EXHIBIT 13.1
Annual Report to Stockholders
for the Fiscal Year Ended
September 30, 2000
TO OUR SHAREHOLDERS:
In this age of revised forecasts and earnings' adjustments, we at AMCON are
proud to advise you that, for fiscal year 2000, we achieved record sales and
record earnings per share for the fifth consecutive year. This was not
achieved without extremely hard work on the part of all of the people of
AMCON. We are also proud of the fact that, over the past five years, sales
have increased a total of 176% and earnings per share have increased a total
of 198%.
Part of our earnings for the fiscal year 2000 were aided by non-recurring
gains from the sale of the Company's condominium and settlement of a trademark
dispute. By the same token, part of our earnings for the fiscal year 1999
were aided by extraordinary price increases in some of our basic products.
For the present fiscal year we are striving hard to continue our record of
growth, in both sales and earnings per share, knowing full well that we cannot
rely upon such extraordinary events to repeat themselves. Whether or not we
can achieve such continued growth is uncertain. However, we will not fail for
lack of effort.
Fiscal year 2000 saw continued strong performance in our traditional
distribution area. It also saw disappointments in the natural foods segment,
as competition became increasingly more difficult. We believe that our health
food retail segment is beginning to show the results which we expected when we
entered that area. We continue to believe that we need to grow, by
acquisition and internally, in this area. During last year, we expanded our
retail health food operations by adding two locations through acquisition. At
the same time, we are re-appraising the validity of our commitment to
wholesale distribution in the health food sector.
Last year we committed to acquire Hawaiian Natural Water and expect that
acquisition to come on line in 2001. We believe that Hawaiian Natural owns
attractive trademarks and names, and know that the company produces a superb
product. As we add our efforts to distribute that product, we hope that you
will have the opportunity to try the products and trust that you will agree
with our analysis. Having in the past a relatively small number of sales
means that the addition of a relatively small amount of additional sales can
make that acquisition accretive to our Company.
In addition, we are looking at acquisitions in our traditional distribution
area and hope to expand that business in a financially sound way. We believe
we operate that segment in a very efficient manner and can utilize our
operating philosophies to effectively expand in the future by acquisition.
At the beginning of year 2000, we moved our stock listing to the American
Stock Exchange and changed our trading symbol to "DIT." In addition,
throughout the year, we continued to pay a cash dividend. That dividend was
increased by 50% to $.03 per share on a quarterly basis. Although we cannot
predict the future, nor can we guarantee continuation, it is our hope that the
dividends will continue with regularity.
As always, both of us are interested in hearing from you with any questions,
suggestions, or comments. We await our future with growing anticipation.
However, we are also cognizant that, with the vagaries of the national economy
and other factors, continued success will not come to us without continued
hard work. We appreciate the support which you, our shareholders, give us, and
hope that, in the short-term future, the equity markets will come to
appreciate our Company to a much greater degree. In addition, we are most
grateful to our suppliers and customers without whom there would be no
business. But most of all we appreciate the efforts of every single one of
our employees it is they who truly are AMCON, and it is they who have made
our success to date possible.
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, 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales................................... $ 466,125 $ 385,501 $ 294,281 $ 178,991 $ 176,145
Cost of sales........................... 410,511 343,021 262,633 159,435 155,885
--------- --------- --------- --------- --------
Gross profit............................ 55,614 42,480 31,648 19,556 20,260
Operating expense....................... 48,706 34,616 26,209 16,753 17,504
--------- --------- --------- --------- ---------
Income from operations.................. 6,908 7,864 5,439 2,803 2,756
Interest expense........................ 3,048 1,754 1,814 867 1,149
Other (income) expense, net............. (2,160) (72) (276) (1,353) (697)
--------- --------- --------- --------- ---------
Income before income taxes 6,020 6,182 3,901 3,289 2,304
Income taxes 2,116 2,346 1,543 1,348 968
--------- --------- --------- --------- ---------
Net income.............................. 3,904 3,836 2,358 1,941 1,336
Accretion of preferred stock /1/ ....... - - - - (83)
--------- --------- --------- --------- ---------
Net income.............................. $ 3,904 $ 3,836 $ 2,358 $ 1,941 $ 1,253
========= ========= ========= ========= =========
Earnings per common and common
equivalent share attributable to
common shareholders:
Basic: $ 1.43 $ 1.41 $ 0.87 $ 0.72 $ 0.46
========= ========= ========= ========= =========
Diluted: $ 1.37 $ 1.35 $ 0.85 $ 0.72 $ 0.46
========= ========= ========= ========= =========
Weighted average shares outstanding:
Basic................................ 2,734,862 2,727,892 2,703,868 2,692,560 2,690,493
Diluted.............................. 2,853,320 2,855,419 2,788,996 2,696,608 2,690,493
</TABLE>
2
<TABLE>
<CAPTION>
(Dollars in thousands)
--------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital ....................... $ 27,373 $ 18,737 $ 18,474 $ 11,158 $ 11,572
Total assets............................ 72,996 68,589 39,644 23,497 23,026
Long-term obligations and subordinated
debt /2/............................... 40,583 38,129 19,207 9,123 10,245
Shareholders' equity /4/................ 16,855 13,258 9,605 7,208 /3/ 6,621
</TABLE>
------------------------
/1/ Preferred stock valued at $1,000,000 was issued in partial payment
for repurchase of warrants which were originally issued in 1989. The
preferred stock accreted to the redemption price of $1,200,000 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/ Net of dividends declared of $322,691 and $198,392 in fiscal 2000
and 1999, respectively.
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, 2000. 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, 2000 Fourth Third Second First
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales................................... $126,461 $115,884 $111,736 $112,044
Gross profit............................ 13,932 13,008 14,715 13,959
Income before taxes..................... 327 2,175 /1/ 1,894 1,624
Net income.............................. 306 1,381 1,206 1,012
Earnings per common and common
equivalent share:
Basic: $ 0.11 $ 0.50 $ 0.44 $ 0.37
======== ======== ======= =======
Diluted: $ 0.11 $ 0.49 $ 0.42 $ 0.35
======== ======== ======= =======
</TABLE>
3
<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 /2/ 10,646 /2/
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: $ 0.25 $ 0.31 $ 0.32 $ 0.53
======== ======== ======= =======
Diluted: $ 0.24 $ 0.30 $ 0.30 $ 0.51
======== ======== ======= =======
</TABLE>
/1/ Income before taxes includes gains associated with the sale of real
estate and intangible assets.
