SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED September 30, 1998
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM to
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Commission File Number 0-24708
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AMCON Distributing Company
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(Exact name of Registrant as specified in its charter)
Delaware 47-0702918
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(State or other jurisdiction (I.R.S. Employer of
incorporation or organization) identification No.)
10228 "L" Street, Omaha NE 68127
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(Address of principal executive offices)
Registrant's telephone number, including area code: (402) 331-3727
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
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(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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrants' knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any other amendment to this Form 10-K. / /
The aggregate market value of equity securities held by non-affiliates
of the Registrant on December 11, 1998 was approximately $6,262,000.
As of December 11, 1998 there were 2,479,903 shares of common stock
outstanding.
- Documents Incorporated by Reference -
---------------------------------------
Portions of the 1998 Annual Report to Stockholders are incorporated
therein by reference into Parts I, II and IV. Portions of the Proxy
Statement pertaining to the March 18, 1999 Annual Stockholders' Meeting
are incorporated herein by reference into Part III.
1
AMCON DISTRIBUTING COMPANY
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1998 FORM 10-K ANNUAL REPORT
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Table of Contents
Page
----
PART I
Item 1. Business.........................................................3
Item 2. Properties.......................................................8
Item 3. Legal Proceedings................................................9
Item 4. Submission of Matters to Vote of Security Holders................9
Item 4A. Executive Officers of the Company................................9
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.............................................10
Item 6. Selected Financial Data.........................................10
Item 7. Management's Discussion of Analysis of Financial
Condition and Results of Operations.............................10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......11
Item 8. Financial Statements and Supplementary Data.....................11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................11
PART III
Item 10. Directors and Executive Officers of the Registrant..............11
Item 11. Executive Compensation................................ .........11
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................................12
Item 13. Certain Relationships and Related
Transactions....................................................12
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.............................................13
2
PART I
ITEM 1. BUSINESS
GENERAL
AMCON Distributing Company (together with its wholly-owned subsidiary,
Food For Health Co., Inc.) is a distributor of consumer products in the Great
Plains, Rocky Mountain and Southwest regions of the United States. As used
herein, unless the context indicates otherwise, the term "ADC" means the
separate company operations or "traditional business" of AMCON Distributing
Company, the term "FFH" means Food For Health Co., Inc. and the term "AMCON"
or the "Company" means AMCON Distributing Company and its subsidiary.
The Company distributes approximately 24,000 different consumer products,
including cigarettes and tobacco products, candy and other confectionery,
beverages, groceries, paper products, health and beauty care products, natural
food and related products and institutional food service products.
The Company has over 8,500 customers and no single account represented
more than 7% of AMCON's total revenues during fiscal 1998. The Company
distributes products primarily to retailers such as convenience stores,
discount and general merchandise stores, grocery stores and supermarkets,
health food stores, natural food stores, drug stores and gas stations. In
addition, the Company services institutional customers, including restaurants
and bars, schools, sports complexes and vendors, as well as other wholesalers.
While cigarettes accounted for approximately 63% of the Company's sales
volume during its most recent fiscal year, the Company continues to diversify
its businesses and product lines in an attempt to lessen the Company's
dependence on cigarette sales.
TRADITIONAL BUSINESS
ADC serves approximately 7,500 retail outlets in the Great Plains and
Rocky Mountain regions and was ranked by the U.S. Distribution Journal as the
twenty-seventh largest tobacco, candy and convenience store distributor of
approximately 1,000 distributors of such products in the United States based
on 1997 sales volume. From its inception, ADC pursued a strategy of growth
through acquisition. From 1993 to 1998, ADC focused on increasing operating
efficiency in its traditional business by merging smaller branch distribution
facilities into larger ones. In addition, ADC controlled growth through
expansion of its market area into contiguous regions and by introduction of
new product lines to customers. In fiscal 1998, ADC continued its growth-by-
acquisition strategy by acquiring a candy and tobacco distribution business in
St. Louis, Missouri.
ADC distributes approximately 9,000 different consumer products,
including cigarettes and tobacco products, candy and other confectionery,
beverages, groceries, paper products, health and beauty care products and
institutional food service products. ADC's principal suppliers include Philip
Morris, RJR Nabisco, Brown & Williamson, Proctor & Gamble, Hershey, Mars,
William Wrigley and Planters-Lifesavers. ADC also markets private label lines
of cigarettes, tobacco, snuff, water and candy products.
3
ADC has sought to increase sales to convenience stores and petroleum
marketers by adopting a number of operating strategies which it
believes gives it a competitive advantage with these types of retailers.
One key operating strategy is a commitment to customer service. In a
continuing effort to provide better service than its competitors, ADC carries
a broad and diverse product line which allows ADC to offer "one-stop shopping"
to its customers. ADC offers self-service health and beauty programs, grocery
products and custom food service programs which have proven to be profitable
to convenience store customers. In addition, ADC has a policy of next-day
delivery and employs a concept of selling products in cut-case quantities or
"by the each" (i.e., individual units). ADC also offers planograms to
convenience store customers to assist in the design of their store and display
of products within the store.
ADC has worked to improve its operating efficiency by investing in the
latest in systems technology, including computerization of buying and
financial control functions. ADC has also sought to reduce inventory expenses
by improving the number of times its inventory is renewed during a period
("inventory turns") for the same level of sales. Inventory turns improved
from 16.3 times in fiscal 1994 to 17.5 times in fiscal 1995 and 21.2 times in
fiscal 1996 to 21.8 times in fiscal 1997. Inventory turns declined slightly
to 19.6 times in fiscal 1998 as ADC managed its inventory levels to take
advantage of manufacturers price increases anticipated by management. By
keeping its operating costs down, ADC is better able to price its products in
such a manner to achieve an advantage over less efficient distributors in its
market areas.
ADC has seven distribution centers located in Kansas, Missouri, Nebraska,
North Dakota, South Dakota, and Wyoming. These distribution centers contain a
total of approximately 311,100 square feet of floor space and employ
state-of-the-art equipment for the efficient distribution of the large and
diverse product mix sold by ADC. ADC also operates a fleet of approximately
90 delivery vehicles, ranging from half-ton vans to over-the-road vehicles
with refrigerated trailers.
NATURAL FOOD BUSINESS
FFH is a distributor of natural foods and related products serving
approximately 1,000 health and natural food retailers in the western United
States. FFH distributes approximately 15,000 different products consisting of
national brands, regional brands, private label and master distribution
products including vitamin and mineral supplements, herbal preparations, skin
and hair care, dairy and dairy substitutes, frozen foods, general grocery and
organic produce. FFH's suppliers number approximately 600 and include well
known national brands such as Twin Labs, Schiff Bio Foods, Weider, Hain Pure
Foods, Arrowhead Mills, Knudsen, Nature's Way and Health Valley. FFH also
markets proprietary brand products under the trade names Healthy Edge and
Nutri-Value . The products offered are consumer packages of nuts, seeds,
grains, pastas, sweeteners, cereals and snacks items.
The Company believes that FFH is positioned to provide unequaled service
to independent health and natural food retail stores of all size and type.
FFH pays particular attention to the ongoing needs of its customers and is
forward looking in developing progressive marketing programs such as the
Nutri-Value Retailers Association which provides co-operative and
preferential buying advantages beyond those generally available through other
types of programs offered in the market.
4
FFH's primary distribution location and main office is located in a
132,000 square foot facility located in Phoenix, Arizona. Since August 1998,
FFH has also operated out of cross-dock facility located near Dallas, Texas.
FFH operates its own fleet of over-the-road and straight trucks equipped to
provide full refrigerated, dry and frozen food service.
ACQUISITIONS
ADC was incorporated in Delaware in 1986 to carry on the business of
General Tobacco and Candy Company ("General Tobacco"), a Nebraska corporation
which was the predecessor to ADC. Since 1981, the Company has acquired 22
consumer product distributors in the Great Plains, Rocky Mountain and
Southwest regions of the United States. In June 1993, ADC acquired Sheya
Brothers Specialty Beverages, Inc., a beer, malt beverage and "New Age"
beverage distribution company. In September 1995, ADC sold the "New Age"
beverage distribution business and in October 1996, ADC sold the beer and malt
beverage business. In November 1996, ADC purchased a water bottling business
from American Star Water Company, Inc. In October 1997, ADC purchased the
assets of a traditional candy and tobacco distribution company in St. Louis,
Missouri, thereby expanding ADC's market area to include eastern Missouri,
Illinois and Indiana. In November 1997, ADC purchased all of the outstanding
stock of FFH. In November 1998, FFH purchased all of the outstanding stock of
U.S. Health Distributors, Inc.
PRINCIPAL PRODUCTS
CIGARETTES. Sales of cigarettes and the gross margin derived therefrom
for the fiscal years ending September 30, 1998, 1997, and 1996 are set forth
below:
(Dollars in Millions)
Fiscal Year Ended September 30,
------------------------------------
1998 1997 1996
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Sales $185.5 $117.6 $112.5
Gross Margin 13.3 10.8 10.8
Gross Margin Percentage 7.2% 9.2% 9.6%
Revenues from the sale of cigarettes during fiscal 1998 increased by
57.8% as compared to fiscal 1997, while gross profit from the sale of
cigarettes increased by 23.1% during the same period (see "MANAGEMENT'S
DISCUSSION AND ANALYSIS-Results of Operations-Year Ended September 30, 1998
Versus Year Ended September 30, 1997" in the Annual Report to Stockholders for
the Fiscal Year Ended September 30, 1998). Sales of cigarettes represented
approximately 63% of the Company's sales volume during fiscal 1998.
ADC has sought to position itself to capitalize on consumer demand for
discount or value-priced cigarettes by marketing its own private label
cigarette. Substantial price increases implemented by manufacturers of
premium cigarettes during the late 1980's and early 1990's resulted in a
demand for private label cigarettes, which are sold at lower prices than
premium brands. The Company began marketing private label cigarettes in 1983
as a high-quality, value-priced alternative to premium cigarettes. Since
5
1988, ADC's private label cigarettes have been manufactured under an exclusive
agreement with Philip Morris Incorporated. This agreement was renewed in
October 1998 for a term of three years.
NATURAL FOODS AND RELATED PRODUCTS. Natural foods and related products,
which are primarily sold by FFH, constitute the Company's second
largest-selling product line, representing approximately 10.6% of the
Company's total sales volume during fiscal 1998. Sales of natural food items
for the period from November 10, 1998 through September 30, 1998, the period
after the acquisition of FFH, was $31.2 million. Gross margin and the gross
margin percentage derived therefrom was $7.7 million and 24.8%, respectively.
CONFECTIONERY. Candy and related confectionery items, which are
primarily sold by ADC, constitute the Company's third largest-selling product
line, representing approximately 10.0% of the Company's total sales volume
during fiscal 1998. Sales of confectionery items and the gross margin derived
therefrom for the fiscal years ending September 30, 1998, 1997 and 1996 are
set forth below:
(Dollars in Millions)
Fiscal Year Ended September 30,
-------------------------------------
1998 1997 1996
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Sales $29.3 $21.8 $20.6
Gross Margin 3.6 3.0 3.0
Gross Margin Percentage 12.3% 13.8% 14.6%
ADC supplies customers with over 1,900 different types of candy and
related products, including chocolate bars, cookies, chewing gum, nuts and
other snack items. Major brand names include products manufactured by Hershey
(Reese's, Kit Kat, and Hershey), Mars (Snickers, M&M's, and Milky Way),
William Wrigley and Planters-Lifesavers. The Company also markets its own
private label candy under a manufacturing agreement with Willmar Cookie & Nut
Company.
OTHER PRODUCT LINES. Over the past eight years, AMCON's strategy has
been to expand its portfolio of consumer products in order to better serve its
customer base. AMCON's other product lines include cigars and other tobacco
products, water and other beverages, groceries, paper products, health and
beauty care products and institutional food products. During fiscal 1998,
AMCON's sales of other products increased $9.1 million or 23.3%. During
fiscal 1998 the gross profit margin on these types of products was 14.5%,
compared to a 7.2% margin on cigarettes.
COMPETITION
Both the traditional distribution and natural food distribution
businesses are highly competitive. There are many distribution companies
operating in the same geographical regions as the Company, and competition in
the distribution industry is intense. ADC's principal competitors are
national wholesalers such as McLane Co., Inc. (Temple, Texas) and regional
wholesalers such as Farner-Bocken (Carroll, Iowa), Merchants Wholesale
(Quincy, IL) and Minter-Weisman Co. (Minneapolis, Minnesota) along with a host
of smaller grocery and tobacco wholesalers. FFH's principal competitors are
national distributors such as Tree of Life Distribution and United Natural
6
Foods and regional distributors such as Nature's Best along with numerous
smaller specialty distributors of natural products. Most of these competitors
generally offer a wide range of products at prices comparable to the
Company's. Therefore, the Company seeks to distinguish itself from its
competitors by offering a higher level of customer service.
GOVERNMENT REGULATION
Various state government agencies regulate the distribution of cigarettes
and tobacco products in several ways, including the imposition of excise
taxes, licensing and bonding requirements. Complying with these regulations
is a very time-consuming, expensive and labor-intensive undertaking. For
example, each state (as well as certain cities and counties) requires the
Company to collect excise taxes ranging from $1.20 to $5.80 per carton on all
cigarettes sold by it in the state. Such excise taxes must be paid in advance
and, in most states, is evidenced by a stamp which must be affixed to each
package of cigarettes.
The Company is also subject to regulation by state and local health
departments, the U.S. Department of Agriculture, the Food and Drug
Administration and the Drug Enforcement Administration. These agencies
generally impose standards for product quality and sanitation, as well as for
setting security and distribution policies.
EMPLOYEES
As of September 30, 1998, the Company had 554 full-time and part-time
employees in the following areas:
Managerial 15
Administrative 68
Sales & Marketing 112
Warehouse 260
Delivery 99
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Total Employees 554
===
None of the Company's employees are subject to any collective bargaining
agreements with the Company and management believes its relations with its
employees are good.
7
ITEM 2. PROPERTIES
The location and approximate square footage of the eight principal
distribution centers operated by AMCON as of September 30, 1998 are set forth
below:
Location Square Feet
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ADC
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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
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Phoenix, Arizona 132,000
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Total 443,100
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The Company owns its distribution facility in Bismarck, North Dakota. The
Company owns one other building that is no longer used as a distribution
facility and is leased to a third party. Each of these facilities is subject
to a first mortgage securing borrowings under the Company's revolving credit
facility (see "MANAGEMENT'S DISCUSSION AND ANALYSIS-Liquidity and Capital
Resources" in the Annual Report to Stockholders for the Fiscal Year Ended
September 30, 1998).
The Company leases its remaining distribution facilities and offices and
certain equipment under noncancellable operating leases. Leases for the seven
distribution facilities leased by the Company have terms expiring from 1999 to
2006. Minimum future lease commitments for these properties and equipment
total approximately $10.0 million as of September 30, 1998.
During fiscal 1998, the Company completed construction of an 18,500
square foot addition to its Bismarck, ND distribution facility. The Company
then combined its Aberdeen, SD facility with Bismarck, ND and now operates
Aberdeen as a cross-dock distribution point serviced by the Bismarck facility.
Effective October 10, 1997, the Company leased a 70,000 square foot
facility in St. Louis, Missouri in connection with the asset purchase of a
distribution business in St. Louis. Also, effective November 10, 1997, the
Company purchased all of the outstanding stock of FFH which operates in a
132,000 square foot leased facility in Phoenix, AZ.
Management believes that its existing facilities, are adequate for the
Company's present level of operations and will be capable of accommodating the
Company's anticipated growth.
