UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2005
OR
/ / Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
------------------------------
COMMISSION FILE NUMBER 1-15589
------------------------------
AMCON DISTRIBUTING COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of Incorporation)
7405 Irvington Road
Omaha, NE 68122
(Address of principal executive offices)
(Zip Code)
47-0702918
(I.R.S. Employer Identification No.)
(402) 331-3727
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
------- -------
The Registrant had 527,062 shares of its $.01 par value common stock
outstanding as of August 15, 2005.
Form 10-Q
3rd Quarter
INDEX
-------
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
--------------------------------------------
Condensed consolidated unaudited balance sheets at
June 2005 and September 2004 3
Condensed consolidated unaudited statements of operations
for the three and nine months ended June 2005 and 2004 4
Condensed consolidated unaudited statements of cash flows
for the nine months ended June 2005 and 2004 5
Notes to condensed consolidated unaudited
financial statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 44
Item 4. Controls and Procedures 45
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 47
Item 3. Defaults Upon Senior Securities 47
Item 4. Submission of Matters to a Vote of Security Holders 47
Item 5. Other Information 47
Item 6. Exhibits 48
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<Caption>
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Balance Sheets
June 2005 and September 2004
- -------------------------------------------------------------------------------------------------------
June 2005 September 2004
------------ --------------
ASSETS
Current assets:
Cash $ 368,439 $ 416,073
Accounts receivable, less allowance for doubtful
accounts of $0.5 million and $0.6 million, respectively 32,774,595 29,109,826
Inventories 28,939,608 35,088,568
Income tax receivable 972,180 1,162,625
Deferred income taxes 3,780,391 2,548,391
Current assets of discontinued operations 196,986 1,941,950
Other 1,173,787 635,841
------------ ------------
Total current assets 68,205,986 70,903,274
Fixed assets, net 20,643,218 19,951,664
Goodwill 6,915,657 6,449,741
Other intangible assets 12,584,945 13,271,211
Noncurrent assets from discontinued operations - 143,670
Other assets 1,570,434 1,010,303
------------ ------------
$109,920,240 $111,729,863
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,049,284 $ 17,180,649
Accrued expenses 4,567,095 3,800,506
Accrued wages, salaries and bonuses 1,787,371 1,365,837
Current liabilities of discontinued operations 781,779 2,166,414
Current portion of credit facility 6,532,000 44,809,814
Current portion of long-term debt 1,082,237 5,574,397
Current portion of long-term debt due related parties 1,500,000 -
Current portion of subordinated debt 80,000 7,876,219
------------ ------------
Total current liabilities 31,379,766 82,773,836
------------ ------------
Credit facility, less current portion 49,255,696 -
Deferred income taxes 619,410 593,018
Noncurrent liabilities of discontinued operations - 3,603
Other long-term liabilities 2,807,000 2,807,000
Long-term debt, less current portion 10,881,659 10,250,154
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 2,438,355
Series B cumulative, convertible preferred stock, $.01 par value
80,000 authorized and issued, liquidation preference
$25.00 per share 1,857,645 -
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 authorized,
none outstanding - -
Common stock, $.01 par value, 3,000,000
shares authorized, 527,062 shares issued 5,271 5,271
Additional paid-in capital 6,218,476 6,218,476
Accumulated other comprehensive income,
net of tax of $0.1 million, respectively 102,962 59,900
Retained earnings 4,354,000 6,483,150
------------ ------------
Total shareholders' equity 10,680,709 12,766,797
------------ ------------
$109,920,240 $111,729,863
============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of Operations
for the three and nine month periods ended June 2005 and 2004
- ---------------------------------------------------------------------------------------------------------
For the three months For the nine months
ended June ended June
----------------------------- -----------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Sales (including excise taxes of
$50.1 million and $50.3 million, and
$145.2 million and $141.3 million,
respectively) $ 216,866,087 $ 218,101,848 $ 625,300,569 $ 603,645,241
Cost of sales 201,251,586 202,879,446 579,946,842 559,691,237
------------- ------------- ------------- -------------
Gross profit 15,614,501 15,222,402 45,353,727 43,954,004
------------- ------------- ------------- -------------
Selling, general and administrative
expenses 13,693,711 12,974,551 41,245,710 37,760,408
Depreciation and amortization 636,599 541,544 1,932,304 1,648,141
------------- ------------- ------------- -------------
14,330,310 13,516,095 43,178,014 39,408,549
------------- ------------- ------------- -------------
Operating income 1,284,191 1,706,307 2,175,713 4,545,455
------------- ------------- ------------- -------------
Other expense (income):
Interest expense 942,585 734,222 2,746,328 2,193,859
Other (32,827) (108,797) (48,679) (555,524)
------------- ------------- ------------- -------------
909,758 625,425 2,697,649 1,638,335
------------- ------------- ------------- -------------
Income (loss) from continuing operations
before income taxes 374,433 1,080,882 (521,936) 2,907,120
Income tax expense (benefit) 138,000 410,000 (203,000) 1,072,000
Minority interest in loss, net of tax - - (97,100) -
------------- ------------- ------------ -------------
Income (loss) from continuing operations 236,433 670,882 (221,836) 1,835,120
Loss from discontinued operations, net of
income tax benefit of $0.2 million,
$0.6 million, $1.0 million and $1.6 million,
respectively (318,257) (935,642) (1,687,541) (2,687,385)
Preferred stock dividend requirements (74,053) - (219,773) -
------------- ------------- ------------- -------------
Net loss available to common shareholders $ (155,877) $ (264,760) $ (2,129,150) $ (852,265)
============= ============= ============= =============
Basic earnings (loss) per share
available to common shareholders:
Continuing operations $ 0.30 $ 1.27 $ (0.84) $ 3.47
Discontinued operations (0.60) (1.77) (3.20) (5.08)
------------- ------------- ------------- -------------
Basic loss per share available
to common shareholders $ (0.30) $ (0.50) $ (4.04) $ (1.61)
============= ============= ============= =============
Diluted earnings (loss) per share
available to common shareholders:
Continuing operations $ 0.43 $ 1.25 $ (0.84) $ 3.42
Discontinued operations (0.58) (1.74) (3.20) (5.01)
------------- ------------- ------------- -------------
Diluted loss per share available
to common shareholders $ (0.15) $ (0.49) $ (4.04) $ (1.59)
============= ============= ============= =============
Weighted average shares outstanding:
Basic 527,062 527,671 527,062 528,010
Diluted 549,264 537,150 527,062 536,133
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
<Caption>
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of Cash Flows
for the nine month periods ended June 2005 and 2004
- ---------------------------------------------------------------------------------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations
available to common shareholders $ (441,609) $ 1,835,120
Preferred stock dividend requirements 219,773 -
------------ ------------
Income (loss) from continuing operations (221,836) 1,835,120
Adjustments to reconcile loss income from continuing operations
to net cash flows from operating activities:
Depreciation 1,884,414 1,613,259
Amortization 211,280 134,399
(Gain) loss on sale of fixed assets (20,361) 17,006
(Gain) loss on sale of securities - (507,418)
Deferred income taxes (1,205,608) (75,938)
Provision for losses on doubtful accounts 259,080 63,645
Provision for losses on inventory obsolescence 237,167 289,196
Minority interest (97,100) -
Impairment of assets held for sale 77,680 -
Changes in assets and liabilities,
net of effect of acquisitions:
Accounts receivable (3,923,849) 5,546
Inventories 5,911,793 2,727,469
Other current assets (494,884) (191,921)
Other assets (191,170) 320,426
Accounts payable (2,131,365) 777,346
Accrued expenses and accrued wages, salaries and bonuses 1,188,123 384,538
Income tax receivable 190,445 29,957
------------ ------------
Net cash flows from operating activities - continuing operations 1,673,809 7,422,630
Net cash flows from operating activities - discontinued operations (327,211) (5,122,420)
------------ ------------
Net cash flows from operating activities 1,346,598 2,300,210
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (2,540,459) (1,566,158)
Acquisitions, net of cash acquired - (2,126,338)
Proceeds from sales of fixed assets 85,265 60,550
Proceeds from sale of available-for-sale securities - 561,910
------------ ------------
Net cash flows from investing activities - continuing operations (2,455,194) (3,070,036)
Net cash flows from investing activities - discontinued operations (21,568) (58,492)
------------ ------------
Net cash flows from investing activities (2,476,762) (3,128,528)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on bank credit agreements 10,977,882 (2,687)
Net proceeds from preferred stock issuance 1,857,645 2,455,571
Proceeds from borrowings of long-term debt 2,399,636 -
Payments on long-term debt and subordinated debt (13,147,853) (1,267,984)
Dividends paid on common stock - (284,959)
Dividends paid on preferred stock (219,773) -
Proceeds from short-term debt 500,000 -
Proceeds from exercise of stock options - 523
Debt issuance costs (446,643) -
Retirement of common stock - (26,328)
------------ ------------
Net cash flows from financing activities - continuing operations 1,920,894 874,136
Net cash flows from financing activities - discontinued operations (838,364) (2,634)
------------ ------------
Net cash flows from financing activities 1,082,530 871,502
------------ ------------
Net change in cash (47,634) 43,184
Cash, beginning of period 416,073 668,073
------------ ------------
Cash, end of period $ 368,439 $ 711,257
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,661,734 $ 2,330,263
Cash paid (refunded) during the period for income taxes (185,630) 1,131,242
Supplemental disclosure of non-cash information:
Acquisition of equipment through capital lease $ 91,343 $ 125,840
Business combinations
Fair value of assets acquired - 11,265,013
Notes payable issued - 3,328,440
Issuance of options - 407,984
Present value of future water royalty payments
and water rights guarantee - 5,245,975
Other liabilities assumed - 156,276
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
AMCON Distributing Company and Subsidiaries
Notes to Condensed Consolidated Unaudited Financial Statements
June 2005 and 2004
- ----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
As more fully described in Note 2, the Company's subsidiary, The Beverage
Group, Inc. which represented the business component of the beverage segment
that marketed and distributed specialty beverage products, ceased operations,
effective March 31, 2005, due to recurring losses since it December 2002
inception. As a result, the September 2004 balance sheet and fiscal 2004
statements of operations and cash flows have been prepared reflecting this
disposition as discontinued operations in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144 "Accounting for Impairment or
Disposal of Long-Lived Assets."
The accompanying condensed consolidated unaudited financial statements
include the accounts of AMCON Distributing Company and its subsidiaries
("AMCON" or the "Company"). As a result of its 85% ownership in Trinity
Springs, Inc. ("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. During the first quarter of fiscal
2005, the Company suspended the allocation of TSI's losses to minority
shareholders once their basis was reduced to zero because the minority
shareholders have not guaranteed TSI debt or committed additional capital to
TSI.
All significant intercompany transactions and balances have been eliminated
in consolidation. Certain information and footnote disclosures normally
included in our annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. In
the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to fairly present the
financial information included therein, such adjustments consisting of normal
recurring items. The Company believes that, although the disclosures are
adequate to prevent the information presented from being misleading, these
condensed consolidated financial statements should be read in conjunction
with the Company's amended annual audited consolidated financial statements
for the year ended September 24, 2004, as filed with the Securities and
Exchange Commission on Form 10-K/A ("2004 Amended Annual Report").
Results for the interim period are not necessarily indicative of results to
be expected for the entire year.
Certain reclassifications have been made to prior years' financial statements
to conform with the current year presentation.
AMCON's fiscal third quarters ended on June 30, 2005 and June 25, 2004. For
convenience, the fiscal third quarters of 2005 and 2004 have been indicated
as June 2005 and 2004, respectively. During the first quarter of fiscal
2005, the Company changed its reporting period from a 52-53 week year ending
on the last Friday in September to a calendar month reporting period ending
6
on September 30. As a result of this change, the first nine months of fiscal
2005 comprised 40 weeks of operations as compared to 39 weeks of operations
for the first nine months of fiscal 2004. The additional week of operations
recorded in the first nine months of fiscal 2005 increased sales, gross
profit and net income by approximately $14.3 million, $0.8 million and $0.1
million, respectively.
Stock-based Compensation
- ------------------------
Prior to its expiration in 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.
AMCON accounted for these 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 was
measured by the excess, if any, of the fair market value of its common stock
on the date of grant over the exercise price of the stock option.
Accordingly, stock-based compensation cost related to stock option grants was
not reflected in income or loss as all options granted under the plan had an
exercise price equal to or above the market value of the underlying stock on
the date of grant.
The following table illustrates the required pro forma 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 SFAS No. 123, "Accounting for Stock-Based
Compensation" to stock-based employee compensation:
For the three months For the nine months
ended June ended June
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
(Loss) earnings
- -------------------------
Net loss available to common
shareholders, as reported $ (155,877) $ (264,760) $(2,129,150) $ (852,265)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of
related tax effects (14,008) (15,303) (42,024) (45,909)
----------- ----------- ----------- -----------
Pro forma loss available to common
shareholders $ (169,885) $ (280,063) $(2,171,174) $ (898,174)
=========== =========== =========== ===========
Loss per share
- -------------------------
As reported: Basic $ (0.30) $ (0.50) $ (4.04) $ (1.61)
=========== =========== =========== ===========
Diluted $ (0.15) $ (0.49) $ (4.04) $ (1.59)
=========== =========== =========== ===========
Pro forma: Basic $ (0.32) $ (0.53) $ (4.12) $ (1.70)
=========== =========== =========== ===========
Diluted $ (0.17) $ (0.52) $ (4.12) $ (1.68)
=========== =========== =========== ===========
7
Related Party Transactions
- --------------------------
As of June 2005, the Company's subsidiary, TSI, owes a director of the
Company $1.0 million on a revolving credit facility extended to TSI in
December 2004 with an interest rate of 8% per annum. The director is secured
by a second mortgage on TSI's real property on an equal basis with the
Company's existing second mortgage on TSI's real property. The revolving
credit line matures on December 14, 2005 at which time principal and accrued
interest will be due.