/2/ Gross profit in the first and second quarters include margin from a
significant cigarette price increase which took effect 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
On December 31, 1999, the Company moved from the NASDAQ SmallCap Market to the
American Stock Exchange ("AMEX"). The Company's trading symbol changed to
"DIT". The following table reflects the range of the high and low prices per
share of the Company's Common Stock reported by NASDAQ and AMEX for the years
ended September 29, 2000 and September 24, 1999. Quotations for fiscal 1999
and for the first quarter of fiscal 2000 represent inter-dealer quotations,
without adjustment for retail mark-ups, mark-downs or commissions and may not
necessarily represent market transactions. Quotations for the second, third
and fourth quarters of fiscal 2000 represent the high and low sales price of
the Company's common stock. All quotations have been adjusted to reflect the
10% stock dividend paid in February 2000. As of December 15, 2000, 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 29, 2000:
4th Quarter $ 6.00 $ 5.00
3rd Quarter 6.81 5.25
2nd Quarter 7.72 6.13
1st Quarter 9.09 6.42
4
Year ended September 24, 1999:
4th Quarter $ 9.09 $ 6.71
3rd Quarter 9.32 5.45
2nd Quarter 7.73 5.17
1st Quarter 7.39 3.86
During the fiscal year ended September 29, 2000, the Board of Directors
declared cash dividends of $0.03 per share per quarter or $0.12 per share for
the year. In December 1999, the Board of Directors declared 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 24,200 shares of its
common stock to management employees at an exercise price of $1.48 per share
(shares and exercise price adjusted for 10% stock dividend paid in February
2000). On November 10, 1997, options to purchase 154,000 shares of common
stock were issued to management employees at exercise prices of $2.61 and
$2.88 (shares and exercise price adjusted for 10% stock dividend paid in
February 2000). During fiscal 1999, options to purchase 115,500 shares of
common stock were issued to management employees at exercise prices between
$5.91 and $9.00 (shares and exercise price adjusted for 10% stock dividend
paid in February 2000). During fiscal 2000, options to purchase 32,900 shares
of common stock were issued to management employees at an exercise price of
$5.75. At September 29, 2000, options to acquire 131,076 shares of common
stock were fully vested and exercisable.
In November 1997, AMCON issued options to acquire 33,000 shares of its common
stock at an exercise price of $2.61 per share (shares and exercise price
adjusted for 10% stock dividend paid in February 2000). 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
22,000 shares of AMCON's stock were issued to the Company's four independent
directors at an exercise price of $6.14 per share (shares and exercise price
adjusted for 10% stock dividend paid in February 2000). The options were
fully vested at the date of grant. In June 1999, AMCON issued options to
acquire 8,800 shares of its common stock to its four independent directors at
an exercise price of $8.18 per share (shares and exercise price adjusted for
10% stock dividend paid in February 2000). The options were fully vested at
the date of grant. At September 29, 2000, 57,200 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, Chamberlin's Natural
Foods, Inc. and Health Food Associates, Inc.) operates 8 distribution centers
and 14 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
5
"traditional distribution business" of AMCON Distributing Company, the term
"FFH" means the "natural food distribution business" of Food For Health Co.,
Inc. 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 29, 2000, September 24, 1999, and September 25, 1998.
Fiscal 2000 comprised 53 weeks. Fiscal 1999 and 1998 each comprised 52 weeks.
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,
2000, 1999, and 1998:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Sales.......................................... 100.0% 100.0% 100.0%
Cost of sales.................................. 88.1 89.0 89.3
------- ------- --------
Gross profit................................... 11.9 11.0 10.7
Selling, general and
administrative expense...................... 9.8 8.5 8.5
Depreciation and amortization.................. 0.6 0.5 0.4
------- ------- --------
Income from operations......................... 1.5 2.0 1.8
Interest expense............................... 0.7 0.5 0.6
Other (income) expense, net.................... (0.5) (0.1) (0.1)
------- ------- --------
Income before income taxes..................... 1.3 1.6 1.3
Income tax expense............................. 0.5 0.6 0.5
------- ------- --------
Net income 0.8% 1.0% 0.8%
======= ======== ========
</TABLE>
6
YEAR ENDED SEPTEMBER 30, 2000 VERSUS YEAR ENDED SEPTEMBER 30, 1999. Sales for
the year ended September 30, 2000 increased 21% to $466.1 million, compared to
$385.5 million for the year ended September 30, 1999. Sales increase by
business segment is as follows (dollars in millions):
Wholesale distribution $ 53.5 million
Retail health food stores 27.1 million
------
$ 80.6 million
======
Sales from the traditional distribution business increased by $54.7 million
for the year ended September 30, 2000 as compared to the same period in the
prior year as follows: Cigarette sales increased approximately $45.4 million
over the prior year (approximately $32.3 million was due to price increases
and the balance was due to increased volume). Sales of non-cigarette products
increased by $9.3 million primarily due to increased volume. Sales from the
health and natural foods distribution business decreased by $1.2 million
primarily due to the loss of several significant customers who either were
acquired or implemented an internal distribution system during the year. The
increase in sales of $27.1 million from the retail health food stores,
Chamberlin's Market & Cafe and Akin's Natural Foods Market, is primarily due
to new sales generated since the retail segment was purchased in the third and
fourth quarters of fiscal 1999.
Gross profit increased 30.9% to $55.6 million for the year ended September 30,
2000 compared to $42.5 million for the prior fiscal year. Gross profit as a
percentage of sales increased to 11.9% for the period compared to 11.0% for
fiscal 1999. Gross profit by business segment for the year ended September
30, 2000 is as follows (dollars in millions):
Incr/
2000 1999 (Decr)
------ ------ ------
Wholesale distribution (recurring) $ 41.6 $ 36.0 $ 5.6
Wholesale distribution (nonrecurring) - 3.7 (3.7)
Retail health food stores 14.0 2.8 11.2
------ ------ ------
$ 55.6 $ 42.5 $ 13.1
====== ====== ======
The increases in gross profit and gross profit percentage were primarily
attributable to $14.0 million in gross profit generated by the retail health
food stores, which were acquired in the third and fourth quarters of fiscal
1999. Profit margins generated by the retail food stores are typically 40-45%
compared to profit margins of 9-11% generated by the distribution segment.
Gross profit generated by the recurring distribution businesses increased by
$5.6 million due to additional sales generated by the traditional distribution
business. However, the traditional distribution business experienced a
decrease of $3.7 million in nonrecurring gross profit in fiscal 2000, as
compared to the same period of the prior year, due to the absence of cigarette
price increases of the magnitude of which occurred in the prior year. A
significant cigarette price increase was implemented by cigarette
manufacturers in the first quarter of fiscal 1999 as the result of a
settlement that was reached between the major tobacco manufacturers and the
7
various states that had filed liability suits against the industry. Price
increases of the magnitude experienced in November 1998 have historically been
rare and the level of profits generated by this event are not expected to
recur on a regular basis. Manufacturers increased the price of cigarettes on
several occasions since November 1998. Management considers gross profits
derived from these increases to occur in the normal course of business even
though their occurrence is irregular and unpredictable.
Sales of the Company's private label cigarettes declined significantly from
1993 through 1999 primarily due to the price differential between premium and
major generic brands. The rate of decline in private label cigarette sales
slowed in fiscal 2000 and gross profit derived from such sales increased
slightly in the year ended September 30, 2000 as compared to the prior year
due to enhancements in the manufacturer's promotional program. Management
expects the gross profit derived from the sale of its private label cigarettes
to remain at current levels in fiscal 2001.
