-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WxTNEliIhaEHbFYT/AHS0R5OAJitk3vIAoeLCN/Z5SHuhPdCbMl7jfUHNLm0IVqQ xR6QEFDtE/4IWLYBT1e1yw== 0000928465-03-000036.txt : 20031224 0000928465-03-000036.hdr.sgml : 20031224 20031224155118 ACCESSION NUMBER: 0000928465-03-000036 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20030926 FILED AS OF DATE: 20031224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMCON DISTRIBUTING CO CENTRAL INDEX KEY: 0000928465 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 470702918 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-15589 FILM NUMBER: 031073888 BUSINESS ADDRESS: STREET 1: 7405 IRVINGTON ROAD STREET 2: POST OFFICE BOX 641940 (68164-7940) CITY: OMAHA STATE: NE ZIP: 68122 BUSINESS PHONE: 4023313727 MAIL ADDRESS: STREET 1: 7405 IRVINGTON ROAD STREET 2: POST OFFICE BOX 641940 (68164-7940) CITY: OMAHA STATE: NE ZIP: 68122 10-K 1 sec10k2003.txt FORM 10-K FOR YEAR ENDED SEPTEMBER 26, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED September 26, 2003 ------------------ /X/ TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM to ------- ------- Commission File Number 0-24708 ------- AMCON Distributing Company - ---------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 47-0702918 - ---------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 7405 Irvington Road, Omaha NE 68122 - ---------------------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (402) 331-3727 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None None ---- ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value - ---------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any other amendment to this Form 10-K. /X/ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- ----- The aggregate market value of equity securities held by non-affiliates of the Registrant on March 28, 2003 was approximately $6.8 million. As of December 12, 2003 there were 3,168,954 shares of common stock outstanding. - Documents Incorporated by Reference - --------------------------------------- Portions of the Company's 2003 Annual Report to Shareholders are incorporated herein by reference into Parts I, II and IV. Portions of the Company's Proxy Statement pertaining to the March 11, 2004 Annual Shareholders' Meeting are incorporated herein by reference into Part III. 1 AMCON DISTRIBUTING COMPANY -------------------------- 2003 FORM 10-K ANNUAL REPORT ---------------------------- Table of Contents ----------------- Page ---- PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 11 Item 3. Legal Proceedings.......................................... 12 Item 4. Submission of Matters to a Vote of Security Holders......... 12 Item 4A. Executive Officers of the Company........................... 13 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters......................................... 13 Item 6. Selected Financial Data..................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.. 14 Item 8. Financial Statements and Supplementary Data................. 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................... 14 Item 9A. Controls and Procedures..................................... 14 PART III Item 10. Directors and Executive Officers of the Registrant.......... 15 Item 11. Executive Compensation...................................... 15 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 15 Item 13. Certain Relationships and Related Transactions. ........... 16 Item 14. Principal Accountant Fees and Services...................... 16 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........................................ 16 2 PART I ITEM 1. BUSINESS GENERAL AMCON Distributing Company ("AMCON" or the "Company") was incorporated in Delaware in 1986. The Company's principal executive offices are located at 7405 Irvington Road, Omaha, Nebraska 68122. The telephone number at that address is 402-331-3727 and the website address is www.amcon.com. The Company makes available free of charge on its website, its reports on Forms 10-K, 10-Q and 8-K as soon as reasonably practical after filing with the SEC. AMCON is primarily engaged in the wholesale distribution of consumer products including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products and health and beauty care products. In addition, the Company operates thirteen retail health food stores in Florida and the Midwest and a non-alcoholic beverage business that includes a natural spring water bottling and packaging operation in the State of Hawaii and a marketing and distribution operation which is focused on selling the Company's Hawaiian natural spring water and other specialty beverages. As used herein, unless the context indicates otherwise, the term "ADC" means the wholesale distribution business and "AMCON" or the "Company" means AMCON Distributing Company and its subsidiaries. WHOLESALE DISTRIBUTION BUSINESS ADC serves approximately 7,500 retail outlets in the Great Plains and Rocky Mountain regions, the largest of which accounted for less than 5.3% of AMCON's total revenues during fiscal 2003. Convenience Store News, a trade periodical, ranked ADC as the ninth (9th) largest distributor in its industry out of approximately 1,000 distributors in the United States based upon fiscal 2002 sales volume. From its inception, ADC has pursued a strategy of growth through increased sales and acquisitions. Since 1993, ADC has focused on increasing operating efficiency in its distribution business by merging smaller branch distribution facilities into larger ones. In addition, ADC has grown through expansion of its market area into contiguous regions and by introduction of new product lines to customers. ADC distributes approximately 13,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and chilled products and institutional food service products. While cigarettes accounted for approximately 73% of the Company's sales volume during fiscal 2003, ADC continues to diversify its businesses and product lines in an attempt to lessen its dependence upon cigarette sales. ADC's principal suppliers include Philip Morris USA, RJ Reynolds Tobacco, Brown & Williamson, Proctor & Gamble, Hershey, Mars, William Wrigley and Nabisco. ADC also markets private label lines of cigarettes, tobacco, snuff, water, candy products, batteries and film. 3 ADC has sought to increase sales to convenience stores and petroleum marketers by adopting a number of operating strategies which it believes gives it a competitive advantage with these types of retailers. One key operating strategy is a commitment to customer service. In a continuing effort to provide better service than its competitors, ADC offers a complete point-of-sale (POS) program to assist with customer image building and product promotions, health and beauty programs, profit building private label programs and custom food service programs, all of which have proven to be advantageous to convenience store customers. ADC has a policy of next-day delivery and employs a concept of selling products in cut-case quantities or "by the each" (i.e. individual units). ADC also offers planograms to convenience store customers to assist in the design of their store and display of products within the store. In addition, customers are able to use ADC's web site to manage their inventory and retail prices, as well as obtain periodic velocity management reports. ADC has worked to improve its operating efficiency by investing in the latest in systems technology, including computerization of buying and financial control functions. Inventory management has become even more critical due to the significant price of cigarettes. ADC has also sought to reduce inventory expenses by improving the number of times its inventory is renewed during a period ("inventory turns") for the same level of sales. Inventory turned 27.5 times in fiscal year 2003. Inventory turns for the past five years are as follows: Fiscal Times Year Inventory Turned ------ ---------------- 2003 27.5 2002 28.5 2001 26.8 2000 25.4 1999 24.5 By keeping its operating costs down, ADC is better able to price its products in such a manner to achieve an advantage over less efficient distributors in its market areas. ADC's main office is in Omaha, Nebraska. ADC has six distribution centers located in Illinois, Missouri, Nebraska, North Dakota, South Dakota, and Wyoming. These distribution centers contain a total of approximately 495,000 square feet of floor space and employ modern equipment for the efficient distribution of the large and diverse product mix. ADC also operates a fleet of approximately 230 delivery vehicles, including straight trucks and over-the-road vehicles with refrigerated trailers. RETAIL HEALTH FOOD BUSINESS AMCON's retail health food stores, which are operated as Chamberlin's Market & Cafe ("Chamberlin's" or "CNF") and Akin's Natural Foods Market ("Akin's" or "ANF"), offer over 35,000 different product selections for their customers. Chamberlin's, which was first established in 1935, is an award-winning and highly-acclaimed chain of seven health and natural product retail stores, 4 all offering an extensive selection of natural supplements and herbs, baked goods, dairy products, delicatessen items and organic produce. Chamberlin's operates all of its stores in and around Orlando, Florida. Akin's, also established in 1935, is also an award winning chain of six health and natural product retail stores, each offering an extensive line of natural supplements and herbs, dairy products, delicatessen items and organic produce. In the July 2003 issue of Whole Foods Magazine, a national trade periodical, Akin's was named "Retailer of the Year" in the retail health food industry. Akin's has locations in Tulsa (2 stores) and Oklahoma City, Oklahoma; Lincoln, Nebraska; Springfield, Missouri; and Topeka, Kansas. Current plans exist to add at least one new store in fiscal 2004. AMCON's retail health food stores are managed collectively through a main office in Tulsa, OK, but utilize the name recognition of the established health food retail chains that were acquired. The Company endeavors to maintain the local identity of each chain while providing a means to achieve operating synergies leading to cost savings through centralized management of operations. BEVERAGE BUSINESS AMCON's beverage business consists of Hawaiian Natural Water Company, Inc. ("HNWC") and The Beverage Group, Inc. ("TBG"). HNWC, which was acquired in December 2001 and is headquartered in Pearl City, HI, was formed in 1994 for the purpose of bottling, marketing and distributing Hawaiian natural spring water in Hawaii, the mainland and foreign markets. HNWC's Hawaiian Springs/R/ brand is the only bottled "natural" spring water available from Hawaii. All other bottled waters produced in Hawaii contain "purified" water, from which chemicals and minerals have been removed by means of reverse osmosis filtration. HNWC draws its Hawaiian Springs water from a well located at the base of the Mauna Loa mountain in Kea'au (near Hilo) on the big island of Hawaii. The water is "bottled at the source" in polyethylene terepthalate ("PET") plastic bottles, which are produced from pre-forms at HNWC's bottling facility. All of HNWC's retail PET products are bottled at its facility in Kea'au, HI. These products consist of the Hawaiian Springs natural spring water line, the Ali'i purified water line and various limited production co-packaged labeled products. AMCON formed TBG in January 2003 as a wholly-owned subsidiary for the purpose of marketing and distributing HNWC's bottled natural spring water products and other premium specialty beverages. TBG owns the Bahia/R/ tradename and has exclusive marketing and distribution rights in the United States, Canada and Mexico for its beverage portfolio which includes Hype Energy Drink/TM/, Royal Kona Coffee/R/, Bottle Green/R/ and Xterra/R/. Xterra also includes a line of energy bars. TBG has brokerage agreements with several national brokerage firms to expand distribution in the convenience store and health foods channels and markets directly to the grocery store and club store markets. TBG's main office is in Pasadena, CA. TBG maintains inventory in several public warehouses throughout the United States who also operate as consolidators, which allows customers to purchase less than truckload amounts of TBG product in an efficient manner. 5 ACQUISITIONS AND DISCONTINUED OPERATIONS Since 1981, the Company has acquired 24 consumer product distributors in the Great Plains, Rocky Mountain and Southern regions of the United States. On June 1, 2001, AMCON completed the acquisition of substantially all of the distribution business and net assets of Merchant's Wholesale, Inc. located in Quincy, Illinois (the "Quincy" distribution business). In addition, the Company purchased a 206,000 square foot building occupied by Merchants and owned by Merchants' sole stockholder. On December 17, 2001 the Company completed a merger with HNWC, pursuant to which HNWC merged with and into, and thereby became, a wholly-owned subsidiary of AMCON Distributing Company. The merger consideration valued the entire common equity interest in HNWC at approximately $2.9 million, which was paid in cash of $0.8 million during fiscal 2001 and in common stock of the Company valued at $2.1 million. As a result, the Company issued 373,558 shares of its common stock to outside HNWC shareholders, representing 12.0% of the Company's outstanding shares after giving effect to the merger. HNWC option holders and warrant holders also received 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. Effective March 23, 2001, AMCON sold the assets of Food For Health Co. Inc. for $10.3 million, subject to certain adjustments. That sale is reflected as discontinued operations in AMCON's consolidated financial statements. Results from the discontinued operations have been excluded from income from continuing operations in the accompanying consolidated statements of operations. The effects of the discontinued operations on net income and per share data are reflected within the accompanying consolidated statements of operations. BUSINESS SEGMENTS AMCON has three reportable business segments: the wholesale distribution of consumer products; the retail sale of health and natural food products; and a beverage division consisting of HNWC and TBG, which was formed in fiscal 2003. As described above, AMCON disposed of its health food distribution segment during the second quarter of fiscal 2001. The results of the acquired Quincy distribution business are included in the wholesale distribution of consumer products segment due to similar economic characteristics shared by AMCON's existing distribution business and the Quincy distribution business, as well as similar characteristics with respect to the nature of products distributed, the type and class of customers for the distribution products and the methods used to distribute the products. The results of the retail health food stores are included in the retail segment due to similar economic characteristics, as well as similar characteristics with respect to the nature of products sold, the type and class of customers for the health food products and the methods used to sell the products. The results of HNWC and TBG comprise the beverage segment due to their unique economic characteristics and the nature of the products, as well as the methods used to sell and distribute the products. The segments are evaluated on revenues, gross margins, operating income and income before taxes. 6 PRINCIPAL PRODUCTS CIGARETTES. Sales of cigarettes and the gross margin derived therefrom for the fiscal years ending 2003, 2002, and 2001 are set forth below (dollars in millions): Fiscal Year Ended ---------------------------- 2003 2002 2001 ------ ------ ------ Sales $564.8 $640.4 $420.1 Sales as a % of Total Sales 73.1% 75.6% 72.7% Gross Margin $ 22.5 $ 24.4 $ 18.1 Gross Margin as a % of Total Gross Margin 37.5% 39.5% 39.6% Gross Margin Percentage 4.0% 3.8% 4.3% Revenues from the sale of cigarettes during fiscal 2003 decreased by 11.8% as compared to fiscal 2002, while gross profit from the sale of cigarettes decreased by 2.8% during the same period (see "MANAGEMENT'S DISCUSSION AND ANALYSIS-Results of Operations-Fiscal Year Ended 2003 Versus Year Ended 2002" in the Annual Report to Shareholders for the Fiscal Year Ended September 26, 2003 which is incorporated herein by reference). Sales of cigarettes represented approximately 73% of the Company's sales volume during fiscal 2003. This represents a 2.5% decrease from the prior year and related primarily to a decrease in cigarette prices on Philip Morris and Brown & Williamson brands beginning in the second quarter of 2003. Although the Philip Morris price reduction program was communicated as a temporary reduction, Philip Morris has extended the program through January 2004 and could extend it further. Brown & Williamson has stated that their price reduction program is permanent. In addition, the Company experienced a 9.0% reduction in carton volume in fiscal 2003 compared to fiscal 2002. Since 1983, ADC has sought to position itself to capitalize on consumer demand for discount or value-priced cigarettes by marketing its own private label cigarettes as a high-quality, value-priced alternative to premium cigarettes. Substantial price increases implemented by manufacturers of premium cigarettes during the late 1980's and early 1990's resulted in a demand for private label cigarettes, which are sold at lower prices than premium brands. Significant manufacturers' price decreases in premium brand cigarettes, aimed at recapturing market share, occurred in 1993 and have caused a steady decline in the sales of private label cigarettes since that time. Sales of ADC's private label cigarettes have declined an average of 35% annually since 1993. Philip Morris USA has manufactured ADC's private label cigarettes since 1988 under an exclusive agreement. The Company entered into a new private label cigarette manufacturing agreement with Philip Morris effective October 1, 2002. The new agreement ends on December 31, 2004, and ADC has two one-year renewal options. Terms of the new agreement are not as favorable to the Company as the prior agreement. 7 CONFECTIONERY. Candy, related confectionery items and snacks constitute the Company's second largest-selling product line, representing approximately 6.8% of the Company's total sales volume during fiscal 2003. Sales of confectionery items and the gross margin derived therefrom for the fiscal years ending 2003, 2002, and 2001 are set forth below (dollars in millions): Fiscal Year Ended ---------------------------- 2003 2002 2001 ------ ------ ------ Sales $ 51.4 $ 52.6 $ 39.3 Gross Margin 6.4 6.1 4.0 Gross Margin Percentage 12.5% 11.5% 10.1% AMCON supplies customers with over 1,900 different types of candy and related products, including chocolate bars, cookies, chewing gum, nuts and other snack items. Major brand names include products manufactured by Hershey (Reese's, Kit Kat, and Hershey), Mars (Snickers, M&M's, and Milky Way), William Wrigley and Nabisco. The Company also markets its own private label candy under a manufacturing agreement with Palmer Candy Company. OTHER TOBACCO PRODUCTS. Sales of other tobacco products (cigars, snuff, chewing tobacco, etc.) represents AMCON's third largest-selling product line, representing approximately 6.1% of the Company's total sales volume during fiscal 2003. Sales of other tobacco products and the gross margin derived therefrom for the fiscal years ending 2003, 2002 and 2001 are set forth below (dollars in million): Fiscal Year Ended ---------------------------- 2003 2002 2001 ------ ------ ------ Sales $ 48.3 $ 46.7 $ 32.9 Gross Margin 4.0 3.7 2.5 Gross Margin Percentage 8.3% 7.9% 7.7 % NATURAL FOODS AND RELATED PRODUCTS. Natural foods and related products, which are primarily sold by the retail segment, constitute the Company's fourth largest-selling product line, representing approximately 4.1% of the Company's total sales volume during fiscal 2003. Sales of natural foods and related products and the gross margin derived therefrom for the fiscal years ending 2003, 2002 and 2001 are set forth below (dollars in millions): Fiscal Year Ended ---------------------------- 2003 2002 2001 ------ ------ ------ Sales $ 33.1 $ 31.6 $ 31.8 Gross Margin 13.2 13.2 11.9 Gross Margin Percentage 39.8% 41.7% 37.3% 8 OTHER PRODUCT LINES. Over the past decade, AMCON's strategy has been to expand its portfolio of consumer products in order to better serve its customer base. AMCON's other product lines include bottled water and other beverages, groceries, paper products, health and beauty care products, frozen and chilled products and institutional food products. During fiscal 2003, AMCON's sales of other products decreased $1.3 million or 1.7% due to the loss of several key customers during the year. During fiscal 2003, the gross profit margin on these types of products was 18.8% compared to 19.2% for fiscal 2002. COMPETITION The distribution business is highly competitive. There are many similar distribution companies operating in the same geographical regions as ADC. ADC is one of the largest distribution companies of its kind operating in its market area. ADC's principal competitors are national wholesalers such as McLane Co., Inc. (Temple, TX) and Core-Mark International (San Francisco, CA) and regional wholesalers such as Eby-Brown LLP (Chicago, IL) and Farner-Bocken (Carroll, IA), along with a host of smaller grocery and tobacco wholesalers. Most of these competitors generally offer a wide range of products at prices comparable to ADC's. ADC seeks to distinguish itself from its competitors by offering a higher level of technology than its smaller competitors and higher level of customer service than its larger competitors. The natural food retail industry is highly fragmented, with more than 9,000 stores operating independently or as part of small chains. The two leading natural food chains, Whole Foods Market and Wild Oats, continue to expand their geographic markets by opening stores in new markets. In addition, conventional supermarkets and mass market outlets also are increasing their emphasis on the sale of natural products. These strategies have contributed to the saturation of health food retail stores in some markets. This has increased competition in the health food sector and has had a restraining impact on same store sales increases in some markets and a slight reduction in same store sales in other markets. The retail bottled water and specialty beverage market is highly competitive, with numerous participants selling products often perceived as generic by consumers. The principal bases of competition in the industry are brand recognition, price, water source for bottled water products, and packaging. Price competition has become more pronounced as the industry has matured. The Company seeks to develop recognition for its brands by differentiating its products from more recognized products in the brand category. The Hawaiian Springs brand of natural spring water is unique because of its water source. HNWC is the only producer of natural spring water from Hawaii. Most other popular brands, such as Aquafina/R/, Dasani/R/, Crystal Geyser/R/, and Arrowhead/R/ are all bottled on the mainland and sell "purified" municipal water, not "natural" or "spring" water. HNWC generally prices this product at or slightly below the price for other premium brands. 9 TBG's line of Xterra sports beverages is a "natural" sports drink alternative to Gatorade/R/ and Powerade/R/ and the Xterra energy bars were developed as a better tasting, natural alternative to other power bars on the market. HYPE Energy Drink is a cranberry based energy drink alternative to Red Bull/R/. Royal Kona Coffee is a line of "iced" coffee designed to compete against a similar line offered by Starbucks/R/. Management believes that by offering a portfolio of high quality specialty beverages, retailers have the ability to choose products that meet their niche market and offer consumers natural alternatives to more popular brands. SEASONALITY Sales in the wholesale distribution and beverage segments are somewhat seasonal by nature and tend to be higher in warm weather months, which generally fall within the Company's third and fourth quarters. GOVERNMENT REGULATION Various state government agencies regulate the distribution of cigarettes and tobacco products in several ways, including the imposition of excise taxes, licensing and bonding requirements. Complying with these regulations is a very time-consuming, expensive and labor-intensive undertaking. For example, each state (as well as certain cities and counties) requires the Company to collect excise taxes ranging from $1.20 to $9.80 per carton on all cigarettes sold by it in the state. Such excise taxes must be paid in advance and, in most states, is evidenced by a stamp which must be affixed to each package of cigarettes. A number of states increased their excise tax on cigarettes in fiscal 2002 and 2003, and more are expected to do so in the future. The Company is also subject to regulation by state and local health departments, the U.S. Department of Agriculture, the Food and Drug Administration, U.S. Department of Transportation and the Drug Enforcement Agency. These agencies generally impose standards for product quality and sanitation, as well as, for security and distribution policies. The bottled water industry is regulated both in the United States and abroad. Various state and Federal regulations, designed to ensure the quality of the product and the truthfulness of its marketing claims, require HNWC to monitor each aspect of its production process, including its water source, bottling operations and packaging and labeling practices. The Environmental Protection Agency requires a yearly analysis of HNWC's water source by a certified laboratory with respect to a comprehensive list of contaminants (including herbicides, pesticides, volatile chemicals and trace metals). In addition, the Hawaii Department of Health requires weekly microbiological testing of HNWC's source water. HNWC's bottling facility has an on-site laboratory, where samples of its finished product are visually and chemically tested daily. HNWC also utilizes an independent state certified laboratory to test samples from each production run. In addition, HNWC's production line is subject to constant visual inspection. HNWC believes that it meets or exceeds all applicable regulatory standards concerning the quality of its water. 