UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED September 30, 2005
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM to
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Commission File Number 1-15589
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AMCON Distributing Company
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(Exact name of Registrant as specified in its charter)
Delaware 47-0702918
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7405 Irvington Road, Omaha NE 68122
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(Address of principal executive offices)
Registrant's telephone number, including area code: (402) 331-3727
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
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(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No X
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes X No
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Annual Report on
Form 10-K or any other amendment to this Form 10-K. /X/
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer X
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Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes No X
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The aggregate market value of equity securities held by non-affiliates of the
Registrant on March 31, 2005 was approximately $5.0 million.
As of July 31, 2006, there were 527,062 shares of common stock outstanding.
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EXPLANATORY NOTE
As previously disclosed on Form 8-K on May 31, 2006 and again on Form 8-K/A
on June 21, 2006, management and the Company's Audit Committee determined
that the Company's first, second and third quarter financial statements for
fiscal 2005 filed on Forms 10-Q with the Securities and Exchange Commission
on February 14, 2005, May 27, 2005 and August 22, 2005, respectively, should
be restated due to accounting errors that occurred at the Company's
wholly-owned subsidiary, Hawaiian Natural Water Company ("HNWC") in
connection with the September 30, 2005 audit procedures.
In performing the September 30, 2005 audit procedures, the auditors noted
discrepancies in the inventory records at HNWC. These discrepancies led the
Company's Audit Committee 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. The Company believes these errors
were isolated to fiscal 2005.
Subsequent to the issuance of the September 30, 2004 financial statement,
Management and the Company's Audit Committee determined that the Company had
incorrectly allocated interest expense to one of its wholly-owned
subsidiaries that had ceased operations on March 31, 2005 (The Beverage
Group, Inc.). Emerging Issues Task Force ("EITF") 87-24 "Allocation of
Interest to Discontinued Operations", requires that (a) interest on debt that
is to be assumed by the buyer or is required to be repaid as a result of the
disposal transaction should be allocated to discontinued operations and (b)
the allocation to discontinued operations of other consolidated interest that
is not directly attributable to or related to other operations of the
enterprise is permitted but not required. Any interest allocated should be
determined by a ratio of net assets to total net assets after adjusting for
all interest and debt directly attributable to other aspects of the business.
The Company allocated interest to its discontinued operations in fiscal 2004
and its quarterly reporting in fiscal 2005 using an invested capital
calculation which resulted in higher interest being allocated to discontinued
operations than permitted by EITF 87-24. Although indirect interest of $0.1
million would be permitted under EITF 87-24 to be allocated to discontinued
operations, the Company has concluded that only direct interest of $0.1
million resulting from debt required to be repaid as part of the
discontinuation of the business should be allocated to discontinued
operations. Accordingly, the fiscal 2004 financial statements included here
within have been restated. The fiscal 2005 impact of this restatement was
corrected in the fourth quarter of fiscal 2005 with the reclassification of
$0.5 million of interest expense, net of income tax benefit of $0.3 million
from discontinued operations to income (loss) from continuing operations.
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AMCON DISTRIBUTING COMPANY
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Table of Contents
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Page
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PART I
Item 1. Business...................................................... 5
Item 1A. Risk Factors.................................................. 15
Item 1B. Unresolved Staff Comments..................................... 31
Item 2. Properties.................................................... 31
Item 3. Legal Proceedings............................................. 32
Item 4. Submission of Matters to a Vote of Security Holders........... 34
PART II
Item 5. Market for the Registrant's Common Stock, Related
Stockholder Matters and Issuer Purchases of Equity Securities. 34
Item 6. Selected Financial Data....................................... 35
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 45
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 69
Item 8. Financial Statements and Supplementary Data................... 69
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 115
Item 9A. Controls and Procedures....................................... 115
Item 9B. Other Information............................................. 117
PART III
Item 10. Directors and Executive Officers of the Registrant............ 117
Item 11. Executive Compensation........................................ 121
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................ 124
Item 13. Certain Relationships and Related Transactions................ 127
Item 14. Principal Accountant Fees and Services........................ 128
PART IV
Item 15. Exhibits and Financial Statement Schedules.................... 129
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PART I
ITEM 1. BUSINESS
GENERAL
AMCON Distributing Company ("AMCON" or the "Company") was incorporated in
Delaware in 1986. The Company's principal executive offices are located at
7405 Irvington Road, Omaha, Nebraska 68122. The telephone number at that
address is 402-331-3727 and the website address is www.amcon.com. The
Company makes available free of charge on its website, its reports on Forms
10-K and 10-Q, including amendments thereto, as soon as reasonably
practicable after filing with the Securities and Exchange Commission ("SEC").
AMCON has three business segments:
- Wholesale Distribution Segment - AMCON is primarily engaged in the
wholesale distribution of consumer products including cigarettes and
tobacco products, candy and other confectionery, beverages,
groceries, paper products and health and beauty care products.
- Retail Health Foods Segment - AMCON operates thirteen retail health
food stores in Florida and the Midwest
- Beverage Segment - AMCON operates a non-alcoholic beverage business
that includes natural spring and purified bottling operations in the
State of Hawaii. Until March 2006, AMCON also operated a geothermal
water bottling operation in Idaho. See discussion in Item 3 - Legal
Proceedings of this Annual Report on Form 10-K.
For purposes of this report, unless the context indicates otherwise, all
references to "we", "us", "our", "Company", and "AMCON" shall mean AMCON
Distributing Company and its subsidiaries including the wholesale
distribution business which will be separately referred to as "ADC".
WHOLESALE DISTRIBUTION BUSINESS
ADC serves approximately 4,500 retail outlets in the Great Plains and Rocky
Mountain regions, the largest of which accounted for approximately 7.6% of
ADC's total revenues during fiscal 2005. Convenience Store News, a trade
periodical, ranked ADC as the ninth (9th) largest distributor in its industry
out of approximately 1,000 distributors in the United States based upon
fiscal 2004 sales volume. Since ADC's inception, we have pursued a strategy
of growth through increased sales and acquisitions. Since 1993, ADC has
focused on increasing operating efficiency in its distribution business by
merging smaller branch distribution facilities into larger ones. On
September 30, 2005, we closed our Casper, Wyoming distribution center and now
service those customers from our new larger facility in Rapid City, South
Dakota. In addition, ADC has grown through expansion of its market area into
contiguous regions and by introduction of new product lines to customers.
ADC distributes approximately 13,000 different consumer products, including
cigarettes and tobacco products, candy and other confectionery, beverages,
groceries, paper products, health and beauty care products, frozen and
chilled products and institutional food service products. While cigarettes
accounted for approximately 72% of the Company's sales volume during fiscal
2005, we continue to evaluate new product lines in an attempt to lessen ADC's
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dependence upon cigarette sales. ADC's principal suppliers include Philip
Morris USA, RJ Reynolds Tobacco, Proctor & Gamble, Hershey, Mars, William
Wrigley and Nabisco. ADC also markets private label lines of tobacco, snuff,
water, candy products, batteries and film.
We have sought to increase sales to convenience stores and petroleum
marketers by adopting a number of operating strategies which we believe give
ADC a competitive advantage with these types of retailers. One key operating
strategy is a commitment to customer service. In a continuing effort to
provide better service than its competitors, ADC offers a complete point-of-
sale (POS) program to assist with customer image building and product
promotions, health and beauty programs, profit building private label
programs and custom food service programs, all of which have proven to be
advantageous to convenience store customers. ADC has a policy of next-day
delivery and employs a concept of selling products in cut-case quantities or
"by the each" (i.e. individual units). We also offer planograms to
convenience store customers to assist in the design of their store and
display of products within the store. In addition, customers are able to use
our web site to manage their inventory and retail prices, as well as obtain
periodic velocity management reports.
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 led to price increases by distributors, followed by manufacturers
reimplementing promotional programs less than a year later. In Q1 2005, the
industry then saw price increases on certain cigarette brands and in Q4 2005
more changes to promotional programs were announced for fiscal 2006 which
will require all distributors to pre-pay for cigarette inventory from a
certain manufacturer in order to maintain the same level of discounts. 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, closed their
operations, been acquired or are on the market to be sold. Increases in fuel
prices are also having a negative 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.
We have worked to improve ADC's operating efficiency by investing in new and
more efficient information systems technology, including computerization of
buying and financial control functions. Due to the significant price of
cigarettes, inventory management has become even more critical. We have also
sought to minimize inventory costs by focusing on the number of times
inventory is renewed during a period ("inventory turns") for the same level
of sales. Inventory turned 27.0 times in fiscal year 2005. Inventory turns
for the past five years are as follows:
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Fiscal Times
Year Inventory Turned
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2005 27.0
2004 27.8
2003 27.5
2002 28.5
2001 26.8
The reduction in inventory turns in 2005, as compared to the last prior year,
is primarily due to higher levels of cigarette inventory maintained during
the year in order to take advantage of state excise tax increases in certain
states. By managing operating costs, ADC is better able to price its
products in such a manner to achieve an advantage over less efficient
distributors in its market areas, yet remain competitively priced with
larger, efficient distributors who offer less service than ADC.
ADC's main office is in Omaha, Nebraska and operates five distribution
centers located in Illinois, Missouri, Nebraska, North Dakota, and South
Dakota. These distribution centers, combined with two cross dock facilities,
contain a total of approximately 516,000 square feet of floor space and
employ modern equipment for the efficient distribution of the large and
diverse product mix. ADC also operates a fleet of approximately 229 delivery
vehicles, including straight trucks and over-the-road vehicles with
refrigerated trailers.
RETAIL HEALTH FOOD BUSINESS
AMCON's retail health food stores, which are operated as Chamberlin's Market
& Cafe ("Chamberlin's" or "CNF") and Akin's Natural Foods Market ("Akin's" or
"ANF"), offer over 31,000 different product selections for their customers.
Chamberlin's, which was first established in 1935, is an award-winning and
highly-acclaimed chain of six health and natural product retail stores, all
offering an extensive selection of natural supplements and herbs, baked
goods, dairy products, delicatessen items and organic produce. Chamberlin's
operates all of its stores in and around Orlando, Florida.
Akin's, established in 1935, is also an award winning chain of seven health
and natural product retail stores, each offering an extensive line of natural
supplements and herbs, dairy products, delicatessen items and organic
produce. Akin's has locations in Tulsa (2 stores) and Oklahoma City (2
stores), Oklahoma; Lincoln, Nebraska; Springfield, Missouri; and Topeka,
Kansas.
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 benefitted from this trend as
fiscal 2005 sales increased over fiscal 2004 particularly in the Midwest
where we opened a new store in Q2 2004. Our Florida stores have experienced
sales improvements due to improvement in general economic conditions. 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.
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AMCON's retail health food stores are managed collectively through a main
office in Tulsa, Oklahoma, but utilize the name recognition of the
established health food retail chains. The Company strives to maintain the
local identity of each chain while providing a means to achieve operating
synergies leading to cost savings through centralized management of
operations.
BEVERAGE BUSINESS
In fiscal 2005 AMCON's beverage business consisted of Hawaiian Natural Water
Company, Inc. ("HNWC") and Trinity Springs, Inc. ("TSI"). HNWC, which is
headquartered in Pearl City, Hawaii, was formed in 1994 for the purpose of
bottling, marketing and distributing Hawaiian natural spring water in Hawaii,
the mainland and foreign markets. HNWC's Hawaiian Springs/R/ brand is the
only bottled natural spring water available from Hawaii. All other bottled
waters produced in Hawaii contain purified water, from which chemicals and
minerals have been removed by means of reverse osmosis filtration. HNWC
draws its Hawaiian Springs water from an artesian well located at the base of
the Mauna Loa mountain in Kea'au (near Hilo) on the big island of Hawaii.
The water is filtered and "bottled at the source" in polyethylene
terepthalate ("PET") plastic bottles, which are produced from pre-forms at
HNWC's bottling facility. All of HNWC's retail PET products are bottled at
its facility in Kea'au, Hawaii. These products consist of the Hawaiian
Springs natural spring water line and various limited production co-packaged
products.
In addition to its premium water brands, HNWC also competes in the purified
water bottling market by means of the acquisition of Nesco Hawaii in July
2004. We believe that competing in this market space enables HNWC to more
effectively differentiate the premium natural spring water from purified
bottled water products in the market place and provides a more competitive
price point in which to provide private label water to the island of Oahu.
TSI, purchased in June 2004, produced and sold a bottled natural mineral
supplement and geothermal bottled water under the Trinity/R/ label and
introduced a line of enhanced and organic fruit based beverage products made
with Trinity Springs water in fiscal 2005. The Trinity brands were bottled
at the source from one of the world's deepest and purest sources at the base
of the Trinity Mountains in Idaho at a place called Paradise. The Trinity
source flows to the surface of the earth through crystal-lined granite faults
by means of geothermal pressure, and reaches the surface at 138 degrees
Fahrenheit. TSI was headquartered in Boise, Idaho and marketed and
distributed the Trinity products on a national level primarily in retail
health food stores where they represented the number two packaged non-
carbonated water brand in the United States. TSI's operations were closed in
March 2006. See discussion in Item 3 - Legal Proceedings of this Annual
Report on Form 10-K.
RECENT EVENTS
TSI - In the first quarter of fiscal year 2006, William F. Wright, the
Company's Chairman of the Board, Chief Executive Officer and largest
stockholder, entered into a letter of intent in connection with his proposed
acquisition of 80% of the outstanding common stock of the Company's retail
health food and beverage manufacturing businesses ("LOI"). This LOI was
terminated on January 10, 2006 due to, among other things, the complications
created by a ruling by the District Court of the Fifth Judicial District of
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the State of Idaho announced by AMCON on December 21, 2005 related to TSI, an
85% owned subsidiary of the Company. Due to uncertainties surrounding the
TSI transaction, the losses generated by TSI and TSI's constant need for
cash, the Company closed the TSI operations in March 2006. For more
information, see Item 3 Legal Proceedings and Item 1A-Risk Factors on this
Annual Report on From 10-K.
HNWC - In connection with conducting the 2005 year end audit for the Company,
our independent public accountant identified approximately $685,000 in
accounting and inventory irregularities at HNWC. The Company's Audit
Committee launched an investigation of these matters, identified areas of
internal control weakness and have put in place procedures and controls to
mitigate these concerns. For more information about this issue see Item 9A
Controls and Procedures of this Annual Report on Form 10-K.
DISCONTINUED OPERATIONS
The Beverage Group, Inc.("TBG"), a former business component of the beverage
segment which marketed and distributed specialty beverage products, ceased
on-going operations in March 2005. All TBG employees were terminated
effective March 31, 2005 and the Company outsourced various responsibilities
in order to maximize the value of the remaining assets by liquidating
inventory, collecting receivables and evaluating its payables. The decision
to discontinue TBG came after significant expenditures were made for product
development, distribution network development and marketing efforts to
promote our portfolio of specialty beverages in fiscal 2003 and 2004. The
resulting sales were less than expected due to lack of market penetration of
our new beverage products.
In our Financial Statements set forth in Item 8 of this Annual Report on Form
10-K and our Management Discussion and Analysis of the Results of Operations
set forth under Item 7 of this Annual Report on Form 10-K for all periods
presented, TBG's sales, gross profit (loss), selling, general and
administrative, depreciation and amortization, interest directly attributable
to TBG, other expenses and income tax benefit have been aggregated and
reported as a loss from discontinued operations in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets."
PRINCIPAL PRODUCTS
CIGARETTES. Sales of cigarettes and the gross margin derived therefrom for
the fiscal years ending 2005, 2004 and 2003 are set forth below (dollars in
millions):
Fiscal Year Ended
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2005 2004 2003
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Sales $607.3 $597.3 $564.8
Sales as a % of Total Sales 71.8% 72.7% 73.2%
Gross Margin $ 19.6 $ 19.4 $ 22.5
Gross Margin as a % of Total
Gross Margin 32.4% 32.6% 37.4%
Gross Margin Percentage 3.2% 3.3% 4.0%
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Revenues from the sale of cigarettes during fiscal 2005 increased by 1.7% as
compared to fiscal 2004, while gross profit from the sale of cigarettes
increased by 3.0% during the same period. Sales of cigarettes represented
approximately 71.8% of the Company's sales volume during fiscal 2005 which is
a decrease of 0.9% due to sales growth in the retail health food and beverage
businesses. Cigarette carton volume decreased 3.7% in fiscal 2005 (excluding
the extra week of operations in fiscal 2005), but the impact to gross margin
of this volume decrease was partially offset by price increases of
approximately $1.00 per carton on Philip Morris and RJ Reynolds brands in
December 2004. In addition, there were excise tax increases in certain
states ranging between $4.40 and $10.00 per carton that occurred throughout
the year which boosted cigarettes sales by approximately $6.5 million. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS-Results of Operations-Fiscal Year Ended
2005 Versus Year Ended 2004" in Item 7 of this Annual Report on Form 10-K.
CONFECTIONERY. Candy, related confectionery items and snacks constitute the
Company's second largest-selling product line, representing approximately
6.6% of the Company's total sales volume during fiscal 2005. Sales of
confectionery items and the gross margin derived therefrom for the fiscal
years ending 2005, 2004, and 2003 are set forth below (dollars in millions):
Fiscal Year Ended
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2005 2004 2003
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Sales $ 56.1 $ 55.6 $ 51.4
Gross Margin 7.0 7.3 6.4
Gross Margin Percentage 12.5% 13.1% 12.5%
ADC supplies customers with over 2,300 different types of candy and related
products, including chocolate bars, cookies, chewing gum, nuts and other
snack items. Major brand names include products manufactured by Hershey
(Reese's, Kit Kat, and Hershey), Mars (Snickers, M&M's, and Milky Way),
William Wrigley and Nabisco. ADC also markets its own private label candy
under a manufacturing agreement with Palmer Candy Company.
OTHER TOBACCO PRODUCTS. Sales of other tobacco products (cigars, snuff,
chewing tobacco, etc.) represents AMCON's third largest-selling product line,
representing approximately 6.5% of the Company's total sales volume during
fiscal 2005. Sales of other tobacco products and the gross margin derived
therefrom for the fiscal years ending 2005, 2004 and 2003 are set forth below
(dollars in millions):
Fiscal Year Ended
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2005 2004 2003
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Sales $ 55.5 $ 54.2 $ 48.3
Gross Margin 5.0 4.7 4.0
Gross Margin Percentage 9.1% 8.6% 8.3%
NATURAL FOODS AND RELATED PRODUCTS. Natural foods and related products,
which are primarily sold by the retail health food segment, constitute the
Company's fourth largest-selling product line, representing approximately
4.1% of the Company's total sales volume during fiscal 2005. Sales of
natural foods and related products and the gross margin derived therefrom for
the fiscal years ending 2005, 2004 and 2003 are set forth below (dollars in
millions):
10
Fiscal Year Ended
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2005 2004 2003
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Sales $ 34.6 $ 32.4 $ 33.1
Gross Margin 13.6 13.0 13.2
Gross Margin Percentage 39.2% 40.0% 39.8%
OTHER PRODUCT LINES. Over the past decade, AMCON's strategy has been to
expand its portfolio of consumer products in order to better serve its
customer base. AMCON's other product lines include bottled water and other
beverages, groceries, paper products, health and beauty care products, frozen
and chilled products and institutional food products. During fiscal 2005,
AMCON's sales of other products increased $10.2 million or 12.5% due
primarily to an increase in the beverage segments sales of bottled water from
the TSI acquisition in fiscal 2004. During fiscal 2005, the gross profit
margin on these types of products was 16.5% compared to 18.5% for fiscal
2004. TSI's operations were closed in March 2006. See discussion in Item 3
- - Legal Proceedings and Item 1A - Risk Factors of this Annual Report on Form
10-K.
COMPETITION
The distribution industry is highly competitive. There are many similar
distribution companies operating in the same geographical regions as ADC.
ADC is one of the largest distribution companies of its kind operating in its
market area. ADC's principal competitors are national wholesalers such as
McLane Co., Inc. (Temple, Texas) and Core-Mark International (San Francisco,
California) and regional wholesalers such as Eby-Brown LLP (Chicago,
Illinois) and Farner-Bocken (Carroll, Iowa), along with a host of smaller
grocery and tobacco wholesalers. Most of these competitors generally offer a
wide range of products at prices comparable to ADC's. ADC seeks to
distinguish itself from its competitors by offering a higher level of
technology to retailers than its smaller competitors and a higher level of
customer service than its larger competitors.
The natural food retail industry is highly fragmented, with more than 9,000
stores operating independently or as part of small chains. The two leading
natural food chains, Whole Foods Market and Wild Oats, continue to expand
their geographic markets by opening stores in new markets. In addition,
conventional supermarkets and mass market outlets are also increasing their
emphasis on the sale of natural products. These strategies have contributed
to the saturation of health food retail stores in some markets. This has
increased competition in the health food sector and has had a restraining
impact on same store sales increases in some markets and a slight reduction
in same store sales in other markets.
The bottled water market is highly competitive, with numerous participants
selling products often perceived as generic by consumers. The principal
bases of competition in the industry are brand recognition, price, water
source for bottled water products, and packaging. Price competition has
become more pronounced as the industry has matured. The Company seeks to
develop recognition for its brands by differentiating its products from more
recognized products in the brand category. The Hawaiian Springs and Trinity
brands of water are unique because of their water source. HNWC is the only
producer of natural spring water from Hawaii. HNWC generally prices this
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product at or slightly below the price for other premium brands. HNWC's
purchase of Nesco Hawaii has allowed HNWC to more effectively differentiate
the premium natural spring water from the purified bottled water products and
services at more competitive price points in which to provide private label
water to the island of Oahu. The Trinity geothermal water, natural mineral
supplement, enhanced and organic beverages were sold primarily in health food
stores.
SEASONALITY
Sales in the wholesale distribution and beverage segments are somewhat
seasonal by nature and tend to be higher in warm weather months as our
convenience store customers experience increased customer traffic. The warm
weather months generally fall within the Company's third and fourth fiscal
quarters.
GOVERNMENT REGULATION
Various state government agencies regulate the distribution of cigarettes and
tobacco products in several ways, including the imposition of excise taxes,
licensing and bonding requirements. Complying with these regulations is a
very expensive and labor-intensive undertaking. For example, each state (as
well as certain cities and counties) requires the Company to collect excise
taxes ranging from $1.70 to $17.00 per carton on all cigarettes sold by it in
the state. Such excise taxes must be paid in advance and, in most states, is
evidenced by a stamp which must be affixed to each package of cigarettes. A
number of states increased their excise tax on cigarettes in recent years and
more are expected to do so in the future.
The Company is also subject to regulation by state and local health
departments, the U.S. Department of Agriculture, the Food and Drug
Administration, U.S. Department of Transportation and the Drug Enforcement
Agency. These agencies generally impose standards for product quality and
sanitation, as well as, security and distribution policies.
The bottled water industry is regulated both in the United States and abroad.
Various state and federal regulations, designed to ensure (but not guarantee)
the quality of the product and the truthfulness of its marketing claims,
require our beverage businesses to monitor each aspect of the bottled water
production process, including its water source, bottling operations and
packaging and labeling practices. The Environmental Protection Agency
requires a yearly analysis of the water sources by a certified laboratory
with respect to a comprehensive list of contaminants (including herbicides,
pesticides, volatile chemicals and trace metals). In addition, the State
Department of Health for Hawaii and Idaho require weekly microbiological
testing of the source water.
Our bottling facilities have on-site laboratories, where samples of finished
product are visually and chemically tested daily. The facilities utilize
independent state certified laboratories to test samples from each production
run. In addition, the production lines are subject to constant visual
inspection. The Company believes that it meets or exceeds all applicable
regulatory standards concerning the quality of its bottled water.
In addition to U.S. regulations, HNWC must meet the requirements of foreign
regulatory agencies in order to export and sell its product into other
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countries. These requirements are generally similar to, and in certain
respects more stringent than, U.S. regulations. HNWC believes that it is in
compliance with applicable regulations in all foreign territories where it
currently markets its product.
Failure to meet applicable regulations in the U.S. or foreign markets could
lead to costly recalls or loss of certification to market products. Even in
the absence of governmental action, loss of revenue could result from adverse
market reaction to negative publicity.
ENVIRONMENTAL MATTERS
All the facilities and operations of the Company are subject to state and
federal environmental regulations. The Company believes that all of its real
property is in compliance with all regulations regarding the discharge of
toxic substances into the environment and is not aware of any condition at
its properties that could have a material adverse effect on its financial
condition or results of operations. In that regard, the Company has not been
notified by any governmental authority of any potential liability or other
claim in connection with any of its properties.
EMPLOYEES
At fiscal year end 2005, the Company had 972 full-time and part-time
employees in the following areas:
Managerial 40
Administrative 90
Delivery 116
Sales & Marketing 340
Warehouse 386
-----
Total Employees 972
=====
All of ADC's delivery employees in the Quincy, Illinois distribution center,
representing 3% of ADC's employees company-wide, are represented by the
International Association of Machinists and Aerospace Workers. The labor
agreement with the union was renegotiated in December 2005 and a new
agreement was executed that is effective through December 2008. Management
believes its relations with its employees are good.
MANAGEMENT; BOARD OF DIRECTORS
Holding Company Structure. On March 7, 2006, the Company issued and sold
80,000 shares of its Series C Convertible Preferred Stock at $25 per share in
a private placement under Section 4(2) of the Securities Act of 1933. See
"Item 7 Management Discussion and Analysis Liquidity and Capital
Resources Recent Developments." On March 29, 2006, in connection with the
issuance of the Series C Convertible Preferred Stock, the Company amended its
bylaws to implement a holding company structure. Among other things, our
bylaws were amended as follows:
13
- to create the Office of the Chairman, which is comprised of the
Chairman, the Vice Chairman and the permanent Chief Financial Officer,
and to provide that the President and our executive officers other
than the Chairman (who is also our chief executive officer) will
report to the Office of the Chairman.
- to provide that the officers of our Company to be elected by our Board
of Directors would include a Chairman and Vice Chairman, in addition
to the President, and that our Board of Directors may choose a Chief
Financial Officer, in addition to one or more Vice Presidents,
Assistant Secretaries, Assistant Treasurers and other officers deemed
necessary by our Board.
- to provide that the duties and responsibilities of the Chairman will
be to serve as the chief executive officer and, as such, the
Chairman's duties and responsibilities were expanded to include
responsibility for directing the business and affairs of our Company's
distribution segment.
- to provide that the duties and responsibilities of the Vice Chairman
will be to serve as the Chief Corporate Officer who will have
responsibility for directing the business and affairs of our Company,
in addition to performing the duties of the Chairman in his or her
absence.
- to provide that the duties and responsibilities of the President will
be to serve as the Chief Operating Officer who will have
responsibility for the active management of the business and affairs
of our Company, in addition to performing the duties of the Chairman
and Vice Chairman in the absence of both the Chairman and Vice
Chairman.
The Certificate of Designations, Preferences and Rights that created and
authorized the Series C Convertible Preferred Stock provides that the holder
of the Series C Preferred Stock, voting separately as a single class, would
be entitled to elect one director to our Company's Board of Directors.
Draupnir Capital, LLC, the holder of the Series C Convertible Preferred
Stock, designated Jeremy W. Hobbs to serve as such director. On March 29,
2006, Mr. Hobbs was appointed to serve as a Class III director of our Company
for an initial term expiring at the annual meeting of stockholders in 2006 or
until his earlier resignation, removal from office, death or disability. To
accommodate this appointment, the size of our Board of Directors was
increased from nine to ten members.
14
ITEM 1A. RISK FACTORS
IN GENERAL
- ----------
You should carefully consider the risks described below before making an
investment decision. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually occurs, our business, financial
condition or results of operations could be materially adversely affected. In
that case, the trading price of our common stock could decline substantially.
This Annual Report also contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from
those anticipated in the forward-looking statements as a result of a number
of factors, including the risks described below and elsewhere in this Annual
Report.
RISKS AFFECTING THE WHOLESALE BUSINESS
- --------------------------------------
- - the Wholesale Distribution of Cigarettes and Convenience Store Products Is
Significantly Affected by Cigarette Pricing Decisions and Promotional
Programs Offered by Cigarette Manufacturers.
