SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED September 30, 1999
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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 10, 1999 was approximately $8,710,600.
As of December 10, 1999 there were 2,483,498 shares of common stock
outstanding.
- Documents Incorporated by Reference -
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Portions of the 1999 Annual Report to Stockholders are incorporated
therein by reference into Parts I, II and IV. Portions of the Proxy
Statement pertaining to the March 28, 2000 Annual Stockholders' Meeting
are incorporated herein by reference into Part III.
1
AMCON DISTRIBUTING COMPANY
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1999 FORM 10-K ANNUAL REPORT
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Table of Contents
Page
----
PART I
Item 1. Business.........................................................3
Item 2. Properties.......................................................9
Item 3. Legal Proceedings...............................................10
Item 4. Submission of Matters to Vote of Security Holders...............10
Item 4A. Executive Officers of the Company...............................10
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.............................................11
Item 6. Selected Financial Data.........................................11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......14
Item 8. Financial Statements and Supplementary Data.....................14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................14
PART III
Item 10. Directors and Executive Officers of the Registrant..............14
Item 11. Executive Compensation................................ .........15
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................................15
Item 13. Certain Relationships and Related
Transactions....................................................15
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.............................................15
2
PART I
ITEM 1. BUSINESS
GENERAL
AMCON Distributing Company (together with its wholly-owned subsidiary, Food
For Health Co., Inc. and its wholly-owned subsidiaries U.S. Health
Distributors, Inc., Chamberlin's Natural Foods, Inc. and Health Food
Associates, Inc.) operates 9 distribution centers and 13 retail health food
stores in the Great Plains, Rocky Mountain and Southern regions of the United
States. As used herein, unless the context indicates otherwise, the term
"ADC" means the separate company operations or "traditional distribution
business" of AMCON Distributing Company, the term "FFH" means the "natural
food distribution business" of Food For Health Co., Inc. and its wholly-owned
subsidiary U.S. Health Distributors, Inc. ("USHD"), the terms "CNF" and "HFA"
represent the "retail health food stores" operated by Chamberlin's Natural
Foods, Inc. and Health Food Associates, Inc., respectively, both wholly-owned
subsidiaries of FFH, and the term "AMCON" or the "Company" means AMCON
Distributing Company and its subsidiaries.
AMCON sells approximately 24,000 different consumer products, including
cigarettes and tobacco products, candy and other confectionery, beverages,
groceries, paper products, health and beauty care products, natural food and
related products, frozen and chilled products and institutional food service
products.
AMCON has over 8,500 retail customers, the largest of which accounted for less
than 6.5% of AMCON's total revenues during fiscal 1999. The Company
distributes products primarily to retailers such as convenience stores,
discount and general merchandise stores, grocery stores and supermarkets,
health food stores, natural food stores, drug stores and gas stations. In
addition, the Company services institutional customers, including restaurants
and bars, schools, sports complexes and vendors, as well as other wholesalers.
AMCON operates seven (7) retail health food stores in Florida and six (6) in
the Midwest. These stores carry natural supplements, groceries, health and
beauty care products and other food items.
While cigarettes accounted for approximately 65% of the Company's sales volume
during its most recent fiscal year, AMCON continues to diversify its
businesses and product lines in an attempt to lessen its dependence upon
cigarette sales.
TRADITIONAL DISTRIBUTION BUSINESS
ADC serves approximately 7,500 retail outlets in the Great Plains and Rocky
Mountain regions and was ranked by the U.S. Distribution Journal as the
seventeenth (17th) largest tobacco, candy and convenience store distributor of
approximately 1,000 distributors of such products in the United States based
upon 1998 sales volume. From its inception, ADC has pursued a strategy of
growth through increased sales and through acquisitions. From 1993 to 1998,
ADC focused on increasing operating efficiency in its traditional distribution
business by merging smaller branch distribution facilities into larger ones.
In addition, ADC grew through expansion of its market area into contiguous
regions and by introduction of new product lines to customers.
3
ADC distributes approximately 9,000 different consumer products, including
cigarettes and tobacco products, candy and other confectionery, beverages,
groceries, paper products, health and beauty care products, frozen and chilled
products and institutional food service products. ADC's principal suppliers
include Philip Morris, RJR Nabisco, Brown & Williamson, Proctor & Gamble,
Hershey, Mars, William Wrigley and Planters-Lifesavers. ADC also markets
private label lines of cigarettes, tobacco, snuff, water, candy products,
batteries and film.
ADC has sought to increase sales to convenience stores and petroleum marketers
by adopting a number of operating strategies which it believes gives it a
competitive advantage with these types of retailers. One key operating
strategy is a commitment to customer service. In a continuing effort to
provide better service than its competitors, ADC carries a broad and diverse
product line which allows ADC to offer "one-stop shopping" to its customers.
ADC offers self-service health and beauty programs, grocery products and
custom food service programs which have proven to be profitable to convenience
store customers. In addition, ADC has a policy of next-day delivery and
employs a concept of selling products in cut-case quantities or "by the each"
(i.e., individual units). ADC also offers planograms to convenience store
customers to assist in the design of their store and display of products
within the store.
ADC has worked to improve its operating efficiency by investing in the latest
in systems technology, including computerization of buying and financial
control functions and introduction in 1999 of internet-based customer
maintenance and reporting options. Inventory management has become even more
critical due to significant increases in the price of cigarettes over the past
two years. ADC has also sought to reduce inventory expenses by improving the
number of times its inventory is renewed during a period ("inventory turns")
for the same level of sales. Inventory turns improved to 24.5 times in 1999.
Inventory turns for the past five years are as follows:
Year Times Inventory Turned
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1999 24.5
1998 19.6*
1997 21.8
1996 21.2
1995 17.5
* Inventory turns declined slightly in fiscal 1998 as ADC
managed its inventory levels to take advantage of
anticipated manufacturers' price increases.
By keeping its operating costs down, ADC is better able to price its products
in such a manner to achieve an advantage over less efficient distributors in
its market areas.
ADC's main office is in Omaha, Nebraska. ADC has seven distribution centers
located in Kansas, Missouri (2), Nebraska, North Dakota, South Dakota, and
Wyoming. These distribution centers contain a total of approximately 311,100
square feet of floor space and employ state-of-the-art equipment for the
efficient distribution of the large and diverse product mix sold by ADC. ADC
also operates a fleet of approximately 110 delivery vehicles, ranging from
over-the-road vehicles with refrigerated trailers to half-ton vans.
4
NATURAL FOOD DISTRIBUTION BUSINESS
FFH is a distributor of natural foods and related products serving
approximately 1,000 health and natural food retailers in the Southern and
Western United States. FFH distributes approximately 15,000 different
products consisting of national brands, regional brands, private label and
master distribution products including vitamin and mineral supplements, herbal
preparations, skin and hair care, dairy and dairy substitutes, frozen foods,
general grocery and organic produce. FFH's suppliers number approximately 600
and include well known national brands such as Twin Labs, Schiff Bio Foods,
Weider, Hain Pure Foods, Arrowhead Mills, Knudsen, Nature's Way and Health
Valley. FFH also markets proprietary brand products under the trade names
Healthy Edge and Nutri-Value . The products offered are consumer packages of
nuts, seeds, grains, pastas, sweeteners, cereals and snack items.
The Company believes that FFH is positioned to provide unequaled service to
independent health and natural food retail stores of all sizes and types. FFH
pays particular attention to the ongoing needs of its customers and is forward
looking in developing progressive marketing programs such as the Nutri-Value
Retailers Association which provides co-operative and preferential buying
advantages beyond those generally available through other types of programs
offered in the market.
FFH's primary distribution location and main office is located in a 132,000
square foot facility located in Phoenix, Arizona. FFH's distribution
subsidiary, U.S. Health Distributors, Inc., operates out of a facility in
Melbourne, Florida. In addition, FFH also utilized a cross-dock facility
located near Dallas, Texas. FFH operates its own fleet of approximately 20
over-the-road and straight trucks equipped to provide full refrigerated, dry
and frozen food service.
RETAIL HEALTH FOOD STORES
FFH's retail health food stores are operated by CNF and HFA as Chamberlin's
Market & Cafe ("Chamberlin's") and Akin's Natural Food Market ("Akin's"),
respectively. Chamberlin's, which was acquired in March 1999, was first
established in 1935, and is an award-winning and highly-acclaimed chain of
seven health and natural product retail stores, all offering an extensive
selection of natural supplements and herbs, baked goods, dairy products,
delicatessen items and organic produce. Chamberlin's was selected the best
health food chain in the United States by the trade publication Health Foods
Business. Chamberlin's is headquartered in Winter Park, Florida and operates
all of its stores in and around Orlando, Florida.
Akin's Natural Foods Market, also established in 1935 and headquartered in
Tulsa, Oklahoma, is a well-recognized chain of six health and natural product
retail stores, each offering an extensive line of natural supplements and
herbs, dairy products, delicatessen items and organic produce. Akin's has
locations in Tulsa (2 stores) and Oklahoma City, Oklahoma; Lincoln, Nebraska;
Springfield, Missouri; and Topeka, Kansas.
FFH's new retail health food store segment is being organized to utilize the
name recognition of the established health food retail chains that are
acquired. Both retail chains are unique in their market areas. The Company
plans to maintain the local identity of each chain while providing a means to
achieve operating synergies leading to cost savings.
5
ACQUISITIONS
ADC was incorporated in Delaware in 1986 to carry on the business of General
Tobacco and Candy Company ("General Tobacco"), a Nebraska corporation which
was the predecessor to ADC. Since 1981, the Company has acquired 23 consumer
product distributors in the Great Plains, Rocky Mountain and Southern regions
of the United States. In June 1993, ADC acquired Sheya Brothers Specialty
Beverages, Inc., a beer and "New Age" beverage distribution company. In
September 1995, ADC sold the "New Age" beverage business and in October 1996,
ADC sold the beer and malt beverage business. In October 1997, ADC purchased
the assets of a traditional candy and tobacco distribution company in St.
Louis, Missouri, thereby expanding ADC's market area to include eastern
Missouri, Illinois and Indiana. In November 1997, ADC purchased all of the
outstanding stock of FFH. In November 1998, FFH purchased all of the
outstanding stock of U.S. Health Distributors, Inc. In March 1999, FFH
purchased all of the outstanding stock of CNF. In September 1999, FFH
purchased all of the outstanding stock of HFA.
PRINCIPAL PRODUCTS
CIGARETTES. Sales of cigarettes and the gross margin derived therefrom for the
fiscal years ending September 30, 1999, 1998, and 1997 are set forth below:
(Dollars in Millions)
Fiscal Year Ended September 30,
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1999 1998 1997
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Sales $251.1 $185.5 $117.6
Sales as a % of Total Sales 65.1% 63.0% 65.7%
Gross Margin $ 17.0 $ 13.3 $ 10.8
Gross Margin as a % of Total
Gross Margin 40.1% 42.0% 55.2%
Gross Margin Percentage 6.8% 7.2% 9.2%
Revenues from the sale of cigarettes during fiscal 1999 increased by 35.3% as
compared to fiscal 1998, while gross profit from the sale of cigarettes
increased by 28.1% during the same period (see "MANAGEMENT'S DISCUSSION AND
ANALYSIS-Results of Operations-Year Ended September 30, 1999 Versus Year Ended
September 30, 1998" in the Annual Report to Stockholders for the Fiscal Year
Ended September 30, 1999). Sales of cigarettes represented approximately 65%
of the Company's sales volume during fiscal 1999. This represents a 2%
increase from the prior year and related primarily to a significant increase
in the price of cigarettes during the first quarter of the year.
ADC has sought to position itself to capitalize on consumer demand for
discount or value-priced cigarettes by marketing its own private label
cigarette. Substantial price increases implemented by manufacturers of
premium cigarettes during the late 1980's and early 1990's resulted in a
demand for private label cigarettes, which are sold at lower prices than
premium brands. The Company began marketing private label cigarettes in 1983
as a high-quality, value-priced alternative to premium cigarettes. Since
1988, ADC's private label cigarettes have been manufactured under an exclusive
agreement with Philip Morris Incorporated. This agreement was renewed in
October 1998 for a term of three years.
6
NATURAL FOODS AND RELATED PRODUCTS. Natural foods and related products, which
are primarily sold by FFH, CNF and HFA, constitute the Company's second
largest-selling product line, representing approximately 12.9% of the
Company's total sales volume during fiscal 1999. Sales of natural foods and
related products and the gross margin derived therefrom for the fiscal years
ending September 30, 1999 and 1998 are set forth below (the Company did not
sell natural foods and related products in 1997):
(Dollars in Millions)
Fiscal Year Ended September 30,
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1999 1998
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Sales $ 49.6 $ 31.2
Gross Margin 13.5 7.7
Gross Margin Percentage 27.2% 24.8%
CONFECTIONERY. Candy and related confectionery items, which are primarily
sold by ADC, constitute the Company's third largest-selling product line,
representing approximately 6.2% of the Company's total sales volume during
fiscal 1999. Sales of confectionery items and the gross margin derived
therefrom for the fiscal years ending September 30, 1999, 1998 and 1997 are
set forth below:
(Dollars in Millions)
Fiscal Year Ended September 30,
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1999 1998 1997
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Sales $ 30.2 $ 29.3 $ 21.8
Gross Margin 3.8 3.6 3.0
Gross Margin Percentage 12.6% 12.3% 13.8%
ADC supplies customers with over 1,900 different types of candy and related
products, including chocolate bars, cookies, chewing gum, nuts and other snack
items. Major brand names include products manufactured by Hershey (Reese's,
Kit Kat, and Hershey), Mars (Snickers, M&M's, and Milky Way), William Wrigley
and Planters-Lifesavers. The Company also markets its own private label candy
under a manufacturing agreement with Palmer Candy Company.
OTHER PRODUCT LINES. Over the past eight years, ADC's strategy has been to
expand its portfolio of consumer products in order to better serve its
customer base. ADC's other product lines include cigars and other tobacco
products, water and other beverages, groceries, paper products, health and
beauty care products, frozen and chilled products and institutional food
products. During fiscal 1999, ADC's sales of other products increased $6.4
million or 13.2%. During fiscal 1999 the gross profit margin on these types
of products was 14.9%.
COMPETITION
Both the traditional and natural food distribution businesses are highly
competitive. There are many similar distribution companies operating in the
same geographical regions as ADC and FFH. Management believes that ADC is one
of the largest distribution companies of its type operating in its market
7
area. ADC's principal competitors are national wholesalers such as McLane Co.,
Inc. (Temple, TX) and regional wholesalers such as Farner-Bocken (Carroll,
IA), Merchants Wholesale (Quincy, IL) and Minter-Weisman Co. (Minneapolis, MN)
along with a host of smaller grocery and tobacco wholesalers. FFH's principal
competitors are national distributors such as Tree of Life and United Natural
Foods and regional distributors such as Nature's Best along with numerous
smaller specialty distributors of natural products. Most of these competitors
generally offer a wide range of products at prices comparable to the
Company's. Therefore, the Company seeks to distinguish itself from its
competitors by offering a higher level of customer service.
The natural food retail industry is highly fragmented, with more than 9,000
stores operating independently or as part of small chains. The two leading
natural food chains, Whole Foods Market and Wild Oats, continue to expand
their geographic markets and acquire smaller independent competitors. In
addition, conventional supermarkets and mass market outlets have also begun to
increase their emphasis on the sale of natural products. Management believes
the Company's retail stores separate themselves from other competitors by
offering smaller, friendly, community-oriented settings run by people who
share a passion for healthy living and natural foods.