For the year ended September 30, 2000, total operating expense, which includes
selling, general and administrative expenses, depreciation and amortization,
increased 40.7% or $14.1 million to $48.7 million compared to fiscal 1999. The
increase was primarily due to expenses associated with the retail health food
stores which accounted for $10.2 million of the increase in operating
expenses. The retail health food stores were acquired in the third and fourth
quarters of fiscal 1999; therefore, there were no operating expenses
associated with this business segment in the first six months of the prior
fiscal year. Operating expenses incurred by the distribution segment
increased by $3.9 million primarily due to increased labor costs in the
distribution centers resulting from tight labor markets, an increase in fuel
and other delivery expenses, and additional administrative costs associated
with development of new retail business opportunities. As a percentage of
sales, total operating expense increased to 10.4% from 9.0% during the prior
year. This increase is primarily due to operating costs incurred by the
retail health food business during the period. Operating expenses incurred by
this business segment were approximately 37.6% of sales compared to 8.3%
incurred by the wholesale distribution business.
As a result of the above, income from operations for the year ended September
30, 2000 decreased $955,700 or 12.2% to $6,908,280.
Interest expense for the year ended September 30, 2000 increased 73.7% to $3.0
million compared to $1.8 million during the prior year. The increase was
primarily due to interest expense attributable to the debt incurred to
purchase the retail health food stores in fiscal 1999. Interest expense
associated with this acquisition debt was approximately $1.6 million for the
year ended September 30, 2000, compared to $204,000 in the prior year.
Interest expense associated with the Company's operating lines of credit
decreased approximately $152,000 for the year ended September 30, 2000, as
compared to the prior year. The decrease was primarily attributable to
reductions to the revolving credit balances from the proceeds of the sale of
the Company's interest in a condominium.
Other income for the year ended September 30, 2000 of $2.2 million was
generated primarily by $1.9 million in gains associated with the sale of the
Company's interest in a condominium and resolution of an intellectual property
matter involving a trademark. Sale of fixed assets and marketable securities,
8
royalty payments and dividends received on investment securities were also
included in other income. Other income for the year ended September 30, 1999
of $72,000 was generated from similar activities.
The effective tax rate was 35% in fiscal 2000, compared to 38% in fiscal 1999.
The decrease was attributable to release of tax reserves that were previously
recorded and are no longer required due to expiration of the related statute
or favorable tax audit determination.
As a result of the above factors, net income for the year ended September 30,
2000 was $3,904,439 compared to $3,835,529 for fiscal 1999.
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 and manufacturers' changing prices and promotional
programs.
While the Company sells a diversified product line, it remains dependent on
cigarette sales which represented approximately 63% of its revenue and 33% of
its gross margin in fiscal 2000. Changes in manufacturers' cigarette pricing
affects the market for generic and private label cigarettes and net income is
heavily dependent upon 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, 2000 and 1999 consisted
primarily of 70,000 and 83,000 shares, respectively, of Consolidated Water
Company Limited ("CWC,"), a public company which is listed on NASDAQ. The
Company's basis in the securities was $127,000 and $151,000, and the fair
market value of the securities was $499,000 and $540,000 on September 30, 2000
and September 30, 1999, respectively. The unrealized gain on CWC shares was
approximately $372,000 and $389,000 on September 30, 2000 and 1999,
respectively. The fair market value of the CWC shares on December 15, 2000
was $485,800.
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
9
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 U.S. Health Distributors,
Inc. ("USHD") which was acquired by FFH in November 1998 and merged into FFH
in fiscal 2000. 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 nonrecurring
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.
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 fiscal 1999, 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.
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
10
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.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended September 30, 2000, AMCON utilized cash flow in
operating activities to finance increases in inventory in the traditional
distribution business for operational and tax planning purposes. Cash was
utilized in investing activities during the fiscal year to purchase the common
stock of TINK, Inc. in August 2000 for $905,000 and to invest in Hawaiian
Natural Water Company by providing $350,000 of financing in September 2000.
Cash was provided from investing activities through settlement of an
intellectual property matter and the sale of the Company's condominium in
April 2000. Cash was provided by financing activities through increases in
ADC's revolving credit facility of $4.2 million to finance the purchase of
additional inventory. In addition, cash was utilized to repay $1.0 million in
term debt related to the acquisition of FFH in fiscal 1998 and $800,000 of
subordinated debt related to the acquisition of HFA in fiscal 1999. Cash of
$372,000 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 and for remodeling of existing retail health food stores. The
Company has historically financed its working capital requirements with a
combination of internally generated funds and bank borrowings. Cash used in
operations approximated $3.1 million in fiscal 2000. Cash provided by
operating activities approximated $2.4 million in fiscal 1999. Capital
expenditures during those periods equaled approximately $959,000 and $762,000,
respectively. Any remaining cash provided by operations is applied to debt
service. The Company anticipates that capital expenditures during fiscal 2001
will be approximately $1.4 million and will be used for the purposes stated
above.
The Company had working capital of approximately $27.7 million as of September
30, 2000. The Company's ratio of debt to equity was 3.33 at September 30,
2000 compared to 4.17 at September 30, 1999.
AMCON maintains two revolving credit facilities, the ADC revolving credit
facility (the "Facility") and the FFH revolving credit facility (the "FFH
Facility"). 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 was amended in November 2000 to increase
the borrowing limit to $30 million for a six month period. The Facility bears
interest at the bank's base rate ("Prime") less 0.5% or LIBOR plus 1.75%, as
11
selected by ADC. As of September 30, 2000, ADC had borrowed approximately
$22.5 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. Borrowings of $15.5 million under the Facility have been
classified as long-term based on expected borrowing levels.
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 2001 and 2000, 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 1999, AMCON received
consent to pay cash dividends of up to $0.03 per share per quarter and to pay
a special 10% stock dividend in February 2000.
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,
2000, FFH had borrowed approximately $5.3 million under the FFH Facility. The
FFH Facility expires on February 25, 2002. Borrowings under the FFH Facility
have been classified as long-term based on expected borrowing levels.
The FFH Facility contains covenants which, among other things, (i) restrict
the incurrence of additional debt, (ii) restrict payments, prepayments and
repurchases of subordinated debt or capital stock, and (iii) restrict mergers
and acquisitions and changes in business or conduct of business. In addition,
FFH may not pay dividends with respect to its Common Stock without the consent
of the lender of the FFH Facility. In December 2000, the FFH Facility was
amended to remove certain covenants that related to financial ratios and net
worth.
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, 2000, the outstanding balance of the Acquisition Loan was
$2.2 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
12
payments of interest only for the first six months and monthly principal
payments for the term of the loan. USHD was merged into FFH during fiscal
2000. The loan is collateralized by the assets of FFH. As of September 30,
2000, the outstanding balance of the USHD Acquisition Loan was $792,000.
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 million was paid in full through
borrowings under the Facility.
In September 1999, FFH purchased of all of the outstanding stock of HFA (d/b/a
Akin's Natural Foods Market) for a purchase price of $14.0 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.
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,
2000, the outstanding balances of the Convertible Note and the Collateralized
Note were $2.0 million and $7.2 million, respectively.
In November 1999, CNF purchased the assets of MDF Health, Inc. ("MDF") for a
purchase price of $220,000. Funding for the acquisition was provided through
borrowings under a subordinated note from CNF to the sellers in the amount of
$220,000 (the "MDF Note"). The MDF Note has a term of 3 years and bears
interest at 8% per annum. Principal and interest payments are due monthly.
