AMCON Distributing Company
7405 Irvington Road
Omaha, NE 68122
June 13, 2006
Ms. Sarah Goldberg
Staff Accountant
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: AMCON Distributing Company
Form 8-K Filed May 31, 2006
File No. 1-15589
Dear Ms. Goldberg:
This letter is being filed as EDGAR correspondence with our proposed First
Amendment to Current Report on Form 8-K/A (see Exhibit A) of AMCON
Distributing Company ("AMCON" or the "Company"), SEC File No. 1-15589, to
respond to the concerns raised by the Securities and Exchange Commission
("SEC") staff on June 2, 2006 in a letter to Mr. Andrew C. Plummer (the
"Comment"). The number Comments are set forth below in all capitals and the
Company's response follows in normal font text.
ITEM 4.02
1. PLEASE TELL US IN GREATER DETAIL THE NATURE OF THE ERRORS IN YOUR
INVENTORY ACCOUNTING, THE CAUSE OF THE ERRORS AND WHY SUCH ERRORS WERE NOT
PREVIOUSLY DISCOVERED.
Response:
Please refer to Exhibit A attached hereto which serves as our proposed First
Amendment to Current Report Form 8-K/A ("Form 8-K/A") which addresses your
concerns and is to be filed upon the completion of this review.
2. AS YOU HAVE CONCLUDED THAT YOUR PREVIOUSLY ISSUED FINANCIAL STATEMENTS
FOR THE FISCAL 2005 QUARTERS SHOULD NO LONGER BE RELIED UPON, PLEASE AMEND
YOUR FISCAL 2005 FORMS 10-Q TO CORRECT THE DISCLOSED ERRORS. IT IS NOT
SUFFICIENT TO RESTATE THE QUARTERLY FINANCIALS PROSPECTIVELY AS EACH QUARTER
IS FILED IN FISCAL 2006. WE BELIEVE IT IS APPROPRIATE TO NOTE THAT AS YOU
ARE RESPONSIBLE UNDER THE FEDERAL SECURITIES LAW AND REGULATIONS TO FILE
ACCURATE REPORTS WITH THE COMMISSION, AND TO BE IN FULL COMPLIANCE WITH THE
REPORTING REQUIREMENTS OF THE EXCHANGE ACT, YOU ARE REQUIRED TO AMEND ANY
FILINGS THAT CONTAIN MATERIALLY INACCURATE FINANCIAL STATEMENTS.
Response: Pursuant to our discussions via voicemails during the week of June
6, 2006, the Company intends to disclose the restated quarterly information
in its Annual Report on Form 10-K for fiscal year ended September 30, 2005
("Form 10-K"). The Company intends to file this Form 10-K near the end of
June 2006.
1
3. YOU DISCLOSE THAT YOU FILED YOUR FISCAL 2005 FORMS 10-Q DURING 2006. IT
APPEARS YOU MAY HAVE INTENDED TO STATE THAT THEY WERE FILED DURING 2005. IF
SO, PLEASE AMEND FOR 8-K TO CORRECT THIS STATEMENT.
Response: Please refer to Exhibit A which serves as our proposed Form 8-K/A
to correct this inadvertent error by stating that the Form 10-Qs for the
fiscal quarters ended December 31, 2004, March 31, 2005 and June 30, 2005,
respectively, were filed on February 14, 2005, May 27, 2005 and August 22,
2005, respectively. We expect to file this Form 8-K/A upon the completion of
this review.
4. WE NOTE THAT YOU CONCLUDED IN FORM 10-Q FOR FISCAL QUARTER ENDED JUNE
30, 2005 THAT DISCLOSURE CONTROLS AND PROCEDURES WERE EFFECTIVE. PLEASE TELL
US IF YOUR CERTIFYING OFFICERS HAVE CONSIDERED THE EFFECTS OF THE ERRORS ON
THE ACCURACY OF SUCH PRIOR DISCLOSURE REGARDING DISCLOSURE CONTROLS AND
PROCEDURES UNDER ITEM 307 OF REGULATION S-K. IF SUCH OFFICERS HAVE CONCLUDED
THAT THEIR PREVIOUS CONCLUSION REGARDING EFFECTIVENESS WAS INCORRECT, YOU
MUST DISCLOSURE THIS DETERMINATION. OTHERWISE, PLEASE EXPLAIN TO US WHY THE
DISCOVERY OF THESE ERRORS DID NOT AFFECT YOUR CONCLUSION REGARDING THE
EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES.
Response: As the Company will report in its Form 10-K, expected to be filed
near the end of June:
The Company maintains disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the
"Exchange Act")), that are designed to ensure that information required to be
disclosed in the Company's reports filed or furnished under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the Exchange Act related rules and forms of the SEC. Such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), as appropriate, to allow timely decisions regarding required
disclosures. Any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance of achieving
the desired control objectives.