GOVERNMENT REGULATION
Various state government agencies regulate the distribution of cigarettes and
tobacco products in several ways, including the imposition of excise taxes,
licensing and bonding requirements. Complying with these regulations is a
very time-consuming, expensive and labor-intensive undertaking. For example,
each state (as well as certain cities and counties) requires the Company to
collect excise taxes ranging from $1.20 to $5.80 per carton on all cigarettes
sold by it in the state. Such excise taxes must be paid in advance and, in
most states, is evidenced by a stamp which must be affixed to each package of
cigarettes.
The Company is also subject to regulation by state and local health
departments, the U.S. Department of Agriculture, the Food and Drug
Administration and the Drug Enforcement Administration. These agencies
generally impose standards for product quality and sanitation, as well as for
setting security and distribution policies.
EMPLOYEES
As of September 30, 1999, the Company had 1,017 full-time and part-time
employees in the following areas:
Managerial 20
Administrative 146
Sales & Marketing 485
Warehouse 265
Delivery 101
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Total Employees 1,017
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None of AMCON's employees are subject to any collective bargaining agreements
with the Company and management believes its relations with its employees are
good.
8
ITEM 2. PROPERTIES
The location and approximate square footage of the nine principal
distribution centers and 13 retail stores operated by AMCON as of September
30, 1999 are set forth below:
LOCATION SQUARE FEET
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DISTRIBUTION
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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
Melbourne, Florida 35,000
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Total Distribution 478,100
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RETAIL
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CNF - Florida 43,900
HFA - Kansas, Missouri,
Nebraska & Oklahoma 50,800
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Total Retail 94,700
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Total Square Footage 572,800
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AMCON owns its distribution facility in Bismarck, North Dakota. The Company
owned one other building that was subsequent to year end. Each of these
facilities is subject to a first mortgage securing borrowings under the
Company's revolving credit facility (see "MANAGEMENT'S DISCUSSION AND
ANALYSIS-Liquidity and Capital Resources" in the Annual Report to Stockholders
for the Fiscal Year Ended September 30, 1999).
AMCON leases its remaining distribution facilities, retail stores, offices and
certain equipment under noncancellable operating leases. Leases for the nine
distribution facilities and 13 retail stores leased by the Company have terms
expiring from 2000 to 2006. Minimum future lease commitments for these
properties and equipment total approximately $14.7 million as of September 30,
1999.
Management believes that its existing facilities are adequate for the
Company's present level of operations; however, additional cross-dock
facilities and retail stores will be required to accommodate the Company's
anticipated growth in certain market areas.
9
AMCON owns a condominium in the Cayman Islands that is uses in furtherance of
its business marketing strategies. AMCON acquired a portion of its interest
in the condominium from its former parent in 1992 under an agreement that
provides that the greater of the first $400,000 of the net gain or one-half of
the net gain from the ultimate sale of this property will be allocated to the
former parent. See Item 13 - "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to claims and litigation in the ordinary course of its
business. However, in the opinion of management, no currently pending legal
proceedings or claims against the Company will, individually or in the
aggregate, have a material adverse effect on the Company's financial condition
or results of operations. The Company believes that all of its real property
is in compliance with all regulations regarding the discharge of toxic
substances into the environment and is not aware of any condition at its
properties that could have a material adverse affect on its financial
condition or results of operations. In that regard, the Company has not been
notified by any governmental authority of any potential liability or other
claim in connection with any of its properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter ended September 30, 1999.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The Company's day-to-day affairs are managed by its executive officers, who
are appointed by the Board of Directors for terms of one year. The Company
has entered into employment agreements with Mr. Wright, Ms. Evans and Mr.
Fleming, each with a term expiring on December 31, 2001. The executive
officers of AMCON are as follows:
Name Age Position
---- --- --------
William F. Wright 57 Chairman of the Board, Director
Kathleen M. Evans 52 President of ADC, Director
Jerry Fleming 61 President of FFH, Director
Michael D. James 38 Secretary, Treasurer and
Chief Financial Officer
WILLIAM F. WRIGHT has served as the Chairman and Chief Executive Officer
of AMCON Corporation (the former parent of ADC) since 1976 and as Chairman
of the Company since 1981. From 1968 to 1984, Mr. Wright practiced corporate
and securities law in Lincoln, Nebraska. Mr. Wright is a graduate
of the University of Nebraska and Duke University School of Law and is a
certified public accountant. Mr. Wright is also a director of Gold Banc
Corporation, Inc., a NASDAQ company.
10
KATHLEEN M. EVANS became President of the Company in February 1991. Prior to
that time she served as Vice President of AMCON Corporation from 1985 to 1991.
From 1978 until 1985, Ms. Evans acted in various capacities with AMCON
Corporation and its operating subsidiaries.
JERRY FLEMING became President of FFH in 1992. Mr. Fleming is a 36 year
veteran of the health and natural foods industry and prior to joining FFH,
served as President of Nature's Way (Murdock Health Care),a leading
manufacturer of herbal remedies; Vice President of the Natural Foods Group for
Tree of Life, Inc.; President of the South East division of Tree of Life;
President of Collegedale Distributors; President of Healthway Specialty Foods,
Inc.; Vice President of Landstrom Specialty Foods, Inc. and served eight years
on the board of directors of the National Nutritional Foods Association.
MICHAEL D. JAMES became Treasurer and Chief Financial Officer of the Company
in June 1994. In November 1997, he assumed the responsibilities of Secretary
of the Company. He is a certified public accountant and is responsible for all
financial and reporting functions within the Company. Prior to joining AMCON,
Mr. James practiced accounting for ten years with the firm of
PricewaterhouseCoopers LLP, serving as the senior tax manager of the Omaha,
Nebraska office from 1992 until 1994. Mr. James graduated from Kansas State
University in 1983.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The information required by this item is incorporated by reference from
the Annual Report to Stockholders for the fiscal year ended September 30,
1999 under the heading "Market for Common Stock" on pages 4 and 5.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is incorporated by reference from
the Annual Report to Stockholders for the fiscal year ended September 30,
1999 under the heading "Selected Financial Data" on pages 2 through 4.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
With the exception of the Year 2000 Readiness discussion below, the
information required by this item is incorporated by reference from the Annual
Report to Stockholders for the fiscal year ended September 30, 1999 under the
heading "Managements Discussion and Analysis" on pages 5 through 14.
YEAR 2000 READINESS
STATE OF READINESS. The Year 2000 computer issue is real and does impact the
way the Company's systems perform. In addition, AMCON has business
relationships with a number of third parties whose Year 2000 problems could
impact the Company. Accordingly, management has recognized the Year 2000
11
issue as a major management and technology project. A task force has been
assembled to review all systems to ensure that they do not malfunction as a
result of the Year 2000 issue. The Year 2000 project includes review of
internal operating systems and equipment, other internal systems and equipment
(such as telephones, copiers and fax machines) and external services and
systems that are depended upon to operate the Company's business. In this
process, AMCON has both replaced some systems and upgraded others.
AMCON's internal operating system consists of midrange computers which are
used for the sales, accounts receivable and inventory systems. With the
exception of the accounts receivable system, the software operating on the
midrange computers does not generally operate or depend upon any date
structure, but rather the day-of-week and week-of-month. Therefore, software
risk to the Year 2000 issue is considered low. The remaining accounting
systems and other record keeping functions performed by the Company are
conducted on personal computers which are connected by a local area network.
AMCON has engaged third party computer consultants to review, test and modify
the midrange computer hardware and software to ensure they will function
correctly after December 31, 1999. All software conversions affiliated with
the Year 2000 issue have been completed and management believes that the Year
2000 problems relating to internal operating systems will be resolved without
significant operational difficulties. Baseline testing of all Year 2000
converted software is completed and deployment of the converted software is
substantially complete. Verification that the converted software is
functioning properly will continue through December 31, 1999. However, there
can be no assurance that testing and verification will discover all potential
Year 2000 problems or that it will not reveal unanticipated material problems
with its systems that will need to be resolved. Management has taken steps to
ensure that information technology personnel are on site at each location on
January 1, 2000 to monitor the systems and make software modifications, if
necessary.
Other internal systems have been evaluated by AMCON's own personnel, along
with the providers that service and maintain the systems with emphasis placed
on critical systems such as telephone systems. Management believes that all
of its internal systems are currently Year 2000 compliant.
AMCON has no control over the efforts of third parties with which we have
material business relationships. AMCON has undertaken the process of
contacting each major third party to determine their state of readiness for
Year 2000. Such parties include, but are not limited to, AMCON's suppliers of
inventory, customers, financial institutions and utility companies. AMCON has
received initial assurances from its major suppliers and financial
institutions that they will not be adversely affected by Year 2000 problems.
COSTS. Through September 30, 1999, cumulative costs relating directly to Year
2000 issues have totaled approximately $163,000. A portion of the estimated
total costs include the cost of existing personnel who have been deployed to
work on various phases of the Year 2000 project. These costs do not include
system upgrades and replacements that were made in the normal course of
business. The deployment of internal resources to the Year 2000 project has
not resulted in significant delays to other major technology projects which
were planned by the Company. Management estimates that Year 2000 costs to be
incurred subsequent to September 30, 1999 will total approximately $30,000 for
deployment of Year 2000 converted software.
12
RISKS. Management believes that AMCON will have successfully addressed the
Year 2000 problem before December 31, 1999. Therefore, management believes
that the most reasonably likely worst-case scenario will be that one or more
of the third parties with which AMCON has a material business relationship
will not have successfully dealt with its Year 2000 issues. A critical third
party failure (such as telecommunication, utilities or financial institutions)
could have a material adverse affect on AMCON by eliminating our ability to
order and pay for products from suppliers and receive orders and payments from
customers. It is also possible that one or more of the internal operating
systems will not function properly and make it difficult to complete routine
tasks, such as accounting and other record keeping duties. Based on
information currently available, management does not believe there will be any
long-term operating system failures. However, AMCON will continue to monitor
these issues as part of its Year 2000 project and will concentrate its efforts
on minimizing their impact.
CONTINGENCY PLANS. AMCON has not modified any specific contingency plans with
respect to internal operating systems. Basic contingency plans are maintained
which address short term operating system failure. Management believes these
contingency plans will be sufficient to cover possible operating system
disruption caused by Year 2000 problems. As AMCON completes deployment of the
Year 2000 converted software, these contingency plans will be addressed and
modified if necessary. Contingency planning includes, remote dial-up
connectivity from remote branches in the event that certain telecommunication
services fail to operate, direct faxing of orders to the distribution centers
and manual routing. Management currently does not foresee contingency
planning in the product receiving, selling, order filling and delivery phases
of our business as these areas are very labor intensive. AMCON may be
required to perform certain accounting and other record keeping functions
manually should a Year 2000 problem become apparent in one or more of those
areas. The Company has terminated relationships with third party service
providers that were not able to demonstrate that they had successfully
resolved their Year 2000 problems in a timely manner. There will inevitably
be some third parties who will not have made proper Year 2000 modifications.
AMCON's contingency plan only addresses those third parties that are
considered critical to its operations.
The foregoing Year 2000 discussion contains certain forward-looking
statements, including without limitation anticipated costs and the dates by
which AMCON expects to substantially complete the modifications and testing of
systems and are based upon management's best current estimates, which were
derived utilizing numerous assumptions about future events, including the
continued availability of certain resources, representations received from
third parties and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ materially
from those anticipated. Specific matters that might cause such material
differences include, but are not limited to, the availability and cost of
trained personnel, the ability to identify and convert all relevant computer
systems, results of Year 2000 testing, adequate identification and resolution
of Year 2000 issues by third party service providers, suppliers or customers
of AMCON, unanticipated system costs, the need to replace additional hardware,
the adequacy of and ability to implement contingency plans and similar
uncertainties.
13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is incorporated by reference from the
Annual Report to Stockholders for the fiscal year ended September 30, 1999
under the heading "Managements Discussion and Analysis" on pages 5 through 14.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and accompanying notes, together with the report of
independent accountants are incorporated by reference from the Annual Report
to Stockholders for the fiscal year ended September 30, 1999 on pages F-1
through F-24. Supplemental financial information is incorporated by reference
from the Annual Report to Stockholders for the fiscal year ended September 30,
1999 under the heading "Selected Quarterly Financial Data" on pages 3 and 4.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Registrant's Proxy Statement to be used in connection with the 2000 Annual
Meeting of Stockholders (the "Proxy Statement") contains under the caption
"Election of Directors" certain information required by Item 10 of Form 10-K
and such information is incorporated herein by this reference. The
information required by Item 10 of Form 10-K as to executive officers is set
forth in Item 4A of Part I hereof.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and certain persons who own more than ten
percent of the Company's Common Stock, to file with the Securities and
Exchange Commission (the "SEC") reports of their ownership of Company Common
Stock. Officers, directors and greater-than-ten-percent shareowners are
required by SEC regulation to furnish the Company with copies of such reports
received by the 16(a) reports they file. Based solely upon review of the
copies of such reports received by the Company and written representations
from each such person who did not file an annual report with the SEC (Form 5)
that no other reports were required, the Company believes that, except as set
forth below, there was compliance for the fiscal year ended September 30, 1999
with all Section 16(a) filing requirements applicable to the Company officers,
directors and greater-than-ten-percent beneficial owners.
During the fiscal year ended September 30, 1999, the Statement of Changes of
Beneficial Ownership (Form 4) was filed late for Susan C. Wright, Wendy M.
Wright and Mark A. Wright, all greater-than-ten-percent owners of the
Company's outstanding Common Stock. However, all transactions with respect to
the Common Stock of the Company were reported by these shareholders.
14
ITEM 11. EXECUTIVE COMPENSATION.
The Proxy Statement contains under the captions "Compensation of Directors",
"Compensation of Executive Officers" and "Compensation Committee Interlocks
and Insider Participation", the information required by Item 11 of Form 10-K,
and such information is incorporated herein by this reference. The
information set forth under the captions "Report of Compensation Committee on
Executive Compensation" and "Company Performance" is expressly excluded from
such incorporation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Proxy Statement contains under the caption "Voting Securities and
Beneficial Ownership Thereof by Principal Stockholders, Directors and
Officers" the information required by Item 12 of Form 10-K and such
information is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Proxy Statement contains under the caption "Certain Relationships and
Related Transactions" the information required by Item 13 of Form 10-K and
such information is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS
The following financial statements of AMCON Distributing Company are
incorporated by reference under Item 8. The Annual Report to
Stockholders for the Fiscal Year Ended September 30, 1999 is attached
as Exhibit 13.
Reference Page
Report of Independent Accountants F-1
Consolidated Balance Sheets as of
September 30, 1999 and 1998 F-2
Consolidated Statements of Income for the Years
Ended September 30, 1999, 1998, and 1997 F-3
Consolidated Statements of Shareholders' Equity
and Comprehensive Income for the Years Ended
September 30, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the
Years Ended September 30, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
(2) FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants S-1
Schedule II - Valuation and Qualifying Accounts S-2
15
(3) EXHIBITS
2.1 Stock Purchase Agreement dated November 3, 1997, between the
Company and FFH Holdings, Inc. (incorporated by reference to
Exhibit 2.1 of AMCON's Current Report on Form 8-K filed on
November 25, 1997)
2.2 Stock Purchase Agreement dated February 24, 1999, between Food
For Health Company, Inc. ("FFH"), an Arizona corporation and a
wholly-owned subsidiary of AMCON, Chamberlin Natural Foods,
Inc.("Chamberlin"), a Florida corporation, Dale C. Bennett, Dale
C. Bennett as Trustee of the Alice M. Bennett Irrevocable Trust
Dated August 8, 1991, Dale C. Bennett as Trustee of the Dale C.