As of September 30, 2000, the outstanding balances of the MDF Note was
$157,900.
In August 2000, CNF purchased all of the outstanding common stock of TINK,
Inc. for a purchase price of $900,000. Funding for the acquisition was
provided as follows: $600,000 in borrowings under the Facility and $300,000
through borrowings under a subordinated note from CNF to the sellers (the
"TINK Note"). The TINK Note has a term of 5 years and bears interest at 7%
per annum. Interest payments are due monthly with annual principal payments
ranging from $40,000 to $80,000. As of September 30, 2000, the outstanding
balances of the TINK Note was $300,000.
13
As of September 30, 2000, the Company had additional outstanding long-term
indebtedness of approximately $174,000 consisting of capital leases for
computer equipment, the current portion of which equaled approximately
$108,000. 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
associated with existing operations.
RECENT DEVELOPMENTS
In November 2000, the Company entered into a merger agreement with Hawaiian
Natural Water Company, Inc. (OTC: HNWC), pursuant to which HNWC would be
merged with and into, and thereby become, a wholly-owned subsidiary of AMCON
Distributing Company. As a result, the Company will issue between 358,168 and
477,558 shares of its common stock to HNWC shareholders, representing between
11.6% and 14.9% of the Company's outstanding shares after giving effect to the
merger.
The Company has provided HNWC with certain interim debt financing pending the
consummation of the merger. The Company loaned HNWC $350,000 in September
2000 and $400,000 in October 2000 for a total of $750,000 to be used for
working capital and other general corporate purposes, including redemption of
outstanding preferred stock. The loan is evidenced by promissory notes,
bearing interest at the rate of 10% per annum, due on March 31, 2001 which are
secured by substantially all of HNWC's assets. In the event that the merger
agreement is terminated for any reason or HNWC defaults on its obligations
under the notes, the Company will be entitled to convert the notes into Series
C Convertible Preferred Stock which, among other things, would entitle the
Company to elect a majority of HNWC's Board of Directors. The notes are also
convertible upon 61 days' advance notice into HNWC common stock at the same
exchange ratio as in the merger.
The merger is expected to qualify as a tax-free reorganization and to be
recorded on the Company's books using the purchase method of accounting. The
merger is subject to various conditions, including the effectiveness of a
registration statement covering the shares to be issued in the merger, the
listing of such shares on AMEX and approval of the stockholders of HNWC. It
is expected that the merger will be consummated on or before March 31, 2001.
In order to achieve HNWC's growth targets, it is anticipated that HNWC will
need to obtain additional bottling equipment in amounts up to $1.5 million.
Financing sources for these capital acquisitions have not yet been determined.
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, a public company
traded on the Nasdaq National Market system, and to changes in interest rates
14
on its long-term obligations. At September 30, 2000, the Company held 70,000
shares of common stock of Consolidated Water Company valued at $499,000.
AMCON values this investment at market and records price fluctuations in
equity as unrealized gain or loss on investments. At September 30, 2000,
AMCON had $30.0 million of variable rate debt outstanding, with maturities
through May 2004. The interest rates on this debt ranged from 8.38% to 9.0%
at September 30, 2000. 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 $185,000 annually for
each 1% change in the lender's base interest rate or LIBOR, as applicable.
The Company is also exposed to market risk through its investment in a
$350,000 convertible note receivable from HNWC. The note is recorded at
amortized cost, accrues interest at 10% per annum and matures on March 31,
2001. The note is convertible into HNWC common stock. Market increases in
interest rates and in HNWC's stock price could increase the likelihood that
such notes would be converted. Alternatively, market decreases in interest
rates and HNWC's stock price could decrease the likelihood of conversion.
Likewise, market changes in HNWC's stock price and interest rates impact the
fair value of the convertible note receivable.
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.
15
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 22, 2000
16
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, 2000 and 1999, and the consolidated results
of their operations and their consolidated cash flows for each of the three
years in the period ended September 30, 2000, in conformity with accounting
principles generally accepted in the United States of America. 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 of America, 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 our opinion.
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 22, 2000, except for paragraph 5
of Note 8, for which the date is
December 22, 2000
F-1
CONSOLIDATED BALANCE SHEETS
AMCON Distributing Company
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
September 30, 2000 1999
------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 1,148,276 $ 1,728,042
Accounts receivable, less allowance for
doubtful accounts of $783,606 and $676,801 18,743,026 18,345,816
Inventories 29,397,579 23,979,639
Notes receivable 350,000 -
Deferred income taxes 888,805 717,022
Other 752,126 1,000,189
------------- -------------
Total current assets 51,279,812 45,770,708
Fixed assets, net 5,886,773 7,502,927
Investments 509,162 561,941
Other assets 15,319,764 14,753,640
------------- -------------
$ 72,995,511 $ 68,589,216
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,747,124 $ 11,953,546
Accrued expenses 2,934,652 3,173,231
Accrued wages, salaries and bonuses 967,383 640,933
Income taxes payable - 283,111
Current portion of long-term debt 8,345,243 10,133,393
Current portion of subordinated debt 912,694 800,000
Dividends payable - 49,598
------------- -------------
Total current liabilities 23,907,096 27,033,812
------------- -------------
Deferred income taxes 486,408 678,455
Other liabilities 421,750 423,574
Long-term debt, less current portion 22,580,116 17,995,432
Subordinated debt, less current portion 8,745,236 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 2,737,551 and 2,480,000 issued at
September 30, 2000 and 1999 27,376 24,800
Additional paid-in capital 4,121,981 2,271,278
Accumulated other comprehensive income,
net of $139,482 and $149,664 tax 228,924 234,299
Retained earnings 12,476,624 10,727,926
------------- -------------
16,854,905 13,258,303
Less treasury stock,102 shares at cost
at September 30, 1999 - (360)
------------- -------------
Total shareholders' equity 16,854,905 13,257,943
------------- -------------
$ 72,995,511 $ 68,589,216
============= =============
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, 2000 1999 1998
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales (including excise taxes of $72.6 million, $ 466,125,245 $ 385,501,178 $ 294,281,323
$54.5 million and $52.9 million, respectively)
Cost of sales 410,511,066 343,021,443 262,632,767
------------- ------------- -------------
Gross profit 55,614,179 42,479,735 31,648,556
Selling, general and administrative expenses 45,910,903 32,754,406 25,088,767
Depreciation and amortization 2,794,996 1,861,364 1,120,482
------------- ------------- -------------
48,705,899 34,615,770 26,209,249
------------- ------------- -------------
Income from operations 6,908,280 7,863,965 5,439,307
Other expense (income):
Interest expense 3,048,314 1,754,837 1,814,555
Other (income) expense, net (2,159,995) (72,325) (276,287)
------------- ------------- -------------
888,319 1,682,512 1,538,268
------------- ------------- -------------
Income before income taxes 6,019,961 6,181,453 3,901,039
Income tax expense 2,115,522 2,345,924 1,542,853
------------- ------------- -------------
Net income $ 3,904,439 $ 3,835,529 $ 2,358,186