8
In addition, the Company owns, in fee simple, a condominium in the Cayman
Islands which had a book value of approximately $732,100 as of September 30,
1998. The Company uses the condominium in furtherance of its business
strategies and is evaluating the costs and benefits associated with retaining
the condominium. The Company and AMCON Corporation, the former parent of the
Company, purchased the condominium in 1990 for total consideration of
$1,099,250. AMCON Corporation transferred its ownership interest in the
condominium to the Company as of September 30, 1992 at its net book value of
$591,596 in partial payment of an intercompany debt owed by AMCON Corporation
to the Company. Under an agreement with AMCON Corporation, the greater of the
first $400,000 of the net gain or one-half of the net gain from the ultimate
sale of this property will be allocated to AMCON Corporation. See Item 13 -
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to claims and litigation in the ordinary course of
its business. However, in the opinion of management, no currently pending
legal proceedings or claims against the Company will, individually or in the
aggregate, have a material adverse effect on the Company's financial condition
or results of operations. The Company believes that all of its real property
is in compliance with all regulations regarding the discharge of toxic
substances into the environment and is not aware of any condition at its
properties that could have a material adverse affect on its financial
condition or results of operations. In that regard, the Company has not been
notified by any governmental authority of any potential liability or other
claim in connection with any of its properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of all security holders during
the fourth quarter ended September 30, 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The Company's day-to-day affairs are managed by its executive officers,
who are appointed by the Board of Directors for terms of one year. The
executive officers of AMCON are as follows:
Name Age Position
---- --- --------
William F. Wright 56 Chairman of the Board, Director
Kathleen M. Evans 51 President of ADC, Director
Jerry Fleming 60 President of FFH, Director
Michael D. James 37 Secretary, Treasurer and
Chief Financial Officer
9
WILLIAM F. WRIGHT has served as the Chairman and Chief Executive Officer
of AMCON Corporation (the former parent of ADC) since 1976 and as Chairman
of the Company since 1981. From 1968 to 1984, Mr. Wright practiced corporate
and securities law in Lincoln, Nebraska. Mr. Wright is a graduate
of the University of Nebraska and Duke University School of Law and is a
certified public accountant. Mr. Wright is also a director of Gold Banc
Corporation, Inc., a NASDAQ company.
KATHLEEN M. EVANS became President of the Company in February 1991. Prior
to that time she served as Vice President of AMCON Corporation since 1985.
From 1978 until 1985, Ms. Evans acted in various capacities with AMCON
Corporation and its operating subsidiaries.
JERRY FLEMING became President of FFH in 1992. Mr. Fleming is a 36 year
veteran of the health and natural foods industry and prior to joining FFH,
served as President of Nature's Way (Murdock Health Care),a leading
manufacturer of herbal remedies; Vice President of the Natural Foods Group for
Tree of Life, Inc.; President of the South East division of Tree of Life;
President of Collegedale Distributors; President of Healthway Specialty Foods,
Inc.; Vice President of Landstrom Specialty Foods, Inc. and served eight years
on the board of directors of the National Nutritional Foods Association.
MICHAEL D. JAMES became Treasurer and Chief Financial Officer of the
Company in June 1994. In November 1997, he assumed the responsibilities of
Secretary of the Company. He is a certified public accountant and is
responsible for all financial and reporting functions within the Company.
Prior to joining AMCON, Mr. James practiced accounting for ten years with the
firm of Price Waterhouse, serving as the senior tax manager of the Omaha,
Nebraska office from 1992 until 1994. Mr. James graduated from Kansas State
University in 1983.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The information required by this item is incorporated by reference from
the Annual Report to Stockholders for the fiscal year ended September 30,
1998 under the heading "Market for Common Stock" on page 4.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is incorporated by reference from
the Annual Report to Stockholders for the fiscal year ended September 30,
1998 under the heading "Selected Financial Data" on pages 2 and 3.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The information required by this item is incorporated by reference from
the Annual Report to Stockholders for the fiscal year ended September 30, 1998
under the heading "Managements Discussion and Analysis" on pages 5 through 11.
10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is incorporated by reference from
the Annual Report to Stockholders for the fiscal year ended September 30, 1998
under the heading "Managements Discussion and Analysis" on pages 5 through 11.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and accompanying notes, together with the report
of independent accountants are incorporated by reference from the Annual
Report to Stockholders for the fiscal year ended September 30, 1998 on pages
F-1 through F-17.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Registrant's Proxy Statement to be used in connection with the 1999
Annual Meeting of Stockholders (the "Proxy Statement") contains under the
caption "Election of Directors" certain information required by Item 10 of
Form 10-K and such information is incorporated herein by this reference. The
information required by Item 10 of Form 10-K as to executive officers is set
forth in Item 4A of Part I hereof.
During the Company's most recent fiscal year, Mark A. Wright, a more than
ten percent owner of the Company's outstanding Common Stock, failed to file,
on a timely basis, Statement of Changes of Beneficial Ownership (Form 4), as
required by Section 16(a) of the Securities Exchange Act of 1934, as amended.
In addition, Timothy R. Pestotnik, a director of the Company, failed to file,
on a timely basis, Initial Statement of Beneficial Ownership of Securities
(Form 3), as required by Section 16(a) of the Securities Exchange Act of 1934,
as amended. None of these failures resulted in any transactions with respect
to the Common Stock of the Company being unreported.
ITEM 11. EXECUTIVE COMPENSATION.
The Proxy Statement contains under the captions "Compensation of
Directors", "Compensation of Executive Officers" and "Compensation Committee
Interlocks and Insider Participation", the information required by Item 11 of
Form 10-K, and such information is incorporated herein by this reference. The
information set forth under the captions "Report of Compensation Committee on
Executive Compensation" and "Company Performance" is expressly excluded from
such incorporation.
11
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Proxy Statement contains under the caption "Voting Securities and
Beneficial Ownership Thereof by Principal Stockholders, Directors and
Officers" the information required by Item 12 of Form 10-K and such
information is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Proxy Statement contains under the caption "Certain Relationships and
Related Transactions" the information required by Item 13 of Form 10-K and
such information is incorporated herein by this reference.
12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS
The following financial statements of AMCON Distributing Company are
incorporated by reference under Item 8. The Annual Report to
Stockholders for the Fiscal Year Ended September 30, 1998 is attached
as Exhibit 13.
Reference Page
Annual Stockholders
Report
Report of Independent Accountants F-1
Consolidated Balance Sheets as of
September 30, 1998 and 1997 F-2
Consolidated Statements of Income for the Years
Ended September 30, 1998, 1997, and 1996 F-3
Consolidated Statements of Shareholders' Equity
for the Years Ended September 30, 1998, 1997
and 1996 F-4
Consolidated Statements of Cash Flows for the
Years Ended September 30, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
(2) FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants S-1
Schedule II - Valuation and Qualifying Accounts S-2
(3) EXHIBITS
2.1 Stock Purchase Agreement dated November 3, 1997, between the
Company and FFH Holdings, Inc. (incorporated by reference to
Exhibit 2.1 of the Company's Current Report on Form 8-K filed on
November 25, 1997)
3.1 Restated Certificate of Incorporation of the Company, as amended
March 19, 1998 (incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q filed on May 11, 1998)
3.3 Bylaws of the Company (incorporated by reference to Exhibit 3.2
of the Company's Registration Statement on Form S-1 (Registration
No. 33-82848) filed on August 15, 1994)
4.1 Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form S-1
(Registration No. 33-82848) filed on August 15, 1994)
10.1 Grant of Exclusive Manufacturing Rights, dated October 1, 1993,
between the Company and Famous Value Brands, a division of Philip
Morris Incorporated, including Private Label Manufacturing
Agreement and Amended and Restated Trademark License Agreement
(incorporated by reference to Exhibit 10.1 of Amendment No. 1 to
the Company's Registration Statement on Form S-1 (Registration
No. 33-82848) filed on November 8, 1994)
13
10.2 Amendment No. 1 to Grant of Exclusive Manufacturing Rights, dated
October 1, 1998, between the Company and Famous Value Brands, a
division of Philip Morris Incorporated, including Amendment No. 1
To Private Label Manufacturing Agreement and Amendment No. 1 to
Amended and Restated Trademark License Agreement (Portions of
Exhibit 10.2 have been omitted pursuant to request for
confidential treatment and such omitted portions have been filed
with the Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934)
10.3 Loan Agreement, dated November 10, 1997, between the Company and
LaSalle National Bank (incorporated by reference to Exhibit 10.1
of the Company's Current Report on Form 8-K filed on November 25,
1997)
10.4 Amended Loan Agreement, dated February 25, 1998, between the
Company and LaSalle National Bank (incorporated by reference to
Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q
filed on May 11, 1998)
10.5 Note, dated November 10, 1997, between the Company and LaSalle
National Bank (incorporated by reference to Exhibit 10.2 of the
Company's Current Report on Form 8-K filed on November 25, 1997)
10.6 First Allonge to Note, dated February 25, 1998, between the
Company and LaSalle National Bank (incorporated by reference to
Exhibit 10.7 of the Company's Quarterly Report on Form 10-Q filed
on May 11, 1998)
10.7 Loan and Security Agreement, dated February 25, 1998, between the
Company and LaSalle National Bank (incorporated by reference to
Exhibit 10.8 of the Company's Quarterly Report on Form 10-Q filed
on May 11, 1998)
10.8 Promissory Note, dated February 25, 1998, between the Company and
LaSalle National Bank (incorporated by reference to Exhibit 10.9
of the Company's Quarterly Report on Form 10-Q filed on May 11,
1998)
10.9 Loan and Security Agreement, dated February 25, 1998, between
Food For Health Co., Inc. and LaSalle National Bank (incorporated
by reference to Exhibit 10.10 of the Company's Quarterly Report
on Form 10-Q filed on May 11, 1998)
10.10 Promissory Note, dated February 25, 1998, between Food For
Health Co., Inc. and LaSalle National Bank (incorporated by
reference to Exhibit 10.11 of the Company's Quarterly Report on
Form 10-Q filed on May 11, 1998)
10.11 Unconditional Guarantee, dated February 25, 1998, between the
Company and LaSalle National Bank (incorporated by reference to
Exhibit 10.12 of the Company's Quarterly Report on Form 10-Q
filed on May 11, 1998)
14
10.12 AMCON Distributing Company 1994 Stock Option Plan (incorporated
by reference to Exhibit 10.7 of the Company's Registration
Statement on Form S-1 (Registration No. 33-82848) filed on
August 15, 1994)
10.13 AMCON Distributing Company Profit Sharing Plan (incorporated by
reference to Exhibit 10.8 of Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-82848)
filed on November 8, 1994)
10.14 Employment Agreement, dated May 22, 1998, between the Company
and William F. Wright (incorporated by reference to Exhibit
10.14 of the Company's Quarterly Report on Form 10-Q filed on
August 6, 1998)
10.15 Employment Agreement, dated May 22, 1998, between the Company
and Kathleen M. Evans (incorporated by reference to Exhibit
10.15 of the Company's Quarterly Report on Form 10-Q filed on
August 6, 1998)
10.16 Employment Agreement, dated May 22, 1998, between the Food For
Health Co., Inc. and Jerry Fleming (incorporated by reference to
Exhibit 10.16 of the Company's Quarterly Report on Form 10-Q
filed on August 6, 1998)
11.1 Statement re: computation of per share earnings (incorporated by
reference to footnote 3 to the financial statements included in
Item 13 herein)
13.1 Annual Report to Stockholders for the Fiscal Year Ended September
30, 1998
23.1 Consent of PricewaterhouseCoopers LLP
27.0 Financial Data Schedules
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter ended September 30, 1998.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of
1934, the Registrant, AMCON Distributing Company, a Delaware corporation, has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Omaha, State of Nebraska, on the
23rd day of December, 1998.
AMCON DISTRIBUTING COMPANY
By: /s/ Kathleen M. Evans
----------------------
Kathleen M. Evans, President
16
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons in the capacities indicated on
the 23rd day of December, 1998.
Signature Title
--------- -----
/s/ William F. Wright Chairman of the Board, Director
- ------------------------
William F. Wright
/s/ Kathleen M. Evans President (Principal Executive
- ------------------------ Officer) and Director
Kathleen M. Evans
/s/ Michael D. James Treasurer, Chief Financial Officer
- ------------------------ and Secretary (Principal Financial
Michael D. James and Accounting Officer)
/s/ J. Tony Howard Director
- ------------------------
J. Tony Howard
/s/ Allen D. Petersen Director
- ------------------------
Allen D. Petersen
/s/ Jerry Fleming Director
- ------------------------
Jerry Fleming
/s/ Timothy R. Pestotnik Director
- ------------------------
Timothy R. Pestotnik
Director
- ------------------------
William R. Hoppner
17
AMENDMENT NO. 1 TO
GRANT OF EXCLUSIVE MANUFACTURING RIGHTS
THIS AMENDMENT NO. 1 is made as of the 1st day of October, 1998 (this
"Amendment"), between FAMOUS VALUE BRANDS, a division of PHILIP MORRIS
INCORPORATED, a Virginia corporation with offices at 120 Park Avenue, New
York, New York 10017 ("Manufacturer"), and AMCON DISTRIBUTING COMPANY, a
Delaware corporation with offices at 10228 L Street, Omaha, Nebraska 68127
(together with its successors, permitted assigns and affiliates, "Grantor").
PRELIMINARY STATEMENTS
A. Manufacturer and Grantor entered into that certain Grant of Exclusive
Manufacturing Rights dated as of October 1, 1993 (the "Grant Agreement"),
providing for, among other things, Grantor to grant and convey to Manufacturer
exclusive rights to manufacture for Grantor any and all proprietary private
label brand cigarettes for sale and distribution in the United States,
including cigarettes utilizing the trademark(s) and package designs identified
on EXHIBIT A attached thereto.
B. Manufacturer and Grantor desire to amend certain provisions of the
Grant Agreement as more particularly described herein, and to continue the
Grant Agreement, as amended hereby, the Private Label Manufacturing Agreement,
dated as of October 1, 1993, as amended by Amendment No. 1 dated as of the
date hereof, between Manufacturer and Grantor (the "Private Label
Manufacturing Agreement"), and the Amended and Restated Trademark License
Agreement, dated as of October 1, 1993, as amended by Amendment No. 1 dated as
of the date hereof, between Manufacturer and Grantor (the "Amended and
Restated Trademark License Agreement"), in full force and effect on the terms
contained therein and herein.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and agreements contained herein, the parties hereto agree as
follows:
ARTICLE I
AMENDMENTS
SECTION 1.1 AMENDMENT TO SECTION 1.1. The Grant Agreement is hereby
amended by deleting Section 1.1 thereof in its entirety and inserting in lieu
thereof the following new Section 1.1:
"SECTION 1.1 GRANT OF EXCLUSIVE MANUFACTURING RIGHTS.
Subject to the terms and provisions of Section 2.1(b), Grantor does
hereby grant, sell, convey, transfer, assign and deliver to
Manufacturer and its successors and assigns, free and clear of all
liens, charges, claims, encumbrances or rights or interests of
third parties of any nature and description whatsoever, exclusive
rights to manufacture all and any private label brand cigarettes
bearing the trademarks or any other trademarks or trade names owned,
used or licensed now or hereafter by the Grantor ("Private Label
Products") for a period commencing on the date hereof and
continuing until the expiration of the Initial Term. (as defined in
Section 4.1) or any later date to which this Agreement is extended
pursuant to Section 4.1 hereof."
SECTION 1.2 AMENDMENT TO SECTION 1.2. The Grant Agreement is hereby
amended by deleting the words "Section 4.2(b) or" from the fourth sentence
appearing in Section 1.2.
