Exhibit 13.1
AMCON Distributing Company
Index to 2004 Annual Report
Letter to Shareholders...................................... 1
Selected Financial Data..................................... 5
Selected Quarterly Financial Data........................... 7
Market for Common Stock..................................... 9
Management's Discussion and Analysis
Forward Looking Statements............................... 9
Restatements............................................. 10
Discontinued Operations.................................. 10
Company Overview......................................... 10
Industry Segment Overviews............................... 11
Certain Accounting Considerations........................ 12
Critical Accounting Estimates............................ 13
Results of Operations.................................... 18
Liquidity and Capital Resources.......................... 26
Off-Balance Sheet Arrangements........................... 32
Acquisitions and Dispositions of Businesses.............. 32
Quantitative and Qualitative Disclosures
About Market Risk..................................... 34
Report of Management........................................ 36
Report of Independent Registered Public
Accounting Firm.......................................... F-1
Consolidated Financial Statements (as restated)............. F-2
Notes to Consolidated Financial Statements.................. F-6
Corporate Directory
January 7, 2005
TO OUR SHAREHOLDERS:
Our Fiscal 2004 was a difficult year to characterize. Some very positive
things occurred; some negative things also occurred. In reviewing the year,
perhaps it would be helpful to consider the overall strategic direction of
your Company.
Our Company has been primarily engaged in the wholesale distribution of
consumer products since its inception. AMCON Distributing Company's six
distribution centers serve the Great Plains and Rocky Mountain regions. They
distribute primarily convenience store products including, cigarettes and
tobacco, candy and other confectionery, beverages, groceries, paper products,
health and beauty care products, frozen and chilled products, and
institutional food service products.
This business conducted by AMCON Distributing Company makes up the Wholesale
Distribution segment of the Company. This segment has historically generated
a large and relatively stable source of earnings and cash flow. However, due
primarily to competitive pressures and the nature of the products being
distributed, the profit margins it generates are lean (but consistent with
the industry) and the potential for organic growth has been limited. Growth
in revenues and profits in this segment are also largely dependent upon the
volume of cigarette sales, price increases in cigarettes and changes in
promotional programs by the major cigarette manufacturers, each of which is
largely outside the control of the Company. The Company expects that
competition and pressure on profit margins will continue to affect both large
and small distributors and demand that distributors consolidate in order to
become more efficient.
In recognition of these market forces, the Company has developed and
implemented over time a strategy that would redeploy the cash resources
generated by the Wholesale Distribution segment into new businesses that have
the long-term potential for much more significant growth in revenues and
profits. In seeking to develop significant new sources of revenues and
profits, the Company intends to diversify the risk associated with its
current dependence on cigarette sales. The selection of these new businesses
is also guided by our desire to generate future revenue and cost synergies
among the businesses currently owned and those being acquired.
One of the first of our acquisitions to achieve these goals was that of
retail health food stores. AMCON operates six retail health food stores in
Florida under the name Chamberlin's Market & Cafe ("Chamberlin's") and seven
stores in the Midwest under the name Akin's Natural Foods Market ("Akin's"),
which collectively constitute our Retail health and natural food products
segment. These stores carry natural supplements, groceries, health and
beauty care products and other food products, most of which generate
significant gross profit margins. This segment has been profitable on an
operating basis prior to acquisition carrying costs.
1
The trend toward profitability of this segment is expected to be enhanced by
the development of a new marketing department and implementation of a new
central point-of-sale inventory control system which was completed in fiscal
2004. However, this segment experienced a decline in sales and gross profit
in the third and fourth quarters of fiscal 2004 because of an extraordinarily
horrible hurricane season and a planned reduction in the size of the
deli/bakery operations in the Florida stores, reduced supplement sales
resulting from unfavorable media coverage related to the government ban on
ephedra-based products, and a general softening of the low-carb market
coupled with continued expansion of low-carb offerings and sales through
mainstream grocery channels. Management is currently reviewing all store
locations for opportunities to close or relocate marginally performing
stores, remodel and expand good performing stores and identify new locations
for one or two additional stores in fiscal 2005. In this regard, a new
retail health food store was opened in Oklahoma City, Oklahoma in fiscal 2004
and we expect to continue to open additional stores in the future.
The potential for attractive growth and return on investment, as well as
potential synergy with the Company's retail and wholesale distribution
capabilities, drew the Company to the non-alcoholic natural beverage
business. This segment consists of Hawaiian Natural Water Company, Inc.
("HNWC") and Trinity Springs, Inc. ("TSI").
HNWC bottles natural spring water from a source located on the Big Island of
Hawaii and bottles purified drinking water on the island of Oahu. HNWC
currently markets its products primarily in the State of Hawaii, but has
expanded marketing to the mainland United States and certain international
markets. HNWC's water bottling operation has historically operated at a
loss. However, the Company is hopeful that this operation generates profits
in fiscal 2005 as HNWC focuses on expansion of its markets and takes
advantage of its new operations.
TSI began operations for our Company in June 2004 following the acquisition
of substantially all of the assets of its unaffiliated predecessor. TSI
bottles geothermal water and a natural mineral supplement that are currently
sold primarily in health food stores. TSI is the market leader in the health
food store channel, having doubled its sales over the past twelve months and
expects to continue strong sales growth in fiscal 2005. TSI intends to build
on the brand identity created by its unique source by accessing broader
channels of distribution. In addition, certain beverage products, including
Hawaiian Springs/R/ and Royal Kona Coffee/R/, previously handled by The
Beverage Group, Inc. have been transferred to Trinity in order to avoid
duplicative expenses.
The beverage marketing and distribution business conducted by The Beverage
Group, Inc. ("TBG") incurred significant losses during 2004 as substantial
expenditures were made for product development, distribution network
development, and marketing efforts to promote our portfolio of specialty
beverages. Subsequent to fiscal year end the decision was made to close
down the operations of TBG The Beverage Group Inc. ("TBG") and focus our
efforts on our other businesses.
2
As described under "Liquidity and Capital Resources," entry into and
development of these new businesses has required the expenditure of
significant cash resources for the costs of acquiring these businesses and
funding their operations and growth. These cash needs include the financing
of growing accounts receivable and inventory associated with increased sales,
making capital investments in equipment, and conducting promotional efforts.
In order to assist in meeting these cash needs, the Company has determined to
suspend the payment of cash dividends on common stock for the foreseeable
future. The Company will periodically revisit its dividend policy to
determine whether it has adequate internally generated funds, together with
other needed financing, to fund its growth and operations in order to resume
the payment of cash dividends on common stock.
As discussed in more detail under "Management's Discussion and Analysis,"
annually we engage an independent valuation firm to perform a review of our
intangible assets, which include goodwill and tradenames, for impairment.
This year, that review resulted in impairment charges in our Beverage
segments of $3.6 million. While we believe that these businesses will
produce profits in the future, our conservative approach in projecting growth
warranted taking an impairment charge this year.
In November 2004, the Company renewed its bank line for a period of
approximately two and a half years. In addition, during the period June
through October 2004, the Company placed $4.5 million of new preferred stock
at competitive rates. These factors allowed us to retire all of our
subordinated indebtedness related to an acquisition in our Retail Segment and
pay for the initial cash commitments required to purchase TSI. In addition,
we plan to secure a separate line of credit to assist in the growth of TSI
and we will continue to evaluate additional funding alternatives for our
Beverage segment.
Finally, Chris Atayan, the Senior Managing Director of Slusser & Associates,
Inc., a New York City Investment Banking firm, has recently joined our Board
of Directors. In addition to Chris' wealth of experience in investment
banking and a long-term relationship with the Company since the late 1980s,
Chris has been a successful investor and director in retail and beverage
enterprises and grew up in a family owned convenience wholesale distribution
business, so he is very familiar with all our industry segments. We welcome
Chris to our Board. Also, Bill Hoppner, a long-term director of the Company,
was elected Senior Vice President of the Company in charge of our retail
health food and beverage segments this year.
We believe fiscal 2005 will start to show the fruits of our efforts in
reorganization and hope that we continue to receive your support as
Shareholders of our Company. As always, we appreciate your past support and
the ongoing support of our hardworking loyal employees at AMCON Distributing
Company.
Very truly yours,
William F. Wright Kathleen M. Evans
Chairman of the Board President
3
EXPLANATORY NOTE
Subsequent to the issuance of these financial statements for the year ended
September 24, 2004, management and the Company's Audit Committee determined
that the Company would restate its balance sheet as of September 24, 2004 to
reflect (i) a correction to the classification of Series A Preferred Stock
from permanent equity to mezzanine financing, and (ii) a correction to the
classification of its revolving credit facility from long-term to short-term
debt. Management and the Company's Audit Committee also determined that the
provision for nonoperating asset impairment which was reported as a component
of "Other income, net" for the year ended September 26, 2003 should be
corrected and reclassified as a component of operating expenses under the
title "Impairment charges." The statement of operations for fiscal 2003 has
been restated to correct this error.
In accordance with Emerging Issue Task Force ("EITF") Topic No. D-98
"Classification and Measurement of Redeemable Securities," the possibility of
a redemption of securities that is not solely within the control of the
issuer without regard to probability requires the security to be
classified outside of permanent equity. The Company's Certificate of
Designations creating the Series A Preferred Stock contains provisions that
give the holders the optional right to redeem such stock if either there is a
change of control (as defined in the Certificate of Designations) or the
Wright Family (as defined in the Certificate of Designations to include
William F. Wright, the Company's Chief Executive Officer, Chairman of the
Board and largest stockholder) beneficially owns less than 20% of the
outstanding shares of common stock. The Company believes it is unlikely that
either of those events will occur without support of the Board of Directors
since the two owners of the Series A Preferred Stock are represented on the
Board of Directors, the interests of the Company and those representatives
are aligned, and the aggregate ownership of all of the Board members is in
excess of two-thirds of the outstanding shares of common stock. However,
there can be no assurance that this will not occur.
EITF 95-22 "Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements That Include both a Subjective Acceleration
Clause and a Lock-Box Arrangement," requires borrowings under an agreement
that includes both a subjective acceleration clause and a lock-box
arrangement to be classified as short-term indebtedness. Because the
Company's agreement contains both of these features, the borrowings have been
restated to be classified as short-term for September 2004 and 2003. The
lending banks and the Company amended the revolving loan agreement after the
Company's second fiscal quarter of 2005 to replace the lockbox provision with
a springing lockbox arrangement that would require the Company's cash to be
placed in a lockbox account that would be used to automatically pay down the
revolving indebtedness only in the instance of an event of default. EITF 92-
22, nevertheless, requires the correction to the classification of the
revolving credit facility for reports filed prior to such amendment to the
revolving loan agreement.
This restatement does not impact amounts already reported as sales, net
income (loss) available to common shareholders or earnings (loss) per share,
nor will it result in a default under any provisions in the credit agreement.
4
In addition, in March 2005, the Company discontinued the operations of its
beverage marketing and distribution business. As a result, the balance
sheets as of September 24, 2004 and September 26, 2003 and the statements of
operations and statements of cash flows for the fiscal years ended September
24, 2004 and September 26, 2003 have been prepared reflecting this
disposition as discontinued operations in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." The beverage marketing and
distribution business was started in fiscal 2003, so there is no change to
the fiscal 2002 amounts.
SELECTED FINANCIAL DATA
The selected financial data presented below have been derived from AMCON
Distributing Company and 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.
Results may not be comparable due to acquisitions and/or dispositions that
have occurred in the periods presented. As described in the footnotes to the
consolidated financial statements, in June 2004 (Fiscal 2004) and December
2001 (Fiscal 2002), we acquired Trinity Springs, Inc.(TSI), and Hawaiian
Natural Water Company, Inc. ("HNWC"), respectively. In June 2001 (Fiscal
2001), we acquired substantially all of the distribution business assets and
net assets of Merchants Wholesale, Inc., as well as, the distribution
facility building owned by the sole shareholder of Merchants Wholesale, Inc.
for $36.7 million. The transaction was accounted for using the purchase
method of accounting. Also, in March 2001 (Fiscal 2001), we sold The Healthy
Edge, Inc. (formerly Food For Health Co. Inc.), our health food distribution
business for $10.3 million and accounted for the transaction as discontinued
operations in the consolidated financial statements in accordance with
Accounting Principles Board Opinion No. 30.
The Company discontinued the operations of its beverage marketing and
distribution business effective March 2005. As a result, the selected
financial data presented below has been prepared reflecting this disposition
as discontinued operations in accordance with SFAS No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets." Revenues and expenses from
the discontinued operations have been excluded from income from continuing
operations in the selected financial data.
5
<Caption>
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------
Fiscal Year 2004 2003/1/ 2002 2001 2000
- --------------------------------------------------------------------------------------------
Sales/2/.......................... $ 821,766 $ 771,793 $ 847,117 $ 577,589 $ 422,901
Cost of sales..................... 762,203 711,614 785,193 531,903 378,138
---------------------------------------------------------
Gross profit...................... 59,563 60,179 61,924 45,686 44,763
Operating expenses................ 53,331 52,413 54,774 44,706 37,847
Impairment charges/3/............. 3,578 399 - - -
---------------------------------------------------------
Operating income.................. 2,654 7,367 7,150 980 6,916
Interest expense.................. 3,002 3,194 4,273 3,877 2,499
Other income, net................. (577) (490) (506) (202) (2,248)
---------------------------------------------------------
Income (loss) from continuing
operations before income taxes... 229 4,663 3,383 (2,695) 6,665
Income tax expense (benefit)...... 147 1,771 1,316 (1,018) 2,354
Equity in loss of unconsolidated
affiliate........................ - - 95 95 -
Minority interest, net of tax..... (91) - - - -
---------------------------------------------------------
Income (loss) from continuing
operations....................... 173 2,892 1,972 (1,772) 4,311
Loss from discontinued operations,
net of income taxes of $(2,570),
$(1,142), $0, $(963), and $(239),
respectively..................... (4,311) (1,865) - (1,570) (407)
Preferred stock dividend
requirements..................... 50 - - - -
---------------------------------------------------------
Net (loss) income available
to common shareholders........... $ (4,188) $ 1,027 $ 1,972 $ (3,342) $ 3,904
=========================================================
Basic earnings (loss) per share:
Continuing operations........... $ 0.23 $ 5.48 $ 3.90 $ (3.88) $ 9.46
Discontinued operations......... (8.17) (3.53) - (3.44) (0.89)
---------------------------------------------------------
Net basic earnings (loss)
per share...................... $ (7.94) $ 1.95 $ 3.90 $ (7.32) $ 8.57
=========================================================
Diluted earnings (loss) per share:
Continuing operations........... $ 0.32 $ 5.38 $ 3.81 $ (3.88) $ 9.07
Discontinued operations......... (7.99) (3.47) - (3.44) (0.86)
---------------------------------------------------------
Net diluted earnings (loss)
per share...................... $ (7.67) $ 1.91 $ 3.81 $ (7.32) $ 8.21
=========================================================
Weighted average shares outstanding:
Basic........................... 527,774 527,699 505,414 456,362 455,810
Diluted......................... 539,648 537,042 518,197 456,362 475,553
Working capital /1/ /4/........... $ (11,871) $ (8,030) $ (1,989) $ 482 $ 11,546
Total assets ..................... 111,730 99,499 104,586 99,197 73,192
Long-term obligations and
subordinated debt /1/ /5/....... 27,104 22,453 21,601 22,873 18,922
Shareholders' equity /6/.......... 12,767/1/ 17,301 16,699 13,363 16,855
Cash dividends declared
per common share................ 0.72 0.72 0.72 0.72 0.72
6
/1/ Amounts restated as described in Note 22 to the Consolidated Financial
Statements.
/2/ 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)" sales incentives paid to customers have
been recorded as a reduction of sales.
/3/ Includes impairment of certain identifiable intangibles and
nonoperating assets in the beverage segment.
/4/ Current assets minus current liabilities.
/5/ Includes deferred taxes, noncurrent liabilities of discontinued
operations, current and long-term portions of subordinated debt and long-term
debt and other long-term liabilities, but excludes the revolving credit
facility.
/6/ Net of dividends declared of $0.4 million, $0.4 million, $0.4 million
in fiscal 2002-2004 and $0.3 million fiscal 2000-2001.
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 2004 and 2003. 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. As described in more detail in
the Notes to the Consolidated Financial Statements, in performing its annual
impairment test for goodwill and other intangible assets during the fourth
quarter of Fiscal 2004 the Company recognized a pre-tax $3.6 million
impairment of its goodwill carried by its subsidiary, Hawaiian Natural Water
Company Inc., which is a reporting unit in the beverage segment. This
impairment was the result of competitive pressures in the natural spring
water bottling business which have resulted in lower than expected operating
profits and cash flow. Quarterly earnings or loss 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 or loss per share amount.
The following selected quarterly financial data gives effect to the
retroactive presentation for discontinued operations as discussed in Note 19
to the Consolidated Financial Statements.