10 In addition to U.S. regulations, HNWC must meet the requirements of foreign regulatory agencies in order to export and sell its product into other countries. These requirements are generally similar to, and in certain respects more stringent than, U.S. regulations. HNWC believes that it is in compliance with applicable regulations in all foreign territories where it currently markets its product. Failure to meet applicable regulations in the U.S. or foreign markets could lead to costly recalls or loss of certification to market products. Even in the absence of governmental action, loss of revenue could result from adverse market reaction to negative publicity. ENVIRONMENTAL MATTERS The Company believes that all of its real property is in compliance with all regulations regarding the discharge of toxic substances into the environment and is not aware of any condition at its properties that could have a material adverse effect on its financial condition or results of operations. In that regard, the Company has not been notified by any governmental authority of any potential liability or other claim in connection with any of its properties. EMPLOYEES At fiscal year end 2003, the Company had 1,042 full-time and part-time employees in the following areas: Managerial 56 Administrative 90 Delivery 122 Sales & Marketing 447 Warehouse 327 ----- Total Employees 1,042 ===== All of ADC's delivery employees in the Quincy distribution center, representing 37% of ADC's delivery employees company-wide, are represented by the International Association of Machinists and Aerospace Workers. Management believes its relations with its employees are generally good. ITEM 2. PROPERTIES The location and approximate square footage of the six distribution centers, thirteen retail stores, water bottling and packaging plant and sales and marketing offices operated by AMCON as of fiscal year end 2003 are set forth below: Location Square Feet -------- ----------- Distribution - IL, MO, ND, NE, SD & WY 494,600 Retail - FL, KS, MO, NE & OK 126,600 Beverage - HI & CA 20,000 ------- Total Square Footage 641,200 ======= 11 AMCON owns its distribution facilities in Quincy, Illinois and Bismarck, North Dakota. These facilities are subject to a first mortgage securing borrowings under the Company's mortgage loan and a second mortgage securing future payments owed in connection with the Merchants Wholesale acquisition (see "MANAGEMENT'S DISCUSSION AND ANALYSIS-Liquidity and Capital Resources" in the Annual Report to Shareholders for the Fiscal Year Ended 2003 which is incorporated herein by reference). AMCON leases its remaining distribution facilities, retail stores, water bottling plant, offices and certain equipment under noncancellable operating and capital leases. Leases for the four distribution facilities, thirteen retail stores and water bottling and packaging plant leased by the Company have base terms expiring from 2004 to 2052. Minimum future lease commitments for these properties and equipment total approximately $24.8 million as of fiscal year end 2003. AMCON also has future lease obligations for a facility and equipment related to the discontinued operations of its former health food distribution business. The Company estimated its ultimate liabilities related to these leases and recorded a charge to earnings during the second quarter of fiscal 2001. The Company negotiated a termination settlement during fiscal 2002 on its former Arizona facility and entered into a sublease agreement on the remaining facility in Florida. The sub-tenant of the Florida facility was in default as of fiscal year end 2003 and the Company began eviction proceedings. The Company incurred approximately $0.1 million of expenses associated with the facility during fiscal 2003. Management expects there will be further expenditures incurred on the Florida facility in fiscal 2004 prior to finding another sub-tenant for the property. These expenditures will be expensed as incurred. However, management is confident that the building can be subleased, so no amount related to the lease obligation has been recorded in the reserve for discontinued operations. Any differences between these expense estimates and their actual settlement will change the loss accordingly. Management believes that its existing facilities are adequate for the Company's present level of operations; however, larger facilities and additional cross-dock facilities and retail stores may be required to accommodate the Company's anticipated growth in certain market areas. ITEM 3. LEGAL PROCEEDINGS The Company is subject to claims and litigation in the ordinary course of its business. However, in the opinion of management, no currently pending legal proceedings or claims against the Company will, individually or in the aggregate, have a material adverse effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of fiscal year 2003. 12 ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY The Company's day-to-day affairs are managed by its executive officers, who are appointed by the Board of Directors for terms of one year. The Company has entered into employment agreements with Mr. Wright and Ms. Evans each with a term expiring on December 31, 2004. These executive officers are as follows: Name Age Position ---- --- -------- William F. Wright 61 Chairman of the Board, Director Kathleen M. Evans 56 President, Director Eric J. Hinkefent 42 President of CNF and HFA Michael D. James 42 Secretary, Treasurer and Chief Financial Officer WILLIAM F. WRIGHT has served as the Chairman and Chief Executive Officer of AMCON Corporation (the former parent of AMCON) since 1976 and as Chairman of the Company since 1981. From 1968 to 1984, Mr. Wright practiced corporate and securities law in Lincoln, Nebraska. Mr. Wright is a graduate of the University of Nebraska and Duke University School of Law and is a certified public accountant. KATHLEEN M. EVANS became President of the Company in February 1991. Prior to that time she served as Vice President of AMCON Corporation from 1985 to 1991. From 1978 until 1985, Ms. Evans acted in various capacities with AMCON Corporation and its operating subsidiaries. ERIC J. HINKEFENT has served as President of both Chamberlin Natural Foods, Inc. and Health Food Associates, Inc. since October 2001. Prior to that time he served as President of Health Food Associates, Inc. beginning in 1993. He has also served on the board of The Healthy Edge, Inc. from 1999 through 2003. Mr. Hinkefent is a graduate of Oklahoma State University. MICHAEL D. JAMES became Treasurer and Chief Financial Officer of the Company in June 1994. In November 1997, he assumed the responsibilities of Secretary of the Company. He is a certified public accountant and is responsible for all financial and reporting functions within the Company. Prior to joining AMCON, Mr. James practiced accounting for ten years with the firm of PricewaterhouseCoopers LLP, serving as the senior tax manager of the Omaha, Nebraska office from 1992 until 1994. Mr. James is a graduate of Kansas State University. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated by reference from the Company's Annual Report to Shareholders for the fiscal year ended September 26, 2003 under the heading "Market for Common Stock." 13 ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference from the Company's Annual Report to Shareholders for the fiscal year ended September 26, 2003 under the heading "Selected Financial Data." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference from the Company's Annual Report to Shareholders for the fiscal year ended September 26, 2003 under the heading "Management's Discussion and Analysis." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated by reference from the Company's Annual Report to Shareholders for the fiscal year ended September 26, 2003 under the heading "Management's Discussion and Analysis - Quantitative and Qualitative Disclosures About Market Risk." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and accompanying notes, together with the report of independent accountants, are incorporated by reference from the Company's Annual Report to Shareholders for the fiscal year ended September 26, 2003 under the heading "Consolidated Financial Statements." Supplemental financial information is incorporated by reference from the Annual Report to Shareholders for the fiscal year ended September 26, 2003 under the heading "Selected Quarterly Financial Data." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9.A. CONTROLS AND PROCEDURES The Company's management, including the Company's Principal Executive Officer and Chief Financial Officer, reviewed and evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that review and evaluation, the Principal Executive Officer and Chief Financial Officer have concluded that the Company's current disclosure controls and procedures, as designed and implemented, were effective as of the end of the period covered by this report. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls subsequent to the date of their evaluation. There were no significant material weaknesses identified in the course of such review and evaluation and, therefore, no corrective measures were taken by the Company. 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Registrant's Proxy Statement to be used in connection with the 2004 Annual Meeting of Shareholders (the "Proxy Statement") will contain under the caption "Election of Directors" certain information required by Item 10 of Form 10-K and such information is incorporated herein by this reference. The information required by Item 10 of Form 10-K as to executive officers is set forth in Item 4A of Part I hereof. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and certain persons who own more than ten percent of the Company's Common Stock, to file with the Securities and Exchange Commission (the "SEC") reports of their ownership of Company Common Stock. Officers, directors and greater-than-ten-percent shareowners are required by SEC regulation to furnish the Company with copies of such Section 16(a) reports they file. Based solely upon review of the copies of such reports received by the Company and written representations from each such person who did not file an annual report with the SEC (Form 5) that no other reports were required, the Company believes that there was compliance for the fiscal year ended 2003 with all Section 16(a) filing requirements applicable to the Company officers, directors and greater-than-ten-percent beneficial owners. CODE OF ETHICS The Company has adopted a Code of Ethics that applies to the Chairman, President, Chief Financial Officer and Controller, as required by Section 406 of the Sarbanes Oxley Act of 2002. A copy of the Code of Ethics is attached to this Form 10-K as Exhibit 14.1. ITEM 11. EXECUTIVE COMPENSATION The Registrant's Proxy Statement will contain under the captions "Compensation of Directors", "Compensation of Executive Officers" and "Compensation Committee Interlocks and Insider Participation", the information required by Item 11 of Form 10-K, and such information is incorporated herein by this reference. The information set forth under the captions "Report of Compensation Committee on Executive Compensation" and "Company Performance" is expressly excluded from such incorporation. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Registrant's Proxy Statement will contain under the captions "Voting Securities and Beneficial Ownership Thereof by Principal Stockholders, Directors and Officers" and "Equity Compensation Plan Information" the information required by Item 12 of Form 10-K and such information is incorporated herein by this reference. 15 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Registrant's Proxy Statement will contain under the caption "Certain Relationships and Related Transactions" the information required by Item 13 of Form 10-K and such information is incorporated herein by this reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The Registrant's Proxy Statement will contain under the caption "Ratification of Appointment of Independent Auditor" the information required by Item 14 of Form 10-K and such information is incorporated herein by this reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements The following financial statements of AMCON Distributing Company are incorporated by reference under Item 8. The Annual Report to Shareholders for the Fiscal Year Ended September 26, 2003 is attached as Exhibit 13.1. Reference Page -------------- Independent Auditors' Report F-1 Consolidated Balance Sheets as of Fiscal Years Ended 2003 and 2002 F-2 Consolidated Statements of Operations for the Fiscal Years Ended 2003, 2002 and 2001 F-3 Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss) for the Fiscal Years Ended 2003, 2002 and 2001 F-4 Consolidated Statements of Cash Flows for the Years Ended September 30, 2003, 2002 and 2001 F-5 Notes to Consolidated Financial Statements F-6 (2) Financial Statement Schedules Independent Auditors' Report of Deloitte & Touche LLP Schedule II - Valuation and Qualifying Accounts (3) Exhibits 2.1 Fifth Amended and Restated Agreement and Plan of Merger dated September 27, 2001 by and between AMCON Distributing Company, AMCON Merger Sub, Inc. and Hawaiian Natural Water Company Inc. (incorporated by reference to Exhibit 2.1 of AMCON's Registration Statement on Form S-4 (Registration No. 333-71300) filed on November 13, 2001) 2.2 Assets Purchase and Sale Agreement by and between Food For Health Company, Inc., AMCON Distributing Company and Tree of Life, Inc. dated March 8, 2001 (incorporated by reference to Exhibit 2.1 of AMCON's Current Report on Form 8-K filed on April 10, 2001) 16 2.3 Amendment to Assets Purchase and Sale Agreement by and between Food For Health Company, Inc., AMCON Distributing Company and Tree of Life, Inc. effective March 23, 2001 (incorporated by reference to Exhibit 2.2 of AMCON's Current Report on Form 8-K filed on April 10, 2001) 2.4 Asset Purchase Agreement, dated February 8, 2001, between AMCON Distributing Company, Merchants Wholesale Inc. and Robert and Marcia Lansing (incorporated by reference to Exhibit 2.1 of AMCON's Current Report on Form 8-K filed on June 18, 2001) 2.5 Addendum to Asset Purchase Agreement, dated May 30, 2001, between AMCON Distributing Company, Merchants Wholesale Inc. and Robert and Marcia Lansing (incorporated by reference to Exhibit 2.2 of AMCON's Current Report on Form 8-K filed on June 18, 2001) 2.6 Real Estate Purchase Agreement, dated February 8, 2001, between AMCON Distributing Company and Robert and Marcia Lansing (incorporated by reference to Exhibit 2.3 of AMCON's Current Report on Form 8-K filed on June 18, 2001) 2.7 Addendum to Real Estate Purchase Agreement, dated May 30, 2001, between AMCON Distributing Company and Robert and Marcia Lansing (incorporated by reference to Exhibit 2.4 of AMCON's Current Report on Form 8-K filed on June 18, 2001) 3.1 Restated Certificate of Incorporation of the Company, as amended March 19, 1998 (incorporated by reference to Exhibit 3.1 of AMCON's Quarterly Report on Form 10-Q filed on May 11, 1998) 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 of AMCON's Registration Statement on Form S-1 (Registration No. 33-82848) filed on August 15, 1994) 4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of AMCON's Registration Statement on Form S-1 (Registration No. 33-82848) filed on August 15, 1994) 10.1 Grant of Exclusive Manufacturing Rights, dated October 1, 1993, between the Company and Famous Value Brands, a division of Philip Morris Incorporated, including Private Label Manufacturing Agreement and Amended and Restated Trademark License Agreement (incorporated by reference to Exhibit 10.1 of Amendment No. 1 to AMCON's Registration Statement on Form S-1 (Registration No. 33-82848) filed on November 8, 1994) 10.2 Amendment No. 1 to Grant of Exclusive Manufacturing Rights, dated October 1, 1998, between the Company and Famous Value Brands, a division of Philip Morris Incorporated, including Amendment No. 1 To Private Label Manufacturing Agreement and Amendment No. 1 to Amended and Restated Trademark License Agreement (incorporated by reference to Exhibit 10.2 of AMCON's Annual Report on Form 10-K filed on December 24, 1998) 17 10.3 Loan and Security Agreement, dated June 1, 2001, between the Company and LaSalle National Bank (incorporated by reference to Exhibit 10.3 on Form 10-Q filed on August 13, 2001) 10.4 ISDA Master Agreement, dated as of December 22, 2000 between LaSalle Bank National Association and Merchants Wholesale Inc., as assumed by the Company on June 1, 2001 (incorporated by reference to Exhibit 10.4 on Form 10-Q/A filed on October 4, 2001) 10.5 Secured Promissory Note, dated as of May 30, 2001 between the Company and Gold Bank (incorporate by reference to Exhibit 10.5 on Form 10-Q/A filed on October 4, 2001) 10.6 8% Convertible Subordinated Note, dated September 15, 1999 by and between Food For Health Company Inc. and Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy Laminsky (incorporated by reference to Exhibit 10.1 of AMCON's Current Report on Form 8-K filed on September 30, 1999) 10.7 Secured Promissory Note, dated September 15, 1999, by and between Food For Health Company, Inc. and James C. Hinkefent and Marilyn M. Hinkefent, as trustees of the James C. Hinkefent Trust dated July 11, 1994, as amended, Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy Laminsky (incorporated by reference to Exhibit 10.2 of AMCON's Current Report on Form 8-K filed on September 30, 1999) 10.8 Pledge Agreement, dated September 15, 1999, by and between Food For Health Company, Inc. and James C. Hinkefent and Marilyn M. Hinkefent, as trustees of the James C. Hinkefent Trust dated July 11, 1994, as amended, Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy Laminsky (incorporated by reference to Exhibit 10.3 of AMCON's Current Report on Form 8-K filed on September 30, 1999) 10.9 First Amended and Restated AMCON Distributing Company 1994 Stock Option Plan (incorporated by reference to Exhibit 10.17 of AMCON's Current Report on Form 10-Q filed on August 4, 2000) 10.10 AMCON Distributing Company Profit Sharing Plan (incorporated by reference to Exhibit 10.8 of Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-82848) filed on November 8, 1994) 10.11 Employment Agreement, dated May 22, 1998, between the Company and William F. Wright (incorporated by reference to Exhibit 10.14 of AMCON's Quarterly Report on Form 10-Q filed on August 6, 1998) 10.12 Employment Agreement, dated May 22, 1998, between the Company and Kathleen M. Evans (incorporated by reference to Exhibit 10.15 of AMCON's Quarterly Report on Form 10-Q filed on August 6, 1998) 10.13 ISDA Master Agreement, dated as of May 12, 2003 between the Company and LaSalle Bank National Association (incorporated by reference to Exhibit 10.13 of AMCON's Quarterly Report on Form 10-Q filed on August 11, 2003) 18 10.14 Swap Transaction Confirmation ($10,000,000) dated as of May 23, 2003 between the Company and LaSalle Bank National Association (incorporated by reference to Exhibit 10.14 of AMCON's Quarterly Report on Form 10-Q filed on August 11, 2003) 10.15 Swap Transaction Confirmation ($5,000,000) dated as of May 23, 2003 between the Company and LaSalle Bank National Association (incorporated by reference to Exhibit 10.15 of AMCON's Quarterly Report on Form 10-Q filed on August 11, 2003) 11.1 Statement re: computation of per share earnings (incorporated by reference to footnote 3 to the financial statements which are incorporated herein by reference to Item 8 of Part II herein) 13.1 Annual Report to Shareholders for the Fiscal Year Ended September 26, 2003 14.1 Code of Ethics for Principal Executive and Financial Officers 21.1 Subsidiaries of the Company 23.1 Consent of Deloitte & Touche LLP 31.1 Certification by William F. Wright, Chairman and Principal Executive Officer, furnished pursuant to section 302 of the Sarbanes-Oxley Act 31.2 Certification by Michael D. James, Vice President and Chief Financial Officer, furnished pursuant to section 302 of the Sarbanes-Oxley Act 32.1 Certification by William F. Wright, Chairman and Principal Executive Officer, furnished pursuant to section 906 of the Sarbanes-Oxley Act 32.2 Certification by Michael D. James, Vice President and Chief Financial Officer, furnished pursuant to section 906 of the Sarbanes-Oxley Act (b) Reports on Form 8-K None 19 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of 1934, the Registrant, AMCON Distributing Company, a Delaware corporation, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Omaha, State of Nebraska, on the 24th day of December, 2003. AMCON DISTRIBUTING COMPANY By: /s/ William F. Wright ------------------------- William F. Wright, Chairman 20 Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons in the capacities indicated on the 24th day of December, 2003. Signature Title --------- ----- /s/ William F. Wright Chairman of the Board, (Principal Executive - ------------------------ Officer), and Director William F. Wright /s/ Kathleen M. Evans President and Director - ------------------------ Kathleen M. Evans /s/ Michael D. James Secretary, Treasurer and Chief Financial - ------------------------ Officer (Principal Financial and Michael D. James Accounting Officer) /s/ Raymond F. Bentele Director - ------------------------ Raymond F. Bentele /s/ William R. Hoppner Director - ------------------------ William R. Hoppner /s/ J. Tony Howard Director - ------------------------ J. Tony Howard /s/ John R. Loyack Director - ------------------------ John R. Loyack /s/ Stanley Mayer Director - ------------------------ Stanley Mayer /s/ Allen D. Petersen Director - ------------------------ Allen D. Petersen /s/ Timothy R. Pestotnik Director - ------------------------ Timothy R. Pestotnik 21 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of AMCON Distributing Company: We have audited the consolidated financial statements of AMCON Distributing Company and its subsidiaries (the "Company") as of September 26, 2003 and September 27, 2002, and for each of the three years in the period ended September 26, 2003 and have issued our report thereon dated December 24, 2003; such financial statements and report are included in your 2003 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule of the Company, listed in Item 15. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Omaha, Nebraska December 24, 2003 S-1 AMCON Distributing Company Financial Statement Schedule SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - -----------------------------------------------
Net Amounts Balance at Provision (Written Off) Balance at Description Beginning of Period (Benefit) Recovered End of Period - ------------------ ---------------------- --------- ------------- ----------------------- Allowance for doubtful accounts Sep 29, 2000 329,069 427,852 (140,742) Sep 28, 2001 616,179 Sep 28, 2001 616,179 390,063 (364,768) Sep 27, 2002 641,474 Sep 27, 2002 641,474 166,417 27,725 Sep 26, 2003 835,616 Allowance for inventory obsolescence Sep 29, 2000 - 222,883 - Sep 28, 2001 222,883 Sep 28, 2001 222,883 20,387 - Sep 27, 2002 243,270 Sep 27, 2002 243,270 71,035 (21,000) Sep 26, 2003 293,305
S-2 EX-13.1 3 ex131.txt EX 13.1 - ANNUAL REPORT FOR SEPTEMBER 26, 2003 Exhibit 13.1 AMCON DISTRIBUTING COMPANY INDEX TO 2003 ANNUAL REPORT Letter to Shareholders......................... 1 Selected Financial Data........................ 2 Selected Quarterly Financial Data.............. 3 Market for Common Stock........................ 4 Management's Discussion and Analysis Forward Looking Statements.................. 5 Company Overview............................ 5 Industry Segment Overview................... 6 Certain Accounting Considerations........... 8 Critical Accounting Policies................ 10 Results of Operations....................... 11 Liquidity and Capital Resources............. 18 Off-Balance Sheet Arrangements.............. 21 Acquisitions and Dispositions............... 22 Quantitative and Qualitative Disclosures About Market Risk........................ 22 Report of Management........................... 23 Independent Auditors' Report................... F-1 Consolidated Financial Statements ............. F-2 Notes to Consolidated Financial Statements..... F-6 Corporate Directory December 24, 2003 To Our Shareholders: In previous letters, we have talked about realigning your Company not only to maintain profitability but also to reduce our long-term reliance upon our Wholesale Distribution Segment. Our intention is to continue to remain profitable while proceeding with the realignment. We remained profitable in fiscal year 2003, as we were in fiscal year 2002. Accomplishing this was greatly assisted by the contributions of our Wholesale Distribution Segment, which had an excellent year in fiscal 2003 despite falling sales and increasing pressures on tobacco products. A significant portion of our fiscal 2003 earnings were used to complete the construction of our facility for Hawaiian Natural Water Company in Hawaii and to establish The Beverage Group to market and distribute, not only our own products, but also other upscale beverages nationwide under exclusive contractual arrangements. In addition to the construction of our new bottling plant in Hawaii, we recently completed our packaging and warehousing facility adjoining the bottling plant. We are now in a position to manufacture and ship significant quantities of product which, in turn, should allow that Hawaiian Natural Water Company to attain profitability. Even though most of fiscal year 2003 was occupied by completing the bottling plant and beginning construction of the packaging and warehousing facility, sales for that Hawaiian Natural Water Company did increase for the year and sales for fiscal 2004 should increase significantly. The Beverage Group spent most of last year securing exclusive distribution agreements, hiring sales and marketing people, aligning with national and regional brokers, and negotiating sales agreements with various retailers. We are now at the point that the substantial background work has been completed and we anticipate sales for that company also to increase significantly during fiscal 2004. The reorganization of the systems and management in the Retail Health Food Segment continued and its Midwestern stores began to show the positive results of these efforts. We expect to continue those efforts throughout fiscal 2004 and, in fact, plan to open at least one new store in the Midwest. In addition, we expect to focus even greater efforts on our Florida stores to improve their profitability. We were happy to welcome John Loyack to our Board of Directors this year. John is the Chief Financial Officer of PNM Resources, Inc., a New York Stock Exchange company, and represents the type of individual that we expect to add to our Board of Directors that is, an independent, hardworking director whose past experiences should help in contributing to our future successes. Over the past year, the Securities and Exchange Commission and the American Stock Exchange have adopted new corporate governance rules. We have been aggressively working to comply with these requirements and commit to you, our Stockholders, that we will operate our Company above and beyond any requirements placed upon public companies. Even though many of those requirements are extremely expensive and time consuming for a small public company, we believe that it is important to set an example for our management, our Directors, our employees and, of course, our Stockholders. We continue to appreciate your support as Stockholders of our Company. We believe that you will see the benefits of our reorganization in the future and, in the interim, hope that our dividend continues to pay you a fair return on your investment. Our efforts this past year and in prior years could not have been made without the hardworking, loyal support of our employees. For that, we are deeply indebted to them. Very truly yours, William F. Wright Kathleen M. Evans Chairman of the Board President 1 SELECTED FINANCIAL DATA The selected financial data presented below have been derived from AMCON Distributing Company and its subsidiaries' (the "Company's") audited financial statements. The information set forth below should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS" and with the Consolidated Financial Statements and Notes thereto included in this Annual Report.