SECTION 1.3 AMENDMENT TO SECTION 1.3. The Grant Agreement is hereby
amended by deleting Section 1.3 in its entirety and inserting in lieu thereof
the following new Section 1.3:
"SECTION 1.3 EXCLUSIVE RELATIONSHIPS.
Grantor has advised Manufacturer, and Manufacturer acknowledges,
that Grantor has certain pre-existing agreements pursuant to which
certain Private Label Products listed on Schedule A hereto (as the
same may be amended or supplemented from time to time with the
consent of the parties) are manufactured for and sold exclusively
by Grantor within certain prescribed geographical areas to retail
and wholesale customers (as and to the extent the same are in
effect on the date hereof, the "Pre-existing Agreements").
Manufacturer hereby grants the Grantor, effective as of the date
Grantor acquired such rights under the Pre-existing Agreements, a
license and interest in the exclusive manufacturing rights granted
to Manufacturer hereby, for a period equal to the applicable term
of each Pre-existing Agreement. Manufacturer further agrees that
the exercise of the Grantor's rights and the performance of the
Grantor's obligations under the Pre-existing Agreements shall not
constitute a breach of any provision of this Agreement or entitle
Manufacturer to reduce Manufacturer's Annual Payment pursuant to
Section 1.2. Except as expressly contemplated by this Section 1.3,
Grantor will not enter into any agreements, arrangements or
understandings with respect to the exclusive distribution within
any regional or national geographic area within the United States
of any brand of cigarettes manufactured by any manufacturer other
than Manufacturer, and Grantor hereby represents to Manufacturer
that Grantor is not on the date hereof a party to any such
agreements, arrangements or understandings. Without limiting the
generality of the foregoing, Grantor will only distribute Private
Label Products manufactured by Manufacturer, other than Private
Label Products that Manufacturer has declined to manufacture
pursuant to the terms of this Agreement. For purposes of this
Agreement, Private Label Products shall also include without
limitation any private label brand cigarettes for which Grantor
becomes the supplier to two or more competing retail customers."
SECTION 1.4 AMENDMENT TO SECTION 4.1. The Grant Agreement is hereby
amended by deleting Section 4.1 in its entirety and inserting in lieu thereof
the following new Section 4.1:
"SECTION 4.1 TERM. Unless earlier terminated pursuant to
Section 4.2 of this Agreement, this Agreement shall continue for
an initial term (the "Initial Term") of eight (8) years following
the date of this Agreement, beginning on October 1, 1993 and
ending on September 30, 2001, and thereafter this Agreement shall
continue in effect upon the same terms and conditions for one or
more additional one-year periods (each a "Renewal Period") unless,
at least ninety (90) days prior to the end of the Initial Term, or
any successive Renewal Period, either party provides the other
with written notice of its intent not to renew this Agreement."
SECTION 1.5 AMENDMENT TO SECTION 4.2. The Grant Agreement is hereby
amended by deleting clause (3) of paragraph (a) of Section 4.2 in its entirety
and by deleting paragraph (b) of section 4.2 in its entirety.
SECTION 1.6 AMENDMENT TO SECTION 4.3. Section 4.3 of the Grant Agreement
is hereby amended as follows:
(a) By replacing the reference in clause (1) of Section 4.3(a) to
"thirty (30)" with a reference to "sixty (60)";
(b) By deleting the words "the expiration of the Non-Exclusive
Period" in the fourth sentence of Section 4.3(a) and inserting
in lieu thereof "delivery to Manufacturer of the Offer;" and
(c) By deleting the words "which is thirty (30) days following the
Scheduled Expiration Date" appearing at the end of the
penultimate sentence in Section 4.3(a).
ARTICLE II
GENERAL PROVISIONS
SECTION 2.1 GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York (other than the
choice of law provisions thereof).
SECTION 2.2 ENTIRE AGREEMENT. The Grant Agreement, as amended by this
Amendment, constitutes the entire agreement between the parties with respect
to the subject matter hereof and supercedes all prior and contemporaneous
agreements, contracts, negotiations and understandings between them (other
than the Private Label Manufacturing Agreement and the Amended and Restated
Trademark License Agreement). This Agreement does not constitute a waiver or
the relinquishment of any right, claim or interest of the parties other than
those based on facts and circumstances known to the parties.
SECTION 2.3 NO FURTHER MODIFICATION. The Grant Agreement, the Private
Label Manufacturing Agreement and the Amended and Restated Trademark License
Agreement shall remain in full force and effect on the terms and conditions
contained therein and herein. The Grant Agreement shall not be deemed to be
amended, modified or supplemented in any respect except as expressly set forth
in this Amendment. For purposes of this Amendment, each of the representations
and warranties of Manufacturer in Section 3.1 of the Grant Agreement shall be
deemed to be made by Manufacturer on and as of the date hereof, and each of
the representations and warranties of Grantor in Section 3.2 of the Grant
Agreement shall be deemed to be made by Grantor on and as of the date hereof.
SECTION 2.4 SEVERABILITY. If any provision of this Amendment is
determined to be invalid or unenforceable, the provision shall be deemed to be
severable from the remainder of this Amendment and shall not cause the
invalidity or unenforceability of the remainder of this Amendment.
SECTION 2.5 COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, this Amendment No. 1 to the Grant Agreement has been
duly executed as of the date first above written.
FAMOUS VALUE BRANDS,
a division of
PHILIP MORRIS INCORPORATED,
a Virginia corporation
By: Norma Suter
-----------
Name: Norma Suter
Title: VP Marketing, Discount Brands
Dated: 6/28/98
AMCON DISTRIBUTING COMPANY
By: Kathleen M. Evans
-----------------
Name: Kathleen M. Evans
Title: President
Dated: 6/25/98
SCHEDULE A
"EAGLE"
"VEGAS"
"BUZ"
"GUNSMOKE"
Tabacalera's "FIRST CLASS" and "ULTRA BUY"
AMENDMENT NO. 1 TO
PRIVATE LABEL MANUFACTURING AGREEMENT
THIS AMENDMENT NO. 1 is made as of the 1st day of October, 1998 (this
"Amendment"), between FAMOUS VALUE BRANDS, a division of PHILIP MORRIS
INCORPORATED, a Virginia corporation with offices at 120 Park Avenue, New
York, New York 10017 ("Manufacturer"), and AMCON DISTRIBUTING COMPANY, a
Delaware corporation with offices at 10228 L Street, Omaha, Nebraska 68127
(together with its successors, permitted assigns and affiliates, "Customer").
PRELIMINARY STATEMENTS
A. Manufacturer and Customer entered into that certain Private Label
Manufacturing Agreement dated as of October 1, 1993 (the "Manufacturing
Agreement"), providing for, among other things, Manufacturer to manufacture
and sell to Customer certain private label brand cigarettes utilizing the
Trademarks (as defined in the Manufacturing Agreement).
B. Manufacturer and Customer desire to amend certain provisions of the
Manufacturing Agreement as more particularly described herein, and, except as
amended hereby, the Manufacturing Agreement shall continue in full force and
effect on the terms contained therein and herein.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and agreements contained herein, the parties hereto agree as
follows:
ARTICLE I
AMENDMENTS
SECTION 1.1 AMENDMENT TO SECTION 1.4. The Manufacturing Agreement is
hereby amended by deleting Section 1.4 in its entirety and inserting in lieu
thereof the following new Section 1.4:
"SECTION 1.4 FORCE MAJEURE. Manufacturer's obligation to
manufacture and deliver the Products under this Agreement shall be to
use its reasonable efforts to satisfy the requirements of Customer
for the Products. Without limiting the generality of the preceding
sentence, this Agreement shall not require that Manufacturer produce
any packing of the Products which is uneconomical for Manufacturer to
produce due to the unreasonably low level of sales of such packing
relative to other Products. Furthermore, without limiting the
generality of the foregoing or other provisions in this Agreement
with respect to the limitation of Manufacturer's obligations or
liabilities hereunder, Manufacturer shall have no obligation or
liability for satisfying the requirements of Customer or any
Associate Distributor, and shall have no liability for the
consequences of (including without limitation for consequential
damages for) any failure to perform, or default in performing, any of
its obligations under this Article I of this Agreement if that
failure arises out of, is based upon or results from Force Majeure
(as defined below). For purposes of this Agreement, "Force Majeure"
shall mean war (whether declared or not); revolution; invasion;
insurrection; riot; civil commotion; mob violence; sabotage;
blockade; military or usurped power; lightning; serious destruction;
explosion; fire; storm; high winds; drought or other shortage of
water; flood; earthquake; strike; labor disturbances; acts or
restraints of governmental or quasi-governmental authorities
(including any changes in applicable laws and regulations); or any
act of God beyond the control of the Manufacturer. To the extent
that a Force Majeure condition or conditions exists which prevents
Manufacturer from manufacturing and delivering to Customer its full
requirement of the Products, Customer shall have the right to
purchase such Products from other manufacturers for so long as
Manufacturer is unable to fulfill Customer's requirements for
Products under this Agreement."
SECTION 1.2 AMENDMENT TO SECTION 3.1. The Manufacturing Agreement is
hereby amended by deleting Section 3.1 thereof in its entirety and inserting
in lieu thereof the following new Section 3.1:
"SECTION 3.1 TERM. This Agreement shall continue for an initial
term (the "Initial Term") of eight (8) years following the date of
this Agreement, beginning on October 1, 1993 and ending on September
30, 2001. Following the Initial Term, this Agreement shall continue
in effect upon the same terms and conditions for one or more
additional one-year periods (each "Renewal Period") unless, at least
ninety (90) days prior to the end of the Initial Term, or any
successive Renewal Period, either party provides the other with
written notice of its intent not to renew this Agreement.
Notwithstanding the foregoing, this Agreement shall be extended to
any Extended Expiration Date (as defined in the Grant of Exclusive
Manufacturing Rights, dated the date hereof (the "Grant Agreement"),
between Manufacturer and Customer)."
SECTION 1.3 AMENDMENT TO SECTION 3.2. The Manufacturing Agreement is
hereby amended by deleting Section 3.2 in its entirety and inserting in lieu
thereof the following new Section 3.2:
"SECTION 3.2 OBLIGATION OF CUSTOMER UPON TERMINATION. Upon
termination of this Agreement, Customer and Manufacturer shall
negotiate in good faith the costs and expenses, if any, to be borne
by Customer that are or have been incurred by the Manufacturer with
regard to finished and unfinished Product and packaging inventory;
provided that, Manufacturer shall be entitled to sell and dispose of
all such finished and unfinished Product and packaging inventory that
Customer shall not have agreed to purchase from Manufacturer."
ARTICLE II
GENERAL PROVISIONS
SECTION 2.1 NO FURTHER MODIFICATION. The Manufacturing Agreement shall
remain in full force and effect and shall not be deemed to be amended,
modified or supplemented in any respect except as expressly set forth in this
Amendment. For purposes of this Amendment, each of the representations and
warranties of Manufacturer in Section 2.1 of the Manufacturing Agreement shall
be deemed to be made by Manufacturer on and as of the date hereof, and each of
the representations and warranties of Customer in Section 2.2 of the
Manufacturing Agreement shall be deemed to be made by Customer on and as of
the date hereof.
SECTION 2.2 SEVERABILITY. If any provision of this Amendment is
determined to be invalid or unenforceable, the provision shall be deemed to be
severable from the remainder of this Amendment and shall not cause the
invalidity or unenforceability of the remainder of this Amendment.
SECTION 2.3 GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York (other than the
choice of law provisions thereof).
SECTION 2.4 ENTIRE AGREEMENT. The Manufacturing Agreement, as amended by
this Amendment, constitutes the entire agreement between the parties with
respect to the Products (as defined in the Manufacturing Agreement) and
supersedes all prior and contemporaneous agreements, contracts, negotiations
and understandings between them (other than the Grant of Exclusive
Manufacturing Rights, dated as of October 1, 1993, between Manufacturer and
Customer, as Amended by Amendment No. 1 dated the date hereof, and the Amended
and Restated Trademark License Agreement, dated as of October 1, 1993, between
Manufacturer and Customer, as amended by Amendment No. 1 dated the date
hereof).
SECTION 2.5 COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, this Amendment No. 1 has been duly executed as of the
date first above written.
FAMOUS VALUE BRANDS,
a division of
PHILIP MORRIS INCORPORATED,
a Virginia corporation
By: Norma Suter
-----------
Name: Norma Suter
Title: VP Marketing, Discount Brands
Dated: 6/28/98
AMCON DISTRIBUTING COMPANY
By: Kathleen M. Evans
-----------------
Name: Kathleen M. Evans
Title: President
Dated: 6/25/98
AMENDMENT NO.1 TO
AMENDED AND RESTATED
TRADEMARK LICENSE AGREEMENT
THIS AMENDMENT NO. 1 is made as of the 1st day of October, 1998 (this
"Amendment"), between FAMOUS VALUE BRANDS, a division of PHILIP MORRIS
INCORPORATED, a Virginia corporation with offices at 120 Park Avenue, New
York, New York 10017 ("Manufacturer"), and AMCON DISTRIBUTING COMPANY, a
Delaware corporation with offices at 10228 L Street, Omaha, Nebraska 68127
(together with its successors, permitted assigns and affiliates, "AMCON").
WHEREAS, this Amendment is an amendment to that certain Amended and
Restated Trademark and License Agreement, dated as of October 1, 1993 (the
"Amended and Restated Trademark and License Agreement"), between Manufacturer
and AMCON.
NOW, THEREFORE, Manufacturer and AMCON agree as follows:
ARTICLE I
AMENDMENTS
SECTION 1.1 AMENDMENT TO SECTION 2. The Amended and Restated Trademark
and License Agreement is hereby amended by deleting Section 2 thereof in its
entirety and inserting in lieu thereof the following new Section 2:
THIS SECTION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND HAS BEEN FILED WITH THE COMMISSION PURSUANT TO RULE 24b-2
OF THE SECURITIES EXCHANGE ACT OF 1934.
SECTION 1.2 AMENDMENT TO SECTION 4. The Amended and Restated Trademark
License Agreement is hereby amended by deleting Section 4 thereof in its
entirety and inserting in lieu thereof the following Section 4:
"4. The term of this Agreement shall be for an initial term
(the "Initial Term") of eight (8) years following the date of this
Agreement, beginning on and as of October 1, 1993 and ending on and
as of September 30, 2001. Not withstanding the foregoing, this
Agreement shall be extended to any Extended Expiration Date (as
defined in the Grant of Exclusive Manufacturing Rights, dated the
date hereof (the "Grant Agreement"), between Manufacturer and AMCON).
Following the Initial Term, this Agreement shall continue in effect
upon the same terms and conditions for one or more additional one-
year periods (each a "Renewal Period") unless, at least ninety (90)
days prior to the end of the Initial Term, or any successive Renewal
Period, either party provides the other with written notice of its
intent not to renew this Agreement. This Agreement may also be
terminated in its entirety upon not less than thirty (30) days'
written notice by either party if the other is in material breach of
any provision hereof not cured within ten (10) days of written notice
of such breach. Upon any expiration or termination of this
Agreement, Manufacturer shall have the right to exhaust, in the
ordinary course of business, its existing stock of cigarettes bearing
the Trademark, unless such stock is otherwise disposed of in
accordance with the Manufacturing Agreement."
ARTICLE II
GENERAL PROVISIONS
SECTION 2.1 NO FURTHER MODIFICATION. The Amended and Restated Trademark
License Agreement shall remain in full force and effect on the terms and
conditions contained therein and herein, and shall not be deemed to be
amended, modified or supplemented in any respect except as expressly set forth
in this Amendment.
SECTION 2.2 SEVERABILITY. If any provision of this Amendment is
determined to be invalid or unenforceable, the provision shall be deemed to be
severable from the remainder of this Amendment and shall not cause the
invalidity or unenforceability of the remainder of this Amendment.
