health Distributors, Inc. ("USHD"). The loan has a term of five and one-half years, bears interest at Prime less 0.5%, requires interest payments only for the first six months and monthly principal payments of $18,000 for the term of the loan. The loan is collateralized by the common stock of USHD. At September 30, 1998, ADC maintained a $1,250,000 non-revolving line of credit with a bank used to finance the purchase of trucks and delivery equipment. In January 1999, ADC utilized proceeds from the Facility to satisfy its obligation associated with the non-revolving line of credit. The above long-term obligations, excluding obligations under the revolving credit facilities, have contractual maturities as follows: Year ending September 30 ------------------------ 2000 $ 1,381,283 2001 1,333,025 2002 1,310,967 2003 390,131 2004 144,000 ----------- $ 4,559,406 =========== Borrowings under the revolving credit facilities in the amount of $14,817,309 have been classified as long-term based on expected borrowing levels. Based on discounted cash flows using current market rates for similar agreements, the fair value of the Company's long-term debt obligations approximated carrying value at September 30, 1999 and 1998. F-16 8. Subordinated Debt: Subordinated debt at September 30, 1999 and September 30, 1998 consisted of the following: 1999 1998 ------------ ---------- Convertible subordinated note payable, interest payable quarterly at 8% per annum; principal due at maturity of the note, September 15, 2004 $ 2,000,000 $ - Collateralized subordinated promissory note payable, interest payable quarterly at 8% per annum; annual principal payments of $800,000 due annually through September 2004 with balance of $4,000,000 due September 2004 8,000,000 - ------------ ---------- 10,000,000 - Less current portion 800,000 - ------------ ---------- $ 9,200,000 $ - ============ ========== In September, 1999, FFH issued subordinated debt of $10.0 million, in addition to $4.0 million borrowed on the Facility, to purchase all of the outstanding stock of HFA. The subordinated debt is comprised of the following: a $2.0 million 8% Convertible Subordinated Note (the "Convertible Note") from FFH to the sellers; and an $8.0 million Collateralized Promissory Note (the "Collateralized Note") from FFH to the sellers. The Collateralized Note is collateralized by a pledge of the stock of HFA. The principal balance of the Convertible Note may be converted into stock of FFH if AMCON distributes its interest in FFH to its shareholders (the "Spin-Off") at which time FFH would become a publicly held corporation. The Convertible Note must be converted within 60 days of any announcement regarding a Spin-Off of FFH. The number of shares of FFH stock to be received upon conversion is determined based upon a formula that takes into account FFH's consolidated gross sales, the outstanding balance of the Convertible Note and the number of shares of FFH's common stock outstanding at the time a Spin-Off is announced. As of September 30, 1999, principal payments are due on subordinated debt as follows: Year ending September 30 ------------------------ 2000 $ 800,000 2001 800,000 2002 800,000 2003 800,000 2004 6,800,000 ----------- $10,000,000 =========== Based on discounted cash flows using current market rates for similar agreements, the fair value of the Company's long-term debt obligations approximated carrying value at September 30, 1999 and 1998. F-17 9. Other (Income) Expense: Other (income) expense consisted of the following for the years ended September 30, 1999, 1998 and 1997: 1999 1998 1997 --------- ---------- ----------- Interest income $ (2,468) $ (61,398) $ (42,671) Dividends (17,850) (14,941) (13,909) Rent income (18,880) (24,880) (14,462) Royalties (15,924) (41,710) (34,568) Gain on marketable securities and investments - (29,420) (99,831) Gain from disposition of fixed assets (22,119) (22,312) (12,689) Gain on sale of beer distributorship and distribution rights - - (1,102,205) Other 4,916 (81,626) (32,398) --------- ---------- ----------- $ (72,325) $ (276,287) $(1,352,733) ========= ========== =========== On October 4, 1996, the Company sold its beer distributorship for a purchase price of $2.4 million. The gain associated with disposition of the assets was $1,102,205. The Company then closed the Denver distribution facility. 