7
<Caption>
(Dollars in thousands, except per share data)
- ------------------------------------------------------------------------------------------
Fiscal Year 2004 Fourth Third Second First
- ------------------------------------------------------------------------------------------
Sales...................................... $ 218,121 $ 218,102 $ 192,971 $ 192,572
Gross profit............................... 15,609 15,223 13,685 15,046
(Loss) income from continuing operations
before income taxes...................... (2,677) 1,081 (208) 2,033
(Loss) income from continuing operations .. (1,661) 671 (126) 1,289
Loss from discontinued operations.......... (1,624) (936) (976) (775)
Preferred stock dividend requirements...... (50) - - -
---------------------------------------------
Net (loss) income available to common
shareholders.............................. $ (3,335) $ (265) $ (1,102) $ 514
=============================================
Basic earnings (loss) per share:
Continuing operations.................... $ (3.25) $ 1.27 $ (0.24) $ 2.44
Discontinued operations.................. (3.08) (1.77) (1.85) (1.47)
---------------------------------------------
Net basic earnings (loss) per share...... $ (6.33) $ (0.50) $ (2.09) $ 0.97
=============================================
Diluted earnings (loss) per share:
Continuing operations.................... $ (3.25) $ 1.25 $ (0.24) $ 2.41
Discontinued operations.................. (3.08) (1.74) (1.85) (1.45)
---------------------------------------------
Net diluted earnings (loss) per share.... $ (6.33) (0.49) $ (2.09) $ 0.96
=============================================
The following selected quarterly financial data gives effect to the
restatements and to the retroactive presentation for discontinued operations
as discussed in Notes 22 and 19, respectively, to the Consolidated Financial
Statements.
<Caption>
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------------------
Fiscal Year 2003 Fourth Third Second First
- -------------------------------------------------------------------------------------------
Sales...................................... $ 207,395 $ 189,860 $ 176,817 $ 197,721
Gross profit............................... 16,545 16,011 13,779 13,844
Income from continuing operations
before income taxes...................... 1,843 2,276 42 502
Income from continuing operations.......... 1,145 1,410 24 313
Loss from discontinued operations.......... (810) (719) (298) (38)
---------------------------------------------
Net income (loss) available to common
shareholders.............................. $ 335 $ 691 $ (274) $ 275
=============================================
Basic earnings (loss) per share:
Continuing operations.................... $ 2.17 $ 2.67 $ 0.04 $ 0.59
Discontinued operations.................. (1.54) (1.36) (0.56) (0.07)
---------------------------------------------
Net basic earnings (loss) per share...... $ 0.63 $ 1.31 $ (0.52) $ 0.52
=============================================
Diluted earnings (loss) per share
Continuing operations.................... $ 2.13 $ 2.63 $ 0.04 $ 0.58
Discontinued operations.................. (1.51) (1.34) (0.55) (0.07)
---------------------------------------------
Net diluted earnings (loss) per share.... $ 0.62 $ 1.29 $ (0.51) $ 0.51
=============================================
8
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 2004 and 2003, after adjustment for a one-
for-six reverse stock split effected on May 14, 2004. As of December 31,
2004, the closing stock price was $18.80 and there were 527,062 common shares
outstanding. The Company has approximately 300 common shareholders of record
and the Company believes that approximately 1,250 additional persons hold
shares beneficially.
Fiscal Year 2004 Fiscal Year 2003
---------------- ----------------
High Low High Low
------- ------- ------- -------
4th Quarter $ 25.10 $ 20.60 $ 31.80 $ 26.02
3rd Quarter 29.40 24.48 28.12 17.70
2nd Quarter 28.80 21.83 35.02 20.48
1st Quarter 27.60 21.90 36.52 27.30
During fiscal years 2004 and 2003, the Board of Directors declared cash
dividends of $0.18 per share per quarter or $0.72 per common share for each
year. The Company's revolving credit facility provides that the Company may
not pay dividends on its common shares in excess of $0.72 per common share on
an annual basis. As discussed more fully in the "Letter to Shareholders,"
the Company is implementing a strategy to invest its cash resources into
growth-oriented businesses and has therefore determined to suspend the
payment of cash dividends on common stock for the foreseeable future. The
Company will periodically revisit its dividend policy to determine whether it
has adequate internally generated funds, together with other needed financing
to fund its growth and operations in order to resume the payment of cash
dividends on common stock.
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 forward looking
statements that are subject to risks and uncertainties and which reflect
management's current beliefs and estimates of future economic circumstances,
industry conditions, company performance and financial results. Forward
looking statements include information concerning the possible or assumed
future results of operations of the Company and those statements preceded by,
followed by or that include the words "future," "position," "anticipate(s),"
"expect," "believe(s)," "see," "plan," "further improve," "outlook," "should"
or similar expressions. For these statements, we claim the protection of the
safe harbor for forward looking statements contained in the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are not
guarantees of future performance or results. They involve risks,
uncertainties and assumptions. 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:
9
- changing market conditions with regard to cigarettes,
- changes in promotional and incentive programs offered by
cigarette manufacturers,
- the demand for the Company's products,
- new business ventures,
- domestic regulatory risks,
- competition,
- other risks over which the Company has little or no control, and
- any other factors not identified herein could also have such an effect.
Changes in these 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. Any forward looking statement contained
herein is made as of the date of this document. The Company undertakes no
obligation to publicly update or correct any of these forward looking
statements in the future to reflect changed assumptions, the occurrence of
material events or changes in future operating results, financial conditions
or business over time.
Restatements
As discussed in Note 22 to the Consolidated Financial Statements, the
Company's September 24, 2004 consolidated balance sheet and Statement of
Operations for the year ended September 30, 2003 have been restated from the
amounts previously reported. The accompanying management discussion and
analysis and results of operations give effect to the restatement.
Discontinued Operations
As more fully described in Note 19 to the Consolidated Financial Statements,
the Company discontinued the operations of its beverage marketing and
distribution business in March 2005. As a result, the balance sheets as of
September 24, 2004 and September 26, 2003 and the statements of operations
and statements of cash flows for the fiscal years ended September 24, 2004
and September 26, 2003 have been prepared reflecting this disposition as
discontinued operations in accordance with SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." The beverage marketing and
distribution business was started in fiscal 2003, so there is no change to
the fiscal 2002 amounts.
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 thirteen retail
health food stores and a non-alcoholic beverage business that includes
natural spring and geothermal water bottling operations in the States of
Hawaii and Idaho. 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.
During fiscal 2004, the Company:
- generated a 6.5% increase in sales compared to fiscal 2003 primarily
due to a 7.5% increase in cigarette carton volume.
10
- generated a non-recurring increase in income before taxes of $0.8
million from a wholesale industry cigarette price increase in response
to the elimination of vendor program incentive payments during the
first quarter of the year.
- completed construction of a new packaging and warehouse facility at our
natural spring water bottling plant in Hawaii.
- opened a new retail health food store in Oklahoma City, OK.
- acquired the tradename, water source, customer list and substantially
all of the operating assets of Trinity Springs, Ltd. for approximately
$8.8 million through a combination of cash, notes, issuance of a 15%
interest in Trinity Springs, Inc. (a newly formed subsidiary of AMCON)
and payment of an annual water royalty.
- completed a $2.5 million private placement of Series A Convertible
Preferred Stock
- completed a one-for-six reverse stock split as approved by the
shareholders at the May 2004 Annual Meeting.
- incurred a $3.6 million before tax charge related to the impairment of
intangible assets in our recently restructured beverage segment.
- recognized earnings per diluted share from continuing operations of
$0.32 for the fiscal year ended September 2004 compared to earnings per
diluted share from continuing operations of $5.38 for the prior fiscal
year.
- recognized a loss per diluted share from discontinued operations of
$7.99 for the fiscal year ended September 2004 compared to a loss per
diluted share from discontinued operations of $3.47 for the prior
fiscal year.
- declared and paid cash dividends of $0.72 per common share.
Industry Segment Overviews
Wholesale Distribution Segment
The wholesale distribution of cigarettes has been significantly affected
during the past year due to changing promotional programs implemented by the
major cigarette manufacturers. Reductions in these promotional programs have
caused wholesalers to react by increasing cigarette prices to retailers.
This occurred for the first time at the beginning of fiscal 2004 without a
corresponding price increase from manufacturers and occurred again at the
beginning of the second quarter of fiscal 2004. Due to timing of recognition
of manufacturer program incentive payments, the price increase in the first
quarter provided the Company with a $0.8 million non-recurring boost in gross
profit during fiscal 2004. Certain manufacturers changed their promotional
programs again for the second quarter of fiscal 2004, therefore, it is
difficult to predict how these changes will impact the Company and the
industry in the future.
11
As a result of one of the manufacturer program changes discussed above,
certain small wholesalers filed suit against Philip Morris and RJ Reynolds
alleging unfair trade practices. In addition, due to the heightened level of
competition in the marketplace from both a wholesale and retail convenience
store perspective, a number of wholesalers and retailers have sought
bankruptcy protection, been acquired or are on the market to be sold.
Therefore, we expect that competition and pressure on profit margins will
continue to affect both large and small distributors and demand that
distributors consolidate in order to become more efficient.
Retail Health Food Segment
The retail segment experienced a decline in sales and gross profit in the
third and fourth quarters of fiscal 2004 resulting from extreme adverse
weather in Florida, a planned reduction in the size of the deli/bakery
operations in the Florida stores, reduced supplement sales resulting from
unfavorable media coverage related to the government ban on ephedra based
products and a general softening of the low-carb market coupled with
continued expansion of low-carb offerings and sales through mainstream
grocery channels. Management is currently reviewing all store locations for
opportunities to close or relocate marginally performing stores, remodel and
expand good performing stores and identify new locations for one or two
additional stores in fiscal 2005. As a result of this analysis, management
closed a small under performing store in the Florida market in October 2004.
Beverage Segment
Construction of an expanded warehouse and packaging building at our plant in
Hawaii, which began in the second quarter of 2003, was completed in the first
quarter of fiscal 2004. Our water bottling operation in Hawaii has
historically operated at a loss; however, we are hopeful that this operation
generates operating profits in fiscal 2005 as the Company focuses on
expansion of its markets and takes advantage of its new operations. In June
2004, the Company acquired substantially all of the operating assets of
Trinity Springs, Ltd., headquartered in Sun Valley/Ketchum, Idaho, which
bottles and sells geothermal bottled water and a natural mineral supplement.
The new company, which is an 85% owned subsidiary of AMCON, was relocated to
Boise, Idaho. The Trinity Springs water and mineral supplements are
currently sold primarily in health food stores where they represent the
number one selling water products. The Company plans to extend the
distribution channels outside the health food market. The beverage marketing
and distribution business incurred significant losses during 2004 as
significant expenditures were made for product development, distribution
network development and marketing efforts to promote our portfolio of
specialty beverages. This business was discontinued in March 2005.
Certain Accounting Considerations
In November 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 151 "Inventory Costs." This statement amends Accounting Research
Bulletin No. 43, Chapter 4, "Inventory Pricing" and removes the "so abnormal"
criterion that under certain circumstances could have led to the
capitalization of certain items. SFAS No. 151 requires that idle facility
expense, excess spoilage, double freight and rehandling costs be recognized
12
as current-period charges regardless of whether they meet the criterion of
"so abnormal." SFAS 151 also requires that allocation of fixed production
overhead expenses to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 is effective for all fiscal years
beginning after June 15, 2005 (fiscal 2006 for the Company). Management does
not believe there will be a significant impact as a result of adopting this
Statement.
In December 2004, the FASB issued Statement No. 123 (revised 2004) ("SFAS
123R"), "Share-Based Payment." SFAS No. 123R will require the Company to
measure the cost of all employee stock-based compensation awards based on the
grant date fair value of those awards and to record that cost as compensation
expense over the period during which the employee is required to perform
service in exchange for the award (generally over the vesting period of the
award). SFAS No. 123R is effective for the Company's fiscal 2006.
Management is currently assessing the impact that this standard will have on
the Company's financial position, result of operations and cash flows.
In December 2004, the FASB issued Statement No. 153, "Exchanges of
Nonmonetary Assets," an amendment of APB Opinion No. 29, "Accounting for
Nonmonetary Transactions." The amendments made by Statement 153 are based on
the principle that exchanges of nonmonetary assets should be measured based
on the fair value of the assets exchanged. Further, the amendments eliminate
the narrow exception for nonmonetary exchanges of similar productive assets
and replace it with a broader exception for exchanges of nonmonetary assets
that do not have commercial substance. Previously, Opinion 29 required that
the accounting for an exchange of a productive asset for a similar productive
asset or an equivalent interest in the same or similar productive asset
should be based on the recorded amount of the asset relinquished. The
Statement is effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005 (fiscal 2006 for the Company). Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. We are currently assessing the
impact that this standard will have on the Company.
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 24, 2004, September 26, 2003,and September 27, 2002.
Fiscal years 2004, 2003, and 2002 each comprised 52 weeks.
Critical Accounting Estimates
Certain accounting estimates used in the preparation of the Company's
financial statements require us to make judgments and estimates and the
financial results we report may vary depending on how we make these
judgments and estimates. Our critical accounting estimates are set forth
below and have not changed during Fiscal 2004.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
NATURE OF ESTIMATES REQUIRED. The allowance for doubtful accounts represents
our estimate of uncollectible accounts receivable at the balance sheet date.
We monitor our credit exposure on a weekly basis and assess the adequacy of
our allowance for doubtful accounts on a quarterly basis. Because credit
13
losses can vary significantly over time, estimating the required allowance
requires a number of assumptions that are uncertain.
ASSUMPTIONS AND APPROACH USED. We estimate our required allowance for
doubtful accounts using the following key assumptions.
- Historical collections - Represented as the amount of historical
uncollectible accounts as a percent of total accounts
receivable.
- Specific credit exposure on certain accounts - Identified based
on management's review of the accounts receivable portfolio
and taking into account the financial wherewithal of particular
customers that management deems to have a higher risk of
collection. For example, a customer in bankruptcy would
indicate that an amount could be uncollectible.
SENSITIVITY ANALYSIS. We believe that our current level of allowance for
doubtful accounts is adequate at the balance sheet date and that our credit
exposure is very low compared with the high volume of sales and the nature of
our industry in which collections are generally made quickly. However, for
every 1% percent of receivables deemed to require an additional reserve at
September 2004, the impact on the statement of operations would be to
increase selling, general and administrative expenses by approximately
$300,000.
INVENTORIES
NATURE OF ESTIMATES REQUIRED. In our businesses, we carry large quantities
and dollar amounts of inventory. Inventories consist primarily of finished
products purchased in bulk quantities to be sold to our customers. Given the
large quantities and broad range of products that we carry to better serve
our customers, there is a risk of impairment in inventory that is unsaleable
or unrefundable, slow moving, obsolete or is discontinued. The use of
estimates is required in determining the salvage value of this inventory.
ASSUMPTIONS AND APPROACH USED. We estimate our inventory obsolescence
reserve at each balance sheet date based on the following criteria:
-Slow moving products - Items identified as slow moving are
evaluated on a case-by-case basis for impairment.
-Obsolete/discontinued inventory - Products identified that are
near or beyond their expiration dates. In addition, we may
discontinue carrying certain product lines for our customers.
As a result, we estimate the market value of this inventory as
if it were to be liquidated.
-Estimated salvage value/sales price - The salvage value of the
inventory is estimated using management's evaluation of the
congestion in the distribution channels and experience with
brokers and inventory liquidators to determine the salvage
value of the inventory.
14
SENSITIVITY ANALYSIS. We believe that our current level of reserve for
inventory obsolescence is adequate at the balance sheet date. However, if
there was a change in the estimated net realizable value of the inventory
identified as obsolete/discontinued inventory (change in estimated selling
price) of 5%, the reserve and costs of goods sold, respectively, would
increase/decrease by approximately $60,000.
DEPRECIATION, AMORTIZATION AND IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets consist primarily of fixed assets and intangible assets
that were acquired in business combinations. Fixed assets and amortizable
identified intangible assets are assigned useful lives ranging from 2 to 40
years. Goodwill is not amortized. Impairment of reporting units, which is
measured in the Company's fourth fiscal quarter in order to coincide with its
budgeting process, is evaluated annually with the assistance of an
independent third party. The reporting units are valued using after-tax cash
flows from operations (less capital expenditures) discounted to present
value.
Due to competitive pressures in the natural spring water bottling industry,
operating profits and cash flows were lower than expected. Based on this
trend, the future cash flow forecasts have been revised for this reporting
unit and an impairment has been recorded in the Company's statement of
operations as a component of income (loss) from operations. In September
2004, HNWC a reporting unit in the beverage segment, recognized impairment of
$3.6 million to its tradename as a result of the annual impairment test.
NATURE OF ESTIMATES REQUIRED. Management has to estimate the useful lives of
the Company's long lived assets. In regard to the impairment analysis, the
most significant assumptions include management's estimate of the annual
growth rate used to project future sales and expenses used by the independent
third party valuation firm.
ASSUMPTIONS AND APPROACH USED. For fixed assets, depreciable lives are based
on our accounting policy which is intended to mirror the expected useful life
of the asset. In determining the estimated useful life of amortizable
intangible assets, such as customer lists, we rely on our historical
experience to estimate the useful life of the applicable asset and consider
industry norms as a benchmark. In evaluating potential impairment of long-
lived assets we primarily use an income based approach (discounted cash flow
method) and guideline public and private company information. A discounted
cash flow methodology requires estimation in (i) forecasting future earnings
(ii) determining the discount rate applicable to the earnings stream being
discounted, and (iii) computing a terminal value at some point in the future.
The forecast of future earnings is an estimate of future financial
performance based on current year results and management's evaluation of the
market potential for growth. The discount rate is a weighted average cost of
capital using a targeted debt-to-equity ratio using the industry average
under the assumption that it represents our optimal capital structure and can
be achieved in a reasonable time period. The terminal value is determined
using a commonly accepted growth model.
15
SENSITIVITY ANALYSIS. We believe that the estimated useful lives of our
fixed assets and amortizable intangibles are appropriate. If we shortened
the estimated useful lives of our fixed assets by one year, the impact on the
statement of operations for the current period would be to increase
depreciation expense by approximately $550,000. A decrease in the estimate
of future sales or increase of estimated expenses for reporting units
evaluated for impairment could result in additional impairment of intangibles
being recorded up to the amount of the carrying amount of the intangible
assets which was approximately $19.7 million as of September 24, 2004.