Bennett Revocable Trust dated August 8, 1991, Kirk D. Bennett and
Chad W. Bennett as Trustees of the Dale C. Bennett Irrevocable
Trust No. 1, Chad W. Bennett and Kirk D. Bennett (incorporated by
reference to Exhibit 2.2 of AMCON's Quarterly Report on Form 10-Q
filed on May 10, 1999)
2.3 Stock Purchase Agreement dated August 30, 1999, by and among Food
For Health Company, Inc., a wholly-owned subsidiary of AMCON
Distributing and Health Food Associates, Inc. (incorporated by
reference to Exhibit 2.1 of AMCON's Current Report of Form 8-K
filed on September 30, 1999)
3.1 Restated Certificate of Incorporation of the Company, as amended
March 19, 1998 (incorporated by reference to Exhibit 3.1 of
AMCON's Quarterly Report on Form 10-Q filed on May 11, 1998)
3.3 Bylaws of the Company (incorporated by reference to Exhibit 3.2
of AMCON's Registration Statement on Form S-1 (Registration
No. 33-82848) filed on August 15, 1994)
4.1 Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 of AMCON's Registration Statement on Form S-1
(Registration No. 33-82848) filed on August 15, 1994)
10.1 Grant of Exclusive Manufacturing Rights, dated October 1, 1993,
between the Company and Famous Value Brands, a division of Philip
Morris Incorporated, including Private Label Manufacturing
Agreement and Amended and Restated Trademark License Agreement
(incorporated by reference to Exhibit 10.1 of Amendment No. 1 to
AMCON's Registration Statement on Form S-1 (Registration
No. 33-82848) filed on November 8, 1994)
10.2 Amendment No. 1 to Grant of Exclusive Manufacturing Rights, dated
October 1, 1998, between the Company and Famous Value Brands, a
division of Philip Morris Incorporated, including Amendment No. 1
To Private Label Manufacturing Agreement and Amendment No. 1 to
Amended and Restated Trademark License Agreement (incorporated by
reference to Exhibit 10.2 of AMCON's Annual Report on Form 10-K
filed on December 24, 1998)
10.3 Loan Agreement, dated November 10, 1997, between the Company and
LaSalle National Bank (incorporated by reference to Exhibit 10.1
of AMCON's Current Report on Form 8-K filed on November 25, 1997)
16
10.4 Amended Loan Agreement, dated February 25, 1998, between the
Company and LaSalle National Bank (incorporated by reference to
Exhibit 10.5 of AMCON's Quarterly Report on Form 10-Q filed on
May 11, 1998)
10.5 Note, dated November 10, 1997, between the Company and LaSalle
National Bank (incorporated by reference to Exhibit 10.2 of
AMCON's Current Report on Form 8-K filed on November 25, 1997)
10.6 First Allonge to Note, dated February 25, 1998, between the
Company and LaSalle National Bank (incorporated by reference to
Exhibit 10.7 of AMCON's Quarterly Report on Form 10-Q filed on
May 11, 1998)
10.7 Loan and Security Agreement, dated February 25, 1998, between the
Company and LaSalle National Bank (incorporated by reference to
Exhibit 10.8 of AMCON's Quarterly Report on Form 10-Q filed on
May 11, 1998)
10.8 Promissory Note, dated February 25, 1998, between the Company and
LaSalle National Bank (incorporated by reference to Exhibit 10.9
of AMCON's Quarterly Report on Form 10-Q filed on May 11, 1998)
10.9 Loan and Security Agreement, dated February 25, 1998, between
Food For Health Co., Inc. and LaSalle National Bank (incorporated
by reference to Exhibit 10.10 of AMCON's Quarterly Report on
Form 10-Q filed on May 11, 1998)
10.10 Promissory Note, dated February 25, 1998, between Food For
Health Co., Inc. and LaSalle National Bank (incorporated by
reference to Exhibit 10.11 of AMCON's Quarterly Report on
Form 10-Q filed on May 11, 1998)
10.11 First Amendment to Loan and Security Agreement, dated November
18, 1998, between Food For Health Co., Inc. and LaSalle National
Bank (incorporated by reference to Exhibit 10.11 of AMCON's
Quarterly Report on Form 10-Q/A filed on August 5, 1999)
10.12 First Amendment and Allonge to Promissory Note, dated November
18, 1998, between Food For Health Co., Inc. and LaSalle National
Bank (incorporated by reference to Exhibit 10.12 of AMCON's
Quarterly Report on Form 10-Q/A filed on August 5, 1999)
10.13 Unconditional Guarantee, dated February 25, 1998, between the
Company and LaSalle National Bank (incorporated by reference to
Exhibit 10.12 of AMCON's Quarterly Report on Form 10-Q
filed on May 11, 1998)
10.14 8% Convertible Subordinated Note, dated September 15, 1999 by
and between Food For Health Company Inc. and Eric Hinkefent,
Mary Ann O'Dell, Sally Sobol, and Amy Laminsky (incorporated by
reference to Exhibit 10.1 of AMCON's Current Report on Form 8-K
filed on September 30, 1999)
17
10.15 Secured Promissory Note, dated September 15, 1999, by and
between Food For Health Company, Inc. and James C. Hinkefent and
Marilyn M. Hinkefent, as trustees of the James C. Hinkefent
Trust dated July 11, 1994, as amended, Eric Hinkefent, Mary Ann
O'Dell, Sally Sobol, and Amy Laminsky (incorporated by reference
to Exhibit 10.2 of AMCON's Current Report on Form 8-K filed on
September 30, 1999)
10.16 Pledge Agreement, dated September 15, 1999, by and between Food
For Health Company, Inc. and James C. Hinkefent and Marilyn M.
Hinkefent, as trustees of the James C. Hinkefent Trust dated
July 11, 1994, as amended, Eric Hinkefent, Mary Ann O'Dell,
Sally Sobol, and Amy Laminsky (incorporated by reference to
Exhibit 10.3 of AMCON's Current Report on Form 8-K filed on
September 30, 1999)
10.17 AMCON Distributing Company 1994 Stock Option Plan (incorporated
by reference to Exhibit 10.7 of the Company's Registration
Statement on Form S-1 (Registration No. 33-82848) filed on
August 15, 1994)
10.18 AMCON Distributing Company Profit Sharing Plan (incorporated by
reference to Exhibit 10.8 of Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-82848)
filed on November 8, 1994)
10.19 Employment Agreement, dated May 22, 1998, between the Company
and William F. Wright (incorporated by reference to Exhibit
10.14 of the Company's Quarterly Report on Form 10-Q filed on
August 6, 1998)
10.20 Employment Agreement, dated May 22, 1998, between the Company
and Kathleen M. Evans (incorporated by reference to Exhibit
10.15 of the Company's Quarterly Report on Form 10-Q filed on
August 6, 1998)
10.21 Employment Agreement, dated May 22, 1998, between the Food For
Health Co., Inc. and Jerry Fleming (incorporated by reference to
Exhibit 10.16 of the Company's Quarterly Report on Form 10-Q
filed on August 6, 1998)
11.1 Statement re: computation of per share earnings (incorporated by
reference to footnote 3 to the financial statements included in
Item 13 herein)
13.1 Annual Report to Stockholders for the Fiscal Year Ended September
30, 1999
21.0 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
27.0 Financial Data Schedules
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter ended September 30, 1999.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of
1934, the Registrant, AMCON Distributing Company, a Delaware corporation, has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Omaha, State of Nebraska, on the
23rd day of December, 1999.
AMCON DISTRIBUTING COMPANY
By: /s/ Kathleen M. Evans
----------------------
Kathleen M. Evans, President
19
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons in the capacities indicated on
the 23rd day of December, 1999.
Signature Title
--------- -----
/s/ William F. Wright Chairman of the Board, Director
- ------------------------
William F. Wright
/s/ Kathleen M. Evans President (Principal Executive
- ------------------------ Officer) and Director
Kathleen M. Evans
/s/ Michael D. James Treasurer, Chief Financial Officer
- ------------------------ and Secretary (Principal Financial
Michael D. James and Accounting Officer)
/s/ J. Tony Howard Director
- ------------------------
J. Tony Howard
/s/ Allen D. Petersen Director
- ------------------------
Allen D. Petersen
/s/ Jerry Fleming Director
- ------------------------
Jerry Fleming
/s/ Timothy R. Pestotnik Director
- ------------------------
Timothy R. Pestotnik
/s/ William R. Hoppner Director
- ------------------------
William R. Hoppner
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of AMCON Distributing Company:
Our report on the consolidated financial statements of AMCON Distributing
Company is included in this Form 10-K. In connection with our audit of such
financial statements, we have also audited the related financial statement
schedule listed in Item 14 for the years ended September 30, 1999, 1998 and
1997.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
PRICEWATERHOUSECOOPERS LLP
Omaha, Nebraska
November 24, 1999
S-1
AMCON Distributing Company
Financial Statement Schedule
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------
<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, 1996 $195,961 $ 11,357 $ - $ (1,069) Sep. 30, 1997 $206,249
Oct 1, 1997 206,249 386,630 339,545 (471,671) Sep. 30, 1998 460,753
Oct 1, 1998 460,753 314,720 - (98,672) Sep. 30, 1999 676,801
Allowance for
inventory
obsolescence Oct 1, 1996 $ - $ 30,000 $ - $ - Sep. 30, 1997 $ 30,000
Oct 1, 1997 30,000 253,864 76,000 (30,000) Sep. 30, 1998 329,864
Oct 1, 1998 329,864 - - (253,864) Sep. 30, 1999 76,000
/1/ Recorded as a result of the acquisition of Food For Health Co., Inc.
</TABLE>
S-2
EXHIBIT 13.1
Annual Report to Stockholders
for the Fiscal Year Ended
September 30, 1999
TO OUR SHAREHOLDERS:
For fiscal year 1999, your Company reported record sales and record net income
for the fourth consecutive year. Sales increased 31% over comparable year
sales. Net income per share increased 59% over comparable year net income per
share. We, at AMCON, are extremely proud of this. At the same time, we
recognize that diligent effort is required in the current fiscal year to
continue growth. We have "set the bar high", but will not be deterred from
continuing our efforts for success in the future.
We recognize that part of our sales and earnings for the fiscal year 1999 were
aided by extraordinary price increases in some of our basic products. Similar
price increases of the magnitude experienced last year are not anticipated in
the present fiscal year. This means that, for the present fiscal year, we
must not only make up for those price increases but must also work hard in all
areas to continue our growth. Hopefully, some of that growth can be achieved
through strategic acquisitions. The rest must come from growth in our core
businesses. We have accomplished that in the past through the dedicated
efforts of all of our people at AMCON Distributing and Food For Health and its
subsidiaries. We believe that we can continue to achieve results through the
dedication and efforts of our people who continue to be your Company's
greatest assets.
As our success continued through last year, our Board of Directors determined
it was appropriate to return more of our earnings to you, our shareholders.
In December of last year, a $0.02 per share dividend was declared by the
Board. The $0.02 per share dividend continued thereafter on a quarterly
basis. Our Board has now determined that the dividend should be increased to
$0.03 per share on a quarterly basis. Although we cannot predict the future,
nor can we guarantee continuation, it is our hope that dividends will continue
with regularity.
In December of this year, our Board also declared a 10% stock dividend. This
means that, for every 10 shares held by a shareholder, an additional one share
will be received as a dividend. Our hope in declaring the stock dividend is
to increase the number of shares in our Company that are publicly traded. As
the number of shares that are publicly traded grows, we hope to achieve a
market value that, in our opinion, will more accurately reflect the true value
of our Company.
FINANCIAL REVIEW
Our new sales record of $385.5 million (a 31% increase over our previous
annual record) was achieved through the twin engines of growth: growth of our
core businesses; and the addition of companies through acquisition. As noted
earlier, per share income for the year increased 59% (versus the 31% increase
in sales). We believe that this shows success in our efforts to not only grow
the Company but make the Company more efficient and profitable. We will
endeavor to maintain this trend in the future.
STRATEGIES
We continue to seek out opportunities for acquisition both in the traditional
distribution business and in the health food sector.
This last fiscal year, we acquired all of the stock of Chamberlin's Natural
Food, Inc. and Health Food Associates, Inc. ("Akin's"). Both Chamberlin's and
Akin's are retail chains selling in the health food segment. Chamberlin's,
headquartered in Orlando, Florida, operates 7 health and natural food and
product stores in the Orlando area and was designated last year by an industry
trade publication as the #1 health food retail chain in America. Akin's,
headquartered in Tulsa, Oklahoma, is a highly acclaimed chain of 6 health and
natural product stores located in Topeka, Kansas; Springfield, Missouri;
Lincoln, Nebraska; Oklahoma City, Oklahoma; and Tulsa, Oklahoma (2). We
encourage all of our shareholders and friends to visit these locations when
you are in the area. We are certain that these stores and the people working
there will make you proud to be associated with our Company.
As always, both of us are interested in hearing from you with any questions,
suggestions or comments. As you undoubtedly can tell, we are excited about
our future. We appreciate the continuing support you, our shareholders, give
us. We appreciate the support of our suppliers and customers and, as
mentioned earlier, we appreciate the efforts of every single one of our
employees - they are AMCON.
William F. Wright Kathleen M. Evans
Chairman President
1
SELECTED FINANCIAL DATA
The selected financial data presented below have been derived from the
Company's audited financial statements. The information set forth below
should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS" and
with the Consolidated Financial Statements and Notes thereto included in this
Annual Report.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales................................... $ 385,501 $ 294,281 $ 178,991 $ 176,145 $ 169,790
Cost of sales........................... 343,021 262,633 159,435 155,885 149,756
--------- --------- --------- --------- --------
Gross profit............................ 42,480 31,648 19,556 20,260 20,034
Operating expense....................... 34,615 26,209 16,753 17,504 17,183
--------- --------- --------- --------- ---------
Income from operations.................. 7,865 5,439 2,803 2,756 2,851
Interest expense........................ 1,755 1,814 867 1,149 1,543
Other (income) expense, net............. (72) (276) (1,353) (697) (228)
--------- --------- --------- --------- ---------
Income before income taxes 6,182 3,901 3,289 2,304 1,536
Income taxes 2,346 1,543 1,348 968 614
--------- --------- --------- --------- ---------
Net income.............................. 3,836 2,358 1,941 1,336 922
Accretion of preferred stock /1/ ....... - - - (83) (100)
--------- --------- --------- --------- ---------
Net income.............................. $ 3,836 $ 2,358 $ 1,941 $ 1,253 $ 822
========= ========= ========= ========= =========
Earnings per common and common
equivalent share attributable
to common shareholders:
Basic: $ 1.55 $ 0.96 $ 0.79 $ 0.51 $ 0.33
========= ========= ========= ========= =========
Diluted: $ 1.48 $ 0.93 $ 0.79 $ 0.51 $ 0.33
========= ========= ========= ========= =========
Weighted average shares outstanding:
Basic................................ 2,479,902 2,458,062 2,447,782 2,445,903 2,478,047
Diluted.............................. 2,595,836 2,535,451 2,451,462 2,445,903 2,478,047
</TABLE>
2
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital ....................... $ 18,737 $ 18,474 $ 11,158 $ 11,572 $ 12,098
Total assets............................ 68,589 39,644 23,497 23,026 22,919
Long-term obligations and subordinated
debt /2/............................... 38,129 19,207 9,123 10,245 12,705
Shareholders' equity.................... 13,258 /4/ 9,605 7,208 /3/ 6,621 5,122
</TABLE>
- ------------------------
/1/ Preferred stock valued at $1,000,000 was issued in partial payment
for repurchase of warrants which were originally issued in conjunction with a
$4 million loan made in 1989 by MLBC Inc. to AMCON. The Company had the right
to redeem the preferred stock at any time after April 1, 1996 for $1,200,000.
