DEEP VALUE LETTER - AUGUST 2005 "Our approach to this accounting schizophrenia is to ignore GAAP figures and to focus solely on the future earning power of both our controlled and non-controlled businesses. Using this approach, we establish our own ideas of business value, keeping these independent from both the accounting values shown on our books for controlled companies and the values placed by a sometimes foolish market on our partially owned companies. It is this business value that we hope to increase at a reasonable (or preferably unreasonable) rate in the years ahead." -- Warren Buffett ----------------- PORTFOLIO UPDATES ----------------- DE RIGO SP.A. ADRS (NYSE: DER) DER shareholders have received a tender offer from the founding De Rigo family for $8.75 of cash per share. Although the company is still inexpensive compared to competitors, I would take advantage of the offer to sell DER shares. ------------------ SPECIAL SITUATIONS ------------------ AMCON DISTRIBUTING (AMEX: DIT) AMCON Distributing owns a wholesale consumer products distribution network principally serving convenience stores and small retailers in the Great Plains and Rocky Mountain regions of the United States, and also owns two smaller subsidiaries respectively engaged in health food retail and bottled water manufacturing. I believe that the significant earnings power of its profitable core distribution business is currently being masked by recent reported losses and one-time charges at its water and health food retail subsidiaries and a recently discontinued sports beverage marketing and distribution business, and that the company's current plans for a sale or spinoff of its unprofitable business units could unlock a great deal of hidden value over the next several years. Amcon's annual revenues of $1,230 per share compared to its current share price near $20 are remarkable even for a low- margin distributor with some debt. Interestingly, Amcon's distribution business alone generated pretax income in excess of $7.6 million in each of the last two fiscal years, a figure representing over 70% of the entire firm's current $10.75 in million market capitalization. Although this earnings power is currently not perceived by most investors, the spinoff or sale transactions currently being planned could soon allow the profitability of the distributing business to come to light. Even without such a transaction, the distribution business unit could make an very attractive acquisition at higher prices for either a financial or strategic buyer. Amcon's reported book value may also be understated due to the use of last-in, first- out (LIFO) accounting on a significant baseline stock of cigarette inventories throughout its entire operating history. The company has recently placed all assets of its beverage and retail subsidiaries into a new corporate entity named The Healthy Edge, Inc., and the board is currently considering several measures intended to separate Healthy Edge from Amcon itself, including a spinoff of Healthy Edge or its direct sale, either to an outside buyer or to DIT CEO William Wright in an arm's-length transaction approved by independent board members. Once separated from the loss-reporting Healthy Edge entity, I believe the core Amcon distribution business will have market value as an independent entity greatly exceeding the current DIT market capitalization as a whole. AMCON DISTRIBUTING - FINANCIAL STATEMENTS BY SEGMENT Wholesale Distribution Retail Beverage Other/2/ Consolidated ----------------------------------------------------------------------- FISCAL YEAR ENDED 2004: External revenues: Cigarettes $ 597,310,736 $ - $ - $ - $ 597,310,736 Health food - 32,431,573 - - 32,431,573 Confectionery 55,641,415 - - - 55,641,415 Tobacco, beverage & other 131,901,800 - 4,480,065 - 136,381,865 ----------------------------------------------------------------------- Total external revenues 784,853,951 32,431,573 4,480,065 - 821,765,589 Depreciation /1/ 1,121,873 765,371 306,499 - 2,193,743 Amortization 177,050 92,004 28,265 - 297,319 Operating income (loss) 8,340,023 90,133 (5,519,647) (256,664) 2,653,845 Interest expense 1,118,014 1,213,098 670,413 - 3,001,525 Income (loss) from continuing operations before taxes 7,754,389 (1,099,671) (6,182,795) (243,064) 228,859 Total assets 71,794,523 17,426,436 20,256,937 2,251,967 111,729,863 Capital expenditures 318,988 591,330 790,455 83,232 1,784,005 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 - 3,166,353 - 122,476,708 ----------------------------------------------------------------------- Total