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 for its worker's
compensation liability based upon claim reserves established with the
assistance of a third-party administrator which are then trended and
developed with the assistance of our insurance agent. The reserves are
evaluated at the end of each reporting period. Due to the uncertainty
involved with the realization of claims incurred but unreported, management
is required to make estimates of these claims.
ASSUMPTIONS AND APPROACH USED. In order to estimate our reserve for incurred
but unreported claims we consider the following key factors:
Employee Health Insurance Claims
- Historical claims experience - We review loss runs for each
month to calculate the average monthly claims experience.
- Lag period for reporting claims - Based on analysis and
consultation with our third party administrator, our experience
is such that we have a one month lag period in which claims are
reported.
Workers Compensation Insurance Claims
- Historical claims experience - We review prior year's loss runs
to estimate the average annual expected claims and review
monthly loss runs to compare our estimates to actual claims.
- Lag period for reporting claims - We utilize the assistance
of our insurance agent to trend and develop reserves on
reported claims in order to estimate the amount of incurred but
unreported claims. Our insurance agent uses standard insurance
industry loss development models.
SENSITIVITY ANALYSIS. We believe that our current reserve for incurred but
unreported insurance claims is adequate at the balance sheet date. However,
for every 5% percent increase in claims, an additional reserve of
approximately $45,000 would be required at September 2004, the impact of
which would increase selling, general and administrative expenses by that
amount in the same period.
16
INCOME TAXES
The Company accounts for its income taxes by recording taxes payable or
refundable for the current year and deferred tax assets and liabilities for
the future tax consequences of events that have been recognized in our
financial statements or tax returns. As required by SFAS No. 109,
"Accounting for Income Taxes", these expected future tax consequences are
measured based on provisions of tax law as currently enacted; the effects of
future changes in tax laws are not anticipated. Future tax law changes, such
as a change in the corporate tax rate, could have a material impact on our
financial condition or results of operations. When appropriate, we record a
valuation allowance against deferred tax assets to offset future tax benefits
that may not be realized.
ASSUMPTIONS AND APPROACH USED. In determining whether a valuation allowance
is appropriate, we consider whether it is more likely than not that all or
some portion of our deferred tax assets will not be realized, based in part
upon management's judgments regarding future events.
In making that estimate we consider the following key factors:
- our current financial position
- historical financial information
- future reversals of existing taxable temporary differences
- future taxable income exclusive of reversing temporary differences
and carryforwards
- taxable income in prior carryback years
- tax planning strategies
SENSITIVITY ANALYSIS. Based on our analysis, we have determined that a
valuation allowance is not required at September 24, 2004. A valuation
allowance would reduce the deferred tax asset to the amount that is more
likely than not to be realized and a corresponding reduction to net income as
a result.
REVENUE RECOGNITION
We recognize revenue in our wholesale and beverage segments when products are
delivered to customers (which generally is the same day products are shipped)
and in our retail health food segment when the products are sold to
consumers. Sales are shown net of returns, discounts, and sales incentives
to customers.
NATURE OF ESTIMATES REQUIRED. We estimate and reserve for anticipated sales
discounts as part of our periodic evaluation of allowance for doubtful
accounts. We also estimate and provide a reserve for anticipated sales
incentives to customers based on volume.
ASSUMPTIONS AND APPROACH USED. We estimate the sales reserves using the
following criteria:
- Sales discounts - We use historical experience to estimate the
amount of accounts receivable that will not be collected due to
customers taking advantage of authorized term discounts.
17
- Volume sales incentives - We use historical experience in
combination with quarterly reviews of customers' sales progress
in order to estimate the amount of volume incentives due to
the customers on a periodic basis.
SENSITIVITY ANALYSIS. Based on the historical information used to estimate
the reserves for sales discounts and volume sales incentives, we do not
anticipate significant variances from the amounts reserved. However, there
could be significant variances from period to period based on customer make-
up and programs offered.
Our estimates and assumptions for each of the aforementioned critical
accounting estimates have not changed materially during the periods
presented, nor are we aware of any reasons that they would be reasonably
likely to change in the future.
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 2004, 2003
and 2002:
<Caption>
Fiscal Years
-----------------------
2004 2003 2002
-----------------------
Sales............................ 100.0% 100.0% 100.0%
Cost of sales.................... 92.8 92.2 92.7
-----------------------
Gross profit..................... 7.2 7.8 7.3
Selling, general and
administrative expenses........ 6.2 6.5 6.1
Depreciation and amortization.... 0.3 0.3 0.4
Impairment charges............... 0.4 - -
-----------------------
Operating income ................ 0.3 1.0 0.8
Interest expense................. 0.4 0.4 0.5
Other income, net................ (0.1) - (0.1)
-----------------------
Income from continuing operations
before income taxes............. - 0.6 0.4
Income tax expense .............. - 0.2 0.2
-----------------------
Income from continuing
operations .................... - 0.4 0.2
Loss from discontinued
operations, net of tax.......... (0.5) (0.3) -
Preferred stock dividend
requirements................... - - -
-----------------------
Net (loss) income available
to common shareholders......... (0.5)% 0.1% 0.2%
=======================
18
FISCAL YEAR 2004 VERSUS FISCAL YEAR 2003.
- -----------------------------------------
SALES
Sales for fiscal year 2004 increased 6.5% to $821.8 million, compared to
$771.8 million for fiscal year 2003. Sales are reported net of costs
associated with sales incentives provided to customers, totaling $13.9
million and $9.0 million for fiscal 2004 and 2003, respectively. Sales
increases (decreases) by business segment are as follows (dollars in
millions):
Wholesale distribution segment $ 49.3
Retail health food stores segment (0.7)
Beverage segment 1.4
Intersegment eliminations -
-------
$ 50.0
=======
Cigarette sales in the wholesale distribution segment increased by $32.5
million, and sales of tobacco, confectionary and other products contributed
an additional $16.8 million in sales as compared to fiscal 2003. Of the
increase in sales of cigarettes, $5.8 million related to price increases
implemented by the Company in response to the elimination of vendor program
incentives during the year, and $49.4 million related to a 7.5% increase in
carton volume, primarily due to new customers within our current market area.
These increases were offset by a $22.7 million decrease in cigarette sales
related to a decrease in prices on Philip Morris and a permanent decrease on
RJ Reynolds' (successor in merger to Brown & Williamson) brands which began 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 2005 and could extend it further. Both
companies, however, did increase prices of certain cigarette brands in
December 2004 by as much as $1.00 per carton. See discussion above under
INDUSTRY SEGMENT OVERVIEWS for additional information regarding cigarette
sales trends. The $16.8 million increase in sales of tobacco, confectionary
and other products was attributable primarily to sales to new customers in
our current market area. 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. However, pricing continues to be
the primary criteria considered by convenience store retailers when
considering suppliers.
Sales from the retail health food segment's new Oklahoma City store, which
opened in April 2004, were $0.8 million. Sales declined in the remaining
stores by $1.5 million primarily because of the extreme adverse weather in
Florida, a planned elimination of the deli operation in the Florida stores,
reduced supplement sales resulting from unfavorable media coverage related to
the government ban on ephedra based products and a general softening of the
low-carb market coupled with continued expansion of low-carb offerings and
sales through mainstream grocery channels.
19
The beverage segment accounted for $4.8 million of sales for fiscal 2004,
compared to $3.4 million in fiscal 2003. The improvement was due to increases
in case volume of our Hawaiian Springs natural spring water, which was
possible due to completion of plant construction and a change to a new
distributor in the Hawaii market in October 2003. In addition, the
acquisition of substantially all of the operating assets of Trinity Springs,
Ltd. at the end of June 2004 contributed $1.1 million of sales for fiscal
2004. Hawaiian Natural Water Company (HNWC), also acquired a water bottling
operation on the island of Oahu that contributed $0.3 million of sales in
fiscal 2004. This acquisition enables HNWC to more effectively differentiate
the premium natural spring water from purified bottled water products and
provides a more competitive price point in which to provide private label
water. Additionally, there were no sales from our home and office bottling
and delivery business in Hawaii for fiscal 2004 because it was sold in
October 2003. Sales from the home and office bottling and delivery business
totaled $0.3 million in fiscal 2003.
GROSS PROFIT
Our gross profit does not include fulfillment costs and costs related to the
distribution network which are included in selling, general and
administrative costs, and may not be comparable to those of other entities.
Some entities may classify such costs as a component of cost of sales. Cost
of sales, a component used in determining gross profit, for wholesale and
retail segments includes the cost of products purchased from manufacturers,
less incentives that we receive which are netted against such costs. In the
beverage segment, cost of sales includes the cost of the raw materials and
related factory labor and manufacturing overhead costs required to convert
raw materials into finished goods, including; labor, depreciation and
utilities.
Gross profit decreased 1.0% to $59.6 million for fiscal year 2004 compared to
$60.2 million for the prior fiscal year. Gross profit as a percentage of
sales decreased to 7.2% for the year compared to 7.8% for fiscal 2003. Gross
profit by business segment is as follows (dollars in millions):
Incr/
2004 2003 (Decr)
-------------------------
Wholesale distribution segment $ 46.2 $ 46.6 $ (0.4)
Retail health food stores segment 13.0 13.2 (0.2)
Beverage segment 0.4 0.4 -
-------------------------
$ 59.6 $ 60.2 $ (0.6)
=========================
Gross profit of $5.5 million was generated from our wholesale distribution
business from cigarette price increases implemented during fiscal 2004 in
response to the elimination of vendor program incentive payments that the
Company historically received. Because vendor program incentive payments are
generally received and recognized by the Company in the quarter following the
period in which the related cigarette sales were made, as that is when it is
estimable, gross profit for fiscal 2004 includes both the normal vendor
program incentive payments relating to the fourth quarter 2003 but received
during the first quarter 2004 of approximately $0.8 million, and the amount
earned from the price increases that were implemented to replace vendor
20
program incentive payments. This increase in gross profit was partially
offset by a decrease of $1.3 million in incentive payments received on our
private label cigarettes, a decrease in incentive allowances received from
manufacturers of approximately $5.4 million (net of amounts paid to
customers), a decrease of $0.9 million related to increases in cigarette
excise taxes in certain states in fiscal 2003 and a $1.2 million larger
charge to cost of sales for fiscal 2004 as compared to the fiscal 2003
related to the change in the required LIFO inventory reserve balance. The
remainder of the increase in gross profit of $2.9 million was primarily due
to increased sales in all other products to new customers.
Gross profit from our retail health food segment decreased $0.2 million to
$13.0 million primarily due to the decreased sales discussed above.
Gross profit from our beverage segment was consistent with the prior year.
The increase in sales produced additional gross profit of $0.2 million which
was offset by a decrease of $0.2 million in gross profit from our home and
office bottling and delivery business in Hawaii which was sold in October
2003.
OPERATING EXPENSE
Operating expense includes selling, general and administrative expenses and
depreciation and amortization. Selling, general and administrative expenses
include costs related to our sales, warehouse, delivery and administrative
departments for all segments. Specifically, purchasing and receiving costs,
inspection costs, warehousing costs and cost of picking and loading customer
orders are all classified as selling, general and administrative expenses.
Our most significant expenses relate to employee costs, facility and
equipment leases, transportation costs, insurance and professional fees.
Total operating expense, which includes selling, general and administrative
expenses, depreciation and amortization, and impairment charges increased
7.8%, or $4.1 million, to $56.9 million compared to fiscal 2003. As a
percentage of sales, total operating expenses increased to 6.9% from 6.8% as
compared to the prior year.
Operating expenses in the beverage segment accounted for $3.9 million of the
increase, primarily due to impairment of intangibles of $3.6 million
discussed below and expenses associated with TSI which was acquired in June
2004 and the water bottling operation acquired by HNWC in July 2004.
Operating expense in the beverage segment in fiscal 2003 included $0.4
million associated with writing down nonoperating assets held for sale to
their fair market value. The wholesale distribution segment reduced
operating costs by $0.2 million during fiscal 2004 as compared to fiscal 2003
primarily due to the decrease in the required allowance for bad debt reserve
that is calculated based on historical collection trends. Total operating
expenses in our retail segment increased $0.2 million due to the opening of a
new store in Oklahoma City. These expenses were partially offset by savings
incurred as a result of a reduced emphasis on the deli operations in the
Florida stores. In addition, the Company incurred $0.2 million of rent
expense and professional fees associated with a warehouse formerly used by
the discontinued health food distribution business when the subtenant of the
warehouse defaulted on the rental agreement.
21
As a result of the Company's annual goodwill and intangible asset impairment
review as required by SFAS No. 142 "Goodwill and Other Intangible Assets,"
the Company determined that certain intangible assets in the beverage segment
were impaired by $3.6 million. Due to competitive pressures in the natural
spring water bottling business, operating profits and cash flows were lower
than expected for the year. Based on this trend, future expected cash flows
were revised for this reporting unit and an impairment was recorded and is
included in operating expenses.
As a result of the above, the operating income for fiscal 2004 was $2.7
million, a decrease of $4.7 million as compared to operating income of $7.4
million in fiscal 2003.
INTEREST EXPENSE
Interest expense for fiscal year 2004 decreased 6.0% to $3.0 million compared
to $3.2 million during the prior year. The increase was due primarily to
additional borrowings on the Company's revolving line to support the beverage
bottling operations. The impact of the increased borrowings is somewhat
offset by lower average interest rates in fiscal 2004 as compared to fiscal
2003.
OTHER
Other income for fiscal 2004 of $0.6 million was generated primarily from
gains on sales of available-for-sale securities, as well as, interest income,
dividends and royalty payments. Other income for fiscal 2003 of $0.5 million
was generated primarily from $0.1 million received from a settlement related
to a former distribution facility, $0.3 million from gains on sales of
available-for-sale securities, and $0.1 million in interest on income tax
refunds, as well as, interest income and dividends on investment securities.
The Company's effective income tax rate was 36.4% in fiscal 2004, compared to
38.0% in 2003. The decrease in the effective tax rate was primarily
attributable to an increase in net operating loss carryforwards which
resulted from new IRS guidance issued in December 2003 allowing additional
carryover of net operating losses related to acquired companies.
In fiscal 2004, minority interest net of tax totaled $0.1 million and
represented the allocation of the current years net loss of TSI to the
minority shareholders.
As a result of the above factors, income from continuing operations for
fiscal year 2004 was $0.2 million compared to $2.9 million in prior year.
22
FISCAL YEAR 2003 VERSUS FISCAL YEAR 2002.
- -----------------------------------------
SALES
Sales for fiscal year 2003 decreased 8.9% to $771.8 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 1.1
Intersegment eliminations (0.1)
--------
$ (75.3)
========
Of the total decrease in sales from the wholesale distribution business,
$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 RJ Reynolds' (successor in merger to Brown & Williamson)
brands beginning in the second quarter of 2003. 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 primarily due to loss of several key customers during the year.
Sales from the retail health food segment increased in part due 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.
The beverage segment accounted for $3.4 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 $3.4 million during fiscal 2003.
There were $0.1 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.
23
GROSS PROFIT
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 by business segment is
as follows (dollars in millions):
Incr/
2003 2002 (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 decreased 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 due to a full year of sales
in the current year from HNWC compared to nine months in the prior year.
Gross profit as a percentage of sales increased to 7.8% for the year compared
to 7.3% for fiscal 2002 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.
OPERATING EXPENSE
Total operating expense, which includes selling, general and administrative
expenses, depreciation and amortization, decreased 3.6% or $2.0 million to
$52.8 million compared to fiscal 2002.
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.
24
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 $2.0 million in operating expenses
during fiscal 2003, which was $0.4 million greater than the prior year
primarily due to an impairment charge to write down non-operating assets to
fair market value.
As a percentage of sales, total operating expenses increased to 6.8% 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, operating income for fiscal 2003 increased $0.2
million to $7.4 million, compared to fiscal 2002.
INTEREST EXPENSE
Interest expense for fiscal year 2003 decreased 25.2% to $3.2 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 $1.1 million in the beverage segment.
OTHER
Other income for fiscal year 2003 of $0.5 million was comprised primarily of
interest income on income tax refunds 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. 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 water bottling operation, interest income and dividends
received on available-for-sale securities.
In fiscal 2002 there was $0.1 million of 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 $2.9 million compared to $2.0 million in fiscal 2002.
25
Liquidity and Capital Resources
OVERVIEW
- --------
The Company requires cash to pay its operating expenses, purchase inventory
and make capital investments and acquisitions of businesses. In general, the
Company finances these cash needs from the cash flow generated by its
operating activities, sales of investment securities and from borrowings, as
necessary. During fiscal 2004, the Company used $3.7 million of cash from
operating activities, primarily the result of slower accounts receivable
turns and build up of inventory. These uses of cash were offset by increases
in accounts payable and accrued expenses resulting from extended terms
received on product promotions and vendor payment incentives. Our variability
in cash flows from operating activities is heavily dependent on the timing of
inventory purchases and seasonal fluctuations. For example, in the
circumstance where we are "buying-in" to obtain favorable terms on particular
product or to maintain our LIFO layers, we may have to retain the inventory
for a period longer than the payment terms. This generates cash outflow from
operating activities that we expect to reverse in a later period.
Additionally, during the summer, which is our busiest time of the year, we
generally carry larger inventory back stock to ensure high fill rates to
maintain customer satisfaction. Our inventory levels are usually at their
highest levels in the third and fourth fiscal quarters but at any given month
can vary based on the day of the week that month end occurs. We generally
experience reductions in inventory levels during the first fiscal quarter, as
compared to year end, and maintain these levels until the beginning of the
third fiscal quarter when we begin building for increased summer business.