The Company carried out the evaluation required by paragraph (b) of the
Exchange Act Rules 13a-15 and 15d-15, under the supervision and with the
participation of our management, including the CEO and CFO, of the
effectiveness of our disclosure controls and procedures. Based upon this
evaluation, as a result of the material weaknesses described below, the CEO
and CFO concluded that our disclosure controls and procedures were not
effective, as of September 30, 2005. The Company's management conducted
similar evaluations for each fiscal quarter of 2005. While the CEO and CFO
had concluded that our disclosure controls and procedures were effective at
the time, they now conclude, as a result of the material weaknesses described
below, that our disclosure controls and procedures were not effective, as of
each of December 31, 2004, March 31, 2005 and June 30, 2005.
To mitigate the control weaknesses described below, the Company performed
additional analysis and other post-closing procedures in order to prepare the
consolidated financial statements in accordance with generally accepted
accounting principles in the United States of America. Accordingly,
management believes that the consolidated financial statements as of and for
2
the fiscal year ended September 30, 2005 and the restated quarterly results,
included in this Annual Report on Form 10-K, fairly present in all material
respects our financial condition, results of operations and cash flows for
the periods presented.
In connection with the Company's September 30, 2005 year end audit and
physical inventory count at its subsidiary, Hawaiian Natural Water Co., Inc.
("HNWC"), the Company discovered that incorrect accounting entries had been
made. These resulted in material weaknesses in internal control over
financial reporting. A material weakness is a significant control
deficiency, or combination of significant control deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual
or interim financial statements will not be prevented or detected. Management
and the Company's independent registered public accountants identified the
following material weaknesses:
a) The Company did not maintain sufficient levels of appropriately
qualified and trained personnel in the accounting office of HNWC,
specifically as they related to the integration of new business
operations and the application of certain complex aspects of inventory
and manufacturing accounting; and
b) The Company did not maintain sufficient oversight and review of the
disclosure controls and procedures of its subsidiaries during fiscal
year 2005 to identify the significant deficiencies in the internal
control over financial reporting at HNWC in a timely manner.
The following changes in our internal control over financial reporting were
made to correct the deficiencies noted above. These changes occurred during
the first and second quarters of fiscal year 2006 and have significantly
strengthened our internal control over financial reporting:
1) AMCON's corporate management terminated HNWC's then current President
and Chief Financial Officer.
2) AMCON's corporate management hired a new acting president and a
highly qualified accounting consultant at HNWC to investigate the
irregularities and guide internal accounting personnel in the
application of generally accepted accounting principles related to
inventory and production cost accounting.
3) HNWC management hired accounting staff at HNWC with more experience.
4) HNWC management is reviewing all product cost summaries and
all inventory cost changes.
5) AMCON's corporate management implemented procedures to ensure
proper review and approval of all adjusting journal entries
posted at HNWC, as well as, increasing monthly review of subsidiary
financial statements.
3
Furthermore, the Company acknowledges:
- it is responsible for the adequacy and accuracy of the
disclosure in the filing;
- staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any
action with respect to the filing; and
- it may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under
the federal securities laws of the United States.
Should you have any additional questions regarding these matters please feel
free to contact me at (402) 331-3727 Ext. 225.
Sincerely,
/s/ Andrew C. Plummer
- ------------------------
Andrew C. Plummer
Vice President and
Acting Chief Financial Officer
4
EXHIBIT A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES ACT OF 1934
Date of Report (Date of earliest event reported) May 24, 2006
------------------------------------------------------------------
AMCON DISTRIBUTING COMPANY
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 1-15589 47-0702918
- ------------------------------------------------------------------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
7405 Irvington Road, Omaha, NE 68122
------------------------------------
(Address of principal executive offices) (Zip Code)
(402) 331-3727
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name or former address, if changed since last report)
ITEM 4.02. NON-RELIANCE ON PREVIOUSLY ISSUED FINANCIAL STATEMENTS OR A
RELATED AUDIT REPORT OR COMPLETED INTERIM REVIEW
In performing year end audit procedures as of and for the period ended
September 30, 2005 on the Company's wholly-owned subsidiary, Hawaiian Natural
Water Company ("HNWC"), the auditors noted discrepancies in their physical
test counts and the final perpetual inventory records. These discrepancies
led the Company to initiate an internal investigation which resulted in the
identification of several areas where journal entries were recorded
incorrectly including inventory production accounting errors; the
overstatement of inventory when integrating in fiscal 2005 the production
systems and records of an operation acquired in fiscal 2004; capitalization
of certain fixed overhead costs as inventory which should have been expensed;
failure to reserve an appropriate amount for inventory that became obsolete;
and capitalization of certain product development costs that should have been
expensed as incurred. The above led to an overstatement of inventory, other
assets and net income by an aggregate of approximately $685,000, after tax
over the first nine months of fiscal 2005.