TSI also owes $0.5 million, as of June 2005, for a loan from a related party
that is wholly-owned by three of the Company's directors (including the
Chairman and the President) and another significant shareholder. The note
bears interest at 7% per annum. The note was originally due June 15, 2005,
but has been extended to September 30, 2005.
Interest on these notes that has been accrued (but remains unpaid until the
notes come due) for Q3 2005 and the first nine months of fiscal 2005, was
$28,671 and $47,548, respectively.
2. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
ACQUISITIONS
Trinity Springs, Inc.
- ---------------------
On June 17, 2004, a newly formed subsidiary of AMCON, TSL Acquisition Corp.,
acquired the tradename, water source, customer list and substantially all of
the operating assets of Trinity Springs, Ltd. (the "Seller," which
subsequently changed its name to Crystal Paradise Holdings, Inc.), a bottler
of geothermal bottled water and a natural mineral supplement. TSL
Acquisition Corp. subsequently changed its name to TSI and continues to
operate under that name.
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 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 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.
8
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 fair values.
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. During Q2 2005, the valuation of the identifiable intangible
assets was completed and an adjustment of the purchase price was recorded.
The results of the completed valuation report did not change the overall
purchase price, but rather a change in the allocation of the purchase price
amongst the identifiable intangible assets and goodwill.
The following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition (June 2004) and subsequent
purchase price allocation (in millions):
June September March
2004 2004 2005
---------- ---------- ----------
Current assets $ 0.5 $ 0.5 $ 0.5
Fixed assets 3.0 3.0 3.0
Tradename 2.3 2.3 0.9
Water source 5.1 2.8 3.7
Customer list 0.4 0.4 0.4
Goodwill - - 0.5
---------- ---------- ----------
Total assets acquired 11.3 9.0 9.0
---------- ---------- ----------
Current liabilities 0.2 0.2 0.2
---------- ---------- ----------
Total liabilities acquired 0.2 0.2 0.2
---------- ---------- ----------
Net assets acquired $ 11.1 $ 8.8 $ 8.8
========== ========== ==========
9
The unique water source acquired as part of the transaction represents an
intangible asset that was originally assigned a preliminary value of $5.1
million at June 2004. The independent third party valuation of this
intangible asset assigned a value of approximately $3.7 million.
Additionally, the Company acquired the Trinity tradename and assigned a
preliminary value of $2.3 million to this intangible asset. The final
valuation report indicated the fair value of this intangible asset was $0.9
million. Since both the water source and the Trinity tradename have
indefinite lives, as does goodwill, the assets are not amortized. Therefore,
the completion of the independent valuation in the allocation of purchase
price from water source or tradename to goodwill does not impact operating
income (loss). Additionally, the Company has assigned a value of $0.4
million to a customer list which will be amortized over a five year period.
Assuming the above acquisition had hypothetically occurred on the first day
of fiscal 2004 (September 27, 2003) unaudited pro forma consolidated sales,
income (loss) from continuing operations, net (loss) income available to
common shareholders and the related per share amounts would have been as
follows:
For the three months For the nine months
ended June 2004 ended June 2004
-------------------- --------------------
Sales $ 219,309,601 $ 606,354,256
Operating income 1,124,534 2,564,655
Net loss available to
common shareholders (703,428) (2,315,759)
Loss per share:
Basic $ (1.33) $ (4.39)
Diluted $ (1.31) $ (4.32)
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 on the island of Oahu 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 allocation of the purchase price is as
follows:
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
======
10
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 consist of
tradenames and a customer list. The tradenames of $0.1 million 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.
DISPOSITIONS
The Beverage Group, Inc.
- ------------------------
Effective March 31, 2005, the Company's subsidiary, The Beverage Group, Inc.
("TBG") which represented the beverage marketing and distribution component
of the beverage segment, ceased on-going operations due to recurring losses
since its December 2002 inception. All TBG employees were terminated
effective March 31, 2005 and the Company outsourced various responsibilities
in order to maximize the value of the assets by collecting receivables and
evaluating its payables. In addition, management is working to sell the
remaining TBG inventory to unrelated beverage companies, distributors or
liquidators. Our water bottling manufacturing subsidiaries in Hawaii (HNWC)
and Idaho (TSI), which bottle, market and distribute their proprietary waters
and are also part of the beverage segment, were unaffected.
During Q3 2005 and the first nine months of fiscal 2005, charges included in
loss from discontinued operations totaling $0.2 and $1.0 million,
respectively, were incurred to adjust the allowance for bad debts and
inventory reserve to their net realizable values and to write off fixed
assets. In addition, in accordance with SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" management has accrued one-time
termination benefits and rent and related expenses associated with the
remaining lease commitment on the office lease totaling less than $0.1
million. This lease will provide no future economic benefit to the Company.
During Q3 2005, the Company entered into a sublease with tenants for the
office lease for the remainder of the lease term which ends August 31, 2006
and has adjusted the liability accordingly. Any additional differences
between these expense estimates and their actual settlement will be recorded
when incurred and will change the loss accordingly.
This transaction has been reflected as discontinued operations in the
condensed consolidated unaudited financial statements in accordance with SFAS
No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets"
because it represents a component of an entity in which the operations and
cash flows have (or will be) eliminated from the ongoing operations and the
Company will not have any significant continuing involvement in the
operations of TBG.
Sales from the discontinued operations, which have been excluded from income
(loss) from continuing operations in the accompanying condensed consolidated
unaudited statements of operations for the three and nine month periods ended
June 30, 2005 and 2004, are presented below. The effects of the discontinued
operations on net (loss) income available to common shareholders and per
share data are reflected within the accompanying condensed consolidated
unaudited statements of operations.
11
<Table>
<Caption>
Three months ended Nine months ended
June June
-------------------------- ---------------------------
2005 2004 2005 2004
----------- ------------ ------------ ------------
Sales $ 430,774 $ 789,212 $ 1,663,757 $ 1,700,234
</Table>
The carrying amount of the major classes of assets and liabilities that are
included in the disposal group are as follows (in millions):
<Table>
<Caption>
June September
2005 2004
---------- ----------
Accounts receivable $ - $ 0.5
Inventories 0.2 1.4
---------- ----------
Total current assets of discontinued operations $ 0.2 $ 1.9
========== ==========
Fixed assets $ - $ 0.1
========== ==========
Accounts payable $ 0.4 $ 0.6
Accrued expenses 0.3 0.7
Current portion of long-term debt - 0.9
---------- ----------
Total current liabilities of discontinued operations $ 0.7 $ 2.2
========== ==========
</Table>
In addition to the discontinued operations of TBG, there is $0.1 million
recorded in current liabilities of discontinued operations related to
unresolved lease issues that remain in litigation incurred in connection with
the discontinued operations of Food for Health, Inc. that occurred in fiscal
2001.
3. CONVERTIBLE PREFERRED STOCK
In June 2004 and October 2004 the Company issued $2.5 million of Series A
Convertible Preferred Stock ("Series A Preferred) and $2.0 million of Series
B Convertible Preferred Stock ("Series B Preferred), respectively. A summary
of the significant terms is as follows:
Series A Series B
------------- ---------------
Date of issuance: June 17, 2004 October 8, 2004
Par value (gross proceeds): $2,500,000 $2,000,000
Number of shares: 100,000 80,000
Liquidation preference: $25.00 $25.00
Conversion price: $30.31 $24.65
Number of common shares in
which to be converted: 82,481 81,136
Dividend rate: 6.785% 6.370%
The Series A Preferred and Series B Preferred are convertible at any time by
the holders into a number of shares of AMCON common stock equal to the number
12
of Preferred Shares being converted times a fraction equal to $25.00 divided
by the conversion price. The conversion price 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 and
Series B Preferred 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. In the event of a liquidation of the Company, the holders of the
Series A Preferred and 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 A
Preferred and Series B Preferred 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. The Series A Preferred
and Series B Preferred are optionally redeemable by the Company beginning on
the second anniversary of the issuance date at a redemption price equal to
112% of the Liquidation Preference. The redemption price decreases 1%
annually thereafter until the redemption price equals the Liquidation
Preference after which date it remains the Liquidation Preference.
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 an owner of a significant portion of the
equity. In addition, the Series B Preferred Stock is owned by an
institutional investor which has elected its representative to AMCON's Board
of Directors pursuant to voting rights in the Certificate of Designation
creating the Series B Preferred Stock. The Series A and Series B 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 or Series B 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.
13
4. INVENTORIES
Inventories consisted of the following at June 2005 and September 2004:
June September
2005 2004
------------ ------------
Finished goods $ 32,954,502 $ 38,194,478
Raw materials 1,279,746 926,237
LIFO reserve (5,294,640) (4,032,147)
------------ ------------
$ 28,939,608 $ 35,088,568
============ ============
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 cost 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 the
costs 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 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 June 2005 and September 2004 represents the
amount by which LIFO inventories were less than the amount of such
inventories valued on a first-in, first-out basis, respectively. The
liquidation of certain LIFO layers decreased cost of goods sold by $0.3
million for the three and nine month periods ended June 2005. There was no
liquidation of LIFO layers in the three or nine month periods ended June
2004. 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 and discontinued
products.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill by reporting segment was as follows at June 2005 and September 2004:
<Caption>
June September
2005 2004
------------ ------------
Wholesale $ 3,935,931 $ 3,935,931
Retail 2,155,465 2,155,465
Beverage 824,261 358,345
------------ ------------
$ 6,915,657 $ 6,449,741
============ ============
14
Other intangible assets at June 2005 and September 2004 consisted of the
following:
<Caption>
June September
2005 2004
------------ ------------
Trademarks and tradenames $ 8,362,535 $ 9,680,521
Water source 3,650,000 2,807,000
Covenants not to compete (less accumulated
amortization of $920,225 and $843,528) - 76,698
Favorable leases (less accumulated
amortization of $370,898 and $340,003) 115,102 145,997
Customer lists (less accumulated
amortization of ($129,972 and $26,285) 457,308 560,995
------------ ------------
$ 12,584,945 $ 13,271,211
============ ============
Goodwill, trademarks, tradenames and the water source are considered to have
indefinite useful lives, therefore, no amortization is taken on these assets.
Impairment of the reporting units carrying these assets is evaluated annually
in the Company's fourth fiscal quarter in order to coincide with its
budgeting process, unless circumstances dictate earlier evaluation is
necessary. Should forecasted financial results not be achieved, impairment
of these assets may be required. As described in Note 2, the Company
received the final independent third party valuation on TSI's identifiable
intangible assets in Q2 2005 and adjusted the allocation of the purchase
price accordingly. See Note 12 for discussion regarding potential impairment
of TSI's intangible assets.
Amortization expense for the intangible assets that are considered to have
finite lives was $53,225 and $44,241 and $211,279 and $134,399 for the three
and nine months ended June 2005 and 2004, respectively.
Amortization expense related to the amortizing intangible assets held at
June 2005 for each of the five fiscal years subsequent to September 2004 is
estimated to be as follows:
<Caption>
Fiscal Fiscal Fiscal Fiscal Fiscal
2005/1/ 2006 2007 2008 2009
--------- --------- -------- -------- --------
Favorable leases $ 10,000 $ 40,000 $ 40,000 $ 27,000 $ -
Customer lists 31,000 125,000 125,000 125,000 50,000
--------- --------- -------- -------- --------
$ 41,000 $ 165,000 $165,000 $152,000 $ 50,000
========= ========= ======== ======== ========
/1/ Fiscal 2005 amortization represents amortization of amortizable
intangible assets for the remaining three months of Fiscal 2005.
15
6. EARNINGS (LOSS) PER SHARE
Basic (loss) earnings per share available to common shareholders is
calculated by dividing (loss) income 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 earnings per share is
calculated by dividing (loss) income 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 June 2005 and 2004
that were anti-dilutive were not included in the computations of diluted
earnings per share. Such potential common shares totaled 197,199 with an
average exercise price of $29.20 for the three and nine months ended June
2005 and 31,440 with an average exercise price of $39.75 for the three and
nine months ended June 2004.