(Dollars in thousands, except per share data) - --------------------------------------------------------------------------------------------------- FISCAL YEAR 2003 2002 2001 2000 1999 - --------------------------------------------------------------------------------------------------- Sales /1/............................... $ 772,135 $ 847,117 $ 577,589 $ 422,901 $ 341,216 Cost of sales /1/....................... 711,974 785,193 531,903 378,138 309,422 ---------------------------------------------------------- Gross profit............................ 60,161 61,924 45,686 44,763 31,794 Operating expense....................... 55,334 54,774 44,706 37,847 23,937 ---------------------------------------------------------- Income from operations.................. 4,827 7,150 980 6,916 7,857 Interest expense........................ 3,270 4,273 3,877 2,499 1,282 Other income, net....................... (98) (411) (107) (2,248) (68) ---------------------------------------------------------- Income (loss) from continuing operations before income taxes.... 1,655 3,288 (2,790) 6,665 6,643 Income tax expense (benefit)............ 629 1,316 (1,018) 2,354 2,521 ---------------------------------------------------------- Income (loss) from continuing operations........................ 1,026 1,972 (1,772) 4,311 4,122 Income (loss) from discontinued operations, net of income taxes of $0, $0, $(963), $(239), and $175 respectively............. - - (1,570) (407) (286) ---------------------------------------------------------- Net income (loss)....................... $ 1,026 $ 1,972 $ (3,342) $ 3,904 $ 3,836 ========================================================== Basic earnings (loss) per share Continuing operations................. $ 0.32 $ 0.65 $ (0.65) $ 1.58 $ 1.51 Discontinued operations............... - - (0.57) (0.15) (0.10) ---------------------------------------------------------- Net basic earnings (loss) per share..... $ 0.32 $ 0.65 $ (1.22) $ 1.43 $ 1.41 ========================================================== Diluted earnings (loss) per share: Continuing operations................. $ 0.32 $ 0.63 $ (0.65) $ 1.51 $ 1.44 Discontinued operations............... - - (0.57) (0.14) (0.10) ---------------------------------------------------------- Net diluted earnings (loss) per share $ 0.32 $ 0.63 $ (1.22) $ 1.37 $ 1.34 ========================================================== Weighted average shares outstanding: Basic................................. 3,166,191 3,032,484 2,738,170 2,734,862 2,727,892 Diluted............................... 3,222,253 3,109,179 2,738,170 2,853,320 2,855,419 Working capital /4/..................... $ 19,439 $ 26,989 $ 33,947 $ 27,023 $ 18,737 Total assets ........................... 99,499 104,586 99,197 73,192 68,589 Long-term obligations and subordinated debt /2/.............................. 61,270 62,579 62,302 41,399 39,231 Shareholders' equity /3/................ 17,301 16,699 13,363 16,855 13,258 Cash dividends declared per common share $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.08
2 /1/ Sales incentives paid to customers have been reclassified from cost of sales to sales in accordance with Emerging Issues Task Force ("EITF") No. 01-9 "Accounting For Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)" for fiscal years 2001 through 1999. For 2003 and 2002, these sales incentives are recorded in sales. /2/ Includes deferred taxes, noncurrent liabilities of discontinued operations, long-term debt, subordinated debt, and current portion of long-term and subordinated debt. /3/ Net of dividends declared of $0.4 million, $0.4 million, $0.3 million, $0.3 million, and $0.2 million in fiscal 2003, 2002, 2001 and 2000 and 1999, respectively. /4/ Current assets minus current liabilities. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth selected financial information for each of the eight quarters in the two fiscal years ended September 2003 and 2002. This information has been prepared by the Company on the same basis as the consolidated financial statements and includes all normal and recurring adjustments necessary to present fairly this information when read in conjunction with the Company's audited Consolidated Financial Statements and Notes thereto included in this Annual Report.
(Dollars in thousands) - -------------------------------------------------------------------------------------------------------- FISCAL YEAR 2003 Fourth Third Second First - -------------------------------------------------------------------------------------------------------- Sales .................................. $ 207,456 $ 189,949 $ 177,009 $ 197,721 Gross profit............................ 16,462 16,024 13,831 13,844 Income (loss) before income taxes....... 535 1,118 (438) 440 Net income (loss)....................... 334 691 (274) 275 Basic earnings (loss) per share......... $ 0.10 $ 0.22 $ (0.09) $ 0.09 Diluted earnings (loss) per share....... $ 0.10 $ 0.22 $ (0.09) $ 0.09 - -------------------------------------------------------------------------------------------------------- FISCAL YEAR 2002 Fourth Third Second First - -------------------------------------------------------------------------------------------------------- Sales .................................. $ 224,071 $ 218,733 $ 194,159 $ 210,154 Gross profit............................ 16,529 16,054 14,231 15,110 Income (loss) from continuing operations before income taxes.................... 1,065 1,377 145 701 Net income ............................. 648 843 90 391 Basic earnings (loss) per share......... $ 0.21 $ 0.27 $ 0.03 $ 0.14 Diluted earnings (loss) per share....... $ 0.20 $ 0.26 $ 0.03 $ 0.14
3 Quarterly earnings per share are based on weighted average shares outstanding for the quarter, therefore, the sum of the quarters may not equal the full year earnings per share amount. MARKET FOR COMMON STOCK The Company's common stock trades on the American Stock Exchange ("AMEX") under the trading symbol "DIT". The following table reflects the range of the high and low closing prices per share of the Company's common stock reported by AMEX for fiscal years 2003 and 2002. As of December 12, 2003, the closing stock price was $3.76 and there were 3,168,954 common shares outstanding. The Company has approximately 1,000 common shareholders of record and the Company believes that approximately 1,800 additional persons hold shares beneficially. Fiscal Year 2003 Fiscal Year 2002 --------------------------------------- High Low High Low 4th Quarter $ 5.30 $ 4.34 $ 5.95 $ 3.25 3rd Quarter 4.69 2.95 5.11 4.20 2nd Quarter 5.84 3.41 4.88 4.10 1st Quarter 6.09 4.55 4.80 3.80 During fiscal years 2003 and 2002, the Board of Directors declared cash dividends of $0.03 per share per quarter or $0.12 per share for each year. The Board of Directors will evaluate payment of future dividends at their regular meetings. The Company's revolving credit facility provides that the Company may not pay dividends in excess of $0.12 per share on an annual basis. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS 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(s)," "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. COMPANY OVERVIEW AMCON Distributing Company ("AMCON" or the "Company") is primarily engaged in the wholesale distribution business in the Great Plains and Rocky Mountain regions of the United States. In addition, AMCON operates 13 retail health food stores and a non-alcoholic beverage business that includes a natural spring water bottling operation in the State of Hawaii and a marketing and distribution operation which is focused on selling the Company's Hawaiian natural spring water and other specialty beverages. As used herein, unless the context indicates otherwise, the term "ADC" means the wholesale distribution segment and "AMCON" or the "Company" means AMCON Distributing Company and its consolidated subsidiaries. ADC operates six distribution centers located in Illinois, Missouri, Nebraska, North Dakota, South Dakota and Wyoming. ADC sells approximately 13,000 consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and chilled products and institutional food service products. ADC distributes products primarily to retailers such as convenience stores, discount and general merchandise stores, grocery stores and supermarkets, drug stores and gas stations. In addition, ADC services institutional customers, such as restaurants and bars, schools, sports complexes and vendors, as well as other wholesalers. On June 1, 2001, ADC acquired substantially all of the distribution business and net assets of 5 Merchants Wholesale, Inc. in Quincy, Illinois. This acquisition significantly increased the size of ADC's wholesale distribution business and allowed ADC to close an existing distribution center in Missouri in order to take advantage of synergies resulting from the acquisition of the Quincy, Illinois facility. Our retail health food segment operates seven stores in Florida under the name Chamberlin's Market & Cafe and six stores in Oklahoma, Kansas, Missouri and Nebraska under the name Akin's Natural Foods Market. These stores carry a comprehensive line of approximately 35,000 natural and gourmet foods, supplements, herbs, natural cosmetics, homeopathic and sports nutrition products. Although this segment has not achieved profitability, operating results improved significantly in our Midwest stores in fiscal year 2003. Realignment of top management was completed in fiscal 2003. The implementation of a new central point-of-sale inventory control system is scheduled to be completed in the first quarter of fiscal 2004. Management's confidence in improved financial performance has resulted in expansion plans including the addition of at least one new store in fiscal 2004 and one to two new stores in fiscal 2005. Our beverage segment consists of Hawaiian Natural Water Company, Inc. ("HNWC") and The Beverage Group Inc. ("TBG"). HNWC bottles natural spring water from an exclusive source located on the Big Island of Hawaii. HNWC currently markets its products primarily in the State of Hawaii, but has recently expanded marketing to the mainland United States and certain international markets. HNWC was acquired during the first quarter of fiscal 2002 and completed an upgrade of its bottling equipment in fiscal 2002 in order to increase its production capacity. During the second quarter of fiscal 2003, HNWC began construction of an expanded warehouse and packaging building at its plant in Hawaii which will be completed in the first quarter of fiscal 2004. HNWC has historically operated at a loss and is expected to continue to do so until it is able to complete the planned expansion of its markets. AMCON's wholly-owned subsidiary, TBG, focuses on marketing and distribution of HNWC bottled water products and other beverages including Hype Energy Drink/TM/, Royal Kona Coffee/R/, Bottle Green/R/ and Bahia/R/ drinks and Xterra/R/, a line of sports beverages and energy bars, in the United States, Canada and Mexico. AMCON completed the sale of its health and natural foods distribution business in fiscal 2001. As a result, the Company's financial data for fiscal year 2001 reflects the former health and natural food distribution business as a discontinued operation. INDUSTRY SEGMENT OVERVIEWS The wholesale distribution industry continues to consolidate as larger distribution companies acquire smaller companies. Competition and pressure on profit margins continue to affect both large and small distributors and demands that distributors consolidate in order to become more efficient. 6 Although ADC sells a diversified line of products, it remains dependent on cigarette sales, which represented approximately 73% of total revenue and 37% of gross profit in fiscal 2003. Overall cigarette consumption in the United States continues to decline and many retailers, such as grocery stores and general merchandise stores, have discontinued the sale of cigarettes. As a result, convenience stores and tobacco stores, which represent ADC's largest customer base, have increased their share of the cigarette market. This trend has partially mitigated the effect of lower overall cigarette consumption on the Company's sales. However, over the past few years as prices for national cigarette brands have increased (primarily to cover payments to states in accordance with the Master Settlement Agreement signed in 1998) and state excise taxes have increased to help fund state budget deficits, sales of national cigarette brands have decreased at a more rapid rate than for all cigarettes. For example, as reported in Altria Inc.'s 2002 Annual Report, U.S. cigarette industry shipment volume in 2002 declined 3.7%, while shipments from Philip Morris declined 7.5%. At the same time, sales of value-priced cigarettes have actually increased. Generally, wholesale cigarette distributors align themselves as either national brand distributors or value-priced distributors. Since a national brand distributor derives a significant amount of its gross profit from selling national cigarette brands, it is generally a detriment to gross profit to focus sales efforts on value-priced brands. The loss of one key customer that was acquired and several smaller customers due to competitive pricing strategies, combined with ADC's alignment as primarily a national brand distributor, has resulted in a higher rate of decline in cigarette carton sales (9.0%) than the national average as reported in Altria Inc.'s 2002 Annual Report, when compared to the prior year. Changes in manufacturers' cigarette pricing over the past decade and increases in state excise taxes over the past year have greatly affected the market for value-priced, generic and private label cigarettes. Although sales of ADC's private label cigarettes have steadily declined over the past nine years due to the relatively small price differential between its private label brands and national brands, and the increasing price differential between our brands and new value-priced, generic and import brands, ADC's net income in fiscal 2003 and prior years remained heavily dependent on sales of private label cigarettes and the volume discounts it received from manufacturers in connection with these sales. The Company entered into a new private label cigarette manufacturing agreement with Philip Morris effective October 1, 2002. The new agreement ends on December 31, 2004, and ADC has two one-year renewal options. However, given the current cigarette industry environment, terms of the new agreement are not as favorable to the Company as the prior agreement, and, as a result, gross profit related to private label cigarettes decreased by $1.4 million in fiscal 2003 compared to fiscal 2002. The Company expects that gross profit related to private label cigarettes will decrease by up to $1.0 million in fiscal 2004, as compared to fiscal 2003. 7 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. In addition, conventional supermarkets and mass market outlets have increased their emphasis on 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 AMCON's retail stores and manufacturers' changing prices and promotional programs. The natural bottled water and beverage business is also highly competitive. All of the popular national brands of natural water, plus several local brands, are sold in Hawaii, which is presently HNWC's primary market. HNWC competes primarily by differentiating its products from those of its competitors due to the fact that it is the only producer of natural spring water bottled in Hawaii. In addition to marketing HNWC's natural spring water products, TBG has acquired exclusive licenses to market and distribute several premium beverage products which are being marketed as a portfolio of specialty beverages. CERTAIN ACCOUNTING CONSIDERATIONS During fiscal 2002 the Company acquired HNWC. In accordance with Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations," the Company used the purchase method of accounting to record the business combination. Recorded intangibles, primarily the HNWC tradename, were separately identified and recognized. No goodwill was recognized in the acquisition. SFAS No. 142 "Goodwill and Other Intangible Assets," requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead will be reviewed for impairment and written down and charged to results of operations only in the periods in which the impairment recognition criteria has been met and the recorded value of goodwill and certain intangibles is more than its measured fair value. Due to the adoption of SFAS No. 142 by the Company at the beginning of fiscal 2003, the Company no longer amortizes goodwill, tradenames and other intangible assets considered to have indefinite useful lives. Goodwill, tradenames and other intangible assets not subject to amortization are now reviewed periodically to determine if their recorded values exceed their fair values. If the recorded value of these assets is determined to be impaired, it will be written down to fair value and the write down will be charged to operations during the period in which the impairment is recognized. Management obtained an independent valuation of its goodwill and intangible assets and the Company did not recognize an impairment charge in the first quarter of fiscal 2003 due to the implementation of SFAS No. 142, nor did it incur an impairment charge in fiscal 2003 upon completion of the annual independent valuation. 8 In March 2003, the Financial Accounting Standards Board ("FASB") added a project to address issues related to share-based payments. In April 2003, the FASB decided that goods and services, including employee stock options, received in exchange for stock-based compensation should be recognized in the income statement as an expense, with the cost measured at fair value. An exposure draft is expected in the first quarter of calendar 2004 and a final statement could be effective in 2004. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS No. 149). SFAS No. 149 amends SFAS No. 133 for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. In particular, SFAS No. 149 clarifies when a contract with an initial net investment meets the characteristic of a derivative and clarifies when a derivative that contains a financing component will require special reporting in the statement of cash flows. SFAS No. 149 is effective for AMCON for contracts entered into or modified after June 30, 2003. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS No. 150). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires an issuer to classify a financial instrument that is within its scope as a liability (or asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for AMCON for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 (the fourth quarter of fiscal 2003 for AMCON). It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. Management is not aware of any events or circumstances that would create a significant impact on future operating results upon adoption of SFAS No. 149 and SFAS No. 150. In the first quarter of fiscal 2002, the Company began to classify costs associated with sales incentives provided to it by suppliers as a reduction in net sales in accordance with the guidance provided in Emerging Issues Task Force ("EITF") No. 01-9, "Accounting For Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." These costs were previously treated by the Company as cost of sales. Results of operations for periods prior to the implementation of EITF No. 01-9 have been restated to reflect the reclassification of these sales incentives. However, this reclassification had no impact on reported net income before taxes, net income or earnings-per-share amounts reported for those periods. Years cited herein refer to AMCON's fiscal years. AMCON maintains a 52-53 week fiscal year which ends on the last Friday in September. The actual years ended September 26, 2003, September 27, 2002, and September 28, 2001. Fiscal years 2003, 2002, and 2001 each comprised 52 weeks. 9 CRITICAL ACCOUNTING POLICIES Certain accounting policies used in the preparation of the Company's financial statements require management to make judgments and estimates and the financial results reported may vary depending on how management makes these judgements and estimates. The following are summaries of the most critical accounting policies relating to the Company's financial statements. The Company's Audit Committee has reviewed the development, selection and disclosure of the critical accounting policies. ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company maintains an allowance for doubtful accounts to reflect the expected uncollectibility of accounts receivable based on past collection history and specific risks identified in the receivable portfolio. INVENTORIES. Inventories consist primarily of finished products purchased in bulk quantities to be sold to the Company's customers. An allowance for obsolete inventory is maintained to reflect the expected unsaleable or unrefundable inventory based on an evaluation of slow moving products, obsolete inventories and discontinued products. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS. Goodwill associated with the excess purchase price over the fair value of assets acquired and other identifiable intangible assets, such as trademarks and tradenames, with indefinite useful lives are no longer amortized, but are reviewed periodically (at least annually) to determine if the recorded values exceed the fair market values of the assets. If impairment exists, the impairment write-down will be charged to operations during the period in which the impairment is recognized. Identifiable intangible assets that are considered to have definite useful lives are amortized on the straight-line method over their estimated useful lives. REVENUE RECOGNITION. The Company recognizes revenue when products are delivered to customers, which generally is the same day products are shipped, or sold to consumers in stores. Sales are shown net of returns, discounts, and sales incentives to customers. INSURANCE. The Company's insurance for worker's compensation, general liability and employee-related health care benefits are provided through high-deductible or self-insured programs. As a result, the Company accrues worker's compensation liability based upon the claim reserves established by a third-party administrator each month. The employee health insurance benefit liability is based on the Company's historical claims experience rate. The reserves associated with the exposure to these self-insured liabilities are reviewed by management for adequacy at the end of each reporting period. 10 RESULTS OF OPERATIONS The following table sets forth an analysis of various components of the Statements of Operations as a percentage of sales for fiscal years 2003, 2002, and 2001:
Fiscal Years ---------------------------- 2003 2002 2001 ---------------------------- Sales.......................................... 100.0% 100.0% 100.0% Cost of sales.................................. 92.2 92.7 92.1 ---------------------------- Gross profit................................... 7.8 7.3 7.9 Selling, general and administrative expenses..................... 6.9 6.1 7.3 Depreciation and amortization.................. 0.3 0.4 0.4 ---------------------------- Income from operations......................... 0.6 0.8 0.2 Interest expense............................... 0.4 0.5 0.7 Other income, net.............................. - (0.1) - ---------------------------- Income (loss) from continuing operations before income taxes........................... 0.2 0.4 (0.5) Income tax expense (benefit)................... 0.1 0.2 (0.2) ---------------------------- Income (loss) from continuing operations....... 0.1 0.2 (0.3) Loss from discontinued operations.............. - - (0.3) ---------------------------- Net income (loss).............................. 0.1% 0.2% (0.6)% ============================
11 FISCAL YEAR 2003 VERSUS FISCAL YEAR 2002. Sales for fiscal year 2003 decreased 8.9% to $772.1 million, compared to $847.1 million for fiscal year 2002. Sales increases (decreases) by business segment are as follows (dollars in millions): Wholesale distribution segment $ (77.7) Retail health food stores segment 1.4 Beverage segment 1.5 Intersegment eliminations (0.2) ------- $ (75.0) ======= Sales from the wholesale distribution business decreased by $77.7 million for fiscal 2003 as compared to fiscal 2002. Of the total decrease, $75.6 million was attributable to a decrease in sales of cigarettes, with $44.0 million of the decrease related to a decrease in cigarette prices on Philip Morris and Brown & Williamson brands beginning in the second quarter of 2003. Although the Philip Morris price reduction program was communicated as a temporary reduction, Philip Morris has extended the program through January 2004 and could extend it further. Brown & Williamson stated that their price reduction program is permanent. The remaining decrease in cigarette sales of $31.6 million resulted primarily from a 9.0% reduction in carton volume. See discussion above under INDUSTRY SEGMENT OVERVIEWS for additional information regarding cigarette sales trends. Sales of tobacco, confectionery and other products accounted for the remainder of the decrease as sales of these products decreased by $2.1 million or 1.2% over the prior year due to loss of several key customers during the year. We continue to market our full service capabilities in an effort to differentiate our Company from competitors who utilize pricing as their primary marketing tool and anticipate increases to our customer base in fiscal 2004 as a result of those efforts. Sales from the retail health food segment increased by $1.4 million when compared to the prior year due in part to increased demand for low carbohydrate products. Improvements in the Midwest retail stores increased sales 9.1% over the prior year, more than offsetting lower than expected sales in the Florida market, which continues to suffer from decreased tourist trade and general economic depression. Management continues to review strategies to improve sales in the retail segment including evaluation of the siting, layout and design of its retail locations, purchasing strategies, product offerings and presentation and promotional activities. The beverage segment accounted for $3.7 million of sales for fiscal 2003, compared to $2.2 million in fiscal 2002. The water bottling operation, which was acquired during the latter part of the first quarter of fiscal 2002, generated sales of $3.2 million during fiscal 2003. The marketing and distribution business, which accounted for $0.5 million of the sales, was started in the first quarter of 2003. There were $0.2 million of intersegment sales eliminated in consolidation for fiscal 2003, all of which related to beverage segment sales to wholesale distribution. There were no intersegment sales for the same period in 2002. 12 Gross profit decreased 2.8% to $60.2 million for fiscal year 2003 compared to $61.9 million for the prior fiscal year. Gross profit as a percentage of sales increased to 7.8% for the year compared to 7.3% for fiscal 2002. Gross profit by business segment is as follows (dollars in millions): 2003 2002 Incr/(Decr) ------------------------------- Wholesale distribution segment $ 46.6 $ 48.4 $ (1.8) Retail health food stores segment 13.2 13.2 - Beverage segment 0.4 0.3 0.1 ------------------------------- $ 60.2 $ 61.9 $ (1.7) =============================== Gross profit from our wholesale distribution business for fiscal 2003 decreased approximately $1.8 million, as compared to the prior year, primarily due to a decrease of $1.6 million in incentive payments received on our private label cigarettes, the absence of cigarette price increases and state excise tax increases during fiscal 2003 which together contributed $1.9 million to gross profit in fiscal 2002, and a decrease in incentive allowances received primarily from cigarette manufacturers on products other than private label cigarettes of approximately $1.5 million (net of amounts paid to customers). The above decrease in gross profit was partially offset by a $1.8 million decrease in cost of sales to account for a reduction in the LIFO reserve and a $1.4 million increase in gross profit from sales of other products. Gross profit from our retail health food segment of $13.2 million was constant compared to the prior year even with a $0.3 million charge to cost of sales (or a decrease in gross profit) resulting from an increase in the LIFO reserve. Gross profit increased slightly in our Midwest stores, but was partially offset by a decrease in gross profit in our Florida stores. Gross profit from our beverage segment increased by $0.1 million over the prior year. The increase was due to a full year of sales in the current year from HNWC compared to nine months in the prior year, and new sales generated in the segment from the formation of TBG in the first quarter of 2003. Gross profit as a percentage of sales for fiscal 2003 increased primarily due to the manufacturers' cigarette price decreases discussed above. Since our gross profit per cigarette carton sold did not change materially after the price decrease, gross profit expressed as a percentage of sales increased. Total operating expense, which includes selling, general and administrative expenses, depreciation and amortization, increased 1.0% or $0.6 million to $55.3 million compared to fiscal 2002. 13 Our wholesale distribution segment reduced operating costs by approximately $2.3 million due to efficiencies gained in its selling, warehousing and delivery areas, primarily in the Quincy distribution center. In addition, the absence of goodwill amortization accounted for a reduction of approximately $0.2 million. Administrative costs increased by approximately $0.2 million, compared to fiscal 2002, primarily due to increased professional fees principally related to compliance with the Sarbanes-Oxley Act, related AMEX listing standards, and SEC rules. Total operating expense in our retail health food segment decreased by approximately $0.1 million. Operating costs increased by approximately $0.5 million primarily due to additional labor and travel costs, but were offset by the absence of tradename and goodwill amortization of approximately $0.6 million. The beverage segment, which began late in the first quarter of fiscal 2002 with the acquisition of HNWC, incurred $4.5 million in operating expenses during fiscal 2003, an increase of approximately $2.9 million over the prior year. The increase was due primarily to $1.7 million of expenses attributable to TBG which was formed late in the first quarter of fiscal 2003 and a full 12 months of operation for the natural spring water bottling operation, compared to nine months in the prior year. As a percentage of sales, total operating expenses increased to 7.2% from 6.5% for the prior year. This increase is primarily the result of the reduction in sales due to the cigarette manufacturers' price decrease and other factors discussed above. We did not experience a significant increase in operating expenses; therefore, since total sales decreased but operating expenses only increased slightly, operating expense expressed as a percentage of sales increased. As a result of the above, income from operations for fiscal 2003 decreased $2.3 million to $4.8 million, compared to fiscal 2002. Interest expense for fiscal year 2003 decreased 23.5% to $3.3 million compared to $4.3 million during the prior year. The decrease was primarily due to a reduction in average interest rates of approximately 0.65% and a reduction in average debt outstanding of approximately $5.5 million in the wholesale segment, partially offset by an increase in average debt outstanding of approximately $1.2 million in the beverage segment. Other income for fiscal year 2003 of $0.1 million was comprised primarily of interest income of $0.1 million, proceeds from a settlement related to a former distribution facility of $0.1 million, and gains on sales of available-for-sale securities of $0.3 million. The above items were offset by losses of $0.4 million associated with writing down nonoperating assets held for sale to their fair market value. Other income for fiscal 2002 of $0.5 million was generated primarily by gains of $0.3 million associated with the sale of available-for-sale securities, $0.2 million related to forgiveness of certain debts from former suppliers to the natural spring 14 water bottling operation, interest income and dividends received on available-for-sale securities. Also included in other expense (income) in fiscal 2002 was $0.1 million equity in losses from our minority investment in HNWC before we acquired this company in December 2001. As a result of the above factors, income from continuing operations for fiscal year 2003 was $1.0 million compared to $2.0 million in fiscal 2002. FISCAL YEAR 2002 VERSUS FISCAL YEAR 2001. Sales for fiscal year 2002, increased 46.7% to $847.1 million, compared to $577.6 million for fiscal year 2001. Sales increases (decreases) by business segment are as follows (dollars in millions): Wholesale distribution segment $ 267.5 Retail health food stores segment (0.2) Water bottling operation segment 2.2 ------- $ 269.5 ======= Sales from the wholesale distribution business increased by $267.5 million for fiscal 2002 as compared to fiscal 2001. Sales from our distribution business in Quincy, Illinois, which was acquired in the third quarter of fiscal 2001, accounted for $253.7 million of the increase. The remaining increase of $13.8 million was attributable primarily to increases in cigarette sales of approximately $12.3 million over the prior year as a result of price increases, which more than offset a 1.3% decline in comparable carton volume. Sales of tobacco, confectionery and other products accounted for the remainder of the increase as sales of these products increased by $1.5 million or 1.1% over the prior year where sales growth was negatively impacted by the unusually severe winter in the Midwest that inhibited travel and other outdoor activities. Pricing strategies implemented by several competitors beginning in 2001 negatively impacted sales growth. Sales from the retail health food segment decreased by $0.2 million when compared to the prior year due to the closing of a store during the fourth quarter of fiscal 2001. Sales at this store totaled approximately $0.7 million during fiscal 2001. Same store sales increased by $0.5 million, or 1.8% over the prior year. Competition by national chains who have opened stores in the same markets as AMCON's stores and an overall softening of the natural food retail market in past years hampered sales growth in the retail health food segment. The natural spring water bottling operation in Hawaii, which was acquired during the latter part of the first quarter of fiscal 2002, generated sales of $2.2 million during fiscal 2002. The operating results of the water bottling operation are included in the Company's consolidated financial statements from the date of acquisition. 15 Gross profit increased 35.5% to $61.9 million for fiscal year 2002 compared to $45.7 million for the prior fiscal year. Gross profit as a percentage of sales decreased to 7.3% for the year compared to 7.9% for fiscal 2001. Gross profit by business segment was as follows (dollars in millions): 2002 2001 Incr/(Decr) ------------------------------- Wholesale distribution $ 48.4 $ 33.8 $ 14.6 Retail health food stores 13.2 11.9 1.3 Water bottling operation 0.3 - 0.3 ------------------------------- $ 61.9 $ 45.7 $ 16.2 =============================== Gross profit from our wholesale distribution business for fiscal 2002 was favorably impacted by our acquisition of the new Quincy distribution facility that contributed $11.9 million of the increase in gross profit. Excluding Quincy, gross profit for the year increased approximately $2.7 million as compared to the prior year. This increase was primarily due to a favorable margin impact of approximately $0.7 million resulting from inventory levels at the time of price increases turning at a lower cost relative to the new sales price, a $0.8 million lower charge to cost of sales to account for the LIFO reserve, and increases in the sales of cigarettes and other products which produced an increase in gross profit of $2.3 million when compared to the prior year. The above increases were partially offset by a decrease of $0.6 million in gross profit from sales of our private label cigarettes and increases in incentive allowances of approximately $0.5 million paid to customers, net of amounts received from manufacturers, as compared to the prior year. The retail health food segment increased gross profits by $1.3 million compared to the prior year. The increase was primarily the result of a realignment of top management which resulted in better inventory management and purchasing strategies. Gross profit from the natural spring water bottling operation, which was acquired at the end of the first quarter of the year, was $0.3 million for fiscal 2002. Gross profit as a percentage of sales for fiscal 2002 declined primarily due to cigarette sales increasing as a percentage of total sales. Although the price of cigarettes continued to increase, our gross margin dollars remained relatively constant and even decreased in certain markets due to competitive pressures. For fiscal year 2002, total operating expense, which includes selling, general and administrative expenses, depreciation and amortization, increased 22.5% or $10.1 million to $54.8 million compared to fiscal 2001. The increase was primarily due to expenses associated with the new Quincy distribution business which accounted for $9.7 million of the increase compared to fiscal 2001. The rest of the wholesale distribution segment maintained operating costs consistent with the prior year primarily due to 16 efficiencies gained through closure of one distribution center and integration of the customer base between other distribution centers. Total operating expenses in our retail health food business declined by $1.2 million during fiscal 2002, as compared to the prior year, due to the closure of one retail store and realignment of the management overhead structure which eliminated significant overhead expenses. Our Hawaiian water bottling business, which was acquired in the first quarter of fiscal 2002, incurred $1.6 million in operating expenses and accounted for the remaining increase in operating expenses for fiscal 2002 as compared to fiscal 2001. As a percentage of sales, total operating expenses decreased to 6.5% from 7.7% for the prior year. This decrease was primarily due to the acquisition of the Quincy distribution business which brought the wholesale distribution segment's operating costs as a percentage of sales down to 5.0% for fiscal 2002 compared to 5.6% for fiscal 2001. As a result of the above, income from operations for fiscal 2002 increased $6.2 million to $7.2 million, compared to fiscal 2001. Interest expense for fiscal year 2002 increased 10.2% to $4.3 million compared to $3.9 million during the prior year. The increase was due to debt incurred in the third quarter of fiscal 2001 to acquire the Quincy, IL distribution business and distribution facility, net interest paid under an interest rate swap contract that was assumed in the Quincy acquisition totaling $1.9 million over the prior year, and $0.2 million related to the Hawaiian water bottling operation. These increases in interest expense were offset by reductions in interest of $0.6 million related to a decline in the remaining average debt balances and $1.1 million related to valuation adjustments on the interest rate swap contract, which are included in interest expense. Other income for fiscal year 2002 of $0.5 million was generated primarily by gains of $0.3 million associated with the sale of available-for-sale securities, $0.2 million related to forgiveness of certain debts from former suppliers to the Hawaiian water bottling operation, and interest income and dividends received on investment securities. Other income for fiscal year 2001 of $0.2 million was generated primarily by interest income and dividends received on investment securities. Included in other expense (income) is equity in loss of an unconsolidated affiliate of $0.1 million, respectively for 2002 and 2001, which represented AMCON's ownership interest in the losses of HNWC prior to acquiring the company in December 2001. The Company's effective tax rate was 40.0% in fiscal 2002, compared to 36.5% in fiscal 2001. The higher rate in fiscal 2002 was primarily attributable to state tax benefits not being recognized in states where separate tax returns are filed for subsidiaries that incur losses. As a result of the above factors, income from continuing operations for fiscal year 2002 was $2.0 million compared to a loss from continuing operations of $1.8 million for fiscal 2001. 17 LIQUIDITY AND CAPITAL RESOURCES As of September 2003, our liquidity was provided by cash on hand of $0.7 million and approximately $17.0 million available under a revolving credit facility with a capacity of $55.0 million. During fiscal year 2003, AMCON generated cash flow of approximately $5.5 million from operating activities primarily through net income and decreases in accounts receivable and inventory. Cash of $3.2 million was utilized in investing activities during the year for capital expenditures and cash of $0.4 million was provided by investing activities through sales of fixed assets and available-for-sale securities. Cash provided by financing activities includes $0.9 million in net proceeds from long term debt which was used primarily to purchase fixed assets. In addition, $2.8 million of cash was used in financing activities to pay down long-term and subordinated debt and $0.4 million was used for payment of dividends to shareholders. The Company makes capital expenditures primarily for equipment for its distribution facilities including computers, delivery vehicles and warehouse equipment, remodeling of existing retail health food stores, and equipment and leasehold improvements for its natural spring water bottling operation. The Company has historically financed its working capital requirements with a combination of internally generated funds and bank borrowings. Cash provided by operating activities approximated $5.5 million in fiscal 2003, compared to cash provided of approximately $2.1 million in fiscal 2002 and $5.7 million in fiscal 2001. Capital expenditures during those periods were approximately $3.1 million, $2.7 million and $1.2 million, respectively. Any remaining cash provided by operations was applied to debt service. The Company had working capital (current assets less current liabilities) of approximately $19.4 million as of fiscal year end 2003 compared to $27.0 million at fiscal year end 2002. The decrease in working capital was primarily attributable to $6.0 million of subordinated debt becoming current as of year end 2003, financing leasehold improvements and other capital asset acquisitions related to the Hawaii natural spring water bottling operation, and funding the cash needs of the beverage marketing and distribution business with short term borrowings. The Company's ratio of debt to equity decreased to 3.45 at fiscal year end 2003 compared to 3.69 at fiscal year end 2002. This decrease in debt to equity ratio is due primarily to net income earned by the Company during fiscal 2003 which resulted in an increase to equity. 18 The following table summarizes our outstanding contractual obligations and commitments as of fiscal year end 2003:
Payments Due By Period ------------------------------------------------------------------------------------------ Contractual Fiscal Fiscal Fiscal Fiscal Fiscal Obligations Total 2004 2005 2006 2007 2008 Thereafter ------------------------------------------------------------------------------------------ Long-term debt $ 49,301 $ 14,927 $ 28,180 $ 6,194 $ - $ - $ - Subordinated debt 8,739 7,763 976 - - - - Capital lease 1,701 421 489 486 284 21 - Operating leases 22,981 5,150 4,616 3,829 2,269 1,617 5,500 ------------------------------------------------------------------------ Total $ 82,722 $ 28,261 $ 34,261 $ 10,509 $ 2,553 $ 1,638 $ 5,500 ======================================================================== Total Other Commercial Amounts Fiscal Fiscal Fiscal Fiscal Fiscal Obligations Committed 2004 2005 2006 2007 2008 Thereafter ------------------------------------------------------------------------------------------ Lines of credit $ 59,750 $ 4,750 $ 55,000 $ - $ - $ - $ - Letters of credit 967 967 - - - - - ------------------------------------------------------------------------ Total $ 60,717 $ 5,717 $ 55,000 $ - $ - $ - $ - ========================================================================