============= ============= =============
Earnings per common and
common equivalent share:
Basic $ 1.43 $ 1.41 $ 0.87
============= ============= =============
Diluted $ 1.37 $ 1.35 $ 0.85
============= ============= =============
Weighted average shares outstanding:
Basic 2,734,862 2,727,892 2,703,868
============= ============= =============
Diluted 2,853,320 2,855,419 2,788,996
============= ============= =============
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, 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
Exercise of options - - 9,032 91 20,361
Purchase of treasury stock - - - - -
Dividends - - - - -
10% stock dividend - - 248,519 2,485 1,830,342
Net income - - - - -
Unrealized gain (loss) on investments
available-for-sale, net of tax - - - - -
Total comprehensive income
-------- ------- --------- -------- -----------
Balance, September 30, 2000 - - 2,737,551 $ 27,376 $ 4,121,981
======== ======= ========= ======== ===========
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, 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
Exercise of options - (223) 108 399 20,628
Purchase of treasury stock - - (6) (39) (39)
Dividends - (322,691) - - (322,691)
10% stock dividend - (1,832,827) - - -
Net income - 3,904,439 - - 3,904,439
Unrealized gain (loss) on investments
available-for-sale, net of tax (5,375) - - - (5,375)
-----------
Total comprehensive income 3,899,064
--------- ----------- ------ --------- -----------
Balance, September 30, 2000 $228,924 $12,476,624 - $ - $16,854,905
========= =========== ====== ========= ===========
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, 2000 1999 1998
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,904,439 $ 3,835,529 $ 2,358,186
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,794,996 1,861,364 1,120,482
(Gain) loss on sales of fixed assets, intangibles,
land held for sale and securities (2,102,857) 259 (46,955)
Proceeds from sales of trading securities - - 157,207
Deferred income taxes (363,830) (89,875) 11,167
Provision for losses on doubtful accounts and
inventory obsolescence 412,724 314,720 640,494
Changes in assets and liabilities, net of effect
of acquisitions:
Accounts receivable (443,449) (3,303,670) (1,629,334)
Inventories (5,130,597) (2,082,434) (2,554,073)
Other current assets (194,117) (537,548) (180,622)
Other assets (109,962) (119,505) (45,366)
Accounts payable (1,324,110) 2,632,025 432,398
Accrued expenses and accrued wages, salaries and
bonuses (82,129) 720,564 (44,771)
Income taxes payable and receivable (490,931) (858,360) 471,985
Other liabilities - - (2,577)
----------- ----------- -----------
Net cash (used in) provided by operating activities (3,129,823) 2,373,069 688,221
----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (966,018) (761,706) (782,440)
Acquisitions, net of cash acquired (606,183) (5,879,143) (7,119,254)
Proceeds from sales of fixed assets and intangibles 2,887,234 54,880 86,887
Proceeds from sales of available-for-sale securities 92,260 - -
Purchase of debt security (350,000) - -
Proceeds from repayment of advance to officer - - 100,000
----------- ----------- -----------
Net cash provided by (used in) investing activities 1,057,293 (6,585,969) (7,714,807)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings of long-term debt - 1,100,000 4,500,000
Net (payments) proceeds on bank credit agreement 4,177,095 9,599,775 3,483,241
Payments on long-term and subordinated debt (2,332,631) (4,648,363) (766,025)
Debt issue costs - - (182,234)
Proceeds from exercise of warrants - - 3,000
Dividends paid (372,289) (148,794) -
Purchase of treasury stock (39) (45) -
Proceeds from exercise of stock options 20,628 - -
----------- ----------- ----------
Net cash provided by financing activities 1,492,764 5,902,573 7,037,982
----------- ----------- -----------
Net (decrease) increase in cash (579,766) 1,689,673 11,396
Cash, beginning of year 1,728,042 38,369 26,973
----------- ----------- -----------
Cash, end of year $ 1,148,276 $ 1,728,042 $ 38,369
=========== =========== ===========
Supplemental cash flow information:
Cash paid during the year for interest $ 3,016,285 $ 1,675,323 $ 1,745,609
Cash paid during the year for income taxes 2,899,950 3,166,246 1,145,770
Supplemental noncash information:
Acquisition of equipment through capital leases - 80,676 -
Business combinations:
Fair value of assets acquired 1,195,995 24,061,292 $12,988,719
Subordinated debt assumed 520,000 10,000,000 -
Other liabilities assumed 995 6,917,274 5,869,053
Warrants issued - - 54,750
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. ("FFH")and its wholly-owned subsidiaries, U.S. Health
Distributors, Inc. ("USHD"), Chamberlin's Natural Foods, Inc. ("CNF") and
Health Food Associates, Inc. ("HFA")) operates 8 distribution centers and 14
retail health food stores in the Great Plains, Rocky Mountain, Western and
Southern regions of the United States. During fiscal 2000, USHD was merged
into FFH.
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 eight (8) 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 63% of its
revenue and 33% of its gross margin in fiscal 2000. 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 maintains a 52-53 week fiscal year which 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 29, 2000, September 24, 1999
and September 25, 1998. Fiscal 2000 comprised 53 weeks. Fiscal 1999 and 1998
each comprised 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 $2,852,720 and $4,423,433 at September 30, 2000
and 1999, 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 8).
F-7
Debt and Equity Investments:
AMCON classifies marketable securities, debt securities and investments as
held to maturity, available-for-sale or trading securities. Investments
classified as available-for-sale or trading are stated at market value.
Investments classified as held to maturity are stated at amortized cost. 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, 2000 and 1999 were approximately $2.4 million and $2.0 million
less than the amount of such inventories valued on a FIFO basis, respectively.
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
$0.47, 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
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:
Comprehensive income 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.
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 August 2000, the Company acquired all of the outstanding shares of TINK,
Inc. (doing business as Natural Way Foods) for $900,000. The acquisition was
financed through borrowings under the Company's revolving credit facility
totaling $600,000 and a subordinated promissory note with the seller in the
amount of $300,000.
In November 1999, the Company acquired all of the outstanding assets of MDF
Health, Inc. for $220,000 financed by a seller-held subordinated note payable
of $220,000.
Both acquisitions were accounted for using the purchase method of accounting.
The purchase price for the above acquisitions was allocated to assets acquired
based on their estimated fair values. The portion of the purchase prices
allocated to goodwill totaled $750,000 and is being amortized on a straight
line basis over 20 years.
The Company acquired HFA, CNF and USHD in September 1999, March 1999 and
November 1998, respectively. FFH and the St. Louis distribution center were
acquired in November 1997 and October 1997, respectively. These acquisitions
were accounted for using the purchase method of accounting. Goodwill and
other intangibles are described in Note 7.
F-9
The results of operations for each of the above are included in the
accompanying financial statements from the date of acquisition.
Assuming the above acquisitions had occurred on the first day preceding the
year of acquisition, unaudited pro forma consolidated sales, net income and
earnings per share would have been as follows:
2000 1999 1998
------------- ------------- -------------
Sales $ 466,980,000 $ 420,652,000 $ 348,459,000
Net income $ 3,906,000 4,197,000 2,857,000
Earnings per share:
Basic $ 1.43 $ 1.54 $ 1.06
Diluted $ 1.37 $ 1.47 $ 1.02
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
the first day of the year preceding the acquisition.