SECTION 2.3 GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the state of New York (other than the
choice of law provisions thereof).
SECTION 2.4 ENTIRE AGREEMENT. This Amendment constitutes the entire
agreement between the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF the parties have duly executed this Amendment as of
the date first set out above.
FAMOUS VALUE BRANDS,
a division of
PHILIP MORRIS INCORPORATED,
a Virginia corporation
By: Norma Suter
-----------
Name: Norma Suter
Title: VP Marketing, Discount Brands
Dated: 6-28-98
AMCON DISTRIBUTING COMPANY
By: Kathleen M. Evans
------------------
Name: Kathleen M. Evans
Title: President
Dated: 6-25-98
SCHEDULE A
THIS SECTION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND HAS BEEN FILED WITH THE COMMISSION PURSUANT TO RULE 24b-2
OF THE SECURITIES EXCHANGE ACT OF 1934.
EXHIBIT 13.1
Annual Report to Stockholders
for the Fiscal Year Ended
September 30, 1998
TO OUR SHAREHOLDERS:
Fiscal 1998, like fiscal 1997, was another record year for your Company -
record sales and record earnings. In fiscal 1997, a significant part of our
earnings came from the sale of our Denver operation. In fiscal 1998, we
showed significant growth in operating earnings (a 94% increase) which allowed
us to increase our overall earnings by 21% despite the fact that we did not
have any one-time benefit from a sale such as Denver. We believe this is
extremely significant, as we continue to build a solid base of operating
earnings. We continue to be committed to becoming one of America's premiere
full-line distributors of consumer convenience and health food products.
At the same time, our Board of Directors has deemed it appropriate to begin to
return some of our earnings to you, our Shareholders. In December 1998, a
$0.02 per share dividend was declared by the Board. Although we cannot
predict the future, we hope that dividends will continue with regularity.
Financial Review
Our new sales record of $294 million (a 64% increase from our previous annual
record) was achieved through the growth of our basic businesses and the
addition of Food for Health for much of the year. Record earnings were
achieved through the increases in sales and the continuing efforts of your
management to enhance productivity. For continuing to achieve these
efficiencies, we are deeply grateful to all of our people at both AMCON
Distributing and its subsidiary, Food For Health. We continue to believe that
it is these dedicated people who are your Company's greatest asset.
Strategies
We continue to seek out opportunities for acquisition both in the traditional
distribution business and in the health food sector. In doing so, we will not
neglect our existing business and customers.
Recently, we acquired all of the capital stock of U.S. Health Distributors,
Inc. This acquisition not only brought to us some fine, committed people, but
also allows us to further extend our geographic coverage. Although U.S.
Health does business nationwide, a large part of its business is presently
done in the southeast sector of the United States from their Melbourne,
Florida location. In addition, earlier this year, we established a cross-dock
facility near Dallas, Texas to handle our health food products.
The Future
Last year at this time, we anticipated creating a holding company with two
operating subsidiaries: one focusing on traditional product categories; and
the other focusing on health-related products. We no longer believe that a
holding company is necessary. Within our present structure, with the parent
handling traditional product categories and a wholly-owned subsidiary handling
health-related products, both companies can be operated efficiently. This
allows us to eliminate potential duplicate costs and operate on a very
streamlined basis.
Recently, Bill Hoppner returned to our Board of Directors. His addition
allowed us to achieve a majority of outside Directors on our Board. We
continue to be committed to that concept and hope that, in the future,
additional outside directors can be added to our Board.
We are excited about our future and we assure you that we will do our best to
maintain our growth pattern in the years to come. We wish to thank you, our
Shareholders, for your continuing support. In addition, we are grateful for
the loyal support of our suppliers and customers and, as mentioned earlier,
are deeply thankful for the efforts of every one of our employees - they are
AMCON.
William F. Wright Kathleen M. Evans
Chairman President
1
SELECTED FINANCIAL DATA
The selected financial data presented below have been derived from the
Company's audited financial statements. The information set forth below
should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS" and
with the Financial Statements and Notes thereto included in this Annual
Report.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales................................... $ 294,281 $ 178,991 $ 176,145 $ 169,790 $ 170,143
Cost of sales........................... 262,633 159,435 155,885 149,756 147,533
--------- --------- --------- --------- ---------
Gross profit............................ 31,648 19,556 20,260 20,034 22,610
Operating expense....................... 26,209 16,753 17,504 17,183 18,859
--------- --------- --------- --------- ---------
Income from operations.................. 5,439 2,803 2,756 2,851 3,751
Interest expense........................ 1,814 867 1,149 1,543 1,553
Other (income) expense, net............. (276) (1,353) (697) (228) 36
--------- --------- --------- --------- ---------
Income before income taxes,
extraordinary item.................... 3,901 3,289 2,304 1,536 2,162
Income before extraordinary item....... 2,358 1,941 1,336 922 1,297
Extraordinary item...................... - - - - (295)/1/
--------- --------- --------- --------- ---------
Net income.............................. 2,358 1,941 1,336 922 1,002
Accretion of warrants /2/............... - - - - (133)
Accretion of preferred stock /3/ ....... - - (83) (100) (17)
--------- --------- --------- --------- ---------
Net income attributable to
common shareholders .................. $ 2,358 $ 1,941 $ 1,253 $ 822 $ 852
========= ========= ========= ========= =========
Earnings per common and common
equivalent share attributable to
common shareholders:
Basic:
Income before extraordinary
item (net of accretion)........... $ 0.96 $ 0.79 $ 0.51 $ 0.33 $ 0.46
Extraordinary item.................. $ - $ - $ - $ - $ (0.12)
--------- --------- --------- --------- ---------
Net income.......................... $ 0.96 $ 0.79 $ 0.51 $ 0.33 $ 0.34
========= ========= ========= ========= =========
Diluted:
Income before extraordinary
item (net of accretion)........... $ 0.93 $ 0.79 $ 0.51 $ 0.33 $ 0.46
Extraordinary item.................. $ - $ - $ - $ - $ (0.12)
--------- --------- --------- --------- ---------
Net income.......................... $ 0.93 $ 0.79 $ 0.51 $ 0.33 $ 0.34
========= ========= ========= ========= =========
Weighted average shares outstanding:
Basic................................ 2,458,062 2,447,782 2,445,903 2,478,047 2,491,996
Diluted.............................. 2,535,451 2,451,462 2,445,903 2,478,047 2,491,996
</TABLE>
2
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital ....................... $ 18,474 $ 11,158 $ 11,572 $ 12,098 $ 10,971
Total assets............................ 39,644 23,497 23,026 22,919 23,476
Long-term obligations and subordinated
debt /4/............................... 19,207 9,123 10,245 12,705 13,206
Shareholders' equity.................... 9,605 7,208 /5/ 6,621 5,122 4,097
</TABLE>
- ------------------------
/1/ Includes $205,913 of debt issue costs and $86,908 of unamortized
discount on senior secured and subordinated notes which were written off as a
result of extinguishing the related debt in January and July 1994 and a
$200,000 prepayment premium paid in connection with restructuring senior
subordinated notes in July 1994. The extraordinary item is presented net of a
$197,128 related tax benefit.
/2/ Represents the accretion of warrants issued in conjunction with a $4
million loan made in 1989 by MLBC, Inc. to the Company which entitled MLBC to
acquire 22.84% of the common stock of the Company (19.98% after June 1993).
MLBC also had the right to require the Company to repurchase the warrants
after October 31, 1995 at a formula price based on earnings and indebtedness.
The original fair value of the warrants was recorded at $400,000 and the
Company was accreting the warrants to the highest redemption price over the
period to October 31, 1995. In July 1994, the warrants were repurchased for
$2,000,000.
/3/ Preferred stock was issued in partial payment for repurchase of
warrants described in footnote 2 above and was valued at $1,000,000. The
Company had the right to redeem the preferred stock at any time after April 1,
1996 for $1,200,000. The preferred stock accreted to the redemption price in
lieu of cash dividends and was redeemed in December 1996.
/4/ Includes current portion of long-term obligations and subordinated
debt.
/5/ Reflects redemption of preferred stock described in footnote 3 above
for $1,200,000 in December 1996.
3
MARKET FOR COMMON STOCK
The Company's Common Stock trades on the NASDAQ SmallCap Market under the
symbol "DIST". The following table reflects the range of the high and low
prices per share of the Company's Common Stock reported by NASDAQ for the
years ended September 30, 1998 and 1997. These quotations represent
inter-dealer quotations, without adjustment for retail mark-ups, mark-downs or
commissions and may not necessarily represent market transactions. As of
December 11, 1998, the Company had approximately 1,000 holders of record of
its shares and the Company believes that approximately 2,200 additional
persons hold shares beneficially.
COMMON STOCK
---------------------
HIGH LOW
------ ------
Year ended September 30, 1998:
4th Quarter $ 8.25 $ 6.00
3rd Quarter 9.75 4.25
2nd Quarter 5.25 3.25
1st Quarter 4.38 2.75
Year ended September 30, 1997:
4th Quarter $ 3.38 $ 1.50
3rd Quarter 2.28 1.50
2nd Quarter 2.75 1.75
1st Quarter 2.75 1.50
The Company has not declared or paid a cash dividend on its Common Stock in
the past. However, the Board of Directors declared a dividend of $0.02 per
share in December 1998. The Board of Directors will evaluate payment of
future dividends at their regular meetings. In addition to possible dividends
in the future, retained earnings will be used to finance acquisitions of other
distributing companies, develop of new products, expand markets and for other
corporate purposes. The payment of dividends requires the prior approval of
the lender under various borrowing arrangements entered into by the Company.
On September 27, 1996, the Company issued options to purchase 22,000 shares to
management employees at an exercise price of $1.63. On November 10, 1997,
options to purchase 140,000 shares of common stock were issued to management
employees at exercise prices of $2.88 and $3.16. At September 25, 1998,
42,000 options were fully vested and exercisable.
On October 10, 1997, the Company issued warrants to acquire 30,000 shares of
its common stock at an exercise price of $0.10 per share. The warrants were
issued as consideration for covenants not to compete entered into with the two
individuals from whom the Company acquired the assets of Marcus Distributors,
Inc. The warrants were exercised in full in June 1998.
In November 1997, the Company issued options to acquire 30,000 shares of its
common stock at an exercise price of $2.875 per share. The options were
issued to two independent directors of the Company as consideration for past
service to the Company. The options have a termination date of November 10,
2007 and vest over a three year period. At September 25, 1998, 12,000 options
were fully vested and exercisable.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The following table sets forth an analysis of various components of the Income
Statement as a percentage of sales for the fiscal years ended September 30,
1998, 1997, and 1996:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Sales.......................................... 100.0% 100.0% 100.0%
Cost of sales.................................. 89.3 89.1 88.5
------- -------- --------
Gross profit................................... 10.7 10.9 11.5
Selling, general and administrative expense.... 8.5 8.9 9.5
Depreciation and amortization.................. 0.4 0.5 0.4
-------- -------- --------
Income from operations......................... 1.8 1.5 1.6
Interest expense............................... 0.6 0.5 0.7
Other (income) expense, net.................... (0.1) (0.8) /1/ (0.4)
-------- -------- --------
Income before income taxes..................... 1.3 1.8 1.3
Income tax expense............................. 0.5 0.7 0.5
-------- -------- --------
Net income..................................... 0.8 1.1 0.8
Accretion of warrants/
preferred stock........................... 0.0 0.0 (0.1)
-------- -------- --------
Net income attributable to
common shareholders....................... 0.8% 1.1% 0.7%
======== ======== ========
</TABLE>
/1/ Other income of $1.4 million or 0.8% of sales for the fiscal year
ended September 30, 1997 was generated primarily by the gain associated with
the sale of the Denver beer distributorship of $1.1 million or 0.6% of sales.
5
YEAR ENDED SEPTEMBER 30, 1998 VERSUS YEAR ENDED SEPTEMBER 30, 1997. Sales for
the year ended September 30, 1998 increased 64.4% to $294.3 million, compared
to $179.0 million for the year ended September 30, 1997. Sales attributable
to the new St. Louis distribution center, which was purchased in October 1997,
and to Food For Health Company, Inc. ("FFH"), a distributor of health and
natural food products which was purchased in November 1997, were $76.3
million, of which, $36.2 million related to cigarette sales. Excluding the
effects of these acquisitions, sales from the traditional distribution
business increased by 21.8% or $39.0 million over the prior year as follows:
Cigarette sales increased approximately $31.7 million over the prior year,
with approximately $13.3 million due to price increases and $18.4 million due
to increased volume. Sales of other products increased by $7.2 million
primarily due to increased volume. There were no sales of beer products
during the fiscal year ended September 30, 1998 due to the sale of the Denver
beer distributorship in October 1996. This accounted for a $538,000 decrease
in sales of beer products as compared to the prior year.
Gross profit increased 61.8% to $31.6 million for the fiscal year ended
September 30, 1998 compared to $19.6 million for the prior fiscal year. The
increase in gross profit was primarily attributable to the new St. Louis
distribution center and FFH which accounted for $10.1 million of the $12.1
million increase in gross profit for the year. Cigarette price increases
during the fiscal year accounted for an additional $485,000 in gross profit as
compared to the prior year and partially offset a decrease of $935,000 in
purchased discounts received from cigarette manufacturers.
Gross profit as a percent of sales declined slightly from 10.9% in fiscal 1997
to 10.7% in the fiscal 1998. The decline was due to a decrease of
approximately 1.8% in profit margin from the Company's traditional
distribution business resulting from a large increase in sales of lower-margin
products (principally cigarettes) primarily in the Company's new St. Louis
market. Because of lower margins realized on cigarettes, a large increase in
cigarette sales adversely affects the profit margin percentage. The decrease
in profit margin was also attributable to a reduction in purchase discounts
received from cigarette manufacturers which had the effect of increasing the
cost of goods sold for cigarettes. Purchase discount programs vary by
manufacturer and, although all of the purchase discount programs offered by
cigarette manufacturers are computed on a cents-per-carton-sold basis, the
criteria necessary for meeting higher purchase discount brackets, such as
market share by cigarette category, vary from year to year as well.
Therefore, it is possible to have increased sales in certain product
categories, but receive less purchase discounts. This was the case for the
Company in fiscal 1998. The decline in profit margin from the Company's
traditional distribution business was substantially offset by additional
profit martin realized by FFH, which added approximately 1.6% to the Company's
profit margin percentage. In general, FFH products have a higher profit
margin than cigarettes and many of the Company's other products.
While sales of cigarettes have increased over the past five years, sales of
the Company's private label cigarettes have continued to decline since 1993
when cigarette manufacturers substantially reduced the price of premium brand
cigarettes. Since that time, the premium cigarette brands have thrived at the
expense of most generic brands. Also, cigarette price increases since 1993
have been identical for both premium and generic brands. Therefore, the price
differential between premium and major generic brands has not increased in the
past five years. Most recently, in November 1998, an announcement was made
that a settlement had been reached
6
between the major tobacco manufacturers and the various states that had filed
liability suits against the industry. Immediately thereafter, the major
cigarette manufacturers increased the price of cigarettes by 30 - 35% on both
premium and generic brands, including the Company's private label brand. As a
result, management anticipates the volume of the Company's private label
cigarettes will continue to decline over the next few years. If such a
decline is realized, gross profit from private label cigarettes could decrease
annually by $300,000 to $500,000 in fiscal 1999 and 2000.
Total operating expense, which includes selling, general and administrative
expenses and depreciation and amortization, increased 56.4% or $9.5 million
compared to fiscal 1997. The increase was primarily due to expenses
associated with the new St. Louis distribution center and FFH which accounted
for $9.2 million of the increase. As a percentage of sales, total operating
expense decreased to 8.9% from 9.4% during the same period in the prior year.