We receive payments from the manufacturers of the products we distribute for,
allowances, discounts, volume rebates, and other merchandising incentives in
connection with various incentive programs. These payments are a substantial
benefit to us and the amount and timing of these payments are affected by
changes in the programs by the manufacturers and our ability to sell
specified volumes of a particular product or attaining specified levels of
purchases by our customers or market share, and the duration of carrying a
specified product. In addition, we receive discounts from states in
connection with the purchase of excise stamps for cigarettes. If the
manufacturers or states change or discontinue these programs or we are unable
to maintain the volume of our sales, our results of operations and financial
condition could be negatively affected.
Over the past several years, the industry has experienced the discontinuance
of promotional programs, which led to price increases by distributors,
followed by manufacturers reimplementing promotional programs less than a
year later. In the first quarter of calendar year 2005, the industry saw
price increases on certain cigarette brands and in fourth quarter of calendar
year 2005 more changes to promotional programs were announced for fiscal 2006
which will require all distributors to pre-pay for cigarette inventory from a
certain manufacturer in order to maintain the same level of discounts. Based
on these activities, it is difficult to predict how changes in cigarette
pricing and promotional programs will impact the Company and the industry in
the future.
- - Increases in Fuel Prices Are Reducing Profit Margins and Affecting Our
Business.
Increases in fuel prices are also having a negative impact on profits over
the past year without any indications that they will return to past levels.
If prices continue to rise and we are not able to pass these costs along to
customers this will have a material adverse impact on our results of
operations, business, cash flow and financial condition.
15
- - Increases in Wholesale Distribution Business Competition May Have an
Adverse Effect on Our Business.
The distribution industry is highly competitive. There are many similar
distribution companies operating in the same geographical regions as ADC.
ADC's principal competitors are national wholesalers such as McLane Co., Inc.
(Temple, Texas), a subsidiary of Berkshire Hathaway, Inc., and Core-Mark
International (San Francisco, California) and regional wholesalers such as
Eby-Brown LLP (Chicago, Illinois) and Farner-Bocken (Carroll, Iowa), along
with a host of smaller grocery and tobacco wholesalers. Most of these
competitors generally offer a wide range of products at prices comparable to
ADC's. Some of our competitors, including McLane Company, Inc., the largest
convenience wholesale distributor in the U.S., have substantial financial
resources and long standing customer relationships. In addition, heightened
competition may reduce our margins and adversely affect our business. If we
fail to successfully respond to these competitive pressures or to implement
our strategies effectively, we may lose market share and our results of
operations, business, cash flow, and financial condition could suffer.
- - Due to the Low-margins on the Products We Distribute, Changes in General
Economic Conditions Could Materially Adversely Affect Our Operating
Results.
We derive most of our revenues from the distribution of cigarettes, other
tobacco products, candy, snacks, fast food, grocery products, non-alcoholic
beverages, general merchandise and health and beauty care products. The
wholesale distribution industry is characterized by a high volume of sales
with relatively low profit margins. Our non-cigarette sales are at prices
that are based on the cost of the product plus a percentage markup. As a
result, our profit levels may be negatively impacted during periods of cost
deflation for these products, even though our gross profit as a percentage of
the price of goods sold may remain relatively constant. Gross profit on
cigarette sales are generally fixed on a cents per carton basis. Therefore,
as cigarette prices increase, gross profit generally decreases as a percent
of sales. In addition, if the cost of the cigarettes that we purchase
increases due to manufacturer price or excise tax rate increases, our
inventory costs and accounts receivable could rise. To the extent that
product cost increases are not passed on to our customers due to their
resistance to higher prices, our profit margins and earnings could be
negatively impacted. The consumable goods distribution industry is sensitive
to national and regional economic conditions. Inflation, fuel costs and other
factors affecting consumer confidence may negatively impact our sales. Our
operating results are also sensitive to, and may be adversely affected by,
other factors, including difficulties with the collectibility of accounts
receivable, competitive price pressures, severe weather conditions and
unexpected increases in fuel or other transportation-related costs.
- - Our Sales Volume Is Largely Dependent upon the Distribution of Cigarette
Products, Sales of Which Are Declining.
The distribution of cigarettes is currently a significant portion of our
business. For the year ended September 30, 2005, approximately 72% of our
revenues came from the distribution of cigarettes. During the same period,
approximately 32% of our gross profit was generated from cigarettes. Due to
increases in the prices of cigarettes, restrictions on advertising and
promotions by cigarette manufacturers, increases in cigarette regulation and
excise taxes, health concerns, increased pressure from anti-tobacco groups
and other factors, the U.S. cigarette market has generally been declining,
16
and is expected to continue to decline. Notwithstanding the general decline
in consumption, we have benefitted from a shift of cigarette sales to
convenience stores. However, this favorable trend may not continue.
- - Legislation and Other Matters Are Negatively Affecting the Cigarette and
Tobacco Industry.
The tobacco industry is subject to a wide range of laws and regulations
regarding the advertising, sale, taxation and use of tobacco products imposed
by local, state, federal and foreign governments. Various state and
provincial governments have adopted or are considering legislation and
regulations restricting displays and advertising of tobacco products,
establishing fire safety standards for cigarettes, raising the minimum age to
possess or purchase tobacco products, requiring the disclosure of ingredients
used in the manufacture of tobacco products, imposing restrictions on public
smoking, restricting the sale of tobacco products directly to consumers or
other unlicensed recipients over the Internet, and other tobacco product
regulation. Other states may adopt similar legislation and initiate similar
lawsuits. In addition, cigarettes are subject to substantial excise taxes in
the United States. Significant increases in cigarette-related taxes have been
proposed or enacted and are likely to continue to be proposed or enacted
within the United States. These tax increases are likely to continue to have
an adverse impact on sales of cigarettes due to lower consumption levels or
sales outside of legitimate channels.
- - In the United States, We Purchase Cigarettes from Manufacturers Covered by
the Industry's Master Settlement Agreement, Which Results in Our Facing
Increased Financial Risks.
In June 1994, the Mississippi attorney general brought an action against
various tobacco industry members. This action was brought on behalf of the
state to recover state funds paid for health-care, medical and other
assistance to state citizens suffering from diseases and conditions allegedly
related to tobacco use. Most other states, through their attorneys general or
other state agencies, sued the major U.S. cigarette manufacturers based on
similar theories. The cigarette manufacturer defendants settled the first
four of these cases scheduled for trial Mississippi, Florida, Texas and
Minnesota by separate agreements between each state and those manufacturers
in each case. These states are referred to as non-master settlement agreement
states.
In November 1998, the major U.S. tobacco product manufacturers entered into
the master settlement agreement with the other 46 states, the District of
Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa
and the Northern Marianas to settle asserted and unasserted health care cost
recovery and other claims. The master settlement agreement and the other
state settlement agreements: settled all health-care cost recovery actions
brought by, or on behalf of, the settling jurisdictions; released the major
U.S. cigarette manufacturers from various additional present and potential
future claims relating to past conduct arising out of the use, sale,
distribution, manufacture, development, advertising, marketing or health
effects of, the exposure to, or research, statements or warnings about,
tobacco products; settled all monetary claims relating to future conduct
arising out of the use of, or exposure to, tobacco products that have been
manufactured in the ordinary course of business; imposed a stream of future
payment obligations on major U.S. cigarette manufacturers; and placed
significant restrictions on their ability to market and sell cigarettes.
17
The payments required under the master settlement agreement result in the
products sold by the participating manufacturers to be priced at higher
levels than non-master settlement agreement manufacturers.
In order to limit our potential tobacco related liabilities, we do not
purchase cigarettes from non-master settlement agreement manufacturers for
sale in master settlement agreement states. The benefits of the master
settlement agreement do not apply to sales of cigarettes manufactured by
non-master settlement agreement manufacturers.
- - In the United States, We Purchase Cigarettes from Manufacturers Covered by
the Industry's Master Settlement Agreement, Which Results in Competition
from Lower Priced Sales of Cigarettes Produced by Manufacturers Who Do Not
Participate in the Master Settlement Agreement.
Competition among cigarette manufacturers for cigarette sales is primarily
based on brand positioning, price, product attributes, consumer loyalty,
promotions, advertising and retail presence. Cigarette brands produced by the
major manufacturers generally require competitive pricing, substantial
marketing support, retail programs and other financial incentives to maintain
or improve a brand's market position. Increased selling prices and higher
cigarette taxes have resulted in the growth of deep-discount brands.
Deep-discount brands are brands manufactured by companies that are not
original participants to the master settlement agreement, and accordingly, do
not have cost structures burdened with master settlement agreement related
payments to the same extent as the original participating manufacturers.
Historically, major manufacturers have had a competitive advantage in the
United States because of significant cigarette marketing restrictions and the
scale of investment required to compete made gaining consumer awareness and
trial of new brands difficult. However, since the master settlement agreement
was signed in November 1998, the category of deep-discount brands
manufactured by smaller manufacturers or supplied by importers has grown
substantially.
As a result of purchasing premium and discount cigarettes for sale in master
settlement agreement states exclusively from manufacturers that are parties
to the master settlement agreement, we are adversely impacted by sales of
brands from non-master settlement agreement manufacturers and deep-discount
brand growth. We believe that small manufacturers, not subject to the master
settlement agreement, of deep-discount brands have steadily increased their
combined market share of cigarette sales. The premium and discount cigarettes
subject to the master settlement agreement that we sell have been negatively
impacted by widening price gaps in the prices between those brands and the
deep-discount brands for the past several years. The growth in market share
of the deep-discount brands since the master settlement agreement was signed
in 1998 has had an adverse impact on the volume of the cigarettes that we
sell. As a result, our operations and financial condition may be negatively
impacted as sales volumes of premium cigarettes erode.
- - We Also Face Competition from Illicit and Other Low Priced Sales of
Cigarettes.
We also face competition from the diversion into the United States market of
cigarettes intended for sale outside the United States, the sale of
counterfeit cigarettes by third parties, the sale of cigarettes in
non-taxable jurisdictions, inter-state and international smuggling of
cigarettes, increased imports of foreign low priced brands, the sale of
cigarettes by third parties over the Internet and by other means designed to
18
avoid collection of applicable taxes. The competitive environment has been
characterized by a continued influx of cheap products that challenge sales of
higher priced and taxed cigarettes manufactured by parties to the master
settlement agreement. Increased sales of counterfeit cigarettes, sales by
third parties over the Internet, or sales by means to avoid the collection of
applicable taxes, could have an adverse effect on our cash flow, results of
operations and financial condition.
- - If the Tobacco Industry's Master Settlement Agreement Is Invalidated, or
Tobacco Manufacturers Cannot Meet Their Obligations to Indemnify Us, We
Could Be Subject to Substantial Litigation Liability.
In connection with the master settlement agreement, we are indemnified by the
tobacco product manufacturers from which we purchase cigarettes and other
tobacco products for liabilities arising from our sale of the tobacco
products that they supply to us. To date, litigation challenging the validity
of the master settlement agreement, including claims that the master
settlement agreement violates antitrust laws, has not been successful.
However, if such litigation were to be successful and the master settlement
agreement is invalidated, we could be subject to substantial litigation due
to our sales of cigarettes and other tobacco products, and we may not be
indemnified for such costs by the tobacco product manufacturers in the
future. In addition, even if we continue to be indemnified by cigarette
manufacturers that are parties to the master settlement agreement, future
litigation awards against such cigarette manufacturers and us could be so
large as to eliminate the ability of the manufacturers to satisfy their
indemnification obligations. Our results of operations and financial
condition could be negatively impacted due to increased litigation costs and
potential adverse rulings against us.
- - Cigarettes and Other Tobacco Products Are Subject to Substantial Excise
Taxes and If These Taxes Are Increased, Our Sales of Cigarettes and Other
Tobacco Products Could Decline.
Cigarettes and tobacco products are subject to substantial excise taxes in
the United States. Significant increases in cigarette-related taxes and/or
fees have been proposed or enacted and are likely to continue to be proposed
or enacted within the United States. These tax increases are expected to
continue to have an adverse impact on sales of cigarettes due to lower
consumption levels and a shift in sales from the premium to the non-premium
or discount cigarette segments or to sales outside of legitimate channels.
If these excise taxes are substantially increased, it could have a negative
impact on our liquidity. Accordingly, we may be required to obtain additional
debt financing, which we may not be able to obtain on satisfactory terms or
at all. Our inability to prepay the excise taxes may prevent or delay our
purchase of cigarettes and other tobacco products, which could materially
adversely affect our ability to supply our customers.
- - If the Costs of the Products We Distribute Increase, or Excise Stamp
Taxes Increase, and We Cannot Pass These Increases on to Our Customers, Our
Results of Operations and Financial Condition Could Be Adversely Affected.
If we cannot pass along to our customers increases in our cost of goods sold
which we experience when manufacturers or taxing authorities increase prices
or taxes or reduce or eliminate discounts, rebates, allowances and other
incentive programs, our profit margins could erode. Our industry is
characterized by a high volume of sales with relatively low profit margins.
19
If we cannot pass along cost increases to our customers due to resistance to
higher prices, our relatively narrow profit margins and earnings could be
negatively affected.
- - We Are Dependent on the Convenience Store Industry for Our Revenues, and
Our Results of Operations and Financial Condition Would Suffer If There Is
an Overall Decline in the Convenience Store Industry.
The majority of our sales are made under purchase orders and short-term
contracts with convenience stores which inherently involve significant risks.
These risks include the uncertainty of general economic conditions in the
convenience store industry, credit exposure from our customers and
termination of customer relationships without notice, consolidation of our
customer base, and consumer movement toward purchasing from club stores. Any
of these factors could negatively affect the convenience store industry which
would negatively affect our results of operations and financial condition.
RISK FACTORS RELATED TO RETAIL BUSINESS
- ---------------------------------------
- - Increases in Retail Health Food Store Competition May Have an Adverse
Effect on Our Business.
In the retail health food business, our primary competitors currently include
national natural foods supermarkets, such as Whole Foods and Wild Oats,
conventional and specialty supermarkets, other regional natural foods stores,
small specialty stores and restaurants. These businesses compete with us in
one or more product categories. Whole Foods Market and Wild Oats, continue
to expand their geographic markets by opening stores in new markets. In
addition, conventional supermarkets and mass market outlets are also
increasing their emphasis on the sale of natural products. In addition, some
traditional and specialty supermarkets are expanding more aggressively in
marketing a range of natural foods, thereby competing directly with us for
products, customers and locations. These strategies have contributed to the
saturation of health food retail stores in some markets. This has increased
competition in the health food sector and has had a restraining impact on
same store sales increases in some markets and a slight reduction in same
store sales in other markets. Further, some of these potential competitors
may have greater financial or marketing resources than we do and may be able
to devote greater resources to sourcing, promoting and selling their
products. Increased competition may have an adverse effect on our results of
operations, business, cash flow and financial condition as the result of
lower sales, lower gross profits and/or greater operating costs such as
marketing.
- - Part of Our Strategy Is to Expand Our Retail Health Food Business Through
The Opening of New Stores, If We Are Unsuccessful it May Have an Adverse
Effect on Our Business.
Our continued growth depends on our ability to open or acquire new retail
health food stores in existing and new markets and to operate these stores
successfully. Our expansion strategy is dependent on finding suitable
locations, and we face intense competition from other retailers for such
sites. We also need to be able to open new stores timely and operate them
successfully. In addition, our success is dependant on our ability to hire,
train and integrate new qualified team members. Management continues to
20
closely review all store locations for opportunities to close or relocate
marginally performing stores, remodel and expand performing stores and
identify locations for additional stores. Our success is dependant on our
ability to adapt our distribution, management information and other operating
systems to adequately supply products to new stores at competitive prices so
that we can operate the stores in a successful and profitable manner. If we
are not able to find and open new store locations and to close poor
performing stores this will have a material adverse impact on our results of
operations, business, cash flow and financial condition.
- - We May Experience Significant Fluctuations in Our Comparable Store Sales.
Our comparable store sales in the future could fluctuate or be lower than our
historical average for many reasons including new and acquired stores
entering into the comparable store base, the opening of new stores that
cannibalize store sales in existing markets, increased competition, price
changes in response to competitive factors, possible supply shortages, and
cycling against above-average sales results in the prior year. Results of
operations and financial condition may be materially impacted by fluctuations
in our comparable store sales as it becomes more difficult to leverage
expenses at a lower level of sales.
- - Changes in the Availability of Quality Natural and Organic Products Could
Impact Our Business.
There is no assurance that quality natural and organic products including
dietary supplements, fresh and processed foods and vitamins will be available
to meet our future needs. If conventional supermarkets increase their natural
and organic product offerings or if new laws require the reformulation of
certain products to meet tougher standards, the supply of these products may
be constrained. Any significant disruption in the supply of quality natural
and organic products could have a material impact on our overall sales and
cost of goods.
- - Perishable Food Product Losses Could Materially Impact Our Results.
We believe our stores more heavily emphasize perishable products than
conventional supermarket stores. The Company's emphasis on perishable
products may result in significant product inventory losses in the event of
extended power outages, natural disasters or other catastrophic occurrences.
RISKS RELATED TO BEVERAGE BUSINESS
- - Increases in Beverage Business Competition May Have a Severe Effect on
Our Business.
The bottled water market is highly competitive, with numerous participants
selling products often perceived as generic by consumers. The principal
bases of competition in the industry are brand recognition, price, water
source for bottled water products, and packaging. Price competition has
become more pronounced as the industry has matured. The Company seeks to
develop recognition for its brands by differentiating its products from more
recognized products in the brand category. The Hawaiian Springs brands of
water are unique because of their water source. HNWC is the only producer of
natural spring water from Hawaii. Most other popular brands, are all bottled
on the mainland and sell purified municipal water, not natural or
spring water. If we are not able to differentiate the product and brand
21
from bottlers purified municipal water, we will not be able to increase our
prices and this will have a materially adverse effect on our results of
operation, business, cash flow and financial condition in the beverage
businesses.
RISKS RELATED TO OVERALL BUSINESS
- ---------------------------------
- - Capital Needed for Expansion May Not Be Available.
The acquisition of existing stores, the opening of new retail stores, and the
development of new production and distribution facilities requires
significant amounts of capital. In the past, our growth has been funded
primarily through proceeds from bank debt, private placements of equity and
debt and internally generated cash flow. These and other sources of capital
may not be available to us in the future. In addition, restrictive covenants
that may be imposed by our lenders may restrict our ability to fund our
growth.
- - Restrictive Covenants in Our Revolving Credit Facility May Restrict Our
Ability to React to Changes in Our Business or Industry Because They
Restrict Our Ability to Obtain Additional Financing.
Our revolving credit facility imposes restrictions on us that could increase
our vulnerability to general adverse economic and industry conditions by
limiting our flexibility in planning for and reacting to changes in our
business and industry. Specifically, these restrictions limit our ability,
among other things, to: incur additional indebtedness, pay dividends and make
distributions, issue stock of subsidiaries, make investments, repurchase
stock, create liens, enter into transactions with affiliates, merge or
consolidate, or transfer and sell our assets.
- - Failure to Meet Restrictive Covenants in Our Revolving Credit Facility
Could Result in Acceleration of the Facility and We May not be Able to
Find Alternative Financing.
Under our revolving credit facility, we are required to meet certain
financial ratios and tests. Our ability to comply with these covenants may be
affected by factors beyond our control. If we breach any of these covenants
or restrictions, it could result in an event of default under our revolving
credit facility, which would permit our lenders to declare all amounts
outstanding thereunder to be immediately due and payable, and our lenders
under our revolving credit facility could terminate their commitments to make
further extensions of credit under our revolving credit facility.
- - During Our First and Second Fiscal Quarters We Generally Experience
Reduced Sales of Our Products Due to Seasonality of Our Business,
Our quarterly operating results could fluctuate for many reasons, including
seasonality of our business, losses from beverage segment, variations in the
mix of product sales, price changes in response to competitive factors,
increases in store operating costs, possible supply shortages, extreme
weather-related disruptions, and potential uninsured casualty losses or other
losses. Sales in the wholesale distribution and beverage segments are
somewhat seasonal by nature and tend to be higher in warm weather months,
which generally fall within the Company's third and fourth fiscal quarters.
22
In addition, our quarterly operating results may fluctuate significantly as
the result of the timing of new retail store openings, the timing of
acquisitions, the range of operating results generated from newly opened
retail stores and changes in estimates associated with the disposal of
discontinued operations. Quarter-to-quarter comparisons of results of
operations and financial condition have been and may be materially impacted
by the timing of new retail store openings.
- - Downturns in Economic Conditions Negatively Impacts Consumer Spending
Resulting in a Reduction of Discretionary Spending for Items such as Snack
Food, Cigarettes, Bottled Water and Health Foods.
Our results of operations and financial condition may be sensitive to changes
in overall economic conditions that impact consumer spending, including
discretionary spending. Future economic conditions affecting disposable
consumer income such as employment levels, business conditions, interest
rates and tax rates could reduce consumer spending or cause consumers to
shift their spending to our competitors. A general reduction in the level of
discretionary spending or shifts in consumer discretionary spending to our
competitors could adversely affect our growth and profitability.
- - Legal Proceedings Could Materially Impact Our Results.
As described under Item 3 - Legal Proceedings of this Annual Report on Form
10-K, the Company is subject to litigation in the District Court of the Fifth
Judicial District of the State of Idaho in connection with its acquisition of
TSI, an 85% owned subsidiary of the Company. In December 2005, the District
Court granted the minority shareholder plaintiffs' motion for partial summary
judgment declaring that the stockholders of Trinity Springs, Ltd. (which
subsequently changed its name to Crystal Paradise Holdings, Inc. ("CPH")),
did not validly approve the sale of its business and assets to the Company
because the vote of certain shares issued as a dividend should not have been
counted in the vote. Since the District Court's December ruling, the
minority shareholder plaintiffs have filed notice with the District Court
that they agree that rescission is not a feasible remedy. However, the
District Court has made no determination as to the appropriate remedy in this
matter.
- - If We Are Not Able to Retain Customers and Attract New Customers, Our
Business Could Suffer.
Increasing the growth and profitability of our distribution business is
particularly dependent upon our ability to retain existing customers and
capture additional distribution customers. The ability to capture additional
customers through our existing network of distribution centers is especially
important because it enables us to leverage our distribution centers and
other fixed assets. Our ability to retain existing customers and attract new
customers is dependent upon our ability to provide industry-leading customer
service, offer competitive products at low prices, maintain high levels of
productivity and efficiency in distributing products to our customers while
integrating new customers into our distribution system, compete with
competitors who are paying our customers to switch distributors and offer
marketing, merchandising and ancillary services that provide value to our
customers. If we are unable to execute these tasks effectively, we may not be
able to maintain and attract a significant number of new customers and our
existing customer base could continue to decrease, either or both of which
could have an adverse impact on our results of operations, business, cash
flow and financial condition.
23
- - We May Not Be Able to Obtain Capital or Borrow Funds to Provide Us with
Sufficient Liquidity and Capital Resources Necessary to Meet Our Future
Financial Obligations.
We expect that our principal sources of funds will be cash generated from our
operations and financial condition and, if necessary, borrowings under our
revolving credit facility. However, these sources may not provide us with
sufficient liquidity and capital resources required to meet our future
financial obligations, or to provide funds for our working capital, capital
expenditures and other needs for the foreseeable future. We may require
additional equity or debt financing to meet our working capital requirements
or to fund our capital expenditures. We may not be able to obtain financing
on terms satisfactory to us, or at all.
- - We Depend on Relatively Few Suppliers for a Large Portion of Our Products,
and Any Interruptions in the Supply of the Products That We Distribute
Could Adversely Affect Our Results of Operations and Financial Condition.
We do not have any long-term contracts with our suppliers committing them to
provide products to us. Although our purchasing volume can provide leverage
when dealing with suppliers, suppliers may not provide the products we
distribute in the quantities we request or on favorable terms. Because we do
not control the actual production of the products we distribute, we are also
subject to delays caused by interruption in production based on conditions
outside our control. These conditions include job actions or strikes by
employees of suppliers, inclement weather, transportation interruptions, and
natural disasters or other catastrophic events. Our inability to obtain
adequate supplies of the products we distribute as a result of any of the
foregoing factors or otherwise, could cause us to fail to meet our
obligations to our customers.
- - We May Be Subject to Product Liability Claims Which Could Materially
Adversely Affect Our Business.
AMCON, as with other distributors of food and consumer products, faces the
risk of exposure to product liability claims in the event that the use of
products sold by us causes injury or illness. With respect to product
liability claims, we believe that we have sufficient liability insurance
coverage and indemnities from manufacturers. However, product liability
insurance may not continue to be available at a reasonable cost, or, if
available, may not be adequate to cover all of our liabilities. We generally
seek contractual indemnification and insurance coverage from parties
supplying the products we distribute, but this indemnification or insurance
coverage is limited, as a practical matter, to the creditworthiness of the
indemnifying party and the insured limits of any insurance provided by
suppliers. If we do not have adequate insurance or if contractual
indemnification is not available or if the counterparty can not fulfill its
indemnification obligation, product liability relating to defective products
could materially adversely impact our results of operations and financial
condition.
- - We Depend on Our Senior Management and Key Personnel.
We substantially depend on the continued services and performance of our
senior management and other key personnel, particularly William F. Wright,
our Chief Executive Officer and Chairman of the Board, Christopher H. Atayan,
our Vice Chairman and Chief Corporate Officer and Kathleen M. Evans, our
24
President and Eric J. Hinkefent, the President of Health Food Associates,
Inc. And Chamberlain Natural Foods, Inc. While we maintain key person life
insurance policies on certain of these individuals and we have employment
agreements with Mr. Wright, Ms. Evans and Mr. Hinkefent, the loss of the
services of any of our executive officers or key employees could harm our
business.
- - We Operate in a Competitive Labor Market and a Small Portion of Our
Employees Are Covered by Collective Bargaining Agreements.
Our continued success will partly depend on our ability to attract and retain
qualified personnel. We compete with other businesses in each of our markets
with respect to attracting and retaining qualified employees. A shortage of
qualified employees could require us to enhance our wage and benefits
packages in order to compete effectively in the hiring and retention of
qualified employees or to hire more expensive temporary employees. In
addition, at September 30, 2005 approximately 3%, or approximately 31, of our
employees are covered by a collective bargaining agreement with a labor
organization, which expires December 2008.
We may not be able to renew our respective collective bargaining agreement on
favorable terms. Employees at other facilities may try to unionize. We may
not be able to recover labor cost increases through increased prices charged
to customers or suffer business interruptions as a result of strikes or other
work stoppages. If we fail to attract and retain qualified employees, to
control our labor costs, or to recover any increased labor costs through
increased prices charged to our customers or offsets by productivity gains,
our results of operations and financial condition could be materially
adversely affected.
- - We Are Subject to Governmental Regulation and If We Are Unable to Comply
with Regulations That Affect Our Business or If There Are Substantial
Changes in These Regulations, Our Business Could Be Adversely Affected.
As a distributor of food products, we are subject to the regulation by the
U.S. Food and Drug Administration. In addition, our employees operate tractor
trailers, trucks, forklifts and various other powered material handling
equipment. Our operations are also subject to regulation by the Occupational
Safety and Health Administration, the Department of Transportation, Drug
Enforcement Agency and other federal, state and local agencies. Each of these
regulatory authorities have broad administrative powers with respect to our
operations. If we fail to adequately comply with government regulations or
regulations become more stringent, we could experience increased inspections,
regulatory authorities could take remedial action including imposing fines or
shutting down our operations or we could be subject to increased compliance
costs. If any of these events were to occur, our results of operations,
business, cash flow and financial condition would be adversely affected.
- - Failure to Comply with Labeling Rules and Regulations and Unfavorable
Changes in Government Regulation Could Harm Our Business.
Our operations are subject to various federal, state and local laws,
regulations and administrative practices affecting our business, and we must
comply with provisions regulating distribution of Consumer products, health
and sanitation standards, food labeling, equal employment, minimum wages and
licensing for the sale of food.
25
Our new store openings could be delayed or prevented or our existing stores
could be impacted by difficulties or failures in our ability to obtain or
maintain required approvals or licenses.