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. All per share data has been restated to
reflect the special 10% stock dividend paid in February 2000.
<TABLE>
<CAPTION>
For the years ended September 30,
-------------------------------------------
2000 1999 1998
----------- ----------- -----------
Basic Basic Basic
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average common
shares outstanding 2,734,862 2,727,990 2,703,965
Weighted average treasury
shares - (98) (97)
----------- ----------- -----------
Weighted average number of
shares outstanding 2,734,862 2,727,892 2,703,868
=========== =========== ===========
Net income $ 3,904,439 $ 3,835,529 $ 2,358,186
=========== =========== ===========
Earnings per share $ 1.43 $ 1.41 $ 0.87
=========== =========== ===========
F-10
Diluted Diluted Diluted
----------- ----------- -----------
Weighted average common
shares outstanding 2,734,862 2,727,990 2,703,965
Weighted average treasury
shares - (98) (97)
Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds used to
purchase treasury stock 118,458 127,527 85,128
----------- ----------- -----------
Weighted average number of
shares outstanding 2,853,320 2,855,419 2,788,996
=========== =========== ===========
Net income $ 3,904,439 $ 3,835,529 $ 2,358,186
=========== =========== ===========
Earnings per share $ 1.37 $ 1.35 $ 0.85
=========== =========== ===========
</TABLE>
4. Comprehensive Income (Loss):
The components of other comprehensive income (loss) were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Unrealized holding gains (losses)
during the period:
Unrealized gains (losses) $ 53,089 $ 28,700 $ (51,875)
Related tax (expense) benefit (34,747) (12,546) 32,517
--------- --------- ---------
Net 18,342 16,154 (19,358)
Less reclassification adjustments for
net gains realized on sale of
investments during the period:
Realized net gains 68,646 - -
Related tax expense (44,929) - -
--------- --------- ---------
Net 23,717 - -
--------- --------- ---------
Total other comprehensive income (loss) $ (5,375) $ 16,154 $ (19,358)
========= ========= =========
</TABLE>
F-11
5. Fixed Assets, Net:
Fixed assets at September 30, 2000 and 1999 consisted of the following:
2000 1999
----------- -----------
Land and buildings $ 617,228 $ 725,597
Condominium and furnishings - 1,246,625
Warehouse equipment 6,536,990 5,238,860
Furniture, fixtures and
leasehold improvements 4,256,189 4,667,681
Vehicles 1,486,106 1,733,182
Capital equipment leases 482,701 482,701
----------- -----------
13,379,214 14,094,646
Less accumulated depreciation & amortization:
Owned equipment 7,166,280 6,405,944
Capital equipment leases 326,161 185,775
----------- -----------
$ 5,886,773 $ 7,502,927
=========== ===========
At September 30, 1999, land and buildings included a warehouse held for sale
which was recorded at its net realizable fair value. The property was sold in
November 1999.
6. Debt and Equity Investments:
Investments in equity securities at September 30, 2000 and 1999 consisted of
the following:
September 30, 2000
------------------------------------
Unrealized Market
Cost Gain(Loss) Value
--------- ---------- ---------
Investments (available-for-sale) $ 140,756 $ 368,406 $ 509,162
========= ========= =========
September 30, 1999
------------------------------------
Unrealized Market
Cost Gain Value
--------- --------- ---------
Investments (available-for-sale) $ 177,978 $ 383,963 $ 561,941
========= ========= =========
The Company sold 13,000 shares of its available-for-sale investments and
realized gains on the sale of $68,646 in fiscal 2000. No shares were sold in
1999 or 1998. The Company recognized gains of $29,400 on trading securities
during fiscal 1998.
At September 30, 2000, the Company held a convertible note receivable of
$350,000 from Hawaiian Natural Water Company, Inc. ("HNWC"). The note accrues
interest at 10% and matures on March 31, 2001. The note is classified as held
to maturity and the fair value approximates the carrying amount. See Note 17.
F-12
7. Other Assets:
Other assets at September 30, 2000 and 1999 consisted of the following:
2000 1999
------------ -----------
Trademarks and tradenames (less
accumulated amortization of
$477,786 and $13,542) $ 8,222,214 $ 8,686,458
Goodwill (less accumulated amortization
of $797,047 and $534,440) 5,503,631 4,279,235
Covenants not to compete (less
accumulated amortization of $287,481
and $153,850) 536,234 724,615
Favorable leases (less accumulated
(amortization of $90,671 and $56,375) 518,329 552,625
Cash surrender value of life
insurance policies 430,850 382,044
Debt issue costs (less accumulated
amortization of $102,748 and $66,062) 79,486 116,172
Other 29,020 12,491
------------ -----------
$ 15,319,764 $14,753,640
============ ===========
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 $262,607, $198,712, and $96,919 for the years ended
September 30, 2000, 1999, and 1998, respectively.
The covenants not to compete are amortized using the straight-line method over
periods ranging from 2 to 5 years. Amortization expense was $287,484,
$126,475, and $29,708 for the years ended September 30, 2000, 1999, and 1998,
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.
8. Long-term Obligations:
Long-term obligations at September 30, 2000 and 1999 consisted of the
following:
F-13
2000 1999
------------ -----------
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 8.44% to 9.0% at
September 30, 2000); principal due February
2002 $ 22,477,301 $18,317,309
FFH revolving credit facility with a bank,
interest payable monthly at the bank's base
rate less 0.5% or LIBOR plus 2.0%, as selected
by FFH (9.0% at September 30, 2000); principal
due February 2002 5,269,213 5,252,110
Note payable to a bank, interest payable
monthly at the bank's base rate less 0.5% or
LIBOR plus 1.75% (ranging from 8.38% to 8.44%
at September 30, 2000); principal payments of
$85,096 due monthly through November 2002 2,212,500 3,233,653
Note payable to bank, interest payable monthly
at the bank's base rate less 0.5% (9.0% at
September 30, 2000); principal payments of
$18,000 due monthly through May 2004 792,000 1,008,000
Obligations under capital leases, payable
in monthly installments with interest
ranging from 6.9% to 9.5% through April 2001
(Note 14) 174,345 317,753
------------ -----------
30,925,359 28,128,825
Less current portion 8,345,243 10,133,393
------------ -----------
$ 22,580,116 $17,995,432
============ ===========
In March 1998, ADC entered into a revolving credit facility with a bank (the
"Facility"). 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 was amended in November 2000 to increase
the borrowing limit to $30 million for a six month period. 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, 2000 the unused portion of
the credit agreement was $2,522,699. 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 2001 and 2000, 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
F-14
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 1.5 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 1999, AMCON received
consent to pay cash dividends of up to $0.03 per share per quarter and to pay
a special 10% stock dividend in February 2000.
In March 1998, FFH entered into a revolving credit facility with a bank (the
"FFH Facility"). 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 2.0%, as selected by FFH. A commitment fee of .25% of
the annual average unutilized amount of the commitment is required. As of
September 30, 2000, 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 semiannual or
annually as specified in the FFH Facility. For fiscal 2001 and 2000, 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, 2000, FFH was not in
compliance with the debt to equity or the net worth covenant. In December
2000, the FFH Facility was amended to remove certain covenants that related to
financial ratios and net worth.