10. Income Taxes: Components of income tax expense (benefit) for the fiscal years ended September 30, 1999, 1998 and 1997 consisted of the following: 1999 1998 1997 ----------- ----------- ---------- Current: Federal $ 2,125,264 $ 1,325,618 $1,201,058 State 310,535 206,068 156,112 ----------- ----------- ---------- 2,435,799 1,531,686 1,357,170 ----------- ----------- ---------- Deferred: Federal (78,417) 9,735 (7,689) State (11,458) 1,432 (975) ----------- ----------- ---------- (89,875) 11,167 (8,664) ----------- ----------- ---------- Provision for income taxes $ 2,345,924 $ 1,542,853 $1,348,506 =========== =========== ========== The difference between the Company's income tax expense as reported in the accompanying financial statements and that which would be calculated using the statutory income tax rate of 34% on income before taxes is as follows for the fiscal years ended September 30, 1999, 1998 and 1997: F-18 10. Income Taxes (continued): 1999 1998 1997 ----------- ----------- ---------- Tax at statutory rate $ 2,101,694 $ 1,326,353 $1,118,274 Amortization of goodwill 70,462 42,742 14,255 Nondeductible business expenses 21,741 26,351 15,207 State income taxes, net of federal tax benefit 205,811 156,551 102,397 Other (53,784) (9,144) 98,373 ----------- ----------- ---------- $ 2,345,924 $ 1,542,853 $1,348,506 =========== =========== ========== Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities giving rise to the net deferred tax asset at September 30, 1999 and 1998 relate to the following: 1999 1998 ----------- ----------- Deferred tax assets: Current: Allowance for doubtful accounts $ 260,509 $ 175,157 Accrued expenses 144,575 64,785 Net operating loss carryforwards 96,145 123,809 Inventory 276,053 309,391 Other 14,930 - ----------- ----------- 792,212 673,142 Noncurrent: Net operating loss carryforwards 211,138 382,434 Other liabilities 169,458 166,693 Other 24,530 8,437 ----------- ----------- 405,126 557,564 ----------- ----------- Total deferred tax assets $ 1,197,338 $ 1,230,706 =========== =========== Deferred tax liabilities: Current: Trade discounts $ 75,190 $ 102,399 ----------- ----------- Noncurrent: Fixed assets 373,318 442,895 Tradenames 514,583 - Leases 46,016 - Unrealized gains on available-for-sale investments 149,664 139,468 ----------- ----------- 1,083,581 582,363 ----------- ----------- Total deferred tax liabilities $ 1,158,771 $ 684,762 =========== =========== F-19 10. Income Taxes (continued): Net deferred tax assets (liabilities): Current $ 717,022 $ 570,743 Noncurrent (678,455) (24,799) ----------- ----------- $ 38,567 $ 545,944 =========== =========== The Company did not record any valuation allowances against deferred tax assets at September 30, 1999 or 1998 because management believes future taxable income will more likely than not be sufficient to realize such amounts. The net operating loss was acquired in connection with the acquisition of Sheya Brothers in 1993 and FFH in 1997. The utilization of the net operating loss related to Sheya Brothers of $298,000 at September 30, 1999 is limited (by Internal Revenue Code Section 382) to approximately $100,000 per year through 2002. The utilization of the net operating loss related to FFH of $919,000 at September 30, 1999 is limited (by Internal Revenue Code Section 382) to approximately $232,000 per year through 2009. 11. Profit Sharing Plan: AMCON maintains profit sharing plans covering substantially all full-time employees. The plans provide for AMCON to make profit sharing contributions of up to 1% of qualified employees' gross wages. Employees may also make additional voluntary contributions which may be matched 50% by the Company up to the first 6% contributed. The Company contributed $272,234, $241,009 and $143,098 (net of employee forfeitures) to the profit sharing plans during the years ended September 30, 1999, 1998, and 1997, respectively. 