The manufacturing, processing, formulating, packaging, labeling and
advertising of products are subject to regulation by various federal agencies
including the Food and Drug Administration ("FDA"), Federal Trade Commission
("FTC"), U.S. Consumer Safety Protection Commission ("CSPC"), U.S. Department
of Agriculture ("USDA") and Environmental Protection Agency ("EPA"). The
composition and labeling of nutritional supplements are most actively
regulated by the FDA under the provisions of the Federal Food, Drug and
Cosmetic Act of 1938 ("FFDC Act"). The FFDC Act has been revised in recent
years with respect to dietary supplements by the Nutrition Labeling and
Education Act and by the Dietary Supplement Health and Education Act.
We cannot predict the impact that future laws, regulations, interpretations
or applications, or determine what effect either additional government
regulations or administrative orders, when and if promulgated, or disparate
federal, state and local regulatory schemes would have on our business in the
future. They could, however, require the reformulation of certain products to
meet new standards, the recall or discontinuance of certain products not able
to be reformulated, additional record keeping, expanded documentation of the
properties of certain products, expanded or different labeling and/or
scientific substantiation. Any or all of such requirements could have an
adverse effect on our results of operations, business, cash flow and
financial condition.
- - Compliance with the USDA's Organic Rules may Prove Burdensome for Our
Suppliers Resulting in a Disruption in Our Business.
The USDA's Organic Rule, implemented into federal law on October 21, 2002,
should facilitate interstate commerce and the marketing of fresh and
processed food that is organically produced and should also provide an
assurance to our customers that such products meet consistent, uniform
standards. Compliance with this rule might pose a significant burden on some
of our suppliers, which may cause a disruption in some of our product
offerings.
- - Failure to Comply with Environmental Regulations or Discovery of Toxic
Substances could have a Material Adverse Impact on Our Business.
All the facilities and operations of the Company are subject to state and
federal environmental regulations. While the Company believes that all of
its real property is in compliance with all regulations regarding the
discharge of toxic substances into the environment, failure to comply with
these requirements or a finding of leaks or toxic substances on our real
property could have a material adverse effect on our business, cash flow,
financial condition and results of operations.
- - We May Not Be Able to Adequately Protect Our Intellectual Property Rights.
We rely on a combination of trademark, trade secret and copyright law and
internal procedures and nondisclosure agreements to protect our intellectual
property. There can be no assurance that our intellectual property rights can
be successfully asserted in the future or will not be invalidated,
circumvented or challenged. Failure to protect our proprietary information
could have a material adverse effect on our results of operations, business,
cash flow and financial condition.
26
- - Self-Insurance Plan Claims Could Materially Impact Our Business.
The Company uses a combination of insurance and self-insurance plans to
provide for the potential liabilities for workers' compensation, general
liability, property insurance, vehicle liability and employee health care
benefits. Liabilities associated with the risks that are retained by the
Company are estimated, in part, by considering historical claims experience,
demographic factors, severity factors and other actuarial assumptions. Our
results of operations, business, cash flow and financial condition could be
materially impacted by claims and other expenses related to such plans if
future occurrences and claims differ from these assumptions and historical
trends.
- - Effective Tax Rate Changes and Results of Examinations by Taxing
Authorities Could Materially Impact Our Business.
Our future effective tax rates could be adversely affected by earnings being
lower than anticipated in states or countries where we have lower statutory
rates and higher than anticipated in states or countries where we have higher
statutory rates, by changes in the valuation of our deferred tax assets and
liabilities, or by changes in tax laws or interpretations thereof. In
addition, we are subject to periodic audits and examinations by the Internal
Revenue Service ("IRS") and other state and local taxing authorities. Our
results of operations, business, cash flow and financial condition could be
materially impacted by the determinations and expenses related to these and
other proceedings by the IRS and other state and local taxing authorities.
- - Earthquake and Natural Disaster Damage Could Have a Material Adverse Affect
on Our Business.
Our locations in the Midwest and Florida are susceptible to damage from
earthquakes, hurricanes, flooding, snow storms, tornados and severe storms.
Certain of our retail locations are subject to severe heat in the summer and
cold in the winter. We manage this risk of loss by maintaining insurance to
indemnify us for losses due to such circumstances. However, significant
weather or earthquake damage could result in losses in excess of our
insurance coverage which would materially adversely affect our results of
operations, business, cash flow and financial condition. We also have
operations and financial condition in other areas that have been affected by
natural disasters such as hurricanes, tornados, flooding, ice and snow
storms. We maintain insurance to indemnify us for losses due to such
occurrences, but our insurance may not be sufficient or payments under our
policies may not be received timely enough to prevent adverse impacts on our
results of operations, business, cash flow and financial condition. Our
customers could also be affected by like events, adversely impacting our
sales.
- - Our Information Technology Systems May Be Subject to Failure or
Disruptions, Which Could Seriously Harm Our Business.
Our business is highly dependent on our information systems ("IS"). The
convenience store industry does not have a standard information technology,
or IT platform. Therefore, actively integrating our customers into our IT
platform is a priority, and our IS platform provides our distribution centers
with the flexibility to adapt to our customers' IT requirements. We also rely
on our IS, and our internal information technology staff, to maintain the
information required to operate our distribution centers and provide our
customers with fast, efficient and reliable deliveries.
27
If our IS fails or is subject to disruptions, we may suffer disruptions in
service to our customers and our results of operations and financial
condition could suffer.
- - Information System Upgrades or Integrations May Disrupt Our Operations and
Financial Condition or Financial Reporting.
We continually evaluate and upgrade our management information systems. We
have completed a number of acquisitions in recent years, and the information
systems at some of the acquired operations have not been fully integrated
with our information systems. Although we do not anticipate any disruption in
our operations or financial reporting as a result of system upgrades or
system integrations, there can be no assurance that such disruption will not
occur or that the desired benefits from the system upgrades will be realized.
RISKS RELATING TO OUR COMMON STOCK
- ----------------------------------
- - The Company Has Very Few Shareholders of Record And, If this Number Drops
below 300, the Company Will No Longer Be Obligated to Report under the
Securities Exchange Act of 1934 and in Such Case We May Be Delisted from
the American Stock Exchange Reducing the Ability of Investors to Trade in
Our Common Stock.
If the number of record owners (including direct participants in the
Depository Trust Company) of our common stock is less than 300, our
obligations to file reports under the Securities Exchange Act of 1934 is
suspended. If we take advantage of this right we will likely reduce
administrative costs of complying with public company rules, but periodic and
current information updates about the Company will not be available to
investors. In addition, the common stock of the Company would be removed
from listing on the American Stock Exchange. This would likely impact an
investors ability to trade in our common stock.
- - We Have Identified Material Weaknesses in Our Internal Controls over
Financial Reporting. If We Fail to Remedy These or Any Other Material
Weaknesses in Our Internal Controls over Financial Reporting That We May
Identify or We Fail to Implement Proposed Remedies, Such Failures Could
Result in Material Misstatements in Our Financial Statements, Cause
Investors to Lose Confidence in Our Reported Financial Information and Have
a Negative Effect on the Trading Price of Our Common Stock.
A material weakness is defined in standards established by the Public Company
Accounting Oversight Board as a deficiency in internal control over financial
reporting 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. As discussed below in Item 9A - Controls and
Procedures of this Annual Report on Form 10-K, we have identified material
weaknesses in our internal controls over financial reporting. To remedy
these weaknesses we have taken the following steps: retained a new Acting
President at HNWC; retained a consultant to investigate accounting
irregularities and to guide internal accounting personnel in the application
of generally accepted accounting principles related to inventory and
production cost accounting; hired accounting staff with more experience at
HNWC; more regular review by HNWC management of product cost summaries and
28
inventory cost changes; a more rigorous subsidiary financial statement review
by corporate management and enhanced the training of our accounting staff and
required periodic review of a wider variety of current technical accounting
literature to obtain a reasonable level of assurance that all appropriate
accounting guidance is applied to transactions such as discontinued
operations and will retain financial expertise as deemed necessary. If we
fail to implement these remedies successfully, such failure could result in
material misstatements in our financial reporting.
- - In Relation to the Size of Our Company We Incur Significant Costs as a
Result of Being a Public Company.
As a public company, we incur significant accounting, legal, governance,
compliance and other expenses that private companies do not incur. In
addition, the Sarbanes-Oxley Act of 2002 and the rules subsequently
implemented by the Securities and Exchange Commission and the American Stock
Exchange, have required changes in corporate governance practices of public
companies. We expect these rules and regulations to increase our legal, audit
and financial compliance costs and to make some activities more
time-consuming and costly. For example, as a result of becoming a public
company, we are required to create additional board committees and formalize
our internal control over financial reporting and disclosure controls and
procedures. In addition, we will incur additional costs associated with our
public company reporting requirements. We also expect these rules and
regulations to make it more difficult and more expensive for us to obtain
director and officer liability insurance and we may be required to accept
reduced policy limits and coverage or incur substantially higher costs to
obtain the same or similar coverage. As a result, it may be more difficult
for us to attract and retain qualified persons to serve on our board of
directors or as executive officers.
- - We May Be Unable to Meet Our Obligation to Conform to the Rules Adopted by
the Securities and Exchange Commission under Section 404 of the
Sarbanes-Oxley Act of 2002.
We are in the process of assessing the effectiveness of our internal control
over financial reporting in connection with the rules adopted by the
Securities and Exchange Commission under Section 404 of the Sarbanes-Oxley
Act of 2002. Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 is
required in connection with the filing of our Annual Report on Form 10-K for
the fiscal year ending September 30, 2007 but proposed regulations may extend
this date. While our management is expending significant resources in an
effort to complete this important project, there can be no assurance that we
will be able to achieve our objective on a timely basis. There also can be no
assurance that our auditors will be able to issue an unqualified opinion on
management's assessment of the effectiveness of our internal control over
financial reporting.
Any failure to complete our assessment of our internal control over financial
reporting, to remediate the material weaknesses we have identified or any
other material weaknesses that we may identify or to implement new or
improved controls, or difficulties encountered in their implementation, could
harm our operating results, cause us to fail to meet our reporting
obligations, or result in material misstatements in our financial statements.
Any such failure also could adversely affect the results of the periodic
management evaluations of our internal control over financial reporting that
29
are required under Section 404 of the Sarbanes-Oxley Act of 2002. Inadequate
internal controls could also cause investors to lose confidence in our
reported financial information, which could have a negative effect on the
trading price of our common stock.
- - Our Stock Price Can Be Volatile.
The market price of our common stock could be subject to significant
fluctuation in response to various market factors and events. These market
factors and events include variations in our earnings results, changes in
earnings estimates by securities analysts, publicity regarding us, our
competitors, the natural products industry generally, new statutes or
regulations or changes in the interpretation of existing statutes or
regulations affecting the natural products industry specifically, sales of
substantial amounts of common stock in the public market or the perception
that such sales could occur and other factors. In addition, the stock market
in recent years has experienced broad price and volume fluctuations that
often have been unrelated to the operating performance of particular
companies. These market fluctuations also may adversely affect the market
price of our common stock.
- - We Have Various Mechanisms in Place to Discourage Takeover Attempts, Which
May Reduce or Eliminate Our Stockholders' Ability to Sell Their Shares for
a Premium in a Change of Control Transaction.
Various provisions of our bylaws and of corporate law may discourage, delay
or prevent a change in control or takeover attempt of our company by a third
party that is opposed to by our management and board of directors. Public
stockholders who might desire to participate in such a transaction may not
have the opportunity to do so. These anti-takeover provisions could
substantially impede the ability of public stockholders to benefit from a
change of control or change in our management and board of directors. These
provisions include:
-classification of our directors into three classes with respect to the
time for which they hold office;
-supermajority voting requirements to amend the provision in our
certificate of incorporation providing for the classification of our
directors into three such classes;
-non-cumulative voting for directors;
-control by our board of directors of the size of our board of
directors;
-limitations on the ability of stockholders to call special meetings of
stockholders; and
-advance notice requirements for nominations of candidates for election
to our board of directors or for proposing matters that can be acted
upon by our stockholders at stockholder meetings.
30
ITEM 1B. UNRESOLVED STAFF COMMENTS
This Item of Form 10-K is not applicable as AMCON is not an accelerated filer
or a large accelerated filer, as defined in Rule 12b-2 of the Exchange Act or
a well-known seasoned issuer as defined in Rule 405 of the Securities Act.
ITEM 2. PROPERTIES
The state location and approximate square footage of the five distribution
centers, thirteen retail stores, water bottling and packaging plants and
sales and marketing offices operated by AMCON as of fiscal year end 2005 are
set forth below:
Location Square Feet
-------- -----------
Distribution - IL, MO, ND, NE & SD 515,900
Retail - FL, KS, MO, NE & OK 132,600
Beverage - HI & ID /1/ 69,800
-------
Total Square Footage 718,300
=======
/1/ As of March 2006, this business was closed.
AMCON owns its distribution facilities in Quincy, Illinois, Bismarck, North
Dakota and Rapid City, South Dakota. The Quincy, Bismarck and Rapid City
distribution centers are subject to first mortgages with M&I Bank (formerly
known as Gold Bank) (see "MANAGEMENT'S DISCUSSION AND ANALYSIS-Liquidity and
Capital Resources" in Item 7 of this Annual Report on Form 10-K). In
addition, AMCON owns a water bottling plant, real estate and a lodge in
Paradise, Idaho that are subject to the mortgage between AMCON and Crystal
Paradise Holdings, Ltd. (formerly Trinity Springs, Ltd.) which is shared on
an equal basis with Allen Petersen, one of the Company's directors who
extended loans to TSI in December 2004. See Item 13 - Certain Relationships
and Related Party Transactions of this Annual Report on Form 10-K.
AMCON leases its remaining distribution, warehouse and cross-dock facilities,
retail stores, water bottling plant, offices, and certain equipment under
noncancellable operating and capital leases. Leases for the two distribution
facilities, thirteen retail stores, warehouse in Idaho and water bottling and
packaging plant in Hawaii leased by the Company have base terms expiring
through 2052. Minimum future lease commitments for these properties and
equipment total approximately $16.5 million as of fiscal year end 2005.
AMCON also had future lease obligations for a facility and equipment related
to the discontinued operations of its former health food distribution
business. The Company estimated its ultimate liabilities related to these
leases and recorded a charge to earnings during the second quarter of fiscal
2001. In connection with a former warehouse lease, the Company negotiated a
termination settlement during the first quarter of fiscal 2006 which resulted
in no additional expenditures being incurred.
Management believes that its existing facilities are adequate for the
Company's present level of operations; however, larger facilities and
additional cross-dock facilities and retail stores may be required to
accommodate the Company's anticipated growth in certain market areas.
31
ITEM 3. LEGAL PROCEEDINGS
AMCON announced in May 2004 that it was filing suit against Trinity Springs,
Ltd. (which subsequently changed its name to Crystal Paradise Holdings, Inc.
("CPH")), 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 CPH were cast in favor of the sale of
substantially all of its assets to AMCON's subsidiary, TSL Acquisition Corp.
("TSI") 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 CPH 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. As against AMCON, they
originally sought: (1) a declaratory judgment that the purchase of CPH's
assets by TSI and AMCON violated Idaho Code Section 30-1-1202 because the
shareholders did not approve the sale; (2) rescission of the sale and
restitution of the assets; (3) a constructive trust; and (4) that AMCON be
estopped to claim the sale's validity because of its alleged false and
misleading representations. The Idaho District Court granted a temporary
restraining order on June 11, 2004, which prevented the closing of the asset
purchase transaction until the Idaho District Court had an opportunity to
receive additional briefing on the issues presented and the parties could be
heard by the Idaho District Court. On June 16, 2004, the Idaho District Court
heard arguments on whether to extend the temporary restraining order and
grant the minority shareholder plaintiffs' motion for preliminary injunction.
As a result of the parties' briefing and the arguments presented, the Idaho
District Court dissolved the temporary restraining order and thereby enabled
the asset sale transaction to be consummated. On June 17, 2004, TSI and CPH
closed the asset sale transaction.
On July 19, 2004, several of the same minority shareholder plaintiffs, along
with some additional shareholders filed an amended complaint in the same
Idaho state court action. The minority shareholder plaintiffs' amended
complaint seeks (1) 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, (2) 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 (3) imposition of a constructive trust on the sale
proceeds and requiring separate books to be maintained.
In June 2005, a year after filing their initial complaint, the minority
shareholder plaintiffs filed a motion seeking summary judgment on their
declaratory judgment and rescission claims. AMCON responded by filing a
cross motion for summary judgment on the rescission claim seeking a
determination that rescission was not an appropriate remedy.
On December 15, 2005, the Idaho District Court granted, in part, the minority
shareholder plaintiffs' motion for summary judgment declaring that the
shareholders did not approve the asset sale transaction because the vote of
certain shares issued as a dividend should not have been counted in the vote.
32
As a result, the asset sale transaction was declared "voidable." The Idaho
District Court denied AMCON's motion for summary judgment but did not rule on
the appropriate remedy in the action. Specifically, the Court did not decide
whether it would impose monetary damages or rescind the sale transaction as a
result of the lack of shareholder approval for the transaction.
In January 2006, the minority shareholder plaintiffs requested a leave of the
Idaho District Court to amend their complaint to add additional claims
against AMCON. They seek to add claims for (1) rescissory damages as a
result of the "voidable" transactions, (2) civil conspiracy as among AMCON,
TSI and the former CPH board members, (3) intentional interference with the
minority shareholders' economic advantage, and (4) inducement or
participation in a breach of fiduciary duties. They additionally seek to add
a claim for punitive damages against AMCON and TSI, as well as several former
CPH board members. On February 10, 2006, the minority shareholder plaintiffs
filed notice with the Idaho District Court that they agree that rescission is
not a feasible remedy. However, the Idaho District Court has made no
determination as to the appropriate remedy in this case.
AMCON and TSI have also requested a leave of the court to amend their answer
to add counterclaims against the minority shareholder plaintiffs and cross
claims against CPH. As against the minority shareholder plaintiffs, AMCON
and TSI seek to add claims of (1) abuse of process, (2) conspiracy to commit
abuse of process, (3) fraud and misrepresentation, and (4) tortious
interference with economic advantage. As against CPH, AMCON and TSI seek to
add claims of (1) declaratory relief as to the rights and obligations of the
parties under the agreements that were part of the original transaction (2)
contribution and offset to the extent that liability is imposed upon AMCON
and Trinity Springs, and (3) fraud and misrepresentation.
The Idaho District Court has not heard arguments on either of these motions
to amend pleadings. Since the closing of the transaction, the parties have
been conducting some written discovery, but have not conducted any
depositions. The minority shareholder plaintiffs recently disclosed their
expert witnesses on their existing claims.
Most recently, as a result of the entire board of CPH having resigned, a
custodian has been appointed to administer the business of CPH. In addition,
a stay has been in place in the litigation which prohibits foreclosure on the
notes and water royalty issued by TSI in connection with the asset sale
transaction discussed in more detail under Note 2 to the Consolidated
Financial Statements. As a result of the litigation, and subsequent to
September 30, 2005, TSI has not made the originally scheduled installment
payments of principal and interest with respect to the notes and water
royalty. While the most recent stay was set to expire on August 1, 2006 or
after the completion of mediation between the parties, whichever occurred
sooner, the Court has continued the stay as long as the parties agree to
continue mediation, which they have.
Given the uncertainty surrounding the potential recession alternatives and
the related accounting ramifications, AMCON engaged legal counsel not
previously involved in the asset sale transaction or the litigation to review
the case documents and to provide management an opinion regarding the
ownership of the TSI assets as of the date of the financial statements.
This legal counsel concluded that the Idaho District Court has not taken any
action to divest TSI of its ownership of the assets acquired from CPH and
accordingly, to the extent that TSI owned the assets immediately prior to the
33
issuance of the Idaho District Court order and has not otherwise transferred
the assets, TSI continues to own the assets. As a result, AMCON continues to
account for TSI as a consolidated subsidiary.
Because substantial discovery is needed, several unresolved legal issues
exist, and other pretrial work is yet to be completed, AMCON management,
after consulting with trial counsel, is unable at this time to state that any
outcome unfavorable to AMCON is either probable or remote and cannot estimate
the amount or range of any potential loss.
AMCON 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 AMCON's financial
condition, results of operations or liquidity after considering amounts
already recorded in AMCON's Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 2005.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR COMMON STOCK
The Company's common stock trades on the American Stock Exchange ("AMEX")
under the trading symbol "DIT". The following table reflects the range of
the high and low closing prices per share of the Company's common stock
reported by AMEX for fiscal years 2005 and 2004. As of July 31, 2006, the
closing stock price was $11.60 and there were 527,062 common shares
outstanding. The Company has approximately 360 common shareholders of record
(including direct participants in the Depository Trust Company) and the
Company believes that approximately 960 additional persons hold shares
beneficially.
Fiscal Year 2005 Fiscal Year 2004/1/
---------------- ----------------
High Low High Low
------- ------- ------- -------
4th Quarter $ 22.68 $ 20.39 $ 25.10 $ 20.60
3rd Quarter 24.65 17.30 29.40 24.48
2nd Quarter 18.80 16.50 28.80 21.83
1st Quarter 20.70 18.55 27.60 21.90
/1/ Adjusted for a one-for-six reverse stock split effected on May 14, 2004.
During fiscal 2005 the Board of Directors voted to suspend payment of cash
dividends on common stock for the foreseeable future in order to preserve
cash resources. 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. During fiscal year 2004, the
Board of Directors declared cash dividends of $0.18 per share per quarter or
$0.72 per common share for the year.
34
The Company's revolving credit facility provides that the Company may not pay
dividends on its common shares in excess of $0.72 per common share on an
annual basis.
ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)
The selected financial data presented below have been derived from AMCON
Distributing Company and Subsidiaries' (the "Company's") audited financial
statements. The information set forth below should be read in conjunction
with Item 7 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION" and Item 8 "FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA" of this Annual Report on Form 10-K.
Results may not be comparable due to acquisitions and/or dispositions that
have occurred in the periods presented. As described in the footnotes to the
consolidated financial statements, in June 2004 (Fiscal 2004) and December
2001 (Fiscal 2002), we acquired Trinity Springs, Inc.(TSI), and Hawaiian
Natural Water Company, Inc. ("HNWC"), respectively. In June 2001 (Fiscal
2001), we acquired substantially all of the distribution business assets and
net assets of Merchants Wholesale, Inc., as well as, the distribution
warehouse owned by the sole shareholder of Merchants Wholesale, Inc. for
$36.7 million. The transaction was accounted for using the purchase method
of accounting. Also, in March 2001 (Fiscal 2001), we sold The Healthy Edge,
Inc. (formerly Food For Health Co. Inc.), our health food distribution
business for $10.3 million and accounted for the transaction as discontinued
operations in the consolidated financial statements in accordance with
Accounting Principles Board Opinion No. 30.
We also discontinued the operations of our beverage marketing and
distribution business effective March 2005. As a result, the selected
financial data presented below has been prepared reflecting this disposition
as discontinued operations in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." Revenues and expenses from the discontinued
operations have been excluded from income from continuing operations in the
selected financial data.
35
<Caption>
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------
Fiscal Year 2005 2004/1/ 2003 2002 2001
- --------------------------------------------------------------------------------------------
Sales/2/.......................... $ 845,923 $ 821,766 $ 771,793 $ 847,117 $ 577,589
Cost of sales..................... 785,572 762,203 711,614 785,193 531,903
---------------------------------------------------------
Gross profit...................... 60,351 59,563 60,179 61,924 45,686
Operating expenses................ 59,098 53,331 52,413 54,774 44,706
Impairment charges/3/............. 13,087 3,578 399 - -
---------------------------------------------------------
Operating (loss) income........... (11,834) 2,654 7,367 7,150 980
Interest expense.................. 4,509 3,329 3,194 4,273 3,877
Other income, net................. (80) (577) (490) (506) (202)
---------------------------------------------------------
(Loss) income from continuing
operations before income taxes... (16,263) (98) 4,663 3,383 (2,695)
Income tax (benefit) expense...... (4,909) 36 1,771 1,316 (1,018)
Equity in loss of unconsolidated
affiliate........................ - - - 95 95
Minority interest................. (97) (91) - - -
---------------------------------------------------------
(Loss) income from continuing
operations....................... (11,257) (43) 2,892 1,972 (1,772)
Loss from discontinued operations,
net of income taxes of $(740)
$(2,459), $(1,142), $0, and $(963),
respectively..................... (1,485) (4,095) (1,865) - (1,570)
---------------------------------------------------------
Net (loss) income................. (12,742) (4,138) 1,027 1,972 (3,342)
Preferred stock dividend
requirements..................... (295) (50) - - -
---------------------------------------------------------
Net (loss) income available to
common shareholders.............. $ (13,037) $ (4,188) $ 1,027 $ 1,972 $ (3,342)
=========================================================
Basic (loss) earnings per share
available to common shareholders:
Continuing operations........... $ (21.91) $ (0.18) $ 5.48 $ 3.90 $ (3.88)
Discontinued operations......... (2.82) (7.76) (3.53) - (3.44)
---------------------------------------------------------
Net basic (loss) earnings
per share available to common
shareholders................... $ (24.73) $ (7.94) $ 1.95 $ 3.90 $ (7.32)
=========================================================
Diluted (loss) earnings per share
available to common shareholders:
Continuing operations........... $ (21.91) $ (0.18) $ 5.38 $ 3.81 $ (3.88)
Discontinued operations......... (2.82) (7.76) (3.47) - (3.44)
---------------------------------------------------------
Net diluted (loss) earnings
per share available to common
shareholders................... $ (24.73) $ (7.94) $ 1.91 $ 3.81 $ (7.32)
=========================================================
36
Weighted average shares outstanding:
Basic........................... 527,062 527,774 527,699 505,414 456,362
Diluted......................... 527,062 527,774 537,042 518,197 456,362
Working capital (deficit) /4/..... $ 30,573 $ (11,871) $ (8,030) $ (1,989) $ 482
Total assets ..................... 95,309 111,730 99,499 104,586 99,197
Long-term obligations and
subordinated debt /5/........... 16,504 27,104 22,453 21,601 22,873
Shareholders' equity (deficit)/6/. (228) 12,767 17,301 16,699 13,363
Cash dividends declared
per common share................ - 0.72 0.72 0.72 0.72
/1/ Amounts have been restated. See Note 20 to the Consolidated Financial
Statements.
/2/ In accordance with Emerging Issues Task Force (EITF) No. 01-9
"Accounting For Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)" sales incentives paid to customers have
been recorded as a reduction of sales.
/3/ Includes impairment of certain identifiable intangible and certain
operating and non-operating long-lived assets in the retail and beverage
segments in fiscal 2005 and certain identifiable intangible and nonoperating
assets in the beverage segments in fiscal 2004 and 2003.
/4/ Current assets minus current liabilities.
/5/ Includes deferred taxes, noncurrent liabilities of discontinued
operations, current and long-term portions of subordinated debt and long-term
debt and water royalty in perpetuity, but excludes the revolving credit
facility.
/6/ Net of dividends declared of $0.4 million, $0.4 million, $0.4 million
in fiscal 2004-2002, respectively, and $0.3 million fiscal 2001.
SELECTED QUARTERLY FINANCIAL DATA
The following tables sets forth selected financial information for each of
the eight quarters in the two fiscal years ended September 2005 and 2004.
This information has been prepared by the Company on the same basis as the
consolidated financial statements and includes all normal and recurring
adjustments necessary to present fairly this information when read in
conjunction with the Company's audited Consolidated Financial Statements and
Notes thereto included in this Annual Report.
The Company's quarterly earnings or loss per share are based on weighted
average shares outstanding for the quarter, therefore, the sum of the
quarters may not equal the full year earnings or loss per share amount.
The fiscal 2005 quarterly data disclosed below gives effect to the
restatements discussed in Note 20 to the Consolidated Financial Statements.
The restated quarterly data for fiscal 2005 will be reflected in all future
filings, including the Forms 10-Q to be filed for fiscal 2006.