Cash of $4.5 million was utilized during fiscal 2004 for capital expenditures
and the Company's acquisition of certain business and operating assets from
Trinity Springs, Ltd. and Nesco Hawaii. These expenditures were partially
offset by the sales of certain fixed assets and available-for-sale securities
which generated a net cash inflow during the year of $0.7 million.
The Company generated net cash of $7.3 million from financing activities
primarily from borrowings of $6.8 million on bank credit agreements and the
private placement of $2.5 million of Series A Convertible Preferred Stock.
Cash of $1.5 million was used in financing activities to pay down long-term
debt and subordinated debt during the period and $0.5 million was used to pay
dividends on common and preferred stock and retire fractional shares of
common stock resulting from a one-for-six reverse stock split in May 2004.
As of September 2004, the Company had cash on hand of $0.4 million and
negative working capital (current assets less current liabilities) of $11.9
million. This compares to cash on hand of $0.7 million and negative working
capital of $8.0 million as of September 2003. The Company's working capital
is significantly impacted by the classification of the revolving credit
facility as a short-term obligation. The amounts on the revolving credit
facility classified as current were $44.8 million and $38.0 million at
September 2004, and September 2003, respectively. The Company expects that
the revolving credit facility will be reduced through net payments on the
revolver of approximately $5.0 million over the next year and that working
capital would be increased by the incremental difference.
26
The Company's ratio of debt to equity increased to 5.37 at September 2004
compared to 3.40 in September 2003. For purposes of this calculation, Series
A Preferred Stock and other long-term liabilities (the water royalty) are
excluded. For the first six months of 2004 the Company was paying down the
outstanding balance on the Facility. Subsequently, the Company increased
borrowing on the Facility to fund the beverage operations and used a
combination of cash raised from the issuance of preferred stock discussed
above and other debt to fund the acquisition of the business and operating
assets of Trinity Springs, Ltd. and Nesco Hawaii.
The Company's maximum revolving credit limit on it credit facility was $55.0
million at September 2004, however, the amount available for use at any given
time is subject to many factors including eligible accounts receivable and
inventory balances that are evaluated on a daily basis. As of September
2004, the balance on the facility was $44.8 million and availability on the
revolver was $9.3 million, based on our collateral and the loan limits.
During the year ended September 2004 our peak borrowing was $49.5 million and
our average borrowing was $36.9 million. Our availability to borrow under
the credit facility generally decreases as inventory and accounts receivable
levels go up because of the borrowing limitations that are placed on the
collateralized assets.
The Company believes that funds generated from operations, supplemented as
necessary with funds available under the credit facility, will provide
sufficient liquidity for the operation of its wholesale distribution and
retail segments for the next twelve months. Management is presently
negotiating with LaSalle Bank to bring Trinity Springs, Inc. into the
Company's revolving credit facility and with investors to privately place
debt or equity to provide additional funding for the beverage operations.
Although management is optimistic that such financing will be committed, the
ultimate outcome of this financing is not certain at this time.
DIVIDEND PAYMENTS
- -----------------
During fiscal year 2004, the Board of Directors declared cash dividends of
$0.18 per share per quarter or $0.72 per common share for the year. The
Company's revolving credit facility provides that the Company may not pay
dividends in excess of $0.72 per common share on an annual basis. The
Company is implementing a strategy to invest its cash resources into growth-
oriented businesses and has therefore determined to suspend the payment of
cash dividends on common stock for the foreseeable future. The Company will
periodically revisit its dividend policy to determine whether it has adequate
internally generated funds, together with other needed financing to fund its
growth and operations in order to resume the payment of cash dividends on
common stock.
CONTRACTUAL OBLIGATIONS
- -----------------------
The following table summarizes our outstanding contractual obligations and
commitments as of fiscal year end 2004:
27
<Caption>
Payments Due By Period
---------------------------------------------------------------------
Contractual Fiscal Fiscal Fiscal Fiscal Fiscal
Obligations Total 2005 2006 2007 2008 2009 Thereafter
- ---------------------- ---------------------------------------------------------------------
Long-term debt/1/, /2/ $ 61,473 $ 11,409 $ 12,005 $ 35,974 $ 282 $ 1,803 $ -
Subordinated debt/2/ 7,876 7,876 - - - - -
Interest on long-term
and subordinated
debt/3/ 6,969 2,936 2,449 1,212 98 274 -
Operating leases 20,454 5,383 4,489 2,712 1,963 1,505 4,402
Minimum water royalty/4/ 4,165 206 288 288 288 288 2,807
---------------------------------------------------------------------
Total $100,937 $ 27,810 $ 19,231 $ 40,186 $ 2,631 $ 3,870 $ 7,209
=====================================================================
Other Commercial Fiscal Fiscal Fiscal Fiscal Fiscal
Commitments Total 2005 2006 2007 2008 2009 Thereafter
- ---------------------- ---------------------------------------------------------------------
Lines of credit/2/ $ 59,750 $ 59,750 $ - $ - $ - $ - $ -
Lines of credit in use (49,548) (49,548) - - - - -
---------------------------------------------------------------------
Lines of credit
available 10,202 10,202 - - - - -
Water source guarantee 5,000 - - - - - 5,000
Letters of credit 837 837 - - - - -
---------------------------------------------------------------------
Total $ 16,039 $ 11,039 $ - $ - $ - $ - $ 5,000
=====================================================================
/1/ Includes capital leases of $1.4 million and amounts borrowed on the
Company's revolving credit facility allocated to discontinued operations of
$3.7 million.
/2/ In October 2004, the Company's revolving credit facility was amended
to increase the total facility to $60.0 million and add the subsidiaries,
except for Trinity Springs, Inc., as borrowers. The new facility includes
$5.0 million of term debt that was used, in addition to the proceeds from
issuance of $2.0 million of Series B Convertible Preferred Stock to retire
$6.8 million of subordinated debt.
/3/ Represents estimated interest payments on long-term debt, including
capital leases and subordinated debt. Certain obligations contain variable
interest rates. For illustrative purposes, the Company has projected future
interest payments assuming that interest rates will remain unchanged and
additionally, that the outstanding revolving credit facility balance will be
reduced by $5.0 million in Fiscal 2005 and 2006 with the remaining principal
falling due when the agreement expires in April 2007
/4/ Fiscal 2005 - 2009 represent the annual minimum water royalty and
the balance thereafter represents the minimum water royalty in perpetuity.
Both amounts are representative of the present value of the obligation
reflected in our balance sheet together with the imputed interest portions of
required payments.
28
CREDIT AGREEMENT
- ----------------
The Company's primary source of borrowing for liquidity purposes is its
revolving credit facility with LaSalle Bank (the "Facility"). As of
September 2004, the outstanding balance on the Facility was $44.8 million.
In October 2004, the Facility was amended to add $5.0 million of term debt to
the total borrowing limit, which increased the limit from $55.0 million to
$60.0 million, and to add the subsidiaries, except Trinity Springs, Inc., as
borrowers. The revolving portion of the Facility bears interest at a
variable rate equal to the bank's base rate, which was 4.75% at September
2004. In addition, the Company may select a rate equal to LIBOR plus 2.50%,
for an amount of the Facility up to $15.0 million. The $5.0 million term
debt bears interest at the bank's base rate plus 2.00% and is required to be
repaid in eighteen monthly installments of $0.3 million beginning March 2005.
The amended Facility continues to restrict borrowing for intercompany
advances to certain subsidiaries. The Company hedges its variable rate risk
on $15.0 million of its borrowings under the Facility by use of interest rate
swap agreements. These swap agreements have the effect of converting the
interest on this amount of debt to fixed rates ranging between 4.38% and
4.87% per annum. As discussed in Note 19, the Facility was amended in
October 2004 and extended to April 30, 2007.
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 the Company's equipment, intangibles,
inventories, and accounts receivable, except those held by Trinity Springs,
Inc. The amended Facility expires in April 2007.
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 certain subsidiaries, (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 fixed charge ratio of 0.8 to 1.0,
and a minimum tangible net worth of $3.0 million for fiscal 2005. The
Facility also provides that the Company may not pay dividends on its common
stock in excess of $0.72 per share on an annual basis. The Company was in
compliance with its debt covenants at September 2004.
PREFERRED STOCK
- ---------------
In June 2004 the Company completed a $2.5 million private placement of Series
A Convertible Preferred Stock representing 100,000 shares at $25 per share,
the proceeds of which were primarily used to fund the acquisition of the
business and operating assets of Trinity Springs, Ltd.
29
SUBORDINATED RETAIL DEBT
- ------------------------
In September 2004, the holders of $6.8 million of subordinated debt related
to the acquisition of Health Food Associates, Inc. in September 1999, agreed
to extend the due date of the debt to October 2004, at which time the Company
completed the private placement of $2.0 million of Series B Convertible
Preferred Stock and restructuring of the Facility to provide the funds to pay
off the subordinated debt. The excess funds from the preferred stock
offering that were not used to pay the subordinated debt of approximately
$0.2 million were used to fund the beverage operations. However, the
Company's beverage segment is still expected to require additional funding
through fiscal 2005 and the Company's ability to fund those operations is
limited by the Facility.
The Company had borrowings of $4.8 million under an 8% Collateralized
Promissory Note (the "Collateralized Promissory Note")and $2.0 million under
a Convertible Subordinated Note (the "Convertible Note"), which were due in
September 2004. However, the terms were extended until October 2004 at which
time they were paid in full.
REAL ESTATE TERM DEBT
- ---------------------
In December 2004, the Company purchased a distribution facility in Rapid
City, South Dakota and began construction of an addition to the building.
The lease on the current Rapid City building was extended to coincide with
the completion of construction in the second quarter of fiscal 2005. The
Company expects capital expenditures relating to the building, construction
of the addition and related equipment purchases to be approximately $1.8
million. The Company has arranged permanent financing for the building and
equipment in an amount equal to 80% of the acquisition cost or approximately
$1.4 million. The remainder of the capital expenditures related to the
building and the building addition will be provided from the Facility.
TSI REVOLVING DEBT
- ------------------
In December 2004, a director of the Company extended a revolving credit
facility to Trinity Springs, Inc., ("Trinity") in a principal amount of up to
$1.0 million at an interest rate of 8% per annum with an initial advance of
$0.5 million. To induce the director to extend this loan to Trinity, the
Company agreed to allow the director to receive a second mortgage on
Trinity's real property on an equal basis with the Company's existing second
mortgage on Trinity's real property.
BANK DEBT
- ---------
The Company's $2.8 million and $2.0 million credit facilities with a bank
which were used to fund operating activities of our beverage segment were
eliminated in October 2004 as they were brought into the Company's revolving
credit facility as part of the debt restructuring transaction.
QUINCY ACQUISITION DEBT
- -----------------------
The Company borrowed $6.9 million from a bank, at a fixed rate of 7.5%, to
purchase the distribution facility in Quincy, IL in June 2001, referred to
herein as the Real Estate Loan, and to retire term debt. The Real Estate
30
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 2004, the outstanding balance on
the Real Estate Loan was approximately $6.4 million.
The acquisition of a distribution business in Quincy, IL in 2001 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
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 2004, the outstanding obligation to the seller was approximately
$1.0 million.
TSI ACQUISITION DEBT
- --------------------
In connection with the acquisition of TSI, the Company financed the
acquisition in part through notes to the former owners totaling approximately
$3.3 million. The Company borrowed $2.8 million at a fixed rate of 5.0%,
payable in monthly installments over a 5 year period with the remainder due
on June 1, 2009. As of September 2004, the outstanding balance was
approximately $2.8 million. In addition, the Company borrowed $0.5 million
at a fixed rate of 5.0% with interest due quarterly commencing in September
2004. The principal, along with unpaid interest, is due in June 2007. As of
September 2004 the outstanding balance was approximately $0.5 million. The
Company also assumed a note from the former owners totaling $0.1 million that
has a fixed rate of 5.0% and is payable in annual installments through June
2007. As of September 2004, the outstanding balance was approximately $0.1
million. The notes are collateralized by substantially all of TSI's assets.
The Company has also recorded a $2.8 million liability for the present value
of the future minimum water royalty payment and the related brokers fees,
utilizing a 6.6% after-tax effective interest rate, to be paid in perpetuity
to the seller.
NESCO ACQUISITION DEBT
- ----------------------
In connection with the acquisition of Nesco Hawaii by HNWC in July 2004, HNWC
issued $0.7 million of notes to the sellers at a fixed rate of 5.0% and
payable in two installments. The first payment is due in December 2004 and
the balance due in March 2005. As of September 2004, the outstanding balance
was approximately $0.7 million.
OTHER
- -----
The Company has several capital leases for office, warehouse and water
bottling equipment. As of September 2004, the outstanding balances on the
capital leases totaled approximately $1.4 million.
AMCON has issued a letter of credit in the amount of approximately $0.8
million to its workers compensation insurance carrier as part of its self-
insured loss control program.
31
CROSS DEFAULT AND CO-TERMINUS PROVISIONS
- ----------------------------------------
The Company's owned real estate in Bismarck, ND and Quincy, IL are financed
through term loans with Gold Bank (the "Gold Bank Loans"), who is also a
participant lender on the Company's revolving line of credit. The Gold Bank
Loans contain cross default provisions which cause all loans with Gold Bank
to be considered in default if any one of the loans where Gold Bank is a
lender, including the revolving credit facility if it is in default. In
addition, the Gold Bank Loans contain co-terminus provisions which require
all loans with Gold Bank to be paid in full if any of the loans are paid in
full prior to the end of their specified terms.
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.
Acquisitions and Dispositions of Businesses
HAWAIIAN NATURAL WATER COMPANY
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
62,260 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.
TRINITY SPRINGS, INC.
On June 17, 2004, a newly formed subsidiary of AMCON, TSL Acquisition Corp.
(which subsequently changed its name to Trinity Springs, Inc.) acquired the
tradename, water source, customer list and substantially all of the operating
assets of Trinity Springs, Ltd. (which subsequently changed its name to
Crystal Paradise Holdings, Inc.). The Seller was headquartered in Sun
Valley/Ketchum, Idaho, and once bottled and sold a geothermal bottled water
and a natural mineral supplement.
The total purchase price of $8.8 million was paid through a combination of
$2.3 million in cash, $3.3 million in notes which were issued by Trinity
Springs, Inc. (TSI) and guaranteed by AMCON; the assumption of approximately
$0.2 million of liabilities and the issuance of TSI common stock representing
15% ownership of TSI which had an estimated fair value of $0.2 million. The
TSI common stock is convertible into 16,666 shares of AMCON common stock at
the option of the Seller. Additionally, the conversion option had an
estimated fair value of $0.2 million. Included in the $2.3 million paid in
cash are transaction costs totaling approximately $0.8 million that were
incurred to complete the acquisition and consists primarily of fees and
expenses for attorneys and investment bankers. In addition, TSI will pay an
annual water royalty to the Seller, in perpetuity, in an amount equal to the
greater of $0.03 per liter of water extracted from the source or 4% of water
32
revenues (as defined by the purchase agreement) which is guaranteed by AMCON
up to a maximum of $5 million, subject to a floor of $206,400 for the first
year and $288,000 annually thereafter. The Company has recorded a $2.8
million liability for the present value of future minimum water royalty
payments and related brokers fees to be paid in perpetuity. The discount
rate utilized by the Company to determine the present value of the future
minimum water royalty was based on a weighted average cost of capital which
incorporated the Company's equity discount rate, dividend rate on the Series
A Convertible Preferred Stock and the Company's average borrowing rate for
all outstanding debt.
The promissory notes referred to above and the water royalty are secured by a
first priority security and mortgage on the acquired assets, other than
inventory and accounts receivable. The Seller retains the right to receive
any water royalty payment for the first five years in shares of AMCON common
stock up to a maximum of 41,666 shares. The water royalty can be cancelled
after ten years have elapsed following the closing of the sale of assets of
TSI, or if the business of TSI is sold to an unaffiliated third party, in
which case the Seller would be entitled to receive the appraised fair market
value of the water royalty but not less than $5 million. The Company's
Chairman has in turn guaranteed AMCON for these payments as well as the
promissory notes referred to above.
The acquisition 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
portion of the purchase price in excess of the estimated fair value of the
net assets acquired to be allocated to identifiable intangible assets is
approximately $5.5 million.
The initial purchase price allocation performed in the third quarter of
fiscal 2004 was based on management's internal preliminary allocation and
resulted in an estimated purchase price of approximately $11.1 million, with
approximately $7.8 million of the purchase price being allocated to
intangible assets, including customer list, the Trinity tradename and the
water source. Subsequently, the Company engaged an independent valuation
firm to further analyze the transaction and based on preliminary input from
the independent valuation firm, the amount of purchase price was reduced from
$11.1 million to $8.8 million based on reassessment of the future water
royalty obligation and related brokers fees and the weighted average cost of
capital rate applied to the payment stream in perpetuity. Accordingly, the
amount allocated to intangible assets was also reduced from $7.8 million to
$5.5 million. At this stage, the purchase price allocation remains
preliminary and is subject to completion of an independent appraisal. The
Company has engaged an independent valuation firm to value the intangible
assets and it is expected that a final report will be completed by the end of
the second quarter, at which time any differences between the preliminary
purchase price allocation will be recorded.
The Company has determined that it has acquired a unique water source as part
of the transaction which represents an intangible asset and the Company has
assigned a preliminary value of $2.8 million to this intangible asset.
Additionally, the Company has acquired the Trinity tradename and has assigned
a preliminary value of $2.3 million to this intangible asset. Upon
completion of the independent valuation, the amount assigned to the water
33
source and/or the Trinity tradename could be different and any residual
amount would then be assigned to goodwill. Since both the water source and
the Trinity tradename have indefinite lives, as does any goodwill, the assets
are not amortized. Therefore, any change resulting from completion of the
independent valuation in the allocation of purchase price from water source
or tradename to goodwill would not have any impact on operating income.