The decrease in operating expenses as a percentage of sales is due to
efficiencies gained through increased volume in the traditional distribution
business which were partially offset by the proportionately higher operating
costs incurred by FFH during the period.
As a result of the above, income from operations for the fiscal year ended
September 30, 1998 increased 94% to $5.4 million.
Interest expense for the fiscal year ended September 30, 1998 increased
109.2%, or $947,000, compared to the prior fiscal year. The increase was
primarily due to a new $4.5 million acquisition loan utilized to purchase FFH,
a $5.3 million increase in the average amount borrowed under the Company's
revolving credit facility with a bank (the "Facility") during fiscal 1998 and
interest expense of $249,000 associated with FFH's revolving credit facility
(the "FFH Facility"). The Facility was utilized to finance the acquisition of
the new St. Louis distribution center, the expansion of the Bismarck, ND
distribution center and to finance an increase in inventory during the period.
Other income of $276,000 for the fiscal year ended September 30, 1998 was
generated from gains on the sale of marketable securities and fixed assets,
royalty payments associated with the sale of the Denver non-alcoholic beverage
business, rent and interest income. Other income of $1.4 million for the
fiscal year ended September 30, 1997 was generated primarily by the gain
associated with the sale of the Denver beer distributorship of $1.1 million.
As a result of the above factors, net income for the fiscal year ended
September 30, 1998 was $2,358,186 compared to $1,940,534 for fiscal 1997.
The Company continues to remain dependent on cigarette sales which represented
approximately 63% of its revenue in fiscal 1998 (66% in fiscal 1997).
Competition within the convenience store distribution industry puts immense
pressure on profit margins. In addition a number of other factors which are
beyond the control of management, such as manufacturers' cigarette pricing
which affect the market for generic and private label cigarettes, impact the
Company's operating income. For example, the cigarette price increase of
$4.50 per carton in November 1998, was a major increase by industry standards.
The immediate impact of this increase will vary across the industry. However,
most convenience store distributors, including ADC, will experience lower
profit margins, higher carrying costs for inventory and accounts receivable
and greater exposure to bad debt losses.
7
The Company continues to evaluate various steps it may take to improve net
income in future periods, including acquisitions of distributing companies
such as the new St. Louis distribution center and FFH which were purchased in
the first quarter of fiscal 1998 and continued sales of assets that are no
longer essential to its primary business activities. An analysis of such
assets held at September 30, 1998 is as follows:
ESTIMATE OF GAIN
-------------------------------
September 30, September 30,
DESCRIPTION OF ASSET 1998 1997
-------------------- ------------- -------------
Investments (available-for-sale) $358,000 $409,500
Condominium & furnishings 500,000 480,000
Investments at September 30, 1998 and 1997 consisted of 83,000 shares of
Cayman Water Company Limited (CWC), a public company which is listed on
NASDAQ. The Company's basis in the securities is $151,000 and the fair market
value of the securities was $508,000 and $560,000 on September 30, 1998 and
September 30, 1997, respectively. The fair market value of the securities on
December 11, 1998 was $664,000.
The condominium and furnishings consist of a condominium in the Cayman Islands
which is used in furtherance of the Company's business marketing strategies.
Under a profit sharing agreement with the Company's former parent corporation,
AMCON Corporation, the greater of $400,000 of the net gain or one-half of the
net gain from the ultimate sale of the real estate will be allocated to AMCON
Corporation. The Company estimates the amount of gain payable to AMCON
Corporation had the real estate sold on September 30, 1998 would have been
approximately $500,000. The costs and benefits associated with retaining the
condominium are being evaluated in relation to the current business strategies
of the Company.
YEAR ENDED SEPTEMBER 30, 1997 VERSUS YEAR ENDED SEPTEMBER 30, 1996. Sales for
the year ended September 30, 1997 increased 1.6% to $179.0 million, compared
to $176.1 million for the year ended September 30, 1996. Beer and beverage
sales related to the Denver facility decreased $6.3 million during the year
ended September 30, 1997 as compared to the prior year as a result of
disposing of the operation in October 1996. Sales from the traditional
distribution business increased by $9.1 million for the year ended September
30, 1997 compared to the prior year as follows: Cigarette sales increased $5.1
million primarily due to price increases from manufacturers over the prior
year. However, the volume of private label cigarettes declined by 22% during
fiscal 1997. Sales of other products increased by $4.0 million principally
due to increased volume.
Gross profit decreased 3.5% to $19.6 million for the year ended September 30,
1997 from $20.3 million in fiscal 1996. Gross profit as a percent of sales
declined to 10.9% for the year ended September 30, 1997 compared to 11.5% for
the prior fiscal year. The decrease in the Company's gross profit margin was
primarily due to the sale of the Denver beer distributorship which accounted
for a $1.3 million reduction in gross profit and a $771,000 or 14.8% reduction
in purchase discounts from manufacturers on the Company's private label
cigarettes. These reductions in gross profit were offset by a $1.4 million
increase in gross profit from the increased sales of cigarettes, tobacco,
candy and other products.
8
Total operating expense decreased 4.3% to $16.8 million from $17.5 million
during fiscal 1996. The decrease was primarily due to the sale of the Denver
beer distributorship and the subsequent closing of the Denver facility which
accounted for a reduction in operating expenses of $1.6 million. This
reduction was offset by an increase of $848,000 in operating expense by the
other distribution centers which was incurred to support the increase in
sales. As a percentage of sales, total operating expense declined to 9.4% for
the year ended September 30, 1997 compared to 9.9% for fiscal 1996.
As a result of the above, income from operations for the fiscal year ended
September 30, 1997 increased 1.7% to $2.8 million.
Interest expense for the fiscal year ended September 30, 1997 decreased 24.5%,
or $282,000, compared to fiscal 1996. The decrease was primarily due to a
$3.1 million reduction in the average amount borrowed under the Company's
prior revolving credit facility with a bank (the "Prior Facility") during the
fiscal year ended September 30, 1997, as compared to fiscal 1996.
Notwithstanding the $499,000 borrowed to finance the purchase and installation
of the water bottling assets from November 1996 through January 1997 and the
$1.2 million borrowed to finance the purchase of the Company's outstanding
preferred stock in December 1996, the Company was able to reduce average
borrowings under the Prior Facility as a result of the cash generated from the
sale of the Denver beer distributorship during the first quarter of fiscal
1997 and the sale of a building in the fourth quarter of fiscal 1996.
Other income for the year ended September 30, 1997 was generated primarily
from the gain associated with the sale of the Denver beer distributorship of
$1.1 million.
As a result of the above factors, net income attributable to common
shareholders for the fiscal year ended September 30, 1997 was $1,940,534
compared to net income of $1,253,041 for fiscal 1996.
YEAR 2000 READINESS
STATE OF READINESS. The Year 2000 computer issue is real and does impact the
way the Company's systems perform. In addition, the Company has business
relationships with a number of third parties whose Year 2000 problems could
impact the Company. Accordingly, the Company has recognized the Year 2000
issue as a major management and technology project. A taskforce has been
assembled to review all systems to ensure that they do not malfunction as a
result of the Year 2000 issue. The Year 2000 project includes review of
internal operating systems and equipment, other internal systems and equipment
(such as telephones, copiers and fax machines) and external services and
systems that are depended upon to operate the Company's business. In this
process, the Company expects to both replace some systems and upgrade others.
AMCON's internal operating system consists of midrange computers which are
used for the sales, accounts receivable and inventory systems. With the
exception of the accounts receivable system, the software operating on the
midrange computers does not generally operate or depend upon any date
structure, but rather the day-of-week and week-of-month. Therefore, software
risk to the Year 2000 issue is considered low. The remaining accounting
systems and other record keeping functions performed by the Company are
conducted on personal computers which are connected by a local area network.
AMCON has engaged third party computer consultants to review, test and modify
the midrange computer hardware and software to ensure they will function
9
correctly after December 31, 1999. The Company expects the critical portions
of this process will be completed by June 30, 1999 and believes that the Year
2000 problems relating to its internal operating systems will be resolved
without significant operational difficulties. However, there can be no
assurance that testing will discover all potential Year 2000 problems or that
it will not reveal unanticipated material problems with the Company's systems
that will need to be resolved.
Other internal systems are being evaluated by AMCON personnel, along with the
providers that service and maintain the systems with emphasis placed on
critical systems such as telephone systems. AMCON believes that the critical
systems are currently Year 2000 compliant and expects to have non-critical
systems modified or replaced by June 30, 1999.
AMCON has no control over the efforts of third parties with which it has
material business relationships. AMCON has undertaken the process of
contacting each major third party to determine their state of readiness for
Year 2000. Such parties include, but are not limited to, AMCON's suppliers of
inventory, customers, financial institutions and utility companies. AMCON has
received initial assurances from its major suppliers and financial
institutions that they will not be adversely affected by Year 2000 problems.
AMCON will continue to request updated information from these third parties in
order to assess their Year 2000 readiness.
COSTS. Through September 30, 1998, cumulative costs relating directly to Year
2000 issues have totaled approximately $12,000. A portion of the estimated
total costs include the cost of existing personnel who have been deployed to
work on various phases of the Year 2000 project. These costs do not include
system upgrades and replacements that were made in the normal course of
business. The deployment of internal resources to the Year 2000 project has
not resulted in significant delays to other major technology projects which
were planned by the Company. The Company estimates that remaining Year 2000
costs will total approximately $135,000, of which approximately $90,000, will
be capitalized and depreciated over a five year period.
RISKS. The Company believes that its internal operating systems will be Year
2000 compliant before December 31, 1999. Therefore, the Company believes that
the most reasonably likely worst-case scenario will be that one or more of the
third parties with which the Company has a material business relationship will
not have successfully dealt with its Year 2000 issues. A critical third party
failure (such as telecommunication, utilities or financial institutions) could
have a material adverse affect on the Company by eliminating the Company's
ability to order and pay for products from suppliers and receive orders and
payments from customers. It is also possible that one or more of the internal
operating systems will not function properly and make it difficult to complete
routine tasks, such as accounting and other record keeping duties. Based on
information currently available, the Company does not believe there will be
any long-term operating system failures. However, the Company will continue
to monitor these issues as part of its Year 2000 project and will concentrate
its efforts on minimizing their impact.
CONTINGENCY PLANS. The Company has not yet made any specific contingency
plans with respect to its internal operating systems. The Company will begin
developing contingency plans during the first few months of 1999 as certain
phases on its Year 2000 project reach completion. These contingency plans
will be modified throughout 1999 as the final phases of the Year 2000 project
are completed or if it becomes apparent that they will not be completed by
December 31, 1999. The Company currently does not foresee contingency
10
planning in the product receiving, selling, order filling and delivery phases
of the Company's business as these areas are very labor intensive. The
Company may be required to perform certain accounting and other record keeping
functions manually should a Year 2000 problem become apparent in one or more
of those areas. Additionally, remote dial-up connectivity from remote
branches has been put in place in the event that certain telecommunication
services fail to operate. AMCON also plans to terminate relationships with
third party service providers that are not able to demonstrate that they have
successfully resolved their Year 2000 problems in a timely manner. There will
inevitably be some third parties who will not have made proper Year 2000
modification. The Company's contingency plan only addresses those third
parties that are considered critical to the Company's operation.
The foregoing Year 2000 discussion contains certain forward-looking
statements, including without limitation anticipated costs and the dates by
which the Company expects to substantially complete the modifications and
testing of systems and are based upon management's best current estimates,
which were derived utilizing numerous assumptions about future events,
including the continued availability of certain resources, representations
received from third parties and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results could
differ materially from those anticipated. Specific matters that might cause
such material differences include, but are not limited to, the availability
and cost of trained personnel, the ability to identify and convert all
relevant computer systems, results of Year 2000 testing, adequate
identification and resolution of Year 2000 issues by third party service
providers, suppliers or customers of the Company, unanticipated system costs,
the need to replace additional hardware, the adequacy of and ability to
implement contingency plans and similar uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended September 30, 1998, the Company utilized cash
flow in operating activities to finance increases in inventory and accounts
receivable to support an increase in business. Cash was utilized in investing
activities during the fiscal year to construct an addition to the Bismarck, ND
distribution center, purchase the assets of Marcus Distributors, Inc. in St.
Louis, MO in October 1997 and purchase of the stock of FFH in November 1997
for $750,000, $2.7 million and $4.5 million, respectively. Cash was provided
in financing activities through increases in the Facility and from a term note
to finance the purchase of FFH.
The Company makes capital expenditures primarily for equipment for its
distribution facilities including computers, delivery vehicles and warehouse
equipment. The Company has historically financed its working capital
requirements with a combination of internally generated funds and bank
borrowings. Cash provided by operations equaled approximately $688,000 and
$1,120,000 for the fiscal years ended September 30, 1998 and 1997,
respectively. Capital expenditures during those periods equaled approximately
$782,000 and $892,000, respectively. The remaining cash provided by
operations was applied to debt service. The Company anticipates that capital
expenditures during fiscal 1999 will be approximately $950,000 and will be
used for the purposes stated above.
The Company had working capital of approximately $18.5 million as of September
30, 1998. The Company's ratio of debt to equity was 3.13 at September 30,
1998 compared to 2.26 at September 30, 1997.
11
In March 1998, ADC refinanced the Facility with a new bank in order to obtain
more favorable lending terms to support operations and to finance any future
acquisitions. The refinancing of the Facility increased the Company's
borrowing limit, which is determined by various percentages of eligible
accounts receivable and inventory, to $15 million and decreased the interest
rate on borrowings to the bank's prime rate ("Prime") less 0.5% or LIBOR plus
1.75%, as selected by the Company. The Facility also provided for an
additional $10 million facility collateralized by specific inventory and a
$1.5 million facility to be used for transportation equipment purchases. As
of September 30, 1998, the Company had borrowed approximately $11.0 million
under the Facility. The Facility is collateralized by all equipment, general
intangibles, inventories and accounts receivable of the Company, and with
first mortgages on the Company's owned distribution center and certain other
real estate. The Facility expires on February 25, 2002.
The Facility contains covenants which, among other things, set forth certain
financial ratios and net worth requirements which adjust semiannually or
annually as specified in the Facility. For fiscal 1999 and 1998, the Facility
includes covenants that (i) restrict the incurrence of additional debt, (ii)
restrict payments, prepayments and repurchases of subordinated debt or capital
stock, (iii) restrict mergers and acquisitions and changes in business or
conduct of business and (iv) require the maintenance of certain financial
ratios and net worth levels including an average annual fixed charge ratio of
1.1 to 1.0, an average annual debt service coverage ratio of 1.25 to 1.0 (1.50
to 1.0 after September 26, 1998), a debt to equity ratio of 4.0 to 1.0 and
minimum tangible net worth of $4,500,000. In addition, the Company may not
pay dividends with respect to its Common Stock without the consent of the
lender of the Facility. In December 1998, the Company received consent to pay
a cash dividend of $0.02 per share. As of September 30, 1998 the Company was
in compliance with all covenants under the Facility.
In March 1998, FFH refinanced its revolving credit facility with a new bank
(the "FFH Facility") in order to obtain more favorable lending terms to
support operations. The borrowings under the FFH Facility are secured by the
assets of FFH and are guaranteed by the Company. The FFH Facility established
a borrowing limit of $5 million and decreased the interest rate on the FFH
Facility to Prime less 0.5% or LIBOR plus 2.00%, as selected by FFH. FFH is
required to pay a commitment fee of .25% of the unused amount of the
commitment. As of September 30, 1998, FFH had borrowed approximately $3.4
million under the FFH Facility. The FFH Facility expires on February 25,
2002.