37
<Caption>
(Dollars in thousands, except per share data)
- ------------------------------------------------------------------------------------------
Fiscal Year 2005 Fourth Third Second First
- ------------------------------------------------------------------------------------------
Sales...................................... $ 220,622 $ 216,866 $ 194,048 $ 214,387
Gross profit, as reported.................. 14,997 15,615 13,812 15,927
Corrections................................ 890 (200) (116) (574)
---------------------------------------------
Gross profit, as restated.................. 15,887 15,415 13,696 15,353
Impairment charges......................... 13,087 - - -
(Loss) income from continuing operations
before income taxes, as reported......... (15,741) 375 (1,490) 593
Corrections............................... 1,574 (409) (313) (852)
(Loss) income from continuing operations ---------------------------------------------
before income taxes, as restated......... (14,167) (34) (1,803) (259)
(Loss) income from continuing operations,
as reported.............................. (11,035) 236 (925) 467
Corrections............................... 1,039 (270) (206) (563)
(Loss) income from continuing operations, ---------------------------------------------
as restated.............................. (9,996) (34) (1,131) (96)
Income (loss) from discontinued operations,
as reported.............................. 203 (318) (890) (480)
Corrections................................ (354) 126 116 112
Loss from discontinued operations, ---------------------------------------------
as restated.............................. (151) (192) (774) (368)
Net (loss) income, as reported............. (10,832) (82) (1,815) (13)
Corrections................................ 685 (144) (90) (451)
---------------------------------------------
Net (loss) income, as restated............. (10,147) (226) (1,905) (464)
Preferred stock dividend requirements...... (75) (74) (73) (73)
---------------------------------------------
Net (loss) income available to common
shareholders, as reported................. $ (10,907) $ (156) $ (1,888) $ (86)
Corrections................................ 685 (144) (90) (451)
Net (loss) income available to common ---------------------------------------------
shareholders, as restated................. $ (10,222) $ (300) $ (1,978) $ (537)
=============================================
Basic earnings (loss) per share available
to common shareholders:
Continuing operations, as reported....... $ (21.08) $ 0.30 $ (1.89) $ 0.75
Corrections.............................. 1.97 (0.51) (0.39) (1.07)
---------------------------------------------
Continuing operations, as restated....... $ (19.11) $ (0.21) $ (2.28) $ (0.32)
Discontinued operations, as reported..... 0.39 (0.60) (1.69) (0.91)
Corrections.............................. (0.67) 0.24 0.22 0.21
---------------------------------------------
Discontinued operations, as restated..... (0.28) (0.36) (1.47) (0.70)
---------------------------------------------
Net basic earnings (loss) per share
available to common shareholders
as reported............................. $ (20.69) $ (0.30) $ (3.58) $ (0.16)
Corrections.............................. 1.30 (0.27) (0.17) (0.86)
Net basic earnings (loss) per share ---------------------------------------------
available to common shareholders
as restated............................. $ (19.39) $ (0.57) $ (3.75) $ (1.02)
=============================================
38
Diluted earnings (loss) per share available
to common shareholders:
Continuing operations, as reported....... $ (21.08) $ 0.30 $ (1.89) $ 0.66
Corrections.............................. 1.97 (0.51) (0.39) (1.07)
Impact of stock option antidilution /1/.. - - - 0.09
---------------------------------------------
Continuing operations, as restated....... $ (19.11) $ (0.21) $ (2.28) $ (0.32)
Discontinued operations, as reported..... 0.39 (0.58) (1.69) (0.68)
Corrections.............................. (0.67) 0.24 0.22 0.21
Impact of stock option antidilution /1/.. - (0.02) - (0.23)
---------------------------------------------
Discontinued operations, as restated..... (0.28) (0.36) (1.47) (0.70)
---------------------------------------------
Net diluted earnings (loss) per share
available to common shareholders
as reported............................. $ (20.69) $ (0.28) $ (3.58) $ (0.02)
Corrections.............................. 1.30 (0.27) (0.17) (0.86)
Impact of stock option antidilution /1/.. - (0.02) - (0.14)
---------------------------------------------
Net diluted earnings (loss) per share
available to common shareholders
as restated ............................ $ (19.39) $ (0.57) $ (3.75) $ (1.02)
=============================================
/1/ Before this restatement, the impact of the conversion of the stock options was dilutive to earnings
per share because there was income from continuing operations in the first and third fiscal quarters.
However, after making the corrections for the restatement, there will now be a loss from continuing
operations in both periods which makes the impact of the conversion of the stock options antidilutive.
As discussed in Item 9A - Controls and Procedures, in performing year end
audit procedures as of and for the period ended September 30, 2005 of the
Company's wholly-owned subsidiary, HNWC, the auditors noted discrepancies in
the inventory records. These discrepancies led the Company's Audit Committee
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.
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 Forms 10-Q 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.
In addition, subsequent to the issuance of the September 30, 2004 financial
statement, Management and the Company's Audit Committee determined that the
Company had incorrectly allocated interest expense to one of its wholly-owned
subsidiaries that had ceased operations on March 31, 2005 (The Beverage
Group, Inc.). Emerging Issues Task Force ("EITF") 87-24 "Allocation of
Interest to Discontinued Operations", requires that (a) interest on debt that
is to be assumed by the buyer or is required to be repaid as a result of the
disposal transaction should be allocated to discontinued operations and (b)
the allocation of discontinued operations of other consolidated interest that
is not directly attributable to or related to other operations of the
enterprise is permitted but not required. If interest is allocated to
39
discontinued operations it should be determined by a ratio of net assets to
total net assets after adjusting for all interest and debt directly
attributable to other aspects of the business. The Company allocated interest
to its discontinued operation in fiscal 2004 and its quarterly reporting in
fiscal 2005 using an invested capital calculation which resulted in higher
interest being allocated to discontinued operations than permitted by EITF
87-24. Although indirect interest of $0.1 million would be permitted under
EITF 87-24 to be allocated to discontinued operations, the Company has
concluded that only direct interest of $0.1 million resulting from debt
required to be repaid as part of the discontinuation of the business should
be allocated to discontinued operations. Accordingly, the fiscal 2004
financial statements have been restated as shown below. The fiscal 2005
impact of this restatement was corrected in the fourth quarter of fiscal 2005
with the reclassification of $0.5 million of interest expense, net of income
tax benefit of $0.3 million from discontinued operations to income (loss)
from continuing operations.
The tables set forth below give effect to the HNWC and interest restatements
and summarizes the significant effects of this restatement by quarter:
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
Interest expense 906,201 169,881 1,076,082
Income tax (benefit) expense 224,000 (289,000) (65,000)
Loss from discontinued operations, net of tax (479,663) 112,881 (366,782)
Net (loss) income (13,118) (450,924) (464,042)
Basic (loss) earning per share available to common
shareholders:
Continuing operations 0.75 (1.07) (0.32)
Discontinued operations (0.91) 0.21 (0.70)
Basic (loss) earnings per share available to
common shareholders (0.16) (0.86) (1.02)
Diluted (loss) earnings per share available to
common shareholders:
Continuing operations 0.66 (1.07) (0.32) /1/
Discontinued operations (0.68) 0.21 (0.70) /1/
Diluted (loss) earnings per share available to
common shareholders (0.02) (0.86) (1.02) /1/
Condensed Consolidated Unaudited Statement of Cash Flows
- --------------------------------------------------------
Income (loss) from continuing operations $ 466,544 $ (563,805) $ (97,261)
Deferred income taxes (45,224) (232,000) (277,224)
Inventory (464,962) 574,165 109,203
Other assets (28,512) 108,759 80,247
Net cash flows from operating activities -
discontinued operations (758,761) 112,881 (645,880)
40
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
Interest expense 897,542 175,735 1,073,277 1,803,743 345,616 2,149,359
Income tax (benefit) expense (565,000) (107,000) (672,000) (341,000) (396,000) (737,000)
Loss from discontinued
operations (889,619) 115,735 (773,884) (1,369,282) 228,616 (1,140,666)
Net (loss) income (1,814,435) (89,973) (1,904,408) (1,827,553) (540,897) (2,368,450)
Basic (loss) earnings per share
Continuing operations (1.89) (0.39) (2.28) (1.14) (1.46) (2.60)
Discontinued operations (1.69) 0.22 (1.47) (2.60) 0.43 (2.17)
Basic (loss) earnings per share (3.58) (0.17) (3.75) (3.74) (1.03) (4.77)
Diluted (loss) earnings per share
Continuing operations (1.89) (0.39) (2.28) (1.14) (1.46) (2.60)
Discontinued operations (1.69) 0.22 (1.47) (2.60) 0.43 (2.17)
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 $ (458,271) $ (769,513) $ (1,227,784)
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
Net cash flows from operating activities -
discontinued operations (347,156) 228,616 (118,540)
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
41
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
Interest expense 942,585 189,964 1,132,549 2,746,328 535,580 3,281,908
Income tax (benefit) expense 138,000 (139,000) (1,000) (203,000) (535,000) (738,000)
Loss from discontinued
operations (318,257) 124,964 (193,293) (1,687,541) 353,580 (1,333,961)
Net (loss) income (81,824) (144,599) (226,423) (1,909,377) (685,496) (2,594,873)
Basic (loss) earnings per share
Continuing operations 0.30 (0.51) (0.21) (0.84) (1.97) (2.81)
Discontinued operations (0.60) 0.24 (0.36) (3.20) 0.67 (2.53)
Basic (loss) earnings per share (0.30) (0.27) (0.57) (4.04) (1.30) (5.34)
Diluted (loss) earnings per share
Continuing operations 0.30 (0.51) (0.21) /1/ (0.84) (1.97) (2.81)
Discontinued operations (0.58) 0.24 (0.34) /1/ (3.20) 0.67 (2.53)
Diluted (loss) earnings per share (0.28) (0.27) (0.57) /1/ (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 $ (221,836) $ (1,039,076) $ (1,260,912)
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)
Net cash flows from operating activities -
discontinued operations (327,211) 353,580 26,369
/1/ Before this restatement, the impact of the conversion of the stock options was dilutive to earnings
per share because there was income from continuing operations. After making the corrections for the
restatements, there will now be a loss from continuing operations which makes the impact of the conversion
of the stock options antidilutive.
/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.
During the fourth quarter of fiscal 2005, based on valuations obtained from
an independent valuation specialist, management determined that a portion of
the tradenames and goodwill were impaired at both of the retail and beverage
segments. The impairments recorded in the beverage and retail segments were
ultimately the result of projected shortfalls in operating cash flows
necessary to support the reporting units carrying value, and in the case of
the beverage segments reporting units, the need for additional capital
resources that, after the termination of the Letter of Intent (discussed in
Note 19), did not appear likely. The fair values of the reporting units were
estimated with the assistance of an independent valuation specialist using
the expected present value of the discounted future cash flows and
consideration of net recoverable values.
42
A summary of the impairment charges by entity for fiscal year 2005 are as
follows (in millions):
Retail TSI HNWC Total
Long-lived assets $ - $ 0.4 $ 2.5 $ 2.9
Goodwill 0.3 0.4 0.4 1.1
Water source - 3.7 - 3.7
Customer list - 0.3 0.1 0.4
Tradename 3.9 0.9 0.2 5.0
----- ----- ----- -----
$ 4.2 $ 5.7 $ 3.2 $13.1
===== ===== ===== =====
The impairment charges are recorded in the Company's statement of operations
as a component of (loss) income from continuing operations.
The following quarterly fiscal 2004 table gives effect to the interest
restatement discussed in Note 20.
<Caption>
(Dollars in thousands, except per share data)
- -----------------------------------------------------------------------------------------
Fiscal Year 2004 Fourth Third Second First
- -----------------------------------------------------------------------------------------
Sales...................................... $ 218,121 $ 218,102 $ 192,971 $192,572
Gross profit............................... 15,609 15,223 13,685 15,046
Impairment charges......................... 3,578 - - -
(Loss) income from continuing operations
before income taxes, as reported......... (2,677) 1,081 (208) 2,033
Corrections................................ (119) (94) (66) (48)
(Loss) income from continuing operations ---------------------------------------------
before income taxes, as restated......... (2,796) 987 (274) 1,985
(Loss) income from continuing operations,
as reported.............................. (1,661) 671 (126) 1,289
Corrections................................ (79) (62) (44) (31)
(Loss) income from continuing operations, ---------------------------------------------
as restated.............................. (1,740) 609 (170) 1,258
Loss from discontinued operations,
as reported.............................. (1,624) (936) (976) (775)
Corrections................................ 79 62 44 31
Loss from discontinued operations, ---------------------------------------------
as restated.............................. (1,545) (874) (932) (744)
Net (loss) income.......................... (3,285) (265) (1,102) 514
Preferred stock dividend requirements...... (50) - - -
---------------------------------------------
Net (loss) income available to common
shareholders............................... $ (3,335) $ (265) $ (1,102) $ 514
=============================================
Basic earnings (loss) per share available
to common shareholders:
Continuing operations, as reported....... $ (3.25) $ 1.27 $ (0.24) $ 2.44
Corrections.............................. (0.15) (0.12) (0.08) (0.06)
Continuing operations, as restated....... (3.40) 1.15 (0.32) 2.38
Discontinued operations, as reported..... (3.08) (1.77) (1.85) (1.47)
Corrections.............................. 0.15 0.12 0.08 0.06
Discontinued operations, as restated..... (2.93) (1.65) (1.77) (1.41)
---------------------------------------------
Net basic earnings (loss) per share
available to common shareholders........ $ (6.33) $ (0.50) $ (2.09) $ 0.97
=============================================
43
Diluted earnings (loss) per share available
to common shareholders:
Continuing operations, as reported....... $ (3.25) $ 1.25 $ (0.24) $ 2.41
Corrections.............................. (0.15) (0.12) (0.08) (0.06)
Continuing operations, as restated....... (3.40) 1.13 (0.32) 2.35
Discontinued operations, as reported..... (3.08) (1.74) (1.85) (1.45)
Corrections.............................. 0.15 0.12 0.08 0.06
Discontinued operations, as restated..... (2.93) (1.62) (1.77) (1.39)
---------------------------------------------
Net diluted earnings (loss) per share
available to common shareholders........ $ (6.33) $ (0.49) $ (2.09) $ 0.96
=============================================
A summary of the impacts of the interest restatement on fiscal 2004 financial
information is set forth in the following tables:
<Caption>
Consolidated Statement of Operations
- --------------------------------------------------------
As previously
reported Corrections As restated
------------- ------------ ------------
Interest expense $ 3,001,525 $ 326,947 $ 3,328,472
Income tax (benefit) expense 147,000 (111,000) 36,000
(Loss) income from continuing operations 172,859 (215,947) (43,088)
Loss from discontinued operations, net of tax (4,311,406) 215,947 (4,095,459)
Basic (loss) earning per share available to common
shareholders:
Continuing operations 0.23 (0.41) (0.18)
Discontinued operations (8.17) 0.41 (7.76)
Basic (loss) earnings per share available to
common shareholders (7.94) - (7.94)
Diluted (loss) earnings per share available to
common shareholders:
Continuing operations 0.23 (0.41) (0.18)
Discontinued operations (7.99) 0.41 (7.76)/1/
Diluted (loss) earnings per share available to
common shareholders (7.76) - (7.94)
/1/ Before this restatement, the impact of the conversion of stock options 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 antidilutive. This antidilutive impact results in loss per diluted share of ($7.76).
Consolidated Statement of Cash Flows
- ----------------------------------------------
Income (loss) from continuing operations $ 172,859 $ (215,947) $ (43,088)
Net cash flows from operating activities -
discontinued operations (4,260,491) 215,947 (4,044,544)
Due to competitive pressures in the natural spring water bottling business,
operating profits and cash flows were lower than expected in fiscal 2004.
Based on this trend, the future cash flow forecasts were revised for this
reporting unit and an impairment charge of $3.6 million to the HNWC tradename
was recorded in the Company's statement of operations as a component of income
(loss) from continuing operations in the fourth quarter of fiscal 2004. The
fair values of the reporting units for fiscal 2004 were estimated with the
assistance of an independent valuation specialist using the expected present
value of the discounted future cash flows.
44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes to the Consolidated Financial Statements, Item
8, and other information in this report, including Critical Accounting
Policies and Cautionary Information included at the end of this Item 7.
Actual year ends for fiscal 2005, 2004 and fiscal 2003 were September 30,
2005, September 24, 2004, and September 26, 2003, respectively. Years cited
herein refer to AMCON's fiscal years.
We operate three business segments:
- Wholesale distribution business which accounts for approximately
94.6% of our revenues. This segment distributes consumer
products such as cigarettes and tobacco products, candy, and other
confectionery products, beverages, groceries, paper products and
health and beauty care products.
- Retail health food business which operates retail stores in Florida and
the Midwest and accounts for approximately 4.1% of our revenues.
- Beverage business which accounts for approximately 0.7% of our
revenues. This segment includes a natural spring and purified bottling
operation. Until March 2006, AMCON also operated a geothermal water
bottling operation in Idaho which constituted the remaining 0.6% of
revenues in fiscal 2005.
For more information regarding our businesses, see Item 1 - Business on this
Annual Report on Form 10-K.
Restatements
- -------------
As discussed in Note 20 to the Consolidated Financial Statements, the
Company's September 24, 2004 Consolidated Statements of Operations and Cash
Flows have been restated from the amounts previously reported. The
accompanying management discussion and analysis and results of operations
gives effect to the restatement.
Significant Events in Fiscal 2005
- ---------------------------------
During fiscal 2005, the Company:
General
- changed its reporting period from a 52-53 week year ending on
the last Friday in September to a calendar month reporting period ending
on September 30. As a result of this change, fiscal 2005 comprised
53 weeks of operations as compared to 52 weeks of operations for fiscal
2004. The additional week of operations recorded in fiscal 2005
increased sales, gross profit and net income by approximately $14.3
million, $0.8 million and $0.1 million, respectively.
- entered into a letter of intent with its Chairman to sell the retail
health food and beverage segments which was subsequently terminated on
January 10, 2006.
45
Financing
- amended and restated its existing credit facility and security agreement
at various points throughout the year in order to (i) fund the payment
of $6.8 million in subordinated term debt in the retail segment and $4.8
million of revolving debt in the beverage segment; (ii) include TSI in
the borrowing base; and (iii) provide for a "springing" lock-box
arrangement which permits long-term classification of the revolving
credit facility. In addition, the Company obtained a waiver for
violation of the minimum tangible net worth covenant, which, in
addition to the fixed charge ratio, was later suspended through the end
of fiscal 2005. Subsequent to the end of fiscal 2005, both the minimum
tangible net worth covenant and the fixed charge ratio requirements were
replaced with a minimum threshold for earnings before interest,
taxes, depreciation and amortization.
- completed a $2.0 million private placement of Series B Convertible
Preferred Stock, a portion of which was used to fund the payment of
the subordinated debt described above.
- suspended payment of dividends on its common stock in order to conserve
capital to fund operations.
Operational
- generated a 2.9% increase in sales compared to fiscal 2004 which was
primarily the result of the extra week of operations in fiscal 2005, the
full year of TSI's operations in fiscal 2005, and cigarette price and
excise tax increases on cigarettes and tobacco that were offset by a
3.7% decrease in cigarette carton volume.
- recognized a loss from continuing operations per diluted share of
$21.91 in fiscal 2005 compared to a loss from continuing operations
per diluted share of $0.18 in fiscal 2004.
- recognized a loss from discontinued operations per diluted share of
$2.82 in fiscal 2005 compared to a loss from discontinued operations
per diluted share of $7.76 in fiscal 2004.
- purchased a building in Rapid City, South Dakota and constructed an
addition to that building in order to relocate the Company's existing
Rapid City, South Dakota distribution facility. The new facility became
operational on April 1, 2005. The increased square footage and improved
flow of product through the distribution center allowed us to
consolidate the business shipped to customers from our Casper, Wyoming
facility which was closed on September 30, 2005. We expect to operate
the combined facilities more efficiently and effectively to capitalize
on economies of scale.
- discontinued the operations in March 2005 of the beverage segments
marketing and distribution business which had been incurring losses
since its inception in December 2002, resulting in a pre-tax charge of
approximately $0.8 million. The business component is now accounted
for as a discontinued operation.
- recognized a pre-tax $10.2 million impairment of goodwill and
identifiable intangible assets at its beverage ($6.0 million) and retail
46
($4.2 million) segments and $2.9 million impairment of long-lived assets
in its beverage segment.
Results of Operations
- ---------------------
The following table sets forth an analysis of various components of the
Statements of Operations as a percentage of sales for fiscal years 2005, 2004
and 2003:
<Caption>
Fiscal Years
-----------------------
2005 2004 2003
-----------------------
Sales............................ 100.0% 100.0% 100.0%
Cost of sales.................... 92.9 92.8 92.2
-----------------------
Gross profit..................... 7.1 7.2 7.8
Selling, general and
administrative expenses........ 6.7 6.2 6.5
Depreciation and amortization.... 0.3 0.3 0.3
Impairment charges............... 1.5 0.4 -
-----------------------
Operating (loss) income ......... (1.4) 0.3 1.0
Interest expense................. 0.5 0.4 0.4
Other income, net................ - (0.1) -
-----------------------
(Loss) income from continuing
operations before income taxes.. (1.9) - 0.6
Income tax benefit (expense)..... 0.6 - 0.2
-----------------------
(Loss) income from continuing
operations .................... (1.3) - 0.4
Loss from discontinued
operations, net of tax.......... (0.2) (0.5) (0.3)
-----------------------
Net (loss) income................ (1.5) (0.5) 0.1
Preferred stock dividend
requirements................... - - -
-----------------------
Net (loss) income available to
common shareholders............. (1.5)% (0.5)% 0.1%
=======================
FISCAL YEAR 2005 VERSUS FISCAL YEAR 2004
- ----------------------------------------
SALES
Sales for fiscal year 2005 increased 2.9% to $845.9 million, compared to
$821.8 million for fiscal year 2004. Sales are reported net of costs
associated with sales incentives provided to customers, totaling $15.9 million
and $13.9 million for fiscal 2005 and 2004, respectively. Sales increases
(decreases) by business segment are as follows (dollars in millions):
Wholesale distribution segment $ 15.2
Retail health food stores segment 2.2
Beverage segment 6.9
Intersegment eliminations (0.1)
-------
$ 24.2
=======
47
Sales from the wholesale distribution segment increased by $15.2 million for
the fiscal 2005 as compared to fiscal 2004. Cigarette sales increased $10.0
million for fiscal 2005 and sales of tobacco, confectionary and other products
contributed an additional $5.2 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 fiscal 2005 as compared
to fiscal 2004, $9.7 million was attributable to price increases implemented
by major cigarette manufacturers in December 2004 and $6.5 million was due to
increased excise taxes implemented in certain states during fiscal 2005.
These increases were offset by a $16.6 million decrease in cigarette sales due
to a 3.7% 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 $2.0 million was attributable primarily to new business
obtained during the fiscal 2005 through expansion of our market area.
Competition from wholesalers who utilize pricing as their primary marketing
tool was aggressive during fiscal 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 fiscal 2005 increased by $2.2
million when compared to fiscal 2004. The extra week of operations during
fiscal 2005 resulting from the change in the Company's monthly reporting
period contributed approximately $0.7 million. In addition, a net sales
increase of $0.9 million resulted from sales generated from the opening of a
new store in Oklahoma City in April 2004. General growth in same store sales
driven largely from increases in vitamins and health and beauty added $1.6
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
$0.8 million and a $0.5 million reduction due to lower sales of grocery and
low carb products during fiscal 2005 compared to fiscal 2004 as these products
continued to move to mainstream grocery channels. In addition, in 2004 a
hurricane forced the temporary closure of several of our stores in Florida.
The increase in sales in fiscal 2005 related to this occurrence in fiscal 2004
was $0.3 million.
The beverage segment accounted for $11.4 million in sales during fiscal 2005,
compared to $4.5 million for fiscal 2004 resulting in an increase of $6.9
million. TSI, which was acquired in June 2004 (and closed in March 2006),
accounted for $4.3 million of the increase in sales. The Nesco Hawaii
acquisition in July 2004 increased sales during the fiscal 2005 by $0.9
million as compared to fiscal 2004. Additionally, the extra week of
operations during fiscal 2005 resulting from the change in the Company's
monthly reporting period increased sales at HNWC by $0.2 million. The
remaining $1.5 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 the gross profit of other entities which
do include such costs. Some entities may classify such costs as a component
of cost of sales. Cost of sales, a component used in determining gross
profit, for our 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
48
of the raw materials and related factory labor and manufacturing overhead
costs required to convert raw materials into finished goods (including labor,
warehousing, depreciation and utilities).
Gross profit increased 1.5% to $60.4 million for fiscal year 2005 compared to
$59.6 million for the prior fiscal year. Gross profit as a percentage of
sales in fiscal 2005 decreased slightly to 7.1% from 7.2% in fiscal 2004.
Gross profit by business segment is as follows (dollars in millions):
Incr/
2005 2004 (Decr)
-------------------------
Wholesale distribution segment $ 46.9 $ 46.3 $ 0.6
Retail health food stores segment 13.6 13.0 0.6
Beverage segment (0.1) 0.2 (0.3)
Intersegment eliminations - 0.1 (0.1)
-------------------------
$ 60.4 $ 59.6 $ 0.8
=========================
Gross profit from our wholesale distribution segment for fiscal 2005 increased
approximately $0.6 million as compared to the prior year. Items increasing
gross profit during fiscal 2005 as compared to 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, $1.3 million
related to the excise tax increases in certain states that occurred during
fiscal 2005, $0.1 million related to candy price increases, incentive payments
of $0.3 million received from cigarette and non-cigarette vendors based on the
Company's buying volumes and $0.1 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 $0.5 million from a
larger LIFO charge during fiscal 2005 as compared to fiscal 2004.
Gross profit for the retail health food segment for fiscal 2005 increased
approximately $0.6 million compared with 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 $0.5 million due to
improved sales and change in product mix. These increases were offset by a
$0.1 million decrease in margin related to higher product costs and disposal
of perishable and low-carb products.
Gross profit for the beverage segment decreased $0.3 million in fiscal 2005
primarily due to the incremental sales from TSI (acquired in June 2004) that
contributed approximately $0.6 million of gross profit and were offset by
negative gross margin at HNWC of $0.8 million due to lower selling prices in
an attempt to increase market share. In addition, TSI recorded a $0.1 million
charge for obsolete inventory in fiscal 2005.
OPERATING EXPENSE
Operating expense includes selling, general and administrative expenses and
depreciation and amortization and impairment charges. Selling, general and
administrative expenses include costs related to our sales, warehouse,
delivery and administrative departments for all segments. Specifically,
purchasing and receiving costs, inspection costs, warehousing costs and cost
of picking and loading customer orders are all classified as selling, general
49
and administrative expenses. Our most significant expenses relate to employee
costs, facility and equipment leases, transportation costs, insurance and
professional fees.
Total operating expense, which included an extra week of operations in fiscal
2005, increased 26.8%, or $15.3 million, to $72.2 million compared to fiscal
2004. As a percentage of sales, total operating expenses increased to 8.5%
from 6.9% as compared to the prior year.
The increase during fiscal 2005 as compared to fiscal 2004 is primarily
related significant goodwill, identifiable intangible asset and long-lived
asset impairment charges in the retail and beverage segments that totaled
$13.1 million in fiscal 2005 as compared to $3.6 million in fiscal 2004.
During fiscal 2005, based on valuations obtained from an independent valuation
specialist, management determined that a portion of the tradenames and
goodwill were impaired at both of the retail segments reporting units. The
tradename impairment was $3.9 million, while the goodwill impairment was $0.3
million. At TSI, a reporting unit in the beverage segment, tradenames, water
source, customer list, goodwill and certain long-lived assets were determined
to be impaired in the amounts of $0.9 million, $3.7 million, $0.3 million,
$0.4 million and $0.4 million, respectively. At HNWC, a reporting unit in the
beverage segment, goodwill, customer list, tradename and certain long-lived
assets were determined to be impaired in the amounts of $0.4 million, $0.1
million, $0.2 million and $2.5 million, respectively.
The goodwill and intangible impairments and impairment of certain long-lived
assets recorded in the beverage and retail segments were ultimately the result
of projected shortfalls in operating cash flow necessary to support the
reporting units carrying value, and in the case of the beverage segment, the
need for additional capital resources that, after the termination of the
Letter of Intent (discussed in Note 19), did not appear likely. The fair
values of the reporting units were estimated with the assistance of an
independent valuation specialist using the expected present value of the
discounted future cash flows and consideration of the net recoverable values.