For the three-month period ended June
-------------------------------------------------------
2005 2004
------------------------- -------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
1. Weighted average common
shares outstanding 527,062 527,062 527,671 527,671
2. Weighted average of net
additional shares outstanding
assuming dilutive options and
warrants exercised and proceeds
used to purchase treasury stock - 22,202 - 9,479
----------- ----------- ----------- -----------
3. Weighted average number of
shares outstanding 527,062 549,264 527,671 537,150
=========== =========== =========== ===========
4. Income from continuing operations $ 236,433 $ 236,433 $ 670,882 $ 670,882
Deduct preferred stock dividend
requirements (74,053) - - -
----------- ----------- ----------- -----------
Income from continuing operations
available to common shareholders $ 162,380 $ 236,433 $ 670,882 $ 670,882
=========== =========== =========== ===========
5. Loss from discontinued operations $ (318,257) $ (318,257) $ (935,642) $ (935,642)
=========== =========== =========== ===========
6. Income (loss) available to
common shareholders $ (155,877) $ (81,824) $ (264,760) $ (264,760)
=========== =========== =========== ===========
7. Earnings per share available
to common shareholders from
continuing operations $ 0.30 $ 0.43 $ 1.27 $ 1.25
=========== =========== =========== ===========
8. Loss per share available
to common shareholders from
discontinued operations $ (0.60) $ (0.58) $ (1.77) $ (1.74)
=========== =========== =========== ===========
9. Loss per share available to
common shareholders $ (0.30) $ (0.15) $ (0.50) $ (0.49)
=========== =========== =========== ===========
16
For the nine-month period ended June
-------------------------------------------------------
2005 2004
------------------------- -------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
1. Weighted average common
shares outstanding 527,062 527,062 528,010 528,010
2. Weighted average of net
additional shares outstanding
assuming dilutive options and
warrants exercised and proceeds
used to purchase treasury stock /1/ - - - 8,123
----------- ----------- ----------- -----------
3. Weighted average number of
shares outstanding 527,062 527,062 528,010 536,133
=========== =========== =========== ===========
4. (Loss) income from continuing
operations $ (221,836) $ (221,836) $ 1,835,120 $ 1,835,120
Deduct preferred stock dividend
requirements /2/ (219,773) (219,773) - -
----------- ----------- ----------- -----------
(Loss) income from continuing
operations available to common
shareholders $ (441,609) $ (441,609) $ 1,835,120 $ 1,835,120
=========== =========== =========== ===========
5. Loss from discontinued operations $(1,687,541) $(1,687,541) $(2,687,385) $(2,687,385)
=========== =========== =========== ===========
6. Loss available to common
shareholders $(2,129,150) $(2,129,150) $ (852,265) $ (852,265)
=========== =========== =========== ===========
7. (Loss) earnings per share available
to common shareholders from
continuing operations $ (0.84) $ (0.84) $ 3.47 $ 3.42
=========== =========== =========== ===========
8. Loss per share available
to common shareholders from
discontinued operations $ (3.20) $ (3.20) $ (5.08) $ (5.01)
=========== =========== =========== ===========
9. Loss per share available to
common shareholders $ (4.04) $ (4.04) $ (1.61) $ (1.59)
=========== =========== =========== ===========
/1/ Weighted average of net additional shares not included for the nine month
period in 2005 as such shares are anti-dilutive due to the loss from
continuing operations.
/2/ Preferred stock dividend requirements are deducted from a net loss from
continuing operations because a net loss from continuing operations will
produce an anti-dilutive result.
17
7. COMPREHENSIVE INCOME (LOSS)
The following is a reconciliation of (loss) income available to common
shareholders per the accompanying condensed consolidated unaudited statements
of operations to comprehensive income for the periods indicated:
For the three months For the nine months
ended June ended June
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ------------ ----------
Net (loss) income available to common
shareholders $ (155,877) $ (264,760) $ (2,129,150) $ (852,265)
Other comprehensive income (loss):
Unrealized holding gains (loss) from
investments arising during the
period, net of income tax expense
(benefit) of $0 for the three months
ended June 2005 and 2004 and $0 and
$3,000 for the nine months ended
June 2005 and 2004, respectively - - - 4,216
Reclassification adjustments for
gains included in net income in
prior periods, net of income tax
expense of $0 and $32,000 for the
three months ended June 2005 and
2004 and $0 and $177,000 for the
nine months ended June 2005 and
2004, respectively - (51,564) - (288,305)
Interest rate swap valuation
adjustment, net of income tax
expenses (benefit) of $(18,000)
and $99,000 for the three months
ended June 2005 and 2004 and $26,000
and $98,000 for nine months ended
June 2005 and 2004, respectively (28,604) 161,821 43,062 159,290
----------- ----------- ------------ ----------
Comprehensive loss $ (184,481) $ (154,503) $ (2,086,088) $ (977,064)
=========== =========== ============ ==========
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 24, 2004 $ 2,638 $ 57,262 $ 59,900
Current period change - 43,062 43,062
--------- --------- ----------
Balance, June 30, 2005 $ 2,638 $ 100,324 $ 102,962
========= ========= ==========
18
8. DEBT
Credit Agreement
- ----------------
The Company's credit agreement (the "Facility") was refinanced in October
2004 and provides for a $55.0 million credit limit consisting of a $53.8
million revolving credit line and a $1.2 million term note ("Term Note A").
As payments are made on Term Note A, the revolving credit limit increases
accordingly to a maximum of $55.0 million. At June 30, 2005, the credit
limit on the revolving portion of the Facility was $54.0 million. In
addition, the Facility provides for a separate term loan in the initial
amount of $5.0 million ("Term Note B").
The Facility expires in April 2007 and retains many of the previous
facility's terms including lending limits subject to accounts receivable and
inventory limitations, 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 and financial covenants. The significant provisions on the
Facility are as follows:
- Inclusion of the subsidiaries as part of the Facility, including TSI as
of April 2005.
- Inclusion of Term Note A within the $55.0 million revolving limit that
is amortized in equal monthly installments over 60 months.
- Replacement of the LIBOR interest rate borrowing option (LIBOR plus
2.50%) on the revolving portion of the Facility and the $1.2 million
term loan with the bank's base rate, except for $10.0 million of
the Facility that corresponds with the Company's remaining interest
rate swap agreement which will remain at LIBOR plus 2.50%.
- Inclusion of a prepayment penalty of $0.6 million and $0.3 million
should the loans be paid off prior to September 30, 2005 and September
30, 2006, respectively.
On May 23, 2005, the Facility was amended to provide for a "springing" lock-
box arrangement. Under this arrangement, the Company now maintains a lock-
box from which it may apply cash receipts to any corporate purpose so long as
it is not in default under the Facility. The bank maintains a security
interest in the Company's lock-box and, upon the occurrence of the foregoing
triggering events, may redirect funds from the lock-box to a loan account in
the name of the lenders on a daily basis and apply the funds against the
revolving loan balance. As a result of the amendment, the Company has
classified the outstanding borrowings under the credit facility as long-term
liabilities as of June 30, 2005, except for the balance expected to be paid
down in the next twelve months.
As of June 2005, the outstanding balance on the Facility was $51.3 million,
including Term Note A. The Facility bears interest at the bank's base rate,
which was 6.25% as of June 30, 2005 and is collateralized by all of the
Company's equipment, intangibles, inventories, and accounts receivable.
The outstanding balance on Term Note B was $4.5 million at June 2005. It
bears interest at the bank's base rate, plus 2.0%, which was 8.25% as of June
30, 2005 and is payable in equal monthly installments of $0.3 million.
19
The Company's Chairman has personally guaranteed repayment of up to $10.0
million of the combined amount of the Facility and the term loans. AMCON
pays the Company's Chairman a fee equal to 2% per annum of the guaranteed
principal then outstanding in return for the personal guarantee. This
guarantee is secured by a pledge of the shares of Chamberlin Natural Foods,
Inc., Health Food Associates, Inc., HNWC and TSI.
At June 30, 2005, the Company had tangible net worth of zero as defined by
the Facility, and was not in compliance with the minimum tangible net worth
covenant, as amended. In addition, the Company's fixed charge ratio of 0.54
at June 30, 2005 was not in compliance with the minimum fixed charge coverage
ratio of 0.7, as amended. As set forth in the loan agreement, the failure to
comply with the minimum fixed charge coverage ratio shall not constitute an
Event of Default so long as AMCON has sufficient aggregate availability on
the revolving credit facility to institute a reserve in an amount equal to
the difference between AMCON's calculated fixed charge coverage ratio and the
minimum fixed charge coverage ratio. At June 30, 2005, the amount necessary
to attain compliance with the fixed charge coverage ratio was approximately
$1.2 million. The Company obtained a waiver of the covenants for the period
ended June 30, 2005. In addition, the lender suspended both covenants
through the end of the fiscal year. The covenants will be reset and
reinstated after the disposal of the beverage operations. See Note 12 for
further discussion.
TSI Financing
- -------------
As of June 2005, the Company's subsidiary, TSI, owes a director of the
Company $1.0 million on a revolving credit facility extended to TSI in
December 2004 with an interest rate of 8% per annum. The director is secured
by a second mortgage on TSI's real property on an equal basis with the
Company's existing second mortgage on TSI's real property. The revolving
credit line matures on December 14, 2005 at which time principal and accrued
interest will be due.
TSI also owes $0.5 million as of June 2005 for a loan from a related party
that is wholly-owned by three of the Company's directors (including the
Chairman and the President) and another significant shareholder. The note
bears interest at 7% per annum. The note was originally due June 15, 2005,
but has been extended to September 30, 2005.
Construction Financing
- ----------------------
In December 2004, the Company purchased a building in order to relocate its
distribution center in Rapid City, South Dakota and began construction of an
addition to the building. The lease on the existing Rapid City building was
extended through April 2005 to coincide with the completion of construction.
At June 2005, the Company had $1.0 million outstanding on a loan from a bank
used to finance the purchase of the building and the construction of the
addition to the building. The terms of repayment are interest only through
July 2005 and then payable in 54 equal monthly installments of principal of
$4,100 based on a twenty year amortization schedule plus interest with the
entire remaining principal due and payable on December 31, 2009. The
interest rate is 6.33%.
20
The Company also arranged the financing with the same bank of certain
equipment expenditures totaling $0.5 million, of which the Company had
borrowed $0.4 million at June 2005. The remaining funds are expected to be
borrowed in the fourth quarter of fiscal 2005 as the Company completes the
equipment expenditures for the new distribution center. Payments are due in
60 equal monthly installments of principal of $8,000, plus interest beginning
April 2005. The interest rate is 6.33%.
Interest Rate Swaps
- -------------------
The Company hedges its variable rate risk on $10.0 million of its borrowings
under the Facility by utilizing interest rate swap agreements. The variable
interest payable on this amount is subject to an interest rate swap agreement
which has the effect of converting this amount to a fixed rate of 4.87%.
During Q3 2005 a $5.0 million interest rate swap agreement, which had the
effect of converting $5.0 million of variable rate debt to a fixed rate of
4.38%, expired.
9. 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, distribution and marketing of bottled water and other
proprietary beverage products. As discussed in Note 2, TBG, which represents
the business component of the beverage segment that marketed and distributed
specialty beverage products, ceased operations effective March 31, 2005. The
segments are evaluated on revenue, gross margins, operating income (loss) and
income (loss) before taxes.
Wholesale
Distribution Retail Beverage Other /2/ Consolidated
------------- ----------- ----------- ---------- -------------
QUARTER ENDED JUNE 2005:
External revenue:
Cigarettes $ 154,059,881 $ - $ - $ - $ 154,059,881
Confectionery 15,048,473 - - - 15,048,473
Health food - 8,483,253 - - 8,483,253
Tobacco, beverage & other 35,959,648 - 3,354,278 (39,446) 39,274,480
------------- ----------- ----------- ---------- -------------
Total external revenue 205,068,002 8,483,253 3,354,278 (39,446) 216,866,087
Depreciation /1/ 321,872 179,225 136,740 - 637,837
Amortization 14,438 14,674 24,113 - 53,225
Operating income (loss) 2,177,436 174,347 (1,059,185) (8,407) 1,284,191
Interest expense 223,682 393,701 325,202 - 942,585
(Loss) income from continuing
operations before taxes 1,978,699 (211,471) (1,384,388) (8,407) 374,433
Total assets 72,505,483 16,248,674 19,335,116 1,830,967 109,920,240
Capital expenditures, net 94,988 - 154,888 - 249,876
QUARTER ENDED JUNE 2004:
External revenue:
Cigarettes $ 157,737,225 $ - $ - $ - $ 157,737,225
Confectionery 15,514,033 - - - 15,514,033
Health food - 7,957,858 - - 7,957,858
Tobacco, beverage & other 36,086,949 - 879,462 (73,679) 36,892,732
------------- ----------- ----------- ---------- -------------
Total external revenue 209,338,207 7,957,858 879,462 (73,679) 218,101,848
21
Depreciation /1/ 290,836 183,834 66,127 - 540,797
Amortization 21,657 22,584 - - 44,241
Operating income (loss) 2,269,221 (271,338) (252,420) (39,156) 1,706,307
Interest expense 299,853 309,924 124,445 - 734,222
(Loss) income from continuing
operations before taxes 2,071,954 (573,576) (378,340) (39,156) 1,080,882
Total assets 67,457,814 17,493,523 19,541,545 5,500,002 109,992,884
Capital expenditures, net 263,082 256,619 125,349 25,481 670,531
NINE MONTHS ENDED JUNE 2005:
External revenue:
Cigarettes $ 448,994,765 $ - $ - $ - $ 448,994,765
Confectionery 41,947,673 - - - 41,947,673
Health food - 25,872,441 - - 25,872,441
Tobacco, beverage & other 100,855,016 - 7,742,768 (112,094) 108,485,690
------------- ------------ ----------- ---------- -------------
Total external revenue 591,797,454 25,872,441 7,742,768 (112,094) 625,300,569
Depreciation /1/ 910,618 566,474 407,322 - 1,884,414
Amortization 57,752 49,840 103,688 - 211,280
Operating income (loss) 4,672,086 598,113 (3,103,437) 8,951 2,175,713
Interest expense 722,278 1,169,303 854,747 - 2,746,328
(Loss) income from continuing
operations before taxes 3,967,519 (540,222) (3,958,184) 8,951 (521,936)
Total assets 72,505,483 16,248,674 19,335,116 1,830,967 109,920,240
Capital expenditures, net 2,074,324 14,127 452,008 21,568 2,562,027
NINE MONTHS ENDED JUNE 2004:
External revenue:
Cigarettes $ 440,381,286 $ - $ - $ - $ 440,381,286
Confectionery 40,429,845 - - - 40,429,845
Health food - 24,781,688 - - 24,781,688
Tobacco, beverage & other 96,259,785 - 2,004,578 (211,941) 98,052,422
------------- ------------ ----------- ---------- -------------
Total external revenue 577,070,916 24,781,688 2,004,578 (211,941) 603,645,241
Depreciation /1/ 885,712 572,470 155,077 - 1,613,259
Amortization 64,971 69,428 - - 134,399
Operating income (loss) 4,852,521 228,912 (423,162) (112,816) 4,545,455
Interest expense 927,335 892,248 374,276 - 2,193,859
(Loss) income from continuing
operations before taxes 4,458,271 (639,419) (798,916) (112,816) 2,907,120
Total assets 67,457,814 17,493,523 19,541,545 5,500,002 109,992,884
Capital expenditures, net 505,142 500,331 560,685 58,492 1,624,650
/1/ Includes depreciation reported in cost of sales for the beverage segment.