ADC maintains a revolving credit facility (the "Facility") with LaSalle Bank which allows it to borrow up to $55.0 million at any time, subject to eligible accounts receivable and inventory requirements. As of fiscal year end 2003, the outstanding balance on the Facility was $38.0 million. The Facility bears interest at a variable rate equal to the bank's base rate, which was 4.00% at September 2003, or LIBOR plus 2.50%, as selected by the Company. As discussed under "Qualitative and Quantitative Disclosures about Market Risk", a notional amount of $15.0 million is subject to interest rate swap agreements which have the effect of converting this amount to a fixed rate ranging between 4.38% and 4.87%. In addition, the Company is required to pay an unused commitment fee equal to 0.25% per annum on the difference between the maximum loan limit and average monthly borrowing for the month. The Facility is collateralized by all of ADC's equipment, intangibles, inventories, and accounts receivable. In December 2003, the due date of the Facility was extended to June 2005. 19 The Facility contains covenants which, among other things, set certain financial ratios and net worth requirements. The Facility includes covenants that (i) restrict permitted investments, (ii) restrict intercompany advances to HNWC, (iii) restrict incurrence of additional debt, (iv) restrict mergers and acquisitions and changes in business or conduct of business and (v) require the maintenance of certain financial ratios and net worth levels including an average annual debt service coverage ratio of 1.0 to 1.0, and a minimum tangible net worth of $9.0 million for fiscal 2003. In addition, the Company must maintain a fill rate percentage of not less than 93% calculated on a weekly basis. The fill rate percentage is determined by dividing the total dollar amount of inventory delivered to the Company's customers each week into the total amount of orders which correspond to such deliveries. The Facility also provides that the Company may not pay dividends in excess of $0.12 per share on an annual basis. The Company was in compliance with its debt covenants at September 2003. The Company has a $2.8 million credit facility with a bank to be used to fund operating activities at our natural spring water bottling operation in Hawaii, (the "Beverage Facility"). Borrowings under the Beverage Facility bear interest at the bank's base rate plus 1.0%, which equaled 6.75% at September 2003. As of September 2003, the outstanding balance under the Beverage Facility was $2.8 million. The Beverage Facility is guaranteed by the Company's Chairman. The Company has a $2.0 million credit facility with a bank collateralized by inventories of the Retail segment (the "Retail Facility"). Borrowings under the Retail Facility bear interest at the bank's base rate plus 1.0%, which equaled 6.75% at September 2003. As of September 2003, the outstanding balance under the Retail Facility was $2.0 million. The Company borrowed $6.9 million from a bank, at a fixed rate of 7.5%, to purchase the distribution facility in Quincy, IL, referred to herein as the Real Estate Loan, and to retire term debt. The Real Estate Loan is amortized on a 20 year basis with a balloon payment due on June 1, 2006. The Real Estate Loan is collateralized by the Company's two owned distribution facilities. As of September 2003, the outstanding balance on the Real Estate Loan was approximately $6.6 million. The acquisition of the Quincy distribution business provides for deferred payments to be made to the seller totaling $3.4 million (plus interest). These deferred payments are subordinate to the Facility and the Real Estate Loan and are due in installments of $0.9 million (including interest) on the first, second, third and fourth anniversaries of the closing date of the transaction. In addition, the Company entered into a noncompetition agreement with the seller that requires the Company to make payments of $0.1 million annually on the first through fourth anniversary dates of the closing of the transaction. The Company has recorded the seller obligations at their fair values utilizing a 6% effective interest rate which was determined based on the Company's approximate average borrowing rate. As of September 2003, the outstanding obligation to the seller was approximately $1.8 million. 20 The Company has borrowings under an 8% Convertible Subordinated Note (the "Convertible Note") and a Collateralized Promissory Note (the "Collateralized Note"), in addition to borrowings under the Facility which were used to purchase all of the common stock of Health Food Associates, Inc. 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 $0.8 million per year with the balance due at maturity. The Collateralized Note is collateralized by a pledge of the stock of Health Food Associates, Inc. The principal balance of the Convertible Note may be converted into stock of The Healthy Edge, Inc. (formerly Food For Health Co., Inc.) under circumstances set forth in the Convertible Note. As of September 2003, the outstanding balances of the Convertible Note and the Collateralized Note were $2.0 million and $4.8 million, respectively. Both the Convertible Note and the Collateralized Note are due in September 2004. The Company is currently considering various restructuring alternatives for these notes. The Company has borrowings under various notes to purchase the assets of health food stores and water bottling equipment. The notes have terms ranging from three to five years with principal and interest payments due monthly. As of fiscal year end 2003, the outstanding balance of those notes was approximately $0.2 million. In connection with the purchase of the Quincy distribution business and HNWC, the Company assumed several capital leases for office equipment, automobiles and warehouse equipment. In addition, the Company entered into a new capital lease in September 2003 in connection with the acquisition of new water bottling and packaging equipment. As of September 2003, the outstanding balances on the capital leases totaled approximately $1.7 million. In connection with the discontinued operations of the health and natural foods distribution business, AMCON is obligated on a letter of credit issued to the buyer in the amount of $0.1 million which expires in March 2004. In addition, AMCON has a letter of credit in the amount of approximately $0.8 million that is required to be issued to our workers compensation insurance carrier as part of our self-insured loss control program. The Company believes that funds generated from operations, supplemented as necessary with funds available under the revolving credit facilities, will provide sufficient liquidity to cover debt service and any reasonably foreseeable future working capital and capital expenditure requirements associated with existing operations. OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any off-balance sheet arrangements that have or are reasonably expected to have a material effect on the Company's financial position or results of operations. 21 ACQUISITIONS AND DISPOSITIONS On June 1, 2001, AMCON completed the acquisition of substantially all of the distribution business and net assets of Merchant's Wholesale, Inc. located in Quincy, Illinois (the "Quincy" distribution business). In addition, the Company purchased a 206,000 square foot building occupied by Merchants and owned by Merchants' sole stockholder. On December 17, 2001, the Company completed a merger with HNWC, pursuant to which HNWC merged with and into, and thereby became, a wholly-owned subsidiary of AMCON Distributing Company. The merger consideration valued the entire common equity interest in HNWC at approximately $2.9 million, which was paid in cash of $0.8 million during fiscal 2001 and in common stock of the Company valued at $2.1 million. As a result, the Company issued 373,558 shares of its common stock to outside HNWC shareholders, representing 12.0% of the Company's outstanding shares after giving effect to the merger. HNWC option holders and warrant holders also received 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. On March 23, 2001, AMCON sold the assets of Food For Health Co. Inc. for $10.3 million, subject to certain adjustments. That sale is reflected as discontinued operations in AMCON's consolidated financial statements. Results from the discontinued operations have been excluded from income from continuing operations in the accompanying consolidated statements of operations. The effects of the discontinued operations on net income and per share data are reflected within the accompanying consolidated statements of operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to interest rate risk on its variable rate debt. At September 2003, we had $27.7 million of variable rate debt outstanding (excluding $15.0 million variable rate debt which is fixed through the swaps described below), with maturities through June 2005. The interest rates on this debt ranged from 3.49% to 6.75% at September 2003. Through December 31, 2001, we had the ability to select the bases on which our variable interest rates were calculated by selecting an interest rate based on our lender's base interest rate or based on LIBOR. This provided management with some control of our variable interest rate risk. Effective January 1, 2002, the LIBOR borrowing rate option was removed. We negotiated reinstatement of the LIBOR borrowing option in April 2003. We estimate that our annual cash flow exposure relating to interest rate risk based on our current borrowings is approximately $0.2 million for each 1% change in our lender's prime interest rate. 22 In June 2003, the Company entered into two interest rate swap agreements with a bank in order to mitigate the Company's exposure to interest rate risk on this variable rate debt. Under the agreements, the Company agrees to exchange, at specified intervals, fixed interest amounts for variable interest amounts calculated by reference to agreed-upon notional principal amounts of $10.0 million and $5.0 million. The interest rate swaps effectively convert $15.0 million of variable-rate senior debt to fixed-rate debt at rates of 4.87% and 4.38% on the $10.0 million and $5.0 million notional amounts through the maturity of the swap agreements on June 2, 2006 and 2005, respectively. These interest rate swap agreements have been designated as hedges and are accounted for as such for financial accounting purposes. We do not utilize financial instruments for trading purposes and hold no derivative financial instruments other than the interest rate swaps which could expose us to significant market risk. In addition, we are exposed to market risk relating to our available-for-sale investment in the common stock of Consolidated Water Company Limited ("CWCO"), a public company traded on the NASDAQ National Market. At September 2003 and 2002 we held 30,000 and 50,000 shares, respectively, of common stock of CWCO valued at approximately $0.5 million and $0.6 million. We value this investment at market and record price fluctuations in shareholders' equity as unrealized gain or loss on investments. The unrealized gain on CWCO shares was approximately $0.5 million at September 2003 and 2002, respectively. We sold 20,000 shares of CWCO common stock in fiscal 2003 and realized a gain of $0.3 million on the sale. 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 accounting principles generally accepted in the United States of America to reflect, in all material aspects, the substance of financial events and transactions occurring during the year. Deloitte & Touche LLP, independent auditor, has audited our consolidated financial statements as of and for the fiscal years ended September 26, 2003, September 27, 2002 and September 28, 2001. 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. William F. Wright Kathleen M. Evans Michael D. James Chairman President Secretary, Treasurer and Chief Financial Officer December 24, 2003 23 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of AMCON Distributing Company: We have audited the accompanying consolidated balance sheets of AMCON Distributing Company and its subsidiaries (the "Company") as of September 26, 2003 and September 27, 2002, and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss) and cash flows for each of the three years in the period ended September 26, 2003. 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 in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of AMCON Distributing Company and its subsidiaries as of September 26, 2003 and September 27, 2002, and the results of their operations and their cash flows for each of the three years in the period ended September 26, 2003 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, in 2003 the Company changed its method of accounting for goodwill and other intangible assets. DELOITTE & TOUCHE LLP Omaha, Nebraska December 24, 2003 F-1 CONSOLIDATED BALANCE SHEETS AMCON Distributing Company and Subsidiaries
- ----------------------------------------------------------------------------------------------------- Fiscal Year End September 2003 2002 - ----------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash $ 668,073 $ 130,091 Accounts receivable, less allowance for doubtful accounts of $0.8 million and $0.6 28,170,129 31,216,783 million in 2003 and 2002, respectively Inventories 32,489,051 35,744,074 Income tax receivable - 981,054 Deferred income taxes 1,568,476 324,369 Other 581,950 393,365 ------------- ------------ Total current assets 63,477,679 68,789,736 Fixed assets, net 16,951,615 16,096,124 Available-for-sale investments 512,694 562,000 Goodwill 6,091,397 6,091,397 Other Intangible Assets 11,420,542 11,804,289 Other assets 1,045,503 1,242,923 ------------- ------------ $ 99,499,430 $104,586,469 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 15,092,091 $ 19,873,851 Accrued expenses 3,715,370 3,969,164 Accrued wages, salaries, bonuses 1,462,678 1,371,310 Income tax payable 540,414 - Current liabilities of discontinued operations 117,612 93,558 Current portion of long-term debt 15,348,167 14,783,967 Current portion of subordinated debt 7,762,666 1,708,986 ------------- ------------- Total current liabilities 44,038,998 41,800,836 Deferred income taxes 1,367,367 788,316 Noncurrent liabilities of discontinued operations 161,025 197,024 Long-term debt, less current portion 35,654,423 36,362,099 Subordinated debt, less current portion 976,220 8,738,886 Commitments and contingencies Shareholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized, none outstanding - - Common stock, $.01 par value, 15,000,000 shares authorized, 3,168,954 and 3,156,962 issued, in 2003 and 2002, respectively 31,690 31,570 Additional paid-in capital 5,997,977 5,977,643 Accumulated other comprehensive income, net of $0.1 million and $0.2 million tax in 2003 and 2002, respectively 220,732 294,771 Retained earnings 11,050,998 10,395,324 ------------- ------------- 17,301,397 16,669,308 ------------- ------------- $ 99,499,430 $ 104,586,469 ============= -============ The accompanying notes are an integral part of these consolidated financial statements
F-2 CONSOLIDATED STATEMENTS OF OPERATIONS AMCON Distributing Company and Subsidiaries
- ---------------------------------------------------------------------------------------------------------- Fiscal Years Ended September 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------- Sales (including excise taxes of $172.2 million, $166.5 million and $100.5 million, respectively) $ 772,135,351 $ 847,116,997 $ 577,589,485 Cost of sales 711,974,154 785,192,882 531,903,086 ------------- ------------- ------------- Gross profit 60,161,197 61,924,115 45,686,399 Selling, general and administrative expenses 53,049,723 51,610,419 42,186,916 Depreciation and amortization 2,284,608 3,163,549 2,519,377 ------------- ------------- ------------- 55,334,331 54,773,968 44,706,293 ------------- ------------- ------------- Income from operations 4,826,866 7,150,147 980,106 Other expense (income): Interest expense 3,269,777 4,272,783 3,876,606 Other income, net (98,384) (505,712) (200,504) Equity in loss of unconsolidated affiliate - 95,007 94,445 ------------- ------------- ------------ 3,171,393 3,862,078 3,770,547 ------------- ------------- ------------ Income (loss) from continuing operations before income taxes 1,655,473 3,288,069 (2,790,441) Income tax expense (benefit) 629,000 1,316,000 (1,018,411) ------------- ------------- ----------- Income (loss) from continuing operations 1,026,473 1,972,069 (1,772,030) Loss from discontinued operations, net of income tax benefit of $0, $0 and $0.6 million in 2001 - - (894,434) Loss on disposal of discontinued operations, net of income tax benefit of $0, $0 and $0.4 million in 2001 - - (675,415) ------------- ------------- ------------- Net income (loss) $ 1,026,473 $ 1,972,069 $ (3,341,879) ============= ============= ============= Basic earnings (loss) per share: Continuing operations $ 0.32 $ 0.65 $ (0.65) Discontinued operations - - (0.57) ------------- ------------- ------------- Net basic earnings (loss) per share $ 0.32 $ 0.65 $ (1.22) ============= ============= ============= Diluted earnings (loss) per share: Continuing operations $ 0.32 $ 0.63 $ (0.65) Discontinued operations - - (0.57) ------------- ------------- ------------- Net diluted earnings (loss) per share $ 0.32 $ 0.63 $ (1.22) ============= ============= ============= Weighted average shares outstanding: Basic 3,166,191 3,032,484 2,738,170 Diluted 3,222,253 3,109,179 2,738,170 The accompanying notes are an integral part of these consolidated financial statements
F-3 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) AMCON Distributing Company and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------- Accumulated Common Stock Additional Other Treasury Stock -------------- Paid-In Comprehensive Retained -------------- Shares Amount Capital Income Earnings Shares Amount Total - ---------------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 29, 2000 2,737,551 $27,376 $4,121,981 $228,924 $12,476,624 - $ - $16,854,905 Exercise of options 1,633 16 3,146 - (62) 17 85 3,185 Purchase of treasury stock - - - - - (17) (85) (85) Dividends - - - - (328,605) - - (328,605) Net loss - - - - (3,341,879) - - (3,341,879) Unrealized gain on investments available- for-sale, net of tax of $0.1 million - - - 175,438 - - - 175,438 ----------- Total comprehensive loss (3,166,441) --------- ------- ----------- -------- ----------- ----- ----- ----------- BALANCE, SEPTEMBER 28, 2001 2,739,184 27,392 4,125,127 404,362 8,806,078 - - 13,362,959 Exercise of options 44,220 442 126,383 - - - - 126,825 Issuance of common stock from acquisition 373,558 3,736 1,726,133 - - - - 1,729,869 Dividends - - - - (382,823) - - (382,823) Net income - - - - 1,972,069 - - 1,972,069 Unrealized loss on investments available- for-sale, net of tax of $0.1 million - - - (109,591) - - - (109,591) ----------- Total comprehensive income 1,862,478 --------- ------- ----------- -------- ----------- ----- ----- ----------- BALANCE, SEPTEMBER 27, 2002 3,156,962 31,570 5,977,643 294,771 10,395,324 - - 16,699,308 Exercise of options 12,000 120 20,370 - - - - 20,490 Retirement of common stock (8) - (36) - - - - (36) Dividends - - - - (370,799) - - (370,799) Net income - - - - 1,026,473 - - 1,026,473 Unrealized loss on investments available- for-sale, net of tax of $0.04 million - - - (74,039) - - - (74,039) ----------- Total comprehensive income 952,434 --------- ------- ----------- -------- ----------- ----- ----- ----------- BALANCE, SEPTEMBER 26, 2003 3,168,954 $31,690 $5,997,977 $220,732 $11,050,998 - $ - $17,301,397 ========= ======= =========== ======== =========== ===== ===== =========== The accompanying notes are an integral part of these consolidated financial statements
F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS AMCON Distributing Company and Subsidiaries
- ------------------------------------------------------------------------------------------------------------- Fiscal Years Ended September 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) from continuing operations $ 1,026,473 $ 1,972,069 $ (1,772,030) Adjustments to reconcile net income (loss) from continuing operations to net cash flows from operating activities: Net loss from discontinued operations - - (894,434) Net loss on disposition of discontinued operations - - (675,415) Depreciation and amortization 2,520,058 3,453,268 2,519,377 (Gain) loss on sales of fixed assets, intangibles, land held for sale and securities (207,950) (62,843) 70,646 Equity in loss of affiliate - 95,007 94,445 Deferred income taxes (660,306) 1,368,445 (542,973) Provision for losses on doubtful accounts, inventory obsolescence and assets held for aale 675,828 45,681 509,993 Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable 2,852,512 768,582 1,608,381 Inventories 3,204,987 (5,710,095) 2,452,459 Other current assets (188,585) (29,514) 281,971 Other assets (144,869) 147,490 (39,170) Accounts payable (4,781,760) 2,506,111 6,379,513 Accrued expenses, wages, salaries and bonuses (269,421) (1,094,380) 1,696,118 Income taxes payable and receivable 1,521,468 769,087 (2,503,562) Net cash flows from operating activities - discontinued operations (11,947) (2,084,866) (3,521,200) ----------- ------------ ------------ Net cash flows from operating activities 5,536,488 2,144,042 5,664,119 Cash flows from investing activities: Purchases of fixed assets (3,228,711) (2,680,214) (1,197,708) Acquisitions, net of cash acquired - (95,321) (32,918,646) Proceeds from sales of fixed assets and intangibles 129,994 93,082 38,000 Proceeds from sales of available-for-sale securities 303,018 303,911 - Purchase of debt security - - (1,254,483) Purchase of equity security - - (300,000) Proceeds from disposal of discontinued operations - - 8,200,641 ----------- ----------- ------------ Net cash flows from investing activities (2,795,699) (2,378,542) (27,432,196) Cash flows from financing activities: Proceeds from borrowings of long-term debt 919,864 - 1,595,000 Net (payments) proceeds on bank credit agreements (536,538) 3,827,287 (9,727,012) Net proceeds on bank credit agreement for acquisition - - 26,678,649 Proceeds from long-term debt for acquisition - - 6,240,000 Payments on long-term and subordinated debt (2,235,788) (3,163,994) (3,238,545) Debt issue costs - - (305,846) Dividends paid (370,799) (382,823) (328,605) Purchase of treasury stock (36) - (85) Proceeds from exercise of stock options 20,490 126,825 3,185 Payment of registration costs - (339,644) - ----------- ----------- ------------ Net cash flows from financing activities (2,202,807) 67,651 20,916,741 Net increase (decrease) in cash 537,982 (166,849) (851,336) Cash, beginning of year 130,091 296,940 1,148,276 ----------- ----------- ------------ Cash, end of year $ 668,073 $ 130,091 $ 296,940 =========== =========== ============ Supplemental cash flow information: Cash paid during the year for interest $ 4,244,482 $ 5,029,754 $ 2,217,801 Cash paid during the year for income taxes 454,110 187,815 361,343 Supplemental non-cash information: Business combinations: Fair value of assets acquired - 5,972,598 42,353,735 Subordinated debt assumed - 457,905 4,541,751 Other liabilities assumed - 1,508,435 4,893,337 Issuance of common stock - 2,069,511 - Conversion of notes receivable and acquisition costs - 692,058 - The accompanying notes are an integral part of these consolidated financial statements