The addition of TSI in June 2004 added an incremental $3.3 million of
additional operating expenses in fiscal 2005, excluding the impairment charges
previously discussed. Other increases where in the wholesale segment which
experienced an increase of $1.1 million in professional fees due to
utilization of professional service firms to explore strategic alternatives
for the retail and beverage segments, work towards Sarbanes-Oxley compliance
and restatement of the Company's 2004 financial statements. In addition, the
wholesale segment had a net increase of $1.4 million primarily related to
increased fuel costs, increased claims for workers' compensation and medical
insurance, increased bad debts and administrative salaries, as well as, the
extra week of operations. HNWC's operating expenses also increased $0.3
million in fiscal 2005 as compared to fiscal 2004, excluding the impairment
charges. The Company experienced a reduction of expenses of $0.3 million
related to rent expense and professional fees incurred in fiscal 2004
associated with a warehouse formerly used by the discontinued health food
distribution business when the subtenant of the warehouse defaulted on the
rental agreement. No corresponding expense was incurred in fiscal 2005.
INTEREST EXPENSE
Interest expense for fiscal year 2005 increased 35.5% to $4.5 million compared
to $3.3 million during the prior year. The increase was primarily due to
50
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 1.46% higher and average borrowings were $10.7 million higher
in fiscal 2005 as compared to fiscal 2004. Borrowings were higher in fiscal
2005 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
During fiscal 2005, other income decreased $0.5 million as compared to fiscal
2004 because of the sale of available-for-sale securities in fiscal 2004 that
did not recur in 2005.
During fiscal 2005, minority interest in loss, net of tax, due to the 15%
ownership of TSI that is not owned by AMCON, remain unchanged compared to
fiscal 2004. However, losses were not allocated after the remaining minority
interest was reduced to zero in fiscal 2005 as a result of the cumulative
losses of TSI.
The Company's effective income tax rate was 30.2% in fiscal 2005 compared to
36.7% in fiscal 2004. The decrease in the effective tax rate was primarily
attributable to valuation allowances placed on state net operating losses and
impairment of non-deductible intangible assets in fiscal 2005 which reduced
the income tax benefit and related effective tax rate. In fiscal 2004,
impairment of non-deductible intangible assets increased the effective income
tax rate.
During fiscal 2005, the Company paid preferred dividends of $0.3 million on
its Series A and B, Cumulative, Convertible Preferred Stock, compared to $0.1
million in fiscal 2004.
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. The loss from discontinued operations, net of tax, was $1.5
million during fiscal 2005. A charge of $1.0 million, before taxes, was
included in loss from discontinued operations in fiscal 2005 representing the
adjustment of 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
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.
FISCAL YEAR 2004 VERSUS FISCAL YEAR 2003
- ----------------------------------------
SALES
Sales for fiscal year 2004 increased 6.5% to $821.8 million, compared to
$771.8 million for fiscal year 2003. Sales are reported net of costs
associated with sales incentives provided to customers, totaling $13.9 million
and $9.0 million for fiscal 2004 and 2003, respectively. Sales increases
(decreases) by business segment are as follows (dollars in millions):
51
Wholesale distribution segment $ 49.3
Retail health food stores segment (0.7)
Beverage segment 1.4
Intersegment eliminations -
-------
$ 50.0
=======
Cigarette sales in the wholesale distribution segment increased by $32.5
million, and sales of tobacco, confectionary and other products contributed an
additional $16.8 million in sales as compared to fiscal 2003. Of the increase
in sales of cigarettes, $5.8 million related to price increases implemented by
the Company in response to the elimination of vendor program incentives during
the year, and $49.4 million related to a 7.5% increase in carton volume,
primarily due to new customers within our current market area.
These increases were offset by a $22.7 million decrease in cigarette sales
related to a decrease in prices on Philip Morris and a permanent decrease on
RJ Reynolds' (successor in merger to Brown & Williamson) brands which began in
the second quarter of 2003. The $16.8 million increase in sales of tobacco,
confectionary and other products was attributable primarily to sales to new
customers in our current market area.
Sales from the retail health food segments new Oklahoma City store, which
opened in April 2004, were $0.8 million. Sales declined in the remaining
stores by $1.5 million primarily because of the extreme adverse weather in
Florida, a planned elimination of the deli operation in the Florida stores,
reduced supplement sales resulting from unfavorable media coverage related to
the government ban on ephedra based products and a general softening of the
low-carb market coupled with continued expansion of low-carb offerings and
sales through mainstream grocery channels.
The beverage segment accounted for $4.8 million of sales for fiscal 2004,
compared to $3.4 million in fiscal 2003. The improvement was due to increases
in case volume of our Hawaiian Springs natural spring water, which was
possible due to completion of plant construction and a change to a new
distributor in the Hawaii market in October 2003. In addition, the
acquisition of substantially all of the operating assets of Trinity Springs,
Ltd. at the end of June 2004 contributed $1.1 million of sales for fiscal
2004. Hawaiian Natural Water Company (HNWC), also acquired a water bottling
operation on the island of Oahu that contributed $0.3 million of sales in
fiscal 2004. This acquisition enabled HNWC to more effectively differentiate
the premium natural spring water from purified bottled water products and
provides a more competitive price point in which to provide private label
water. Additionally, there were no sales from our home and office bottling
and delivery business in Hawaii for fiscal 2004 because it was sold in October
2003. Sales from the home and office bottling and delivery business totaled
$0.3 million in fiscal 2003.
GROSS PROFIT
Our gross profit does not include fulfillment costs and costs related to the
distribution network which are included in selling, general and administrative
costs, and may not be comparable to those of other entities. Some entities
may classify such costs as a component of cost of sales. Cost of sales, a
component used in determining gross profit, for wholesale and retail segments
includes the cost of products purchased from manufacturers, less incentives
52
that we receive which are netted against such costs. In the beverage segment,
cost of sales includes the cost of the raw materials and related factory labor
and manufacturing overhead costs required to convert raw materials into
finished goods, including; labor, depreciation and utilities.
Gross profit decreased 1.0% to $59.6 million for fiscal year 2004 compared to
$60.2 million for the prior fiscal year. Gross profit as a percentage of
sales decreased to 7.2% for the year compared to 7.8% for fiscal 2003. Gross
profit by business segment is as follows (dollars in millions):
Incr/
2004 2003 (Decr)
-------------------------
Wholesale distribution segment $ 46.2 $ 46.6 $ (0.4)
Retail health food stores segment 13.0 13.2 (0.2)
Beverage segment 0.4 0.4 -
-------------------------
$ 59.6 $ 60.2 $ (0.6)
=========================
Gross profit of $5.5 million was generated from our wholesale distribution
business from cigarette price increases implemented during fiscal 2004 in
response to the elimination of vendor program incentive payments that the
Company historically received. Because vendor program incentive payments are
generally received and recognized by the Company in the quarter following the
period in which the related cigarette sales were made, as that is when it is
estimable, gross profit for fiscal 2004 includes both the normal vendor
program incentive payments relating to the fourth quarter 2003 but received
during the first quarter 2004 of approximately $0.8 million, and the amount
earned from the price increases that were implemented to replace vendor
program incentive payments. This increase in gross profit was partially
offset by a decrease of $1.3 million in incentive payments received on our
private label cigarettes, a decrease in incentive allowances received from
manufacturers of approximately $5.4 million (net of amounts paid to
customers), a decrease of $0.9 million related to increases in cigarette
excise taxes in certain states in fiscal 2003 and a $1.2 million larger charge
to cost of sales for fiscal 2004 as compared to the fiscal 2003 related to the
change in the required LIFO inventory reserve balance. The remainder of the
increase in gross profit of $2.9 million was primarily due to increased sales
in all other products to new customers.
Gross profit from our retail health food segment decreased $0.2 million to
$13.0 million primarily due to the decreased sales discussed above.
Gross profit from our beverage segment was consistent with the prior year.
The increase in sales produced additional gross profit of $0.2 million which
was offset by a decrease of $0.2 million in gross profit from our home and
office bottling and delivery business in Hawaii which was sold in October
2003.
OPERATING EXPENSE
Operating expense includes selling, general and administrative expenses and
depreciation and amortization and impairment charges. Selling, general and
administrative expenses include costs related to our sales, warehouse,
delivery and administrative departments for all segments. Specifically,
purchasing and receiving costs, inspection costs, warehousing costs and cost
53
of picking and loading customer orders are all classified as selling, general
and administrative expenses. Our most significant expenses relate to employee
costs, facility and equipment leases, transportation costs, insurance and
professional fees.
Total operating expense, which includes selling, general and administrative
expenses, depreciation and amortization, and impairment charges increased
7.8%, or $4.1 million, to $56.9 million compared to fiscal 2003. As a
percentage of sales, total operating expenses increased to 6.9% from 6.8% as
compared to the prior year.
Operating expenses in the beverage segment accounted for $3.9 million of the
increase, primarily due to impairment of intangibles of $3.6 million discussed
below and expenses associated with TSI which was acquired in June 2004 and the
water bottling operation acquired by HNWC in July 2004. Operating expense in
the beverage segment in fiscal 2003 included $0.4 million associated with
writing down nonoperating assets held for sale to their fair market value.
The wholesale distribution segment reduced operating costs by $0.2 million
during fiscal 2004 as compared to fiscal 2003 primarily due to the decrease in
the required allowance for bad debt reserve that is calculated based on
historical collection trends. Total operating expenses in our retail segment
increased $0.2 million due to the opening of a new store in Oklahoma City.
These expenses were partially offset by savings incurred as a result of a
reduced emphasis on the deli operations in the Florida stores. In addition,
the Company incurred $0.2 million of rent expense and professional fees
associated with a warehouse formerly used by the discontinued health food
distribution business when the subtenant of the warehouse defaulted on the
rental agreement.
As a result of the Company's annual goodwill and intangible asset impairment
review as required by SFAS No. 142 "Goodwill and Other Intangible Assets," the
Company determined that certain intangible assets in the beverage segment were
impaired by $3.6 million. Due to competitive pressures in the natural
spring water bottling business, operating profits and cash flows were lower
than expected for the year. Based on this trend, future expected cash flows
were revised for this reporting unit and an impairment was recorded and is
included in operating expenses.
As a result of the above, the operating income for fiscal 2004 was $2.7
million, a decrease of $4.7 million as compared to operating income of $7.4
million in fiscal 2003.
INTEREST EXPENSE
Interest expense for fiscal year 2004 increased 0.4% to $3.3 million compared
to $3.2 million during the prior year. The increase was due primarily to
additional borrowings on the Company's revolving line to support the beverage
bottling operations. The impact of the increased borrowings was somewhat
offset by lower average interest rates in fiscal 2004 as compared to fiscal
2003.
54
OTHER
Other income for fiscal 2004 of $0.6 million was generated primarily from
gains on sales of available-for-sale securities, as well as, interest income,
dividends and royalty payments. Other income for fiscal 2003 of $0.5 million
was generated primarily from $0.1 million received from a settlement related
to a former distribution facility, $0.3 million from gains on sales of
available-for-sale securities, and $0.1 million in interest on income tax
refunds, as well as, interest income and dividends on investment securities.
The Company's effective income tax rate was 36.7% in fiscal 2004, compared to
38.0% in 2003. The decrease in the effective tax rate was primarily
attributable to an increase in net operating loss carryforwards which resulted
from new IRS guidance issued in December 2003 allowing additional carryover of
net operating losses related to acquired companies.
In fiscal 2004, minority interest net of tax totaled $0.1 million and
represented the allocation of the current years net loss of TSI to the
minority shareholders.
Liquidity and Capital Resources
- --------------------------------
OVERVIEW
- --------
Operating Activities. 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, issuance of preferred stock, and
from borrowings, as necessary. During fiscal 2005, the Company generated $8.5
million of cash from operating activities, primarily due to reduced cigarette
inventory levels resulting from a reduced LIFO "buy-in" at year end and income
tax refunds received. Our variability in cash flows from operating activities
is heavily dependent on the timing of inventory purchases and seasonal
fluctuations. For example, in the circumstance where we are "buying-in" to
obtain favorable terms on particular products 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 warm weather months,
which is our busiest time of the year, we generally carry larger inventory
back stock to ensure high fill rates to maintain customer satisfaction. Our
inventory levels are usually at their highest levels in the third and fourth
fiscal quarters but at any given month can vary based on the day of the week
that month end occurs. We generally experience reductions in inventory levels
during the first fiscal quarter, as compared to our fiscal year end, and
maintain these levels until the beginning of the third fiscal quarter when we
begin building for increased warm weather business.
Investing Activities. Cash of $2.9 million was utilized in investing
activities during 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.
Financing Activities. The Company used net cash of $5.5 million from
financing activities during fiscal 2005. Cash of $15.1 million was used in
55
financing activities during 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 $2.8
million. During fiscal 2005, $0.3 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. These uses of cash from financing
activities were offset by borrowings of $7.8 million on bank credit agreements
and other short and long-term debt arrangements and receipt of $1.8 million
from the private placement of Series B Convertible Preferred Stock (net of
costs incurred to issue the securities).
Cash on Hand/Working Capital. As of September 2005, the Company had cash on
hand of $0.5 million and working capital (current assets less current
liabilities) of $28.5 million. This compares to cash on hand of $0.4 million
and a working capital deficit 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 fiscal 2005. This classification
change is due to an amendment to the credit agreement which now includes a
"springing lockbox" provision which results in accounting for the debt
associated with the credit agreement as long-term in fiscal 2005, except for
the portion expected to be paid off during the next twelve months. The
Company's ratio of debt to equity increased significantly as a result of the
significant net loss which decreased shareholder equity. For purposes of this
calculation, 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 September 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 September 30, 2005, the
balance on the facility was $44.6 million, excluding Term Note A, and the
amount available to borrow based on our collateral and loan limit was
approximately $50.9 million. Excluding Term Note A, our peak borrowing was
$53.8 million, our average borrowing was $48.5 million and our average
availability was $3.3 million in fiscal 2005. 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.
Additional Demands for Capital. 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. However, TSI still required additional capital
resources and as a result, had to look to alternative sources of financing.
This included subordinated loans of $500,000 issued 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 and Jeremy W.
Hobbs, two of the Company's directors, are members).
These temporary loans were made available to TSI to provide time for the
Special Committee, composed of independent, disinterested members of the
56
Company's Board of Directors, to explore strategic alternatives and evaluate
Wright group's proposed acquisition. One of the matters delegated by the
Board of Directors to the Special Committee was to explore the feasibility of
obtaining additional equity or mezzanine capital for investment in The Healthy
Edge, Inc. which was planned to be an intermediate holding company for the
subsidiaries conducting the retail health food and beverage segments. The
Special Committee considered a potential spin-off of at least 80% of the stock
of The Healthy Edge, Inc. to the Company's stockholders but additional capital
was necessary to make that alternative viable. Because the additional capital
did not materialize, the sale of some or all of the businesses constituting
the retail health food and beverage segments became the only principal
strategic alternative pursued by the Special Committee with assistance from
its financial adviser.
Because our credit agreement contains restrictions for funding of certain
subsidiaries and the fact that the sale transaction of the retail health food
and beverage subsidiaries was terminated in January 2006 due to complications
associated with the TSI acquisition, the beverage subsidiaries were placed in
dire need of additional capital in order to fund operations. No such funding
was received and as of March 2006, the Company discontinued TSI operations.
HNWC, which owns Nesco, continues to manufacture product and is sustaining
operations through operating cash flows, but continues to be strained in
meeting its day-to-day obligations.
RECENT DEVELOPMENTS
- -------------------
Issuance of Series C Convertible Preferred Stock. On March 7, 2006, the
Company issued and sold 80,000 shares of its Series C Convertible Preferred
Stock at $25 per share in a private placement under Section 4(2) of the
Securities Act of 1933. The Series C Convertible Preferred Stock was issued
and sold for the purpose of generating $2.0 million to be applied as a
repayment of principal under the Company's secured credit facilities with
LaSalle Bank National Association.
Cumulative cash dividends on the Series C Convertible Preferred Stock are
payable in arrears at a rate of 6% per annum when, as and if declared by our
Board of Directors, on March 31, June 30, September 30 and December 31 of
each year. The Series C Convertible Preferred Stock is convertible by the
holder at any time into shares of our Company's common stock. The Series C
Convertible Preferred Stock currently is convertible into 146,842 shares of
our Company's common stock, subject to customary anti-dilution adjustments in
the event of stock splits, stock dividends and certain other events with
respect to our common stock.
Dividend Payments
- -----------------
During the first quarter of fiscal 2005, the Board of Directors suspended
payment of cash dividends on our common shares for the foreseeable future.
The Company will periodically revisit its dividend policy to determine whether
it has adequate internally generated funds, together with other needed
financing to fund its growth and operations in order to resume the payment of
cash dividends on common stock.
CONTRACTUAL OBLIGATIONS
- -----------------------
The following table summarizes our outstanding contractual obligations and
commitments as of fiscal year end 2005:
57
<Caption>
Payments Due By Period
---------------------------------------------------------------------
Contractual Fiscal Fiscal Fiscal Fiscal Fiscal
Obligations Total 2006 2007 2008 2009 2010 Thereafter
- ---------------------- ---------------------------------------------------------------------
Credit Facility/1/ $ 49,162 $ 1,432 $ 47,730 $ - $ - $ - $ -
Long-term debt/2/ 11,697 1,219 7,317 448 1,936 777 -
Related party debt 2,000 2,000 - - - - -
Interest on long-term
and subordinated
debt/3/ 6,028 3,932 1,796 165 122 13 -
Operating leases 15,455 4,952 2,776 2,090 1,470 1,252 2,915
Minimum water royalty/4/ 4,247 288 288 288 288 288 2,807
---------------------------------------------------------------------
Total $ 88,589 $13,823 $ 59,907 $ 2,991 $ 3,816 $ 2,330 $ 5,722
=====================================================================
Other Commercial Fiscal Fiscal Fiscal Fiscal Fiscal
Commitments Total 2006 2007 2008 2009 2010 Thereafter
- ---------------------- ---------------------------------------------------------------------
Lines of credit/1/ $ 60,000 $ - $ 60,000 $ - $ - $ - $ -
Lines of credit in use (49,162) - (49,162) - - - -
---------------------------------------------------------------------
Lines of credit
available 10,838 - 10,838 - - - -
Water source guarantee 5,000 - - - - - 5,000
Letters of credit 837 837 - - - - -
---------------------------------------------------------------------
Total $ 16,675 $ 837 $ 10,838 $ - $ - $ - $ 5,000
=====================================================================
/1/ In October 2004, the Company's revolving credit facility was amended
to increase the total facility to $60.0 million and add the subsidiaries,
except for Trinity Springs, Inc., as borrowers. TSI was subsequently added as
a borrower in April 2005. TSI was closed in March 2006. The facility
includes $5.0 million (original face amount) of term debt that was used, in
addition to the proceeds from issuance of $2.0 million of Series B Convertible
Preferred Stock to retire $6.8 million of subordinated debt.
/2/ Includes capital leases of $1.0 million with maturities through 2010.
/3/ Represents estimated interest payments on long-term debt, including
capital leases and subordinated debt. Certain obligations contain variable
interest rates. For illustrative purposes, the Company has projected future
interest payments assuming that interest rates will remain unchanged and
additionally, that the revolving portion of the credit agreement will be
reduced by $0.2 million in fiscal 2006 with the remaining principal falling
due when the agreement expires in April 2007.
/4/ Fiscal 2006 - 2010 represents the annual minimum water royalty and
the balance thereafter represents the minimum water royalty in perpetuity.
Both amounts are representative of the present value of the obligation
reflected in our balance sheet together with the imputed interest portions of
required payments.
58
CREDIT AGREEMENT
- ----------------
The Company's primary source of borrowing for liquidity purposes is its
revolving credit facility with LaSalle Bank (the "Facility"). As of September
2005, the outstanding balance on the Facility was $45.5 million, including
Term Note A. The Facility, which was amended in October 2004, transferred
$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 6.75% at September 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 restricted 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 an interest rate swap agreement. This
swap agreement, which expires in June 2006, 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) required
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.
Because the Company was unable to comply with the fixed charge ratio and
minimum tangible net worth financial covenants, as amended, at various times
throughout the year, the participating lenders agreed to suspend such
covenants through the end of fiscal 2005. Further, as described in Note 19 to
the Consolidated Financial Statements, subsequent to September 30, 2005, the
Company and the participating lenders further amended the Credit Facility to
replace all existing financial covenants with only a financial covenant that
requires minimum levels of earnings before interest, taxes, depreciation and
amortization as well as certain other requirements.
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 $3.6 million at September 2005. Term Note B bears
interest at the bank's base rate plus 2.00%, which was 8.75% at September
2005 and is required to be repaid in eighteen monthly installments of $0.3
million (subsequently amended in March 2006 to be repaid in monthly
installments of $0.1 million).
The Company's Chairman personally guaranteed repayment of up to $10.0 million
of the combined amount of the Facility and the term loans. The amount of the
59
guarantee at September 30, 2005 was $8.6 million. 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.
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 old building was extended to coincide with the completion of
construction in the third quarter of fiscal 2005. The Company 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 with an original maturity of June 1,
2006. The maturity date of the loan has been extended to April 30, 2007 and
the interest rate has been adjusted to 8%. 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 September 30,
2005 and after year end was default on. 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.
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 was subsequently
amended to be due on December 31, 2005 and is currently in default. The note
bears interest at 7% per annum.
60
TSI also 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 and Jeremy W.
Hobbs, two of the Company's directors, are members). The loans bear interest
at 7% per annum. The maturity dates of the subordinated loans were extended
to December 31, 2005 and are currently in default.
OTHER
- -----
The Company has several capital leases for office, warehouse and water
bottling equipment. As of September 2005, the outstanding balances on the
capital leases totaled approximately $1.0 million.
AMCON has issued a letter of credit in the amount of approximately $0.8
million to its workers' compensation insurance carrier as part of its self-
insured loss control program. The amount was increased to $1.0 million in
October 2005.
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 M&I Bank (formerly known as Gold Bank) (the
"M&I Loans"), who is also a participant lender on the Company's revolving line
of credit. The M&I Loans contain cross default provisions which cause all
loans with M&I to be considered in default if any one of the loans where M&I
is a lender, including the revolving credit facility is in default. Since M&I
approved waivers of the covenant violations in the Facility, the M&I Loans are
not considered to be in default.
In addition, the M&I Loans contain co-terminus provisions which require all
loans with M&I to be paid in full if any of the loans are paid in full prior
to the end of their specified terms.
Off-Balance Sheet Arrangements
- ------------------------------
The Company does not have any off-balance sheet arrangements.
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. In addition, a director of
the Company has extended a $1.0 million revolving line of credit to TSI at an
interest rate of 8% per annum and a Company that is wholly-owned by the three
directors of the Company (including the Chairman and President) and another
significant shareholder lent TSI $0.5 million at an interest rate of 7% per
annum.
Also, 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
61
Draupnir, LLC, a Delaware limited partnership (of which, Allen D. Petersen and
Jeremy W. Hobbs, two of the Company's directors, are members). The loans bear
interest at 7% percent per annum.
DISPOSITIONS OF BUSINESSES
- ----------------------------
In March 2005, the Company discontinued the operations of its beverage
marketing and distribution business. As a result, the balance sheets as of
September 24, 2004 and September 26, 2003 and the statements of operations and
statements of cash flows for the fiscal years ended September 24, 2004 and
September 26, 2003 have been prepared reflecting this disposition as
discontinued operations in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-
Lived Assets." The beverage marketing and distribution business was started
in fiscal 2003, so there is no change to the fiscal 2002 amounts.
Other Matters
- -------------
Certain Accounting Considerations
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 certain 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
the Company). Management does not expect that the adoption of this statement
would have a material impact on our results of operations, business, cash
flows or financial condition.
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. Based on
the unvested options outstanding at September 30, 2005, approximately $60,000,
$12,000 and $1,000, before tax, will be recorded as expense in the statement
of operations in fiscal 2006, 2007 and 2008, respectively.
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
62
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 does not expect that
the adoption of this statement would have a material impact on our results of
operations, business, cash flow or financial condition.
On July 13, 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, and Related Implementation Issues" ("FIN 48").
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
a Company's financial statements in accordance with Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS 109"). FIN
48 prescribes a recognition threshold and measurement attribute for a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. FIN 48 is effective as of the
beginning of fiscal years that begin after December 15, 2006. The Company is
currently evaluating the effects of implementing this new standard.
CRITICAL ACCOUNTING ESTIMATES
Certain accounting estimates used in the preparation of the Company's
financial statements require us to make judgments and estimates and the
financial results we report may vary depending on how we make these
judgments and estimates. Our critical accounting estimates are set forth
below and have not changed during fiscal 2005.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
NATURE OF ESTIMATES REQUIRED. The allowance for doubtful accounts represents
our estimate of uncollectible accounts receivable at the balance sheet date.
We monitor our credit exposure on a weekly basis and assess the adequacy of
our allowance for doubtful accounts on a quarterly basis. Because credit
losses can vary significantly over time, estimating the required allowance
requires a number of assumptions that are uncertain.
ASSUMPTIONS AND APPROACH USED. We estimate our required allowance for
doubtful accounts using the following key assumptions.
- Historical collections - Represented as the amount of historical
uncollectible accounts as a percent of total accounts
receivable.
- Specific credit exposure on certain accounts - Identified based
on management's review of the accounts receivable portfolio
and taking into account the financial wherewithal of particular
customers that management deems to have a higher risk of
collection. For example, a customer in bankruptcy would
indicate that an amount could be uncollectible.
SENSITIVITY ANALYSIS. We believe that our current level of allowance for
doubtful accounts is adequate at the balance sheet date and that our credit
exposure is very low compared with the high volume of sales and the nature of
our industry in which collections are generally made quickly. However, for
every 1% percent of receivables deemed to require an additional reserve at
63
September 2005, the impact on the statement of operations would be to increase
selling, general and administrative expenses by approximately $290,000.
INVENTORIES
NATURE OF ESTIMATES REQUIRED. In our businesses, we carry large quantities
and dollar amounts of inventory. Inventories consist primarily of finished
products purchased in bulk quantities to be sold to our customers. Given the
large quantities and broad range of products that we carry to better serve our
customers, there is a risk of impairment in inventory that is unsaleable or
unrefundable, slow moving, obsolete or is discontinued. The use of estimates
is required in determining the salvage value of this inventory.
ASSUMPTIONS AND APPROACH USED. We estimate our inventory obsolescence reserve
at each balance sheet date based on the following criteria:
-Slow moving products - Items identified as slow moving are
evaluated on a case-by-case basis for impairment.
-Obsolete/discontinued inventory - Products identified that are
near or beyond their expiration dates. In addition, we may
discontinue carrying certain product lines for our customers.
As a result, we estimate the market value of this inventory as
if it were to be liquidated.
-Estimated salvage value/sales price - The salvage value of the
inventory is estimated using management's evaluation of the
congestion in the distribution channels and experience with
brokers and inventory liquidators to determine the salvage
value of the inventory.
DEPRECIATION, AMORTIZATION AND IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets consist primarily of fixed assets and intangible assets that
were acquired in business combinations. Fixed assets and amortizable
identified intangible assets are assigned useful lives ranging from 2 to 40
years. Goodwill is not amortized. Impairment of reporting units, which is
measured in the Company's fourth fiscal quarter in order to coincide with its
budgeting process, is evaluated annually with the assistance of an independent
valuation specialist. The reporting units are valued using after-tax cash
flows from operations (less capital expenditures) discounted to present value.
Fiscal 2005 impairment
- ----------------------
During fiscal 2005, based on valuations obtained from an independent valuation
specialist, management determined that a portion of the tradenames and
goodwill were impaired at both the retail and the beverage segments. The
impairments recorded in the beverage and retail segments were the result of
projected shortfalls in operating cash flows necessary to support the
64
reporting units carrying value. The fair values of the reporting units were
estimated with the assistance of an independent valuation specialist using the
expected present value of the discounted future cash flows and consideration
of the net recoverable values.