/2/ Includes charges to operations incurred by discontinued operations and
intercompany eliminations.
10. CONTINGENCIES
The Company is exposed to contingencies that occur in the normal course of
business. The significant contingencies are summarized below.
TSI Acquisition
- ---------------
AMCON announced in May 2004 that it was filing suit against Trinity Springs,
Ltd. in order to obtain an order from the United States District Court for
the District of Idaho declaring that a majority of the votes entitled to be
cast by the shareholders of Trinity Springs, Ltd. were cast in favor of the
sale of substantially all of its assets to AMCON's subsidiary, TSL
Acquisition Corp. and thereby satisfied the shareholder approval condition of
the asset purchase transaction. Subsequent to AMCON's filing of its lawsuit,
the Inspectors of Election and the Board of Directors of Trinity Springs,
Ltd. certified the shareholder voting results in favor of the asset purchase
transaction.
22
After the certification of the voting results, certain minority shareholders
filed a complaint and motion seeking injunctive relief in the District Court
of the Fifth Judicial District of the State of Idaho. The Court granted a
temporary restraining order on June 11, 2004, which prevented the closing of
the asset purchase transaction until the Court had an opportunity to review
additional briefing on the issues presented and the parties could be heard by
the Court. On June 16, 2004, the Court heard arguments on whether to extend
the temporary restraining order and grant the minority shareholders' motion
for preliminary injunction. As a result of the parties' briefing and the
arguments presented, the Court dissolved the temporary restraining order and
thereby enabled the asset sale transaction to be consummated.
On July 19, 2004, several of the same minority shareholders, along with some
additional shareholders filed an amended complaint in the same Idaho state
court action. The minority shareholders' amended complaint seeks (i) a
declaration that the asset sale transaction is void and injunctive relief
rescinding that transaction or, alternatively, that a new shareholder vote on
the asset sale transaction be ordered, (ii) damages for the alleged breaches
of fiduciary duty which are claimed to have arisen out of the disclosure made
in connection with the solicitation of proxies, how the votes were counted,
and conducting the closing without the requisite shareholder vote, and (iii)
imposition of a constructive trust on the sale proceeds and requiring
separate books to be maintained. In June 2005, the same minority
shareholders filed a motion for a partial summary judgement in which they
asked the Court for a determination that the asset sale transaction was
consummated without shareholder approval in violation of Idaho law.
Additionally, the minority shareholders requested the rescission of the sale
and the restoration of the parties to their pre-sale positions. AMCON is
currently in the process of responding to this filing and, on the basis of
the advice from trial counsel, continues to believe that the shareholders of
Trinity Springs, Ltd. approved the sale of assets to the Company in
accordance with applicable law and that the asset sale transaction was
properly completed.
Pacific Ventures Hawaii
- -----------------------
On or about April 15, 2005, plaintiff Pacific Ventures Hawaii brought an
action in Superior Court of the State of California for the County of Los
Angeles naming The Beverage Group, Inc. ("TBG") and certain other
unaffiliated parties as defendants. The dispute centers around a series of
contracts entered into by the various parties to import, broker, market and
distribute the Hype Classic Energy Drink line of products. TBG was to act as
the master distributor for the product. The complaint filed in that action
alleges five causes of action against the defendants: breach of contract;
common counts; intentional interference with contract; intentional
interference with prospective economic advantage; and negligent interference
with business relationships. The plaintiff does not specifically allege how
TBG breached the contracts or how it acted wrongfully. The complaint in that
action seeks compensatory damages "in excess of $500,000 and according to
proof"; punitive damages in an unspecified amount; attorney's fees, witness
fees and costs incurred; and all other relief the Court deems just and
proper.
On May 6, 2005 outside counsel for TBG faxed a letter to plaintiff's counsel
demanding that the case be dismissed with prejudice because TBG believes: it
did not breach any of its obligations under those contracts to which it is a
23
party; the plaintiff has stated in writing that TBG does not have any
liability; and the applicable contract has provisions mandating submission of
any disputes to arbitration by the American Arbitration Association in New
York. If the plaintiff does not voluntarily dismiss the suit, TBG will file
an answer or motion to dismiss and vigorously defend the action. At this
point it is too early to determine the likely outcome of the action.
Television Events & Marketing, Inc. vs. AMCON Distributing Co., et Al.
- ----------------------------------------------------------------------
An action entitled Television Events & Marketing, Inc. vs. AMCON Distributing
Co., et al., Civil No. CV 05-00259 ACK BMK, was filed in the First Circuit
Court of the State of Hawaii in Honolulu, Hawaii on March 8, 2005 and then
removed on April 12, 2005 to the United States District Court for the
District of Hawaii. This action concerns the alleged breach of two trademark
licensing agreements involving Television Events & Marketing, Inc. The
complaint seeks (i) an unstated amount of damages for an alleged breach of
those agreements; (ii) an unstated amount of damages for alleged fraudulent
transfer of assets to Trinity Springs, Inc., a subsidiary of the Company;
(iii) interest and reasonable attorney's fees and costs; and (iv) such other
relief as the court deems just and proper. On May 4, 2005, the Company,
together with its named subsidiaries, moved to dismiss the complaint or for
summary judgment on the complaint. On April 28, 2005, the Company offered to
settle this matter with the plaintiff for $100,000. The plaintiff rejected
that written settlement offer. The plaintiff's attorney asserts that the
amount of the plaintiff's damages for the alleged breach of the two
agreements exceeds $400,000.
In General
- ----------
The Company is also party to other lawsuits and claims arising out of the
operation of its businesses. Management believes the ultimate resolution of
such matters should not have a material adverse effect on the Company's
financial condition, results of operations or liquidity after giving
consideration to amounts already recorded in the Company's consolidated
financial statements.
11. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("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 on the Company's results of operations or
financial condition 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
24
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, results 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. Management is currently
assessing the impact that this standard will have on the Company.
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and Error
Corrections," which replaces APB Opinion No. 20, "Accounting Changes," and
FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements". This statement changes the requirements in the accounting for
and reporting of a change in accounting principle. This statement is
effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005.
NOTE 12. SUBSEQUENT EVENTS
Special Board Committee
- -----------------------
On June 6, 2005 the Company announced that it was studying the feasibility of
a spin-off of The Healthy Edge, Inc., a wholly-owned subsidiary, to the
Company's stockholders. This possible spin-off is being considered in the
context of transferring all of the common stock of Hawaiian Natural Water
Company, Inc., currently a direct wholly-owned subsidiary of the Company, and
all of the common stock of Trinity Springs, Inc., currently 85% owned
directly by the Company, to The Healthy Edge, Inc. Chamberlin's Natural
Foods, Inc. and Health Food Associates, Inc. (d/b/a Akin's Natural Foods
Market) would continue as wholly-owned subsidiaries of The Healthy Edge, Inc.
Following those share transfers, the businesses constituting the retail
health food and beverage segments would be operated through these current or
proposed subsidiaries of The Healthy Edge, Inc.
On August 8, 2005 the Company's Board of Directors established a Special
Committee of independent, disinterested directors consisting of John R.
Loyack (Chairman of the Special Committee), Raymond F. Bentele and Stanley
Mayer and authorized it to evaluate a broader array of strategic alternatives
but which continues to include the spin-off as one of these alternatives.
The Special Committee is in the process of selecting a financial adviser to
assist it in evaluating and pursuing these strategic alternatives and related
25
matters. One of these related matters delegated by the Board of Directors to
the Special Committee is to explore the feasibility of obtaining additional
equity or mezzanine capital for investment in The Healthy Edge, Inc. in order
to provide needed capital expenditures and to fund operating requirements and
thus improve the viability of the spin-off alternative. Another principal
strategic alternative under consideration is to explore the potential sale of
some or all of the businesses constituting the retail health food and
beverage segments. In this regard, William F. Wright, the Company's Chairman
of the Board, Chief Executive Officer and largest stockholder, has expressed
a potential interest in forming a group to acquire those businesses on an
arms-length basis with the Special Committee acting on behalf of the Board of
Directors.
With regard to the timing of this process, the Company recently entered into
an amendment to the loan agreement for the Company's revolving credit
facility requiring the beverage business to be sold or liquidated by December
10, 2005, thus requiring the consent of the bank lenders if the spin-off
alternative is pursued. This timing generally coincides with the repayment
date of December 8, 2005 for two unsecured, subordinate loans, bearing
interest at seven percent per annum, made to Trinity Springs, Inc., on August
8, 2005, one of which is in the amount of $250,000 from Aristide Investments,
L.P., a California limited partnership, of which Mr. Wright is a partner and
the other of which is also in the amount of $250,000 from Draupnir, LLC, a
Delaware limited liability company, of which Allen D. Petersen, one of the
Company's directors, is a member.
Bank Covenants
- --------------
As discussed in Note 8, at June 30, 2005 the Company was not in compliance
with the tangible net worth covenant set forth in its revolving credit
agreement (the "Facility") with its bank lenders, with LaSalle Bank acting as
agent on behalf of those lenders (the "Agent"). In addition, the fixed
charge ratio covenant will cause the Company's availability under the
Facility to be reduced by $1.2 million further restricting the Company's
ability to continue to borrow funds for operations. The Agent agreed to
waive the violation of the tangible net worth covenant for the period ended
June 30, 2005 and to suspend the tangible net worth covenant and fixed charge
ratio covenants through September 30, 2005. In addition, the Agent has
required the Company to dispose of its beverage operations within 120 days
(by December 10, 2005). As discussed above, the Board of Directors has
formed a Special Committee to begin the process of evaluating the Company's
strategic alternatives, with particular emphasis on alternatives that include
either a sale or spin-off of the businesses constituting the retail and
beverage business segments.
Intangible Impairment Analysis
- ------------------------------
The Company performs its annual impairment test for goodwill and other
intangibles assets during the fourth quarter of each fiscal year. However,
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142") provides
that intangible assets not subject to amortization should be tested for
impairment between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit
below its carrying amount.
26
The carrying amount of non-amortizable intangible assets of Trinity Springs,
Inc. ("TSI") was $5.0 million at June 30, 2005. Various circumstances have
occurred since the fiscal 2004 annual test for impairment which would
indicate that one or more of the non-amortizable intangible assets at TSI may
be impaired. These factors include, but are not limited to TSI's inability
to establish a direct store delivery system during the first nine months of
fiscal 2005 which caused TSI's sales to be well below forecast; introduction
of vitamin based beverages which have had moderate success, but which cannot
currently be produced efficiently; less than expected acceptance of the
Hawaiian Springs brand in TSI's customer base; and increases in the cost of
raw materials due to the price of crude oil. The Company believes that these
factors are sufficient to require a test for impairment earlier than the
regular annual test and as a result has engaged a valuation expert to assist
in this process. This evaluation process is progressing but is in the
preliminary stages. This, in addition to the facts that the Company's
primary lender has required the Company to dispose of the beverage segment
operations in the next 120 days and the Special Committee of the Board of
Directors has taken steps to retain a financial advisor to assist in
determining the fair value of various business components, including TSI, the
Company is not yet able to conclude whether or not an impairment of TSI's
intangible assets exists at June 30, 2005. During the fourth quarter of
2005, in conjunction with the Special Committee's evaluation of strategic
alternatives, the Company will continue with its annual test for impairment
of all non-amortizing intangible assets and will be in a position to evaluate
any potential impairment of TSI intangible assets at the end of fiscal year
2005.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD LOOKING STATEMENTS
This Quarterly Report, including the 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:
- changing market conditions with regard to cigarettes,
- changes in promotional and incentive programs offered by cigarette
manufacturers,
- the demand for the Company's products,
- rising fuel costs,
- new business ventures,
27
- domestic regulatory risks,
- competition,
- adequacy of capital to meet operating and capital needs,
- 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. Except as required by law,
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.