F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (a) General: As more fully described in Note 2 to the consolidated financial statements, AMCON Distributing Company and its wholly-owned subsidiaries ("AMCON" or the "Company") completed the sale of its health food distribution business effective March 23, 2001. As a result, the Company's fiscal year 2001 results reflect the health food distribution business as discontinued operations. (b) Company Operations: AMCON is primarily engaged in the wholesale distribution of consumer products in the Midwest and Rocky Mountain regions. In addition, the Company operates thirteen retail health food stores in Florida and the Midwest and a non- alcoholic beverage business that includes a natural spring water bottling operation in the State of Hawaii and a marketing and distribution operation which is focused on selling the Company's Hawaiian natural spring water and other specialty beverages. AMCON's wholesale distribution business ("ADC") includes six distribution centers that sell approximately 13,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and chilled products and institutional food service products. The Company distributes products primarily to retailers such as convenience stores, discount and general merchandise stores, grocery stores and supermarkets, drug stores and gas stations. In addition, the Company services institutional customers, including restaurants and bars, schools, sports complexes and vendors, as well as other wholesalers. AMCON also operates seven retail health food stores in Florida under the name Chamberlin's Market & Cafe and six in the Midwest under the name Akin's Natural Foods Market. These stores carry natural supplements, groceries, health and beauty care products and other food items. In addition, AMCON operates a non-alcoholic beverage business which consists of Hawaiian Natural Water Company, Inc. ("HNWC") and The Beverage Group Inc. ("TBG"). HNWC bottles natural spring water from an exclusive source located on the Big Island of Hawaii. HNWC currently markets its products primarily in the State of Hawaii, but has expanded marketing to the mainland United States and certain international markets. AMCON's newly formed wholly-owned subsidiary, TBG is focused on the marketing and distribution of HNWC bottled water products and other beverages including Hype Energy Drink/TM/, Royal Kona Coffee/R/, Bottle Green/R/ and Bahia/R/ drinks and Xterra/R/, a line of sports beverages and energy bars in the United States, Canada and Mexico. 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 and state excise tax increases 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 F-6 diversified product line, it remains dependent upon cigarette sales which represented approximately 73% of its revenue and 37% of its gross profit in fiscal 2003 compared to 76% of its revenue and 39% of its gross profit in fiscal 2002 and 73% of its revenue and 40% of its gross profit in fiscal 2001. The Company's net income in fiscal 2003 and prior years was heavily dependent on sales of the Company's private label cigarettes and volume discounts received from manufacturers in connection with such sales. (c) Accounting Period: AMCON maintains a 52-53 week fiscal year which ends on the last Friday in September. The actual years ended September 26, 2003, September 27, 2002 and September 28, 2001. Fiscal 2003, 2002 and 2001 were comprised of 52 weeks. Years cited herein refer to AMCON's fiscal years. (d) Principles of Consolidation: The consolidated financial statements include the accounts of AMCON and its wholly-owned subsidiaries. The investments in and the operating results of 50%-or-less-owned entities are included in the consolidated financial statements on the basis of the equity method of accounting. All significant intercompany accounts and transactions have been eliminated. (e) 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 of $4.8 million and $5.6 million at fiscal year end 2003 and 2002, respectively, reflect 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 facility (see Note 10). (f) 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 fair 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 excluded from net income and reported in other comprehensive income, net of tax. For trading securities, net unrealized holding gains and losses are included in the determination of net income. (g) 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. (h) Inventories: The wholesale distribution segment inventories consist of finished products purchased in bulk quantities to be redistributed to ADC's customers and are stated at the lower of cost (last-in, first-out or "LIFO" method) or market. The retail health food operation utilizes the retail LIFO inventory method of accounting stated at lower of cost (LIFO) or market. The beverage F-7 operation's inventories are stated at lower of cost (LIFO) or market and consist of raw materials and finished goods. Finished goods inventory of $35.9 million includes materials, labor and manufacturing overhead costs. Raw materials inventory of $0.3 million consists of pre-forms used to make bottles, caps, labels and various packaging and shipping materials. LIFO inventories at fiscal year end 2003 and 2002 were approximately $3.7 million and $4.5 million less than the amount of such inventories valued on a FIFO basis, respectively. The liquidation of certain LIFO layers decreased cost of goods sold by $1.5 million during fiscal 2003. An allowance for obsolete inventory is maintained to reflect the expected unsaleable or unrefundable inventory based on evaluation of slow moving products. (i) Fixed Assets: Fixed assets are stated at cost less accumulated depreciation or amortization. Major renewals and improvements are capitalized and charged to expense over their useful lives through depreciation or amortization charges. Repairs and maintenance are charged to expense in the period incurred. The straight-line method of depreciation is used to depreciate assets over the estimated useful lives 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 operations. (j) Long-Lived Assets: During fiscal 2003, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such asset may not be recoverable. Long-lived assets classified as held for sale, are reviewed annually for impairment and are reported at the lower of the carrying amount or fair value less the cost to sell. (k) Goodwill, Intangible and Other Assets: Goodwill consists of the excess purchase price paid in business acquisitions over the fair value of assets acquired. Intangible assets consist primarily of tradenames, covenants not to compete and favorable leases assumed in acquisitions. These assets are initially recorded at an amount equal to the purchase price paid or allocated to them. Other assets consist primarily of the cash surrender value of life insurance policies and equipment held for sale. During fiscal 2003, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and intangible assets having indefinite useful lives. F-8 Under a nonamortization approach, goodwill and intangible assets having indefinite useful lives are not amortized into results of operations, but instead are reviewed at least annually for impairment. If the recorded value of goodwill and intangible assets having indefinite useful lives is determined to exceed their fair value, the asset will be written down to fair value and a charge taken against results of operations in the period. AMCON considers its tradenames to have indefinite lives. Therefore, upon adoption of SFAS No. 142, goodwill and tradename amortization ceased. Management has obtained an independent valuation of its goodwill and tradename assets and the Company did not incur an impairment charge upon implementation of SFAS No. 142, nor did the Company incur an impairment charge during fiscal 2003 upon completion of the annual review. During fiscal 2002, the Company recognized goodwill amortization of $0.3 million and tradename amortization of $0.6 million. Intangible assets that are considered to have definite useful lives continue to be charged to expense through amortization on the straight-line method over their estimated useful lives as follows: Years ----- Covenants not to compete 2 - 5 Favorable leases 3 - 7 The benefit related to increases in the cash surrender value of split dollar life insurance policies is recorded as a reduction to insurance expense. The cash surrender value of life insurance policies is limited to the lesser of the cash value or premiums paid by the Company through September 2002. (l) Debt Issue Costs: The costs related to the issuance of debt are capitalized in other assets and amortized on an effective interest method to interest expense over the terms of the related debt agreements. (m) Derivative Instruments The Company uses derivatives (e.g. interest rate swaps) for the purpose of hedging its exposure to changes in interest rates. The fair value of each derivative is shown on the balance sheet as a current asset or current liability. Changes in the fair value of derivatives are recognized immediately in the income statement for derivatives that do not qualify for hedge accounting. For derivatives designated as hedges and used to hedge an existing asset or liability, both the derivative and hedged item are recognized at fair value within the balance sheet with the changes in both of these fair values being recognized immediately in the income statement. For derivatives designated as a hedge and used to hedge an anticipated transaction or event (e.g. increases or decreases in interest rates), changes in the fair value of the derivatives are deferred in the balance sheet within accumulated other comprehensive income to the extent the hedge is effective in mitigating the exposure to the related anticipated event. Any ineffectiveness associated with the hedge is recognized immediately in the income statement. Amounts deferred within accumulated other comprehensive income are recognized in the income statement in the same period during which the hedged transaction affects earnings (e.g. when interest payments are made). F-9 (n) Revenue Recognition: AMCON recognizes revenue in its wholesale distribution and beverage divisions when products are delivered to customers (which generally is the same day products are shipped) and in its retail health food business when products are sold to consumers. Sales are shown net of returns and discounts. In accordance with the guidance provided in Emerging Issues Task Force ("EITF") No. 01-9, "Accounting For Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)," beginning in the first quarter of fiscal 2002, the Company classified the costs associated with sales incentives provided to customers as a reduction in net sales. These costs were previously included in cost of goods sold. This reclassification had no impact on reported net income before taxes, net income or earnings- per-share amounts. (o) Insurance: The Company's insurance for worker's compensation, general liability and employee-related health care benefits are provided through high-deductible or self-insurance programs. As a result, the Company accrues its worker's compensation and general liability based upon the claim reserves established by a third-party administrator each month. The employee health care benefit liability is based on the Company's historical claims experience rate. The reserves associated with the exposure to these liabilities are reviewed by management for adequacy at the end of each reporting period. (p) Income Taxes: Deferred income taxes are determined based on temporary differences between the financial reporting and tax bases of the Company's assets and liabilities, using enacted tax rates in effect during the years in which the differences are expected to reverse. (q) Comprehensive Income (Loss): Comprehensive income (loss) includes all changes in shareholders' equity with the exception of additional investments by shareholders or distributions to shareholders. Comprehensive income (loss) for the Company includes net income or loss the changes in net unrealized holding gains or losses on investments and changes in the valuation of interest rate swap contracts treated as hedging instruments that are charged or credited to shareholders' equity. (r) Stock-Based Compensation: AMCON maintains a stock-based compensation plan which provides that the Compensation Committee of the Board of Directors may grant incentive stock options and non-qualified stock options. AMCON accounts for stock option grants using the intrinsic value method under which compensation cost is measured by the excess, if any, of the deemed fair market value of its common stock on the date of grant over the exercise price of the stock option. Accordingly, stock-based compensation cost related to stock option grants is not reflected in net income as all options granted under the plan had an exercise price equal to the market value of the underlying stock on the date of grant. F-10 In December 2002, the FASB issued Statement of Financial Accounting Standard No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123, "Accounting for Stock- Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. The disclosure provisions of SFAS No. 148 are effective for financial statements issued for interim periods beginning after December 15, 2002, (fiscal 2003 for AMCON), with early adoption encouraged. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:
2003 2002 2001 ----------- ----------- ------------ Net earnings from continuing operations --------------------------------------- Net income from continuing operations as reported $ 1,026,473 $ 1,972,069 $ (1,772,030) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (68,021) (87,617) (88,723) ----------- ----------- ------------ Pro forma net income from continuing operations $ 958,452 $ 1,884,452 $ (1,860,753) =========== =========== ============ Income per share from continuing operations ------------------------------------------- As reported: Basic $ 0.32 $ 0.65 $ (0.65) =========== =========== ============ Diluted $ 0.32 $ 0.63 $ (0.65) =========== =========== ============ Pro forma: Basic $ 0.30 $ 0.62 $ (0.68) =========== =========== ============ Diluted $ 0.30 $ 0.61 $ (0.68) =========== =========== ============
The 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 3.0% for 2003 and 3.0% for 2002; expected volatility of 50.68% for 2003 and 51.65% for 2002; risk free interest rate based on U.S. Treasury strip yield at the date of grant of 3.68% - 4.12% for 2003 and 4.49% for 2002; and expected lives of 5 to 10 years. No options were granted in fiscal 2001. F-11 (s) Per-share results: Basic earnings per share data are based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share data are based on the weighted-average number of common shares outstanding and the effect of all dilutive potential common shares including stock options. (t) Reclassifications: Certain reclassifications have been made to prior years' financial statements to conform with the current year presentation. (u) Use of Estimates: The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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. (v) Recently Issued Accounting Standards: In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS 145 rescinds Statement of Financial Accounting Standard No. 4, "Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, Financial Accounting Standard No.64, "Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements. SFAS 145 also rescinds Financial Accounting Standard No. 44, "Accounting For Intangible Assets of Motor Carriers. SFAS 145 amends Financial Accounting Standard No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS 145 is generally effective for financial statements issued after May 15, 2002, and interim periods within those years (fiscal 2003 for AMCON), with early adoption encouraged. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by SFAS 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Previous accounting guidance was provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 replaces EITF No. 94-3. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. F-12 In November 2002, the FASB's EITF reached a consensus on EITF Issue No. 00- 21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance for revenue arrangements that involve the delivery or performance of multiple products or services where performance may occur at different points or over different periods of time. EITF Issue No. 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003 (i.e., the Company's fourth quarter of fiscal 2003). The adoption of EITF Issue No. 00-21 did not have a material impact on the Company's results from operations. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantors's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN No. 45"). The initial recognition and measurement provisions of FIN No. 45 are effective for guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN No. 45 are effective for interim or annual reports ending after December 15, 2002. There was not impact on the Company's consolidated financial statements as a result of adopting FIN No. 45. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 clarifies when variable interest entities are consolidated by business enterprises where the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, or, where equity investors lack certain characteristics of a controlling financial interest. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company did not have any investments in any variable interest entities at February 2003 and will apply the provisions of FIN No. 46 prospectively to investments in variable interest entities made in the future. In March 2003, the FASB added a project to address issues related to share- based payments. In April 2003, the FASB decided that goods and services, including employee stock options, received in exchange for stock-based compensation should be recognized in the income statement as an expense, with the cost measured at fair value. An exposure draft is expected in the first quarter of calendar 2004. In April 2003, the FASB issued Statement of Financial Accounting Standard No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS No. 149). SFAS No. 149 amends FASB No. 133 for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 149 also amends certain other existing pronouncements. It will require contracts with comparable characteristics to be accounted for similarly. In particular, SFAS No. 149 clarifies when a contract with an initial net investment meets the characteristic of a derivative and clarifies when a derivative that contains a financing component will require special reporting in the statement of cash flows. SFAS No. 149 is effective for AMCON for contracts entered into or modified after June 30, 2003. F-13 In April 2003, the FASB issued Statement of Financial Accounting Standard No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS No. 150). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires an issuer to classify a financial instrument that is within its scope as a liability (or asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for AMCON for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 (fiscal 2003 for AMCON). It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. Management is not aware of any events or circumstances that would create a significant impact on future operating results upon adoption of SFAS No. 145, SFAS No. 146, EITF No. 00-21, FIN No. 45, FIN No. 46, SFAS No. 149, and SFAS 150. 2. CHANGES IN ACCOUNTING POLICY: The Company adopted SFAS No. 142 at the beginning of fiscal year 2003. Upon adoption of SFAS No. 142, goodwill and tradename amortization ceased as these assets are considered to have indefinite useful lives. Management obtained an independent valuation of its goodwill and intangible assets and did not incur an impairment charge upon implementation of SFAS No. 142. As of September 2003, the Company had approximately $6.1 million of goodwill and $10.9 million of tradenames reflected on the accompanying condensed consolidated balance sheet. The following is certain unaudited pro forma information assuming SFAS No. 142 had been in effect for the three years ended September 26, 2003:
2003 2002 2001 ----------- ----------- ------------ Reported net income from continuing operations $ 1,026,473 $ 1,972,069 $ (1,772,030) Add goodwill amortization, net of tax - 194,567 138,143 Add tradename amortization, net of tax - 356,653 270,220 ----------- ----------- ------------ Adjusted net income from continuing operations $ 1,026,473 $ 2,523,289 $ (1,363,667) =========== =========== ============ Earnings per share - basic: Reported net income from continuing operations $ 0.32 $ 0.65 $ (0.65) Add goodwill amortization, net of tax - 0.06 0.05 Add tradename amortization, net of tax - 0.12 0.10 ----------- ----------- ------------ Adjusted net income from continuing operations $ 0.32 $ 0.83 $ (0.50) =========== =========== ============ Earnings per share -diluted: Reported net income from continuing operations $ 0.32 $ 0.63 $ (0.65) Add goodwill amortization, net of tax - 0.06 0.05 Add tradename amortization, net of tax - 0.12 0.10 ----------- ----------- ------------ Adjusted net income from continuing operations $ 0.32 $ 0.81 $ (0.50) =========== =========== ============