The FFH Facility contains covenants which, among other things, set forth
certain financial ratios and net worth requirements which adjust semiannually
or annually as specified in the FFH Facility. For fiscal 1999 and 1998, the
FFH Facility includes covenants that (i) restrict the incurrence of additional
debt, (ii) restrict payments, prepayments and repurchases of subordinated debt
or capital stock, (iii) restrict mergers and acquisitions and changes in
business or conduct of business and (iv) require the maintenance of certain
financial ratios and net worth levels including an average annual fixed charge
ratio of 1.5 to 1.0, an average annual debt service coverage ratio of 2.00 to
1.0, a debt to equity ratio of 4.0 to 1.0 and minimum tangible net worth of
$2,000,000. In addition, the FFH may not pay dividends with respect to its
Common Stock without the consent of the lender of the FFH Facility. As of
September 30, 1998 the Company was not in compliance with the net worth
covenant, however, the lender waived the covenant violation and subsequently
amended the FFH Facility to reduce the net worth requirement.
12
In November 1997, the Company borrowed $4.5 million from a bank to finance the
purchase of the common stock of FFH (the "Acquisition Loan"). The Acquisition
Loan has a term of five years, bears interest at Prime less 0.5% or LIBOR plus
1.75%, as selected by the Company and requires monthly payments equal to
accrued interest plus principal payments of $85,096, which began in August
1998. As of September 30, 1998, the outstanding balance of the Acquisition
Loan was $4.3 million.
On November 20, 1998, FFH purchased all of the outstanding stock of U.S.
Health Distributors, Inc. ("USHD"), a distributor of health and natural foods
based in Melbourne, FL, for $1.1 million in cash. The acquisition was funded
by a $1.1 million five and one-half year term loan from a bank. The loan
bears interest at Prime less 0.5%, requires payments of interest only for the
first six months and monthly principal payments for the term of the loan. The
loan is collateralized by the common stock of USHD.
The Company also maintains a $1,250,000 non-revolving line of credit with a
bank used to finance the purchase of trucks and delivery equipment. The line
of credit bears interest at two hundred basis points above the five-year U.S.
Treasury Note rate on the date of each advance. As the Company takes
advances, a note is drawn and is payable in monthly installments from 36 to 60
months. Advances against the non-revolving line of credit were $482,000
through September 30, 1998. The amount available on the non-revolving line of
credit was $768,000 at September 30, 1998. The line of credit is secured by a
first lien on the delivery vehicles purchased with the loan proceeds.
As of September 30, 1998, the Company had additional outstanding long-term
indebtedness of approximately $143,000 consisting of a capital lease for
computer equipment, the current portion of which equaled approximately
$51,000. The interest rate on the note relating to such indebtedness is 9.5%
per annum.
The Company believes that funds generated from operations, supplemented as
necessary with funds available under ADC's Facility, the FFH Facility and the
non-revolving line of credit, will provide sufficient liquidity to cover its
debt service and any reasonably foreseeable future working capital and capital
expenditure requirements.
CONCERNING FORWARD LOOKING STATEMENTS
This Annual Report, including the Letter to Shareholders, Management's
Discussion and Analysis and other sections, contains certain forward looking
statements that are subject to risks and uncertainties and which reflect
management's current beliefs and estimates of future economic circumstances,
industry conditions, company performance and financial results. Forward
looking statements include information concerning the possible or assumed
future results of operations of the Company and those statements preceded by,
followed by or include the words "future", "position", "anticipate(s)",
"expect", "believe(s)", "see", "plan", "further improve", "outlook", "should"
or similar expressions. For these statements, we claim the protection of the
safe harbor for forward looking statements contained in the Private Securities
Litigation Reform Act of 1995. You should understand that the following
important factors, in addition to those discussed elsewhere in this document,
could affect the future results of the Company and could cause those results
to differ materially from those expressed in our forward looking statements:
changing market conditions with regard to cigarettes and the demand for the
Company's products, domestic regulatory risks, competitive and other risks
13
(such as overall business conditions) over which the Company has little or no
control. Any changes in such factors could result in significantly different
results. Consequently, future results may differ from management's
expectations. Moreover, past financial performance should not be considered a
reliable indicator of future performance.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 establishes reporting standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that displays an amount representing total comprehensive
income for the period. Adoption is effective for fiscal years beginning after
December 15, 1997, the Company's fiscal 1999.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segment of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes
reporting standards for reporting disclosures about segments of an enterprise
and related information about different types of business activities in which
an enterprise engages and the different economic environments in which it
operates. The statement requires that public business enterprises' report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. Adoption
is effective for fiscal years beginning after December 15, 1997, the Company's
fiscal 1999.
14
REPORT OF MANAGEMENT
Management is responsible for the preparation of the accompanying financial
statements. The financial statements and the notes thereto have been prepared
in accordance with generally accepted accounting principles to reflect, in all
material aspects, the substance of financial events and transactions occurring
during the year. PricewaterhouseCoopers LLP, independent certified public
accountants, have audited our financial statements as described in their
report.
The Company maintains financial control systems designed to provide reasonable
assurance that assets are safeguarded and that transactions are executed and
recorded in accordance with management authorization. The control systems are
evaluated annually by the Company.
Kathleen M. Evans
President
Michael D. James
Treasurer and Chief Financial Officer
November 20, 1998
15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of AMCON Distributing Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the consolidated financial position
of AMCON Distributing Company and its subsidiary as of September 30, 1998 and
1997, and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended September 30, 1998,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Omaha, Nebraska
November 20, 1998
F-1
CONSOLIDATED BALANCE SHEETS
AMCON Distributing Company
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
September 30, 1998 1997
- ------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 38,369 $ 26,973
Marketable securities - 127,786
Accounts receivable, less allowance for
doubtful accounts of $460,753 and $206,249 15,229,107 10,788,979
Note and interest receivable from officer - 130,795
Inventories 16,127,250 7,183,245
Deferred income taxes 570,743 119,017
Other 327,997 84,616
------------- -------------
Total current assets 32,293,466 18,461,411
Fixed assets, net 4,466,707 3,608,891
Investments 508,375 560,250
Other assets 2,375,189 866,749
------------- -------------
$ 39,643,737 $ 23,497,301
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 7,350,645 $ 4,764,816
Accrued expenses 1,329,843 906,282
Accrued wages, salaries and bonuses 675,562 719,962
Income taxes payable 1,023,944 579,802
Current portion of long-term debt 3,439,169 332,338
------------- -------------
Total current liabilities 13,819,163 7,303,200
------------- -------------
Deferred income taxes 24,799 195,458
Other liabilities 427,419 -
Long-term debt, less current portion 15,767,659 8,790,524
Commitments (Note 13)
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none outstanding - -
Common stock, $.01 par value, 15,000,000 shares
authorized and 2,480,000 issued at September 30, 1998;
5,000,000 shares authorized and 2,450,000 shares issued
at September 30, 1997 24,800 24,500
Additional paid-in capital 2,271,278 2,213,828
Unrealized gain on investments available-for-sale,
net of $139,468 and $171,985 tax 218,145 237,503
Retained earnings 7,090,789 4,732,603
------------- -------------
9,605,012 7,208,434
Less treasury stock, 97 shares at cost (315) (315)
------------- -------------
Total shareholders' equity 9,604,697 7,208,119
------------- -------------
$ 39,643,737 $ 23,497,301
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
CONSOLIDATED STATEMENTS OF INCOME
AMCON Distributing Company
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales (including excise taxes of $52.9 million, $ 294,281,323 $ 178,990,978 $ 176,144,966
$40.1 million and $40.7 million, respectively)
Cost of sales 262,632,767 159,434,631 155,885,022
------------- ------------- -------------
Gross profit 31,648,556 19,556,347 20,259,944
Selling, general and administrative expenses 25,088,767 15,883,969 16,682,845
Depreciation and amortization 1,120,482 868,744 820,672
------------- ------------- -------------
26,209,249 16,752,713 17,503,517
------------- ------------- -------------
Income from operations 5,439,307 2,803,634 2,756,427
Other expense (income):
Interest expense 1,814,555 867,327 1,149,162
Other (income) expense, net (276,287) (1,352,733) (696,828)
------------- ------------- -------------
1,538,268 (485,406) 452,334
------------- ------------- -------------
Income before income taxes 3,901,039 3,289,040 2,304,093
Income tax expense 1,542,853 1,348,506 967,719
------------- ------------- -------------
Net income 2,358,186 1,940,534 1,336,374
Accretion of preferred stock - - (83,333)
------------- ------------- -------------
Net income attributable to common shareholders $ 2,358,186 $ 1,940,534 $ 1,253,041
============= ============= =============
Earnings per common and common equivalent
share attributable to common shareholders:
Basic $ 0.96 $ 0.79 $ .51
============= ============= =============
Diluted $ 0.93 $ 0.79 $ .51
============= ============= =============
Weighted average shares outstanding:
Basic 2,458,062 2,447,782 2,445,903
============= ============= =============
Diluted 2,535,451 2,451,462 2,445,903
============= ============= =============
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AMCON Distributing Company
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
------------------- ---------------------- Paid-In
Shares Amount Shares Amount Capital
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1995 250,000 $ 2,500 2,450,000 $ 24,500 $ 3,327,995
Unrealized gain on investments
available-for-sale, net of tax - - - - -
Accretion of preferred stock - - - - 83,333
Net income - - - - -
-------- ------- --------- -------- -----------
Balance, September 30, 1996 250,000 2,500 2,450,000 24,500 3,411,328
Unrealized gain (loss) on investments
available-for-sale, net of tax - - - - -
Redemption of preferred stock (250,000) (2,500) - - (1,197,500)
Exercise of stock options - - - - -
Net income - - - - -
-------- ------- --------- -------- -----------
Balance, September 30, 1997 - - 2,450,000 24,500 2,213,828
Unrealized gain on investments
available-for-sale, net of tax - - - - -
Issuance and exercise of warrants - - 30,000 300 57,450
Net income - - - - -
-------- ------- --------- -------- -----------
Balance, September 30, 1998 - $ - 2,480,000 $ 24,800 $ 2,271,278
======== ======= ========= ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AMCON Distributing Company
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Unrealized
Gain on
Investments
Available- Retained Treasury Stock
for-sale Earnings Shares Amount Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1995 $ 234,900 $ 1,545,528 (4,097) $ (13,315) $ 5,122,108
Unrealized gain on investments
available-for-sale, net of tax 163,128 - - - 163,128
Accretion of preferred stock - (83,333) - - -
Net income - 1,336,374 - - 1,336,374
--------- ----------- ------ --------- -----------
Balance, September 30, 1996 398,028 2,798,569 (4,097) (13,315) 6,621,610
Unrealized gain (loss) on investments
available-for-sale, net of tax (160,525) - - - (160,525)
Redemption of preferred stock - - - - (1,200,000)
Exercise of stock options - (6,500) 4,000 13,000 6,500
Net income - 1,940,534 - - 1,940,534
--------- ----------- ------ --------- -----------
Balance, September 30, 1997 237,503 4,732,603 (97) (315) 7,208,119
Unrealized gain on investments
available-for-sale, net of tax (19,358) - - - (19,358)
Issuance and exercise of warrants - - - - 57,750
Net income - 2,358,186 - - 2,358,186
--------- ----------- ------ --------- -----------
Balance, September 30, 1998 $ 218,145 $ 7,090,789 (97) $ (315) $ 9,604,697
========= =========== ====== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMCON Distributing Company
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,358,186 $ 1,940,534 $ 1,336,374
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,120,482 868,744 820,672
Gain on sales of fixed assets, land held for sale
and securities (46,955) (112,520) (588,659)
Gain on sale of Denver beer distributorship - (1,102,205) -
Proceeds from sales of trading securities 157,207 92,548 147,993
Purchases of trading securities - - (14,825)
Deferred income taxes 11,167 (8,664) 36,948
Provision for losses on doubtful accounts and
inventory obsolescence 640,494 33,836 11,357
Changes in assets and liabilities, net of effect
of acquisitions:
Accounts and interest receivable (1,629,334) (916,159) (415,447)
Inventories (2,554,073) (801,978) 477,021
Other current assets (180,622) 80,161 (23,885)
Other assets (45,366) (42,648) (78,397)
Accounts payable 432,398 661,948 340,933
Accrued expenses and accrued wages, salaries and
bonuses (44,771) 490,413 191,207
Income taxes payable 471,985 (63,766) 324,265
Other liabilities (2,577) - -
----------- ----------- -----------
Net cash provided by operating activities 688,221 1,120,244 2,565,557
----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (782,440) (891,783) (723,308)
Acquisitions, net of cash acquired (7,119,254) (499,109) -
Proceeds from sales of fixed assets 86,887 160,961 516,162
Proceeds from repayment of advance to officer 100,000 25,000 -
Proceeds from sale of Denver beer distributorship - 2,371,994 -
Proceeds from sales of available-for-sale securities - 33,967 357,170
----------- ----------- -----------
Net cash provided by (used in) investing
activities (7,714,807) 1,201,030 150,024
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings of long-term debt 4,500,000 516,741 188,615
Net (payments) proceeds on bank credit agreement 3,483,241 (1,239,484) (2,082,930)
Payments on long-term and subordinated debt (766,025) (399,555) (814,366)
Debt issue costs (182,234) - -
Proceeds from exercise of warrants 3,000 - -
Redemption of preferred stock - (1,200,000) -
Proceeds from exercise of stock options - 6,500 -
----------- ----------- -----------
Net cash provided by (used in) financing
activities 7,037,982 (2,315,798) (2,708,681)
----------- ----------- -----------
Net increase in cash 11,396 5,476 6,900
Cash, beginning of year 26,973 21,497 14,597
----------- ----------- -----------
Cash, end of year $ 38,369 $ 26,973 $ 21,497
=========== =========== ===========
Supplemental cash flow information:
Cash paid during the year for interest $ 1,745,609 $ 868,378 $1,199,396
Cash paid during the year for income taxes 1,145,770 1,420,936 714,696
Supplemental noncash information:
Issuance of warrants in connection with acquisition 54,750 - -
Unrealized gain on available-for-sale securities, net (19,358) (160,525) 163,128
Accretion of preferred stock - - 83,333
Fixed assets acquired through capital lease - - 248,928
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMCON Distributing Company
1. Summary of Significant Accounting Policies:
Company Operations:
AMCON Distributing Company ("AMCON"), together with its wholly-owned
subsidiary, Food For Health Co., Inc. ("FFH"), collectively referred to as
"the Company," is a leading wholesale distributor of consumer products in the
Great Plains, Rocky Mountain and Southwest regions of the United States. The
Company distributes a broad portfolio of consumer products including
beverages, candy, cigarettes, groceries, natural food products and health and
beauty care products through its distribution centers located in Arizona,
Kansas, Missouri, Nebraska, North Dakota, South Dakota and Wyoming.
The distribution industry is in a state of consolidation as intense
competition and pressure on profit margins continue to affect both large and
small distributors. The Company's operating income is subject to a number of
factors which are beyond its control, such as changes in manufacturers'
cigarette pricing which affects the market for generic and private label
cigarettes. While the Company sells a diversified product line, it remains
dependent on cigarette sales which represent approximately 63% of its revenue.
Net income is heavily dependent on sales of the Company's private label
cigarettes and volume discounts received from manufacturers in connection with
such sales. The Company continuously evaluates steps it may take to improve
net income in future periods, including further acquisitions of smaller
distributing companies in similar business lines and further sales of assets
that are no longer essential to its primary business activities such as
investments and certain real estate.