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. USHD was merged into FFH during
fiscal 2000. The loan is collateralized by the assets of FFH.
F-15
The above long-term obligations, excluding obligations under the revolving
credit facilities, have contractual maturities as follows:
Year ending September 30
------------------------
2001 $ 1,344,689
2002 1,299,786
2003 390,370
2004 144,000
-----------
$ 3,178,845
===========
Borrowings under the revolving credit facilities in the amount of $20,746,514
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, 2000.
9. Subordinated Debt:
Subordinated debt at September 30, 2000 and September 30, 1999 consisted of
the following:
2000 1999
------------ ------------
Convertible subordinated note payable,
interest payable quarterly at 8% per
annum; principal due at maturity of
the note, September 15, 2004 $ 2,000,000 $ 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 7,200,000 8,000,000
Collateralized subordinated promissory note
payable bearing interest at 8% per annum;
principal and interest payments due monthly
through October 2002 157,930 -
Collateralized subordinated promissory note
payable, interest payable monthly at 7.0%
per annum; annual interest payments ranging
from $40,000 to $80,000 due annually from
August 2001 through August 2005 300,000 -
------------ ------------
9,657,930 10,000,000
Less current portion 912,694 800,000
------------ ------------
$ 8,745,236 $ 9,200,000
============ ============
F-16
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, 2000, principal payments are due on subordinated debt as
follows:
Year ending September 30
------------------------
2001 $ 912,694
2002 928,727
2003 866,509
2004 6,870,000
2005 80,000
-----------
$ 9,657,930
===========
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, 2000.
10. Other (Income) Expense:
Other (income) expense consisted of the following for the years ended
September 30, 2000, 1999 and 1998:
2000 1999 1998
----------- ----------- -----------
Interest income $ (39,079) $ (2,468) $ (61,398)
Dividends (21,609) (17,850) (14,941)
Rent income (6,787) (18,880) (24,880)
Royalties (1,625) (15,924) (41,710)
Gain on marketable securities
and investments (68,646) - (29,420)
Gain from disposition of
fixed and intangible assets (2,034,211) (22,119) (22,312)
Other 11,962 4,916 (81,626)
----------- ----------- -----------
$(2,159,995) $ (72,325) $ (276,287)
=========== =========== ===========
F-17
11. Income Taxes:
Components of income tax expense (benefit) for the fiscal years ended
September 30, 2000, 1999 and 1998 consisted of the following:
2000 1999 1998
----------- ----------- ----------
Current:
Federal $ 2,115,958 $ 2,125,264 $1,325,618
State 363,394 310,535 206,068
----------- ----------- ----------
2,479,352 2,435,799 1,531,686
----------- ----------- ----------
Deferred:
Federal (310,504) (78,417) 9,735
State (53,326) (11,458) 1,432
----------- ----------- ----------
(363,830) (89,875) 11,167
----------- ----------- ----------
Provision for income
taxes $ 2,115,522 $ 2,345,924 $1,542,853
=========== =========== ==========
During fiscal 2000, the Company recognized income tax benefit of approximately
$184,000 related to tax reserves that were previously recorded and are no
longer required due to expiration of the related statute or favorable tax
audit determination.
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, 2000, 1999 and 1998:
2000 1999 1998
----------- ----------- ----------
Tax at statutory rate $ 2,046,787 $ 2,101,694 $1,326,353
Amortization of
goodwill 69,590 70,462 42,742
Nondeductible business
expenses 20,953 21,741 26,351
State income taxes, net of
federal tax benefit 201,573 205,811 156,551
Release of tax reserves (186,737) - -
Other (36,644) (53,784) (9,144)
----------- ----------- ----------
$ 2,115,522 $ 2,345,924 $1,542,853
=========== =========== ==========
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, 2000 and 1999 relate to the following:
F-18
2000 1999
----------- -----------
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 284,546 $ 260,509
Accrued expenses 175,570 144,575
Net operating loss carryforwards 124,068 96,145
Inventory 443,319 276,053
Other - 14,930
----------- -----------
1,027,503 792,212
Noncurrent:
Net operating loss carryforwards 280,275 211,138
Other liabilities 170,030 169,458
Other 59,719 24,530
----------- -----------
510,024 405,126
----------- -----------
Total deferred tax assets $ 1,537,527 $ 1,197,338
=========== ===========
Deferred tax liabilities:
Current:
Trade discounts $ 128,204 $ 75,190
Other 10,494 -
----------- -----------
138,698 75,190
Noncurrent:
Fixed assets 330,165 373,318
Tradenames 484,695 514,583
Leases 42,090 46,016
Unrealized gains on available-for-sale
investments 139,482 149,664
----------- -----------
996,432 1,083,581
----------- -----------
Total deferred tax liabilities $ 1,135,130 $ 1,158,771
=========== ===========
Net deferred tax assets (liabilities):
Current $ 888,805 $ 717,022
Noncurrent (486,408) (678,455)
----------- -----------
$ 402,397 $ 38,567
=========== ===========
The Company did not record any valuation allowances against deferred tax
assets at September 30, 2000 or 1999 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 $198,000 at September 30, 2000
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 $884,000 at September 30, 2000 is limited (by Internal Revenue Code
Section 382) to approximately $232,000 per year through 2009.
F-19
12. 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 $367,818, $272,234, and
$241,009 (net of employee forfeitures) to the profit sharing plans during the
years ended September 30, 2000, 1999 and 1998, respectively.
13. 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, 2000, 1999 and 1998, as
consideration for office rent and management services, which is included in
selling, general and administrative expenses.
The remaining interest in a condominium and furnishings and related mortgage
loan, was transferred from AMCON Corporation to the Company in 1992, as
partial settlement of intercompany balances. The condominium was sold in
2000. Under a profit sharing agreement with AMCON Corporation, one-half of
the net gain from the sale of the real estate was allocated to AMCON
Corporation.
14. Commitments:
The Company leases certain office equipment under a capital lease. The
carrying value of these assets was $156,540 and $296,926 as of September 30,
2000 and 1999, respectively, net of accumulated amortization of $326,161 and
$185,775.
The Company leases various office and warehouse facilities and equipment under
noncancellable operating leases. Rent charged to expense during the years
ended September 30, 2000, 1999 and 1998 under such lease agreements was
$3,820,925, $2,974,431 and $2,138,042, respectively. As of September 30,
2000, minimum future lease commitments are as follows:
Year ending September 30,
Capital Operating
Leases Leases
---------- ------------
2001 $ 116,974 $ 3,967,884
2002 66,480 3,355,825
2003 4,216 2,584,060
2004 - 2,015,005
2005 - 1,670,162
Thereafter - 1,486,138
---------- ------------
Total minimum lease payments 187,670 $ 15,079,074
Less amount representing interest 13,325 ============
----------
Present value of net minimum
lease payments $ 174,345
==========
F-20
15. Stock Option Plan:
In June 1994, the Company adopted the 1994 Stock Option Plan (the "Stock
Option Plan"). In March 2000, the Stock Option Plan was amended to increase
the maximum number of shares of common stock which may be issued pursuant to
the Stock Option Plan from 300,000 to 550,000. A special 10% stock dividend
was paid in February 2000 and all share and price information has been
restated to reflect the dividend. 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 September 27, 1996, options to
purchase 24,200 shares of common stock were issued to management employees at
an exercise price of $1.48. On November 10, 1997, options to purchase 154,000
shares of common stock were issued to management employees at exercise prices
of $2.62 and $2.87. During fiscal 1999, options to purchase 115,500 shares of
common stock were issued to management employees at exercise prices between
$6.14 and $9.00. During fiscal 2000, options to purchase 32,900 shares of
common stock were issued to management employees at an exercise price of
$5.75. At September 30, 2000, 131,076 options were fully vested and
exercisable. In addition, options to purchase 33,000 shares of common stock
were issued to certain outside directors at an exercise price of $2.62 in
fiscal 1998 and options to purchase 30,800 shares of common stock were issued
to outside directors at exercise prices of $6.14 and $8.18 in fiscal 1999.