A summary of the impairment charges by entity for fiscal year 2005 are as
follows (in millions):
Retail TSI HNWC Total
Long-lived assets $ - $ 0.4 $ 2.5 $ 2.9
Goodwill 0.3 0.4 0.4 1.1
Water source - 3.7 - 3.7
Customer list - 0.3 0.1 0.4
Tradename 3.9 0.9 0.2 5.0
----- ----- ----- -----
$ 4.2 $ 5.7 $ 3.2 $13.1
===== ===== ===== =====
The impairment charges are recorded in the Company's statement of operations
as a component of (loss) income from continuing operations.
Fiscal 2004 impairment
- ----------------------
Due to competitive pressures in the natural spring water bottling business,
operating profits and cash flows were lower than expected. Based on this
trend, the future cash flow forecasts were revised for this reporting unit and
an impairment of $3.6 million to the HNWC tradename was recorded in the
Company's statement of operations as a component of income (loss) from
operations. The fair values of the reporting units were estimated with the
assistance of an independent valuation specialist using the expected present
value of the discounted future cash flows.
NATURE OF ESTIMATES REQUIRED. Management has to estimate the useful lives of
the Company's long lived assets. In regard to the impairment analysis, the
most significant assumptions include management's estimate of the annual
growth rate used to project future sales and expenses used by the independent
third party valuation specialist.
ASSUMPTIONS AND APPROACH USED. For fixed assets, depreciable lives are based
on our accounting policy which is intended to mirror the expected useful life
of the asset. In determining the estimated useful life of amortizable
intangible assets, such as customer lists, we rely on our historical
experience to estimate the useful life of the applicable asset and consider
industry norms as a benchmark. In evaluating potential impairment of long-
lived assets we primarily use an income based approach (discounted cash flow
method) and guideline public and private company information. A discounted
cash flow methodology requires estimation in (i) forecasting future earnings
(ii) determining the discount rate applicable to the earnings stream being
discounted, and (iii) computing a terminal value at some point in the future.
The forecast of future earnings is an estimate of future financial performance
based on current year results and management's evaluation of the market
potential for growth. The discount rate is a weighted average cost of capital
using a targeted debt-to-equity ratio using the industry average under the
assumption that it represents our optimal capital structure and can be
achieved in a reasonable time period. The terminal value is determined using
a commonly accepted growth model.
65
SENSITIVITY ANALYSIS. We believe that the estimated useful lives of our fixed
assets and amortizable intangibles are appropriate. If we shortened the
estimated useful lives of our fixed assets by one year, the impact on the
statement of operations for the current period would be to increase
depreciation expense by approximately $550,000. A decrease in the estimate of
future sales or increase of estimated expenses for reporting units evaluated
for impairment could result in additional impairment of intangibles being
recorded up to the amount of the carrying amount of the intangible assets
which was approximately $9.3 million as of September 30, 2005.
INSURANCE
The Company's insurance for workers' compensation, general liability and
employee-related health care benefits are provided through high-deductible or
self-insured programs. As a result, the Company accrues for its workers'
compensation liability based upon claim reserves established with the
assistance of a third-party administrator which are then trended and
developed. The reserves are evaluated at the end of each reporting period.
Due to the uncertainty involved with the realization of claims incurred but
unreported, management is required to make estimates of these claims.
ASSUMPTIONS AND APPROACH USED. In order to estimate our reserve for incurred
but unreported claims we consider the following key factors:
Employee Health Insurance Claims
- Historical claims experience - We review loss runs for each
month to calculate the average monthly claims experience.
- Lag period for reporting claims - Based on analysis and
consultation with our third party administrator, our experience
is such that we have a one month lag period in which claims are
reported.
Workers' Compensation Insurance Claims
- Historical claims experience - We review prior year's loss runs
to estimate the average annual expected claims and review
monthly loss runs to compare our estimates to actual claims.
- Lag period for reporting claims - We utilize the assistance
of our insurance agent to trend and develop reserves on
reported claims in order to estimate the amount of incurred but
unreported claims. Our insurance agent uses standard insurance
industry loss development models.
SENSITIVITY ANALYSIS. We believe that our current reserve for incurred but
unreported insurance claims is adequate at the balance sheet date.
However, for every 5% percent increase in claims, an additional reserve of
approximately $54,000 would be required at September 2005, the impact of which
would increase selling, general and administrative expenses by that amount in
the same period.
INCOME TAXES
The Company accounts for its income taxes by recording taxes payable or
refundable for the current year and deferred tax assets and liabilities for
66
the future tax consequences of events that have been recognized in our
financial statements or tax returns. As required by SFAS No. 109, "Accounting
for Income Taxes", these expected future tax consequences are measured based
on provisions of tax law as currently enacted; the effects of future changes
in tax laws are not anticipated. Future tax law changes, such
as a change in the corporate tax rate, could have a material impact on our
financial condition or results of operations. When appropriate, we record a
valuation allowance against deferred tax assets to offset future tax benefits
that may not be realized. During fiscal 2005, we recorded a valuation
allowance of $0.6 million against state net operating loss carryforwards for
the beverage and retail health companies in the consolidated group who have
historically incurred losses and file separate state tax returns.
ASSUMPTIONS AND APPROACH USED. In determining whether a valuation allowance
is appropriate, we consider whether it is more likely than not that all or
some portion of our deferred tax assets will not be realized, based in part
upon management's judgments regarding future events.
In making that estimate we consider the following key factors:
- our current financial position
- historical financial information
- future reversals of existing taxable temporary differences
- future taxable income exclusive of reversing temporary differences
and carryforwards
- taxable income in prior carryback years
- tax planning strategies
SENSITIVITY ANALYSIS. Based on our analysis, we have determined that a
valuation allowance of $0.6 million was required at September 2005. The
valuation allowance reduced the deferred tax asset to the amount that is more
likely than not to be realized and a corresponding reduction to net income
resulted.
REVENUE RECOGNITION
We recognize revenue in our wholesale and beverage segments when products are
delivered to customers (which generally is the same day products are shipped)
and in our retail health food segment when the products are sold to consumers.
Sales are shown net of returns, discounts, and sales incentives to customers.
NATURE OF ESTIMATES REQUIRED. We estimate and reserve for anticipated sales
discounts as part of our periodic evaluation of allowance for doubtful
accounts. We also estimate and provide a reserve for anticipated sales
incentives to customers based on volume.
ASSUMPTIONS AND APPROACH USED. We estimate the sales reserves using the
following criteria:
- Sales discounts - We use historical experience to estimate the
amount of accounts receivable that will not be collected due to
customers taking advantage of authorized term discounts.
- Volume sales incentives - We use historical experience in
combination with quarterly reviews of customers' sales progress
in order to estimate the amount of volume incentives due to
the customers on a periodic basis.
67
SENSITIVITY ANALYSIS. Based on the historical information used to estimate
the reserves for sales discounts and volume sales incentives, we do not
anticipate significant variances from the amounts reserved. However, there
could be significant variances from period-to-period based on customer make-up
and programs offered.
Our estimates and assumptions for each of the aforementioned critical
accounting estimates have not changed materially during the periods presented,
nor are we aware of any reasons that they would be reasonably likely to change
in the future.
FORWARD LOOKING STATEMENTS
- ---------------------------
This Annual Report, including the Letter to Shareholders, Management's
Discussion and Analysis, and other sections, contains forward looking
statements that are subject to risks and uncertainties and which reflect
management's current beliefs and estimates of future economic circumstances,
industry conditions, company performance and financial results. Forward
looking statements include information concerning the possible or assumed
future results of operations of the Company and those statements preceded by,
followed by or that include the words "future," "position," "anticipate(s),"
"expect," "believe(s)," "see," "plan," "further improve," "outlook," "should"
or similar expressions. For these statements, we claim the protection of the
safe harbor for forward looking statements contained in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are not guarantees
of future performance or results. They involve risks, uncertainties and
assumptions. You should understand that the following important factors, in
addition to those discussed elsewhere in this document, including Item 1A-Risk
Factors of this Annual Report on Form 10-K, could adversely affect our results
of operations, business, cash flow and financial condition and could cause our
results of operations to differ materially from those expressed in our forward
looking statements:
- treatment of TSI transaction,
- changing market conditions with regard to cigarettes,
- changes in promotional and incentive programs offered by
cigarette manufacturers,
- the demand for the Company's products,
- new business ventures,
- domestic regulatory risks,
- competition,
- collection of guaranteed amounts,
- other risks over which the Company has little or no control, and
- any other factors not identified herein could also have such an effect.
Changes in these factors could result in significantly different results.
Consequently, future results may differ from management's expectations.
Moreover, past financial performance should not be considered a reliable
indicator of future performance. Any forward looking statement contained
herein is made as of the date of this document. The Company undertakes no
obligation to publicly update or correct any of these forward looking
statements in the future to reflect changed assumptions, the occurrence of
material events or changes in future operating results, financial conditions
or business over time.
68
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk on its variable rate debt. At
September 2005, we had $39.2 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 6.75% at September 2005. We estimate that our annual cash flow
exposure relating to interest rate risk based on our current borrowings is
approximately $0.2 million for each 1% change in our lender's prime interest
rate. As discussed in Note 8 to the consolidated financial statements, the
LIBOR interest rate borrowing option was removed, except for the portion of
the loan that is related to the swap agreement as part of the revolving credit
facility restructuring in October 2004.
At September 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 swap which could
expose us to significant market risk. The information required by this item is
set forth under Management's Discussion and Analysis of Financial Condition
and Results of Operations-Other Matters, Item 7 of this Annual Report on Form
10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to 2005 Consolidated Financial Statements
Report of Independent Registered Public
Accounting Firm.......................................... 70
Consolidated Financial Statements .......................... 71
Notes to Consolidated Financial Statements.................. 76
69
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of AMCON Distributing Company:
We have audited the accompanying consolidated balance sheets of AMCON
Distributing Company and subsidiaries (the "Company") as of September 30, 2005
and September 24, 2004, and the related consolidated statements of operations,
shareholders' equity (deficiency) and comprehensive income (loss) and cash
flows for each of the fiscal years ended September 30, 2005, September 24,
2004, and September 26, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of AMCON Distributing Company and
subsidiaries as of September 30, 2005 and September 24, 2004, and the results
of their operations and their cash flows for each of the fiscal years ended
September 30, 2005, September 24, 2004 and September 26, 2003 in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 19 to the consolidated financial statements, the Company
is a defendant in litigation relating to the Company's June 2004 purchase of
Trinity Springs, Inc. ("TSI"). The Company is being challenged in the
District Courts by the former shareholders of TSI regarding the validity of
the Company's purchase of TSI. The plaintiffs seek rescissory damages and
other remedies against the Company.
As discussed in Note 20 to the consolidated financial statements, the Company
restated its 2004 consolidated statements of operations and cash flows.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
August 21, 2006
70
<Caption>
CONSOLIDATED BALANCE SHEETS
AMCON Distributing Company and Subsidiaries
- --------------------------------------------------------------------------------------------------
Fiscal Year End September 2005 2004
- --------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 546,273 $ 416,073
Accounts receivable, less allowance
for doubtful accounts of $0.6 million
and $0.6 million in 2005 and 2004, respectively 28,650,183 29,109,826
Inventories 24,640,522 35,088,568
Income tax receivable - 1,162,625
Deferred income taxes 1,642,212 2,548,391
Current assets of discontinued operations 2,988 1,941,952
Prepaid and other current assets 5,316,065 635,839
------------------------------
Total current assets 60,798,243 70,903,274
Fixed assets, net of depreciation and amortization 17,637,810 19,951,664
Deferred income taxes 6,300,503 -
Non-current assets of discontinued operations - 143,670
Goodwill 5,848,808 6,449,741
Other intangible assets 3,464,534 13,271,211
Other assets 1,258,899 1,010,303
------------------------------
$ 95,308,797 $ 111,729,863
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 17,701,544 $ 17,180,649
Accrued expenses 5,510,371 3,800,506
Accrued wages, salaries and bonuses 1,707,687 1,365,837
Income taxes payable 118,798 -
Current liabilities of discontinued operations 536,026 2,166,414
Current portion of revolving credit facility 1,432,000 44,809,814
Current portion of long-term debt 1,219,295 5,574,397
Current portion of long-term debt due related parties 2,000,000 -
Current portion of subordinated debt - 7,876,219
------------------------------
Total current liabilities 30,225,721 82,773,836
Revolving credit facility, less current portion 47,730,388 -
Deferred income taxes - 593,018
Noncurrent liabilities of discontinued operations - 3,603
Water royalty, in perpetuity 2,807,000 2,807,000
Long-term debt, less current portion 10,478,116 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 17)
Shareholders' equity (deficiency):
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, none outstanding - -
Common stock, $.01 par value, 3,000,000 shares authorized,
527,062 outstanding in 2005 and 2004, respectively 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 in 2005 and 2004, respectively 101,294 59,900
Retained (deficit) earnings (6,553,469) 6,483,150
------------------------------
Shareholders' equity (deficiency) (228,428) 12,766,797
------------------------------
$ 95,308,797 $ 111,729,863
==============================
The accompanying notes are an integral part of these consolidated financial
statements
71
<Caption>
CONSOLIDATED STATEMENTS OF OPERATIONS
AMCON Distributing Company and Subsidiaries
- ---------------------------------------------------------------------------------------------
Fiscal Years Ended September 2005 2004 2003
As Restated
See Note 20
- ---------------------------------------------------------------------------------------------
Sales (including excise taxes of $197.7 million,
$191.6 million and $172.2 million in 2005, 2004
and 2003, respectively) $ 845,922,699 $ 821,765,589 $ 771,793,256
Cost of sales 785,571,912 762,202,743 711,613,810
-------------------------------------------
Gross profit 60,350,787 59,562,846 60,179,446
-------------------------------------------
Selling, general and administrative expenses 56,491,004 50,992,469 50,136,766
Depreciation and amortization 2,607,132 2,338,277 2,276,702
Impairment charges 13,087,262 3,578,255 399,435
-------------------------------------------
72,185,398 56,909,001 52,812,903
-------------------------------------------
Operating (loss) income (11,834,611) 2,653,845 7,366,543
Other expense (income):
Interest expense 4,508,892 3,328,472 3,194,239
Other income, net (80,107) (576,539) (490,469)
-------------------------------------------
4,428,785 2,751,933 2,703,770
(Loss) income from continuing operations
before income taxes (16,263,396) (98,088) 4,662,773
Income tax (benefit) expense (4,909,000) 36,000 1,771,000
Minority interest (97,100) (91,000) -
-------------------------------------------
(Loss) income from continuing operations (11,257,296) (43,088) 2,891,773
Loss from discontinued operations, net of
income tax benefit of $0.7 million, $2.5 million
and $1.1 million, respectively (1,484,683) (4,095,459) (1,865,300)
-------------------------------------------
Net (loss) income (12,741,979) (4,138,547) 1,026,473
Preferred stock dividend requirements (294,640) (49,474) -
-------------------------------------------
Net (loss) income available to common
shareholders $ (13,036,619) $ (4,188,021) $ 1,026,473
===========================================
Basic (loss) earnings per share
available to common shareholders:
Continuing operations $ (21.91) $ (0.18) $ 5.48
Discontinued operations (2.82) (7.76) (3.53)
-------------------------------------------
Net basic (loss) earnings per share
available to common shareholders $ (24.73) $ (7.94) $ 1.95
===========================================
Diluted (loss) earnings per share
available to common shareholders:
Continuing operations $ (21.91) $ (0.18) $ 5.38
Discontinued operations (2.82) (7.76) (3.47)
-------------------------------------------
Net diluted (loss) earnings per share
available to common shareholders $ (24.73) $ (7.94) $ 1.91
===========================================
Weighted average shares outstanding:
Basic 527,062 527,774 527,699
Diluted 527,062 527,774 537,042
The accompanying notes are an integral part of these consolidated financial
statements
72
<Caption>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
AND COMPREHENSIVE INCOME (LOSS)
AMCON Distributing Company and Subsidiaries
- ----------------------------------------------------------------------------------------------------------
Additional
Paid in Accumulated
Common Stock Capital Other Retained
----------------- Common Comprehensive Earnings
Shares Amount Stock Income (Deficit) Total
- ----------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 27, 2002 526,160 $ 31,570 $5,977,643 $ 294,771 $10,395,324 $16,699,308
Exercise of options 2,000 120 20,370 - - 20,490
Retirement of common stock (1) - (36) - - (36)
Dividends on common stock - - - - (370,799) (370,799)
Net income - - - - 1,026,473 1,026,473
Change in fair value of
interest rate swap, net
of tax of $0.04 million - - - (65,995) - (65,995)
Unrealized loss on investments
available-for-sale, net of
tax of $0.0 million - - - (8,044) - (8,044)
-----------
Total comprehensive income 952,434
--------------------------------------------------------------------------
BALANCE, SEPTEMBER 26, 2003 528,159 31,690 5,997,977 220,732 11,050,998 17,301,397
Exercise of options 33 2 520 - - 522
Options issued in connection
with TSI acquisition - - 219,886 - - 219,886
Reverse stock split (1,130) (26,421) 93 - - (26,328)
Dividends on common stock - - - - (379,827) (379,827)
Dividends on preferred stock - - - - (49,474) (49,474)
Net loss - - - - (4,138,547) (4,138,547)
Change in fair value of
interest rate swap, net of
tax of $0.1 million - - - 123,257 - 123,257
Unrealized loss on investments
available-for-sale, net of
tax of $0.2 million - - - (284,089) - (284,089)
-----------
Total comprehensive loss (4,299,379)
--------------------------------------------------------------------------
Balance, September 24, 2004 527,062 5,271 6,218,476 59,900 6,483,150 12,766,797
Dividends on preferred stock - - - - (294,640) (294,640)
Net loss - - - - (12,741,979) (12,741,979)
Change in fair value of
interest rate swap, net of
tax of $0.03 million - - - 41,394 - 41,394
-----------
Total comprehensive loss (12,700,585)
--------------------------------------------------------------------------
Balance, September 30, 2005 527,062 $ 5,271 $6,218,476 $ 101,294 $(6,553,469) $ (228,428)
==========================================================================
The accompanying notes are an integral part of these consolidated financial
statements
73
<Caption>
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMCON Distributing Company and Subsidiaries
- ----------------------------------------------------------------------------------------------------------
Fiscal Years 2005 2004 2003
As Restated
See Note 20
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(12,741,979) $(4,138,547) $ 1,026,473
Deduct: Loss from discontinued operations, net of tax (1,484,683) (4,095,459) (1,865,300)
----------- ----------- -----------
(Loss) income from continuing operations (11,257,296) (43,088) 2,891,773
Adjustments to reconcile (loss) income from
continuing operations to net cash flows
from operating activities:
Depreciation 2,586,763 2,195,743 2,128,408
Amortization 241,558 295,339 383,744
Impairment charges 13,087,262 3,578,255 -
Provision for losses on doubtful accounts, inventory
obsolescence and assets held for sale 198,150 22,912 675,828
(Gain) loss on sale of fixed assets (13,117) (7,773) 58,739
Loss on sale of assets held for sale - 1,475 -
Gain on sale of securities - (507,418) (266,690)
Deferred income taxes (5,987,342) (1,754,264) (660,306)
Minority interest (97,100) (91,000) -
Changes in assets and liabilities,
net of effect of acquisitions:
Accounts receivable 475,489 (1,046,449) 3,151,279
Inventories 10,234,050 (3,704,957) 4,674,992
Other current assets (4,638,830) 129,691 (177,294)
Other assets 20,365 186,999 (137,619)
Accounts payable 520,895 2,623,690 (5,316,892)
Accrued expenses and accrued wages, salaries and bonuses 2,051,715 206,012 (620,198)
Income taxes payable and receivable 1,281,423 (1,703,039) 1,521,468
----------- ----------- -----------
Net cash flows from operating activities
- continuing operations 8,703,985 382,128 8,307,232
Net cash flows from operating activities
- discontinued operations (176,109) (4,044,544) (2,770,744)
----------- ----------- -----------
Net cash flows from operating activities 8,527,876 (3,662,416) 5,536,488
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (3,028,576) (1,700,773) (3,114,595)
Proceeds from sales of fixed assets and intangibles 116,597 105,497 129,994
Acquisitions, net of cash acquired - (2,774,280) -
Proceeds from sales of available-for-sale securities - 561,910 303,018
----------- ----------- -----------
Net cash flows from investing activities
- continuing operations (2,911,979) (3,807,646) (2,681,583)
Net cash flows from investing activities
- discontinued operations (21,569) (83,232) (114,116)
----------- ----------- -----------
Net cash flows from investing activities (2,933,548) (3,890,878) (2,795,699)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on bank credit agreements 4,352,573 6,828,533 (1,379,372)
Net proceeds from preferred stock issuance 1,857,645 2,438,355 -
Proceeds from borrowings of long-term debt 2,899,636 - 919,864
Payments on long-term and subordinated debt (13,494,338) (1,508,361) (2,233,519)
Proceeds from short-term debt 500,000 - -
Debt issuance costs (446,641) - -
Dividends paid on common stock - (379,827) (370,799)
Dividends paid on preferred stock (294,640) (49,474) -
Purchase of common stock, retired - (26,328) -
Purchase of treasury stock - - (36)
Proceeds from exercise of stock options - 522 20,490
----------- ----------- -----------
Net cash flows from financing activities
- continuing operations (4,625,765) 7,303,420 (3,043,372)
74
Net cash flows from financing activities
- discontinued operations (838,363) (2,126) 840,565
----------- ----------- -----------
Net cash flow from financing activities (5,464,128) 7,301,294 (2,202,807)
----------- ----------- -----------
Net change in cash 130,200 (252,000) 537,982
Cash, beginning of year 416,073 668,073 130,091
----------- ----------- -----------
Cash, end of year $ 546,273 $ 416,073 $ 668,073
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 4,376,251 $ 3,632,384 $ 4,244,482
Cash paid (refunded) during the year for
income taxes (911,278) 1,253,768 454,110
Supplemental disclosure of non-cash information:
Acquisition of equipment through capital leases $ 91,343 $ 125,840 $ -
Business combinations:
Fair value of assets acquired - 10,307,042 -
Subordinated debt assumed and notes payable issued - 4,028,440 -
Present value of future water royalty payments - 2,807,000 -
Other liabilities assumed - 289,336 -
Issuance of common stock, stock options and
minority interest - 407,986 -
</Table>
The accompanying notes are an integral part of these consolidated financial
statements
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Company Operations:
AMCON Distributing Company and Subsidiaries ("AMCON" and "the Company") is
primarily engaged in the wholesale distribution of consumer products in the
Great Plains and Rocky Mountain regions. In addition, the Company operates
thirteen retail health food stores in Florida and the Midwest and a non-
alcoholic beverage business that includes a natural spring water bottling
operation in the State of Hawaii and a geothermal water and natural mineral
supplement bottler in Idaho.
AMCON's wholesale distribution business ("ADC") includes six distribution
centers (prior to the merging of the Casper and Rapid City distribution
centers effective September 30, 2005) that sell approximately 13,000 different
consumer products, including cigarettes and tobacco products, candy and other
confectionery, beverages, groceries, paper products, health and beauty care
products, frozen and chilled products and institutional food service products.
The Company distributes products primarily to retailers such as convenience
stores, discount and general merchandise stores, grocery stores and
supermarkets, drug stores and gas stations. In addition, the Company services
institutional customers, including restaurants and bars, schools, sports
complexes and vendors, as well as other wholesalers.
AMCON also operates six retail health food stores in Florida under the name
Chamberlin's Market & Cafe (Chamberlin's) and seven in the Midwest under the
name Akin's Natural Foods Market (Akin's). These stores carry natural
supplements, groceries, health and beauty care products and other food items.
In addition, AMCON operates a non-alcoholic beverage business which, at
September 30, 2005, consisted of Hawaiian Natural Water Company, Inc. ("HNWC")
and Trinity Springs, Inc. ("TSI"). HNWC bottles natural spring water from an
exclusive source located on the Big Island of Hawaii and bottles purified
drinking water on the island of Oahu. HNWC currently markets its products
primarily in the State of Hawaii, but has expanded marketing to the mainland
United States and certain international markets. TSI bottled geothermal water
and a natural mineral supplement and distributed HNWC water products and other
premium beverages in the health food distribution channel. As described
further in Note 19, TSI operations ceased in March 2006.
The Company's operations are subject to a number of factors which are beyond
the control of management, such as changes in manufacturers' cigarette pricing
and state excise tax increases, competing retail stores opening in close
proximity to the Company's retail stores and intense competition in the
bottled water industry. While the Company sells a diversified product line,
it remains dependent upon cigarette sales which represented approximately 72%
of its revenue and 32% of its gross profit in fiscal 2005 compared to 73% of
its revenue and 33% of its gross profit in fiscal 2004 and 73% of its revenue
and 37% of its gross profit in fiscal 2003. The Company's net income in
fiscal 2003 and prior years was heavily dependent on sales of the Company's
private label cigarettes and volume discounts received from manufacturers in
connection with such sales. However, the Company did not generate significant
profits from sales of its private label cigarettes in fiscal 2005 or 2004.
76
(b) Accounting Period:
During the first quarter of fiscal 2005, the Company changed its reporting
period from 52-53 week year ending on the last Friday in September to a
calendar month reporting period ending on September 30. As a result of this
change, fiscal 2005 comprised 53 weeks of operations as compared to 52 weeks
of operations for fiscal 2004. Actual year ends for fiscal 2004 and fiscal
2003 were September 24, 2004 and September 26, 2003, respectively. Years
cited herein refer to AMCON's fiscal years.
(c) Principles of Consolidation:
The consolidated financial statements include the accounts of AMCON and its
wholly-owned subsidiaries. As a result of its 85% ownership in TSI, the
Company has included the operating results of TSI in the accompanying
consolidated financial statements since the date of acquisition (June 17,
2004) and has presented the 15% non-owned interest in this subsidiary as a
minority interest. As described further in Note 19, the Company is currently
involved in litigation regarding its ownership of the assets acquired by TSI
(see Note 2 for description of acquisition). Given the uncertainty
surrounding the potential recession alternatives and the related accounting
ramifications, the Company engaged independent legal counsel to review the
case documents and to provide management an opinion regarding the ownership of
the TSI assets as of the date of the financial statements. Independent legal
counsel concluded that the court has not taken any action to divest TSI of its
ownership of the acquired assets and accordingly, to the extent that TSI owned
the assets immediately prior to the issuance of the court order discussed in
Note 19, and has not otherwise transferred the assets, TSI continues to own
the assets. As a result, the Company continues to account for TSI as a
consolidated subsidiary.
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 accounts and transactions have been eliminated.
(d) Cash and Accounts Payable:
AMCON uses a cash management system under which an overdraft is the normal
book balance in the primary disbursing accounts. The overdrafts included in
accounts payable of $3.8 million and $7.1 million at fiscal year end 2005 and
2004, respectively, reflect checks drawn on the disbursing accounts that have
been issued but have not yet cleared through the banking system. The
Company's policy has been to fund these outstanding checks as they clear with
borrowings under its revolving credit facility (see Note 9). These
outstanding checks (book overdrafts) are classified as cash flows from
operating activities in the Consolidated Statements of Cash Flows.
(e) Debt and Equity Investments:
AMCON classifies marketable securities, debt securities and investments as
held to maturity, available-for-sale or trading securities. Investments
classified as available-for-sale or trading are stated at fair value.
Investments classified as held-to-maturity are stated at amortized cost. The
carrying amounts of the securities used in computing unrealized and realized
gains and losses are determined by specific identification. Fair values are
determined using quoted market prices. For available-for-sale securities, net
unrealized holding gains and losses are excluded from net income and reported
in other comprehensive income, net of tax. For trading securities, net
77
unrealized holding gains and losses are included in the determination of net
income.
The Company sold its available-for-sale investments during fiscal 2004. The
Company realized gains on these sales of $0.5 million and $0.3 million in
fiscal 2004 and 2003, respectively. The sale in 2004 represented the final
liquidation of available-for-sale investments.
(f) Accounts Receivable:
Accounts receivable consist primarily of amounts due to the Company from its
normal business activities. An allowance for doubtful accounts is maintained
to reflect the expected uncollectibility of accounts receivable based on past
collection history and specific risks identified in the portfolio.