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 in
our amended 2004 Annual Report to Shareholders on Form 10-K/A for the fiscal
year ended September 24, 2004 filed with the Securities and Exchange
Commission. There have been no significant changes with respect to these
policies during fiscal 2005.
COMPANY OVERVIEW - THIRD FISCAL QUARTER 2005
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 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.
AMCON's fiscal third quarters ended on June 30, 2005 and June 25, 2004. For
ease of discussion, these fiscal quarters are referred to herein as June 2005
and 2004, respectively or Q2 2005 and Q2 2004, respectively.
During the third quarter of fiscal 2005, the Company:
- recognized income (loss) from continuing operations per diluted share of
$0.43 and ($0.84) for the three and nine months ended June 2005,
respectively, compared to income from continuing operations per
diluted share of $1.25 and $3.42 for the same periods in the prior
year.
- amended its credit agreement to include TSI in the borrowing base and to
provide for a "springing" lock-box arrangement which permits long-term
classification of the revolving credit facility provided an event of
default has not occurred that has not been waived.
28
Prior to filing this Quarterly Report on Form 10-Q for the quarter ended June
30, 2005, the Company:
- filed an amended 2004 Annual Report to Shareholders on Form 10-K/A for
the year ended September 24, 2004 and an amended Quarterly Report on
Form 10-Q/A for the first quarter ended December 31, 2004 for errors
identified in the classification on the balance sheet of its Preferred
Stock and of its revolving credit facility and to reclassify the
provision for a nonoperating asset impairment which was reported as a
component of "other income, net" for the year ended September 26, 2003
but should be reclassified as a component of operating expense.
- obtained a waiver for violation of the minimum tangible net worth
covenant. In addition, the lender suspended the tangible net worth and
fixed charge ratio covenants through the end the fiscal year 2005.
- announced that it was studying the feasibility of a spin-off or
potential sale of its retail health food and beverage segments.
On August 8, 2005 the Company's Board of Directors established a Special
Committee of independent, disinterested directors consisting of John R.
Loyack (Chairman of the Special Committee), Raymond F. Bentele and Stanley
Mayer and is authorized to evaluate the Company's strategic alternatives.
The Special Committee is in the process of selecting a financial adviser to
assist it in evaluating and pursuing these strategic alternatives and related
matters. One of these related matters delegated by the board of directors to
the Special Committee is to explore the feasibility of obtaining additional
equity or mezzanine capital for investment in The Healthy Edge, Inc. in order
to provide needed capital expenditures and to fund operating requirements and
thus improve the viability of the spin-off alternative. Another principal
strategic alternative under consideration is to explore the potential sale of
some or all of the businesses constituting the retail health food and
beverage segments. In this regard, William F. Wright, the Company's Chairman
of the Board, Chief Executive Officer and largest stockholder, has expressed
a potential interest in forming a group to acquire those businesses on an
arms-length basis with the Special Committee acting on behalf of the Board of
Directors.
With regard to the timing of this process, on August 12, 2005, the Company
entered into an amendment to the loan agreement for the Company's revolving
credit facility requiring the beverage business to be sold or liquidated by
December 10, 2005, thus requiring the consent of the bank lenders if the
spin-off alternative is pursued. This timing generally coincides with the
repayment date of December 8, 2005 for two unsecured, subordinate loans,
bearing interest at seven percent per annum, made to Trinity Springs, Inc.,
on August 8, 2005, one of which is in the amount of $250,000 from Aristide
Investments, L.P., a California limited partnership, of which Mr. Wright is a
partner and the other of which is also in the amount of $250,000 from
Draupnir, LLC, a Delaware limited liability company, of which Allen D.
Petersen, one of the Company's directors, is a member.
29
INDUSTRY SEGMENT OVERVIEWS
Wholesale Distribution Segment
- ------------------------------
The wholesale distribution of cigarettes and convenience store products is
significantly affected by cigarette pricing decisions and promotional
programs offered by cigarette manufacturers. Over the past several years,
the industry has experienced the discontinuance of promotional programs,
which lead to price increases by distributors, followed by manufacturers
reimplementing promotional programs less than a year later. In Q1 2005, the
industry saw price increases on certain cigarette brands. Based on these
activities, it is difficult to predict how future changes in cigarette
pricing and promotional programs will impact the Company and the industry in
the future.
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. Increases in fuel prices are also having an
impact on profits as fuel prices have steadily increased over the past year
without any indications that they will return to past levels. Therefore, we
expect that competition and pressure on profit margins will continue to
affect both large and small distributors and demand that distributors
continue to consolidate in order to become more efficient.
Retail Health Food Segment
- --------------------------
The retail health food industry is experiencing an increase in sales and
gross profit after several years of decline, primarily due to new store
openings. Our retail health food segment has felt the impacts of this trend
as our sales increase in our Midwest stores is primarily due to a new store
that opened in Q2 2004. Improvement in general economic conditions is
attributable to sales improvements in our Florida stores. The negative
impact to supplement sales resulting from unfavorable media coverage related
to the government ban on ephedra based products appears to have passed as
sales of vitamins and supplements have increased over the prior year.
Management continues to closely review all store locations for opportunities
to close or relocate marginally performing stores, remodel and expand good
performing stores and identify locations for additional stores.
Beverage Segment
- ----------------
With the discontinuation of The Beverage Group, Inc.("TBG") in March 2005,
the business component of the beverage segment which marketed and distributed
specialty beverage products, the beverage segment now consists of Hawaiian
Natural Water Co., Inc. ("HNWC") and Trinity Springs, Inc. ("TSI"). HNWC and
TSI bottle, distribute and market their proprietary waters. HNWC completed
the construction of an expanded warehouse and packaging building at our plant
on the Big Island in Hawaii in the first quarter of fiscal 2004 and
management is hopeful that HNWC will now generate profits as we focus on
expansion of our markets and take advantage of the new operations. In
addition, the acquisition of a purified water bottling operations on the
island of Oahu in Hawaii ("Nesco Hawaii") in Q4 2004 has positioned us to
30
more effectively compete in the private label water bottling channel and
diversify our water production to include premium spring water and purified
water. TSI, acquired in June 2004, bottles and sells geothermal bottled
water, a natural mineral supplement and a vitamin enhanced bottled water
which was introduced in April 2005. TSI, which is an 85% owned subsidiary of
AMCON, is headquartered in Boise, Idaho. The TSI water and mineral
supplements are currently sold primarily in health food stores where they
represent the number two packaged non-carbonated water brand in the United
States. The Company is extending the distribution channels for this water
and mineral supplement outside the health food market by adding distributor
relationships that are outside the health food market.
The beverage marketing and distribution business operated by TBG 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. The resulting sales were
less than expected due to lack of market penetration of our new beverage
products. In October 2004, management took steps to reduce on-going
operating expenses by reducing the work force and consolidating certain
activities of marketing and distribution with other companies in the
affiliated group. However, the results that we had hoped to achieve were not
being realized and as a result, management decided to exit this business line
in March 2005.
In management's discussion and analysis of the results of operations for Q2
2005 compared to Q2 2004 and the nine month results through June 30, 2005 and
2004, TBG's sales, gross profit (loss), selling, general and administrative,
depreciation and amortization, interest, other expenses and income tax
benefit have been aggregated and reported as a loss from discontinued
operations in accordance with SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" and is therefore not a component of the
discussion of the aforementioned items.
RESULTS OF OPERATIONS
Comparison of the three and nine months periods ended June 2005 and 2004
- ------------------------------------------------------------------------
SALES
Sales for Q3 2005 decreased 0.6%, or $1.2 million, compared to Q3 2004.
Sales are reported net of costs associated with sales incentives provided to
retailers, totaling $4.0 million and $3.4 million, for Q3 2005 and Q3 2004,
respectively. The increase (decrease) in sales by business segment from Q3
2004 to Q3 2005 is as follows:
Wholesale distribution segment $ (4.3) million
Retail health food stores segment 0.5 million
Beverage segment 2.5 million
Intersegment eliminations 0.1 million
------
$ (1.2) million
======
31
Cigarette sales in the wholesale distribution segment decreased by $3.7
million and the sales of tobacco, confectionary and other products decreased
$0.6 million in Q3 2005 compared to Q3 2004. The decrease in cigarette sales
was primarily attributable to a 7.4% decrease in carton volume in Q3 2005
compared to Q3 2004 which was caused by the loss of several customers during
the quarter due to competitive pricing issues resulting in a reduction in
sales of approximately $8.8 million.
This reduction was partially offset by $3.1 million of increased sales that
were attributable to price increases implemented by major cigarette
manufacturers in December 2004 and by $2.0 million related to excise tax
increases implemented in certain states on January 1, 2005. In addition,
sales of tobacco, confectionary and other products decreased by $0.6 million
due to decreased volume during Q3 2005 as compared to Q3 2004.
Sales from the retail health food segment during Q3 2005 increased by $0.5
million when compared to Q3 2004. The retail health food segment experienced
lower sales of grocery and low carb products in Q3 2005 as compared to Q3
2004 as these products continued to move to mainstream grocery channels, but
the impacts were mitigated by strong vitamin and supplement sales which
increased $0.5 million quarter over quarter and have been showing steady
signs of improvement.
The beverage segment accounted for $3.4 million in sales for Q3 2005 compared
to $0.9 million in Q3 2004. TSI, which was acquired in June 2004, accounted
for $1.7 million of the increase in sales during Q3 2005. The addition of
Nesco Hawaii increased sales in Q3 2005 by $0.3 million. The remaining $0.5
million increase was due primarily to increased case sales of HNWC's spring
water in Hawaii.
Sales for the nine months ended June 2005 increased to $625.3 million,
compared to $603.6 million for the same period in the prior fiscal year.
Sales changes by business segment are as follows:
Incr
(Decr)
------
Wholesale distribution segment $ 14.7 million
Retail health food stores segment 1.1 million
Beverage segment 5.8 million
Intersegment eliminations 0.1 million
------
$ 21.7 million
======
Sales from the wholesale distribution segment increased by $14.7 million for
the nine months ended June 2005 as compared to the same period in the prior
year. Cigarette sales increased $8.6 million for the first nine months of
fiscal 2005 and the sales of tobacco, confectionary and other products
contributed an additional $6.1 million during the period. Of the increase in
cigarette sales, $10.4 million was a result of the change in our monthly
reporting period which added an extra week of sales in the first nine months
of fiscal 2005 as compared to the same period in fiscal 2004, $6.6 million
was attributable to price increases implemented by major cigarette
manufacturers in December 2004 and $3.6 million was due to increased excise
32
taxes implemented in certain states on January 1, 2005. These increases were
offset by a $12.0 million decrease in sales due to a 3.4% decrease in carton
volume (excluding the extra week). Of the increase in tobacco, confectionary
and other products, $3.2 million was due to the extra week and $2.9 million
was attributable primarily to new business obtained during the first six
months of the year through expansion of our market area.
Competition from wholesalers who utilize pricing as their primary marketing
tool was aggressive during Q3 2005 and resulted in the loss of several
customers. We believe that our full service capabilities are still in high
demand and will continue to market in this manner in an effort to
differentiate our Company from price-only competitors.
Sales from the retail health food segment during the first nine months of
fiscal 2005 increased by $1.1 million when compared to the same period in
2004. The extra week of operations during the first nine months of fiscal
2005 resulting from the change in the Company's monthly reporting period
contributed approximately $0.4 million. In addition, a net sales increase of
$0.7 million resulted from sales generated from the opening of a new store in
Oklahoma City in April 2004 and improved vitamin and supplement sales of $1.2
million. These increases were offset by the closure of a non contributing
store in Florida in October 2004 which accounted for a decrease in sales of
$0.7 million and a $0.5 million reduction in lower sales of grocery and low
carb products during the first nine months of fiscal 2005 compared to the
same period in prior year as these products continued to move to mainstream
grocery channels.
The beverage segment accounted for $7.8 million in sales for first nine
months of fiscal 2005, compared to $2.0 million for the same period in 2004.
TSI, which was acquired in June 2004, accounted for $3.3 million of the
increase in sales. The Nesco Hawaii acquisition increased sales during the
first nine months of fiscal 2005 by $0.9 million as compared to the same
period in 2004. Additionally, the extra week of operations during the first
nine months of fiscal 2005 resulting from the change in the Company's monthly
reporting period and increased sales at HNWC by $0.2 million. The remaining
$1.4 million increase was due to additional volume generated by HNWC in
Hawaii.
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 plant labor and manufacturing overhead costs required to convert raw
materials into finished goods (including labor, warehousing, depreciation and
utilities).