12. Related Party Transactions: The Company was charged $60,000 by AMCON Corporation, the former parent of the Company for each of the years ended September 30, 1999, 1998 and 1997, as consideration for office rent and management services, which is included in selling, general and administrative expenses. The remaining interest in a condominium and furnishings and related mortgage loan, was transferred from AMCON Corporation to the Company in 1992, as partial settlement of intercompany balances. Under a profit sharing agreement with AMCON, the greater of $400,000 of the net gain or one-half of the net gain from the ultimate sale of the real estate will be allocated to AMCON. The Company estimates the amount of gain payable to AMCON had the real estate sold on September 30, 1999 would have been $500,000. 13. Commitments: The Company leases certain office equipment under a capital lease. The carrying value of these assets was $316,242 and $143,218 as of September 30, 1999 and 1998, respectively, net of accumulated amortization of $211,036 and $110,642. F-20 13. Commitments (continued): The Company leases various office and warehouse facilities and equipment under noncancellable operating leases. Rent charged to expense during the years ended September 30, 1999, 1998 and 1997 under such lease agreements was $2,974,431, $2,138,042 and $644,753, respectively. As of September 30, 1999, minimum future lease commitments are as follows: Year ending September 30, Capital Operating Leases Leases ---------- ------------ 2000 $ 150,847 $ 3,433,573 2001 120,151 2,903,694 2002 76,973 2,342,927 2003 2,108 1,789,172 2004 - 1,588,217 Thereafter - 2,715,848 ---------- ------------ Total minimum lease payments 350,079 $ 14,773,431 Less amount representing interest 32,326 ============ ---------- Present value of net minimum lease payments $ 317,753 ========== 14. Stock Option Plan: In June 1994, the Company adopted the 1994 Stock Option Plan (the "Stock Option Plan"). The maximum number of shares of common stock which may be issued pursuant to the Stock Option Plan is 300,000. Options are generally granted at the stock's fair market value at date of grant. Options issued to shareholders holding 10% or more of the Company's stock are generally issued at 110% of the stock's fair market value at date of grant. On November 10, 1997, options to purchase 140,000 shares of common stock were issued to management employees at exercise prices of $2.88 and $3.16. During fiscal 1999, options to purchase 105,000 shares of common stock were issued to management employees at exercise prices between $6.75 and $9.90. At September 24, 1999, 120,200 options were fully vested and exercisable. In addition, options to purchase 30,000 shares of common stock were issued to certain directors at an exercise price of $2.875 in fiscal 1998 and options to purchase 28,000 shares of common stock were issued to outside directors at exercise prices ranging from $6.75 to $9.00 in fiscal 1999. These options were not issued pursuant to the Stock Option Plan. At September 24, 1999, 46,000 shares issued to certain directors were fully vested and exercisable. The options have varying vesting schedules ranging up to five years and expire ten years after the date of grant. F-21 14. Stock Option Plan (continued): The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Accordingly, no compensation cost has been recognized for the stock option plan. Had compensation cost for the Company's stock option plan been determined on the fair value at the grant date for awards issued in or subsequent to 1995 consistent with the provisions of SFAS 123, the Company's net income and earnings per share on a pro forma basis would have been as follows: 1999 1998 1997 ----------- ----------- ----------- Net income - as reported $ 3,835,529 $ 2,358,187 $ 1,940,534 Net income - pro forma $ 3,657,477 $ 2,293,014 $ 1,940,534 Basic EPS - as reported $ 1.55 $ 0.96 $ 0.79 Basic EPS - pro forma $ 1.47 $ 0.93 $ 0.79 Diluted EPS - as reported $ 1.48 $ 0.93 $ 0.79 Diluted EPS - pro forma $ 1.42 $ 0.90 $ 0.79 The above pro forma results are not likely to be representative of the effects on reported net income for future years since additional awards are made periodically. The fair value of the weighted average of each year's option grants is estimated as of the date of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions: dividend yield of 1.0% for 1999 and 1.8% for 1998; expected volatility of 58.31% for 1999 and 60.30% for 1998; risk free interest rate based on U.S. Treasury strip yield at the date of grant of 5.68% for 1999 and 5.90% for 1998; and expected lives of 5 to 10 years. The table below summarizes information about stock options outstanding as of the following fiscal year ends:
September 30, 1999 September 30, 1998 September 30, 1997 ------------------ ------------------ ------------------ Weighted Weighted Weighted Average Exercise Average Exercise Average Exercise ------------------ ------------------ ------------------ Shares Price Shares Price Shares Price --------- ------- --------- ------- --------- ------- Outstanding at beginning of period 182,000 $2.84 16,000 $1.63 22,000 $1.63 Granted 133,000 8.41 170,000 2.95 - - Exercised - - - - (4,000) 1.63 Forfeited/Expired - - (4,000) $2.26 (2,000) $1.63 --------- ------- --------- ------- --------- ------- Outstanding at end of period 315,000 $5.19 182,000 $2.84 16,000 $1.63 ========= ======= ========= ======= ========= ======= Shares available for options that may be granted 39,000 144,000 280,000 ========= ========= ========= Weighted-average grant date fair value of options granted during the period - exercise price equals stock market price at grant $5.20 $1.71 ======= ======= Weighted-average grant date fair value of options granted during the period - exercise price exceeds stock market price at grant $4.47 $1.38 ======= =======
F-22 14. Stock Option Plan (continued): The following summarizes options outstanding at September 30, 1999:
Exercisable Remaining ----------------------------- Exercise Number Weighted-Average Weighted-Average Number Weighted-Average Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price ------------- ----------- ---------------- ---------------- ----------- ---------------- 1995 Options $1.63 14,000 6.3 years $1.63 14,000 $1.63 1997 Options $2.88 - $3.16 168,000 8.1 years $2.94 81,600 $3.00 1999 Options $6.50 - $6.75 45,000 9.2 years $6.69 20,000 $6.75 1999 Options $8.38 - $9.90 88,000 9.8 years $9.28 23,000 $9.00
15. Business Segments: AMCON operates within two business segments; the wholesale distribution of consumer products by ADC and FFH and the retail sale of health and natural food products. The business units within each segment are evaluated on revenues, operating income and income before taxes and extraordinary items. The following table represents AMCON's adoption of Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information." Wholesale Distribution Retail Consolidated ------------- ----------- ------------- Year ended September 30, 1999: External revenues: Cigarettes $ 251,076,045 $ - $ 251,076,045 Health food 42,637,607 6,961,742 49,599,349 Confectionery 30,191,317 - 30,191,317 Tobacco, beverage & other 54,634,467 - 54,634,467 ------------- ----------- ------------- Total external revenues 378,539,436 6,961,742 385,501,178 Intersegment sales: Health food 701,101 - 701,101 ------------- ----------- ------------- Total intersegment sales 701,101 - 701,101 Depreciation and amortization 1,560,222 301,142 1,861,364 Operating income 7,664,526 199,439 7,863,965 Interest expense 1,564,096 190,741 1,754,837 Income before taxes 5,994,405 187,048 6,181,453 Total assets 47,965,695 20,623,521 68,589,216 Capital expenditures 740,919 20,787 761,706 F-23 15. Business Segments (continued): Wholesale Distribution Retail Consolidated ------------- ----------- ------------- Year ended September 30, 1998: External revenues: Cigarettes $ 185,524,096 $ - $ 185,524,096 Health food 31,197,993 - 31,197,993 Confectionery 29,286,831 - 29,286,831 Tobacco, beverage & other 48,272,403 - 48,272,403 ------------- ----------- ------------- Total external revenues 294,281,323 - 294,281,323 Intersegment sales - - - Depreciation and amortization 1,120,482 - 1,120,482 Operating Income 5,439,307 - 5,439,307 Interest expense 1,814,555 - 1,814,555 Income before taxes 3,901,039 - 3,901,039 Total assets 39,643,737 - 39,643,737 Capital expenditures 782,440 - 782,440 Year ended September 30, 1997: External revenues: Cigarettes $ 117,598,733 $ - $ 117,598,733 Confectionery 21,726,956 - 21,726,956 Tobacco, beverage & other 39,665,289 - 39,665,289 ------------- ----------- ------------- Total external revenues 178,990,978 - 178,990,978 Intersegment sales - - - Depreciation and amortization 868,744 - 868,744 Operating Income 2,803,634 - 2,803,634 Interest expense 867,327 - 867,327 Income before taxes 3,289,040 - 3,289,040 Total assets 23,497,301 - 23,497,301 Capital expenditures 891,783 - 891,783 Intersegment sales are at cost plus a nominal markup and are eliminated in the consolidated statements of income. The retail segment was acquired in fiscal 1999, therefore no segment information is presented for the retail segment in fiscal years 1998 and 1997. Segment information for the retail segment presented in fiscal 1999 represents approximately six months of operations of CNF and two weeks of operations of HFA. 16. Subsequent Event: In December 1999, the Board of Directors declared a $0.03 per share cash dividend and a special ten percent (10%) stock dividend. The cash dividend will be paid on January 21, 2000 to shareholders of record on December 31, 1999. The stock dividend will be paid in February 2000 to shareholders of record on January 25, 2000. Fractional shares will not be issued, but will be paid in cash. The cash paid will not be material in amount. F-24 DIRECTORS AND CORPORATE OFFICERS DIRECTORS William F. Wright Chairman Kathleen M. Evans President Jerry Fleming President of Food For Health Company, Inc. J. Tony Howard /2/ President of Nebraska Distributing Company Allen D. Petersen /1/ Chairman and Chief Executive Officer of American Tool Companies, Inc. Timothy R. Pestotnik /1/ Partner with the law firm Luce Forward Hamilton & Scripps William R. Hoppner /2/ Consultant /1/ Audit Committee /2/ Compensation Committee CORPORATE OFFICERS William F. Wright Chairman Kathleen M. Evans President Jerry Fleming President of Food For Health Company, Inc. Michael D. James Secretary, Treasurer and Chief Financial Officer AMCON DISTRIBUTING COMPANY CORPORATE HEADQUARTERS AMCON Distributing Company 10228 L Street Omaha, Nebraska 68127 (402) 331-3727 TRANSFER AGENT Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016-3572 INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP 1299 Landmark Center Omaha, Nebraska 68102 ANNUAL STOCKHOLDERS' MEETING Tuesday, March 28, 2000 9:00 a.m. Embassy Suites Hotel Omaha, Nebraska 68102 ADDITIONAL INFORMATION The Form 10-K Annual Report to the Securities and Exchange Commission provides certain additional information and is available without charge upon request to Michael D. James, Secretary, Treasurer and Chief Financial Officer of the Company. STOCK INFORMATION AMCON Distributing Company's Common Shares are traded on the NASDAQ SmallCap Market. The symbol for the Common Stock is "DIST". WEB SITE http://www.amcon-dist.com EX-21.0 3 SUBSIDIARIES OF THE COMPANY State of Names Incorporation D/B/A (if applicable) - ------------------------------ ------------- -------------------------- Food For Health Company, Inc. Arizona U.S. Health Distributors, Inc. Florida America Direct, Inc. Florida Chamberlin Natural Foods, Inc. Florida Chamberlin's Market & Cafe Health Food Associates, Inc. Oklahoma Akin's Natural Foods Market /DOCUMENT> 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 24, 1999, except for Note 16, for which the date is December 20, 1999, on our audits of the financial statements and financial statement schedules of AMCON Distributing Company as of September 30, 1999 and 1998, and for each of the three years in the period ended September 30, 1999, which report is incorporated by reference in this Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS LLP Omaha, Nebraska December 22, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Balance Sheet at September 30, 1999 and the Statement of Income for the Year Ended September 30, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS SEP-30-1999 OCT-01-1998 SEP-30-1999 1,728 0 19,623 677 23,980 45,771 14,095 6,592 68,589 27,034 27,195 0 0 25 13,233 68,589 385,501 385,501 343,021 343,021 0 0 1,755 6,181 2,346 3,836 0 0 0 3,836 1.55 1.48
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