Based on the results of the investigation, (a) these errors were generally
caused by deficiencies in internal control over financial reporting,
including deficiencies in disclosure controls and procedures, discussed below
in this Form 8-K/A; (b) the scope of the errors were contained in fiscal
2005, and (c) the errors were concentrated in the areas discussed above.
When AMCON corporate management became aware of the issues referenced above,
it reported these problems to the Audit Committee and Deloitte and Touche,
the Company's independent registered public accountants. AMCON corporate
management has discussed the investigation, the resolution of the problems
and strengthening of internal controls with the Audit Committee and its
independent registered public accountants.
On January 16, 2006, the Company issued a press release disclosing
management's investigation into the above.
As a result of the accounting errors, management and the Company's Audit
Committee determined on May 24, 2006 that the Company's first, second and
third quarter financial statements for fiscal 2005 filed on Form 10-Qs with
the Securities and Exchange Commission on February 14, 2005, May 27, 2005 and
August 22, 2005, respectively, should no longer be relied upon because of
these errors and that these financial statements should be restated to
correct these errors. Management and the Audit Committee have discussed with
the Company's independent registered public accountants that these financial
statements can no longer be relied upon.
The foregoing incorrect accounting entries resulted from the following
material weaknesses in internal control over financial reporting:
a) The Company did not maintain sufficient levels of appropriately
qualified and trained personnel in the accounting office of HNWC,
specifically as they related to the integration of new business operations
and the application of certain complex aspects of inventory and manufacturing
accounting; and
b) The Company did not maintain sufficient oversight and review of the
disclosure controls and procedures of its subsidiaries during fiscal year
2005 to identify the significant deficiencies in the internal controls over
financial reporting at HNWC in a timely manner.
The following changes in our internal control over financial reporting were
made to correct the deficiencies noted above. These changes occurred during
the first and second quarters of fiscal year 2006 and have significantly
strengthened our internal control over financial reporting:
1) AMCON corporate management terminated HNWC's then current President
and Chief Financial Officer.
2) AMCON corporate management hired a new acting president and a highly
qualified accounting consultant at HNWC to investigate the irregularities and
to guide internal accounting personnel in the application of generally
accepted accounting principles related to inventory and production cost
accounting.
3) HNWC hired accounting staff with more experience.
4) HNWC management is reviewing all product cost summaries and all
posting of inventory cost changes.
5) AMCON corporate management implemented procedures to ensure proper
review and approval of all adjusting journal entries posted at HNWC, as well
as, increasing monthly review of subsidiary financial statements.
The table set forth below gives effect to these restatements. Management
expects to restate the quarterly financials prospectively as each quarter is
filed in fiscal 2006.
A summary of the significant effects of this restatement by quarter is as
follows:
FIRST FISCAL QUARTER ENDED DECEMBER 31, 2004
- --------------------------------------------
As previously
reported Corrections As restated
------------- ------------ ------------
Condensed Consolidated Unaudited Balance Sheet
- ----------------------------------------------
Inventory $ 35,454,419 $ (574,165) $ 34,880,254
Deferred income taxes 2,618,391 232,000 2,850,391
Other assets 1,485,457 (108,759) 1,376,698
Retained earnings 6,397,550 (450,924) 5,946,626
Condensed Consolidated Unaudited Statement of Operations
- --------------------------------------------------------
Cost of sales $ 198,459,240 $ 574,165 $199,033,405
Selling, general and administrative expenses 13,824,366 108,759 13,933,125
Income tax (benefit) expense 224,000 (232,000) (8,000)
Net (loss) income (85,599) (450,924) (536,523)
Basic (loss) earnings per share (0.16) (0.86) (1.02)
Diluted (loss) earnings per share (0.02) (0.86) (1.02) /1/
/1/ Before this restatement, the impact of the conversion of the stock options and preferred stock was
dilutive to earnings per share because there was income from continuing operations. After making the
corrections for the restatement, there will now be a loss from continuing operations which makes the
impact of the conversion of the stock options and preferred stock was antidilutive. This antidilutive
impact results in a loss of ($1.02) per dilutive share.