Accounting Period:
The Company's fiscal year ends on the last Friday in September. For
convenience, the fiscal years have been indicated as September 30, whereas the
actual year ends were September 25, 1998, September 26, 1997 and September 27,
1996. Each fiscal year was comprised of 52 weeks.
Principles of Consolidation:
The consolidated financial statements include the accounts of AMCON and its
subsidiary. Intercompany accounts and transactions have been eliminated.
Cash and Accounts Payable:
The Company uses a cash management system under which an overdraft is the
normal book balance in the primary disbursing accounts. The overdrafts
included in accounts payable which were $2,972,303 and $1,988,915 at September
30, 1998 and 1997, respectively, reflect the checks drawn on the disbursing
accounts that have been issued but have not yet cleared through the banking
system. The Company's policy has been to fund these outstanding checks as
they clear with borrowings under the credit agreement (see Note 7).
Marketable Securities and Investments:
The Company has classified marketable securities and investments as either
available-for-sale or trading securities. The carrying amounts of the
securities used in computing unrealized and realized gains and losses are
determined by specific identification. Fair values are determined using
quoted market prices. For available-for-sale securities, net unrealized
F-7
1. Summary of Significant Accounting Policies (continued):
holding gains and losses are reported as a separate component of shareholders'
equity, net of tax. For trading securities, net unrealized holding gains and
losses are included in the determination of net income.
Accounts Receivable:
Accounts receivable consist of amounts due to the Company from its normal
business activities. The Company's customers are retailers, institutions and
other wholesalers located throughout the Great Plains, Rocky Mountain and
Southwest regions of the United States. The Company maintains an allowance
for doubtful accounts to reflect the expected uncollectibility of accounts
receivable based on past collection history and specific risks identified in
the portfolio.
Inventories:
Inventories consist of finished products purchased in bulk quantities to be
redistributed to the Company's customers. Inventories are valued at the lower
of first-in, first-out ("FIFO") cost or market.
Fixed Assets:
Fixed assets are stated at cost. Major renewals and improvements are
capitalized and charged to expense through depreciation charges. Repairs and
maintenance are charged to expense as incurred. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
depreciable assets. Estimated useful lives are as follows:
Years
--------
Buildings 7 - 40
Warehouse equipment 5 - 7
Furniture, fixtures and leasehold
improvements 5 - 18
Vehicles 5
Costs and accumulated depreciation applicable to assets retired or sold are
eliminated from the accounts, and the resulting gains or losses are reported
in the statement of income.
Revenue Recognition:
The Company recognizes revenue when products are shipped. Sales are shown net
of returns and discounts.
Income Taxes:
Deferred income taxes are determined based on temporary differences between
the financial reporting and tax basis of the Company's assets and liabilities,
using enacted tax rates in effect during the years in which the differences
are expected to reverse.
Long Lived Assets:
The Company reviews goodwill and other long lived assets whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Impairments would be recognized in operating results if a
permanent reduction in value were to occur based on discounted cash flows.
F-8
1. Summary of Significant Accounting Policies (continued):
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. Acquisitions:
In October 1997, the Company acquired certain assets from Marcus Distributors,
Inc. ("Marcus") of St. Louis, Missouri for $2.7 million in cash and warrants
to acquire 30,000 shares of the Company's common stock at an exercise price of
$0.10 per share. The acquisition was accounted for under the purchase method
of accounting.
In November 1997, the Company acquired all of the outstanding stock of Food
For Health Company, Inc. ("FFH"), a distributor of health and natural foods
based in Phoenix, Arizona, for $4.4 million in cash. The acquisition was
accounted for under the purchase method of accounting. Approximately $1.3
million of the purchase price was allocated to goodwill which is being
amortized over 25 years.
Operating results for each of these acquisitions are included in the
accompanying consolidated statements of operations from the respective
acquisition dates. Assuming the above described companies had been acquired
on October 1, 1996, unaudited pro forma consolidated revenues, net income and
net income per share would have been as follows:
1998 1997
------------- -------------
Sales $ 300,663,000 $ 270,373,000
Net income $ 2,444,000 $ 2,079,000
Earnings per share:
Basic $0.99 $0.85
Diluted $0.96 $0.84
The pro forma information provided above is based on assumptions that
management deems appropriate, but does not purport to be indicative of the
results that would have actually occurred had the acquisitions taken place on
October 1, 1996.
3. Earnings Per Share:
Earnings per share, as presented below, was computed in accordance with
Statement of Accounting Standards No. 128, Earnings Per Share. Prior years
amounts have been restated to conform to the new standard. Basic earnings per
share is calculated by dividing net income by the weighted average common
shares outstanding for each period. Diluted earnings per share is calculated
by dividing net income by the sum of the weighted average common shares
outstanding and the weighted average dilutive options and warrants, using the
treasury stock method.
F-9
3. Earnings Per Share (continued):
<TABLE>
<CAPTION>
For the years ended September 30,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
Basic Basic Basic
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average common
shares outstanding 2,458,159 2,450,474 2,450,000
Weighted average treasury
shares (97) (2,692) (4,097)
----------- ----------- -----------
Weighted average number of
shares outstanding 2,458,062 2,447,782 2,445,903
=========== =========== ===========
Net income $ 2,358,186 $ 1,940,534 $ 1,253,041
=========== =========== ===========
Earnings per share $ 0.96 $ 0.79 $ 0.51
=========== =========== ===========
Diluted Diluted Diluted
----------- ----------- -----------
Weighted average common
shares outstanding 2,458,159 2,450,474 2,450,000
Weighted average treasury
shares (97) (2,692) (4,097)
Weighted average of net
additional shares outstanding
assuming dilutive options and
warrants exercised and proceeds
used to purchase treasury stock 77,389 3,680 -
----------- ----------- -----------
Weighted average number of
shares outstanding 2,535,451 2,451,462 2,445,903
=========== =========== ===========
Net income $ 2,358,186 $ 1,940,534 $ 1,253,041
=========== =========== ===========
Earnings per share $ 0.93 $ 0.79 $ 0.51
=========== =========== ===========
</TABLE>
F-10
4. Fixed Assets, Net:
Fixed assets at September 30, 1998 and 1997 consisted of the following:
1998 1997
----------- -----------
Land and buildings $ 750,809 $ 490,955
Condominium and furnishings 1,237,065 1,228,801
Warehouse equipment 4,106,245 2,283,580
Furniture, fixtures and
leasehold improvements 2,315,119 1,288,773
Vehicles 1,764,763 1,775,999
----------- -----------
10,174,001 7,068,108
Less accumulated depreciation 5,707,294 3,459,217
----------- -----------
$ 4,466,707 $ 3,608,891
=========== ===========
Included in land and buildings is a warehouse leased to a third party. Future
minimum rentals are $7,103 in fiscal 1999.
5. Marketable Securities and Investments:
Investments in equity securities at September 30, 1998 and 1997 consisted of
the following:
September 30, 1998
------------------------------------
Unrealized Market
Cost Gain Value
--------- --------- ---------
Investments (available-for-sale) $ 150,762 $ 357,613 $ 508,375
========= ========= =========
September 30, 1997
------------------------------------
Unrealized Market
Cost Gain Value
--------- --------- ---------
Marketable securities (trading) $ 39,700 $ 88,086 $ 127,786
========= ========= =========
Investments (available-for sale) $ 150,762 $ 409,488 $ 560,250
========= ========= =========
The Company did not sell any available-for-sale investments in 1998. The
Company realized gains on the sale of available-for-sale investments of
$27,600 and $281,789 in fiscal 1997 and 1996, respectively. The Company
recognized gains of $29,400, $72,222 and $42,455 on trading securities during
1998, 1997 and 1996, respectively.
F-11
6. Other Assets:
Other assets at September 30, 1998 and 1997 consisted of the following:
1998 1997
----------- ----------
Goodwill (less accumulated amortization
of $295,023 and $238,810) $ 1,832,008 $ 585,238
Covenants not to compete (less
accumulated amortization of $262,374
and $232,666) 27,375 2,333
Cash surrender value of life
insurance policies 353,920 279,178
Debt issue costs (less accumulated
amortization of $29,376) 152,858 -
Other 9,028 -
----------- ----------
$ 2,375,189 $ 866,749
=========== ==========
Goodwill arose from the acquisition of certain businesses and is amortized
using the straight-line method over periods ranging from 5 to 25 years.
Amortization expense was $56,213, $41,926 and $68,381 for the years ended
September 30, 1998, 1997, and 1996, respectively. During 1997, the Company
disposed of goodwill in the amount of $358,553 (net) in connection with the
sale of the Denver beer distributorship.
The covenants not to compete are amortized using the straight-line method over
2-5 year terms of the related agreements. Amortization expense was $29,708,
$63,625 and $65,500 for the years ended September 30, 1998, 1997 and 1996,
respectively.
7. Long-term Obligations:
Long-term obligations at September 30, 1998 and 1997 consisted of the
following:
1998 1997
------------ -----------
Revolving credit facility with a bank,
interest payable monthly at the bank's
base rate less 0.5% or LIBOR plus 1.75%,
as selected by the Company (approximately
7.50% at September 30, 1998; principal
due February 2002 $ 10,964,888 $ 8,122,086
FFH Revolving credit facility with a
bank, interest payable monthly at the
bank's base rate less 0.5% or LIBOR
plus 2.00%, as selected by FFH
(approximately 7.75% at September 30,
1998); principal due February 2002 3,361,355 -
F-12
7. Long-term Obligations (continued):
1998 1997
------------ -----------
Note payable to a bank, interest
payable monthly at the bank's base
rate less 0.5% or LIBOR plus 1.75%
(approximately 7.50% at September 30,
1998); principal payments of $85,096
due monthly through November 2002; 4,254,808 -
Nonrevolving line of credit,
interest payable monthly (at rates
ranging between 8.00% and 8.50% at
September 30, 1998); principal due
in monthly installments through
December 2001 collateralized by
delivery vehicles 482,479 810,859
Obligations under capital lease, payable
in monthly installments at 9.5% through
April 2001 (Note 13) 143,298 189,917
------------ -----------
19,206,828 9,122,862
Less current portion 3,439,169 332,338
------------ -----------
$ 15,767,659 $ 8,790,524
============ ===========
In March 1998, AMCON entered into a revolving credit facility with a bank (the
"Facility") in order to obtain more favorable lending terms than those
available under the prior revolving credit facility with another bank. The
Facility increased the Company's borrowing limit from $10 million to $15
million and decreased the interest rate on borrowing to the lender's prime
rate ("Prime") less 0.5% or LIBOR plus 1.75%, as selected by the Company. The
Facility also provided for an additional $10 million facility to be
collateralized by specific inventory and a $1.5 million facility to be used
for transportation equipment purchases. Under the terms of the credit
agreement, all of the Company's assets have been pledged as collateral to the
lenders. Advances made under the Facility are limited to a "borrowing base"
determined by various percentages of eligible accounts receivable and
inventory. At September 30, 1998 and 1997, the unused portion of the credit
agreement was $14,035,111 and $1,877,914, respectively. The Facility expires
on February 25, 2002.
The Facility contains covenants which, among other things, set forth certain
financial ratios and net worth requirements which adjust semiannually or
annually as specified in the Facility. For fiscal 1999 and 1998, the Facility
includes covenants that (i) restrict the incurrence of additional debt, (ii)
restrict payments, prepayments and repurchases of subordinated debt or capital
stock, (iii) restrict mergers and acquisitions and changes in business or
conduct of business and (iv) require the maintenance of certain financial
ratios and net worth levels including an average annual fixed charge ratio of
1.1 to 1.0, an average annual debt service coverage ratio of 1.25 to 1.0 (1.50
to 1.0 after September 26, 1998), a debt to equity ratio of 4.0 to 1.0 and
minimum tangible net worth of $4,500,000. In addition, the Company may not
F-13
7. Long-term Obligations (continued):
pay dividends with respect to its Common Stock without the consent of the
lender of the Facility. As of September 30, 1998 the Company was in
compliance with all covenants under the Facility.
In March 1998, FFH entered into a revolving credit facility with a bank (the
"FFH Facility") in order to obtain more favorable lending terms than those
available under the prior revolving credit facility with another bank. The
borrowings under the FFH Facility are secured by the assets of FFH and are
guaranteed by the Company. The FFH Facility established a borrowing limit of
$5 million and decreased the interest rate on the FFH Facility to Prime less
0.5% or LIBOR plus 2.00%, as selected by FFH. Advances made under the
Facility are limited to a "borrowing base" determined by various percentages
of eligible accounts receivable and inventory. As of September 30, 1998, FFH
had borrowed approximately $3.4 million under the FFH Facility. FFH is
required to pay a commitment fee of .25% of the unused amount of the
commitment. The FFH Facility expires on February 25, 2002.
The FFH Facility contains covenants which, among other things, set forth
certain financial ratios and net worth requirements which adjust semiannually
or annually as specified in the FFH Facility. For fiscal 1999 and 1998, the
FFH Facility includes covenants applicable to FFH that (i) restrict the
incurrence of additional debt, (ii) restrict payments, prepayments and
repurchases of subordinated debt or capital stock, (iii) restrict mergers and
acquisitions and changes in business or conduct of business and (iv) require
the maintenance of certain financial ratios and net worth levels including an
average annual fixed charge ratio of 1.5 to 1.0, an average annual debt
service coverage ratio of 2.00 to 1.0, a debt to equity ratio of 4.0 to 1.0
and minimum tangible net worth of $2,000,000. In addition, the FFH may not
pay dividends with respect to its Common Stock without the consent of the
lender of the FFH Facility. As of September 30, 1998 the Company was not in
compliance with the net worth covenant, however, the lender waived the
covenant violation and subsequently amended the FFH Facility to reduce the net
worth requirement.
In November 1997, the Company borrowed $4.5 million from a bank to finance the
purchase of the common stock of FFH (the "Acquisition Loan"). The Acquisition
Loan has a term of five years, bears interest at Prime less 0.5% or LIBOR plus
1.75%, as selected by the Company and requires monthly payments equal to
accrued interest plus principal payments of $85,096, which began in August
1998. As of September 30, 1998, the outstanding balance of the Acquisition
Loan was $4.3 million. The loan in collateralized by the common stock of FFH.
In connection with the Acquisition Loan, an officer of the Company was paid
$130,000 as compensation for a personal guarantee required by the lender. The
personal guarantee was subsequently released during fiscal 1998.
The Company also maintains a $1,250,000 non-revolving line of credit with a
bank used to finance the purchase of trucks and delivery equipment. The line
of credit bears interest at two hundred basis points above the five-year U.S.
Treasury Note rate on the date of each advance. As the Company takes
advances, a note is drawn and is payable in monthly installments from 36 to 60
months. Advances against the non-revolving line of credit were $482,000
through September 30, 1998. The amount available on the non-revolving line of
credit was $768,000 at September 30, 1998. The line of credit is secured by a
first lien on the delivery vehicles purchased with the loan proceeds.
F-14
7. Long-term Obligations (continued):
The above long-term obligations, excluding obligations under the capital
lease, have the maturities as follows (See Note 13):
Year ending September 30
- ------------------------
1999 $ 3,387,804
2000 1,182,865
2001 1,090,572
2002 13,232,090
2003 170,201
------------
$ 19,063,532
============
$12,208,290 of borrowings under the revolving credit facilities have been
classified as long-term based on expected borrowing levels. Based on
discounted cash flows using current market rates for similar agreements, the
fair value of the Company's long-term debt obligations approximated carrying
value at September 30, 1998 and 1997.
8. Preferred Stock:
In June 1994, the Company issued 250,000 shares of Series A Cumulative
Redeemable Convertible Preferred Stock (the "Preferred Stock") to the holder
of a senior subordinated note. The note was repaid in November 1995. The
Preferred Stock was accreted to the redemption price in lieu of cash
dividends. The Company redeemed all 250,000 shares of the Preferred Stock on
December 23, 1996 for $1,200,000.