Additionally, the Company has assigned a preliminary value of $0.4 million to
a customer list which will be amortized over a five year period.
NESCO HAWAII
On July 1, 2004, the Company's water bottling subsidiary in Hawaii entered
into an agreement to acquire certain water bottling assets and liabilities
from a water bottling company in Hawaii (Nesco Hawaii) for $0.5 million in
cash, and $0.7 million in notes and the assumption of $0.1 million of
liabilities. The acquisition 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 portion of the purchase price in excess of the estimated fair value of
the net assets acquired to be allocated to identifiable intangible assets is
approximately $0.7 million. The identifiable intangible assets consists of
tradenames and a customer list. The tradenames have indefinite lives and
therefore are not amortized. The customer list of $0.2 million is amortized
over a five year period. The remaining portion of the excess purchase price
allocated to goodwill was $0.4 million.
DISPOSITIONS
In March 2005, the Company discontinued the operations of its beverage
marketing and distribution business. As a result, the balance sheets as of
September 24, 2004 and September 26, 2003 and the statements of operations
and statements of cash flows for the fiscal years ended September 24, 2004
and September 26, 2003 have been prepared reflecting this disposition as
discontinued operations in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets." The beverage marketing and distribution business was
started in fiscal 2003, so there is no change to the fiscal 2002 amounts.
Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate risk on its variable rate debt. At
September 2004, we had $34.5 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 3.60% to 6.75% at September 2004. During most of
fiscal 2003 and all of fiscal 2004 the Company had the option of selecting an
interest rate based on our lender's base interest rate or based on LIBOR.
This provides management with some control of our variable interest rate
risk. 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. As discussed in Note 19
to the consolidated financial statements, the LIBOR interest rate borrowing
option was removed as part of the revolving credit facility restructuring in
October 2004.
34
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.
35
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 registered
public accounting firm, has conducted an audit of our consolidated financial
statements as of and for the fiscal years ended September 24, 2004, September
26, 2003 and September 27, 2002.
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's financial
statements is properly reported. The accompanying financial statements have
been restated to properly classify preferred stock issued in fiscal 2004 as
mezzanine equity, to classify the Company's revolving credit facility as
current debt and to correct the classification of the provision for
nonoperating asset impairment which was originally reported as a component of
"Other income, net" for the year ended September 26, 2003 to operating
expenses under the title "Impairment charges" as discussed in Note 22. As a
result of the restatement of these financial statements, management has
determined that these disclosure controls and procedures were ineffective as
of September 24, 2004 and that a material weakness existed in the disclosure
controls and procedures with respect to the application of accounting
guidance relating to the Company's recent financing transactions as of such
date. The Company has enhanced the training of our accounting staff and
requires periodic review of a wider variety of technical accounting
literature to obtain a reasonable level of assurance that all appropriate
accounting guidance is applied to the classification of debt and equity
instruments which we believe corrected this material weakness.
The Company also 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. These
control systems are evaluated annually by the Company and were determined to
be effective as of September 24, 2004, at the reasonable level of assurance.
William F. Wright Kathleen M. Evans Michael D. James
Chairman President Secretary, Treasurer
and Chief Financial Officer
August 19, 2005
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of AMCON Distributing Company:
We have audited the accompanying consolidated balance sheets of AMCON
Distributing Company and subsidiaries (the "Company") as of September 24,
2004 and September 26, 2003, and the related consolidated statements of
operations, shareholders' equity and comprehensive income (loss) and cash
flows for each of the three fiscal years in the period ended September 24,
2004. 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 standards of the Public Company
Accounting Oversight Board (United States). 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
subsidiaries as of September 24, 2004 and September 26, 2003, and the results
of their operations and their cash flows for each of the three fiscal years
in the period ended September 24, 2004 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.
As discussed in Note 22, the accompanying consolidated financial statements
have been restated.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
January 7, 2005 (August 19, 2005, as to the effects of the subsequent event
discussed in Note 19 and as to the effects of the restatements discussed in
Note 22)
F-1
<Caption>
CONSOLIDATED BALANCE SHEETS
AMCON Distributing Company and Subsidiaries
- --------------------------------------------------------------------------------------------------
Fiscal Year End September 2004 2003
(As restated (As restated
-see Note 22) -see Note 22
- --------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 416,073 $ 668,073
Accounts receivable, less allowance
for doubtful accounts of $0.6 million
and $0.8 million in 2004 and 2003, respectively 29,109,826 27,871,362
Available-for-sale investments - 512,694
Inventories 35,088,568 31,019,047
Income tax receivable 1,162,625 -
Deferred income taxes 2,548,391 1,568,476
Current assets of discontinued operations 1,941,952 1,780,061
Other 635,839 570,660
------------------------------
Total current assets 70,903,274 63,990,373
Fixed assets, net 19,951,664 16,845,405
Non-current assets of discontinued operation 143,670 113,460
Goodwill 6,449,741 6,091,397
Other intangible assets 13,271,211 11,420,542
Other assets 1,010,303 1,038,253
------------------------------
$ 111,729,863 $ 99,499,430
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,180,649 $ 14,556,959
Accrued expenses 3,800,506 3,295,977
Accrued wages, salaries, bonuses 1,365,837 1,422,684
Income tax payable - 540,414
Current liabilities of discontinued operations 2,166,414 1,946,968
Revolving credit facility 44,809,814 37,981,281
Current portion of long-term debt 5,574,397 4,513,330
Current portion of subordinated debt 7,876,219 7,762,666
------------------------------
Total current liabilities 82,773,836 72,020,279
Deferred income taxes 593,018 1,367,367
Noncurrent liabilities of discontinued operations 3,603 166,754
Other long-term liabilities 2,807,000 -
Long-term debt, less current portion 10,250,154 7,667,413
Subordinated debt, less current portion - 976,220
Minority interest 97,100 -
Series A cumulative, convertible preferred stock, $.01 par value
100,000 authorized and issued, liquidation preference
$25.00 per share 2,438,355 -
Commitments and contingencies (Note 17)
Shareholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, none outstanding - -
Common stock, $.01 par value, 15,000,000 shares authorized,
527,062 and 528,159 issued in 2004 and 2003, respectively 5,271 31,690
Additional paid-in capital 6,218,476 5,997,977
Accumulated other comprehensive income, net of tax
of $0.1 million in 2004 and 2003, respectively 59,900 220,732
Retained earnings 6,483,150 11,050,998
------------------------------
12,766,797 17,301,397
------------------------------
$ 111,729,863 $ 99,499,430
==============================
The accompanying notes are an integral part of these consolidated financial
statements
F-2
<Caption>
CONSOLIDATED STATEMENTS OF OPERATIONS
AMCON Distributing Company and Subsidiaries
- ---------------------------------------------------------------------------------------------
Fiscal Years Ended September 2004 2003 2002
(As restated
- see Note 22)
- ---------------------------------------------------------------------------------------------
Sales (including excise taxes of $191.6 million,
$172.2 million and $166.5 million in 2004, 2003
and 2002, respectively) $ 821,765,589 $ 771,793,256 $ 847,116,997
Cost of sales 762,202,743 711,613,810 785,192,882
-------------------------------------------
Gross profit 59,562,846 60,179,446 61,924,115
-------------------------------------------
Selling, general and administrative expenses 50,992,469 50,136,766 51,610,419
Depreciation and amortization 2,338,277 2,276,702 3,163,549
Impairment charges 3,578,255 399,435 -
-------------------------------------------
56,909,001 52,812,903 54,773,968
-------------------------------------------
Operating income 2,653,845 7,366,543 7,150,147
Other expense (income):
Interest expense 3,001,525 3,194,239 4,272,783
Other income, net (576,539) (490,469) (505,712)
-------------------------------------------
2,424,986 2,703,770 3,767,071
Income from continuing operations
before income taxes 228,859 4,662,773 3,383,076
Income tax expense 147,000 1,771,000 1,316,000
Equity in loss of unconsolidated affiliate,
net of tax - - 95,007
Minority interest, net of tax (91,000) - -
-------------------------------------------
Income from continuing operations 172,859 2,891,773 1,972,069
Loss from discontinued operations, net of
income tax benefit of $2.6 million and $1.1
million, respectively (4,311,406) (1,865,300) -
Preferred stock dividend requirements (49,474) - -
-------------------------------------------
Net (loss) income available to
common shareholders $ (4,188,021) $ 1,026,473 $ 1,972,069
===========================================
Basic (loss) earnings per share
available to common shareholders:
Continuing operations $ 0.23 $ 5.48 $ 3.90
Discontinued operations (8.17) (3.53) -
-------------------------------------------
Net basis (loss) earnings per share $ (7.94) $ 1.95 $ 3.90
===========================================
Diluted (loss) earnings per share
available to common shareholders:
Continuing operations $ 0.32 $ 5.38 $ 3.81
Discontinued operations (7.99) (3.47) -
-------------------------------------------
Net basis (loss) earnings per share $ (7.67) $ 1.91 $ 3.81
===========================================
Weighted average shares outstanding:
Basic 527,774 527,699 505,414
Diluted 539,648 537,042 518,197
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<Caption>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS) (AS RESTATED)
AMCON Distributing Company and Subsidiaries
- ----------------------------------------------------------------------------------------------------------
Additional
Paid in Accumulated
Common Stock Capital Other
----------------- Common Comprehensive Retained
Shares Amount Stock Income Earnings Total
- ----------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 28, 2001 456,531 $ 27,392 $ 4,125,127 $ 404,362 $ 8,806,078 $13,362,959
Exercise of options 7,369 442 126,383 - - 126,825
Issuance of common stock from
acquisition 62,260 3,736 1,726,133 - - 1,729,869
Dividends on common stock - - - - (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 526,160 31,570 5,977,643 294,771 10,395,324 16,699,308
Exercise of options 2,000 120 20,370 - - 20,490
Retirement of common stock (1) - (36) - - (36)
Dividends on common stock - - - - (370,799) (370,799)
Net income - - - - 1,026,473 1,026,473
Change in fair value of
interest rate swap, net
of tax of $0.04 million - - - (65,995) - (65,995)
Unrealized loss on investments
available-for-sale, net of
tax of $0.0 million - - - (8,044) - (8,044)
-----------
Total comprehensive income 952,434
--------------------------------------------------------------------------
BALANCE, SEPTEMBER 26, 2003 528,159 31,690 5,997,977 220,732 11,050,998 17,301,397
Exercise of options 33 2 520 - - 522
Options issued in connection
with TSI acquisition - - 219,886 - - 219,886
Reverse stock split (1,130) (26,421) 93 - - (26,328)
Dividends on common stock - - - - (379,827) (379,827)
Dividends on preferred stock - - - - (49,474) (49,474)
Net loss - - - - (4,138,547) (4,138,547)
Change in fair value of
interest rate swap, net of
tax of $0.1 million - - - 123,257 - 123,257
Unrealized loss on investments
available-for-sale, net of
tax of $0.2 million - - - (284,089) - (284,089)
-----------
Total comprehensive loss (4,348,853)
--------------------------------------------------------------------------
Balance, September 24, 2004 527,062 $ 5,271 $6,218,476 $ 59,900 $ 6,483,150 $12,766,797
==========================================================================
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<Caption>
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMCON Distributing Company and Subsidiaries
- ----------------------------------------------------------------------------------------------------------
Fiscal Years 2004 2003 2002
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations
available to common shareholders $ 123,385 $ 2,891,773 $ 1,972,069
Preferred stock dividend requirements 49,474 - -
----------- ----------- -----------
Income from continuing operations 172,859 2,891,773 1,972,069
Adjustments to reconcile income from continuing operations
to net cash flows from operating activities:
Depreciation 2,195,743 2,128,408 2,169,934
Amortization 295,339 383,744 1,283,334
Impairment charges 3,578,255 - -
(Gain) loss on sale of fixed assets (7,773) 58,739 194,678
(Gain) loss on sale of assets held for sale 1,475 - -
(Gain) loss on sale of securities (507,418) (266,690) (257,521)
Equity in loss of unconsolidated affiliate - - 95,007
Deferred income taxes (1,754,264) (660,306) 1,368,445
Provision for losses on doubtful accounts,
inventory obsolescence and assets held for sale 22,912 675,828 45,681
Minority interest (91,000) - -
Changes in assets and liabilities,
net of effect of acquisitions:
Accounts receivable (1,046,449) 3,151,279 768,582
Inventories (3,704,957) 4,674,992 (5,710,095)
Other current assets 129,691 (177,294) (29,514)
Other assets 186,999 (137,619) 147,490
Accounts payable 2,623,690 (5,316,892) 2,506,111
Accrued expenses and accrued wages, salaries and bonuses 206,012 (620,198) (1,094,380)
Income taxes payable and receivable (1,703,039) 1,521,468 769,087
----------- ----------- -----------
Net cash flows from operating activities
- continuing operations 598,075 8,307,232 4,228,908
Net cash flows from operating activities
- discontinued operations (4,260,491) (2,770,744) (2,084,866)
----------- ----------- -----------
Net cash flows from operating activities (3,662,416) 5,536,488 2,144,042
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (1,700,773) (3,114,595) (2,680,214)
Acquisitions, net of cash acquired (2,774,280) - (95,321)
Proceeds from sales of fixed assets and intangibles 105,497 129,994 93,082
Proceeds from sales of available-for-sale securities 561,910 303,018 303,911
----------- ----------- -----------
Net cash flows from investing activities
- continuing operations (3,807,646) (2,681,583) (2,378,542)
Net cash flows from investing activities
- discontinued operations (83,232) (114,116) -
----------- ----------- -----------
Net cash flows from investing activities (3,890,878) (2,795,699) (2,378,542)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings of long-term debt - 919,864 -
Net (payments) proceeds on bank credit agreements 6,828,533 (1,379,372) 3,827,287
Payments on long-term and subordinated debt (1,508,361) (2,233,519) (3,163,994)
Net proceeds from preferred stock offering 2,438,355 - -
Dividends paid on common stock (379,827) (370,799) (382,823)
Dividends paid on preferred stock (49,474) - -
Retirement of common stock (26,328) - -
Purchase of treasury stock - (36) -
Proceeds from exercise of stock options 522 20,490 126,825
Payment of registration costs - - (339,644)
----------- ----------- -----------
Net cash flows from financing activities
- continuing operations 7,303,420 (3,043,372) 67,651
Net cash flows from financing activities
- discontinued operations (2,126) 840,565 -
----------- ----------- -----------
Net cash flow from financing activities 7,301,294 (2,202,807) (166,849)
----------- ----------- -----------
Net change in cash (252,000) 537,982 (166,849)
Cash, beginning of year 668,073 130,091 296,940
----------- ----------- -----------
Cash, end of year $ 416,073 $ 668,073 $ 130,091
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 3,632,384 $ 4,244,482 $ 5,029,754
Cash paid during the year for income taxes 1,253,768 454,110 187,815
Supplemental disclosure of non-cash information:
Acquisition of equipment through capital leases $ 125,840 $ - $ -
Business combinations:
Fair value of assets acquired 10,307,042 - 5,972,598
Subordinated debt assumed and
notes payable issued 4,028,440 - 457,905
Present value of future water
royalty payments 2,807,000 - -
Other liabilities assumed 289,336 - 1,508,435
Issuance of common stock, stock options
and minority interest 407,986 - 2,069,511
Conversion of notes receivable and
acquisition costs - - 692,058
</Table>
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:
As more fully described in Note 22, the Company has restated its September
2004 Balance Sheet, Statement of Operations and Statement of Shareholders'
Equity in the accompanying consolidated financial statements to correct a
classification error related to the Series A Preferred Stock, its revolving
credit facility and classification of a nonoperating asset impairment charge
originally recorded in "Other income, net." In addition, as described in
Note 19, the operations of the beverage marketing and distribution business
were discontinued in March 2005 and accordingly have been reflected as
discontinued operations in these financial statements.
(a) Company Operations:
AMCON is primarily engaged in the wholesale distribution of consumer products
in the Great Plains 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 geothermal water and natural mineral
supplement bottler in Idaho.
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 six retail health food stores in Florida under the name
Chamberlin's Market & Cafe (Chamberlin's) and seven in the Midwest under the
name Akin's Natural Foods Market (Akin's). 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 Trinity Springs, Inc.
("TSI"). HNWC bottles natural spring water from an exclusive source located
on the Big Island of Hawaii and bottles purified drinking water on the island
of Oahu. HNWC currently markets its products primarily in the State of
Hawaii, but has expanded marketing to the mainland United States and certain
international markets. TSI bottles geothermal water and a natural mineral
supplement, and distributes HNWC water products and other premium beverages
that are currently sold primarily in health food stores.
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, competing retail stores opening in
close proximity to the Company's retail stores and intense competition in the
bottled water industry. While the Company sells a diversified product line,
it remains dependent upon cigarette sales which represented approximately 73%
F-6
of its revenue and 33% of its gross profit in fiscal 2004 compared to 73% of
its revenue and 37% of its gross profit in fiscal 2003 and 76% of its revenue
and 39% of its gross profit in fiscal 2002. However, the Company did not
generate significant profits from sales of its private label cigarettes in
2004 and does not expect significant profits from sales of private label
cigarettes in 2005. 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.
(b) Accounting Period:
AMCON maintains a 52-53 week fiscal year which ends on the last Friday in
September. The actual years ended September 24, 2004, September 26, 2003
and September 27, 2002. Fiscal 2004, 2003 and 2002 were comprised of 52
weeks. Years cited herein refer to AMCON's fiscal years.
(c) Principles of Consolidation:
The consolidated financial statements include the accounts of AMCON and its
wholly-owned subsidiaries. As a result of its 85% ownership in TSI, the
Company has included the operating results of TSI in the accompanying
consolidated financial statements since the date of acquisition (June 17,
2004) and has presented the 15% non-owned interest in this subsidiary as a
minority interest. 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.