During Q3 2005, gross profit of $15.6 million increased 2.6%, or $0.4
million, compared to Q3 2004. Gross profit as a percent of sales increased
to 7.2% in Q3 2005 compared to 7.0% in Q3 2004. Gross profit by business
segment is as follows (dollars in millions):
33
Quarter ended
June
---------------- Incr
2005 2004 (Decr)
------ ------ -----
Wholesale distribution segment $ 12.0 $ 12.1 $(0.1)
Retail health food stores segment 3.2 3.0 0.2
Beverage segment 0.4 0.1 0.3
------ ------ -----
$ 15.6 $ 15.2 $ 0.4
====== ====== =====
Gross profit from our wholesale distribution segment for Q3 2005 decreased
$0.1 million compared to Q3 2004 primarily due to $1.1 million lower gross
profit realized on cigarette and non cigarette products resulting from
competitive pricing pressures. Items increasing gross profit during Q3 2005
included $0.6 million related to excise tax increases in certain states that
occurred on January 1, 2005, $0.2 million related to increases in
manufacturer's incentive payments less incentive payments made to customers,
$0.1 million related to candy price increases and $0.1 million related to a
smaller quarterly LIFO charge in Q3 2005 as compared to Q3 2004.
Gross profit for the retail health food segment increased $0.2 million in Q3
2005 as compared to Q3 2004 primarily the result of increased sales discussed
above and product mix which generated $0.4 million of additional gross
profit, a $0.2 million smaller LIFO charge in Q3 2005 as compared with Q3
2004, offset by $0.4 million in increased product costs and higher throw-outs
related to perishable and low-carb products.
Gross profit for the beverage segment increased $0.3 million in Q3 2005
primarily due to the incremental sales from TSI., which was acquired in June
2004, and HNWC as discussed above.
For the nine months ended June 2005, gross profit increased 3.2% to $45.4
million from $44.0 million for the same period during the prior fiscal year.
Gross profit as a percent of sales decreased to 7.25% from 7.28% for the nine
month period ended June 2005 compared to the same period in 2004. Gross
profit by business segment is as follows (dollars in millions):
Nine months ended
June
---------------- Incr
2005 2004 (Decr)
------ ------ -----
Wholesale distribution $ 34.4 $ 33.8 $ 0.6
Retail health food stores 10.0 9.8 0.2
Beverage segment 1.0 0.4 0.6
Intersegment elimination 0.0 0.0 0.0
------ ------ -----
$ 45.4 $ 44.0 $ 1.4
====== ====== =====
34
Gross profit from our wholesale distribution segment for the nine months
ended June 2005 increased approximately $0.6 million as compared to the prior
year. Items increasing gross profit during the first nine months of fiscal
2005 as compared to the same period in fiscal 2004 included $0.6 million
attributable to the extra week of operations resulting from a change in our
reporting period, $0.3 million due to cigarette price increases implemented
by major cigarette manufacturers in December 2004, $1.2 million related to
the excise tax increases in certain states that occurred on January 1, 2005,
$0.1 million related to candy price increases, incentive payments of $0.5
million received from cigarette and non-cigarette vendors based on the
Company's buying volumes and $0.2 million related to increased volume of
other products. These increases were offset by decreases in cigarette margin
of $1.6 million resulting from decreased carton volume and $0.7 million from
a larger LIFO charge during the first nine months of fiscal 2005 as compared
to the same period in fiscal 2004.
Gross profit for the retail health food segment for the first nine months of
fiscal 2005 increased approximately $0.2 million compared with the same
period in fiscal 2004. The increase was primarily due to the extra week of
operations, which contributed approximately $0.2 million in gross profit
during the period, and $0.2 million due to improved sales and change in
product mix and a smaller LIFO charge when compared to the first nine months
of fiscal 2004. These increases were offset by a $0.2 million decrease in
margin related to higher product costs and throw-outs of perishable and low-
carb products.
Gross profit for the beverage segment increased $0.6 million in the first
nine months of fiscal 2005 primarily due to the incremental sales from TSI
(acquired in June 2004) that contributed approximately $0.4 million of gross
profit. HNWC contributed an additional $0.3 million in gross profit due in
large part to process improvements that have occurred since the completion of
the plant construction in fiscal 2004. These increases were offset by a $0.1
million larger LIFO charge at HNWC in the first nine months of 2005 as
compared to the first nine months of fiscal 2004.
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 costs 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.
In Q3 2005 operating expense increased 6.0% or approximately $0.8 million as
compared to Q3 2004. The increase is primarily related to the acquisition of
TSI in June 2004 which added $1.0 million of additional operating expenses in
Q3 2005 compared to Q3 2004. The wholesale distribution segment's operating
expenses were flat quarter over quarter, however the segment experienced an
increase of $0.3 million higher professional fees during Q3 2005 as compared
to Q3 2004 as the Company works towards Sarbanes-Oxley compliance. This
increase was offset by reduced bad debt expense of $0.1 million and lower
labor and insurance costs totaling $0.2 million. The retail segment
decreased its operating expenses by $0.3 million in Q3 2005 as compared to Q3
2004 primarily from lower employee related expenses.
35
For the nine month period ended June 2005, which included an extra week of
operations, total operating expense increased 9.6% or approximately $3.8
million to $43.2 million compared to the same period in the prior year. The
increase during the first nine months of fiscal 2005 as compared to the same
period in prior year is primarily related to the addition of TSI in June 2004
which added approximately $3.0 million of additional operating expenses,
increased professional fees of $0.7 million in the wholesale segment as the
Company works towards Sarbanes-Oxley compliance and increased operating
expenses of $0.3 million at HNWC due to the acquisition of NESCO Hawaii in
July 2004. The increases were offset by decreased operating expenses in the
retail segment of $0.1 million which was the result of lower employee related
expenses, despite the extra week of operations in the first nine month of
fiscal 2005. In addition, the Company incurred $0.1 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.
As a result of the above, operating income for Q3 2005 decreased by $0.4
million compared to Q3 2004 to $1.3 million. Operating income from
continuing operations for the nine months ended June 2005 decreased by $2.3
million to $2.2 million.
INTEREST EXPENSE
Interest expense for Q3 2005 and the nine months ended June 2005 increased
$0.2 million and $0.6 million, respectively as compared to Q3 2004. The
increase was primarily due to increases in the prime lending rate during the
periods which under the terms of the amended and restated credit facility, is
the rate at which the Company primarily borrows. On average, the Company's
borrowing rates on its variable rate debt were 1.43% higher and average
borrowings were $7.3 million higher in Q3 2005 as compared to Q3 2004. For
the nine months ended June 2005 interest rates were, on average, 1.93% higher
and average borrowings were $13.3 million higher as compared to Q3 2004.
Borrowings were higher in both periods in large part due to the $4.5 million
of debt related to the acquisition of TSI in June 2004 and Nesco Hawaii in
July 2004.
OTHER
For the first nine months of fiscal 2005, other income decreased $0.5 million
as compared to same period in fiscal 2004 because of the sale of available-
for-sale securities in the first nine months of 2004 that did not recur in
2005.
For the first nine months of fiscal 2005, minority interest in loss, net of
tax, increased during the period (which decreased the net loss) by $0.1
million as compared to the same period in fiscal 2004 due to the 15%
ownership of TSI that is not owned by AMCON. Additionally, losses were not
allocated due to the reduction of the third parties investment to zero as a
result of the cumulative losses.
As a result of the above factors, the income from continuing operations for
Q3 June 2005 decreased $0.4 million compared to the same period of the prior
year to $0.2 million. The loss from continuing operations for the nine
months ended June 2005 of $0.2 million represented a decrease of $2.1 million
from the same period of the prior year.
36
During Q3 2005 and the first nine months of fiscal 2005, the Company paid
preferred dividends of $0.1 million and $0.2 million, respectively, on its
Series A and B, Cumulative, Convertible Preferred Stock.
DISCONTINUED OPERATIONS
Effective March 31, 2005, the Company's subsidiary, The Beverage Group, Inc.,
ceased on-going operations due to recurring losses since its December 2002
inception. A charge of $0.2 million and $1.0 million, before taxes, was
included in loss from discontinued operations in Q3 2005 and first nine
months of fiscal 2005, respectively. The charge represents the adjustment of
the accounts receivable and inventory to their net realizable values and to
write off fixed assets. In addition, in accordance with SFAS No. 146
"Accounting for Costs Associated with Exit or Disposal Activities" management
has accrued one-time termination benefits and rent and related expenses
associated with the remaining lease commitment on the office lease totaling
approximately $0.1 million.
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 and from borrowings, as necessary. During the nine
months ended June 2005, the Company generated $1.3 million of cash from
operating activities, primarily through the reduction of inventories offset
by an increase in accounts receivable and a reduction of accounts payable.
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 a
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 back stock of inventory 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 end 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 $2.5 million was utilized in investing activities during the first
nine months of fiscal 2005 for capital expenditures primarily related to the
purchase of a building and the construction of an addition so that we could
relocate one of our wholesale distribution facilities. A significant portion
of the cash flows used in investing activities were financed through the real
estate term debt discussed below.
The Company added net cash of $1.1 million from financing activities during
the first nine months of fiscal 2005 primarily from borrowings of $13.9
million on bank credit agreements and other short and long-term debt
arrangements and $1.8 million from the private placement of Series B
37
Convertible Preferred Stock (net of costs incurred to issue the securities).
Cash of $14.0 million was used in financing activities during the first nine
months of fiscal 2005 to pay down revolving lines of credit totaling $4.8
million used to fund our beverage segment, $6.8 million in subordinated debt
in the retail segment and other long-term debt totaling $2.4 million. During
the first nine months of fiscal 2005, $0.2 million was used to pay dividends
on preferred stock and $0.4 million was used to pay for costs incurred to
amend and restate our revolving credit facility.
As of June 2005, the Company had cash on hand of $0.4 million and working
capital (current assets less current liabilities) of $36.8 million. This
compares to cash on hand of $0.4 million and negative working capital of
$11.9 million as of September 2004. The evaluation of the Company's working
capital is significantly impacted by the classification of the revolving
credit facility as a short-term obligation in September 2004 and treatment as
long-term in June 2005, except for the amount expected to be paid on the
revolver in the next twelve months, for the reasons discussed in Note 8. The
Company's ratio of debt to equity was 6.49 at June 2005 compared to 5.37 in
September 2004. For purposes of this calculation, the Series A and Series B
Preferred Stock and other long-term liabilities (the water royalty) are
excluded.
The Company's maximum revolving credit limit on the Facility was $54.0
million at June 30, 2005, 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. On June 30, 2005,
the balance on the facility was $51.3 million, including Term Note A, and the
amount available to borrow, based on our collateral and the loan limit was
approximately $52.1 million. During the nine months ended June 30, 2005 our
peak borrowing was $52.9 million, our average borrowing was $48.2 million and
our average availability was $3.5 million. Our availability to borrow under
the Facility generally decreases as inventory and accounts receivable levels
go up because of the borrowing limitations that are placed on the
collateralized assets.
Funds generated from operations, supplemented as necessary with funds
available under the Facility have historically provided sufficient liquidity
for operation of the wholesale and retail businesses. In April 2005,
management negotiated the inclusion of TSI into the Company's revolving
credit facility which has incrementally increased collateral by $0.8 million.
Additionally, management has been actively negotiating with potential
investors and lenders to privately place additional debt or equity to provide
additional funding for TSI. If the Company is unable to raise the additional
funds in the near future, plans for growth within TSI would be negatively
impacted and could potentially impact the carrying value of the business.
As described in Note 12 to the condensed consolidated unaudited financial
statements included in this report, TSI obtained unsecured, subordinated
loans of $500,000 on August 8, 2005 with a maturity of December 8, 2005, of
which $250,000 was from Aristide Investment, L.P., a California limited
partnership (of which, William F. Wright, the Company's Chairman of the
Board, Chief Executive Officer and largest stockholder, is a partner). The
other $250,000 was from Draupnir, LLC, a Delaware limited liability company
(of which, Allen Petersen, one of the Company's directors, is a member).
These temporary loans was made available to TSI to provide time for the
Special Committee, composed of independent, disinterested members of the
Company's Board of Directors, to explore strategic alternatives. The Special
38
Committee is in the process of selecting a financial adviser to evaluate and
pursue these strategic alternatives and related matters. One of these
related matters delegated by the Board of Directors to the Special Committee
is to explore the feasibility of obtaining additional equity or mezzanine
capital for investment in The Healthy Edge, Inc. which is planned to be an
intermediate holding company for the subsidiaries conducting the retail
health food and beverage segments. These businesses have higher growth
potential than the wholesale distribution segment and require additional
capital to fund their capital expenditures and operating requirements in
order to achieve that potential and also, in the case of TSI, to achieve
profitability. The strategic alternatives being considered by the Special
Committee include the spin-off of at least 80% of the stock of The Healthy
Edge, Inc. to the Company's stockholders but additional capital is expected
to be needed to make that alternative viable. If such capital is not
forthcoming, it is anticipated that the sale of some or all of the business
constituting the retail health food and beverage segments will emerge as the
principal strategic alternative to be pursued by the Special Committee with
assistance from its financial adviser. In this regard, Mr. Wright has
expressed an interest in forming a group to acquire the Company's retail
health food and beverage businesses on an arms-length basis with the Special
Committee acting on behalf of the Board of Directors.
The Special Committee plans to proceed with this process as promptly as is
reasonably practicable in order to avoid jeopardizing access to the capital
needed for continued operation and growth of these businesses. The Special
Committee also recognizes the need to move quickly in conducting this process
to satisfy the requirement contained in a recent amendment to the loan
agreement for the Company's revolving credit facility that the Company sell
or liquidate the beverage businesses by December 10, 2005. The spin-off
alternative would not constitute a sale or liquidation of the beverage
business and would for this and other reasons require a consent from the bank
lenders under the revolving credit agreement.