external revenues 735,516,197 33,110,706 3,166,353 - 771,793,256 Depreciation /1/ 1,192,146 750,071 186,191 - 2,128,408 Amortization 195,935 187,809 - - 383,744 Operating income (loss) 8,538,065 503,799 (1,597,662) (77,659) 7,366,543 Interest expense 1,397,631 1,384,295 412,313 - 3,194,239 Income (loss) from continuing operations before taxes 7,645,028 (847,604) (2,056,992) (77,659) 4,662,773 Total assets 72,589,504 16,778,236 8,192,120 1,939,570 99,499,430 Capital expenditures 732,411 475,775 1,906,409 114,116 3,228,711 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 /1/ 1,195,595 739,412 234,927 - 2,169,934 Amortization 394,150 749,774 139,410 - 1,283,334 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) from continuing operations before taxes 5,677,906 (1,049,613) (1,245,217) - 3,383,076 Total assets 79,392,521 18,452,752 6,741,196 - 104,586,469 Capital expenditures 1,569,981 674,310 435,923 - 2,680,214 /1/ Includes depreciation reported in cost of sales for beverage segment. /2/ Includes charges to operations incurred by discontinued operations and intercompany eliminations. Wholesale Distribution Retail Consolidated ------------- ----------- ------------- Year ended September 30, 2000: External revenues: Cigarettes $ 296,533,411 $ - $ 296,533,411 Health food 41,393,914 34,089,817 75,483,731 Confectionery 31,051,435 - 31,051,435 Tobacco, beverage & other 63,056,668 - 63,056,668 ------------- ----------- ------------- Total external revenues 432,035,428 34,089,817 466,125,245 Intersegment sales: Health food 7,726,612 - 7,726,612 ------------- ----------- ------------- Total intersegment sales 7,726,612 - 7,726,612 Depreciation and amortization 1,371,906 1,423,090 2,794,996 Operating income 5,685,565 1,222,715 6,908,280 Interest expense 1,399,134 1,649,180 3,048,314 Income before taxes 6,366,618 (346,657) 6,019,961 Total assets 53,454,401 19,541,110 72,995,511 Capital expenditures 561,851 404,167 966,018 Year ended September 30, 1999: External revenues: Cigarettes $ 251,076,045 $ - $ 251,076,045 Health food 42,637,607 6,961,742 49,599,349 Confectionery 30,191,317 - 30,191,317 Tobacco, beverage & other 54,634,467 - 54,634,467 ------------- ----------- ------------- Total external revenues 378,539,436 6,961,742 385,501,178 Intersegment sales: Health food 701,101 - 701,101 ------------- ----------- ------------- Total intersegment sales 701,101 - 701,101 Depreciation and amortization 1,560,222 301,142 1,861,364 Operating income 7,664,526 199,439 7,863,965 Interest expense 1,564,096 190,741 1,754,837 Income before taxes 5,994,405 187,048 6,181,453 Total assets 47,965,695 20,623,521 68,589,216 Capital expenditures 740,919 20,787 761,706 Year ended September 30, 1998: External revenues: Cigarettes $ 185,524,096 $ - $ 185,524,096 Health food 31,197,993 - 31,197,993 Confectionery 29,286,831 - 29,286,831 Tobacco, beverage & other 48,272,403 - 48,272,403 ------------- ----------- ------------- Total external revenues 294,281,323 - 294,281,323 Intersegment sales - - - Depreciation and amortization 1,120,482 - 1,120,482 Operating Income 5,439,307 - 5,439,307 Interest expense 1,814,555 - 1,814,555 Income before taxes 3,901,039 - 3,901,039 Total assets 39,643,737 - 39,643,737 Capital expenditures 782,440 - 782,440 AMCON DISTRIBUTING (AMEX: DIT) Market Cap (intraday): 10.75M Enterprise Value: 79.71M Trailing P/E: N/A Price/Sales (ttm): 0.02 Price/Book (mrq): 1.01 Enterprise Value/Revenue (ttm): 0.12 Enterprise Value/EBITDA (ttm): 12.057 Revenue (ttm): 647.92M Revenue Per Share (ttm): 1,229.304 Gross Profit (ttm): 58.17M EBITDA (ttm): 6.61M Total Cash (mrq): 368.44K Total Cash Per Share (mrq): 0.699 Total Debt (mrq): 69.33M Total Debt/Equity (mrq): 4.629 Current Ratio (mrq): 2.174 Book Value Per Share (mrq): 20.264999 CORPORATE WEBSITE http://www.amcon.com/ COMPANY PROFILE AMCON Distributing Company and its subsidiaries engage in the wholesale distribution of consumer products in the Great Plains and Rocky Mountain regions of the United States. The company sells approximately 24,000 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. AMCON also operates 13 retail health food stores that offer health and natural food products, including natural supplements, groceries, health and beauty care products, and other food products. In addition, it engages in the nonalcoholic beverage business that includes natural spring and geothermal water bottling operations in Hawaii and Idaho, as well as marketing and distribution operation of water and other specialty beverages. AMCON was incorporated in 1986 and is based in Omaha, Nebraska.