The preferred stock accreted to the redemption price in lieu of cash dividends
and was redeemed in December 1996.
/2/ Includes current portion of long-term obligations and subordinated
debt.
/3/ Reflects redemption of preferred stock described in footnote 1 above
for $1,200,000 in December 1996.
/4/ Includes dividends paid of $198,392.
SELECTED QUARTERLY FINANCIAL DATA (unaudited)
The following table sets forth selected financial information for each of the
eight quarters in the two-year period ended September 30, 1999. This
information has been prepared by the Company on the same basis as the
consolidated financial statements and includes all normal and recurring
adjustments necessary to present fairly this information when read in
conjunction with the Company's audited Consolidated Financial Statements and
Notes thereto included in this Annual Report.
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1999 Fourth Third Second First
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales................................... $109,501 $103,651 $90,040 $82,309
Gross profit............................ 11,814 10,665 9,353 /1/ 10,646 /1/
Income before taxes..................... 1,001 1,360 1,425 2,395
Net income.............................. 682 850 861 1,443
Earnings per common and common
equivalent share:
Basic: $ 0.27 $ 0.34 $ 0.35 $ 0.58
======== ======== ======= =======
Diluted: $ 0.26 $ 0.33 $ 0.34 $ 0.56
======== ======== ======= =======
</TABLE>
3
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1998 Fourth Third Second First
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales................................... $ 82,735 $ 77,651 $68,946 $64,949
Gross profit............................ 8,733 8,338 7,412 7,166
Income before taxes..................... 1,104 1,236 406 1,155
Net income.............................. 664 754 268 672
Earnings per common and common
equivalent share:
Basic: $ 0.27 $ 0.31 $ 0.11 $ 0.27
======== ======== ======= =======
Diluted: $ 0.26 $ 0.29 $ 0.11 $ 0.27
======== ======== ======= =======
</TABLE>
/1/ Gross profit in the first and second quarters include margin from a
significant cigarette price increase which took affect during the first
quarter.
Quarterly earnings are based on weighted average shares outstanding for the
quarter, therefore, the sum of the quarters may not equal the full year
earnings per share amount.
MARKET FOR COMMON STOCK
The Company's Common Stock trades on the NASDAQ SmallCap Market under the
symbol "DIST". The following table reflects the range of the high and low
prices per share of the Company's Common Stock reported by NASDAQ for the
years ended September 24, 1999 and September 25, 1998. These quotations
represent inter-dealer quotations, without adjustment for retail mark-ups,
mark-downs or commissions and may not necessarily represent market
transactions. As of December 10, 1999, the Company had approximately 1,000
holders of record of its shares and the Company believes that approximately
1,600 additional persons hold shares beneficially.
COMMON STOCK
---------------------
HIGH LOW
------ ------
Year ended September 24, 1999:
4th Quarter $10.00 $ 7.38
3rd Quarter 10.25 6.00
2nd Quarter 8.50 5.69
1st Quarter 8.13 4.25
Year ended September 25, 1998:
4th Quarter $ 8.25 $ 6.00
3rd Quarter 9.75 4.25
2nd Quarter 5.25 3.25
1st Quarter 4.38 2.75
4
During the fiscal year ended September 24, 1999, the Board of Directors
declared cash dividends of $0.02 per share per quarter or $0.08 per share for
the year. In December 1999, the Board of Directors declared a $0.03 per share
cash dividend and a special 10% stock dividend. The Board of Directors will
evaluate payment of future dividends at their regular meetings. In addition
to possible dividends in the future, retained earnings will be used to finance
acquisitions of other distributing and retail companies, develop new products,
expand markets and for other corporate purposes. The payment of dividends
requires the prior approval of the lender under various borrowing arrangements
entered into by the Company.
On September 27, 1996, AMCON issued options to purchase 22,000 shares of its
common stock to management employees at an exercise price of $1.63. On
November 10, 1997, options to purchase 140,000 shares of common stock were
issued to management employees at exercise prices of $2.88 and $3.16. During
fiscal 1999, options to purchase 95,000 shares of common stock were issued to
management employees at exercise prices between $6.75 and $9.90. At
September 24, 1999, options to acquire 120,200 shares of common stock were
fully vested and exercisable.
In November 1997, AMCON issued options to acquire 30,000 shares of its common
stock at an exercise price of $2.875 per share. The options were issued to
two independent directors of the Company as consideration for past service to
the Company. The options have a termination date of November 10, 2007 and
vest over a three year period. In December 1998, options to acquire 20,000
shares of AMCON's stock were issued to the Company's four independent
directors at an exercise price of $6.75 per share. The options were fully
vested at the date of grant. In June 1999, AMCON issued options to acquire
8,000 shares of its common stock to its four independent directors at an
exercise price of $9.00 per share. The options were fully vested at the date
of grant. At September 24, 1999, 46,000 options issued to independent
directors were fully vested and exercisable.
MANAGEMENT'S DISCUSSION AND ANALYSIS
AMCON Distributing Company (together with its wholly-owned subsidiary, Food
For Health Co., Inc. and its wholly-owned subsidiaries, U.S. Health
Distributors, Inc., Chamberlin's Natural Foods, Inc. and Health Food
Associates, Inc.) operates 9 distribution centers and 13 retail health food
stores in the Great Plains, Rocky Mountain, Western and Southern regions of
the United States. As used herein, unless the context indicates otherwise,
the term "ADC" means the separate company operations or "traditional
distribution business" of AMCON Distributing Company, the term "FFH" means the
"natural food distribution business" of Food For Health Co., Inc. and its
wholly-owned subsidiary, U.S. Health Distributors, Inc. ("USHD"). The terms
"CNF" and "HFA" represent the "retail health food stores" operated by
Chamberlin's Natural Foods, Inc. and Health Food Associates, Inc.,
respectively, both wholly-owned subsidiaries of FFH, and the term "AMCON" or
the "Company" means AMCON Distributing Company and its subsidiaries.
AMCON's fiscal year ends on the last Friday in September. For convenience,
the fiscal years have been indicated as September 30, whereas the actual year
ends were September 24, 1999, September 25, 1998 and September 26, 1997. Each
fiscal year was comprised of 52 weeks.
5
RESULTS OF OPERATIONS
The following table sets forth an analysis of various components of the Income
Statement as a percentage of sales for the fiscal years ended September 30,
1999, 1998, and 1997:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Sales.......................................... 100.0% 100.0% 100.0%
Cost of sales.................................. 89.0 89.3 89.1
------- ------- --------
Gross profit................................... 11.0 10.7 10.9
Selling, general and
administrative expense...................... 8.5 8.5 8.9
Depreciation and amortization.................. 0.5 0.4 0.5
------- ------- --------
Income from operations......................... 2.0 1.8 1.5
Interest expense............................... 0.5 0.6 0.5
Other (income) expense, net.................... (0.1) (0.1) (0.8) /1/
------- ------- --------
Income before income taxes..................... 1.6 1.3 1.8
Income tax expense............................. 0.6 0.5 0.7
------- ------- --------
Net income 1.0% 0.8% 1.1%
======= ======== ========
</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.
6
YEAR ENDED SEPTEMBER 30, 1999 VERSUS YEAR ENDED SEPTEMBER 30, 1998. Sales for
the year ended September 30, 1999 increased 31% to $385.5 million, compared to
$294.3 million for the year ended September 30, 1998. Sales from the
traditional distribution business through September 30, 1999 were $72.8
million over the prior year. Component increases were as follows: Cigarette
sales increased approximately $65.5 million over the prior year (approximately
61% was due to price increases over the past 12 months and the balance was due
to increased volume). Sales of non-cigarette products increased by $7.3
million primarily due to increased volume. Sales from the health and natural
foods distribution business increased by $11.4 million. This increase was
partially due to $5.8 million of sales generated by USHD which was acquired by
FFH in November 1998. Additionally, since FFH was acquired mid-way through
the first quarter of fiscal 1998, FFH's sales in the first quarter of 1999
were approximately $4.1 million greater than the prior year. New sales
generated by the retail health food stores acquired by FFH during fiscal 1999
totaled $7.0 million. CNF, acquired on March 29, 1999, contributed $6.4
million of new sales and HFA, acquired on September 15, 1999, contributed
$569,000 of new sales.
Gross profit increased 34.2% to $42.5 million for the year ended September 30,
1999 compared to $31.6 million for the prior fiscal year. Gross profit as a
percent of sales increased to 11.0% for the period compared to 10.7% for the
year ended September 30, 1998. The increases in gross profit and gross profit
percentage were primarily attributable to a substantial cigarette price
increase during the first quarter of the year which resulted from a settlement
that was reached between the major tobacco manufacturers and the various
states that had filed liability suits against the industry. This unusual
price increase accounted for approximately $4.2 million in gross margin for
the year ended September 30, 1999 versus $1.5 million in the prior year. It
is expected that profit margins in fiscal 2000 and thereafter will return to
historical levels. Gross margin from the distribution businesses operated by
ADC and FFH increased by $5.2 million due to increases in volume and an
additional 6 weeks of operations by FFH, which was acquired in mid-November
1997. In addition, gross profit generated by USHD and the retail businesses,
CNF & HFA, which were acquired during the current fiscal year, was $4.5
million. These increases in gross profit were partially offset by a $2.0
million LIFO inventory adjustment during the second, third and fourth
quarters.
While sales of cigarettes have increased consistently over the past six years,
sales of the Company's private label cigarettes have declined. Since 1993,
when cigarette manufacturers substantially reduced the price of premium brand
cigarettes, the premium cigarette brands have thrived at the expense of most
generic brands. Also, cigarette price increases since 1993 have been
identical for both premium and the Company's generic brands. In November
1998, an announcement was made that a settlement had been reached between the
major tobacco manufacturers and the various states that had filed liability
suits against the industry. Immediately thereafter, the major cigarette
manufacturers increased the price of cigarettes by 30 - 35% on both premium
and generic brands, including the Company's private label brand. In late
August 1999, prices charged by manufacturers were again increased another
9 - 11%, in advance of the scheduled increase in federal excise tax of $1.00
per carton effective on January 1, 2000. As a result, management anticipates
the volume of the Company's private label cigarettes will continue to decline
7
over the next few years. The gross profit derived from sales of the Company's
private label cigarettes was $549,000 less in fiscal 1999 than in fiscal 1998.
Management estimates that gross profit from private label cigarettes sales
could decrease by another $300,000 to $500,000 in fiscal 2000.
For the year ended September 30, 1999, total operating expense, which includes
selling, general and administrative expenses, depreciation and amortization,
increased 32.1% to $34.6 million compared to fiscal 1998. The increase was
partially due to expenses attributable to USHD, CNF and HFA, which were
acquired during fiscal 1999. These subsidiaries accounted for $4.4 million of
the increase in operating expenses. In addition, since FFH was purchased
midway through the first quarter of fiscal 1998, FFH's operating expenses in
the prior year represent approximately 88% of a full 12 month period. As a
result, FFH's operating expenses were approximately $1.0 million greater in
1999 than 1998. The remaining increase in operating expenses was due to
additional expenses incurred by ADC to support increased volume for the year.
As a percentage of sales, total operating expense increased to 9.0% from 8.9%
during the same period in the prior year. This increase was primarily due to
the acquisition of USHD, CNF and HFA, whose operating expenses as a percent of
sales are much higher than AMCON's historical average.
As a result of the above, income from operations for the fiscal year ended
September 30, 1999 increased by $2.4 million to $7.9 million.
Interest expense for the fiscal year ended September 30, 1999 decreased 3.3%
to $1.75 million compared to $1.81 million during the prior year. The
decrease was primarily due to a 40 to 80 basis point reduction in the average
borrowing rate during the year ended September 30, 1999 combined with a $1.4
million reduction in the average amount borrowed by ADC. These factors more
than offset an increase in the average amount borrowed by FFH during the year
to finance internal growth and the acquisition of USHD.
Other income for the year ended September 30, 1999 of $72,000 was generated by
gains associated with the sale of fixed assets, royalty payments,
miscellaneous industry promotional income and dividends received on investment
securities. Other income for the year ended September 30, 1998 of $276,000
was generated from similar activities as well as the gain associated with the
sale of marketable securities.
As a result of the above factors, net income for the fiscal year ended
September 30, 1999 was $3,835,529 compared to $2,358,186 for fiscal 1998.
The distribution industry is in a state of consolidation as intense
competition and pressure on profit margins continue to affect both large and
small distributors. The retail natural foods industry is highly fragmented,
with more than 9,000 stores operated independently or as part of small chains.
The two leading natural food chains continue to expand their geographic
markets and acquire smaller independent competitors. In addition,
conventional supermarkets and mass market outlets have also begun to increase
their emphasis on the sale of natural products. This business climate
subjects operating income to a number of factors which are beyond the control
of management, such as competing retail stores opening in close proximity to
the Company's retail stores. While the Company sells a diversified product
line, it remains dependent on cigarette sales which represented approximately
8
65% of its revenue and 40% of its gross margin in fiscal 1999. Changes in
manufacturers' cigarette pricing affects the market for generic and private
label cigarettes and net income is heavily dependent up on sales of the
Company's private label cigarettes and volume discounts received from
manufacturers in connection with such sales. The Company continuously
evaluates steps it may take to improve net income in future periods, including
further acquisitions of other distributing companies and retail stores in
similar business lines and further sales of assets that are no longer
essential to its primary business activities such as investments in equity
securities.
Investments in equity securities at September 30, 1999 and 1998 consisted
primarily of 83,000 shares of Consolidated Water Company Limited ("CWC,"
formally Cayman Water Company Limited), a public company which is listed on
NASDAQ. The Company's basis in the securities is $151,000 and the fair market
value of the securities was $540,000 and $508,000 on September 30, 1999 and
September 30, 1998, respectively. The unrealized gain on CWC shares was
approximately $389,000 and $358,000 on September 30, 1999 and 1998,
respectively. The fair market value of the CWC shares on December 10, 1999
was $539,500.
YEAR ENDED SEPTEMBER 30, 1998 VERSUS YEAR ENDED SEPTEMBER 30, 1997. Sales for
the year ended September 30, 1998 increased 64.4% to $294.3 million, compared
to $179.0 million for the year ended September 30, 1997. Sales attributable
to the new St. Louis distribution center, which was purchased in October 1997,
and to FFH, a distributor of health and natural food products, which was
purchased in November 1997, were $76.3 million, of which $36.2 million related
to cigarette sales. Excluding the effects of these acquisitions, sales from
the traditional distribution business increased by 21.8% or $39.0 million over
the prior year. Component increases were as follows: Cigarette sales
increased approximately $31.7 million over the prior year, with approximately
$13.3 million due to price increases and $18.4 million due to increased
volume. Sales of other products increased by $7.2 million primarily due to
increased volume. There were no sales of beer products during the fiscal year
ended September 30, 1998 due to the sale of the Denver beer distributorship in
October 1996. This accounted for a $538,000 decrease in sales of beer
products as compared to the prior year.
Gross profit increased 61.8% to $31.6 million for the fiscal year ended
September 30, 1998 compared to $19.6 million for the prior fiscal year. The
increase in gross profit was primarily attributable to the new St. Louis
distribution center and FFH which accounted for $10.1 million of the $12.1
million increase in gross profit for the year. Cigarette price increases
during the fiscal year accounted for an additional $485,000 in gross profit as
compared to the prior year and partially offset a decrease of $935,000 in
purchase discounts received from cigarette manufacturers.