Dividend Payments
- -----------------
During the first quarter of fiscal 2005, the Board of Directors suspended
payment of cash dividends on our common shares. 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
- -----------------------
Except as described above, there have been no material changes to our
financial obligations and financial commitments as described on pages 43 and
44 of Form 10-Q for the quarter ended March 31, 2005 filed with the
Securities and Exchange Commission on May 27, 2005.
Credit Agreement
- -------------------
The Company's primary source of borrowing for liquidity purposes is its
revolving credit facility with LaSalle Bank (the "Facility"). As of June
2005, the outstanding balance on the Facility was $51.3 million, including
39
Term Note A. The Facility, which was amended in October 2004, transfered
$1.2 million of revolving debt to term debt and added the subsidiaries,
except TSI, as borrowers. TSI was subsequently added as a borrower in April
2005. The Facility bears interest at a variable rate equal to the bank's
base rate, which was 6.25% at June 2005. The Company may, however, select a
rate equal to LIBOR plus 2.50%, for an amount of the Facility up to $10.0
million which relates to our swap agreement. The Facility continues to
restrict borrowings for intercompany advances to TBG and TSI to $1.0 million
in the aggregate and to the retail health food subsidiaries and HNWC to $0.9
million in the aggregate in fiscal 2005 and $0.1 million in the aggregate in
subsequent years.
The Company hedges its variable rate risk on a notional $10.0 million of its
borrowings under the Facility by use of interest rate swap agreements. This
swap agreement has the effect of converting the interest on this amount of
debt to a fixed rate of 4.87% per annum.
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. The
Facility expires in April 2007.
The Facility contains covenants that (i) restrict permitted investments, (ii)
restrict intercompany advances to certain subsidiaries as described above,
(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 0.7 to 1.0, and a minimum tangible net
worth of $1.5 million through September 2005 and $2.5 million thereafter.
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.
At June 30, 2005, the Company had tangible net worth of zero, as defined by
the Facility, and was not in compliance with the minimum tangible net worth
covenant, as amended. In addition, the Company's fixed charge ratio of 0.54
at June 30, 2005 was not in compliance with the minimum fixed charge coverage
ratio of 0.7, as amended. As set forth in the loan agreement, the failure to
comply with the minimum fixed charge coverage ratio shall not constitute an
Event of Default so long as AMCON has sufficient aggregate availability on
the revolving credit facility to institute a reserve in an amount equal to
the difference between AMCON's calculated fixed charge coverage ratio and
the minimum fixed charge coverage ratio. At June 30, 2005, the amount
necessary to attain compliance with the fixed charge coverage ratio was
approximately $1.2 million. The Company obtained a waiver of the covenants
for the period ended June 30, 2005. In addition, the lender suspended both
covenants through the end of the fiscal year. The covenants will be reset
and reinstated after the disposal of the beverage operations. See Item 2,
COMPANY OVERVIEW - THIRD FISCAL QUARTER 2005 for further discussion.
In connection with the amendment to the Facility in October 2004, the Company
obtained the $5.0 million Term Note B from LaSalle Bank, which had an
outstanding balance of $4.5 million at June 2005. Term Note B bears interest
at the bank's base rate plus 2.00%, which was 8.25% at June 2005 and is
required to be repaid in eighteen monthly installments of $0.3 million.
40
The Company's Chairman has personally guaranteed repayment of up to $10
million of the combined amount of the 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., Health Food
Associates, Inc., HNWC and TSI.
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.
As noted above, the agent for the bank lenders under the Facility has
required that the Company dispose of the beverage business by December 10,
2005.
Preferred Stock
- ---------------
In October 2004 the Company completed a $2.0 million private placement of
Series B Convertible Preferred Stock representing 80,000 shares at $25 per
share, the proceeds of which were used in combination with funds from Term
Note B to retire $6.8 million of subordinated debt.
Real Estate Term Debt
- ---------------------
In December 2004, the Company purchased a distribution building in Rapid
City, South Dakota and began construction of an addition to the building.
The lease on the current building was extended to coincide with the
completion of construction in the third quarter of fiscal 2005. The Company
has incurred capital expenditures relating to the building, construction of
the addition and related equipment purchases in the amount of approximately
$1.8 million. The Company arranged permanent financing for the building and
equipment in an amount equal to 80% of the acquisition cost or approximately
$1.5 million. The remainder of the capital expenditures related to the
building and the building addition have been provided by the Facility.
In June 2001, the Company borrowed $6.9 million from a bank, at a fixed rate
of 7.5%, to purchase the distribution facility in Quincy, IL. The loan is
collateralized by two of the Company's owned distribution facilities
(Bismarck, ND and Quincy, IL). As of June 2005, the outstanding balance on
the loan was approximately $6.2 million. This real estate loan is amortized
on a 20 year basis with a balloon payment due on June 1, 2006. In August
2005, the maturity date of the loan was extended to October 1, 2005. The
Company intends to refinance the loan on a long term basis on terms similar
to those in the current loan agreement.
TSI Financing
- -------------
In December 2004, a director of the Company extended a revolving credit
facility to TSI in a principal amount of up to $1.0 million at an interest
rate of 8% per annum. The entire $1.0 million is outstanding at June 30,
2005. The director received, as collateral, a second mortgage on TSI's real
property on an equal basis with the Company's existing second mortgage on
TSI's real property.
41
Additionally, on March 30, 2005, a Company that is wholly-owned by three of
the Company's directors (including the Chairman and the President) and
another significant shareholder of the Company, extended $0.5 million to TSI
under a promissory note due on or before June 15, 2005 and has subsequently
been amended to come due on September 30, 2005. The note bears interest at
7% per annum.
As noted above, TSI obtained unsecured, subordinated loans of $500,000 on
August 8, 2005, with a maturity of December 8, 2005, of which $250,000 was
from Aristide Investments, L.P., a California limited partnership (of which,
William F. Wright, the Company's Chairman of the Board, Chief Executive
Officer and largest stockholder, is a partner). The other $250,000 was from
Draupnir, LLC, a Delaware limited partnership (of which, Allen D. Petersen,
one of the Company's directors, is a member). The loans bear interest at
seven percent per annum.
Cross Default and Co-Terminus Provisions
- -----------------------------------------
The Company's owned real estate in Bismarck, ND, Quincy, IL, and Rapid City,
SD, and certain warehouse equipment in the Rapid City, SD warehouse is
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 is in default. Since
Gold Bank approved waivers of the covenant violations in the Facility, the
Gold Bank Loans are not considered to be 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.
CERTAIN ACCOUNTING CONSIDERATIONS
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, results of operations and cash flows.
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and Error
Corrections," which replaces APB Opinion No. 20, "Accounting Changes," and
FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements". This statement changes the requirements in the accounting for
and reporting of a change in accounting principle. This statement is
effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005.
42
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.
RELATED PARTY TRANSACTIONS
As described under the headings LIQUIDITY AND CAPITAL RESOURCES - Credit
Facilities and TSI Financing, the Company's Chairman has personally
guaranteed repayment of certain obligations of the Company and is being paid
a guarantee fee for that service. In addition, a director of the Company has
extended a $1.0 million revolving line of credit to TSI and a Company that is
wholly-owned by the three directors of the Company (including the Chairman
and President) and another significant shareholder have issued a promissory
note to TSI in the amount of $0.5 million.
As noted above, TSI obtained unsecured, subordinated loans of $500,000 on
August 8, 2005, with a maturity of December 8, 2005, of which $250,000 was
from Aristide Investments, L.P., a California limited partnership (of which,
William F. Wright, the Company's Chairman of the Board, Chief Executive
Officer and largest stockholder, is a partner). The other $250,000 was from
Draupnir, LLC, a Delaware limited partnership (of which, Allen D. Petersen,
one of the Company's directors, is a member). The loans bear interest at
seven percent per annum.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate risk on its variable rate debt. At
June 2005, we had $45.8 million of variable rate debt outstanding (excluding
$10.0 million variable rate debt which is fixed through the swaps described
below), with maturities through April 2007. The interest rate on this debt
was 6.25% at June 2005. We estimate that our annual cash flow exposure
relating to interest rate risk based on our current borrowings is
approximately $0.3 million for each 1% change in our lender's prime interest
rate.
At June 2005, the Company has an interest rate swap agreement with a bank in
order to mitigate the Company's exposure to interest rate risk on this
variable rate debt. Under the agreement, the Company agreed 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. The interest rate swap effectively converts $10.0 million of
variable-rate senior debt to fixed-rate debt at a rate of 4.87% on the $10.0
million notional amount through the maturity of the swap agreements on June
2, 2006. This interest rate swap agreement has been designated as a hedge
and is 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.
43
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure
that information required to be disclosed in the Company's reports under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission, and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures. Any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives. The Company's management, including the
Company's Principal Executive Officer and Chief Financial Officer, reviewed
and evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered by
this report. There have been no significant changes in the Company's
disclosure controls and procedures or in other factors that could
significantly affect the Company's disclosure controls and procedures
subsequent to the date of their evaluation. There were no material
weaknesses identified in the course of such review and evaluation and,
therefore, no corrective measures were taken by the Company. Based on that
evaluation and subject to the foregoing, the Principal Executive Officer and
Chief Financial Officer have concluded that the Company's current disclosure
controls and procedures, as designed and implemented, are effective, as of
the end of the period covered by this report, at the reasonable assurance
level.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
TSI ACQUISITION
AMCON announced in May 2004 that it was filing suit against Trinity Springs,
Ltd. in order to obtain an order from the United States District Court for
the District of Idaho declaring that a majority of the votes entitled to be
cast by the shareholders of Trinity Springs, Ltd. were cast in favor of the
sale of substantially all of its assets to AMCON's subsidiary, TSL
Acquisition Corp., and thereby satisfied the shareholder approval condition
of the asset purchase transaction. Subsequent to AMCON's filing of its
lawsuit, the Inspectors of Election and the Board of Directors of Trinity
Springs, Ltd. certified the shareholder voting results in favor of the asset
purchase transaction.
After the certification of the voting results, certain minority shareholders
filed a complaint and motion seeking injunctive relief in the District Court
of the Fifth Judicial District of the State of Idaho. The Court granted a
temporary restraining order on June 11, 2004, which prevented the closing of
the asset purchase transaction until the Court had an opportunity to review
additional briefing on the issues presented and the parties could be heard by
the Court. On June 16, 2004, the Court heard arguments on whether to extend
the temporary restraining order and grant the minority shareholders' motion
for preliminary injunction. As a result of the parties' briefing and the
arguments presented, the Court dissolved the temporary restraining order and
thereby enabled the asset sale transaction to be consummated.
44
On July 19, 2004, several of the same minority shareholders, along with some
additional shareholders filed an amended complaint in the same Idaho state
court action. The minority shareholders' amended complaint seeks (i) a
declaration that the asset sale transaction is void and injunctive relief
rescinding that transaction or, alternatively, that a new shareholder vote on
the asset sale transaction be ordered, (ii) damages for the alleged breaches
of fiduciary duty which are claimed to have arisen out of the disclosure made
in connection with the solicitation of proxies, how the votes were counted,
and conducting the closing without the requisite shareholder vote, and (iii)
imposition of a constructive trust on the sale proceeds and requiring
separate books to be maintained. In June 2005, the same minority
shareholders filed a motion for a partial summary judgement in which they
asked the Court for a determination that the asset sale transaction was
consummated without shareholder approval in violation of Idaho law.
Additionally, the minority shareholders requested the rescission of the sale
and the restoration of the parties to their pre-sale positions. AMCON is
currently in the process of responding to this filing and, on the basis of
the advice from trial counsel, continues to believe that the shareholders of
Trinity Springs, Ltd. approved the sale of assets to the Company in
accordance with applicable law and that the asset sale transaction was
properly completed.
PACIFIC VENTURES HAWAII
On or about April 15, 2005, plaintiff Pacific Ventures Hawaii filed an action
in Superior Court of the State of California for the County of Los Angeles
naming The Beverage Group, Inc. ("TBG") and certain other unaffiliated
parties as defendants. The dispute centers around a series of contracts
entered into by the various parties to import, broker, market and distribute
the Hype Classic Energy Drink line of products. TBG was to act as the master
distributor for the product. The complaint filed in that action alleges five
causes of action against the defendants: breach of contract; common counts;
intentional interference with contract; intentional interference with
prospective economic advantage; and negligent interference with business
relationships. The plaintiff does not specifically allege how TBG breached
the contracts or how it acted wrongfully. The complaint filed in that action
seeks compensatory damages "in excess of $500,000 and according to proof";
punitive damages in an unspecified amount; attorney's fees, witness fees and
costs incurred; and all other relief the Court deems just and proper.
On May 6, 2005 outside counsel for TBG faxed a letter to plaintiff's counsel
demanding that the case be dismissed with prejudice because TBG believes: it
did not breach any of its obligations under those contracts to which it is a
party; the plaintiff has stated in writing that TBG does not have any
liability; and the applicable contract has provisions mandating submission of
any disputes to arbitration by the American Arbitration Association in New
York. If the plaintiff does not voluntarily dismiss this suit, TBG will file
an answer or motion to dismiss and vigorously defend the action. At this
point it is too early to determine the likely outcome of the action.