(d) 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 $7.1 million and $4.8 million at fiscal year end 2004 and
2003, 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 11). These
outstanding checks (book overdrafts) are classified as cash flows from
operating activities in the Consolidated Statements of Cash Flows.
(e) 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.
(f) 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.
F-7
(g) Inventories:
Inventories consisted of the following at September 2004 and 2003 (in
millions):
September September
2004 2003
--------- ---------
Finished Goods $ 38.2 $ 34.4
Raw Materials 0.9 0.3
LIFO Reserve (4.0) (3.7)
--------- ---------
$ 35.1 $ 31.0
========= =========
The wholesale distribution and retail health food segment inventories consist
of finished products purchased in bulk quantities to be redistributed to the
Company's customers or sold at retail. The wholesale distribution
operation's inventories are stated at the lower of cost (last-in, first-out
or "LIFO" method) or market and consists of the costs of finished goods. The
retail health food operation utilizes the retail inventory method of
accounting stated at the lower of cost (LIFO) or market and consists of
finished goods. The beverage operation's inventories are stated at the lower
of cost (LIFO) or market and consist of raw materials and finished goods.
The beverage operation's finished goods inventory includes raw materials,
related plant labor and manufacturing overhead costs required to convert raw
materials to finished goods. Raw materials inventory consists of pre-forms
used to make bottles, caps, labels and various packaging and shipping
materials. The LIFO reserve at September 2004 and 2003 represents the amount
by which LIFO inventories were less than the amount of such inventories
valued on a first-in, first-out basis. The liquidation of certain LIFO
layers decreased cost of goods sold by $0.1 million and $1.5 million during
fiscal 2004 and 2003, respectively. An allowance for obsolete inventory is
maintained in the retail health food and beverage segments to reflect the
expected unsaleable or non-refundable inventory based on evaluation of slow
moving products and discontinued products.
(h) 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 40
Warehouse equipment 5 - 7
Furniture, fixtures and
leasehold improvements 5 - 18
Vehicles 5
F-8
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.
(i) 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. During fiscal
2004 no such impairment under SFAS No. 144 was recorded.
(j) 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, water source, customer lists, 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 SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 requires the use of a nonamortization
approach to account for purchased goodwill and intangible assets having
indefinite useful lives. 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. Subsequent to the third fiscal quarter of each year, the Company
engages an external consulting firm to assist them in performing this
valuation. If the recorded value of goodwill and intangible assets having
indefinite useful lives is determined to exceed their fair value, the asset
is written down to fair value and a charge taken against results of
operations in the period. AMCON considers its tradenames and water source to
have indefinite lives. Therefore, upon adoption of SFAS No. 142, goodwill
and tradename amortization ceased and the Company did not incur an impairment
charge upon implementation of SFAS No. 142. As discussed in Note 9, the
Company determined, with the assistance of the independent third party
valuations obtained, that one of the beverage segment's reporting units
tradenames was impaired and an impairment charge of $3.6 million was recorded
in fiscal 2004. The Company did not 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
Customer lists 5
F-9
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 due to
passing of the Sarbanes-Oxley Act of 2002 which disallowed loans
to executives.
(k) Other Long-Term Liabilities:
Other long-term liabilities consist of a balance representing the present
value of the future minimum water royalty payments and related brokers fees
to be paid in perpetuity incurred in connection with the Trinity Springs,
Inc. acquisition that occurred in June 2004 as discussed in Note 3.
(l) Reverse Stock Split:
On May 11, 2004, the shareholders' approved a one-for-six reverse stock split
of the outstanding shares of its common stock. On May 14, 2004, the Company
effected the reverse stock split and those shareholders who held fewer than
six shares of AMCON's common stock immediately prior to the reverse stock
split received a cash payment in exchange for their shares. The total cash
paid for all fractional shares was $26,328. All common stock shares and per
share data (except par value) for all periods presented have been adjusted to
reflect the reverse stock split.
(m) 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.
(n) 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).
(o) 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.
F-10
(p) 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 for its worker's
compensation and general liability based upon the claim reserves established
with the assistance of a third-party administrator which are trended and
developed with the assistance of the Company's insurance agent. The Company
has issued a letter of credit in the amount of $0.8 million to its workers
compensation insurance carrier as part of its loss control program. The
reserve for incurred but not reported employee health care benefits is based
on one month of average claims using 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.
(q) 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.
(r) 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.
(s) Stock-Based Compensation:
Prior to June 2004, AMCON maintained a stock-based compensation plan which
provided that the Compensation Committee of the Board of Directors granted
incentive stock options and non-qualified stock options. The Compensation
Committee is evaluating various equity based compensation programs to be
implemented in the future. AMCON accounts for stock option grants in
accordance with Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" 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
costs related to stock option granted are not reflected in net income or loss
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.
The following table illustrates the required proforma effect on income (loss)
and earnings (loss) available to common shareholders and the associated per
share amounts assuming the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" to stock-based employee
compensation:
F-11
<Caption>
2004 2003 2002
----------------------------------------
(Loss) earnings available to common shareholders
- ------------------------------------------------
Net (loss) income available to common
shareholders, as reported $ (4,188,021) $ 1,026,473 $ 1,972,069
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (60,273) (68,021) (87,617)
-----------------------------------------
Pro forma (loss) income available to
common shareholders $ (4,248,294) $ 958,452 $ 1,884,452
=========================================
(Loss) earnings per share available to common
shareholders
- -----------------------------------------------
As reported: Basic $ (7.94) $ 1.95 $ 3.90
Diluted $ (7.67) $ 1.91 $ 3.81
Pro forma: Basic $ (8.05) $ 1.81 $ 3.73
Diluted $ (7.78) $ 1.78 $ 3.64
The pro forma results are not likely to be representative of the effects on
reported income (loss) 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 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 2004.
(t) Per-share results:
Basic earnings or loss per share data are based on the weighted-average
number of common shares outstanding during each period. Diluted earnings or
loss 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.
(u) Reclassifications:
Certain reclassifications have been made to prior years' financial statements
to conform with the current year presentation.
(v) 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.
F-12
(w) Recently Issued Accounting Standards:
In November 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 151 "Inventory Costs." This statement amends Accounting Research
Bulletin No. 43, Chapter 4, "Inventory Pricing" and removes the "so abnormal"
criterion that under certain circumstances could have led to the
capitalization of these items. SFAS No. 151 requires that idle facility
expense, excess spoilage, double freight and rehandling costs be recognized
as current-period charges regardless of whether they meet the criterion of
"so abnormal." SFAS 151 also requires that allocation of fixed production
overhead expenses to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 is effective for all fiscal years
beginning after June 15, 2005 (fiscal 2006 for AMCON). Management does not
believe there will be a significant impact as a result of adopting this
Statement.
In December 2004, the FASB issued Statement No. 123 (revised 2004) ("SFAS
123R"), "Share-Based Payment." SFAS No. 123R will require the Company to
measure the cost of all employee stock-based compensation awards based on the
grant date fair value of those awards and to record that cost as compensation
expense over the period during which the employee is required to perform
service in exchange for the award (generally over the vesting period of the
award). SFAS No. 123R is effective for the Company's fiscal 2006.
Management is currently assessing the impact that this standard will have on
the Company's financial position, result of operations and cash flows.
In December 2004, the FASB issued Statement No. 153, "Exchanges of
Nonmonetary Assets," an amendment of APB Opinion No. 29, "Accounting for
Nonmonetary Transactions." The amendments made by Statement 153 are based on
the principle that exchanges of nonmonetary assets should be measured based
on the fair value of the assets exchanged. Further, the amendments eliminate
the narrow exception for nonmonetary exchanges of similar productive assets
and replace it with a broader exception for exchanges of nonmonetary assets
that do not have commercial substance. Previously, Opinion 29 required that
the accounting for an exchange of a productive asset for a similar productive
asset or an equivalent interest in the same or similar productive asset
should be based on the recorded amount of the asset relinquished. The
Statement is effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005 (fiscal 2006 for the Company). Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The Company is currently
assessing the impact that this standard will have on the Company.
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 2004, the Company had approximately $5.6 million of goodwill, $9.7
million of tradenames and $2.8 million of water source reflected on the
accompanying consolidated balance sheet.
F-13
The Company's fiscal 2002 operating results do not reflect the provisions of
SFAS No. 142. The following is certain unaudited pro forma information
assuming SFAS No. 142 had been in effect at the beginning of fiscal 2002:
2002
-----------
Reported net income $ 1,972,069
Add goodwill amortization, net of tax 194,567
Add tradename amortization, net of tax 356,653
-----------
Adjusted net income $ 2,523,289
===========
Earnings per share - basic:
Reported net income $ 3.90
Add goodwill amortization, net of tax 0.38
Add tradename amortization, net of tax 0.71
-----------
Adjusted net income $ 4.99
===========
Earnings per share - diluted:
Reported net income $ 3.81
Add goodwill amortization, net of tax 0.37
Add tradename amortization, net of tax 0.69
-----------
Adjusted net income $ 4.87
===========
3. ACQUISITIONS 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
62,260 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:
F-14
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 estimated fair value of
the net assets acquired to be allocated to identifiable intangible assets is
approximately $3.8 million. The identifiable intangible asset, the HNWC
tradename, is considered to have an indefinite useful life. Based on an
independent valuation obtained to measure the fair value of the intangible
asset in 2004, an impairment charge of $3.6 million was recorded for the
entire carrying amount of the HNWC tradename in the fourth quarter of 2004.
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.
Trinity Springs, Inc.
- ---------------------
On June 17, 2004, a newly formed subsidiary of AMCON, TSL Acquisition Corp.
(which subsequently changed its name to Trinity Springs, Inc.) acquired the
tradename, water source, customer list and substantially all of the operating
assets of Trinity Springs, Ltd. (which subsequently changed its name to
Crystal Paradise Holdings, Inc.). The Seller was headquartered in Sun
Valley/Ketchum, Idaho, and once bottled and sold a geothermal bottled water
and a natural mineral supplement.
The total purchase price of $8.8 million was paid through a combination of
$2.3 million in cash, $3.3 million in notes which were issued by Trinity
Springs, Inc. (TSI) and guaranteed by AMCON; the assumption of approximately
$0.2 million of liabilities and the issuance of TSI common stock representing
15% ownership of TSI which had an estimated fair value of $0.2 million. The
TSI common stock is convertible into 16,666 shares of AMCON common stock at
the option of the Seller. Additionally, the conversion option had an
estimated fair value of $0.2 million. Included in the $2.3 million paid in
cash are transaction costs totaling approximately $0.8 million that were
incurred to complete the acquisition and consists primarily of fees and
expenses for attorneys and investment bankers. In addition, TSI will pay an
annual water royalty to the Seller, in perpetuity, in an amount equal to the
greater of $0.03 per liter of water extracted from the source or 4% of water
revenues (as defined by the purchase agreement) which is guaranteed by AMCON
F-15
up to a maximum of $5 million, subject to a floor of $206,400 for the first
year and $288,000 annually thereafter. The Company has recorded a $2.8
million liability for the present value of future minimum water royalty
payments and related brokers fees to be paid in perpetuity. The discount
rate utilized by the Company to determine the present value of the future
minimum water royalty was based on a weighted average cost of capital which
incorporated the Company's equity discount rate, dividend rate on the Series
A Convertible Preferred Stock and the Company's average borrowing rate for
all outstanding debt.
The promissory notes referred to above and the water royalty are secured by a
first priority security and mortgage on the acquired assets, other than
inventory and accounts receivable. The Seller retains the right to receive
any water royalty payment for the first five years in shares of AMCON common
stock up to a maximum of 41,666 shares. The water royalty can be cancelled
after ten years have elapsed following the closing of the sale of assets of
TSI, or if the business of TSI is sold to an unaffiliated third party, in
which case the Seller would be entitled to receive the appraised fair market
value of the water royalty but not less than $5 million. The Company's
Chairman has in turn guaranteed AMCON for these payments as well as the
promissory notes referred to above.
The acquisition 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 at the date of acquisition based on a preliminary
allocation of the purchase price and are subject to refinement.
At June 17, 2004
(Dollars in millions)
---------------------------------------
Current assets $ 0.5
Fixed assets 3.0
Intangible assets 5.5
------
Total assets acquired 9.0
Current liabilities 0.2
------
Total liabilities assumed 0.2
------
Net assets acquired $ 8.8
======
The portion of the purchase price in excess of the estimated fair value of
the net assets acquired to be allocated to identifiable intangible assets is
approximately $5.5 million.
The initial purchase price allocation performed in the third quarter of
fiscal 2004 was based on management's internal preliminary allocation and
resulted in an estimated purchase price of approximately $11.1 million, with
approximately $7.8 million of the purchase price being allocated to
intangible assets, including customer list, the Trinity tradename and the
water source. Subsequently, the Company engaged an independent valuation
F-16
firm to further analyze the transaction and based on preliminary input from
the independent valuation firm, the amount of purchase price was reduced from
$11.1 million to $8.8 million based on reassessment of the future water
royalty obligation and related brokers fees and the weighted average cost of
capital rate applied to the payment stream in perpetuity. Accordingly, the
amount allocated to intangible assets was also reduced from $7.8 million to
$5.5 million. At this stage, the purchase price allocation remains
preliminary and is subject to completion of an independent appraisal. The
Company has engaged an independent valuation firm to value the intangible
assets and it is expected that a final report will be completed by the end of
the second quarter, at which time any differences between the preliminary
purchase price allocation will be recorded.
The Company has determined that it has acquired a unique water source as part
of the transaction which represents an intangible asset and the Company has
assigned a preliminary value of $2.8 million to this intangible asset.
Additionally, the Company has acquired the Trinity tradename and has assigned
a preliminary value of $2.3 million to this intangible asset. Upon
completion of the independent valuation, the amount assigned to the water
source and/or the Trinity tradename could be different and any residual
amount would then be assigned to goodwill. Since both the water source and
the Trinity tradename have indefinite lives, as does any goodwill, the assets
are not amortized. Therefore, any change resulting from completion of the
independent valuation in the allocation of purchase price from water source
or tradename to goodwill would not have any impact on operating income.
Additionally, the Company has assigned a preliminary value of $0.4 million to
a customer list which will be amortized over a five year period.
Assuming the above acquisition had occurred on the first day of fiscal 2003
(September 27, 2002) unaudited pro forma consolidated sales, operating income
(loss), net loss and net loss per share would have been as follows:
For the year ended September
-----------------------------
2004 2003
------------- -------------
Sales $ 824,474,604 $ 775,120,055
Operating income 673,045 5,120,402
Net (loss) income available
to common shareholders (1,340,109) 932,499
Net (loss) income per share:
Basic $ (2.54) $ 1.77
Diluted $ (2.54) $ 1.74
Nesco Hawaii
- ------------
On July 1, 2004, the Company's water bottling subsidiary in Hawaii entered
into an agreement to acquire certain water bottling assets and liabilities
from a water bottling company in Hawaii (Nesco Hawaii) for $0.5 million in
cash, and $0.7 million in notes and the assumption of $0.1 million of
liabilities. The preliminary allocation of the purchase price was allocated
as follows:
F-17
At July 1, 2004
(Dollars in millions)
----------------------------------------
Current assets $ 0.1
Fixed assets 0.5
Intangible assets 0.7
------
Total assets acquired 1.3
Current liabilities 0.1
------
Total liabilities assumed 0.1
------
Net assets acquired $ 1.2
======
The acquisition 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 portion of the purchase price in excess of the estimated fair value of
the net assets acquired to be allocated to identifiable intangible assets is
approximately $0.7 million. The identifiable intangible assets consists of
tradenames and a customer list. The tradenames have indefinite lives and
therefore are not amortized. The customer list of $0.2 million is amortized
over a five year period. The remaining portion of the excess purchase price
allocated to goodwill was $0.4 million. Proforma information is not
presented due to the insignificance of the acquisition.
4. CONVERTIBLE PREFERRED STOCK
In June 2004, the Company issued $2.5 million of Series A Convertible
Preferred Stock representing 100,000 shares at a purchase price of $25 per
share (the "Liquidation Preference"). The Series A Convertible Preferred
Stock is convertible at any time by the holders into a number of shares of
AMCON common stock equal to the number of Preferred Shares being converted
times a fraction equal to $25.00 divided by the conversion price. The
conversion price is initially $30.31 per share, but is subject to customary
adjustments in the event of stock splits, stock dividends and certain other
distributions on the Common Stock. Cumulative dividends on the Series A
Convertible Preferred Stock are payable at a rate of 6.785% per annum and are
payable in arrears, when, as and if declared by the Board of Directors, on
March 31, June 30, September 30 and December 31 of each year. Upon
liquidation of the Company, the holders of the Series A Preferred Stock are
entitled to receive the Liquidation Preference plus any accrued and unpaid
dividends prior to the distribution of any amount to the holders of the
Common Stock. The Series A Convertible Preferred Stock also contains
redemption features in certain circumstances such as a change of control,
minimum thresholds of ownership by the Chairman and his family in AMCON, or
bankruptcy. Finally, the Series A Convertible Preferred Stock is redeemable
at the option of the Company beginning June 17, 2006 at a redemption price
equal to 112% of the Liquidation Preference. The redemption price decreases
1% annually thereafter until June 16, 2018, after which date it remains the
liquidation preference. These securities were issued to the Company's
Chairman and Draupnir, LLC., of which one of the Company's directors is a
member and director.