Gross profit as a percent of sales declined slightly from 10.9% in fiscal 1997
to 10.7% in fiscal 1998. The decline was due to a decrease of approximately
1.8% in profit margin from the Company's traditional distribution business
resulting from a large increase in sales of lower-margin products (principally
cigarettes) primarily in the Company's new St. Louis market. Because of lower
margins realized on cigarettes, a large increase in cigarette sales adversely
affected the profit margin percentage. The decrease in profit margin was also
9
attributable to a reduction in purchase discounts received from cigarette
manufacturers which had the effect of increasing the cost of goods sold for
cigarettes. Purchase discount programs vary by manufacturer and, although all
of the purchase discount programs offered by cigarette manufacturers are
computed on a cents-per-carton-sold basis, the criteria necessary for meeting
higher purchase discount brackets, such as market share by cigarette category,
vary from year to year as well. Therefore, it is possible to have increased
sales in certain product categories, but receive less purchase discounts.
This was the case for the Company in fiscal 1998. The decline in profit
margin from the Company's traditional distribution business was substantially
offset by additional profit margin realized by FFH, which added approximately
1.6% to the Company's profit margin percentage. In general, FFH products have
a higher profit margin than cigarettes and many of the Company's other
products.
Total operating expense, which includes selling, general and administrative
expenses and depreciation and amortization, increased 56.4% or $9.5 million
compared to fiscal 1997. The increase was primarily due to expenses
associated with the new St. Louis distribution center and FFH which accounted
for $9.2 million of the increase. As a percentage of sales, total operating
expense decreased to 8.9% from 9.4% during the same period in the prior year.
The decrease in operating expenses as a percentage of sales is due to
efficiencies gained through increased volume in the traditional distribution
business which were partially offset by the proportionately higher operating
costs incurred by FFH during the period.
As a result of the above, income from operations for the fiscal year ended
September 30, 1998 increased 94% to $5.4 million.
Interest expense for the fiscal year ended September 30, 1998 increased
109.2%, or $947,000, compared to the prior fiscal year. The increase was
primarily due to a new $4.5 million acquisition loan utilized to purchase FFH,
a $5.3 million increase in the average amount borrowed under the Company's
revolving credit facility with a bank during fiscal 1998, and interest expense
of $249,000 associated with FFH's revolving credit facility. The Company's
revolving credit facility was also utilized to finance the acquisition of the
new St. Louis distribution center, the expansion of the Bismarck, ND
distribution center, and to finance an increase in inventory during the
period.
Other income of $276,000 for the fiscal year ended September 30, 1998 was
generated from gains on the sale of marketable securities and fixed assets,
royalty payments associated with the sale of the Denver non-alcoholic beverage
business, and rent and interest income. Other income of $1.4 million for the
fiscal year ended September 30, 1997 was generated primarily by the gain
associated with the sale of the Denver beer distributorship of $1.1 million.
As a result of the above factors, net income for the fiscal year ended
September 30, 1998 was $2,358,186 compared to $1,940,534 for fiscal 1997.
10
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended September 30, 1999, AMCON utilized cash flow in
operating activities to finance increases in accounts receivable due to the
significant increase in the selling price of cigarettes and to support
increases in non-tobacco related inventory from both traditional and health
food businesses. Additionally, cash was provided by operating activities
through increased accounts payable related to the increases in inventory.
Cash was utilized in investing activities during the fiscal year to purchase
the common stock of USHD in November 1998, to purchase the common stock of CNF
in April 1999, and to purchase the common stock of HFA in September 1999 for
$1.3 million, $2.2 million and $3.4 million, respectively. In addition, cash
was utilized to repay CNF's existing short and long-term debt of $2.8 million.
Cash was provided by financing activities through increases in the FFH
revolving credit facility of $1.9 million, from term notes to finance the
purchase of USHD and HFA totaling $11.1 million, and through increases in
ADC's revolving credit facility to finance the purchase of CNF and HFA of $8.9
million. Cash of $149,000 was also used to pay dividends to common
shareholders.
The Company makes capital expenditures primarily for equipment for its
distribution facilities including computers, delivery vehicles and warehouse
equipment. The Company has historically financed its working capital
requirements with a combination of internally generated funds and bank
borrowings. Cash provided by operations approximated $2,373,000 and $688,000
for the fiscal years ended September 30, 1999 and 1998, respectively. Capital
expenditures during those periods equaled approximately $762,000 and $782,000,
respectively. The remaining cash provided by operations was applied to debt
service. The Company anticipates that capital expenditures during fiscal 2000
will be approximately $850,000 and will be used for the purposes stated above.
The Company had working capital of approximately $18.7 million as of September
30, 1999. The Company's ratio of debt to equity was 4.17 at September 30,
1999 compared to 3.13 at September 30, 1998.
AMCON maintains two revolving credit facilities, the ADC revolving credit
facility (the "Facility") and the FFH revolving credit facility (the "FFH
Facility"). The Facility was amended in September 1999 to increase the
primary borrowing limit from $20 million to $25 million and remove the
additional $10 million facility which was collateralized by specific
inventory. The Facility allows ADC to borrow up to $25 million at any time,
subject to eligible accounts receivable and inventory requirements, and
provides for an additional $1.5 million facility to be used for transportation
equipment purchases. The Facility bears interest at the bank's base rate
("Prime") less 0.5% or LIBOR plus 1.75%, as selected by ADC. As of September
30, 1999, ADC had borrowed approximately $18.3 million under the Facility.
The Facility is collateralized by all equipment, general intangibles,
inventories and accounts receivable, and with a first mortgage on the owned
distribution center. The Facility expires on February 25, 2002.
The Facility contains covenants which, among other things, set forth certain
financial ratios and net worth requirements which adjust semiannually or
annually as specified in the Facility. For fiscal 2000 and 1999, the Facility
includes covenants that (i) restrict the incurrence of additional debt, (ii)
11
restrict payments, prepayments and repurchases of subordinated debt or capital
stock, (iii) restrict mergers and acquisitions and changes in business or
conduct of business and (iv) require the maintenance of certain financial
ratios and net worth levels including an average annual fixed charge ratio of
1.1 to 1.0, an average annual debt service coverage ratio of 1.50 to 1.0, a
debt to equity ratio of 4.0 to 1.0 (excluding debt associated with the
acquisition of FFH) and minimum tangible net worth of $4,500,000. In
addition, AMCON may not pay dividends with respect to its Common Stock without
the consent of the lender of the Facility. In December 1998, AMCON received
consent to pay cash dividends of up to $0.02 per share per quarter.
The FFH Facility, which includes a separate revolving line of credit of up to
$1.0 million for USHD, was amended in November 1999 to increase the amount
provided for maximum borrowings from $6 million to $8 million. Borrowings
under the FFH Facility are collateralized by the assets of FFH and are
guaranteed by AMCON. Amounts under the FFH Facility bear interest at Prime
less 0.5% or LIBOR plus 2.00%, as selected by FFH. A commitment fee of .25%
of the annual average unutilized amount of the commitment is required. As of
September 30, 1999, FFH had borrowed approximately $5.3 million under the FFH
Facility. The FFH Facility expires on February 25, 2002.
The FFH Facility contains covenants which, among other things, set forth
certain financial ratios and net worth requirements which adjust semiannually
or annually as specified in the FFH Facility. For fiscal 2000 and 1999, the
FFH Facility includes covenants that (i) restrict the incurrence of additional
debt, (ii) restrict payments, prepayments and repurchases of subordinated debt
or capital stock, (iii) restrict mergers and acquisitions and changes in
business or conduct of business and (iv) require the maintenance of certain
financial ratios and net worth levels including a debt to equity ratio of 4.0
to 1.0 and minimum tangible net worth of $200,000. In addition, FFH may not
pay dividends with respect to its Common Stock without the consent of the
lender of the FFH Facility. As of September 30, 1999, FFH was not in
compliance with the debt to equity ratio or the net worth covenant due to the
acquisition of HFA in September 1999. However, FFH received waivers from the
lender for these covenant violations at September 30, 1999.
In November 1997, AMCON borrowed $4.5 million from a bank to finance the
purchase of the common stock of FFH (the "Acquisition Loan"). The Acquisition
Loan has a term of five years, bears interest at Prime less 0.5% or LIBOR plus
1.75%, as selected by AMCON, and requires monthly payments equal to accrued
interest plus principal payments of $85,096, which began in August 1998. As
of September 30, 1999, the outstanding balance of the Acquisition Loan was
$3.2 million.
On November 20, 1998, FFH purchased all of the outstanding stock of U.S.
Health Distributors, Inc. ("USHD"), a distributor of health and natural foods
based in Melbourne, FL, for $1.3 million in cash. The acquisition was funded
by a $1.1 million five and one-half year term loan from a bank (the "USHD
Acquisition Loan"). The loan bears interest at Prime less 0.5%, requires
payments of interest only for the first six months and monthly principal
payments for the term of the loan. The loan is collateralized by the common
stock of USHD. As of September 30, 1999, the outstanding balance of the USHD
Acquisition Loan was $1.0 million.
12
In January 1999, ADC utilized proceeds from the Facility to satisfy its
obligation associated with a $1,250,000 non-revolving line of credit with a
bank which was used to finance the purchase of trucks and delivery equipment.
In March, 1999, FFH, purchased all of the outstanding stock of CNF (d/b/a
Chamberlin's Market & Cafe), a chain of six health and natural food product
retail stores based in Winter Park, Florida, for $2.2 million in cash. The
acquisition was funded through borrowings on the Facility. In addition, CNF's
existing short and long-term debt of $2.8 was paid in full through borrowings
under the Facility.
In September, 1999, FFH purchased of all of the outstanding stock of HFA for a
purchase price of $13.4 million. Funding for the acquisition was provided as
follows: $4.0 million through borrowings under the Facility; $2.0 million
through borrowings under an 8% Convertible Subordinated Note (the "Convertible
Note") from FFH to the sellers; and $8.0 million through borrowings under a
Collateralized Promissory Note (the "Collateralized Note") from FFH to the
sellers. A receivable of approximately $600,000 is due from the sellers based
upon purchase price adjustments outlined in the purchase agreement.
Both the Convertible Note and the Collateralized Note have five-year terms and
bear interest at 8% per annum. Principal on the Convertible Note is due in a
single payment at maturity. Principal on the Collateralized Note is payable
in installments of $800,000 per year with the balance due at maturity. The
Collateralized Note is collateralized by a pledge of the stock of HFA. The
principal balance of the Convertible Note may be converted into stock of FFH
under circumstances set forth in the Convertible Note. As of September 30,
1999, the outstanding balances of the Convertible Note and the Collateralized
Note were $2.0 million and $8.0 million, respectively.
As of September 30, 1999, the Company had additional outstanding long-term
indebtedness of approximately $318,000 consisting of capital leases for
computer equipment, the current portion of which equaled approximately
$144,000. The interest rates on the notes relating to such indebtedness range
from 6.9% to 9.5% per annum.
Management believes that funds generated from operations, supplemented as
necessary with funds available under the Facility and the FFH Facility, will
provide sufficient liquidity to cover its debt service and any reasonably
foreseeable future working capital and capital expenditure requirements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
AMCON does not utilize financial instruments for trading purposes and holds no
derivative financial instruments which could expose the Company to significant
market risk. AMCON's exposure to market risk relates primarily to its
investment in the common stock of Consolidated Water Company (formerly Cayman
Water Company), a public company traded on the Nasdaq National Market system,
and to changes in interest rates on its long-term obligations. At September
30, 1999, the Company held 83,000 shares of common stock of Consolidated Water
13
Company valued at $540,000. AMCON values this investment at market and
records price fluctuations in equity as unrealized gain or loss on
investments. At September 30, 1999, AMCON had $27.8 million of variable rate
debt outstanding, with maturities through May 2004. The interest rates on
this debt ranged from 6.81 to 7.75% at September 30, 1999. The Company has
the ability to select the bases on which its variable interest rates are
calculated and may select an interest rate based upon the lender's base
interest rate or based upon LIBOR. This provides management with some control
of AMCON's variable interest rate risk. Management estimates that AMCON's
cash flow exposure relating to interest rate risk based upon its current
borrowings is approximately $175,000 annually for each 1% change in the
lender's base interest rate or LIBOR, as applicable.
CONCERNING FORWARD LOOKING STATEMENTS
This Annual Report, including the Letter to Shareholders, Management's
Discussion and Analysis, and other sections, contains certain forward looking
statements that are subject to risks and uncertainties and which reflect
management's current beliefs and estimates of future economic circumstances,
industry conditions, company performance, and financial results. Forward
looking statements include information concerning the possible or assumed
future results of operations of the Company and those statements preceded by,
followed by or that include the words "future", "position", "anticipate(s)",
"expect", "believe(s)", "see", "plan", "further improve", "outlook", "should"
or similar expressions. For these statements, we claim the protection of the
safe harbor for forward looking statements contained in the Private Securities
Litigation Reform Act of 1995. You should understand that the following
important factors, in addition to those discussed elsewhere in this document,
could affect the future results of the Company and could cause those results
to differ materially from those expressed in our forward looking statements:
changing market conditions with regard to cigarettes and the demand for the
Company's products, domestic regulatory risks, and competitive and other risks
(such as overall business conditions) over which the Company has little or no
control. Any changes in such factors could result in significantly different
results. Consequently, future results may differ from management's
expectations. Moreover, past financial performance should not be considered a
reliable indicator of future performance.
14
REPORT OF MANAGEMENT
Management is responsible for the preparation of the accompanying consolidated
financial statements. The consolidated financial statements and the notes
thereto have been prepared in accordance with generally accepted accounting
principles to reflect, in all material aspects, the substance of financial
events and transactions occurring during the year. PricewaterhouseCoopers
LLP, independent certified public accountants, have audited our consolidated
financial statements as described in their report.
The Company maintains financial control systems designed to provide reasonable
assurance that assets are safeguarded and that transactions are executed and
recorded in accordance with management authorization. The control systems are
evaluated annually by the Company.
Kathleen M. Evans
President
Michael D. James
Treasurer and Chief Financial Officer
November 24, 1999
15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of AMCON Distributing Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and shareholders' equity and comprehensive
income and of cash flows present fairly, in all material respects, the
consolidated financial position of AMCON Distributing Company and its
subsidiaries as of September 30, 1999 and 1998, and the consolidated results
of their operations and their consolidated cash flows for each of the three
years in the period ended September 30, 1999, in conformity with accounting
principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for inventory in fiscal 1999.