(g) Inventories:
Inventories consisted of the following at September 2005 and 2004 (in
millions):
September September
2005 2004
--------- ---------
Finished Goods $ 28.7 $ 38.2
Raw Materials 0.7 0.9
LIFO Reserve (4.8) (4.0)
--------- ---------
$ 24.6 $ 35.1
========= =========
The wholesale distribution and retail health food segment inventories consist
of finished products purchased in bulk quantities to be redistributed to the
Company's customers or sold at retail. The wholesale distribution operation's
inventories are stated at the lower of cost (last-in, first-out or "LIFO"
method) or market and consists of the costs of finished goods. The retail
health food operation utilizes the retail inventory method of accounting
stated at the lower of cost (LIFO) or market and consists of finished goods.
The beverage operation's inventories are stated at the lower of cost (LIFO) or
market and consist of raw materials and finished goods. The beverage
operation's finished goods inventory includes raw materials, related plant
labor and manufacturing overhead costs required to convert raw materials to
finished goods. Raw materials inventory consists of pre-forms used to make
bottles, caps, labels and various packaging and shipping materials. The LIFO
reserve at September 2005 and 2004 represents the amount by which LIFO
inventories were less than the amount of such inventories valued on a first-
in, first-out basis. The liquidation of certain LIFO layers decreased cost of
goods sold by $0.5 million, $0.1 million and $1.5 million during fiscal 2005,
2004 and 2003, respectively. An allowance for obsolete inventory of $0.6
million and $0.4 million at September 2005 and 2004, respectively, is
maintained in the retail health food and beverage segments to reflect the
expected unsaleable or non-refundable inventory based on evaluation of slow
moving products and discontinued products.
78
(h) Prepaid Expenses and Other Current Assets:
A summary of prepaid expenses and other current assets is as follows (in
millions):
September September
2005 2004
--------- ---------
Prepaid expenses $ 0.7 $ 0.5
Prepaid inventory 4.5 -
Interest rate swap 0.1 0.1
--------- ---------
$ 5.3 $ 0.6
========= =========
Prepaid inventory represents inventory in transit that has been paid for but
has not yet been received.
(i) Fixed Assets:
Fixed assets are stated at cost less accumulated depreciation or amortization.
Major renewals and improvements are capitalized and charged to expense over
their useful lives through depreciation or amortization charges. Repairs and
maintenance are charged to expense in the period incurred. The straight-line
method of depreciation is used to depreciate assets over the estimated useful
lives as follows:
Years
-------
Buildings 40
Warehouse equipment 5 - 7
Furniture, fixtures and
leasehold improvements 5 - 18
Vehicles 5
Costs and accumulated depreciation applicable to assets retired or sold are
eliminated from the accounts, and the resulting gains or losses are reported
in the operating (loss) income.
(j) Long-Lived Assets:
The Company reviews its long-lived assets for impairment in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets," that is, whenever events or
changes in circumstances indicate that the carrying amount of such asset may
not be recoverable. Long-lived assets are reviewed annually for impairment
and are reported at the lower of the carrying amount or fair value less the
cost to sell. During fiscal 2005 the Company recorded a $2.5 million and $0.4
million impairment on long-lived assets at Hawaiian Natural Water Company
("HNWC") and Trinity Springs, Inc. ("TSI"), respectively. The impairments
were due to the shortfall of expected future cash flows to support the assets
as well as a need for additional capital to sustain the same level of
operations. During fiscal 2004 no such impairment under SFAS No. 144 was
recorded.
(k) Goodwill, Intangible and Other Assets:
Goodwill consists of the excess purchase price paid in business acquisitions
over the fair value of assets acquired. Intangible assets consist primarily
of tradenames, water source, customer lists, covenants not to compete and
favorable leases assumed in acquisitions. These assets are initially
79
recorded at an amount equal to the purchase price paid or allocated to them.
Other assets consist primarily of the cash surrender value of life insurance
policies and equipment held for sale prior to its impairment in fiscal 2005.
SFAS No. 142, "Goodwill and Other Intangible Assets" requires the use of a
nonamortization approach to account for purchased goodwill and intangible
assets having indefinite useful lives. Under a nonamortization approach,
goodwill and intangible assets having indefinite useful lives are not
amortized into results of operations, but instead are reviewed at least
annually for impairment. Subsequent to the third fiscal quarter of each year,
the Company engages an external consulting firm to assist it in performing
this valuation. If the recorded value of goodwill and intangible assets
having indefinite useful lives is determined to exceed their fair value, the
asset is written down to fair value and a charge taken against results of
operations in the period. AMCON considers its tradenames and water source to
have indefinite lives.
As discussed in Note 7, in fiscal 2005 the Company determined, based on the
valuation report provided by the independent valuation specialist that
goodwill and intangible assets at TSI and HNWC, both components of the
beverage segment reporting unit, were impaired. Additionally, the Company
also determined that a portion of the tradenames and goodwill carried by the
Company's retail segments reporting units were impaired. The total amount of
the impairment of goodwill and identifiable intangible assets before tax was
$10.2 million. In fiscal 2004, the Company determined that the tradenames at
HNWC, one of the beverage segments reporting units, were impaired and an
impairment charge of $3.6 million was recorded. The Company did not incur an
impairment charge during fiscal 2003 upon completion of the annual review.
Intangible assets that are considered to have definite useful lives continue
to be charged to expense through amortization on the straight-line method over
their estimated useful lives as follows:
Years
-----
Covenants not to compete 2 - 5
Favorable leases 3 - 7
Customer lists 5
The benefit related to increases in the cash surrender value of split dollar
life insurance policies is recorded as a reduction to insurance expense. The
cash surrender value of life insurance policies is limited to the lesser of
the cash value or premiums paid by the Company through September 2002 due to
passing of the Sarbanes-Oxley Act of 2002 which disallowed loans to
executives.
(l) Water Royalty in Perpetuity:
Water royalty in perpetuity consists of a balance representing the present
value of the future minimum water royalty payments and related brokers fees to
be paid in perpetuity incurred in connection with the TSI acquisition that
occurred in June 2004 as discussed in Notes 2 and 19.
(m) Reverse Stock Split:
On May 11, 2004, the shareholders approved a one-for-six reverse stock split
of the outstanding shares of its common stock. On May 14, 2004, the Company
effected the reverse stock split and those shareholders who held fewer than
80
six shares of AMCON's common stock immediately prior to the reverse stock
split received a cash payment in exchange for their shares. The total cash
paid for all fractional shares was $26,328. All common stock shares and per
share data (except par value) for all periods presented have been adjusted to
reflect the reverse stock split.
(n) Debt Issuance Costs:
The costs related to the issuance of debt are capitalized in other assets and
amortized on an effective interest method to interest expense over the terms
of the related debt agreements.
(o) Derivative Instruments:
The Company uses derivatives (e.g. interest rate swaps) for the purpose of
hedging its exposure to changes in interest rates. The fair value of each
derivative is shown on the balance sheet as a current asset or current
liability. Changes in the fair value of derivatives are recognized
immediately in the income statement for derivatives that do not qualify for
hedge accounting. For derivatives designated as hedges and used to hedge an
existing asset or liability, both the derivative and hedged item are
recognized at fair value within the balance sheet with the changes in both of
these fair values being recognized immediately in the income statement. For
derivatives designated as a hedge and used to hedge an anticipated transaction
or event (e.g. increases or decreases in interest rates), changes in the fair
value of the derivatives are deferred in the balance sheet within accumulated
other comprehensive income to the extent the hedge is effective in mitigating
the exposure to the related anticipated event. Any ineffectiveness associated
with the hedge is recognized immediately in the income statement. Amounts
deferred within accumulated other comprehensive income are recognized in the
income statement in the same period during which the hedged transaction
affects earnings (e.g. when interest payments are made).
(p) Revenue Recognition:
AMCON recognizes revenue in its wholesale distribution and beverage divisions
when products are delivered to customers (which generally is the same day
products are shipped) and in its retail health food business when products are
sold to consumers. Sales are shown net of returns and discounts.
(q) Insurance:
The Company's workers' compensation, general liability and employee-related
health care benefits are provided through high-deductible or self-insurance
programs. As a result, the Company accrues for its workers' compensation and
general liability based upon the claim reserves established with the
assistance of a third-party administrator which are trended and developed.
The Company has issued a letter of credit in the amount of $0.8 million to its
workers' compensation insurance carrier as part of its loss control program.
In October 2005, this amount was increased to $1.0 million. The reserve for
incurred but not reported employee health care benefits is based on one month
of average claims using the Company's historical claims experience rate plus
specific reserves for large claims. The reserves associated with the exposure
to these liabilities are reviewed by management for adequacy at the end of
each reporting period.
(r) Income Taxes:
Deferred income taxes are determined based on temporary differences between
the financial reporting and tax bases of the Company's assets and liabilities,
using enacted tax rates in effect during the years in which the differences
are expected to reverse.
81
(s) Comprehensive Income (Loss):
Comprehensive income (loss) for the Company includes net income or loss, the
changes in net unrealized holding gains or losses on investments and changes
in the valuation of interest rate swap contracts treated as hedging
instruments that are charged or credited to shareholders' equity.
(t) Stock-Based Compensation:
Prior to it 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.
The Compensation Committee evaluated various equity based compensation
programs and chose not to implement a new plan in fiscal 2005. AMCON accounts
for stock option grants in accordance with Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees" using the intrinsic
value method under which compensation cost is measured by the excess, if any,
of the deemed fair market value of its common stock on the date of grant over
the exercise price of the stock option. Accordingly, stock-based compensation
costs related to stock options granted are not reflected in net income or loss
as all options granted under the plan had an exercise price equal to the
market value of the underlying stock on the date of grant.
The following table illustrates the required proforma effect on income (loss)
and earnings (loss) available to common shareholders and the associated per
share amounts assuming the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" to stock-based employee
compensation:
<Caption>
2005 2004 2003
----------------------------------------
(Loss) earnings available to common shareholders
- ------------------------------------------------
Net (loss) income available to common
shareholders, as reported $(13,036,619) $ (4,188,021) $ 1,026,473
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (53,108) (60,273) (68,021)
-----------------------------------------
Pro forma (loss) income $(13,089,727) $ (4,248,294) $ 958,452
=========================================
(Loss) earnings per share available to common shareholders
- ----------------------------------------------------------
As reported: Basic $ (24.73) $ (7.94) $ 1.95
Diluted $ (24.73) $ (7.94) $ 1.91
Pro forma: Basic $ (24.83) $ (8.05) $ 1.81
Diluted $ (24.83) $ (8.05) $ 1.78
The pro forma results are not likely to be representative of the effects on
reported income (loss) for future years since additional awards may be made
periodically.
82
The fair value of the weighted average of each year's option grants is
estimated as of the date of grant using the Black-Scholes option-pricing model
using the following weighted-average assumptions: dividend yield of 3.0% for
2003 grants; expected volatility of 50.68% for 2003 grants; risk free interest
rate based on U.S. Treasury strip yield at the date of grant of 3.68% - 4.12%
for 2003 grants; and expected lives of 5 to 10 years. No options were granted
in fiscal 2005 or 2004.
(u) Per-share results:
Basic earnings or loss per share data are based on the weighted-average number
of common shares outstanding during each period. Diluted earnings or loss per
share data are based on the weighted-average number of common shares
outstanding and the effect of all dilutive potential common shares including
stock options and conversion features of the Company's preferred stock
issuances.
(v) Use of Estimates:
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(w) Recently Issued Accounting Standards:
In November 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 151 "Inventory Costs." This statement amends Accounting Research
Bulletin No. 43, Chapter 4, "Inventory Pricing" and removes the "so abnormal"
criterion that under certain circumstances could have led to the
capitalization of these items. SFAS No. 151 requires that idle facility
expense, excess spoilage, double freight and rehandling costs be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal." SFAS 151 also requires that allocation of fixed production
overhead expenses to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 is effective for all fiscal years
beginning after June 15, 2005 (fiscal 2006 for AMCON). Management does not
believe there will be a significant impact as a result of adopting this
Statement.
In December 2004, the FASB issued Statement No. 123 (revised 2004) ("SFAS
123R"), "Share-Based Payment." SFAS No. 123R will require the Company to
measure the cost of all employee stock-based compensation awards based on the
grant date fair value of those awards and to record that cost as compensation
expense over the period during which the employee is required to perform
service in exchange for the award (generally over the vesting period of the
award). SFAS No. 123R is effective for the Company's fiscal 2006. Based on
the unvested options outstanding at September 30, 2005, approximately $60,000,
$12,000 and $1,000, before tax, will be recorded as expense in the statement
of operations in fiscal 2006, 2007 and 2008, respectively.
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
83
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 does not believe
there will be a significant impact as a result of adopting this Statement.
On July 13, 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, and Related Implementation Issues" ("FIN 48").
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
a Company's financial statements in accordance with Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS 109"). FIN
48 prescribes a recognition threshold and measurement attribute for a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. FIN 48 is effective as of the
beginning of fiscal years that begin after December 15, 2006. The Company is
currently evaluating the effects of implementing this new standard.
(x)Operations and Financing:
The Company's core operations, wholesale distribution and retail health food
which account for approximately 98.7% of total Company sales, have continued
to operate profitably in fiscal 2005 and 2004, with income from continuing
operations before tax of $4.0 million in fiscal 2005 (excluding an impairment
charge at retail health food of $4.2 million) and $6.3 million in fiscal 2004
and are expected to continue to be profitable in fiscal 2006. The fiscal 2005
and 2004 income from continuing operations from its core operations described
above includes $0.7 million and $0.3 million, respectively, of interest
expense from discontinued operations previously allocated to TBG which ceased
operations in 2005.
The Company's beverage businesses, which included HNWC and TSI at September
30, 2005, have contributed significant losses from continuing operations
before tax of $16.0 million and $6.3 million in fiscal 2005 and 2004,
respectively, which included impairment charges totaling $8.9 million and $3.6
million in fiscal 2005 and 2004, respectively. In fiscal 2005 and 2004, the
losses from continuing operations described above for its beverage businesses
include allocated credit facility interest expense of $0.8 million and $0.2
million, respectively, that, if the businesses were sold or closed without
generating sufficient proceeds to pay down the credit facility, would be
absorbed by the Company's core operations. These losses have consumed
significant cash resources and placed the Company in a restricted liquidity
situation.
During the first six months of fiscal 2006, management took steps to limit
these operating losses and cash requirements going forward. The TSI bottled
water business has been closed; management is currently seeking to resolve
pending litigation matters related to TSI (see discussion of TSI litigation in
Note 19) to enable the ultimate sale of that business. Should the resolution
of the TSI litigation require the Company to fund certain of the TSI
obligations, the Company may call upon the guaranty of the Company's CEO and
84
Chairman, Mr. William Wright. The HNWC bottled water business has been
reorganized and operational improvements have been made, including cost
reductions and sales price increases. HNWC is currently operating without
requiring additional cash investments by AMCON. The Company is also
considering alternatives for the infusion of outside capital and/or the
possible sale of the HNWC business. If successful, any proceeds from the sale
of those businesses would be utilized to reduce related debt obligations and
/or the Company's outstanding balance under the credit facility.
The Company renegotiated and amended its credit facility in January 2006, and
all prior covenants were replaced with monthly and cumulative year to date
earnings before interest, taxes, depreciation and amortization (EBITDA)
covenants (excluding all the beverage operations) that are measured at the end
of each month and quarter, respectively. As of June 30, 2006, the Company is
in compliance with all such covenants, and based on operating forecasts
currently expects to remain in compliance with such covenants with the
possible exception of the December 2006 and February 2007 monthly covenants.
Further, management is in preliminary negotiations to modify the covenants and
to extend the current maturity date of April 2007, on similar terms, and
management believes it will be successful in obtaining an extension and
covenant modifications.
Based on its operating forecasts and projected cash requirements, management
believes the Company has adequate cash resources to fund its operations and
capital expenditure needs as well to meet its debt obligations as they mature
through fiscal 2006 and fiscal 2007 with the extension of the maturity date
for the credit facility and its covenant modifications.
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. As discussed more fully in Note
19, TSI's operations were closed in March 2006.
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 $0.4 million and is convertible into
16,666 shares of AMCON common stock at the option of the Seller. 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 $5.0 million, subject to a
floor of $206,400 for the first year and $288,000 annually thereafter. The
85
Company has recorded a $2.8 million liability for the present value of future
minimum water royalty payments and related brokers fees to be paid in
perpetuity. The discount rate utilized by the Company to determine the
present value of the future minimum water royalty was based on a weighted
average cost of capital which incorporated the Company's equity discount rate,
dividend rate on the Series A Convertible Preferred Stock and the Company's
average borrowing rate for all outstanding debt.
The promissory notes referred to above and the water royalty are secured by a
first priority security and mortgage on the acquired assets, other than
inventory and accounts receivable. The Seller retains the right to receive
any water royalty payment for the first five years in shares of AMCON common
stock up to a maximum of 41,666 shares. The water royalty can be cancelled
after ten years have elapsed following the closing of the sale of assets of
TSI, or if the business of TSI is sold to an unaffiliated third party, in
which case the Seller would be entitled to receive the appraised fair market
value of the water royalty but not less than $5.0 million. The Company's
Chairman has, in turn, guaranteed AMCON in connection with AMCON's obligation
for these payments as well as for the payments of 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 Company allocated the purchase price based on preliminary feedback from
the valuation specialists in September 2004 and subsequently changed the
purchase price allocation based on the final valuation reports received in
March 2005. The September 2004 and the final purchase price allocation from
March 2005 is as follows:
March September
2005 2004
---------- ----------
Current assets $ 0.5 $ 0.5
Fixed assets 3.0 3.0
Tradename 0.9 2.3
Water source 3.7 2.8
Customer list 0.4 0.4
Goodwill 0.5 -
--------- ----------
Total assets acquired 9.0 9.0
--------- ----------
Current liabilities 0.2 0.2
--------- ----------
Total liabilities acquired 0.2 0.2
--------- ----------
Net assets acquired $ 8.8 $ 8.8
========= ==========
The unique water source acquired as part of the transaction represents an
intangible asset that was assigned a value of $2.8 million at September 2004.
However, the independent third party valuation of this intangible asset
assigned a value of approximately $3.7 million at March 2005. 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
86
the fair value of this intangible asset was $0.9 million. The final valuation
report also indicated that the purchase price allocation to goodwill should
have been $0.5 million while the preliminary allocation did not allocate any
purchase price to goodwill. 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 is being amortized over a five
year period.
Assuming the above acquisition had hypothetically occurred on the first day of
fiscal 2003 (September 27, 2002) 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 year ended September
-----------------------------
2004 2003
------------- -------------
Sales $ 824,474,604 $ 775,120,055
Operating income 673,045 5,120,402
Net (loss) income available
to common shareholders (5,651,515) (932,801)
Net (loss) income per share:
Basic $ (10.72) $ (1.77)
Diluted $ (10.72) $ (1.77)
Nesco Hawaii
- ------------
On July 1, 2004, the Company's water bottling subsidiary in Hawaii entered
into an agreement to acquire certain water bottling assets and liabilities
from a water bottling company in Hawaii (Nesco Hawaii) for $0.5 million in
cash, and $0.7 million in notes and the assumption of $0.1 million of
liabilities. The purchase price was allocated 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
======
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.
87
The portion of the purchase price in excess of the estimated fair value of the
net assets acquired to be allocated to identifiable intangible assets is
approximately $0.7 million. The identifiable intangible assets consists of
tradenames and a customer list. The tradenames have indefinite lives and
therefore are not amortized. The customer list of $0.2 million is being
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 sold 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
at that time. However, TSI ceased operations in March 2006 for other reasons
discussed in Note 19. TSI's operations are included in continuing operations
at September 30, 2005.
During fiscal 2005 charges included in loss from TBG's discontinued operations
totaling $1.0 million 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.
The Company has 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 consolidated statements of operations
in all periods presented are summarized below. The effects of the
discontinued operations on net (loss) income available to common shareholders
and per share data are reflected within the statements of operations.
88
<Table>
<Caption>
2005 2004 2003
------------ ------------ ------------
Sales $ 1,813,863 $ 2,039,711 $ 342,095
Income benefit (740,000) (2,459,000) (1,142,000)
Loss from discontinued
operations (1,484,683) (4,095,459) (1,865,300)
</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>
September September
2005 2004
---------- ----------
Accounts receivable $ - $ 0.5
Inventories - 1.4
---------- ----------
Total current assets of discontinued operations $ - $ 1.9
========== ==========
Fixed assets $ - $ 0.1
========== ==========
Accounts payable $ 0.4 $ 0.6
Accrued expenses 0.1 0.7
Current portion of long-term debt - 0.9
---------- ----------
Total current liabilities of discontinued operations $ 0.5 $ 2.2
========== ==========
</Table>
3. CONVERTIBLE PREFERRED STOCK:
The Company has Series A and Series B Convertible Preferred Stock outstanding
as of September 2005 that were issued in June 2004 and October 2004,
respectively. Series A Convertible Preferred Stock ("Series A Preferred") was
issued at $2.5 million and Series B Convertible Preferred Stock ("Series B
Preferred") was issued at $2.0 million. 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 per share: $25.00 $25.00
Conversion price per share: $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
of Preferred Shares being converted times a fraction equal to $25.00 divided
89
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. Our executive officers and
directors as a group own approximately 60% of the outstanding common stock as
of the end of fiscal 2005. 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 29% of the outstanding common stock without giving
effect to shares owned by his adult children at the end of fiscal 2005. 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 and Mr. Jeremy Hobbs, a recently appointed
director of the Company, is an executive officer. In addition, the Series B
Preferred Stock is owned by an institutional investor which has elected Mr.
Chris Atayan, now AMCON's Vice Chairman and Chief Corporate Officer, 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. Additionally, the Company's credit facility prohibits the
redemption of the Series A and B Preferred Stock and only allows the
redemption of Series C Preferred Stock so long as no event of default is in
existence at the time of, or would occur after giving effect to, any such
redemption, and the Company has excess availability under the credit facility
of not less than $2.0 million after giving effect to any such redemption. 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.
As described further in Note 19, the Company issued 80,000 shares, or $2.0
million, of Series C Convertible Preferred Stock in March 2006 to Draupnir
Capital, LLC. Mr. Chris Atayan provides consulting services to Draupnir, LLC
the parent of Draupnir Capital, LLC from time to time. The Company continues
to believe that it is not probable that the preferred stock will become
redeemable in the future as a result of the redemption features.
90
4. EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share available to common shareholders is calculated
by dividing income (loss) from continuing operations less preferred stock
dividend requirements and loss from discontinued operations by the weighted
average common shares outstanding for each period. Diluted earning (loss) per
share available to common shareholders is calculated by dividing income (loss)
from continuing operations less preferred stock dividend requirements (when
anti-dilutive) and loss from discontinued operations by the sum of the
weighted average common shares outstanding and the weighted average dilutive
options, using the treasury stock method. Stock options and potential common
stock outstanding at fiscal year end 2005, 2004 and 2003 that were anti-
dilutive were not included in the computations of diluted earnings per share.
Such potential common shares totaled 198,620, 113,921, and 29,773 with average
exercise prices of $29.13, $32.92 and $40.47, respectively.
<Caption>
For Fiscal Years
---------------------------------------
2005 2004 2003
---------------------------------------
Basic Basic Basic
---------------------------------------
Weighted average number of
shares outstanding 527,062 527,774 527,699
=======================================
(Loss) income from continuing
operations $(11,257,296) $ (43,088) $2,891,773
Deduct: preferred stock dividend
requirements (294,640) (49,474) -
---------------------------------------
$(11,551,936) $ (92,562) $2,891,773
=======================================
Loss from discontinued operations $ (1,484,683) $(4,095,459) $(1,865,300)
=======================================
Net (loss) income available to
common shareholders $(13,036,619) $(4,188,021) $1,026,473
=======================================
Earnings (loss) per share from
continuing operations $ (21.91) $ (0.18) $ 5.48
Loss per share from discontinued
operations (2.82) (7.76) (3.53)
---------------------------------------
(Loss) income per share available
to common shareholders $ (24.73) $ (7.94) $ 1.95
=======================================
Diluted Diluted Diluted
---------------------------------------
Weighted average common
shares outstanding 527,062 527,774 527,699
Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds used
to purchase treasury stock - - 9,343
---------------------------------------
Weighted average number of
shares outstanding 527,062 527,774 537,042
=======================================
(Loss) income from continuing
operations $(11,257,296) $ (43,088) $2,891,773
91
Deduct: preferred stock dividend
requirements /1/ (294,640) (49,474) -
---------------------------------------
$(11,551,936) $ (92,562) $2,891,773
=======================================
Loss from discontinued operations $ (1,484,683) $(4,095,459) $(1,865,300)
=======================================
Net (loss) income available to
common shareholders $(13,036,619) $(4,188,021) $ 1,026,473
=======================================
(Loss) earnings per share from
continuing operations $ (21.91) $ (0.18) $ 5.38
Loss per share from discontinued
operations (2.82) (7.76) (3.47)
---------------------------------------
(Loss) income per share available
to common shareholders $ (24.73) $ (7.94) $ 1.91
=======================================
/1/ Convertible preferred stock is anti-dilutive in fiscal 2005 and fiscal 2004 because the
dividends accumulated per common share obtainable on conversion exceeds basic earning (loss)
per share. There was no convertible preferred stock outstanding in fiscal 2003.
5. OTHER COMPREHENSIVE INCOME (LOSS):
The components of other comprehensive income (loss) were as follows:
<Caption> 2005 2004 2003
-----------------------------------
Unrealized holding gains during the period:
Unrealized gains $ - $ 6,800 $ 255,975
Related tax (expense) - (2,584) (97,271)
-----------------------------------
Net - 4,216 158,704
-----------------------------------
Less reclassification adjustments
for gains which were included in
comprehensive income in prior periods:
Realized net gains $ 2,638 $ 465,008 $ 268,948
Related tax (expense) - (176,703) (102,200)
-----------------------------------
Net 2,638 288,305 166,748
-----------------------------------
Interest rate swap valuation adjustment
during the period:
Unrealized gains (losses) $ 71,018 $ 199,354 $(106,995)
Related tax (expense) benefit (26,986) (76,097) 41,000
-----------------------------------
Net 44,032 123,257 (65,995)
-----------------------------------
Total other comprehensive income (loss) $ 41,394 $ (160,832) $ (74,039)
===================================
92
The accumulated balances for each classification of accumulated other
comprehensive income (loss) are as follows:
<Caption>
Unrealized Interest Accumulated
gains on rate swap Other
securities mark-to Comprehensive
-market Income
-------------------------------------------
Balance, September 27, 2002 $ 294,771 $ - $ 294,771
Current period change (8,044) (65,995) (74,039)
--------- --------- ----------
Balance, September 26, 2003 286,727 (65,995) 220,732
Current period change (284,089) 123,257 (160,832)
--------- --------- ----------
Balance, September 24, 2004 2,638 57,262 59,900
Current period change (2,638) 44,032 41,394
--------- --------- ----------
Balance, September 30, 2005 $ - $ 101,294 $ 101,294
========= ========= ==========
6. FIXED ASSETS, NET:
Fixed assets at fiscal year ends 2005 and 2004 consisted of the following:
<Caption>
2005 2004
---------------------------
Land $ 1,206,818 $ 849,460
Buildings 10,763,494 9,550,121
Warehouse equipment 6,729,994 7,410,235
Furniture, fixtures and
leasehold improvements 7,863,182 9,163,138
Vehicles 1,229,619 1,370,695
Capital equipment leases 2,081,145 1,924,005
---------------------------
29,874,252 30,267,654
Less accumulated depreciation
and amortization:
Owned buildings and equipment (11,594,251) (9,860,174)
Capital equipment leases (642,191) (455,816)
---------------------------
$ 17,637,810 $ 19,951,664
===========================
7. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill by reporting segment at fiscal year ends 2005 and 2004 was as
follows:
<Caption>
2005 2004
------------ ------------
Wholesale $ 3,935,931 $ 3,935,931
Retail 1,912,877 2,155,465
Beverage - 358,345
------------ ------------
$ 5,848,808 $ 6,449,741
============ ============
93
Other intangible assets at fiscal year ends 2005 and 2004 consisted of the
following:
2005 2004
---------------------------
Trademarks and tradenames $ 3,358,269 $ 9,680,521
Water source - 2,807,000
Covenants not to compete (less
accumulated amortization of
$920,225 and $843,527) - 76,698
Favorable leases (less accumulated
amortization of $379,735 and $340,003) 106,265 145,997
Customer lists (less accumulated
amortization of $151,417 and $26,285) - 560,995
---------------------------
$ 3,464,534 $ 13,271,211
===========================
The Company performs its annual impairment test for goodwill and other
intangible assets after the completion of the fiscal third quarter. During
this evaluation in fiscal 2005 and 2004, management concluded that there had
been an impairment of certain goodwill and identifiable intangible assets.