Condensed Consolidated Unaudited Statement of Cash Flows
- --------------------------------------------------------
Income (loss) from continuing operations $ 394,063 $ (450,924) $ (56,861)
available to common shareholders
Deferred income taxes (45,224) (232,000) (277,224)
Inventory (464,962) 574,165 109,203
Other assets (28,512) 108,759 80,247
SECOND FISCAL QUARTER ENDED MARCH 31, 2005
- ------------------------------------------
Condensed Consolidated Unaudited Balance Sheet /2/
- ----------------------------------------------
As previously
reported Corrections As restated
------------- ------------ ------------
Inventory $ 30,304,173 $ (689,993) $ 29,614,180
Deferred income taxes 3,729,391 279,000 4,008,391
Other assets 1,494,754 (129,904) 1,364,850
Retained earnings 4,509,877 (540,897) 3,968,980
Condensed Consolidated Unaudited Statement of Operations /2/
- --------------------------------------------------------
Three months ended March 31, 2005 Six months ended March 31, 2005
-------------------------------------- ------------------------------------
As previously As previously
reported Corrections As restated reported Corrections As restated
------------- ----------- ------------ -------------- ----------- ------------
Cost of sales $180,236,017 $115,828 $180,351,845 $378,695,256 $689,993 $379,385,249
Selling, general
and administrative expenses 13,727,633 21,145 13,748,778 27,551,999 129,904 27,681,903
Income tax (benefit) expense (565,000) (47,000) (612,000) (341,000) (279,000) (620,000)
Net (loss) income (1,887,674) (89,973) (1,977,647) (1,973,273) (540,897) (2,514,170)
Basic (loss) earnings per share (3.58) (0.17) (3.75) (3.74) (1.03) (4.77)
Diluted (loss) earnings per share (3.58) (0.17) (3.75) (3.74) (1.03) (4.77)
Condensed Consolidated Unaudited Statement of Cash Flows /2/
- --------------------------------------------------------
As previously
reported Corrections As restated
------------- ------------ ------------
Net income (loss) from continuing operations $ (603,991) $ (540,897) $ (1,144,888)
available to common shareholders
Deferred income taxes (1,137,076) (279,000) (1,416,076)
Inventory 4,639,543 689,993 5,329,536
Other assets (37,810) 129,904 92,094
THIRD FISCAL QUARTER ENDED JUNE 30, 2005
- ----------------------------------------
Condensed Consolidated Unaudited Balance Sheet /2/
- ----------------------------------------------
As previously
reported Corrections As restated
------------- ------------ ------------
Inventory $ 28,939,608 $ (889,612) $ 28,049,996
Deferred income taxes 3,780,391 353,000 4,133,391
Other assets 1,570,434 (148,884) 1,421,550
Retained earnings 4,354,000 (685,496) 3,668,504
Condensed Consolidated Unaudited Statement of Operations /2/
- --------------------------------------------------------
Three months ended June 30, 2005 Nine months ended June 30, 2005
------------------------------------- ---------------------------------------
As previously As previously
reported Corrections As restated reported Corrections As restated
------------- ----------- ------------ ------------ ----------- ------------
Cost of sales $201,251,586 $199,619 $201,451,205 $579,946,842 $889,612 $580,836,454
Selling, general
and administrative expenses 13,693,711 18,980 13,712,691 41,245,710 148,884 41,394,594
Income tax (benefit) expense 138,000 (74,000) 64,000 (203,000) (353,000) (556,000)
Net (loss) income (155,877) (144,599) (300,476) (2,129,150) (685,496) (2,814,646)
Basic (loss) earnings per share (0.30) (0.27) (0.57) (4.04) (1.30) (5.34)
Diluted (loss) earnings per share (0.28) (0.27) (0.55) (4.04) (1.30) (5.34)
Condensed Consolidated Unaudited Statement of Cash Flows /2/
- --------------------------------------------------------
As previously
reported Corrections As restated
------------- ------------ ------------
Income (loss) from continuing operations $ (441,609) $ (685,496) $ (1,127,105)
available to common shareholders
Deferred income taxes (1,205,608) (353,000) (1,558,608)
Inventory 5,911,793 889,612 6,801,405
Other assets (191,170) 148,884 (42,286)
/2/ In March 2006, the Company discontinued the operations of Trinity Springs, Inc., its water bottling
operation located in Idaho. As a result, the balance sheets as of March 31, 2005 and June 30, 2005 and
the statements of operations and statements of cash flows for the fiscal periods then ended will be
prepared reflecting TSI's financial results as discontinued operations in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" when filed. As a result, the information presented above will differ from the actual financial
statements to be filed with the SEC.
SIGNATURE
Pursuant to the requirements of the Securities and 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: June 13, 2006 By : Andrew C. Plummer
-------------------------
Name: Andrew C. Plummer
Title: Vice President & Acting
Chief Financial Officer
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