PRICEWATERHOUSECOOPERS LLP
Omaha, Nebraska
November 24, 1999, except for
Note 16, for which the date is
December 20, 1999
F-1
CONSOLIDATED BALANCE SHEETS
AMCON Distributing Company
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
September 30, 1999 1998
- ------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 1,728,042 $ 38,369
Accounts receivable, less allowance for
doubtful accounts of $676,801 and $460,753 18,345,816 15,229,107
Inventories 23,979,639 16,127,250
Deferred income taxes 717,022 570,743
Other 1,000,189 327,997
------------- -------------
Total current assets 45,770,708 32,293,466
Fixed assets, net 7,502,927 4,466,707
Investments 550,691 508,375
Other assets 14,764,890 2,375,189
------------- -------------
$ 68,589,216 $ 39,643,737
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 11,953,546 $ 7,350,645
Accrued expenses 3,173,231 1,329,843
Accrued wages, salaries and bonuses 640,933 675,562
Income taxes payable 283,111 1,023,944
Current portion of long-term debt 10,133,393 3,439,169
Current portion of subordinated debt 800,000 -
Dividends payable 49,598 -
------------- -------------
Total current liabilities 27,033,812 13,819,163
------------- -------------
Deferred income taxes 678,455 24,799
Other liabilities 423,574 427,419
Long-term debt, less current portion 17,995,432 15,767,659
Subordinated debt, less current portion 9,200,000 -
Commitments (Note 13)
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none outstanding - -
Common stock, $.01 par value, 15,000,000 shares
authorized and 2,480,000 issued at September 30, 1999
and 1998 24,800 24,800
Additional paid-in capital 2,271,278 2,271,278
Accumulated other comprehensive income,
net of $149,664 and $139,468 tax 234,299 218,145
Retained earnings 10,727,926 7,090,789
------------- -------------
13,258,303 9,605,012
Less treasury stock, 102 shares at cost at
September 30, 1999; 97 shares at cost
at September 30, 1998 (360) (315)
------------- -------------
Total shareholders' equity 13,257,943 9,604,697
------------- -------------
$ 68,589,216 $ 39,643,737
============= =============
The accompanying notes are an integral part of these financial statements
</TABLE>
F-2
CONSOLIDATED STATEMENTS OF INCOME
AMCON Distributing Company
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales (including excise taxes of $54.5 million, $ 385,501,178 $ 294,281,323 $ 178,990,978
$52.9 million and $40.1 million, respectively)
Cost of sales 343,021,443 262,632,767 159,434,631
------------- ------------- -------------
Gross profit 42,479,735 31,648,556 19,556,347
Selling, general and administrative expenses 32,754,406 25,088,767 15,883,969
Depreciation and amortization 1,861,364 1,120,482 868,744
------------- ------------- -------------
34,615,770 26,209,249 16,752,713
------------- ------------- -------------
Income from operations 7,863,965 5,439,307 2,803,634
Other expense (income):
Interest expense 1,754,837 1,814,555 867,327
Other (income) expense, net (72,325) (276,287) (1,352,733)
------------- ------------- -------------
1,682,512 1,538,268 (485,406)
------------- ------------- -------------
Income before income taxes 6,181,453 3,901,039 3,289,040
Income tax expense 2,345,924 1,542,853 1,348,506
------------- ------------- -------------
Net income $ 3,835,529 $ 2,358,186 $ 1,940,534
============= ============= =============
Earnings per common and
common equivalent share:
Basic $ 1.55 $ 0.96 $ 0.79
============= ============= =============
Diluted $ 1.48 $ 0.93 $ 0.79
============= ============= =============
Weighted average shares outstanding:
Basic 2,479,902 2,458,062 2,447,782
============= ============= =============
Diluted 2,595,836 2,535,451 2,451,462
============= ============= =============
The accompanying notes are an integral part
of these financial statements
</TABLE>
F-3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
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, 1996 250,000 $ 2,500 2,450,000 $ 24,500 $ 3,411,328
Redemption of preferred stock (250,000) (2,500) - - (1,197,500)
Exercise of stock options - - - - -
Net income - - - - -
Unrealized gain (loss) on investments
available-for-sale, net of tax - - - - -
Less: reclassification adjustments
for gains included in net income - - - - -
Total comprehensive income
-------- ------- --------- -------- -----------
Balance, September 30, 1997 - - 2,450,000 24,500 2,213,828
Issuance and exercise of warrants - - 30,000 300 57,450
Net income - - - - -
Unrealized gain (loss) on investments
available-for-sale, net of tax - - - - -
Total comprehensive income
-------- ------- --------- -------- -----------
Balance, September 30, 1998 - - 2,480,000 24,800 2,271,278
Purchase of treasury stock - - - - -
Dividends - - - - -
Net income - - - - -
Unrealized gain on investments
available-for-sale, net of tax - - - - -
Total comprehensive income
-------- ------- --------- -------- -----------
Balance, September 30, 1999 - - 2,480,000 $ 24,800 $ 2,271,278
======== ======= ========= ======== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (continued)
AMCON Distributing Company
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive Retained Treasury Stock
Income Earnings Shares Amount Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1996 $ 398,028 $ 2,798,569 (4,097) $ (13,315) $ 6,621,610
Redemption of preferred stock - - - - (1,200,000)
Exercise of stock options - (6,500) 4,000 13,000 6,500
Net income - 1,940,534 - - 1,940,534
Unrealized gain (loss) on investments
available-for-sale, net of tax (144,517) - - - (144,517)
Less: reclassification adjustments
for gains included in net income (16,008) - - - (16,008)
--------- -----------
(160,525) (160,525
-----------
Total comprehensive income 1,780,009
--------- ----------- ------ --------- -----------
Balance, September 30, 1997 237,503 4,732,603 (97) (315) 7,208,119
Issuance and exercise of warrants - - - - 57,750
Net income - 2,358,186 - - 2,358,186
Unrealized gain (loss) on investments
available-for-sale, net of tax (19,358) - - - (19,358)
-----------
Total comprehensive income 2,338,828
--------- ----------- ------ --------- -----------
Balance, September 30, 1998 218,145 7,090,789 (97) (315) 9,604,697
Purchase of treasury stock - - (5) (45) (45)
Dividends - (198,392) - - (198,392)
Net income - 3,835,529 - - 3,835,529
Unrealized gain on investments
available-for-sale, net of tax 16,154 - - - 16,154
-----------
Total comprehensive income 3,851,683
--------- ----------- ------ --------- -----------
Balance, September 30, 1999 $234,299 $10,727,926 (102) $ (360) $13,257,943
========= =========== ====== ========= ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMCON Distributing Company
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,835,529 $ 2,358,186 $ 1,940,534
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,861,364 1,120,482 868,744
(Gain) loss on sales of fixed assets, land held
for sale and securities 259 (46,955) (112,520)
Gain on sale of Denver beer distributorship - - (1,102,205)
Proceeds from sales of trading securities - 157,207 92,548
Deferred income taxes (89,875) 11,167 (8,664)
Provision for losses on doubtful accounts and
inventory obsolescence 314,720 640,494 33,836
Changes in assets and liabilities, net of effect
of acquisitions:
Accounts receivable (3,303,670) (1,629,334) (916,159)
Inventories (2,082,434) (2,554,073) (801,978)
Other current assets (537,548) (180,622) 80,161
Other assets (119,505) (45,366) (42,648)
Accounts payable 2,632,025 432,398 661,948
Accrued expenses and accrued wages, salaries and
bonuses 720,564 (44,771) 490,413
Income taxes payable (858,360) 471,985 (63,766)
Other liabilities - (2,577) -
----------- ----------- -----------
Net cash provided by operating activities 2,373,069 688,221 1,120,244
----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (761,706) (782,440) (891,783)
Acquisitions, net of cash acquired (5,879,143) (7,119,254) (499,109)
Proceeds from sales of fixed assets 54,880 86,887 160,961
Proceeds from repayment of advance to officer - 100,000 25,000
Proceeds from sale of Denver beer distributorship - - 2,371,994
Proceeds from sales of available-for-sale securities - - 33,967
----------- ----------- -----------
Net cash (used in) provided by investing
activities (6,585,969) (7,714,807) 1,201,030
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings of long-term debt 1,100,000 4,500,000 516,741
Net (payments) proceeds on bank credit agreement 9,599,775 3,483,241 (1,239,484)
Payments on long-term (4,648,363) (766,025) (399,555)
Debt issue costs - (182,234) -
Proceeds from exercise of warrants - 3,000 -
Dividends paid (148,794) - -
Purchase of treasury stock (45) - -
Redemption of preferred stock - - (1,200,000)
Proceeds from exercise of stock options - - 6,500
----------- ----------- -----------
Net cash provided by (used in) financing
activities 5,902,573 7,037,982 (2,315,798)
----------- ----------- -----------
Net increase in cash 1,689,673 11,396 5,476
Cash, beginning of year 38,369 26,973 21,497
----------- ----------- -----------
Cash, end of year $ 1,728,042 $ 38,369 $ 26,973
=========== =========== ===========
Supplemental cash flow information:
Cash paid during the year for interest $ 1,675,323 $ 1,745,609 $ 868,378
Cash paid during the year for income taxes 3,166,246 1,145,770 1,420,936
Supplemental noncash information:
Issuance of warrants in connection with acquisition - 54,750 -
Unrealized gain (loss)on available-for-sale
securities, net 16,154 (19,358) (160,525)
Acquisition of equipment through capital leases 80,676 - -
Acquisition financed with subordinated debt $10,000,000 - -
The accompanying notes are an integral part
of these financial statements.
</TABLE>
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMCON Distributing Company
1. Summary of Significant Accounting Policies:
Company Operations:
AMCON Distributing Company (together with its wholly-owned subsidiary, Food
For Health Co., Inc. and its wholly-owned subsidiaries, U.S. Health
Distributors, Inc., Chamberlin's Natural Foods, Inc. and Health Food
Associates, Inc.) operates 9 distribution centers and 13 retail health food
stores in the Great Plains, Rocky Mountain, Western and Southern regions of
the United States. AMCON sells approximately 24,000 different consumer
products, including cigarettes and tobacco products, candy and other
confectionery, beverages, groceries, paper products, health and beauty care
products, natural food and related products, frozen and chilled products, and
institutional food service products.
The Company distributes products primarily to retailers such as convenience
stores, discount and general merchandise stores, grocery stores and
supermarkets, health food stores, natural food stores, drug stores and gas
stations. In addition, the Company services institutional customers,
including restaurants and bars, schools, sports complexes and vendors, as well
as other wholesalers.
AMCON also operates seven (7) retail health food stores in Florida under the
name Chamberlin's Market & Cafe and six (6) in the Midwest under the name
Akin's Natural Foods Market. These stores, which were acquired during fiscal
1999, carry natural supplements, groceries, health and beauty care products
and other food items.
The Company's operating income is subject to a number of factors which are
beyond the control of management, such as changes in manufacturers' cigarette
pricing which affects the market for generic and private label cigarettes and
competing retail stores opening in close proximity to the Company's retail
stores. While the Company sells a diversified product line, it remains
dependent upon cigarette sales which represented approximately 65% of its
revenue and 40% of its gross margin in fiscal 1999. Net income is heavily
dependent on sales of the Company's private label cigarettes and volume
discounts received from manufacturers in connection with such sales.
Accounting Period:
AMCON's fiscal year ends on the last Friday in September. For convenience,
the fiscal years have been indicated as September 30, whereas the actual year
ends were September 24, 1999, September 25, 1998 and September 26, 1997. Each
fiscal year was comprised of 52 weeks.
Principles of Consolidation:
The consolidated financial statements include the accounts of AMCON and its
subsidiaries. Intercompany accounts and transactions have been eliminated.
Cash and Accounts Payable:
AMCON uses a cash management system under which an overdraft is the normal
book balance in the primary disbursing accounts. The overdrafts included in
accounts payable which were $4,423,433 and $2,972,303 at September 30, 1999
and 1998, respectively, reflect the checks drawn on the disbursing accounts
that have been issued but have not yet cleared through the banking system.
The Company's policy has been to fund these outstanding checks as they clear
with borrowings under its revolving credit facilities (see Note 7).
F-7
1. Summary of Significant Accounting Policies (continued):
Marketable Securities and Investments:
AMCON has classified marketable securities and investments as either
available-for-sale or trading securities. The carrying amounts of the
securities used in computing unrealized and realized gains and losses are
determined by specific identification. Fair values are determined using
quoted market prices. For available-for-sale securities, net unrealized
holding gains and losses are reported as a separate component of shareholders'
equity, net of tax. For trading securities, net unrealized holding gains and
losses are included in the determination of net income.
Accounts Receivable:
Accounts receivable consist primarily of amounts due to the Company from its
normal business activities. An allowance for doubtful accounts is maintained
to reflect the expected uncollectibility of accounts receivable based on past
collection history and specific risks identified in the portfolio.
Inventories:
Inventories consist of finished products purchased in bulk quantities to be
sold to the Company's customers. Effective in fiscal 1999, AMCON changed the
method of accounting for inventory from the first-in, first-out, ("FIFO")
method to the last-in, first-out ("LIFO") method. LIFO inventories at
September 30, 1999 were approximately $2.0 million less than the amount of
such inventories valued on a FIFO basis. The change in the inventory
valuation method was made to better match current costs with current revenue.
The change to LIFO reduced net income and basic earnings per share for the
year ended September 30, 1999 by $1,284,000 and $0.52, respectively. Pro
forma effects of retroactive application of LIFO are not determinable and
there is no cumulative effect on retained earnings at the beginning of the
year.
Fixed Assets:
Fixed assets are stated at cost. Major renewals and improvements are
capitalized and charged to expense through depreciation charges. Repairs and
maintenance are charged to expense as incurred. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
depreciable assets. Estimated useful lives are as follows:
Years
--------
Buildings 7 - 40
Warehouse equipment 5 - 7
Furniture, fixtures and leasehold
improvements 5 - 18
Vehicles 5
Costs and accumulated depreciation applicable to assets retired or sold are
eliminated from the accounts, and the resulting gains or losses are reported
in the statement of income.
Revenue Recognition:
AMCON recognizes revenue when products are shipped from distribution centers
or sold to consumers in retail stores. Sales are shown net of returns and
discounts.
F-8
1. Summary of Significant Accounting Policies (continued):
Income Taxes:
Deferred income taxes are determined based on temporary differences between
the financial reporting and tax basis of the Company's assets and liabilities,
using enacted tax rates in effect during the years in which the differences
are expected to reverse.
Comprehensive Income:
In 1999, AMCON adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130). SFAS 130 requires the display
and reporting of comprehensive income, which includes all changes in stock
holders' equity with the exception of additional investments by shareholders
or distributions to shareholders. Comprehensive income for the Company
includes net income and the changes in net unrealized holding gains on
investments charged or credited to stockholders' equity. The adoption of SFAS
130 had no impact on total shareholders' equity.
Long Lived Assets:
Management reviews goodwill and other long lived assets whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Impairments would be recognized in operating results if a
permanent reduction in value were to occur based on discounted cash flows.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. Acquisitions:
In November 1998, Food For Health Company, Inc. ("FFH"), a wholly-owned
subsidiary of AMCON Distributing Company, purchased all of the outstanding
stock of U.S. Health Distributors, Inc. ("USHD"), a distributor of health and
natural foods based in Melbourne, Florida, for $1.3 million in cash. The
acquisition was funded by a $1.1 million term loan. The acquisition was
accounted for using the purchase method. Based on an independent valuation,
the portion of the purchase price allocated to goodwill and other intangibles
is $1.5 million and will be amortized over 20 years.
In March 1999, FFH purchased all of the outstanding stock of Chamberlin
Natural Foods, Inc. (d/b/a Chamberlin's Market & Cafe), a chain of six health
and natural food product retail stores based in Winter Park, Florida, for $2.2
million in cash. The acquisition was funded through the Company's revolving
line of credit (the "Facility"). In addition, Chamberlin's existing short and
long-term debt of $2.8 million was paid in full through borrowings under the
"Facility." The acquisition was accounted for using the purchase method.
Based on an independent valuation, the portion of the purchase price allocated
to trademark and tradenames, goodwill and other intangibles is $2.0 million
and will be amortized over 20 years.
F-9
2. Acquisitions (continued):
In September, 1999, FFH purchased all of the outstanding stock of Health Food
Associates, Inc. (d/b/a Akin's Natural Foods Market) for a purchase price of
$13.4 million. Funding for the acquisition was provided as follows: $4.0
million through borrowings under the Facility; $2.0 million through borrowings
under an 8% Convertible Subordinated Note (the "Convertible Note") from FFH to
the sellers; and $8.0 million through borrowings under a Collateralized
Promissory Note (the "Collateralized Note") from FFH to the sellers. A
receivable of approximately $600,000 is due from the sellers based on purchase
price adjustments outlined in the purchase agreement and is included in other
current assets. The acquisition was accounted for using the purchase method.