F-14 3. ACQUISITIONS AND DISPOSITION OF BUSINESSES: HAWAIIAN NATURAL WATER COMPANY, INC. - ------------------------------------ On December 17, 2001, the Company completed a merger with HNWC, pursuant to which HNWC merged with and into, and thereby became, a wholly-owned subsidiary of AMCON Distributing Company. The merger consideration valued the entire common equity interest in HNWC at approximately $2.9 million, which was paid in cash of $0.8 million during fiscal 2001 and in common stock of the Company valued at $2.1 million. As a result, the Company issued 373,558 shares of its common stock to outside HNWC shareholders, representing 12.0% of the Company's outstanding shares after giving effect to the merger. HNWC option holders and warrant holders also received 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. Transaction costs, totaling approximately $0.3 million, were incurred to complete the merger and consist primarily of fees and expenses for bankers, attorneys and accountants, SEC filing fees, stock exchange listing fees and financial printing and other related charges. The merger has been recorded on the Company's books using the purchase method of accounting. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed, including a note payable of $1.1 million due to the Company, at the date of acquisition: At December 17, 2001 (Dollars in millions) ---------------------------------- Current assets $ 0.4 Fixed assets 1.7 Intangible assets 3.8 Other assets 0.1 ----- Total assets acquired 6.0 ----- Current liabilities 2.9 Long-term liabilities 0.2 ----- Total liabilities assumed 3.1 ----- Net assets acquired $ 2.9 ===== The portion of the purchase price in excess of the fair value of the net assets acquired to be allocated to other identifiable assets is approximately $3.5 million. The identifiable intangible asset, the HNWC tradename, is considered to have an indefinite useful life. Prior to the acquisition, the Company accounted for its initial common stock investment in HNWC under the equity method. The charge to the Company's results of operations to record its equity in the losses of HNWC from the investment date was approximately $0.1 million in fiscal 2002 and 2001, respectively. F-15 MERCHANTS WHOLESALE, INC. - ------------------------- On June 1, 2001, the Company completed the acquisition of substantially all of the distribution business and net assets of Merchants Wholesale, Inc. ("Merchants") located in Quincy, IL. In addition, the Company purchased a 206,000 square foot building occupied by Merchants and owned by Merchants' sole shareholder. The net purchase price of $36.7 million (including $0.3 million of debt issue costs), net of assumed liabilities of $6.0 million, was based on assets held at the closing date, including the real estate. Funding for the acquisition was provided as follows: $27.0 million (including $0.3 million of debt issue costs) through borrowings under a revolving loan agreement with LaSalle Bank (the "Facility"); $6.2 million through a real estate loan with Gold Bank (the "Real Estate Loan"); and $3.4 million of deferred payments to the sole stockholder of Merchants. Costs and expenses associated with the acquisition were paid from the Facility. The Facility is secured by all of AMCON's assets, excluding real estate. The Real Estate Loan is secured by AMCON's two owned distribution facilities. The transaction was accounted for using the purchase method of accounting under which the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The portion of the purchase price in excess of the fair value of the net assets acquired to be allocated to goodwill and other identifiable assets was approximately $3.8 million and $0.3 million, respectively. The goodwill was amortized over 25 years through fiscal year 2002, however, under Statement of Financial Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," amortization of goodwill has ceased and will periodically be reviewed for impairment. A convenant not to compete agreement with the sole shareholder of Merchants is being amortized over the period covered by the agreement of four years. The results of operations for each of the above are included in the accompanying financial statements from the date of acquisition. HEALTH FOOD DISTRIBUTION BUSINESS - --------------------------------- Effective March 23, 2001, the Company's subsidiary, The Healthy Edge, Inc. (formerly Food For Health Co., Inc.), completed the sale of the assets of its health food distribution business for $10.3 million, subject to certain adjustments. The purchase price was paid in cash and the assumption by the purchaser of approximately $2.1 million in indebtedness. The sale resulted in a pre-tax loss of approximately $1.1 million ($0.7 million after taxes) in fiscal year 2001. This loss included an accrual for estimated costs, including rent and related expenses associated with the remaining lease commitments on the two distribution facilities that were retained by the Company of $2.5 million and contractual consulting agreements of $0.4 million, which provide no future economic benefit to the Company. The Company negotiated a termination settlement during fiscal 2002 on its Arizona facility and obtained a subtenant for its Florida facility. The remaining accrual for estimated costs related to the discontinued operations was $0.3 million at fiscal year end 2003. Any differences between these expense estimates and their actual settlement will change the loss accordingly. In connection with the sale of the health food distribution business, the Company also entered into a five year supply agreement with the purchaser under which the purchaser will supply products to the Company's retail health food stores at market prices. F-16 The sale of the Company's health food distribution business has been reflected as discontinued operations in the consolidated financial statements in accordance with Accounting Principles Board ("APB") Opinion No. 30," Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Revenues from the discontinued operations, which have been excluded from income from continuing operations in the accompanying consolidated statements of operations for fiscal years 2003, 2002 and 2001, are presented below. The effects of the discontinued operations on net income (loss) and per share data are reflected within the accompanying consolidated statements of operations (dollars in millions). Fiscal Years ---------------------------- 2003 2002 2001 ---------------------------- Revenue $ - $ - $ 13.7 4. EARNINGS (LOSS) PER SHARE: Basic earnings (loss) per share is calculated by dividing income (loss) from continuing operations, income (loss) from discontinued operations and net income (loss) by the weighted average common shares outstanding for each period. Diluted earning (loss) per share is calculated by dividing income from continuing operations, income (loss) from discontinued operations and net income (loss) by the sum of the weighted average common shares outstanding and the weighted average dilutive options, using the treasury stock method. Stock options outstanding at fiscal year end 2003, 2002 and 2001, respectively, which were not included in the computations of diluted earnings per share because the option's exercise price was greater than the average market price of the common shares totaled 178,640, 144,350 and 145,390 with average exercise prices of $6.74, $8.05 and $8.01 respectively. F-17
For Fiscal Years ------------------------------------------- 2003 2002 2001 ----------- ----------- ----------- Basic Basic Basic ----------- ----------- ----------- Weighted average common shares outstanding 3,166,191 3,032,484 2,738,170 Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock/1/ - - - ----------- ----------- ----------- Weighted average number of shares outstanding 3,166,191 3,032,484 2,738,170 =========== =========== =========== Income (loss) from continuing operations $ 1,026,473 $ 1,972,069 $(1,772,030) Loss from discontinued operations - - (1,569,849) ----------- ----------- ----------- Net income (loss) $ 1,026,473 $ 1,972,069 $(3,341,879) =========== =========== =========== Earnings (loss) per share from continuing operations $ 0.32 $ 0.65 $ (0.65) Loss per share from discontinued operations - - (0.57) ----------- ----------- ----------- Earnings (loss) per share $ 0.32 $ 0.65 $ (1.22) =========== ============ =========== Diluted Diluted Diluted ----------- ----------- ----------- Weighted average common shares outstanding 3,166,191 3,032,484 2,738,170 Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock/1/ 56,062 76,695 - ----------- ----------- ----------- Weighted average number of shares outstanding 3,222,253 3,109,179 2,738,170 =========== =========== =========== Income (loss) from continuing operations $ 1,026,473 $ 1,972,069 $(1,772,030) Loss from discontinued operations - - (1,569,849) ----------- ----------- ----------- Net income (loss) $ 1,026,473 $ 1,972,069 $(3,341,879) =========== =========== =========== Earnings (loss) per share from continuing operations $ 0.32 $ 0.63 $ (0.65) Loss per share from discontinued operations - - (0.57) ----------- ----------- ----------- Earnings (loss) per share $ 0.32 $ 0.63 $ (1.22) =========== =========== ===========
F-18 /1/ Weighted average of net additional shares not included for fiscal 2001 as such shares are anti-dilutive due to the net loss incurred during the year. 5. COMPREHENSIVE INCOME (LOSS): The components of other comprehensive income (loss) were as follows:
2003 2002 2001 --------- ---------- --------- Unrealized holding gains (losses) during the period: Unrealized gains $ 255,975 $ 71,565 $ 280,700 Related tax expense (97,271) (27,194) (105,262) --------- ---------- --------- Net 158,704 44,371 175,438 --------- ---------- --------- Less reclassification adjustments for gains which were included in comprehensive income in prior periods: Realized net gains 268,948 249,491 - Related tax expense (102,200) (95,529) - --------- ---------- --------- Net 166,748 153,962 - --------- ---------- --------- Interest rate swap valuation adjustment during the period: Unrealized loss (106,995) - - Related tax benefit 41,000 - - --------- ---------- --------- Net (65,995) - - --------- ---------- --------- Total other comprehensive income (loss) $ (74,039) $ (109,591) $ 175,438 ========= ========== =========
6. FIXED ASSETS, NET: Fixed assets at fiscal year ends 2003 and 2002 consisted of the following: 2003 2002 ------------ ------------ Land and buildings $ 8,417,228 $ 8,417,228 Warehouse equipment 5,332,937 5,180,232 Furniture, fixtures and leasehold improvements 8,435,242 7,686,552 Vehicles 1,301,710 1,398,033 Capital equipment leases 2,017,488 1,095,000 ------------ ------------ 25,504,605 23,777,045 Less accumulated depreciation: Owned equipment (8,121,020) (7,422,143) Capital equipment leases (431,970) (258,778) ------------ ------------ $ 16,951,615 $ 16,096,124 ============ ============ F-19 7. DEBT AND EQUITY INVESTMENTS: Available-for-sale investments at fiscal year ends 2003 and 2002 consisted of the following: 2003 2002 --------- --------- Cost $ 54,492 $ 90,820 Unrealized Gain 458,202 471,180 --------- --------- Fair Value $ 512,694 $ 562,000 ========= ========= The Company sold 20,000 shares of its available-for-sale investments in fiscal 2003 and 2002, respectively. The Company realized gains on these sales of $266,690 and $257,521 in fiscal 2003 and fiscal 2002, respectively. 8. OTHER INTANGIBLE ASSETS: Other intangible assets at fiscal year ends 2003 and 2002 consisted of the following: 2003 2002 ------------ ------------ Trademarks and tradenames $ 10,928,793 $ 10,928,793 Covenants not to compete (less accumulated amortization of $724,625 and $519,256) 195,600 400,969 Favorable leases (less accumulated amortization of $280,273 and $211,195) 205,727 274,805 Debt issue costs (less accumulated amortization of $399,347 and $290,040) 90,422 199,722 ------------ ------------ $ 11,420,542 $ 11,804,289 ============ ============ Trademarks and tradenames are considered to have indefinite useful lives and no amortization of these assets was taken during fiscal 2003 in accordance with SFAS No. 142. Amortization expense associated with trademarks and tradenames was $575,247, and $435,838, for the fiscal years ended 2002 and 2001, respectively. The covenants not to compete arose from business acquisitions and are amortized using the straight-line method over their terms which range from two to five years. Amortization expense of $205,370, $205,370, and $145,679 was recorded for these assets for the fiscal years ended 2003, 2002 and 2001, respectively. Favorable leases represent the amount by which the lease rates of acquired leases were below fair market lease rates for the leased properties on the acquisition date. The favorable variances between the contract lease rates and the fair market lease rates on the acquisition date are recorded as assets which are then amortized over the remaining terms of the leases which ranged from three to seven years. Amortization expense was $69,068, $69,068, and $69,073, for the fiscal years ended 2003, 2002 and 2001, respectively. F-20 Debt issue costs represent fees incurred to obtain the ADC revolving credit facility and real estate loan and are amortized over the terms of the respective loan agreements. Amortization expense was $109,307, $119,833 and $67,459 for the fiscal years ended 2003, 2002 and 2001, respectively. 9. OTHER ASSETS: Other assets at fiscal year ends 2003 and 2002 consisted of the following: 2003 2002 ----------- ----------- Cash surrender value of life insurance policies $ 697,035 $ 530,228 Equipment held for sale 200,000 500,000 Other 148,468 212,695 ----------- ----------- $ 1,045,503 $ 1,242,923 =========== =========== 10. LONG-TERM OBLIGATIONS: Long-term obligations at fiscal year end 2003 and 2002 consisted of the following:
2003 2002 ------------ ------------ Revolving credit facility with a bank (the "Facility"), interest payable monthly at the bank's base rate (4.00% at fiscal year end 2003) or LIBOR plus 2.50%, as selected by the Company; principal due June 2005 $ 37,981,281 $ 40,977,992 Note payable to a bank ("Real Estate Loan"), interest payable at a fixed rate of 7.5% with monthly installments of principal and interest of $56,531 per month through June 2006; remaining principal due June 2006, collateralized by two owned distribution facilities 6,576,243 6,747,508 Revolving credit facility with a bank, interest payable monthly at the bank's base rate plus 1% (6.75% at fiscal year end 2003); principal due April 2004 2,750,000 2,278,233 Obligations under capital leases, payable in monthly installments with interest rates from 8% to 16.3% through December 2006 1,701,449 937,781 Revolving credit facility with a bank, interest payable monthly at the bank's base rate plus 1% (6.75 % at fiscal year end 2003); principal due April 2004 1,988,403 - Notes payable on equipment, payable in monthly installments with interest rates from 9.4% to 10% through October 2004, collateralized by HNWC equipment 5,214 204,552 ------------ ------------ 51,002,590 51,146,066 Less current portion 15,348,167 14,783,967 ------------ ------------ $ 35,654,423 $ 36,362,099 ============ ============
F-21 The Company maintains a revolving credit facility (the "Facility") with LaSalle Bank which allows it to borrow up to $55.0 million at any time, subject to eligible accounts receivable and inventory requirements. The Company is required to pay an unused commitment fee equal to 0.25% per annum on the difference between the maximum loan limit and average monthly borrowing for the month. The Facility is collateralized by all of ADC's equipment, intangibles, inventories, and accounts receivable. The Facility contains covenants which, among other things, set certain financial ratios and net worth requirements. The Facility includes covenants that (i) restrict permitted investments, (ii) restrict intercompany advances to HNWC, (iii) restrict incurrence of additional debt, (iv) restrict mergers and acquisitions and changes in business or conduct of business and (v) require the maintenance of certain financial ratios and net worth levels including an average annual debt service coverage ratio of 1.0 to 1.0, and a minimum tangible net worth of $9.0 million for fiscal 2003. In addition, the Company must maintain a fill rate percentage of not less than 93% calculated on a weekly basis. The fill rate percentage is determined by dividing the total dollar amount of inventory delivered to the Company's customers each week into the total amount of orders which correspond to such deliveries. The Facility also provides that the Company may not pay dividends in excess of $0.12 per share on an annual basis. The Company hedges its variable rate risk on a portion of its borrowings under the Facility by use of interest rate swap agreements. The variable interest payable on notional amounts of $15.0 million is subject to interest rate swap agreements which have the effect of converting this amount to fixed rates ranging between 4.38% and 4.87%. The Company has a $2.8 million credit facility with a bank to be used to fund operating activities at our natural spring water bottling operation in Hawaii, (the "Beverage Facility"). Borrowings under the Beverage Facility bear interest at the bank's base rate plus 1.0%, which equaled 6.75% at September 2003. As of September 2003, the outstanding balance under the Beverage Facility was $2.8 million. The Beverage Facility is guaranteed by the Company's Chairman. The Company has a $2.0 million credit facility with a bank collateralized by inventories of the Retail segment (the "Retail Facility"). Borrowings under the Retail Facility bear interest at the bank's base rate plus 1.0%, which equaled 6.75% at September 2003. As of September 2003, the outstanding balance under the Retail Facility was $2.0 million. The Company borrowed $6.9 million from a bank, at a fixed rate of 7.5%, to purchase the distribution facility in Quincy, IL, referred to herein as the Real Estate Loan, and to retire term debt. The Real Estate Loan is amortized on a 20 year basis with a balloon payment due on June 1, 2006. The Real Estate Loan is collateralized by the Company's two owned distribution facilities. As of September 2003, the outstanding balance on the Real Estate Loan was approximately $6.6 million. F-22 In connection with the purchase of the Quincy distribution business and HNWC, we assumed several capital leases for office equipment, automobiles and warehouse equipment. In addition, we entered into a new capital lease in September 2003 in connection with the acquisition of new water bottling and packaging equipment. As of September 2003, the outstanding balances on the capital leases totaled approximately $1.7 million. The above long-term obligations, excluding obligations under the Facility, have contractual maturities as follows: Fiscal Year Ending ------------------ 2004 $ 5,348,167 2005 688,094 2006 6,680,167 2007 283,906 2008 20,975 Thereafter - ----------- $13,021,309 =========== Borrowings under the Facility in the amount of $28.0 million have been classified as long-term based on expected borrowing levels. Market rate risk for fixed rate debt is estimated as the potential increase in fair value of debt obligations resulting from decreases in interest rates. 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 fiscal year end 2003. In connection with the discontinued operation of the health and natural foods distribution business, AMCON is obligated on a letter of credit issued to the buyer in the amount of $0.1 million which expires in March 2004. In addition, AMCON has a letter of credit in the amount of approximately $0.8 million that is required to be issued to the Company's workers compensation insurance carrier as part of a self-insured loss control. F-23 11. SUBORDINATED DEBT: Subordinated debt at fiscal year end 2003 and 2002 consisted of the following:
2003 2002 ----------- ----------- Note payable, interest (imputed at 6%) and principal payable annually through June 2005 $ 1,788,886 $ 2,631,025 Convertible subordinated note payable, interest payable quarterly at 8%per annum; principal due at maturity of the note on September 15, 2004,convertible into The Healthy Edge, Inc. stock 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, collateralized by Health Food Associates, Inc. stock 4,800,000 5,600,000 Collateralized subordinated promissory note payable bearing interest at 8% per annum; principal and interest payments due monthly through October 2002 - 6,847 Collateralized subordinated promissory note payable, interest payable monthly at 7.0% per annum; annual principal payments ranging from $40,000 to $80,000 due annually from August 2001 through August 2005 150,000 210,000 ----------- ----------- 8,738,886 10,447,872 Less current portion 7,762,666 1,708,986 ----------- ----------- $ 976,220 $ 8,738,886 =========== ===========
The asset purchase agreement with Merchants provides for deferred payments to be made to the seller totaling $3.4 million. The deferred payments are subordinate to the Facility and the Real Estate Loan and are due in installments of $0.9 million (including interest) on the first, second, third and fourth anniversaries of the closing date of the transaction. In addition, the Company entered into a covenant not to compete agreement with the seller that requires the Company to make payments of $0.1 million annually on the first through fourth anniversary dates of the closing of the transaction. The Company has recorded the seller obligations at their fair values utilizing a 6% effective interest rate which was determined based on the Company's approximate average borrowing rate. As of fiscal year end 2003, the outstanding obligation to the seller was approximately $1.8 million. F-24 As of fiscal year end 2003, principal payments are due on subordinated debt as follows: Fiscal Year Ending ------------------- 2004 $ 7,762,666 2005 976,220 ------------ $ 8,738,886 ============ Market rate risk for fixed rate subordinated debt is estimated as the potential increase in fair value of debt obligations resulting from decreases in interest rates. 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 fiscal year end 2003. 12. OTHER INCOME, NET: Other income, net consisted of the following for fiscal years 2003, 2002 and 2001: 2003 2002 2001 ---------- ---------- ---------- Interest income $ (94,704) $ (45,091) $ (32,183) Dividends (18,900) (27,682) (26,600) Rent income (5,272) (4,382) (4,843) Gain from sale of investments (266,690) (257,521) - Fee income - - (26,166) Provision for nonoperating asset impairment 399,435 - - Settlement proceeds on former leased facility (131,558) - - Debt forgiveness - (176,809) - Other 19,305 5,773 (110,712) ---------- ---------- ---------- $ (98,384) $ (505,712) $ (200,504) ========== ========== ========== F-25 13. INCOME TAXES: Components of income tax expense (benefit) for the fiscal years ended 2003, 2002 and 2001 consisted of the following: 2003 2002 2001 ----------- ----------- ----------- Current: Federal $ 1,247,543 $ 63,095 $ (527,834) State 41,763 (115,540) 52,396 ----------- ----------- ----------- 1,289,306 (52,445) (475,438) ----------- ----------- ----------- Deferred: Federal (674,010) 1,327,951 (473,656) State 13,704 40,494 (69,317) ----------- ----------- ----------- 660,306 1,368,445 (542,973) ----------- ----------- ----------- Income tax expense (benefit) - continuing operations 629,000 1,316,000 (1,018,411) Income tax (benefit) - discontinued operations - - (962,648) ----------- ----------- ----------- $ 629,000 $ 1,316,000 $(1,981,059) =========== =========== =========== The difference between the Company's income tax expense (benefit) attributable to continuing operations 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 2003, 2002 and 2001: 2003 2002 2001 ----------- ----------- ----------- Tax at statutory rate $ 562,861 $ 1,117,943 $ (948,750) Amortization of goodwill and other intangibles (4,777) 54,155 77,064 Nondeductible business expenses (21,081) 17,229 3,908 State income taxes, net of federal tax benefit (29,494) 73,716 28,908 Benefit of loss on disposal - - (424,743) Valuation allowance for loss on disposal - - 212,371 Equity in loss of unconsolidated affiliate - 32,302 32,111 Other 121,491 20,655 720 ----------- ----------- ----------- $ 629,000 $ 1,316,000 $(1,018,411) =========== =========== =========== F-26 Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities giving rise to the net deferred tax asset at fiscal year ends 2003 and 2002 relate to the following: 2003 2002 ----------- ----------- Deferred tax assets: Current: Allowance for doubtful accounts $ 306,050 $ 232,122 Allowance for impairment of assets held for sale 151,757 - Accrued expenses 446,719 417,109 Net operating loss carryforwards 51,449 194,028 Inventory 759,910 - Other 46,050 122,480 ----------- ----------- 1,761,935 965,739 Noncurrent: Net operating loss carryforwards 887,492 1,028,977 Other 85,533 38,250 ----------- ----------- 973,025 1,067,227 ----------- ----------- Total deferred tax assets $ 2,734,960 $ 2,032,966 =========== =========== Deferred tax liabilities: Current: Trade discounts $ 193,459 $ 211,843 Other - 429,527 ----------- ---------- 193,459 641,370 Noncurrent: Fixed assets 345,018 162,936 Tradenames 1,659,594 1,461,914 Goodwill 167,974 58,654 Unrealized gains on available-for-sale investments 167,806 172,039 ----------- ----------- 2,340,392 1,855,543 ----------- ----------- Total deferred tax liabilities $ 2,533,851 $ 2,496,913 =========== =========== Net deferred tax assets (liabilities): Current $ 1,568,476 $ 324,369 Noncurrent (1,367,367) (788,316) ----------- ----------- $ 201,109 $ (463,947) =========== =========== The Company did not record any valuation allowances against deferred tax assets at fiscal year ends 2003 or 2002 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 HNWC in 2002. The utilization of the net operating loss of $2,471,000 at fiscal year end 2003 is limited (by Internal Revenue Code Section 382) to approximately $135,000 per year through 2022. F-27 14. PROFIT SHARING PLAN: AMCON maintains a profit sharing plan (i.e. a section 401(k) plan) covering substantially all full-time employees. The plan allows employees to make voluntary contributions up to 100% of their compensation, subject to Internal Revenue Service limits. The Company matches 50% of the first 4% contributed and 100% of the next 2% contributed for a maximum match of 4% of employee compensation. The Company contributed $0.5 million, $0.5 million, and $0.3 million, (net of employee forfeitures) to the profit sharing plans during the fiscal years ended 2003, 2002 and 2001, respectively. 