F-18
The Company believes that redemption of these securities by the holders is
not probable based on the following evaluation. As shown in the table under
the caption "Ownership of Our Common Stock By Our Directors And Executive
Officers And Other Principal Stockholder," in our proxy statement, our
executive officers and directors as a group own approximately 64% of the
outstanding common stock. Mr. William Wright, who has been AMCON's Chairman
of the Board and Chief Executive Officer from the time AMCON was originally
founded, beneficially owns 31% of the outstanding common stock without giving
effect to shares owned by his adult children. There is an identity of
interest among AMCON and its officers and directors for purposes of the
determination of whether the triggering redemption events described above are
within the control of AMCON since AMCON can only make decisions on control or
other matters through those persons. Moreover, the Series A Preferred Stock
is owned by Mr. Wright and a private equity firm of which Mr. Petersen, one
of our long-standing directors, is a large owner. The Series A Preferred
Stock is thus in friendly hands with no expectation that there would be any
effort by the holders of such preferred stock to seek optional redemption
without the Board being supportive of the events that may trigger that right.
In view of the foregoing, the Company believes that it is not probable under
Rule 5-02.28 of Regulation S-X that either Series A Preferred Stock will
become redeemable in the future as a result of redemption features described
above. However, there can be no assurance that this will not occur.
As discussed in Note 22, this financial instrument has been classified as
mezzanine financing between long-term debt and shareholders' equity in the
balance sheet.
5. EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share available to common shareholders is
calculated by dividing income (loss) from continuing operations less
preferred stock dividend requirements, loss from discontinued operations and
net (loss) income available to common shareholders by the weighted average
common shares outstanding for each period. Diluted earning (loss) per share
is calculated by dividing income (loss) from continuing operations, loss from
discontinued operations and net (loss) income available to common
shareholders by the sum of the weighted average common shares outstanding and
the weighted average dilutive options, using the treasury stock method.
Stock options and potential common stock outstanding at fiscal year end 2004,
2003 and 2002 that were anti-dilutive were not included in the computations
of diluted earnings per share. Such potential common shares totaled 113,921,
29,773 and 24,058 with average exercise prices of $32.92, $40.47 and $48.28
respectively.
<Caption>
For Fiscal Years
---------------------------------------
2004 2003 2002
---------------------------------------
Basic Basic Basic
---------------------------------------
Weighted average number of
shares outstanding 527,774 527,699 505,414
=======================================
F-19
Income from continuing operations $ 172,859 $2,891,773 $1,972,069
Deduct: preferred stock dividend
requirements (49,474) - -
---------------------------------------
$ 123,385 $2,891,773 $1,972,069
=======================================
Loss from discontinued operations $ (4,311,406) $(1,865,300) $ -
=======================================
Net (loss) income available to
common shareholders $ (4,188,021) $1,026,473 $1,972,069
=======================================
Earnings per share from
continuing operations available
to common shareholders $ 0.23 $ 5.48 $ 3.90
Loss per share from discontinued
operations (8.17) (3.53) -
---------------------------------------
(Loss) income per share available
to common shareholders $ (7.94) $ 1.95 $ 3.90
=======================================
Diluted Diluted Diluted
---------------------------------------
Weighted average common
shares outstanding 527,774 527,699 505,414
Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds used
to purchase treasury stock 11,874 9,343 12,783
---------------------------------------
Weighted average number of
shares outstanding 539,648 537,042 518,197
=======================================
Income from continuing operations $ 172,859 $2,891,773 $1,972,069
=======================================
Loss from discontinued operations $ (4,311,406) $(1,865,300) $ -
=======================================
Net (loss) income available to
common shareholders $ (4,138,547) $1,026,473 $1,972,069
=======================================
Earnings per share from
continuing operations available
to common shareholders $ 0.32 $ 5.38 $ 3.81
Loss per share from discontinued
operations (7.99) (3.47) -
---------------------------------------
(Loss) income per share available
to common shareholders $ (7.67) $ 1.91 $ 3.81
=======================================
F-20
6. COMPREHENSIVE INCOME (LOSS):
The components of other comprehensive income (loss) were as follows:
<Caption> 2004 2003 2002
-----------------------------------
Unrealized holding gains during the period:
Unrealized gains $ 6,800 $ 255,975 $ 71,565
Related tax expense (2,584) (97,271) (27,194)
-----------------------------------
Net 4,216 158,704 44,371
-----------------------------------
Less reclassification adjustments
for gains which were included in
comprehensive income in prior periods:
Realized net gains 465,008 268,948 249,491
Related tax expense (176,703) (102,200) (95,529)
-----------------------------------
Net 288,305 166,748 153,962
-----------------------------------
Interest rate swap valuation adjustment
during the period:
Unrealized gains (losses) 199,354 (106,995) -
Related tax benefit (76,097) 41,000 -
-----------------------------------
Net 123,257 (65,995) -
-----------------------------------
Total other comprehensive income (loss) $ (160,832) $ (74,039) $ (109,591)
===================================
The accumulated balances for each classification of accumulated comprehensive
income (loss) is as follows:
<Caption>
Unrealized Interest Accumulated
gains on rate swap Other
securities mark-to Comprehensive
-market Income
-------------------------------------------
Balance, September 28, 2001 $ 404,362 $ - $ 404,362
Current period change (109,591) - (109,591)
--------- --------- ----------
Balance, September 27, 2002 294,771 - 294,771
Current period change (8,044) (65,995) (74,039)
--------- --------- ----------
Balance, September 26, 2003 286,727 (65,995) 220,732
Current period change (284,089) 123,257 (160,832)
--------- --------- ----------
Balance, September 24, 2004 $ 2,638 $ 57,262 $ 59,900
========= ========= ==========
F-21
7. FIXED ASSETS, NET:
Fixed assets at fiscal year ends 2004 and 2003 consisted of the following:
<Caption>
2004 2003
---------------------------
Land $ 849,460 $ 291,460
Buildings 9,550,121 8,125,768
Warehouse equipment 7,410,235 5,257,702
Furniture, fixtures and
leasehold improvements 9,163,138 8,396,361
Vehicles 1,370,695 1,301,710
Capital equipment leases 1,924,005 2,017,488
---------------------------
30,267,654 25,390,489
Less accumulated depreciation
and amortization:
Owned buildings and equipment (9,860,174) (8,113,114)
Capital equipment leases (455,816) (431,970)
---------------------------
$ 19,951,664 $ 16,845,405
===========================
8. DEBT AND EQUITY INVESTMENTS:
Available-for-sale investments at fiscal year ends 2004 and 2003 consisted of
the following:
2004 2003
-------------------
Cost $ - $ 54,492
Unrealized Gain - 458,202
-------------------
Fair Value $ - $ 512,694
===================
The Company sold 30,000 and 20,000 shares of its available-for-sale
investments in fiscal 2004 and 2003, respectively. The Company realized
gains on these sales of $507,418, $266,690 and $257,251 in fiscal 2004, 2003
and 2002, respectively. The sale in 2004 represented the final liquidation
of available-for-sale investments.
9. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill by reporting segment at September 2004 and 2003 was as follows:
<Caption>
September September
2004 2003
------------ ------------
Wholesale $ 3,935,931 $ 3,935,931
Retail 2,155,465 2,155,466
Beverage 358,345 -
------------ ------------
$ 6,449,741 $ 6,091,397
============ ============
F-22
Other intangible assets at fiscal year ends 2004 and 2003 consisted of the
following:
2004 2003
---------------------------
Trademarks and tradenames $ 9,680,521 $ 10,928,793
Water source 2,807,000 -
Covenants not to compete (less
accumulated amortization of
$843,527 and $724,625) 76,698 195,600
Favorable leases (less accumulated
amortization of $340,003 and $280,273) 145,997 205,727
Customer lists (less accumulated
amortization of $26,285 and $0) 560,995 -
Debt issue costs (less accumulated
amortization of $489,769 and $399,347) - 90,422
---------------------------
$ 13,271,211 $ 11,420,542
===========================
The Company performs its annual impairment test for goodwill and other
intangible assets after the completion of the fiscal third quarter. Due to
competitive pressures in the natural spring water bottling business,
operating profits and cash flows were lower than expected. Based on this
trend, the future cash flow forecasts have been revised for this reporting
unit and an impairment of $3.6 million to the HNWC tradename has been
recorded in the Company's statement of operations as a component of income
(loss) from operations. The fair values of the reporting units were
estimated with the assistance of an independent valuation firm using the
expected present value of the discounted future cash flows. The $3.6 million
impairment of the HNWC tradename was offset by $5.5 million of intangible
additions associated with the acquisition of Trinity Springs, Inc.
Tradenames and water source are considered to have indefinite useful lives
and no amortization of these assets was taken during fiscal 2004 or 2003 in
accordance with SFAS No. 142. Amortization expense associated with
tradenames was $575,247 for the fiscal year ended 2002.
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 $118,902, $205,370 and $205,370
was recorded for these assets for the fiscal years ended 2004, 2003 and 2002,
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 $59,730, $69,068,
and $69,068, for the fiscal years ended 2004, 2003 and 2002, respectively.
F-23
The customer lists were purchased as part of the TSI and Nesco Hawaii
acquisitions and are amortized over a five year period from the date of
acquisition. Amortization expense for 2004 was $26,285.
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 $90,422, $109,307 and
$119,833 for the fiscal years ended 2004, 2003 and 2002, respectively.
Amortization expense related to the amortizing intangible assets held at
September 2004 for each of the five subsequent years is estimated to be as
follows:
<Caption>
Fiscal Fiscal Fiscal Fiscal Fiscal
2005 2006 2007 2008 2009
--------- --------- -------- -------- --------
Covenants not to compete $ 77,000 $ - $ - $ - $ -
Favorable leases 40,000 40,000 40,000 27,000 -
Customer lists 135,000 125,000 125,000 125,000 50,000
--------- --------- -------- -------- --------
$ 252,000 $ 165,000 $165,000 $152,000 $ 50,000
========= ========= ======== ======== ========
10. OTHER ASSETS:
Other assets at fiscal year ends 2004 and 2003 consisted of the following:
2004 2003
-------------------------
Cash surrender value of life
insurance policies $ 743,933 $ 697,035
Equipment held for sale 177,680 200,000
Other 88,690 141,218
-------------------------
$ 1,010,303 $ 1,038,253
=========================
Included in other assets is certain bottling equipment held for sale that was
acquired in Fiscal 2002 as part of the HNWC acquisition. HNWC is a reporting
unit within our beverage segment. The equipment was not in use at the time
of the acquisition and was therefore recorded in other assets as assets held
for sale at its estimated fair value, less the estimated cost to sell, in
accordance with APB 16 (the applicable purchase accounting guidance at that
time). In Fiscal 2003, after having difficulty selling the equipment due to
saturation of the bottling equipment market, we determined that the carrying
value of this equipment was too high based on prices for similar equipment in
the market place. Therefore, we recorded an impairment of $399,435 related
to this equipment in operating expenses under the title "Impairment charges."
We were unsuccessful in Fiscal 2004 in selling all of the equipment, although
we did sell portions and recognized an immaterial loss on the sale. We
continue to respond to changes in the market place and the equipment
continues to be actively marketed at a price that is reasonable and
consistent with its carrying value.
F-24
11. DEBT:
Revolving Credit Facility
- -------------------------
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. As of
September 2004, the balance on the facility was $44.8 million and
availability on the revolver was $9.3 million, based on our collateral and
the loan limits. Interest is payable monthly at the bank's base rate which
at September 2004, was 4.75% or LIBOR plus 2.50% as selected by the Company.
The principal amount of this obligation is due April 2007. 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 certain subsidiaries, (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 $10.2 million for fiscal 2004.
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 on its common shares in excess of $0.72 per common
share on an annual basis.
At September 2004, the Company was in compliance with each of the Facility's
covenants.
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%.
Long-term debt
- --------------
Long-term obligations, excluding obligations under the Facility at fiscal
year end 2004 and 2003 consisted of the following:
<Caption>
2004 2003
---------------------------
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 6,392,911 6,576,243
F-25
2004 2003
---------------------------
Revolving credit facility with a bank, interest payable
monthly at the bank's base rate plus 1% (6.75% at
fiscal year end 2004); principal due October 2004 2,750,000 2,750,000
Revolving credit facility with a bank, interest payable
monthly at the bank's base rate plus 1% (6.75 % at
fiscal year end 2004); principal due October 2004 1,988,403 1,988,403
Note payable, interest payable at a fixed rate of 5%
with monthly installments of principal and interest of
$30,000 per month through June 2009 and the remaining
balance due June 30, 2009, collateralized by
substantially all of the assets of TSI 2,773,568 -
Note payable, interest payable quarterly at a fixed rate
of 5% with interest due quarterly commencing in September
2004. The principal along with any unpaid interest is due
in June 2007, collateralized by substantially all of the
assets of TSI 500,000 -
Note payable, interest payable at a fixed rate of 5%
with two installments of $350,000 plus accrued interest
due on December 1, 2004 and March 1, 2005 700,000 -
Note payable, interest payable at a fixed rate of 5% with
monthly installments of principal and interest of $49,655
through June 2007, collateralized by the equipment of TSI 135,222 -
Notes payable on equipment, payable in monthly installments
with interest rates from 9.4% to 10% through October 2004,
collateralized by HNWC equipment 426 5,214
Obligations under capital leases, payable in monthly
installments with interest rates from 8% to 16.3%
through December 2006 1,422,461 1,701,449
---------------------------
16,662,991 13,021,309
Less current portion 5,574,397 4,513,331
Less amount attributable to discontinued operations 838,440 840,565
---------------------------
$ 10,250,154 $ 7,667,413
===========================
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 2004. As of September 2004, 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 2004. As of September 2004, 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
F-26
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 2004, the outstanding balance on the Real Estate
Loan was approximately $6.4 million.
In connection with the acquisition of TSI as described in Note 3 the Company
financed the acquisition in part through notes to the former owner totaling
approximately $3.3 million. The Company borrowed $2.8 million at a fixed
rate of 5.0%, payable in monthly installments over a 5 year period with the
remainder due on June 1, 2009. As of September 2004, the outstanding balance
was approximately $2.8 million. In addition, the Company borrowed $0.5
million at a fixed rate of 5.0% with interest due quarterly commencing in
September 2004. The principal, along with unpaid interest, is due in June
2007. As of September 2004 the outstanding balance was approximately $0.5
million. The Company also assumed a note from the former owners totaling
$0.1 million that has a fixed rate of 5.0% and is payable in annual
installments through June 2007. As of September 2004, the outstanding
balance was approximately $0.1 million. The notes are collateralized by
substantially all of TSI's assets.
In connection with the acquisition of the Nesco assets completed by HNWC in
July 2004, HNWC issued a $0.7 million note to the sellers at a fixed rate of
5% and payable in two installments. The first payment is due in December 2004
and the balance due in March 2005. As of September 2004, the outstanding
balance was approximately $0.7 million.
The Company has several capital leases for office equipment, warehouse and
water bottling and packaging equipment. As of September 2004, the
outstanding balances on the capital leases totaled approximately $1.4
million.
The above long-term obligations, excluding obligations under the Facility,
have contractual maturities as follows:
Fiscal Year Ending
------------------
2005 $ 5,574,397
2006 7,001,771
2007 1,163,043
2008 282,047
2009 1,803,293
Thereafter -
------------
$ 15,824,551
Amount attributable to discontinued operations 838,440
------------
$ 16,662,991
============
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 2004.
In connection with the Company's self-insured loss control program, AMCON has
issued a letter of credit in the amount of $0.8 million to its workers
compensation insurance carrier.
F-27
12. SUBORDINATED DEBT:
Subordinated debt at fiscal year end 2004 and 2003 consisted of the
following:
<Caption>
2004 2003
---------------------------
Note payable, interest (imputed at 6%) and principal
payable annually through June 2005 $ 996,219 $ 1,788,886
Convertible subordinated note payable, interest payable
quarterly at 8% per annum; principal due at maturity
of the note on September 15, 2004, (the due date of
the note was extended to October 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, (the due date of the note was
extended to October 2004), collateralized by
Health Food Associates, Inc. stock 4,800,000 4,800,000
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 80,000 150,000
---------------------------
7,876,219 8,738,886
Less current portion 7,876,219 7,762,666
---------------------------
$ - $ 976,220
===========================
In connection with an acquisition that occurred in fiscal 2001, the Company
is making deferred payments to the former owner 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
2004, the outstanding obligation to the seller was approximately $1.0
million.
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 2004.