Based on an independent valuation, the portion of the purchase price allocated
to trademark and tradenames, goodwill and other intangibles is $7.7 million
and will be amortized over 20 years.
Operating results for each of these acquisitions are included in the
accompanying consolidated statements of operations from the respective
acquisition dates. Assuming the above described companies had been acquired
on October 1, 1997, unaudited pro forma consolidated revenues, net income and
net income per share would have been as follows:
1999 1998
------------- -------------
Sales $ 418,792,000 $ 340,308,000
Net income $ 4,121,000 $ 2,702,000
Earnings per share:
Basic $1.66 $1.10
Diluted $1.59 $1.07
The pro forma information provided above is based on assumptions that
management deems appropriate, but does not purport to be indicative of the
results that would have actually occurred had the acquisitions taken place on
October 1, 1997.
F-10
3. Earnings Per Share:
Basic earnings per share is calculated by dividing net income by the weighted
average common shares outstanding for each period. Diluted earnings per share
is calculated by dividing net income by the sum of the weighted average common
shares outstanding and the weighted average dilutive options and warrants,
using the treasury stock method.
<TABLE>
<CAPTION>
For the years ended September 30,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
Basic Basic Basic
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average common
shares outstanding 2,480,000 2,458,159 2,450,474
Weighted average treasury
shares (98) (97) (2,692)
----------- ----------- -----------
Weighted average number of
shares outstanding 2,479,902 2,458,062 2,447,782
=========== =========== ===========
Net income $ 3,835,529 $ 2,358,186 $ 1,940,534
=========== =========== ===========
Earnings per share $ 1.55 $ 0.96 $ 0.79
=========== =========== ===========
Diluted Diluted Diluted
----------- ----------- -----------
Weighted average common
shares outstanding 2,480,000 2,458,159 2,450,474
Weighted average treasury
shares (98) (97) (2,692)
Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds
used to purchase treasury stock 115,934 77,389 3,680
----------- ----------- -----------
Weighted average number of
shares outstanding 2,595,836 2,535,451 2,451,462
=========== =========== ===========
Net income $ 3,835,529 $ 2,358,186 $ 1,940,534
=========== =========== ===========
Earnings per share $ 1.48 $ 0.93 $ 0.79
=========== =========== ===========
</TABLE>
F-11
4. Fixed Assets, Net:
Fixed assets at September 30, 1999 and 1998 consisted of the following:
1999 1998
----------- -----------
Land and buildings $ 725,597 $ 750,809
Condominium and furnishings 1,246,625 1,237,065
Warehouse equipment 5,238,860 4,106,245
Furniture, fixtures and
leasehold improvements 4,667,681 2,066,191
Vehicles 1,733,182 1,764,763
Capital equipment leases 482,701 248,928
----------- -----------
14,094,646 10,174,001
Less accumulated depreciation & amortization:
Owned equipment 6,405,944 5,582,829
Capital equipment leases 185,775 124,465
----------- -----------
$ 7,502,927 $ 4,466,707
=========== ===========
Included in land and buildings is a warehouse held for sale. At September 30,
1999, the warehouse held for sale was recorded at its net realizable fair
value. The property was sold in November 1999.
5. Marketable Securities and Investments:
Investments in equity securities at September 30, 1999 and 1998 consisted of
the following:
September 30, 1999
------------------------------------
Unrealized Market
Cost Gain(Loss) Value
--------- ---------- ---------
Investments (available-for-sale) $ 164,370 $ 386,321 $ 550,691
========= ========= =========
September 30, 1998
------------------------------------
Unrealized Market
Cost Gain Value
--------- --------- ---------
Investments (available-for-sale) $ 150,762 $ 357,613 $ 508,375
========= ========= =========
The Company did not sell any available-for-sale investments in 1999 or 1998.
The Company realized gains on the sale of available-for-sale investments of
$27,600 in fiscal 1997. The Company recognized gains of $29,400 and $72,222
on trading securities during 1998 and 1997, respectively.
F-12
6. Other Assets:
Other assets at September 30, 1999 and 1998 consisted of the following:
1999 1998
------------ -----------
Trademarks and tradenames (less
accumulated amortization of $13,542) $ 8,686,458 $ -
Goodwill (less accumulated amortization
of $534,440 and $335,728) 4,279,235 1,832,008
Covenants not to compete (less
accumulated amortization of $153,850
and $262,374) 724,615 27,375
Favorable leases (less accumulated
(amortization of $56,375) 552,625 -
Cash surrender value of life
insurance policies 382,044 353,920
Debt issue costs (less accumulated
amortization of $66,062 and $29,376) 116,172 152,858
Other 23,741 9,028
------------ -----------
$ 14,764,890 $ 2,375,189
============ ===========
Trademarks and tradenames arose from the acquisitions of CNF and HFA during
1999 and are amortized using the straight-line method over 20 years.
Goodwill arose from the acquisition of certain businesses and is amortized
using the straight-line method over periods ranging from 20 to 25 years.
Amortization expense was $198,712, $96,919 and $41,926 for the years ended
September 30, 1999, 1998, and 1997, respectively. During 1997, the Company
disposed of goodwill in the amount of $358,553 (net) in connection with the
sale of the Denver beer distributorship.
The covenants not to compete are amortized using the straight-line method over
periods ranging from 2 to 5 years. Amortization expense was $126,475, $29,708
and $63,625 for the years ended September 30, 1999, 1998 and 1997,
respectively.
Favorable leases arose from the acquisitions of USHD and HFA during fiscal
1999 and represent lease agreements in which the lease rates were below market
value on the acquisition date. The leases are amortized over periods ranging
from 3 to 11 years.
F-13
7. Long-term Obligations:
Long-term obligations at September 30, 1999 and 1998 consisted of the
following:
1999 1998
------------ -----------
Revolving credit facility with a bank,
interest payable monthly at the bank's
base rate less 0.5% or LIBOR plus 1.75%,
as selected by the Company (ranging from
6.81% to 7.75% at September 30, 1999);
principal due February 2002 $ 18,317,309 $10,964,888
FFH revolving credit facility with a
bank, interest payable monthly at the
bank's base rate less 0.5% or LIBOR
plus 2.00%, as selected by FFH
(approximately 7.75% at September 30,
1999); principal due February 2002 5,252,110 3,361,355
Note payable to a bank, interest
payable monthly at the bank's base
rate less 0.5% or LIBOR plus 1.75%
(ranging from 7.13% to 7.19% at
September 30, 1999); principal
payments of $85,096 due monthly
through November 2002 3,233,653 4,254,808
Note payable to bank, interest payable
monthly at the bank's base rate less
0.5% (7.75% at September 30, 1999);
principal payments of $18,000 due
monthly through May 2004 1,008,000 -
Non-revolving line of credit; paid
in full in January 1999 - 482,479
Obligations under capital leases, payable
in monthly installments with interest
ranging from 6.9% to 9.5% through
April 2001 (Note 13) 317,753 143,298
------------ -----------
28,128,825 19,206,828
Less current portion 10,133,393 3,439,169
------------ -----------
$ 17,995,432 $15,767,659
============ ===========
F-14
7. Long-term Obligations (continued):
In March 1998, ADC entered into a revolving credit facility with a bank (the
"Facility"). The Facility was amended in September 1999 to increase the
primary borrowing limit from $20 million to $25 million and remove the
additional $10 million facility which was collateralized by specific
inventory. The Facility allows ADC to borrow up to $25 million at any time,
subject to eligible accounts receivable and inventory requirements, and
provides for an additional $1.5 million facility to be used for transportation
equipment purchases. The Facility bears interest at the bank's base rate
("Prime") less 0.5% or LIBOR plus 1.75%, as selected by ADC. The Facility is
collateralized by all equipment, general intangibles, inventories and accounts
receivable, and with a first mortgage on the owned distribution center. As of
September 30, 1999 the unused portion of the credit agreement was $6,682,691.
The Facility expires on February 25, 2002.
The Facility contains covenants which, among other things, set forth certain
financial ratios and net worth requirements which adjust semiannually or
annually as specified in the Facility. For fiscal 2000 and 1999, the Facility
includes covenants that (i) restrict the incurrence of additional debt, (ii)
restrict payments, prepayments and repurchases of subordinated debt or capital
stock, (iii) restrict mergers and acquisitions and changes in business or
conduct of business and (iv) require the maintenance of certain financial
ratios and net worth levels including an average annual fixed charge ratio of
1.1 to 1.0, an average annual debt service coverage ratio of 1.50 to 1.0, a
debt to equity ratio of 4.0 to 1.0 (excluding debt associated with the
acquisition of FFH) and minimum tangible net worth of $4,500,000. In
addition, AMCON may not pay dividends with respect to its Common Stock without
the consent of the lender of the Facility. In December 1998, AMCON received
consent to pay cash dividends of up to $0.02 per share per quarter.
In March 1998, FFH entered into a revolving credit facility with a bank (the
"FFH Facility") which includes a separate revolving line of credit of up to
$1.0 million for USHD. The FFH Facility was amended in November 1999 to
increase the amount provided for maximum borrowings from $6 million to $8
million. Borrowings under the FFH Facility are collateralized by the assets
of FFH and are guaranteed by AMCON. Amounts under the FFH Facility bear
interest at Prime less 0.5% or LIBOR plus 2.00%, as selected by FFH. A
commitment fee of .25% of the annual average unutilized amount of the
commitment is required. As of September 30, 1999, FFH had borrowed
approximately $5.3 million under the FFH Facility. The FFH Facility expires
on February 25, 2002.
The FFH Facility contains covenants which, among other things, set forth
certain financial ratios and net worth requirements which adjust semiannually
or annually as specified in the FFH Facility. For fiscal 2000 and 1999, the
FFH Facility includes covenants that (i) restrict the incurrence of additional
debt, (ii) restrict payments, prepayments and repurchases of subordinated debt
or capital stock, (iii) restrict mergers and acquisitions and changes in
business or conduct of business and (iv) require the maintenance of certain
financial ratios and net worth levels including a debt to equity ratio of 4.0
F-15
7. Long-term Obligations (continued):
to 1.0 and minimum tangible net worth of $200,000. In addition, FFH may not
pay dividends with respect to its Common Stock without the consent of the
lender of the FFH Facility. As of September 30, 1999, FFH was not in
compliance with the debt to equity ratio or the net worth covenant due to the
acquisition of HFA in September 1999. However, FFH received waivers from the
lender for these covenant violations at September 30, 1999. The balance
outstanding at September 30, 1999 is classified as current.
In November 1997, the Company borrowed $4.5 million from a bank to finance the
purchase of the common stock of FFH (the "Acquisition Loan"). The Acquisition
Loan has a term of five years, bears interest at Prime less 0.5% or LIBOR plus
1.75%, as selected by the Company, and requires monthly payments equal to
accrued interest plus principal payments of $85,096, which began in August
1998. The loan is collateralized by the common stock of FFH.
In November 1998, FFH borrowed $1.1 million from a bank to finance the
purchase of the common stock of US Health Distributors, Inc. ("USHD"). The
loan has a term of five and one-half years, bears interest at Prime less 0.5%,
requires interest payments only for the first six months and monthly principal
payments of $18,000 for the term of the loan. The loan is collateralized by
the common stock of USHD.
At September 30, 1998, ADC maintained a $1,250,000 non-revolving line of
credit with a bank used to finance the purchase of trucks and delivery
equipment. In January 1999, ADC utilized proceeds from the Facility to
satisfy its obligation associated with the non-revolving line of credit.
The above long-term obligations, excluding obligations under the revolving
credit facilities, have contractual maturities as follows:
Year ending September 30
------------------------
2000 $ 1,381,283
2001 1,333,025
2002 1,310,967
2003 390,131
2004 144,000
-----------
$ 4,559,406
===========
Borrowings under the revolving credit facilities in the amount of $14,817,309
have been classified as long-term based on expected borrowing levels. Based
on discounted cash flows using current market rates for similar agreements,
the fair value of the Company's long-term debt obligations approximated
carrying value at September 30, 1999 and 1998.
F-16
8. Subordinated Debt:
Subordinated debt at September 30, 1999 and September 30, 1998 consisted of
the following:
1999 1998
------------ ----------
Convertible subordinated note payable,
interest payable quarterly at 8% per
annum; principal due at maturity of
the note, September 15, 2004 $ 2,000,000 $ -
Collateralized subordinated promissory
note payable, interest payable quarterly
at 8% per annum; annual principal payments
of $800,000 due annually through September
2004 with balance of $4,000,000 due
September 2004 8,000,000 -
------------ ----------
10,000,000 -
Less current portion 800,000 -
------------ ----------
$ 9,200,000 $ -
============ ==========
In September, 1999, FFH issued subordinated debt of $10.0 million, in addition
to $4.0 million borrowed on the Facility, to purchase all of the outstanding
stock of HFA. The subordinated debt is comprised of the following: a $2.0
million 8% Convertible Subordinated Note (the "Convertible Note") from FFH to
the sellers; and an $8.0 million Collateralized Promissory Note (the
"Collateralized Note") from FFH to the sellers. The Collateralized Note is
collateralized by a pledge of the stock of HFA. The principal balance of the
Convertible Note may be converted into stock of FFH if AMCON distributes its
interest in FFH to its shareholders (the "Spin-Off") at which time FFH would
become a publicly held corporation. The Convertible Note must be converted
within 60 days of any announcement regarding a Spin-Off of FFH. The number of
shares of FFH stock to be received upon conversion is determined based upon a
formula that takes into account FFH's consolidated gross sales, the
outstanding balance of the Convertible Note and the number of shares of FFH's
common stock outstanding at the time a Spin-Off is announced.
As of September 30, 1999, principal payments are due on subordinated debt as
follows:
Year ending September 30
------------------------
2000 $ 800,000
2001 800,000
2002 800,000
2003 800,000
2004 6,800,000
-----------
$10,000,000
===========
Based on discounted cash flows using current market rates for similar
agreements, the fair value of the Company's long-term debt obligations
approximated carrying value at September 30, 1999 and 1998.
F-17
9. Other (Income) Expense:
Other (income) expense consisted of the following for the years ended
September 30, 1999, 1998 and 1997:
1999 1998 1997
--------- ---------- -----------
Interest income $ (2,468) $ (61,398) $ (42,671)
Dividends (17,850) (14,941) (13,909)
Rent income (18,880) (24,880) (14,462)
Royalties (15,924) (41,710) (34,568)
Gain on marketable
securities and
investments - (29,420) (99,831)
Gain from disposition
of fixed assets (22,119) (22,312) (12,689)
Gain on sale of beer
distributorship and
distribution rights - - (1,102,205)
Other 4,916 (81,626) (32,398)
--------- ---------- -----------
$ (72,325) $ (276,287) $(1,352,733)
========= ========== ===========
On October 4, 1996, the Company sold its beer distributorship for a purchase
price of $2.4 million. The gain associated with disposition of the assets was
$1,102,205. The Company then closed the Denver distribution facility.