9. Other (Income) Expense:
Other (income) expense consisted of the following for the years ended
September 30, 1998, 1997 and 1996:
1998 1997 1996
---------- ----------- ----------
Interest income $ (61,398) $ (42,671) $ (52,102)
Dividends (14,941) (13,909) (8,658)
Rent income (24,880) (14,462) (12,462)
Royalties (41,710) (34,568) (34,628)
Gain on marketable
securities and
investments (29,420) (99,831) (324,244)
Gain from disposition
of fixed assets (22,312) (12,689) (264,516)
Gain on sale of beer
distributorship and
distribution rights - (1,102,205) -
Other (81,626) (32,398) (218)
----------- ----------- ----------
$ (276,287) $(1,352,733) $ (696,828)
=========== =========== ==========
F-15
9. Other (Income) Expense (continued):
On October 4, 1996, the Company sold its beer distributorship for a purchase
price of $2.4 million, subject to post-closing adjustments as defined in the
Asset Purchase Agreement. The gain associated with disposition of the assets
was $1,102,205. The Company then closed the Denver distribution facility.
10. Income Taxes:
Components of income tax expense (benefit) for the fiscal years ended
September 30, 1998, 1997 and 1996 consisted of the following:
1998 1997 1996
----------- ----------- ----------
Current:
Federal $ 1,325,618 $ 1,201,058 $ 865,764
State 206,068 156,112 65,003
----------- ----------- ----------
1,531,686 1,357,170 930,767
----------- ----------- ----------
Deferred:
Federal 9,735 (7,689) 34,215
State 1,432 (975) 2,737
----------- ----------- ----------
11,167 (8,664) 36,952
----------- ----------- ----------
Provision for income
taxes $ 1,542,853 $ 1,348,506 $ 967,719
=========== =========== ==========
The difference between the Company's income tax expense as reported in the
accompanying financial statements and that which would be calculated using the
statutory income tax rate of 34% on income before taxes is as follows for the
fiscal years ended September 30, 1998, 1997 and 1996:
1998 1997 1996
----------- ----------- ----------
Tax at statutory rate $ 1,326,353 $ 1,118,274 $ 783,392
Amortization of
goodwill 42,742 14,255 21,300
Nondeductible business
expenses 26,351 15,207 17,504
State income taxes, net of
federal tax benefit 156,551 102,397 44,708
Other (9,144) 98,373 100,815
----------- ----------- ----------
$ 1,542,853 $ 1,348,506 $ 967,719
=========== =========== ==========
F-16
10. Income Taxes (continued):
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities giving rise to the net deferred tax asset at
September 30, 1998 and 1997 relate to the following:
1998 1997
----------- ----------
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 175,157 $ 75,892
Accrued vacation 64,785 29,896
Net operating loss carryforwards 123,809 36,796
Inventory 309,391 64,458
Other - 16,174
----------- ----------
673,142 223,216
Noncurrent:
Net operating loss carryforwards 382,434 146,388
Other liabilities 166,693 -
Other 8,437 -
----------- ----------
557,564 146,388
----------- ----------
Total deferred tax assets $ 1,230,706 $ 369,604
=========== ==========
Deferred tax liabilities:
Current:
Unrealized gains on marketable
securities $ - $ 32,412
Excess book over tax on trade discounts 102,399 71,787
----------- ----------
102,399 104,199
----------- ----------
Noncurrent:
Excess tax over book depreciation 442,895 169,861
Unrealized gains on available-for-sale
investments 139,468 171,985
----------- ----------
582,363 341,846
----------- ----------
Total deferred tax liabilities $ 684,762 $ 446,045
=========== ==========
Net deferred tax assets (liabilities):
Current $ 570,743 $ 119,017
Noncurrent (24,799) (195,458)
----------- ----------
$ 545,944 $ (76,441)
=========== ==========
The Company did not record any valuation allowances against deferred tax
assets at September 30, 1998 or 1997 because management believes future
taxable income will more likely than not be sufficient to realize such
amounts. The net operating loss was acquired in connection with the
F-17
10. Income Taxes (continued):
acquisition of Sheya Brothers in 1993 and FFH in 1997. The utilization of the
net operating loss related to Sheya Brothers of $398,000 at September 30, 1998
is limited (by Internal Revenue Code Section 382) to approximately $100,000
per year through 2002. The utilization of the net operating loss related to
FFH of $919,000 at September 30, 1998 is limited (by Internal Revenue Code
Section 382) to approximately $232,000 per year through 2009.
11. Profit Sharing Plan:
The Company has a profit sharing plan covering substantially all full-time
employees. The Company makes contributions of not less than 1% of qualified
employees' gross wages. Employees may also make additional voluntary
contributions of which the first 6% contributed is matched 50% by the Company.
The Company contributed $235,713, $143,098 and $196,552, (net of employee
forfeitures) to the profit sharing plan during the years ended September 30,
1998, 1997, and 1996, respectively. Additionally, FFH contributed $5,296 to
its profit sharing plan during the year ended September 30, 1998.
12. Related Party Transactions:
In 1995, the Company made an advance of $125,000 to an officer of the Company.
The note was paid in full in December 1997. The balance of the note
receivable, plus accrued interest was $130,795 at September 30, 1997. Total
interest recognized on the advance was $1,980 and $11,100 in fiscal 1998 and
1997, respectively.
The Company was charged $60,000 by AMCON Corporation, the former parent of the
Company for each of the years ended September 30, 1998, 1997 and 1996, as
consideration for office rent and management services, which is included in
selling, general and administrative expenses.
The remaining interest in a condominium and furnishings and related mortgage
loan, was transferred from AMCON Corporation to the Company in 1992, as
partial settlement of intercompany balances. The condominium is used by the
Company in furtherance of its business strategies. Under a profit sharing
agreement with AMCON, the greater of $400,000 of the net gain or one-half of
the net gain from the ultimate sale of the real estate will be allocated to
AMCON. The Company estimates the amount of gain payable to AMCON had the real
estate sold on September 30, 1998 would have been $500,000.
13. Commitments:
The Company leases certain office equipment under a capital lease. The
carrying value of these assets was $143,218 and $189,917 as of September 30,
1998 and 1997, respectively, net of accumulated amortization of $110,642 and
$63,943.
The Company leases various office and warehouse facilities and equipment under
noncancellable operating leases. Rent charged to expense during the years
ended September 30, 1998, 1997 and 1996 under such lease agreements was
F-18
13. Commitments (continued):
$2,138,042], $644,753 and $731,944, respectively. As of September 30, 1998,
minimum future lease commitments are as follows:
Year ending September 30,
Capital Operating
Lease Leases
---------- ------------
1999 $ 62,735 $ 1,991,940
2000 62,735 1,784,233
2001 36,590 1,601,712
2002 - 1,333,269
2003 -
Thereafter - 3,318,820
---------- ------------
Total minimum lease payments 162,060 $ 10,029,974
Less amount representing interest 18,762 ============
----------
Present value of net minimum
lease payments $ 143,298
==========
14. Stock Option Plan:
In June 1994, the Company adopted the 1994 Stock Option Plan (the "Stock
Option Plan"). The maximum number of shares of common stock which may be
issued pursuant to the Stock Option Plan is 300,000. Options are generally
granted at the stock's fair market value at date of grant. Options issued to
shareholders holding 10% or more of the Company's stock are generally issued
at 110% of the stock's fair market value at date of grant. On December 15,
1995, options to purchase 22,000 shares of common stock were issued to
management employees at an exercise price of $2.78. On September 27, 1996,
such options were canceled and reissued at an exercise price of $1.63. On
November 10, 1997, options to purchase 140,000 shares of common stock were
issued to management employees at exercise prices of $2.88 and $3.16. At
September 25, 1998, 42,000 options were fully vested and exercisable. In
addition, options to purchase 30,000 shares of common stock were issued to
certain directors at an exercise price of $2.88. These options were not
issued pursuant to the Stock Option Plan. The options have varying vesting
schedules ranging up to five years and expire ten years after the date of
grant.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). Accordingly, no compensation cost has been
recognized for the stock option plan. Had compensation cost for the Company's
stock option plan been determined on the fair value at the grant date for
awards issued in or subsequent to 1995 consistent with the provisions of SFAS
123, the Company's net income and earnings per share on a pro forma basis
would have been as follows:
F-19
14. Stock Option Plan (continued):
1998 1997 1996
----------- ----------- -----------
Net income - as reported $ 2,358,187 $ 1,940,534 $ 1,253,041
Net income - pro forma $ 2,293,014 $ 1,940,534 $ 1,240,451
Basic EPS - as reported $ 0.96 $ 0.79 $ 0.51
Basic EPS - pro forma $ 0.93 $ 0.79 $ 0.51
Diluted EPS - as reported $ 0.93 $ 0.79 $ 0.51
Diluted EPS - pro forma $ 0.90 $ 0.79 $ 0.51
The above pro forma results are not likely to be representative of the effects
on reported net income for future years since additional awards are made
periodically.
The fair value of the weighted average of each year's option grants is
estimated as of the date of grant using the Black-Scholes option-pricing model
using the following weighted-average assumptions: dividend yield of 1.8% for
1998 and 0% for 1996; expected volatility of 60.30% for 1998 and 58.91% for
1996; risk free interest rate based on U.S. Treasury strip yield at the date
of grant of 5.90% for 1998 and 6.74% for 1996; and expected lives of 5 to 10
years.
The table below summarizes information about stock options outstanding as of
the following fiscal year ends:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997 September 30, 1996
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Exercise Average Exercise Average Exercise
------------------ ------------------ ------------------
Shares Price Shares Price Shares Price
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 16,000 $1.63 22,000 $1.63 - -
Granted 170,000 2.95 - - 44,000 $2.21
Exercised - - (4,000) $1.63 - -
Forfeited/Expired (4,000) $2.26 (2,000) $1.63 (22,000) $2.78
--------- ------- --------- ------- --------- -------
Outstanding at end of period
182,000 $2.84 16,000 $1.63 22,000 $1.63
========= ======= ========= ======= ========= =======
Shares available for options
that may be granted 144,000 280,000 278,000
========= ========= =========
Weighted-average grant date fair value
of options granted during the
period - exercise price equals stock
market price at grant $1.71 $1.08
======= =======
Weighted-average grant date fair value
of options granted during the
period - exercise price exceeds stock
market price at grant $1.38
=======
</TABLE>
F-20
14. Stock Option Plan (continued):
The following summarizes options outstanding at September 30, 1998:
<TABLE>
<CAPTION>
Exercisable
-----------------------------
Exercise Number Weighted-Average Weighted-Average Number Weighted-Average
Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------- ----------- ---------------- ---------------- ----------- ----------------
<C> <C> <C> <C> <C> <C>
$1.63 14,000 7.3 years $1.63 14,000 $1.63
$2.88 - $3.16 168,000 9.1 years $2.94 40,000 $2.99
</TABLE>
15. Subsequent Events
On November 20, 1998, FFH purchased all of the outstanding stock of U.S.
Health Distributors, Inc. ("USHD"), a distributor of health and natural foods
based in Melbourne, FL, for $1.1 million in cash. The acquisition was funded
by a $1.1 million five and one-half year term loan from a bank. The loan
bears interest at Prime less 0.5%, requires payments of interest only for the
first six months and monthly principal payments for the term of the loan. The
loan is collateralized by the common stock of USHD.
F-21
DIRECTORS AND CORPORATE OFFICERS
DIRECTORS
William F. Wright
Chairman
Kathleen M. Evans
President
Jerry Fleming
President of
Food For Health Company, Inc.
J. Tony Howard /2/
President of Nebraska Distributing Company
Allen D. Petersen /1/
Chairman and Chief Executive Officer of
American Tool Companies, Inc.
Timothy R. Pestotnik /1/
Partner with the law firm
Luce Forward Hamilton & Scripps
William R. Hoppner /2/
Consultant
/1/ Audit Committee
/2/ Compensation Committee
CORPORATE OFFICERS
William F. Wright
Chairman
Kathleen M. Evans
President
Jerry Fleming
President of
Food For Health Company, Inc.
Michael D. James
Secretary, Treasurer and
Chief Financial Officer
AMCON DISTRIBUTING COMPANY
CORPORATE HEADQUARTERS
AMCON Distributing Company
10228 L Street
Omaha, Nebraska 68127
(402) 331-3727
TRANSFER AGENT
First National Bank of Omaha
One First National Center
Omaha, Nebraska 68102-1596
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1299 Landmark Center
Omaha, Nebraska 68102
ANNUAL STOCKHOLDERS' MEETING
Thursday, March 18, 1999
9:00 a.m.
Four Points Sheraton Hotel
Omaha, Nebraska 68137
ADDITIONAL INFORMATION
The Form 10-K Annual Report to the Securities and
Exchange Commission provides certain additional
information and is available upon request to
Michael D. James, Secretary, Treasurer and
Chief Financial Officer of the Company.
STOCK INFORMATION
AMCON Distributing Company's Common Shares
are traded on the NASDAQ SmallCap Market. The
symbol for the Common Stock is "DIST".
WEB SITE
http://www.amcon-dist.com
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of AMCON Distributing Company:
Our report on the financial statements of AMCON Distributing Company is
included in this Form 10-K. In connection with our audit of such financial
statements, we have also audited the related financial statement schedule
listed in Item 14 for the years ended September 30, 1998, 1997 and 1996.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
PRICEWATERHOUSECOOPERS LLP
Omaha, Nebraska
November 20, 1998
S-1
AMCON Distributing Company
Financial Statement Schedule
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------
<TABLE>
<CAPTION>
Net
Amounts
Balance at Provision Other (Written Off) Balance at
Description Beginning of Period (Benefit) /1/ Recovered End of Period
- ------------------ --------------------- --------- ------- ------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts Oct 1, 1995 177,331 3,836 - 14,794 Sep. 30, 1996 195,961
Oct 1, 1996 195,961 11,357 - (1,069) Sep. 30, 1997 206,249
Oct 1, 1997 206,249 386,630 339,545 (471,671) Sep. 30, 1998 460,753
Allowance for
inventory
obsolescence Oct 1, 1995 - - - - Sep. 30, 1996 -
Oct 1, 1996 - 30,000 - - Sep. 30, 1997 30,000
Oct 1, 1997 30,000 253,864 76,000 (30,000) Sep. 30, 1998 329,864
/1/ Recorded as a result of the acquisition of Food For Health Co., Inc.
</TABLE>
S-2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
AMCON Distributing Company on Form S-8 of our report dated November 20, 1998,
on our audits of the financial statements and financial statement schedules of
AMCON Distributing Company as of September 30, 1998 and 1997, and for each of
the three years in the period ended September 30, 1998, which report is
incorporated by reference in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Omaha, Nebraska
December 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance
Sheet at September 30, 1998 and the Statement of Income for the Year Ended
September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 38
<SECURITIES> 0
<RECEIVABLES> 15,690
<ALLOWANCES> 461
<INVENTORY> 16,127
<CURRENT-ASSETS> 32,293
<PP&E> 10,174
<DEPRECIATION> 5,707
<TOTAL-ASSETS> 39,644
<CURRENT-LIABILITIES> 13,819
<BONDS> 15,768
0
0
<COMMON> 25
<OTHER-SE> 9,580
<TOTAL-LIABILITY-AND-EQUITY> 39,644
<SALES> 294,281
<TOTAL-REVENUES> 294,281
<CGS> 262,633
<TOTAL-COSTS> 262,633
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,815
<INCOME-PRETAX> 3,901
<INCOME-TAX> 1,543
<INCOME-CONTINUING> 2,358
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,358
<EPS-PRIMARY> .96
<EPS-DILUTED> .93
</TABLE>