15. RELATED PARTY TRANSACTIONS: For each of the fiscal years ended 2003, 2002 and 2001, the Company was charged $60,000 by AMCON Corporation, the former parent of the Company, as consideration for office rent and management services, which is included in selling, general and administrative expenses. The Company also contracted with one of its outside directors for consulting services in connection with its retail health food operations during fiscal years 2003, 2002 and 2001. The amount paid for consulting services was $90,000, $90,000 and $150,000, respectively, plus reimbursement of expenses. Effective October 1, 2001, the president of the wholesale health food distribution business, which was sold in March 2001, was terminated and the Company entered into a four-year consulting agreement with him at the rate of $104,000 per year. The total amount to be paid under the agreement approximates the amount of the Company's obligation under its employment agreement with the former president. The amount paid for consulting services during fiscal 2003 and 2002 was $104,000, respectively. 16. COMMITMENTS AND CONTINGENCIES: Future Lease Obligations - ------------------------ The Company leases certain office and warehouse equipment under capital leases. The carrying value of these assets was approximately $1.6 million and $0.8 million as of fiscal year ends 2003 and 2002, respectively, net of accumulated amortization of $0.4 million and $0.3 million, respectively. F-28 The Company leases various office and warehouse facilities and equipment under noncancellable operating leases. Rent charged to expense during fiscal years 2003, 2002 and 2001 under such lease agreements was $5.4 million, $5.3 million and $3.2 million, respectively. As of fiscal year end 2003, minimum future lease commitments are as follows: Fiscal Year Capital Operating Ending Leases Leases ----------- ----------- ------------ 2004 $ 493,028 $ 5,149,587 2005 535,732 4,616,153 2006 501,469 3,828,601 2007 284,371 2,268,986 2008 20,977 1,617,456 Thereafter - 5,500,113 ----------- ------------ Total minimum lease payments $ 1,835,577 $ 22,980,896 Less amount representing interest 134,128 ============ ----------- Present value of net minimum lease payments $ 1,701,449 =========== The Company also has future lease obligations for facilities and equipment related to the discontinued operations of its former health food distribution business. The Company estimated its ultimate liabilities related to these leases and recorded a charge to earnings during fiscal 2001. The Company terminated the lease on one facility during fiscal 2002 for a termination fee of $1.5 million and subleased the Florida facility. The sub-tenant of the Florida facility was in default as of fiscal year end 2003 and the Company began eviction proceedings. The Company incurred approximately $0.1 million of expenses associated with the facility during fiscal 2003. The Company expects there will be further liability on the Florida facility in fiscal 2004 prior to finding another sub-tenant for the property. Any differences between these expense estimates and their actual settlement will change the loss accordingly. Liability Insurance - ------------------- The Company carries property, general liability, vehicle liability, directors and officers liability and workers compensation, as well as umbrella liability policies to provide excess coverage over the underlying limits contained in these primary policies. The Company's insurance programs for worker's compensation, general liability and employee related health care benefits are provided through high-deductible or self-insured programs. Claims in excess of self-insurance levels are fully insured. Accruals are based on claims filed and estimates of claims incurred but not reported. F-29 The Company's liabilities for unpaid and incurred but not reported claims at fiscal year end 2003 and 2002 was $1.0 million and $0.8 million, respectively, under its current risk management program and are included in other current liabilities in the accompanying consolidated balance sheets. While the ultimate amount of claims incurred are dependent on future developments, in management's opinion, recorded reserves are adequate to cover the future payment of claims. However, it is reasonably possible that recorded reserves may not be adequate to cover the future payment of claims. Adjustments, if any, to estimates recorded resulting from the ultimate claim payments will be reflected in operations in the periods in which such adjustments are known. 17. STOCK OPTION PLAN: In June 1994, the Company adopted the 1994 Stock Option Plan (the "Stock Option Plan") which was subsequently 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. Option shares and prices are adjusted for common stock splits and dividends. 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. At fiscal year end 2003, there were 177,492 options fully vested and exercisable under the Stock Option Plan. Options issued and outstanding to management employees pursuant to the Stock Option Plan are summarized below: Number of Number Date Exercise Price Options Outstanding Exercisable ------------ ---------------- ------------------- ----------- Fiscal 1997 $2.62 - $2.87 88,210 88,210 Fiscal 1999 $6.14 - $9.00 82,390 72,512 Fiscal 2000 $5.75 27,950 16,770 Fiscal 2003 $4.60 - $4.80 32,500 - ------- ------- 231,050 177,492 At fiscal year end 2003, there were 83,800 options fully vested and exercisable issued to management employees and outside directors outside the Stock Option Plan as summarized as follows: Number of Number Date Exercise Price Options Outstanding Exercisable ------------ ---------------- ------------------- ----------- Fiscal 1997 $2.62 33,000 33,000 Fiscal 1999 $6.14 - $8.18 30,800 30,800 Fiscal 2002 $3.94 - $4.49 15,000 15,000 Fiscal 2003 $4.71 5,000 5,000 ------- ------- 83,800 83,800 The stock options have varying vesting schedules ranging up to five years and expire ten years after the date of grant. F-30 The table below summarizes information about stock options outstanding as of the following fiscal years:
2003 2002 2001 ------------------ ------------------ ------------------ Weighted Weighted Weighted Average Exercise Average Exercise Average Exercise ------------------ ------------------ ------------------ Shares Price Shares Price Shares Price --------- ------- --------- ------- --------- ------- Outstanding at beginning of period 294,750 $ 4.94 325,020 $ 4.70 360,480 $ 4.83 Granted 40,000 4.79 15,000 4.31 - - Exercised (12,000) 1.71 (44,220) 2.87 (1,650) 1.93 Forfeited/Expired (7,900) 5.35 (1,050) 7.20 (33,810) 6.20 --------- ------- --------- ------- --------- ------- Outstanding at end of period 314,850 $ 4.95 294,750 $ 4.94 325,020 $ 4.70 ========= ======= ========= ======= ========= ======= Options exercisable at end of period 261,292 248,384 234,756 ========= ========= ========= Shares available for options that may be granted 246,780 273,880 272,830 ========= ========= ========= Weighted-average grant date fair value of options granted during the period - exercise price equals stock market price at grant $ 1.94 $ 2.58 $ - ======= ======= ======= Weighted-average grant date fair value of options granted during the period - exercise price exceeds stock market price at grant $ - $ - $ - ======= ======= =======
The following summarizes all stock options outstanding at fiscal year end 2003:
Exercisable Remaining ---------------------------- Exercise Number Weighted-Average Weighted-Average Number Weighted-Average Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price ------------- ----------- ---------------- ---------------- ----------- ---------------- 1997 Options $2.62 - $2.87 121,210 2.9 years $2.61 121,210 $2.61 1999 Options $6.14 - $9.00 113,190 5.4 years $7.64 103,312 $7.56 2000 Options $5.75 27,950 6.7 years $5.75 16,770 $5.75 2002 Options $3.94 - $4.49 15,000 8.9 years $4.31 15,000 $4.31 2003 Options $4.60 - $4.80 37,500 9.1 years $4.79 5,000 $4.71 ----------- ---------------- ----------- --------------- 314,850 $4.95 261,292 $4.91
F-31 18. DERIVATIVE INSTRUMENTS: The Company borrows money at variable interest rates which exposes it to risk that interest expense will increase if the benchmark interest rate used to set the variable rates increases. In order to reduce its exposure to this risk, the Company may use derivative instruments (i.e. interest rate swaps agreements) pursuant to established Company policies. As of September 2003 and 2002, the Company had interest rate swap agreements outstanding with notional amounts totaling $15 million and $25 million, respectively, related to borrowings on the Facility. Theses interest rate swaps were used to effectively convert certain of the Company's floating rate debt to fixed rate debt. The interest rate swaps outstanding at September 2003 are accounted for as cash flow hedges with gains and losses deferred in accumulated other comprehensive income, to the extent the hedge is effective. Any ineffectiveness associated with the interest rate swaps is immediately recognized in earnings within interest expense. The interest rate swap outstanding as of September 2002 was not accounted for as a hedge transaction. 19. BUSINESS SEGMENTS: AMCON has three reportable business segments: the wholesale distribution of consumer products, the retail sale of health and natural food products, and a beverage division consisting of HNWC and TBG. The results of the acquired Merchants distribution business are included in the wholesale distribution of consumer products segment due to similar economic characteristics shared by AMCON's existing distribution business and Merchants distribution business, as well as similar characteristics with respect to nature of products distributed, the type and class of customers for the distribution products, and the methods used to distribute the products. The results of the retail health food stores comprise the retail segment due to similar economic characteristics, as well as similar characteristics with respect to nature of products sold, the type and class of customers for the health food products, and the methods used to sell the products. The results of the HNWC and TBG comprise the beverage segment due to their unique economic characteristics and the nature of the products, as well as the methods used to sell and distribute the products. The segments are evaluated on revenues, gross margins, operating income and income before taxes.
Wholesale Distribution Retail Beverage Other/2/ Consolidated --------------------------------------------------------------------------- FISCAL YEAR ENDED 2003: External revenues: Cigarettes $ 564,804,865 $ - $ - $ - $ 564,804,865 Health food - 33,110,706 - - 33,110,706 Confectionery 51,400,977 - - - 51,400,977 Tobacco, beverage & other 119,310,355 - 3,695,318 (186,870) 122,818,803 --------------------------------------------------------------------------- Total external revenues 735,516,197 33,110,706 3,695,318 (186,870) 772,135,351 Depreciation and amortization /1/ 1,388,081 937,880 194,097 - 2,520,058 Operating income (loss) 8,538,065 503,799 (4,099,116) (115,882) 4,826,866 Interest expense 1,397,631 1,384,295 487,851 - 3,269,777 Income (loss) before taxes 7,645,028 (847,604) (5,026,069) (115,882) 1,655,473 Total assets 72,589,504 16,778,236 10,085,641 46,049 99,499,430 Capital expenditures 732,411 475,775 2,020,525 - 3,228,711 F-32 Wholesale Distribution Retail Beverage Other/2/ Consolidated --------------------------------------------------------------------------- FISCAL YEAR ENDED 2002: External revenues: Cigarettes $ 640,359,587 $ - $ - $ - $ 640,359,587 Health food - 31,655,388 - - 31,655,388 Confectionery 52,566,991 - - - 52,566,991 Tobacco, beverage & other 120,297,206 - 2,237,825 - 122,535,031 --------------------------------------------------------------------------- Total external revenues 813,223,784 31,655,388 2,237,825 - 847,116,997 Depreciation and amortization /1/ 1,589,745 1,489,186 374,337 - 3,453,268 Operating income (loss) 7,969,125 382,332 (1,201,310) - 7,150,147 Interest expense 2,786,389 1,265,678 220,716 - 4,272,783 Income (loss) before taxes 6,128,297 (1,595,011) (1,245,217) - 3,288,069 Total assets, excluding discontinued operations 79,392,521 18,452,752 6,741,196 - 104,586,469 Capital expenditures 1,569,981 674,310 435,923 - 2,680,214 FISCAL YEAR ENDED 2001: External revenues: Cigarettes $ 420,096,403 $ - $ - $ - $ 420,096,403 Health food - 31,843,339 - - 31,843,339 Confectionery 39,311,698 - - - 39,311,698 Tobacco, beverage & other 86,338,045 - - - 86,338,045 --------------------------------------------------------------------------- Total external revenues 545,746,146 31,843,339 - - 577,589,485 Depreciation and amortization 994,028 1,525,349 - - 2,519,377 Operating income (loss) 3,159,167 (2,179,061) - - 980,106 Interest expense 2,233,278 1,643,328 - - 3,876,606 Income (loss) before taxes 912,940 (3,703,381) - - (2,790,441) Total assets, excluding discontinued operations 78,998,414 20,025,635 - 173,273 99,197,322 Capital expenditures 412,455 785,253 - - 1,197,708
/1/ Includes depreciation reported in cost of sales for beverage segment. /2/ Includes charges to operations incurred by discontinued operations and intercompany eliminations. F-33 CORPORATE DIRECTORY DIRECTORS AND CORPORATE OFFICERS DIRECTORS William F. Wright Chairman Kathleen M. Evans President Raymond F. Bentele Retired, Former Chairman and CEO of Mallinckrodt, Inc. William R. Hoppner /2/ Consultant J. Tony Howard /2/ President of Nebraska Distributing Company John R. Loyack /1/ Sr. Vice President and CFO of PNM Resources, LLP Stanley Mayer /1/ Consultant Timothy R. Pestotnik /1/ Partner with the law firm Luce, Forward, Hamilton & Scripps, LLP Allen D. Petersen Chairman of Draupnir LLP, Former Chairman and CEO of American Tool Companies, Inc. /1/ Audit Committee /2/ Compensation Committee CORPORATE OFFICERS William F. Wright Chairman Kathleen M. Evans President Michael D. James Secretary, Treasurer and Chief Financial Officer Patrick Medinger Assistant Secretary and Controller SUBSIDIARY OFFICERS Eric J. Hinkefent President and Chief Executive Officer of Chamberlin Natural Foods, Inc. and Health Food Associates, Inc. Willard Irwin President and Chief Executive Officer of Hawaiian Natural Water Co., Inc. Stephen O. Sparks President and Chief Executive Officer of The Beverage Group, Inc. CORPORATE HEADQUARTERS AMCON Distributing Company 7405 Irvington Road Omaha, Nebraska 68122 (402) 331-3727 TRANSFER AGENT Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016-3572 INDEPENDENT AUDITORS Deloitte & Touche LLP First National Tower 1601 Dodge Street, Suite 3100 Omaha, Nebraska 68102 ANNUAL STOCKHOLDERS' MEETING Thursday, March 11, 2004 10:00 a.m. LaSalle Bank 135 South LaSalle, 43rd Floor Chicago, IL 60603 ADDITIONAL INFORMATION The Annual Report on Form 10-K 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.com EX-14.1 4 ex141.txt EX 14.1 - CODE OF ETHICS Exhibit -14.1 Code of Ethics for Principal Executive Officers and Senior Financial Officers AMCON Distributing Company Code of Ethics (Principal Executive Officers and Senior Financial Officers) This Code of Ethics ("Code") sets forth principles which the principal executive officers and senior financial officers are expected to adhere to and advocate. The Code embodies rules regarding individual and peer responsibilities, as well as responsibilities to AMCON Distributing Company (the "Company"), its shareholders, the public and other shareholders. In addition to this Code, the principal executive officer and senior financial officers are expected to adhere to the policies and principles contained in the Company's Code of Business Conduct and Ethics, which is applicable to all directors, officers and employees of the Company and which will incorporate the specific terms hereof. In my role as a principal executive officer, principal financial officer, principal accounting officer or controller of the Company, I recognize that persons in these positions play a critical role in corporate governance, and I am committed to ensuring that stakeholders' interests are appropriately balanced, protected and preserved. I certify that I will adhere to and advocate the following principles and responsibilities governing my professional and ethical conduct. I understand and agree that failure to adhere to this Code constitutes grounds for discipline, termination of employment, and any other remedies available under the law. To the best of my knowledge and ability: 1. I will act with honesty and integrity, avoiding actual or apparent conflicts of interest in personal and professional relationships. When conflicts of interest do arise, I will disclose such conflicts to the Chairman of the Audit Committee of the Company. In addition, I will disclose to the Chairman of the Audit Committee any material transactions or relationships that reasonably can be expected to give rise to such a conflict. I understand that a conflict of interest can arise any time a member of my family or I have any interest in any business, property or transaction, or have any right or obligation from or to any person, which might affect the fulfillment of my job responsibilities to the Company. 2. I will provide my constituents with information that is accurate, complete, objective, relevant, timely and understandable. In particular, I will do my best to ensure that reports and documents filed with or submitted to the Securities and Exchange Commission and the American Stock Exchange, or otherwise publicly communicated by the Company, contain full, fair, accurate, timely, and understandable disclosure. If I become aware that any information contained in such reports or publicly communicated by the Company is materially false or misleading or omits material information, I will promptly disclose this fact to the Chairman of the Audit Committee in accordance with the Company's procedures for the receipt, retention and treatment of complaints and concerns regarding accounting, internal control or auditing matters. I understand that reports to the Audit Committee may be made on an anonymous basis. 3. I will comply with all applicable laws, rules, and regulations of the federal, state, foreign, provincial and local governments, and other appropriate private and public regulatory agencies. 4. I will act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing my independent judgment to be subordinated. 5. I will respect the confidentiality of information acquired in the course of my work except when authorized or otherwise legally obligated to disclose it. I will not use any confidential information acquired in the course of my work for personal advantage. 6. If I become aware of a violation of the law or of this Code, I will promptly report the violation to the Chairman of the Audit Committee. 7. I understand that I will be held accountable for my adherence to this Code and that failure to observe the terms of this Code may result in disciplinary action, up to and including termination of employment. 8. As a principal executive officer or a senior financial officer of the Company, I acknowledge that any waiver of the provisions of this Code may only be made by the Board of Directors or by a Board Committee and that any such waiver will require immediate public disclosure. Date: December 24, 2003 /s/ William F. Wright ------------------------------- William F. Wright, Chairman and Principal Executive Officer Date: December 24, 2003 /s/ Kathleen M. Evans ------------------------------- Kathleen M. Evans, President Date: December 24, 2003 /s/ Michael D. James ------------------------------- Michael D. James, Secretary, Treasurer and Chief Financial Officer Date: December 24, 2003 /s/ Patrick Medinger ------------------------------- Patrick Medinger, Assistant Secretary and Controller EX-21.1 5 ex211.txt EX 21.1 - SUBSIDIARIES OF THE COMPANY Exhibit-21.1 Subsidiaries of the Company
State of Names Incorporation D/B/A (if applicable) - ----------------------------- ------------- -------------------------- The Healthy Edge, Inc. Arizona Chamberlin Natural Foods, Inc. Florida Chamberlin's Market & Cafe Health Food Associates, Inc. Oklahoma Akin's Natural Foods Market Hawaiian Natural Water Co., Inc. Delaware The Beverage Group, Inc. Delaware
EX-23.1 6 ex231.txt EX 23.1 - CONSENT OF DELOITTE & TOUCHE LLP Exhibit-23.1 Consent of Deloitte & Touche LLP INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statement of AMCON Distributing Company on Form S-8, filed on September 7, 2000, of our reports dated December 24, 2003, appearing in and incorporated by reference in the Annual Report on Form 10-K of AMCON Distributing Company for the year ended September 26, 2003. DELOITTE & TOUCHE LLP Omaha, Nebraska December 24, 2003 EX-31.1 7 ex311.txt EX 31.1 - 302 CERTIFICATION BY WILLIAM F. WRIGHT EXHIBIT 31.1 ------------ CERTIFICATION ------------- I, William F. Wright, certify that: 1. I have reviewed this annual report on Form 10-K of AMCON Distributing Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrants' fiscal fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 24, 2003 /s/ William F. Wright -------------------------------- William F. Wright, Chairman and Principal Executive Officer EX-31.2 8 ex312.txt EX 31.2 - 302 CERTIFICATION BY MICHAEL D. JAMES EXHIBIT 31.2 ------------ CERTIFICATION ------------- I, Michael D. James, certify that: 1. I have reviewed this annual report on Form 10-K of AMCON Distributing Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrants' fiscal fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 24, 2003 /s/ Michael D. James --------------------------------- Michael D. James, Vice President and Chief Financial Officer EX-32.1 9 ex321.txt EX 32.1 - 906 CERTIFICATION BY WILLIAM F. WRIGHT EXHIBIT 32.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Annual Report on Form 10-K (the "Report") of AMCON Distributing Company (the "Company") for the fiscal year ended September 26, 2003, I, William F. Wright, Chariman and Principal Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that: (1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: December 24, 2003 /s/ William F. Wright ------------------------------ Title: Chairman and Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to AMCON Distributing Company and will be retained by AMCON Distributing Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 10 ex322.txt EX 32.2 - 906 CERTIFICATION BY MICHAEL D. JAMES EXHIBIT 32.2 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Annual Report on Form 10-K (the "Report") of AMCON Distributing Company (the "Company") for the fiscal year ended September 26, 2003, I, Michael D. James, Vice President and Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that: (1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: December 24, 2003 /s/ Michael D. James ------------------------- Title: Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to AMCON Distributing Company and will be retained by AMCON Distributing Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----