10. Income Taxes:
Components of income tax expense (benefit) for the fiscal years ended
September 30, 1999, 1998 and 1997 consisted of the following:
1999 1998 1997
----------- ----------- ----------
Current:
Federal $ 2,125,264 $ 1,325,618 $1,201,058
State 310,535 206,068 156,112
----------- ----------- ----------
2,435,799 1,531,686 1,357,170
----------- ----------- ----------
Deferred:
Federal (78,417) 9,735 (7,689)
State (11,458) 1,432 (975)
----------- ----------- ----------
(89,875) 11,167 (8,664)
----------- ----------- ----------
Provision for income
taxes $ 2,345,924 $ 1,542,853 $1,348,506
=========== =========== ==========
The difference between the Company's income tax expense as reported in the
accompanying financial statements and that which would be calculated using the
statutory income tax rate of 34% on income before taxes is as follows for the
fiscal years ended September 30, 1999, 1998 and 1997:
F-18
10. Income Taxes (continued):
1999 1998 1997
----------- ----------- ----------
Tax at statutory rate $ 2,101,694 $ 1,326,353 $1,118,274
Amortization of
goodwill 70,462 42,742 14,255
Nondeductible business
expenses 21,741 26,351 15,207
State income taxes, net of
federal tax benefit 205,811 156,551 102,397
Other (53,784) (9,144) 98,373
----------- ----------- ----------
$ 2,345,924 $ 1,542,853 $1,348,506
=========== =========== ==========
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities giving rise to the net deferred tax asset at
September 30, 1999 and 1998 relate to the following:
1999 1998
----------- -----------
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 260,509 $ 175,157
Accrued expenses 144,575 64,785
Net operating loss carryforwards 96,145 123,809
Inventory 276,053 309,391
Other 14,930 -
----------- -----------
792,212 673,142
Noncurrent:
Net operating loss carryforwards 211,138 382,434
Other liabilities 169,458 166,693
Other 24,530 8,437
----------- -----------
405,126 557,564
----------- -----------
Total deferred tax assets $ 1,197,338 $ 1,230,706
=========== ===========
Deferred tax liabilities:
Current:
Trade discounts $ 75,190 $ 102,399
----------- -----------
Noncurrent:
Fixed assets 373,318 442,895
Tradenames 514,583 -
Leases 46,016 -
Unrealized gains on available-for-sale
investments 149,664 139,468
----------- -----------
1,083,581 582,363
----------- -----------
Total deferred tax liabilities $ 1,158,771 $ 684,762
=========== ===========
F-19
10. Income Taxes (continued):
Net deferred tax assets (liabilities):
Current $ 717,022 $ 570,743
Noncurrent (678,455) (24,799)
----------- -----------
$ 38,567 $ 545,944
=========== ===========
The Company did not record any valuation allowances against deferred tax
assets at September 30, 1999 or 1998 because management believes future
taxable income will more likely than not be sufficient to realize such
amounts. The net operating loss was acquired in connection with the
acquisition of Sheya Brothers in 1993 and FFH in 1997. The utilization of the
net operating loss related to Sheya Brothers of $298,000 at September 30, 1999
is limited (by Internal Revenue Code Section 382) to approximately $100,000
per year through 2002. The utilization of the net operating loss related to
FFH of $919,000 at September 30, 1999 is limited (by Internal Revenue Code
Section 382) to approximately $232,000 per year through 2009.
11. Profit Sharing Plan:
AMCON maintains profit sharing plans covering substantially all full-time
employees. The plans provide for AMCON to make profit sharing contributions
of up to 1% of qualified employees' gross wages. Employees may also make
additional voluntary contributions which may be matched 50% by the Company up
to the first 6% contributed. The Company contributed $272,234, $241,009 and
$143,098 (net of employee forfeitures) to the profit sharing plans during the
years ended September 30, 1999, 1998, and 1997, respectively.
12. Related Party Transactions:
The Company was charged $60,000 by AMCON Corporation, the former parent of the
Company for each of the years ended September 30, 1999, 1998 and 1997, as
consideration for office rent and management services, which is included in
selling, general and administrative expenses.
The remaining interest in a condominium and furnishings and related mortgage
loan, was transferred from AMCON Corporation to the Company in 1992, as
partial settlement of intercompany balances. Under a profit sharing agreement
with AMCON, the greater of $400,000 of the net gain or one-half of the net
gain from the ultimate sale of the real estate will be allocated to AMCON.
The Company estimates the amount of gain payable to AMCON had the real estate
sold on September 30, 1999 would have been $500,000.
13. Commitments:
The Company leases certain office equipment under a capital lease. The
carrying value of these assets was $316,242 and $143,218 as of September 30,
1999 and 1998, respectively, net of accumulated amortization of $211,036 and
$110,642.
F-20
13. Commitments (continued):
The Company leases various office and warehouse facilities and equipment under
noncancellable operating leases. Rent charged to expense during the years
ended September 30, 1999, 1998 and 1997 under such lease agreements was
$2,974,431, $2,138,042 and $644,753, respectively. As of September 30, 1999,
minimum future lease commitments are as follows:
Year ending September 30,
Capital Operating
Leases Leases
---------- ------------
2000 $ 150,847 $ 3,433,573
2001 120,151 2,903,694
2002 76,973 2,342,927
2003 2,108 1,789,172
2004 - 1,588,217
Thereafter - 2,715,848
---------- ------------
Total minimum lease payments 350,079 $ 14,773,431
Less amount representing interest 32,326 ============
----------
Present value of net minimum
lease payments $ 317,753
==========
14. Stock Option Plan:
In June 1994, the Company adopted the 1994 Stock Option Plan (the "Stock
Option Plan"). The maximum number of shares of common stock which may be
issued pursuant to the Stock Option Plan is 300,000. Options are generally
granted at the stock's fair market value at date of grant. Options issued to
shareholders holding 10% or more of the Company's stock are generally issued
at 110% of the stock's fair market value at date of grant. On November 10,
1997, options to purchase 140,000 shares of common stock were issued to
management employees at exercise prices of $2.88 and $3.16. During fiscal
1999, options to purchase 105,000 shares of common stock were issued to
management employees at exercise prices between $6.75 and $9.90. At September
24, 1999, 120,200 options were fully vested and exercisable. In addition,
options to purchase 30,000 shares of common stock were issued to certain
directors at an exercise price of $2.875 in fiscal 1998 and options to
purchase 28,000 shares of common stock were issued to outside directors at
exercise prices ranging from $6.75 to $9.00 in fiscal 1999. These options
were not issued pursuant to the Stock Option Plan. At September 24, 1999,
46,000 shares issued to certain directors were fully vested and exercisable.
The options have varying vesting schedules ranging up to five years and expire
ten years after the date of grant.
F-21
14. Stock Option Plan (continued):
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). Accordingly, no compensation cost has been
recognized for the stock option plan. Had compensation cost for the Company's
stock option plan been determined on the fair value at the grant date for
awards issued in or subsequent to 1995 consistent with the provisions of SFAS
123, the Company's net income and earnings per share on a pro forma basis
would have been as follows:
1999 1998 1997
----------- ----------- -----------
Net income - as reported $ 3,835,529 $ 2,358,187 $ 1,940,534
Net income - pro forma $ 3,657,477 $ 2,293,014 $ 1,940,534
Basic EPS - as reported $ 1.55 $ 0.96 $ 0.79
Basic EPS - pro forma $ 1.47 $ 0.93 $ 0.79
Diluted EPS - as reported $ 1.48 $ 0.93 $ 0.79
Diluted EPS - pro forma $ 1.42 $ 0.90 $ 0.79
The above pro forma results are not likely to be representative of the effects
on reported net income for future years since additional awards are made
periodically.
The fair value of the weighted average of each year's option grants is
estimated as of the date of grant using the Black-Scholes option-pricing model
using the following weighted-average assumptions: dividend yield of 1.0% for
1999 and 1.8% for 1998; expected volatility of 58.31% for 1999 and 60.30% for
1998; risk free interest rate based on U.S. Treasury strip yield at the date
of grant of 5.68% for 1999 and 5.90% for 1998; and expected lives of 5 to 10
years.
The table below summarizes information about stock options outstanding as of
the following fiscal year ends:
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------
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 182,000 $2.84 16,000 $1.63 22,000 $1.63
Granted 133,000 8.41 170,000 2.95 - -
Exercised - - - - (4,000) 1.63
Forfeited/Expired - - (4,000) $2.26 (2,000) $1.63
--------- ------- --------- ------- --------- -------
Outstanding at end of period 315,000 $5.19 182,000 $2.84 16,000 $1.63
========= ======= ========= ======= ========= =======
Shares available for options
that may be granted 39,000 144,000 280,000
========= ========= =========
Weighted-average grant date fair value
of options granted during the
period - exercise price equals stock
market price at grant $5.20 $1.71
======= =======
Weighted-average grant date fair value
of options granted during the
period - exercise price exceeds stock
market price at grant $4.47 $1.38
======= =======
</TABLE>
F-22
14. Stock Option Plan (continued):
The following summarizes options outstanding at September 30, 1999:
<TABLE>
<CAPTION>
Exercisable
Remaining -----------------------------
Exercise Number Weighted-Average Weighted-Average Number Weighted-Average
Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------- ----------- ---------------- ---------------- ----------- ----------------
<C> <C> <C> <C> <C> <C>
1995 Options $1.63 14,000 6.3 years $1.63 14,000 $1.63
1997 Options $2.88 - $3.16 168,000 8.1 years $2.94 81,600 $3.00
1999 Options $6.50 - $6.75 45,000 9.2 years $6.69 20,000 $6.75
1999 Options $8.38 - $9.90 88,000 9.8 years $9.28 23,000 $9.00
</TABLE>
15. Business Segments:
AMCON operates within two business segments; the wholesale distribution of
consumer products by ADC and FFH and the retail sale of health and natural
food products. The business units within each segment are evaluated on
revenues, operating income and income before taxes and extraordinary items.
The following table represents AMCON's adoption of Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information."
Wholesale
Distribution Retail Consolidated
------------- ----------- -------------
Year ended September 30, 1999:
External revenues:
Cigarettes $ 251,076,045 $ - $ 251,076,045
Health food 42,637,607 6,961,742 49,599,349
Confectionery 30,191,317 - 30,191,317
Tobacco, beverage & other 54,634,467 - 54,634,467
------------- ----------- -------------
Total external revenues 378,539,436 6,961,742 385,501,178
Intersegment sales:
Health food 701,101 - 701,101
------------- ----------- -------------
Total intersegment sales 701,101 - 701,101
Depreciation and amortization 1,560,222 301,142 1,861,364
Operating income 7,664,526 199,439 7,863,965
Interest expense 1,564,096 190,741 1,754,837
Income before taxes 5,994,405 187,048 6,181,453
Total assets 47,965,695 20,623,521 68,589,216
Capital expenditures 740,919 20,787 761,706
F-23
15. Business Segments (continued):
Wholesale
Distribution Retail Consolidated
------------- ----------- -------------
Year ended September 30, 1998:
External revenues:
Cigarettes $ 185,524,096 $ - $ 185,524,096
Health food 31,197,993 - 31,197,993
Confectionery 29,286,831 - 29,286,831
Tobacco, beverage & other 48,272,403 - 48,272,403
------------- ----------- -------------
Total external revenues 294,281,323 - 294,281,323
Intersegment sales - - -
Depreciation and amortization 1,120,482 - 1,120,482
Operating Income 5,439,307 - 5,439,307
Interest expense 1,814,555 - 1,814,555
Income before taxes 3,901,039 - 3,901,039
Total assets 39,643,737 - 39,643,737
Capital expenditures 782,440 - 782,440
Year ended September 30, 1997:
External revenues:
Cigarettes $ 117,598,733 $ - $ 117,598,733
Confectionery 21,726,956 - 21,726,956
Tobacco, beverage & other 39,665,289 - 39,665,289
------------- ----------- -------------
Total external revenues 178,990,978 - 178,990,978
Intersegment sales - - -
Depreciation and amortization 868,744 - 868,744
Operating Income 2,803,634 - 2,803,634
Interest expense 867,327 - 867,327
Income before taxes 3,289,040 - 3,289,040
Total assets 23,497,301 - 23,497,301
Capital expenditures 891,783 - 891,783
Intersegment sales are at cost plus a nominal markup and are eliminated in the
consolidated statements of income. The retail segment was acquired in fiscal
1999, therefore no segment information is presented for the retail segment in
fiscal years 1998 and 1997. Segment information for the retail segment
presented in fiscal 1999 represents approximately six months of operations of
CNF and two weeks of operations of HFA.
16. Subsequent Event:
In December 1999, the Board of Directors declared a $0.03 per share cash
dividend and a special ten percent (10%) stock dividend. The cash dividend
will be paid on January 21, 2000 to shareholders of record on December 31,
1999. The stock dividend will be paid in February 2000 to shareholders of
record on January 25, 2000. Fractional shares will not be issued, but will be
paid in cash. The cash paid will not be material in amount.
F-24
DIRECTORS AND CORPORATE OFFICERS
DIRECTORS
William F. Wright
Chairman
Kathleen M. Evans
President
Jerry Fleming
President of
Food For Health Company, Inc.
J. Tony Howard /2/
President of Nebraska Distributing Company
Allen D. Petersen /1/
Chairman and Chief Executive Officer of
American Tool Companies, Inc.
Timothy R. Pestotnik /1/
Partner with the law firm
Luce Forward Hamilton & Scripps
William R. Hoppner /2/
Consultant
/1/ Audit Committee
/2/ Compensation Committee
CORPORATE OFFICERS
William F. Wright
Chairman
Kathleen M. Evans
President
Jerry Fleming
President of
Food For Health Company, Inc.
Michael D. James
Secretary, Treasurer and
Chief Financial Officer
AMCON DISTRIBUTING COMPANY
CORPORATE HEADQUARTERS
AMCON Distributing Company
10228 L Street
Omaha, Nebraska 68127
(402) 331-3727
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1299 Landmark Center
Omaha, Nebraska 68102
ANNUAL STOCKHOLDERS' MEETING
Tuesday, March 28, 2000
9:00 a.m.
Embassy Suites Hotel
Omaha, Nebraska 68102
ADDITIONAL INFORMATION
The Form 10-K Annual Report to the Securities and
Exchange Commission provides certain additional
information and is available without charge upon
request to Michael D. James, Secretary, Treasurer
and Chief Financial Officer of the Company.
STOCK INFORMATION
AMCON Distributing Company's Common Shares
are traded on the NASDAQ SmallCap Market. The
symbol for the Common Stock is "DIST".
WEB SITE
http://www.amcon-dist.com
State of
Names Incorporation D/B/A (if applicable)
- ------------------------------ ------------- --------------------------
Food For Health Company, Inc. Arizona
U.S. Health Distributors, Inc. Florida
America Direct, Inc. Florida
Chamberlin Natural Foods, Inc. Florida Chamberlin's Market & Cafe
Health Food Associates, Inc. Oklahoma Akin's Natural Foods Market
/DOCUMENT>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
AMCON Distributing Company on Form S-8 of our report dated November 24, 1999,
except for Note 16, for which the date is December 20, 1999, on our audits of
the financial statements and financial statement schedules of AMCON
Distributing Company as of September 30, 1999 and 1998, and for each of the
three years in the period ended September 30, 1999, which report is
incorporated by reference in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Omaha, Nebraska
December 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance
Sheet at September 30, 1999 and the Statement of Income for the Year Ended
September 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 1,728
<SECURITIES> 0
<RECEIVABLES> 19,623
<ALLOWANCES> 677
<INVENTORY> 23,980
<CURRENT-ASSETS> 45,771
<PP&E> 14,095
<DEPRECIATION> 6,592
<TOTAL-ASSETS> 68,589
<CURRENT-LIABILITIES> 27,034
<BONDS> 27,195
0
0
<COMMON> 25
<OTHER-SE> 13,233
<TOTAL-LIABILITY-AND-EQUITY> 68,589
<SALES> 385,501
<TOTAL-REVENUES> 385,501
<CGS> 343,021
<TOTAL-COSTS> 343,021
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,755
<INCOME-PRETAX> 6,181
<INCOME-TAX> 2,346
<INCOME-CONTINUING> 3,836
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,836
<EPS-BASIC> 1.55
<EPS-DILUTED> 1.48
</TABLE>