F-28
13. OTHER INCOME, NET:
Other income, net consisted of the following for fiscal years 2004, 2003 and
2002:
2004 2003 2002
-----------------------------------------
Interest income $ (37,372) $ (94,704) $ (45,091)
Dividends (4,250) (18,900) (27,682)
Rent income (4,135) (5,272) (4,382)
Gain from sale of investments (507,418) (266,690) (257,521)
Settlement proceeds on former
leased facility - (131,558) -
Debt forgiveness - - (176,809)
Other (23,502) 26,655 5,773
-----------------------------------------
$ (576,677) $ (490,469) $ (505,712)
=========================================
14. INCOME TAXES:
Components of income tax expense (benefit) from continuing operations for the
fiscal years ended 2004, 2003 and 2002 consisted of the following:
2004 2003 2002
-----------------------------------------
Current:
Federal $ 706,434 $ 2,149,999 $ 63,095
State 149,640 281,143 (115,540)
-----------------------------------------
856,074 2,431,142 (52,445)
-----------------------------------------
Deferred:
Federal (610,348) (673,880) 1,327,951
State (98,726) 13,738 40,494
-----------------------------------------
(709,074) (660,142) 1,368,445
-----------------------------------------
Income tax (benefit) expense $ 147,000 $ 1,771,000 $ 1,316,000
=========================================
The difference between the Company's income tax expense (benefit) in the
accompanying financial statements and that which would be calculated using
the statutory income tax rate of 34% on income (loss) before taxes is as
follows for the fiscal years ended 2004, 2003 and 2002:
2004 2003 2002
-----------------------------------------
Tax at statutory rate $ 77,812 $ 1,585,343 $ 1,117,943
Amortization of goodwill and
other intangibles (4,777) (4,777) 54,155
Nondeductible business expenses 25,148 (21,635) 17,229
State income taxes, net of
federal tax benefit 206,800 129,691 73,716
Net operating loss (435,000) - -
F-29
2004 2003 2002
-----------------------------------------
Impairment of non-deductible
intangibles 308,389 - -
Equity in loss of
unconsolidated affiliate - - 32,302
Other (31,372) 82,378 20,655
-----------------------------------------
$ 147,000 $ 1,771,000 $ 1,316,000
=========================================
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 2004 and 2003 relate to the following:
2004 2003
----------------------------
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 258,808 $ 306,050
Allowance for impairment of assets
held for sale 160,237 151,757
Accrued expenses 534,035 446,719
Net operating loss carry forwards 681,904 51,449
Inventory 648,311 759,910
AMT credit carry forwards 380,356 -
Other 132,530 46,050
----------------------------
2,796,181 1,761,935
Noncurrent:
Net operating loss carry forwards 1,102,268 887,492
Other 179 85,533
----------------------------
1,102,447 973,025
----------------------------
Total deferred tax assets $ 3,898,628 $ 2,734,960
============================
Deferred tax liabilities:
Current:
Trade discounts $ 222,373 $ 193,459
Unrealized gains on interest
rate swap contracts 25,417 -
----------------------------
247,790 193,459
Noncurrent:
Fixed assets 528,753 345,018
Tradenames 887,144 1,659,594
Goodwill 279,568 167,974
Unrealized gains on available-for-sale
investments - 167,806
----------------------------
1,695,465 2,340,392
----------------------------
Total deferred tax liabilities $ 1,943,255 $ 2,533,851
============================
F-30
Net deferred tax assets (liabilities):
Current $ 2,548,391 $ 1,568,476
Noncurrent (593,018) (1,367,367)
----------------------------
$ 1,955,373 $ 201,109
============================
The Company did not record any valuation allowances against deferred tax
assets at fiscal year ends 2004 or 2003 because management believes future
taxable income will more likely than not be sufficient to realize such
amounts. The Company's net operating loss carryforward at fiscal year end
2004 was $4.5 million. Of this amount, $1.2 million expires in 2024. The
remaining $3.3 million was acquired in connection with the acquisition of
HNWC in fiscal 2002. This includes a deferred tax benefit of $0.4 million
recognized during fiscal 2004 to record the impact of $1.4 million of net
operating losses that became available as a result of IRS rules issued
subsequent to the acquisition. The utilization of the HNWC net operating
loss of $3.3 million at fiscal year end 2004 is limited (by Internal Revenue
Code Section 382) to approximately $0.8 million in fiscal year 2005, $0.4
million in fiscal year 2006 and $0.1 million per year thereafter through
2022.
15. 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, $0.4 million and $0.5
million (net of employee forfeitures) to the profit sharing plans during
each of the fiscal years ended 2004, 2003 and 2002, respectively.
16. Related Party Transactions:
For the fiscal years ended 2004, 2003 and 2002, the Company was charged
$66,000, $60,000 and $60,000, respectively, 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 part of
fiscal year 2004 and all of fiscal years 2003 and 2002. The amount paid for
consulting services was $37,500, $90,000 and $90,000, respectively, plus
reimbursement of expenses. The outside director was hired by the Company
during the second quarter of 2004 to manage the retail and beverage
operations.
In connection with the acquisition of TSI, the Company's Chairman has
guaranteed the Company for certain obligations as more fully described in
Note 3.
F-31
17. 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 $1.5 million
and $1.6 million as of fiscal year ends 2004 and 2003, respectively, net of
accumulated amortization of $0.5 million and $0.4 million, respectively.
The Company leases various office and warehouse facilities and equipment
under noncancellable operating leases. Rent charged to expense during fiscal
years 2004, 2003 and 2002 under such lease agreements was $5.2 million, $5.3
million and $5.3 million, respectively.
As of fiscal year end 2004, minimum future lease commitments are as follows:
Capital Operating
Fiscal Year Ending Leases Leases
------------------ --------------------------
2005 $ 598,171 $ 5,383,047
2006 586,178 4,489,111
2007 383,717 2,712,250
2008 21,072 1,963,120
2009 - 1,504,790
Thereafter - 4,402,174
--------------------------
Total minimum lease payments $ 1,589,138 $ 20,454,492
============
Less amount representing interest 173,011
-----------
Present value of net minimum
lease payments $ 1,416,127
===========
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 currently subleases the Florida facility at an amount
greater than the Company's lease rate which is approximately $0.1 million per
year.
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-32
The Company's liabilities for unpaid and incurred but not reported claims at
fiscal year end 2004 and 2003 was $0.9 million and $1.0 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.
18. 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. The Stock Option Plan expired on June 1, 2004.
The Compensation Committee is evaluating various equity based compensation
programs to be implemented in the future. 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 2004, there were 32,009 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 1998 $ 15.68 14,672 14,672
Fiscal 1999 $ 36.82 - $ 54.00 12,644 12,644
Fiscal 2000 $ 34.50 4,667 3,734
Fiscal 2003 $ 28.80 4,797 959
------ ------
36,780 32,009
====== ======
At fiscal year end 2004, there were 13,970 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 1998 $ 15.68 5,500 5,500
Fiscal 1999 $ 36.82 - $ 49.09 5,134 5,134
Fiscal 2002 $ 23.64 - $ 26.94 2,502 2,502
Fiscal 2003 $ 28.26 834 834
------ ------
13,970 13,970
====== ======
F-33
The stock options have varying vesting schedules ranging up to five years and
expire ten years after the date of grant.
The table below summarizes information about stock options outstanding as of
the following fiscal years:
<Caption>
2004 2003 2002
------------------------------------------------------
Weighted Weighted Weighted
Average Exercise Average Exercise Average Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------
Outstanding at beginning of period 52,475 $29.70 49,125 $29.64 54,170 $28.20
Granted - - 6,667 28.74 2,500 25.80
Exercised (33) 15.68 (2,000) 10.26 (7,370) 17.22
Forfeited/Expired (1,689) 44.86 (1,317) 32.10 (175) 43.20
------------------------------------------------------
Outstanding at end of period 50,753 $29.75 52,475 $29.70 49,125 $29.64
======================================================
Options exercisable at end of period 45,979 43,549 41,398
======== ======== ========
Shares available for options
that may be granted - 464,523 480,866
======== ======== ========
Weighted-average grant date fair
value of options granted during
the period - exercise price equals
stock market price at grant $ - $11.64 $15.48
====== ====== ======
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
2004:
<Table>
<Caption>
Exercisable
Remaining ----------------------------
Exercise Number Weighted-Average Weighted-Average Number Weighted-Average
Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------- ----------- ---------------- ---------------- ----------- ----------------
1998 Options $15.68 20,173 3.1 years $15.68 20,172 $15.68
1999 Options $36.82-$54.00 17,780 4.7 years $45.33 17,778 $45.33
2000 Options $34.50 4,667 5.7 years $34.50 3,734 $34.50
2002 Options $23.64-$26.94 2,502 7.9 years $25.84 2,502 $25.84
2003 Options $28.26-$28.80 5,631 8.2 years $28.72 1,793 $28.55
------ ------ ------ ------
50,753 $29.75 45,979 $29.73
====== ====== ====== ======
F-34
19. SUBSEQUENT EVENTS:
In order to finance the payment of $6.8 million in subordinated notes related
to the Company's acquisition of Health Food Associates, Inc. in 1999, the
Company refinanced its existing credit facility (see Note 11) in October 2004
to provide for term loans in addition to the extension and modification of
the revolving collateralized borrowings. The Company also issued $2.0
million of Series B Convertible Preferred Stock which is described below.
The subordinated note obligations were originally due September 15, 2004, but
the due date was extended to October 2004, when they were paid in full.
The Company's new revolving credit facility (the "New Facility") with LaSalle
Bank extends the agreement through April 2007 and retains many of the
existing facility's terms including lending limits subject to accounts
receivable and inventory limitations, an unused commitment fee and financial
covenants. The significant changes under the New Facility are as follows:
- Replacement of the LIBOR interest rate borrowing option (LIBOR plus
2.50%) with the bank's base rate, except for portion of the new facility that
corresponds with the Company's existing interest rate swap agreements which
will remain at LIBOR plus 2.50%.
- The requirement of a fixed charge coverage ratio of 0.8 to 1.0 through
June 2005 and 1.0 to 1.0 thereafter in lieu of a debt service coverage ratio.
- Amendment of the definition of minimum tangible net worth and reduction
of the minimum tangible net worth requirement to $3.0 million for fiscal
2005.
The New Facility is collateralized by all of the Company's equipment,
intangibles, inventories, and accounts receivable, except those held by
Trinity Springs, Inc.
As part of the credit facility refinancing, the Company obtained two term
loans totaling $6,160,000, a portion of which was used in connection with the
Series B Convertible Preferred Stock issuance proceeds to pay off the
subordinated debt obligations.
The Company's Chairman has personally guaranteed repayment of up to $10
million of the New Facility and the term loans. AMCON will pay the Company's
Chairman an annual fee equal to 2% of the guaranteed principal in return for
the personal guarantee. This guarantee is secured by a pledge of the shares
of Chamberlin Natural Foods, Inc., Hawaiian Natural Water Company, Inc.,
Health Food Associates, Inc. and Trinity Springs, Inc.
In October 2004, the Company issued $2.0 million of Series B Convertible
Preferred Stock representing 80,000 shares at a purchase price of $25 per
share (the "Liquidation Preference"). The Series B Convertible Preferred
Stock is convertible at any time by the holders into a number of shares of
AMCON common stock equal to the number of Preferred Shares being converted
times a fraction equal to $25.00 divided by the conversion price. The
conversion price is initially $24.65 per share, but is subject to customary
F-35
adjustments in the event of stock splits, stock dividends and certain other
distributions on the Common Stock. Cumulative dividends on the Series B
Convertible Preferred Stock are payable at a rate of 6.37% per annum and are
payable in arrears, when, as and if declared by the Board of Directors, on
March 31, June 30, September 30 and December 31 of each year. Upon
liquidation of the Company, the holders of the Series B Preferred Stock are
entitled to receive the Liquidation Preference plus any accrued and unpaid
dividends prior to the distribution of any amount to the holders of the
Common Stock. The Series B Convertible Preferred Stock also contain
redemption features in certain circumstances such as a change of control,
minimum thresholds of ownership by the Chairman and his family in AMCON, or
bankruptcy. Finally, the Series B Convertible Preferred Stock is optionally
redeemable by the Company beginning October 8, 2006 at a redemption price
equal to 112% of the Liquidation Preference. The redemption price decreases
1% annually thereafter until October 8, 2018, after which date it remains the
Liquidation Preference.
In December 2004, the Company purchased a distribution facility in Rapid
City, South Dakota and began construction of an addition to the building.
The lease on the current Rapid City facility was extended to coincide with
the completion of construction in the second quarter of fiscal 2005. The
Company expects capital expenditures relating to the building, construction
of the addition and related equipment purchases to be approximately $1.8
million. The Company has arranged permanent financing for the building and
equipment in an amount equal to 80% of the acquisition cost or approximately
$1.4 million. The remainder of the capital expenditures related to the
facility will be provided from the Facility.
In December 2004, a director of the Company extended a revolving credit
facility to Trinity Springs, Inc., ("Trinity") in a principal amount of up to
$1.0 million at an interest rate of 8% per annum with an initial advance of
$0.5 million. To induce the director to extend this loan to Trinity, the
Company agreed to allow the director to receive a second mortgage on
Trinity's real property on an equal basis with the Company's existing second
mortgage on Trinity's real property.
In addition, in March 2005, the Company discontinued the operations of its
beverage marketing and distribution business. As a result, the balance
sheets as of September 24, 2004 and September 26, 2003 and the statements of
operations and statements of cash flows for the fiscal years ended September
24, 2004 and September 26, 2003 have been prepared reflecting this
disposition as discontinued operations in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." The beverage marketing and
distribution business was started in fiscal 2003, so there is no change to
the fiscal 2002 amounts.
20. 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 2004
F-36
and 2003, the Company had interest rate swap agreements outstanding with
notional amounts totaling $15 million related to borrowings on the Facility.
These 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 2004 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.
21. BUSINESS SEGMENTS:
AMCON has three reportable business segments: the wholesale distribution of
consumer products, the retail sale of health and natural food products, and
the bottling and distribution of bottled water products. The results of
retail health food stores comprise 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 the HNWC
and TSI (which was acquired in June 2004) 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. As discussed
in Note 19, TBG, a business component of the beverage segment ceased
operations on March 31, 2005 and its assets accordingly are included in the
"Other" column below. The segments are evaluated on revenues, gross margins,
operating income (loss) and income before taxes.
<Caption>
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
F-37
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.
22. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Subsequent to the issuance of these financial statements for the year ended
September 24, 2004, management and the Company's Audit Committee determined
that the Company would restate its balance sheet as of September 24, 2004 to
reflect (i) a correction to the classification of Series A Preferred Stock
from permanent equity to mezzanine financing, and (ii) a correction to the
classification of its revolving credit facility from long-term to short-term
debt. Management and the Company's Audit Committee also determined that the
provision for nonoperating asset impairment which was reported as a component
of "Other income, net" for the year ended September 26, 2003 should be
corrected and reclassified as a component of operating expenses under the
title "Impairment charges." The statement of operations for fiscal 2003 has
been restated to correct this error.
In accordance with Emerging Issue Task Force ("EITF") Topic No. D-98
"Classification and Measurement of Redeemable Securities," the possibility of
a redemption of securities that is not solely within the control of the
issuer without regard to probability requires the security to be
classified outside of permanent equity. The Company's Certificate of
Designations creating the Series A Preferred Stock contains provisions that
give the holders the optional right to redeem such stock if either there is a
change of control (as defined in the Certificate of Designations) or the
Wright Family (as defined in the Certificate of Designations to include
William F. Wright, the Company's Chief Executive Officer, Chairman of the
Board and largest stockholder) beneficially owns less than 20% of the
outstanding shares of common stock. The Company believes it is unlikely that
either of those events will occur without support of the Board of Directors
since the two owners of the Series A Preferred Stock are represented on the
Board of Directors, the interests of the Company and those representatives
are aligned, and the aggregate ownership of all of the Board members is in
excess of two-thirds of the outstanding shares of common stock. However,
there can be no assurance that this will not occur.
EITF 95-22 "Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements That Include both a Subjective Acceleration
Clause and a Lock-Box Arrangement," requires borrowings under an agreement
that includes both a subjective acceleration clause and a lock-box
F-38
arrangement to be classified as short-term indebtedness. Because the
Company's agreement contains both of these features, the borrowings have been
restated to be classified as short-term for September 2004 and 2003. The
lending banks and the Company amended the revolving loan agreement after the
Company's second fiscal quarter of 2005 to replace the lockbox provision with
a springing lockbox arrangement that would require the Company's cash to be
placed in a lockbox account that would be used to automatically pay down the
revolving indebtedness only in the instance of an event of default. EITF 92-
22, nevertheless, requires the correction to the classification of the
revolving credit facility for reports filed prior to such amendment to the
revolving loan agreement.
This restatement does not impact amounts already reported as sales, net
income (loss) available to common shareholders or earnings (loss) per share,
nor will it result in a default under any provisions in the credit agreement.
A summary of the significant effects of the restatement is as follows:
September 2004
---------------------------------------------------------------
Retroactive
effect of
discontinued
As previously operations - Restatement As
reported See Note 19 Restated
-------------- ------------- -------------- -------------
Current liabilities $ 42,964,022 $ - $ 39,809,814 $ 82,773,836
Long-term debt, less current portion 50,063,571 (3,603) (39,809,814) 10,250,154
Series A cumulative, convertible
preferred stock, $.01 par value
100,000 authorized and issued
liquidation preference $25.00
per share - - 2,438,355 2,438,355
Shareholders' equity 15,205,152 - (2,438,355) 12,766,797
September 2003
---------------------------------------------------------------
Retroactive
effect of
discontinued
As previously operations - As
reported See Note 19 Restatement Restated
-------------- ------------- -------------- -------------
Current liabilities $ 44,038,998 $ - $ 27,981,281 $ 72,020,279
Long-term debt, less current portion 35,654,423 (5,729) (27,981,281) 7,667,413
Operating expenses 55,334,331 (2,920,863) 399,435 52,812,903
Other income, net (98,384) 7,350 (399,435) (490,469)
F-39
Corporate Directory
DIRECTORS AND CORPORATE OFFICERS
DIRECTORS
William F. Wright
Chairman
Kathleen M. Evans
President
William R. Hoppner
Senior Vice President
Christopher H. Atayan
Managing Director of Slusser Associates
Raymond F. Bentele /2/, /3/
Retired, Former President and CEO of
Mallinckrodt, Inc.
J. Tony Howard
President of Nebraska Distributing Company
John R. Loyack /1/, /2/, /3/
Sr. Vice President and CFO of PNM Resources, Inc.
Stanley Mayer /1/, /2/
Consultant
Timothy R. Pestotnik /1/, /3/
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
/3/ Nominating/Governance Committee
CORPORATE OFFICERS
William F. Wright
Chairman
Kathleen M. Evans
President
William R. Hoppner
Senior Vice President
Michael D. James
Secretary, Treasurer and Chief Financial Officer
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.
Andrew S. Mitchell
President of Trinity Springs, 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 15, 2005
9:00 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