TELEVISION EVENTS & MARKETING, INC. VS. AMCON DISTRIBUTING CO., ET AL.
An action entitled Television Events & Marketing, Inc. vs. AMCON Distributing
Co., et al., Civil No. CV 05-00259 ACK BMK, was filed in the First Circuit
Court of the State of Hawaii in Honolulu, Hawaii on March 8, 2005 and then
removed on April 12, 2005 to the United States District Court for the
45
District of Hawaii. This action concerns the alleged breach of two trademark
licensing agreements involving Television Events & Marketing, Inc. The
complaint seeks (i) an unstated amount of damages for an alleged breach of
those agreements; (ii) an unstated amount of damages for alleged fraudulent
transfer of assets to Trinity Springs, Inc., a subsidiary of the Company;
(iii) interest and reasonable attorney's fees and costs; and (iv) such other
relief as the court deems just and proper. On May 4, 2005, the Company,
together with its named subsidiaries, moved to dismiss the complaint or for
summary judgment on the complaint. On April 28, 2005, the Company offered to
settle this matter with the plaintiff for $100,000. The plaintiff rejected
that written settlement offer. The plaintiff's attorney asserts that the
amount of the plaintiff's damages for the alleged breach of the two
agreements exceeds $400,000.
IN GENERAL
The Company is also party to other lawsuits and claims arising out of the
operation of its businesses. Management believes the ultimate resolution of
such matters should not have a material adverse effect on the Company's
financial condition, results of operations or liquidity after giving
consideration to amounts already recorded in the Company's financial
statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
During the fiscal quarters ended December 2004 and June 2005, the Company's
minimum tangible net worth dropped below that required by the Facility.
LaSalle Bank, agent for the lenders, waived this default and entered into an
amendment to the Credit Agreement effective December 31, 2004 which reduced
the minimum tangible net worth covenant requirement to $1.5 million through
September 30, 2005 and $2.5 million thereafter, and redefined and reduced the
minimum fixed charge coverage ratio to 0.7 million for the remainder of
fiscal 2005. The Company was not in compliance with the minimum tangible net
worth covenant at June 30, 2005. As discussed in Note 8 to the condensed
consolidated unaudited financial statements and Part I, Item 2 of
Management's Discussion and Analysis, the financial covenant violations were
waived by the lenders as of June 30, 2005 and suspended through the end of
the fiscal year. The covenants will be reset and reinstated subsequent to
the Company's disposition of its beverage operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
46
Item 6. Exhibits
(a) EXHIBITS
2.1 Assets Purchase and Sale Agreement by and between Food For Health
Company, Inc., AMCON Distributing Company and Tree of Life, Inc. dated
March 8, 2001 (incorporated by reference to Exhibit 2.1 of AMCON's
Current Report on Form 8-K filed on April 10, 2001)
2.2 Amendment to Assets Purchase and Sale Agreement by and between Food For
Health Company, Inc., AMCON Distributing Company and Tree of Life, Inc.
effective March 23, 2001 (incorporated by reference to Exhibit 2.2 of
AMCON's Current Report on Form 8-K filed on April 10, 2001)
2.3 Asset Purchase Agreement, dated April 24, 2004, between TSL Acquisition
Corp., AMCON Distributing Company and Trinity Springs, Ltd.
(incorporated by reference to Exhibit 2.8 of AMCON's Quarterly Report on
Form 10-Q filed on August 9, 2004)
2.4 First Amendment to Asset Purchase Agreement dated June 17, 2004 between
TSL Acquisition Corp., AMCON Distributing Company and Trinity Springs,
Ltd. (incorporated by reference to Exhibit 2.9 of AMCON's Quarterly
Report on Form 10-Q filed on August 9, 2004)
3.1 Restated Certificate of Incorporation of the Company, as amended May
11, 2004 (incorporated by reference to Exhibit 3.1 of AMCON's Quarterly
Report on Form 10-Q filed on August 9, 2004)
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 of
AMCON's Registration Statement on Form S-1 (Registration No. 33-82848)
filed on August 15, 1994)
3.3 Second Corrected Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Securities of AMCON Distributing Company
dated August 5, 2004 (incorporated by reference to Exhibit 3.3 of
AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004)
3.4 Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Securities of AMCON Distributing Company dated
October 8, 2004 (incorporated by reference to Exhibit 3.4 of AMCON's
Annual Report on Form 10-K filed on January 7, 2005)
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit
4.1 of AMCON's Registration Statement on Form S-1 (Registration No.
33-82848) filed on August 15, 1994)
4.2 Specimen Series A Convertible Preferred Stock Certificate (incorporated
by reference to Exhibit 4.2 of AMCON's Quarterly Report on Form 10-Q
filed on August 9, 2004)
4.3 Specimen Series B Convertible Preferred Stock Certificate (incorporated
by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed
on January 7, 2005)
47
4.4 Securities Purchase Agreement dated June 17, 2004 between AMCON
Distributing Company, William F. Wright and Draupnir, LLC (incorporated
by reference to Exhibit 4.3 of AMCON's Quarterly Report on Form 10-Q
filed on August 9, 2004)
4.5 Securities Purchase Agreement dated October 8, 2004 between AMCON
Distributing Company and Spencer Street Investments, Inc. (incorporated
by reference to Exhibit 4.5 of AMCON's Annual Report on Form 10-K filed
on January 7, 2005)
10.1 Amended and Restated Loan and Security Agreement, dated September 30,
2004, between the Company and LaSalle National Bank, as agent
(incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on
Form 10-K filed on January 7, 2005)
10.2 Revised First Amendment To Amended and Restated Loan and Security
Agreement, dated April 14, 2005 (incorporated by reference to Exhibit
10.2 of AMCON's Form 10-Q filed on May 27, 2005)
10.3 Revised Second Amendment to Amended and Restated Loan and Security
Agreement, dated May 23, 2005 (incorporated by reference to Exhibit
10.3 of AMCON's Form 10-Q filed on May 27, 2005)
10.4 Third Amendment to Amended and Restated Loan and Security Agreement,
dated August 12, 2005
10.5 First Amended and Restated AMCON Distributing Company 1994 Stock Option
Plan (incorporated by reference to Exhibit 10.17 of AMCON's Current
Report on Form 10-Q filed on August 4, 2000)*
10.6 AMCON Distributing Company Profit Sharing Plan (incorporated by
reference to Exhibit 10.8 of Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-82848) filed on
November 8, 1994)*
10.7 Employment Agreement, dated May 22, 1998, between the Company and
William F. Wright (incorporated by reference to Exhibit 10.14 of
AMCON's Quarterly Report on Form 10-Q filed on August 6, 1998)*
10.8 Employment Agreement, dated May 22, 1998, between the Company and
Kathleen M. Evans (incorporated by reference to Exhibit 10.15 of
AMCON's Quarterly Report on Form 10-Q filed on August 6, 1998)*
10.9 Director and Officer Compensation (incorporated by reference to Exhibit
10.8 of AMCON's Form 10-Q filed on May 27, 2005)
10.10 Agreement, dated December 10, 2004 between AMCON Distributing Company
and William F. Wright with respect to split dollar life insurance
(incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on
Form 10-K filed on January 7, 2005)
10.11 Agreement, dated December 15, 2004 between AMCON Distributing Company
and Kathleen M. Evans with respect to split dollar life insurance
(incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on
Form 10-K filed on January 7, 2005)
48
10.12 ISDA Master Agreement, dated as of May 12, 2003 between the Company and
LaSalle Bank National Association (incorporated by reference to Exhibit
10.13 of AMCON's Quarterly Report on Form 10-Q filed on August 11,
2003)
10.13 Swap Transaction Confirmation ($10,000,000) dated as of May 23, 2003
between the Company and LaSalle Bank National Association (incorporated
by reference to Exhibit 10.14 of AMCON's Quarterly Report on Form 10-Q
filed on August 11, 2003)
10.14 Promissory Note ($2,828,440), dated as of June 17, 2004 between the
Company and Trinity Springs, Ltd. (incorporated by reference to Exhibit
10.15 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004)
10.15 Promissory Note ($500,000), dated as of June 17, 2004 between the
Company and Trinity Springs, Ltd. (incorporated by reference to Exhibit
10.16 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004)
10.16 Security Agreement, dated June 17, 2004 by and between TSL Acquisition
Corp., AMCON Distributing Company and Trinity Springs,Ltd.(incorporated
by reference to Exhibit 10.17 of AMCON's Quarterly Report on Form 10-Q
filed on August 9, 2004)
10.17 Shareholders Agreement, dated June 17,2004, by and between TSL
Acquisition Corp, AMCON Distributing Company and Trinity Springs, Ltd.
(incorporated by reference to Exhibit 10.18 of AMCON's Quarterly Report
on Form 10-Q filed on August 9, 2004)
10.18 Guaranty and Suretyship Agreement, dated June 17, 2004, by and between
AMCON Distributing Company and Trinity Springs, Ltd. (incorporated by
reference to Exhibit 10.19 of AMCON's Quarterly Report on Form 10-Q
filed on August 9, 2004)
10.19 Mortgage, dated June 17, 2004, by and between TSL Acquisition Corp.,
AMCON Distributing Company and Trinity Springs, Ltd.(incorporated by
reference to Exhibit 10.20 of AMCON's Quarterly Report on Form 10-Q
filed on August 9, 2004)
10.20 Guaranty Fee, Reimbursement and Indemnification Agreement, dated as of
September 30, 2004, between AMCON Distributing Company and William F.
Wright (incorporated by reference to Exhibit 3.4 of AMCON's Annual
Report on Form 10-K filed on January 7, 2005)
10.21 Unconditional Guaranty, dated as of September 30, 2004 between William
F. Wright and LaSalle Bank, N.A.(incorporated by reference to Exhibit
3.4 of AMCON's Annual Report on Form 10-K filed on January 7, 2005)
10.22 Secured Promissory Note ($1,000,000), dated December 14, 2004, issued
by Trinity Springs, Inc. to Allen D. Petersen (incorporated by
reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed
on January 7, 2005)
49
10.23 Modification and Extension of Second Lien Commercial Mortgage,
Assignment of Leases and Rents, and Fixture Filing, dated as of
December 14, 2004 between Trinity Springs, Inc. and Allen D. Petersen
(incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on
Form 10-K filed on January 7, 2005)
10.24 Term Real Estate Promissory Note, dated December 21, 2004, issued by
AMCON Distributing Company to Gold Bank (incorporated by reference to
Exhibit 10.21 of AMCON's quarterly report on Form 10-Q filed on
February 14, 2005)
10.25 Term Equipment Promissory Note, dated December 21, 2004 issued by AMCON
Distributing Company to Gold Bank (incorporated by reference to
Exhibit 10.22 of AMCON's quarterly report on Form 10-Q filed on
February 14, 2005)
10.26 One Hundred Eighty Day Redemption Mortgage and Security Agreement by
and between AMCON Distributing Company and Gold Bank (incorporated by
reference to Exhibit 10.23 of AMCON's quarterly report on Form 10-Q
filed on February 14, 2005)
10.27 Security Agreement by and between AMCON Distributing Company and Gold
Bank (incorporated by reference to Exhibit 10.24 of AMCON's quarterly
report on Form 10-Q filed on February 14, 2005)
10.28 Promissory Note, dated March 30, 2005 issued by Trinity Springs, Inc.
to Nebraska Distributing Company
10.29 Subordinated Promissory Note, dated August 8, 2005 issued
by Trinity Springs, Inc. to Draupnir, LLC
10.30 Subordinated Promissory Note, dated August 8, 2005 issued
by Trinity Springs, Inc. to Aristide Investments, L.P.
10.31 Subordination Agreement, dated as of August 8, 2005, among Trinity
Springs, Inc., Artiside Investment L.P., and Draupnir, LLC
11.1 Statement re: computation of per share earnings (incorporated by
reference to footnote 4 to the financial statements which are
incorporated herein by reference to Item 1 of Part I herein)
14.1 Code of Ethics for Principal Executive and Financial Officers
(incorporated by reference to Exhibit 14.1 of AMCON's Annual Report on
Form 10-K filed on December 24, 2003)
31.1 Certification by William F. Wright, Chairman and Principal Executive
Officer, furnished pursuant to section 302 of the Sarbanes-Oxley Act
31.2 Certification by Michael D. James, Vice President and Chief Financial
Officer, furnished pursuant to section 302 of the Sarbanes-Oxley Act
32.1 Certification by William F. Wright, Chairman and Principal Executive
Officer, furnished pursuant to section 906 of the Sarbanes-Oxley Act
50
32.2 Certification by Michael D. James, Vice President and Chief Financial
Officer, furnished pursuant to section 906 of the Sarbanes-Oxley Act
* Represents management contract or compensation plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
AMCON DISTRIBUTING COMPANY
(registrant)
Date: August 19, 2005 /s/ William F. Wright
----------------- -----------------------------
William F. Wright
Chairman of the Board and
Principal Executive Officer
Date: August 19, 2005 /s/ Michael D. James
----------------- -----------------------------
Michael D. James
Treasurer & CFO and
Principal Financial and
Accounting Officer
51