These options were not issued pursuant to the Stock Option Plan. At September
30, 2000, 57,200 shares issued to certain outside 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.
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:
2000 1999 1998
----------- ----------- -----------
Net income - as reported $ 3,904,439 $ 3,835,529 $ 2,358,187
Net income - pro forma $ 3,823,138 $ 3,657,477 $ 2,293,014
Basic EPS - as reported $ 1.43 $ 1.41 $ 0.87
Basic EPS - pro forma $ 1.40 $ 1.35 $ 0.85
Diluted EPS - as reported $ 1.37 $ 1.35 $ 0.85
Diluted EPS - pro forma $ 1.34 $ 1.29 $ 0.82
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 2.0% for
2000, 1.0% for 1999 and 1.8% for 1998; expected volatility of 52.01% for 2000,
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 6.57% for 2000, 5.68% for 1999
and 5.90% for 1998; and expected lives of 5 to 10 years.
F-21
The table below summarizes information about stock options outstanding as of
the following fiscal year ends (all share and price information has been
restated to reflect the special 10% stock dividend in February 2000):
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------
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 346,500 $4.72 200,200 $2.58 17,600 $1.48
Granted 32,900 5.75 146,300 7.65 187,000 2.68
Exercised (9,900) 2.08 - - - -
Forfeited/Expired (9,020) 7.08 - - (4,400) $2.05
--------- ------- --------- ------- --------- -------
Outstanding at end of period 360,480 $4.83 346,500 $4.72 200,200 $2.58
========= ======= ========= ======= ========= =======
Shares available for options
that may be granted 239,020 42,900 158,400
========= ========= =========
Weighted-average grant date fair value
of options granted during the
period - exercise price equals stock
market price at grant $3.19 $4.73 $1.55
======= ======= =======
Weighted-average grant date fair value
of options granted during the
period - exercise price exceeds stock
market price at grant - $4.06 $1.25
======= ======= =======
</TABLE>
The following summarizes options outstanding at September 30, 2000:
<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 $1.48 10,780 5.2 years $1.48 10,780 $1.48
1997 Options $2.62 - $2.87 177,320 5.9 years $2.68 110,760 $2.70
1999 Options $5.91 - $6.14 49,500 8.3 years $6.09 27,500 $6.12
1999 Options $7.62 - $9.00 89,980 8.4 years $8.43 38,236 $8.41
2000 Options $5.75 32,900 9.7 years $5.75 - $5.75
</TABLE>
F-22
16. Business Segments:
AMCON operates within two reportable business segments; the wholesale
distribution of consumer products by ADC and the wholesale distribution of
natural food products by FFH are aggregated as the "Wholesale Distribution"
segment. The other reportable segment represents 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.
<TABLE>
<CAPTION>
Wholesale
Distribution Retail Consolidated
------------- ----------- -------------
<S> <C> <C> <C>
Year ended September 30, 2000:
External revenues:
Cigarettes $ 296,533,411 $ - $ 296,533,411
Health food 41,393,914 34,089,817 75,483,731
Confectionery 31,051,435 - 31,051,435
Tobacco, beverage & other 63,056,668 - 63,056,668
------------- ----------- -------------
Total external revenues 432,035,428 34,089,817 466,125,245
Intersegment sales:
Health food 7,726,612 - 7,726,612
------------- ----------- -------------
Total intersegment sales 7,726,612 - 7,726,612
Depreciation and amortization 1,371,906 1,423,090 2,794,996
Operating income 5,685,565 1,222,715 6,908,280
Interest expense 1,399,134 1,649,180 3,048,314
Income before taxes 6,366,618 (346,657) 6,019,961
Total assets 53,454,401 19,541,110 72,995,511
Capital expenditures 561,851 404,167 966,018
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
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
</TABLE>
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 1998. 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.
17. Subsequent Event:
In November 2000, the Company entered into a merger agreement with Hawaiian
Natural Water Company, Inc. (OTC: HNWC), pursuant to which HNWC would be
merged with and into, and thereby become, a wholly-owned subsidiary of AMCON
Distributing Company. The merger consideration values the entire common
equity interest in HNWC at $2,865,348, payable in common stock of the Company,
which will be priced no lower than $6.00 and no greater than $8.00 per share
based on a 20 trading day measuring period ending three trading days before
the date of the HNWC stockholder vote on the merger. As a result, the Company
will issue an aggregate of not less than 358,168 or more than 477,558 shares,
representing between 11.6% and 14.9% of the Company's outstanding shares after
giving effect to the merger. HNWC optionholders and warrantholders would also
receive comparable options and warrants of The Company but with the exercise
price and number of shares covered thereby being adjusted to reflect the
exchange ratio.
The Company has provided HNWC with certain interim debt financing pending the
consummation of the merger. The Company loaned HNWC $350,000 in September
2000 and $400,000 in October 2000 for a total of $750,000 to be used for
working capital and other general corporate purposes, including redemption of
outstanding preferred stock. The loan is evidenced by promissory notes,
bearing interest at the rate of 10% per annum, due on March 31, 2001 which are
secured by substantially all of HNWC's assets. In the event that the merger
agreement is terminated for any reason or HNWC defaults on its obligations
under the notes, the Company will be entitled to convert the notes into Series
C Convertible Preferred Stock which, among other things, would entitle the
Company to elect a majority of HNWC's Board of Directors. The notes are also
convertible upon 61 days' advance notice into HNWC common stock at the same
exchange ratio as in the merger.
F-24
The merger is expected to qualify as a tax-free reorganization and to be
recorded on the Company's books using the purchase method of accounting. The
merger is subject to various conditions, including the effectiveness of a
registration statement covering the shares to be issued in the merger, the
listing of such shares on AMEX and approval of the stockholders of HNWC. All
of HNWC's officers and directors and any of their affiliated entities that own
shares of HNWC common stock (constituting approximately 40% of the currently
outstanding shares) have agreed to vote their shares in favor of the merger.
It is expected that the merger will be consummated on or before March 31,
2001.
F-25
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, LLP
William R. Hoppner /1/2/
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 9, 2001
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 American Stock Exchange. The
symbol for the Common Stock is "DIT".
WEB SITE
http://www.amcon-dist.com