Fiscal 2005 impairment
- ----------------------
During fiscal 2005, based on valuations obtained from an independent valuation
specialist, management determined that a portion of the tradenames and
goodwill were impaired at both of the retail and beverage segments. The
impairments recorded in the beverage and retail segments were the result of
projected shortfalls in operating cash flows necessary to support the
reporting units carrying value. The fair values of the reporting units were
estimated with the assistance of an independent valuation specialist using the
expected present value of the discounted future cash flows and consideration
of net recoverable values.
A summary of the impairment charges by entity for fiscal year 2005 are as
follows (in millions):
Retail TSI HNWC Total
Long-lived assets $ - $ 0.4 $ 2.5 $ 2.9
Goodwill 0.3 0.4 0.4 1.1
Water source - 3.7 - 3.7
Customer list - 0.3 0.1 0.4
Tradename 3.9 0.9 0.2 5.0
----- ----- ----- -----
$ 4.2 $ 5.7 $ 3.2 $13.1
===== ===== ===== =====
The impairment charges are recorded in the Company's statement of operations
as a component of (loss) income from continuing operations.
Fiscal 2004 impairment
- ----------------------
Due to competitive pressures in the natural spring water bottling business,
operating profits and cash flows were lower than expected. Based on this
trend, the future cash flow forecasts have been revised for this reporting
unit and an impairment of $3.6 million to the HNWC tradename has been recorded
in the Company's statement of operations as a component of income (loss) from
94
operations. The fair values of the reporting units were estimated with the
assistance of an independent valuation firm using the expected present value
of the discounted future cash flows. The $3.6 million reduction of the
intangible assets for the impairment of the HNWC tradename was offset by the
acquisition of $5.5 million of intangible asset additions associated with the
acquisition of Trinity Springs, Inc.
Tradenames and the water source are considered to have indefinite useful lives
and no amortization of these assets was taken during fiscal 2005 or 2004 in
accordance with SFAS No. 142. However, as discussed above certain tradenames
and the water source were impaired in fiscal 2005 and 2004.
The covenants not to compete arose from business acquisitions and are
amortized using the straight-line method over their terms which range from two
to five years. Amortization expense of $76,698, $118,902, and $205,370 was
recorded for these assets for the fiscal years ended 2005, 2004 and 2003,
respectively.
Favorable leases represent the amount by which the lease rates of acquired
leases were below fair market lease rates for the leased properties on the
acquisition date. The favorable variances between the contract lease rates
and the fair market lease rates on the acquisition date are recorded as assets
which are then amortized over the remaining terms of the leases which ranged
from three to seven years. Amortization expense was $39,732, $59,730, and
$69,068, for the fiscal years ended 2005, 2004 and 2003, respectively.
The customer lists were purchased as part of the TSI and Nesco Hawaii
acquisitions and are amortized over a five year period from the date of
acquisition. Amortization expense recorded in fiscal 2005 prior to the
impairment of the remaining customer list at September 30, 2005 was $125,132.
In fiscal 2004 amortization expense was $26,285.
Amortization expense related to the amortizing intangible assets held at
September 2005 for each of the five subsequent years is estimated to be as
follows:
<Caption>
Fiscal Fiscal Fiscal Fiscal Fiscal
2006 2007 2008 2009 2010
--------- --------- -------- -------- --------
Favorable leases $ 40,000 $ 40,000 $ 26,000 $ - $ -
========= ========= ======== ======== ========
8. OTHER ASSETS:
Other assets at fiscal year ends 2005 and 2004 consisted of the following:
2005 2004
-------------------------
Cash surrender value of life
insurance policies $ 795,830 $ 743,933
Debt issuance costs 332,406 -
Equipment held for sale - 177,680
Other 130,663 88,690
-------------------------
$ 1,258,899 $ 1,010,303
=========================
95
Debt issuance costs represent fees incurred to obtain the ADC revolving credit
facility and real estate loan and are amortized over the terms of the
respective loan agreements. Amortization expense was $410,764, $90,422 and
$109,307 for the fiscal years ended 2005, 2004 and 2003, respectively.
Included in other assets in fiscal 2004 is certain bottling equipment held for
sale that was acquired in prior years as part of the HNWC acquisition that
occurred in fiscal 2002. HNWC is a reporting unit within our beverage
segment. The equipment was not in use at the time of the acquisition and was
therefore recorded in other assets as assets held for sale at its estimated
fair value, less the estimated cost to sell, in accordance with APB 16 (the
applicable purchase accounting guidance at that time). In fiscal 2003, after
having difficulty selling the equipment due to saturation of the bottling
equipment market, we determined that the carrying value of this equipment was
too high based on prices for similar equipment in the market place.
Therefore, we recorded an impairment of $0.4 million related to this equipment
in operating expenses under the title "Impairment charges." We continued our
efforts to sell the equipment in fiscal 2004, with limited success, but based
on potential prospects, expected a sale to occur in fiscal 2005 at an amount
that would recover its carrying value. The sale did not materialize and
management believes that the equipment is unlikely to be sold at this time. As
a result, we have recorded an impairment charge of $0.2 million (the remaining
carrying value of the equipment) as part of the "Impairment charges" line item
in the statement of operations.
9. DEBT:
The Company finances certain obligations and, in the case of its beverages
segment, its operations, through the credit agreement (the "Facility"), long-
term debt arrangements with banks and third parties and related party debt
arrangements.
CREDIT FACILITY
- ---------------
The Facility consisted of the following at fiscal year end 2005 and 2004:
<Caption>
2005 2004
---------------------------
Revolving portion of the Facility, interest payable
at the bank's base rate (6.75% at fiscal year end 2005),
principal due April 2007 $44,563,654 $44,809,814
Term Note A, payable in monthly installments of $19,333
plus interest at the bank's base rate (6.75% at fiscal
year end 2005), remaining principal due April 2007 973,734 -
Term Note B, payable in monthly installments of $275,000
plus interest at the bank's base rate plus 2.0% (8.75%
at fiscal year end 2005) through November 2006
(subsequently amended to monthly installments of $100,000
through April 2007) 3,625,000 -
---------------------------
49,162,388 44,809,814
Less current portion 1,432,000 44,809,814
---------------------------
$47,730,388 $ -
===========================
96
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 monthly payments are made on Term Note
A, the revolving credit limit increases accordingly to a maximum of $55.0
million. At September 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 $0.3 million should the loans be
paid off prior to September 30, 2006.
The Facility contains covenants that (i) restrict permitted investments, (ii)
restrict intercompany advances to certain subsidiaries , (iii) restrict
incurrence of additional debt, (iv) restrict mergers and acquisitions and
changes in business or conduct of business and (v) require the maintenance of
certain financial ratios and net worth levels including an average annual
fixed charge ratio of 0.7 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.
Because the Company was unable to comply with the fixed charge ratio and
minimum tangible net worth financial covenants, as amended, at various times
throughout the year, the participating lenders agreed to suspend such
covenants through the end of fiscal 2005. Further, as described in Note 19,
subsequent to September 30, 2005, the Company and the participating lenders
further amended the Credit Facility to replace all existing financial
covenants with only a financial covenant that requires minimum levels of
earnings before interest, taxes, depreciation and amortization as well as
certain other requirements.
The Facility also provides for a "springing" lock-box arrangement, under
which, the Company 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.
97
As of September 2005, the outstanding balance on the Facility was $45.5
million, including Term Note A. The Facility bears interest at the bank's
base rate, which was 6.75% as of September 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 $3.6 million at September 2005. It
bears interest at the bank's base rate, plus 2.0%, which was 8.75% as of
September 30, 2005 and is payable in equal monthly installments of $0.3
million (subsequently amended in March 2006 to be repaid in monthly
installments of $0.1 million).
The Company's Chairman has personally guaranteed repayment of up to an
original amount of $10.0 million ($8.6 million as of September 30, 2005) 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.
The Company hedges its variable rate risk on $10.0 million of its borrowings
under the Facility by utilizing an interest rate swap agreement. 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 fiscal 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.
LONG-TERM DEBT:
- ---------------
In addition to the Facility, the Company also has other long-term obligations
at fiscal year end 2005 and 2004 that consisted of the following:
98
<Caption>
2005 2004
---------------------------
Note payable to a bank ("Real Estate Loan"), interest
payable at a fixed rate of 7.5% with monthly
installments of principal and interest of $56,531 per
month through October 2006; remaining principal due October
2006, collateralized by two owned distribution facilities
(subsequently extended to April 2007 and the interest
rate increased to 8%) $ 6,203,543 $ 6,392,911
Note payable, interest payable at a fixed rate of 5%
with monthly installments of principal and interest of
$30,000 per month through June 2009 and the remaining
balance due June 2009, collateralized by
substantially all of the assets of TSI 2,527,716 2,773,568
Note payable, interest payable quarterly at a fixed rate
of 5% with interest due quarterly commencing in September
2004. The principal along with any unpaid interest is due
in June 2007, collateralized by substantially all of the
assets of TSI 500,000 500,000
Note payable, interest payable at a fixed rate of 5% with
annual installments of principal and interest of $49,655
through June 2007, collateralized by the equipment of TSI 92,328 135,222
Note payable, interest payable at a fixed rate of 5%, due
currently with accrued interest 49,042 700,000
Note payable to a bank, interest payable monthly at a
fixed rate of 6.33% plus monthly principal payments of
$4,100 through December 2009 at which time the remaining
principal is due, collateralized by the Rapid City building
and equipment 967,600 -
Note payable to a bank, interest payable monthly at a
fixed rate of 6.33% plus monthly principal payments of
$8,000 through July 2009 collateralized by the Rapid City
building and equipment 359,429 -
Obligations under capital leases, payable in monthly
installments with interest rates from 4.91% to 16.3%
through January 2010 997,753 1,422,461
Revolving credit facility with a bank ("Beverage Facility"),
interest payable monthly at the bank's base rate plus
1% (6.75% at fiscal year end 2004); principal due October
2004 - 2,750,000
Revolving credit facility with a bank ("Retail Facility"),
interest payable monthly at the bank's base rate plus
1% (6.75 % at fiscal year end 2004); principal due
October 2004 - 1,988,403
Notes payable on equipment, payable in monthly installments
with interest rates from 9.4% to 10% through October 2004,
collateralized by HNWC equipment - 426
---------------------------
11,697,411 16,662,991
Less current portion 1,219,295 5,574,397
Less amount attributable to discontinued operations - 838,440
---------------------------
$10,478,116 $ 10,250,154
===========================
99
Real Estate Loan
- ----------------
The Company has a note due to a bank with an original face amount of $6.9
million, bearing interest at a fixed rate of 7.5%, that was used to purchase
the distribution facility in Quincy, Illinois in fiscal 2001 (referred to
herein as the "Real Estate Loan") and to retire term debt. The Real Estate
Loan is amortized on a 20 year basis with a balloon payment due on April 30,
2007 as extended (originally due June 1, 2006). The Real Estate Loan is
collateralized by two of the Company's owned distribution facilities (Quincy
and Bismarck). As of September 2005, the outstanding balance on the Real
Estate Loan was approximately $6.2 million. In connection with the extension
of this loan, the interest rate was increased to 8%.
TSI and Nesco Acquisition Financing
- -----------------------------------
In connection with the acquisition of TSI in fiscal 2004, as discussed in Note
2, the Company financed the acquisition in part through notes to the former
owner totaling approximately $3.3 million. The Company borrowed $2.8 million
at a fixed rate of 5.0%, payable in monthly installments over a 5 year period
with the remainder due on June 1, 2009. Because of the litigation and
subsequent to September 30, 2005, TSI stopped making payments until the
litigation/mediation has ceased and has accordingly classified the notes based
on their contractual terms. As of September 2005, the outstanding balance
was approximately $2.5 million. In addition, the Company borrowed $0.5
million at a fixed rate of 5.0% with interest due quarterly commencing in
September 2004. The principal, along with unpaid interest, is due in June
2007. As of September 2005 the outstanding balance was approximately $0.5
million. The Company also assumed a note from the former owners totaling $0.1
million that has a fixed rate of 5.0% and is payable in annual installments
through June 2007. As of September 2005, the outstanding balance was
approximately $0.1 million. The notes are collateralized by substantially all
of TSI's assets.
In connection with the acquisition of the Nesco assets completed by HNWC in
fiscal 2004, as discussed in Note 2, HNWC issued a $0.7 million note to the
sellers at a fixed rate of 5% and payable in two installments due in fiscal
2005. In fiscal 2005, HNWC paid all but $49,042 which remains due at the end
of fiscal 2005, plus accrued interest.
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 September 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%.
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 September 2005. The remaining funds are expected to
be borrowed in the first quarter of fiscal 2006 as the Company completes the
100
equipment expenditures for the new distribution center. Payments are due in
60 equal monthly installments of principal of $8,000, plus interest which
began in April 2005. The interest rate is 6.33%.
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 M&I Bank (formerly known as Gold Bank) (the
"M&I Loans"), who is also a participant lender on the Company's revolving line
of credit. The M&I Loans contain cross default provisions which cause all
loans with M&I to be considered in default if any one of the loans where M&I
is a lender, including the revolving credit facility is in default. Since M&I
approved waivers of the covenant violations in the Facility, the M&I Loans are
not in default.
In addition, the M&I Loans contain co-terminus provisions which require all
loans with M&I to be paid in full if any of the loans are paid in full prior
to the end of their specified terms.
Capital leases
- --------------
The Company has several capital leases for office equipment, warehouse and
water bottling and packaging equipment. As of September 2005, the outstanding
balances on the capital leases totaled approximately $1.0 million.
Other
- -----
During fiscal 2005, the Beverage and Retail Facilities matured. As a result,
the Beverage and Retail Facilities, which were comprised of separate $2.8
million and $2.0 million credit facilities with a bank, were paid off.
RELATED PARTY DEBT
- ------------------
Related party debt is due to a director, the Company's Chairman, the Company's
President and their affiliates and consisted of the following at fiscal year
end 2005 and 2004:
<Caption>
2005 2004
---------------------------
Revolving credit facility due to a related party, principal
and interest due December 2005, bearing interest at 8%
per annum, collateralized by a second mortgage on an
equal basis with the Company's existing second mortgage
on TSI's real property $ 1,000,000 $ -
Notes due to related parties, principal and interest
due December 2005, interest at 7% 1,000,000 -
---------------------------
2,000,000 -
Less current portion 2,000,000 -
---------------------------
$ - $ -
===========================
101
The above long-term obligations, excluding obligations under the Facility,
have contractual maturities as follows:
Fiscal Year Ending
------------------
2006 $ 3,219,295
2007 7,316,609
2008 447,700
2009 1,936,195
2010 777,612
Thereafter -
------------
$ 13,697,411
============
Market rate risk for fixed rate debt is estimated as the potential increase in
fair value of debt obligations resulting from decreases in interest rates.
Based on discounted cash flows using current market rates for similar
agreements, the fair value of the Company's long-term debt obligations
approximated carrying value at fiscal year end 2005.
In connection with the Company's self-insured loss control program, AMCON has
issued a letter of credit in the amount of $0.8 million to its workers'
compensation insurance carrier. In October 2005, the amount was increased to
$1.0 million.
10. SUBORDINATED DEBT:
Subordinated debt at fiscal year end 2005 and 2004 consisted of the following:
<Caption>
2005 2004
---------------------------
Note payable, interest (imputed at 6%) and principal
payable annually through June 2005 $ - $ 996,219
Convertible subordinated note payable, interest payable
quarterly at 8% per annum; principal due at maturity
of the note on September 2004, (the due date of
the note was extended to October 2004),convertible
into The Healthy Edge, Inc. stock - 2,000,000
Collateralized subordinated promissory note payable,
interest payable quarterly at 8% per annum; annual
principal payments of $800,000 due annually through
September 2004 with balance of $4,000,000 due
September 2004, (the due date of the note was
extended to October 2004), collateralized by
Health Food Associates, Inc. stock - 4,800,000
Collateralized subordinated promissory note payable,
interest payable monthly at 7.0% per annum; annual
principal payments ranging from $40,000 to $80,000
due annually from August 2001 through August 2005 - 80,000
---------------------------
- 7,876,219
Less current portion - 7,876,219
---------------------------
$ - $ -
===========================
102
11. OTHER INCOME, NET:
Other income, net consisted of the following for fiscal years 2005, 2004 and
2003:
2005 2004 2003
------------------------------------------
Interest income $ (45,831) $ (37,372) $ (94,704)
Dividends - (4,250) (18,900)
Rent income (4,289) (4,135) (5,272)
Gain from sale of investments - (507,418) (266,690)
Settlement proceeds on former
leased facility - - (131,558)
Royalty (15,211) - -
Other (14,776) (23,364) 26,655
------------------------------------------
$ (80,107) $ (576,539) $ (490,469)
==========================================
12. INCOME TAXES:
Components of income tax expense (benefit) from continuing operations for the
fiscal years ended 2005, 2004 and 2003 consisted of the following:
2005 2004 2003
----------------------------------------
Current:
Federal $ - $ 595,434 $ 2,149,999
State 127,131 149,640 281,143
----------------------------------------
127,131 745,074 2,431,142
----------------------------------------
Deferred:
Federal (5,675,878) (610,348) (673,880)
State 639,747 (98,726) 13,738
----------------------------------------
(5,036,131) (709,074) (660,142)
----------------------------------------
Income tax (benefit) expense $ (4,909,000) $ 36,000 $ 1,771,000
========================================
103
The difference between the Company's income tax expense (benefit) in the
accompanying financial statements and that which would be calculated using the
statutory income tax rate of 34% on income (loss) before taxes is as follows
for the fiscal years ended 2005, 2004 and 2003:
2005 2004 2003
-----------------------------------------
Tax at statutory rate $ (5,529,554) $ (33,350) $ 1,585,343
Amortization of goodwill and
other intangibles (4,777) (4,777) (4,777)
Nondeductible business expenses 23,217 25,148 (21,635)
Minority interest in subsidiary (53,074) - -
State income taxes, net of
federal tax benefit 127,990 206,800 129,691
Valuation allowance, state net
operating losses 635,338 - -
Net operating loss - (435,000) -
Impairment of non-deductible
intangibles - 308,389 -
Other (108,140) (31,210) 82,378
-----------------------------------------
$ (4,909,000) $ 36,000 $ 1,771,000
=========================================
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities giving rise to the net deferred tax asset at
fiscal year ends 2005 and 2004 relate to the following:
2005 2004
---------------------------
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 418,294 $ 258,808
Allowance for impairment of assets
held for sale - 160,237
Accrued expenses 528,811 534,035
Inventory 593,110 648,311
Net operating loss carry forwards - 681,904
AMT credit carry forwards 285,333 380,356
Other 81,545 132,530
---------------------------
1,907,093 2,796,181
Noncurrent:
Fixed assets $ 1,705,661 $ -
Intangible assets 2,530,848 -
Net operating loss carry forwards 4,214,883 1,102,268
Other - 179
---------------------------
8,451,392 1,102,447
---------------------------
Total deferred tax assets 10,358,485 3,898,628
Valuation allowance (635,338) -
---------------------------
Net deferred tax assets $ 9,723,147 $ 3,898,628
===========================
104
Deferred tax liabilities:
Current:
Trade discounts $ 205,570 $ 222,373
Inventory 35,880 -
Unrealized gains on interest
rate swap contracts 23,431 25,417
---------------------------
264,881 247,790
Noncurrent:
Fixed assets 1,204,800 528,753
Tradenames - 887,144
Goodwill 310,751 279,568
---------------------------
1,515,551 1,695,465
---------------------------
Total deferred tax liabilities $ 1,780,432 $ 1,943,255
===========================
Net deferred tax assets (liabilities):
Current $ 1,642,212 $ 2,548,391
Noncurrent 6,300,503 (593,018)
---------------------------
$ 7,942,715 $ 1,955,373
===========================
During fiscal 2005, the Company recorded a valuation allowance of $0.6 million
against deferred tax assets, consisting primarily of state net operating
losses of Hawaiian Water, Trinity Springs and Chamberlin's Natural Foods for
which realization of the deferred tax asset is no longer more likely than not.
No valuation allowance was recorded against the remaining federal and state
net operating losses as of September 30, 2005 and no valuation allowance was
recorded at fiscal year end 2004, as management believes future taxable income
would more likely than not be sufficient to realize such net operating losses
prior to the expiration dates.
The Company's deferred tax asset related to the net operating loss
carryforward at fiscal year end 2005 was $4.2 million and includes the net
operating losses of TSI and HNWC. If the Company chooses to sell the stock of
these companies, as opposed to an asset transaction, the net operating losses
would be part of the contemplated purchase price and be available to the
successor stockholders. Of this amount, $0.6 million expires in 2024 and $2.3
expires in 2025. The remaining $1.3 million was acquired in connection with
the acquisition of HNWC in fiscal 2002. The utilization of the HNWC deferred
tax asset related to the net operating loss of $1.3 million at fiscal year end
2005 is limited (by Internal Revenue Code Section 382) to approximately $0.5
million in fiscal year 2006, $0.1 million in fiscal 2007 and $0.1 million per
year thereafter through 2022.
13. PROFIT SHARING PLAN:
AMCON maintains a profit sharing plan (i.e. a section 401(k) plan) covering
substantially all employees. The plan allows employees to make voluntary
contributions up to 100% of their compensation, subject to Internal Revenue
Service limits. The Company matches 50% of the first 4% contributed and 100%
of the next 2% contributed for a maximum match of 4% of employee compensation.
105
The Company contributed $0.6 million, $0.5 million and $0.4 million (net of
employee forfeitures) to the profit sharing plans during each of the fiscal
years ended 2005, 2004 and 2003, respectively.
14. RELATED PARTY TRANSACTIONS:
For the fiscal years ended 2005, 2004 and 2003, the Company was charged
$72,000, $66,000 and $60,000, respectively, by AMCON Corporation, the former
parent of the Company, as consideration for office rent and management
services, which is included in selling, general and administrative expenses.
The Company also contracted with one of its outside directors for consulting
services in connection with its retail health food operations during part of
fiscal year 2004 and all of fiscal year 2003. The amount paid for consulting
services was $37,500 and $90,000, respectively, plus reimbursement of
expenses. The outside director was hired by the Company during the second
quarter of 2004 to manage the retail and beverage operations.
The Company's Chairman has personally guaranteed repayment of up to an
original amount of $10.0 million ($8.6 million as of September 30, 2005) 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. 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 lent TSI $0.5 million. Both of the loans are currently in
default.
TSI has also 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 and Jeremy W.
Hobbs, two of the Company's directors, are members). The loans bear interest
at seven percent per annum and are currently in default.
In connection with the acquisition of TSI in fiscal 2004, the Company's
Chairman has guaranteed the Company in connection with certain of the
Company's obligations as more fully described in Note 2 but is not being paid
a fee in connection with this guarantee.
15. COMMITMENTS AND CONTINGENCIES:
Future Lease Obligations
- ------------------------
The Company leases certain office and warehouse equipment under capital
leases. The carrying value of these assets was approximately $1.4 million and
$1.5 million as of fiscal year ends 2005 and 2004, respectively, net of
accumulated amortization of $0.6 million and $0.5 million, respectively.
The Company leases various office and warehouse facilities and equipment under
noncancellable operating leases. Rent charged to expense during fiscal years
2005, 2004 and 2003 under such lease agreements was $5.1 million, $5.2 million
and $5.3 million, respectively.
106
As of fiscal year end 2005, minimum future lease commitments are as follows:
Capital Operating
Fiscal Year Ending Leases Leases
------------------ --------------------------
2006 $ 608,052 $ 4,951,903
2007 402,813 2,776,185
2008 41,714 2,089,955
2009 20,640 1,469,903
2010 6,879 1,252,559
Thereafter - 2,914,913
--------------------------
Total minimum lease payments $ 1,080,098 $ 15,455,418
============
Less amount representing interest 82,345
-----------
Present value of net minimum
lease payments $ 997,753
===========
The Company also has future lease obligations for facilities and equipment
related to the discontinued operations of its former health food distribution
business. The Company estimated its ultimate liabilities related to these
leases and recorded a charge to earnings during fiscal 2001. The Company
terminated the lease on one facility during fiscal 2002 for a termination fee
of $1.5 million and as of September 30, 2005 was subleasing the Florida
facility at an amount greater than the Company's lease rate which is
approximately $0.1 million per year. Subsequent to September 30, 2005, the
Company successfully terminated the lease arrangement at no cost and the sub-
tenant is now leasing the facility directly from the lessor.
Liability Insurance
- -------------------
The Company carries property, general liability, vehicle liability, directors
and officers liability and workers' compensation, as well as umbrella
liability policies to provide excess coverage over the underlying limits
contained in these primary policies.
The Company's insurance programs for worker's compensation, general liability
and employee related health care benefits are provided through high deductible
or self-insured programs. Claims in excess of self-insurance levels are fully
insured. Accruals are based on claims filed and estimates of claims incurred
but not reported.
The Company's liabilities for unpaid and incurred but not reported claims for
workers' compensation and health insurance at fiscal year end 2005 and 2004
was $1.1 million and $0.9 million, respectively, under its current risk
management program and are included in other current liabilities in the
accompanying consolidated balance sheets. While the ultimate amount of claims
incurred are dependent on future developments, in management's opinion,
recorded reserves are adequate to cover the future payment of claims
previously incurred. However, it is reasonably possible that recorded
reserves may not be adequate to cover the future payment of claims.
Adjustments, if any, to estimates recorded resulting from the ultimate claim
payments will be reflected in operations in the periods in which such
adjustments are known.
107
Trinity Springs, Inc. Litigation
- --------------------------------
As discussed in Note 19, the Company is involved in litigation regarding the
ownership of TSI. Based on a legal opinion obtained by management from legal
counsel not previously involved in the asset sale transaction or the
litigation, to the extent that TSI owned the assets immediately prior to the
issuance of the Idaho District Court order and has not otherwise transferred
the assets, TSI continues to own the assets. Accordingly, AMCON has continued
to account for the operations of TSI as a consolidated subsidiary because the
District Court has not taken any action to divest TSI of its ownership of the
assets.
16. STOCK OPTION PLAN:
In June 1994, the Company adopted the 1994 Stock Option Plan (the "Stock
Option Plan") which was subsequently amended to increase the maximum number of
shares of common stock which may be issued pursuant to the Stock Option Plan
from 300,000 to 550,000. The Stock Option Plan expired on June 1, 2004. The
Compensation Committee evaluated various equity based compensation programs
and chose not to implement a new plan in fiscal 2005. Option shares and
prices are adjusted for common stock splits and dividends. Options are
generally granted at the stock's fair market value at date of grant. Options
issued to shareholders holding 10% or more of the Company's stock are
generally issued at 110% of the stock's fair market value at date of grant.
At fiscal year end 2005, there were 33,066 options fully vested and
exercisable under the Stock Option Plan. Options issued and outstanding to
management employees pursuant to the Stock Option Plan are summarized below:
Number of Number
Date Exercise Price Options Outstanding Exercisable
------------------------------------------------------------------
Fiscal 1998 $ 15.68 14,672 14,672
Fiscal 1999 $ 36.82 - $ 51.14 12,093 12,093
Fiscal 2000 $ 34.50 4,416 4,416
Fiscal 2003 $ 28.80 4,713 1,885
------ ------
35,894 33,066
====== ======
At fiscal year end 2005, there were 8,188 options fully vested and exercisable
issued to outside directors outside the Stock Option Plan as summarized as
follows:
Number of Number
Date Exercise Price Options Outstanding Exercisable
------------------------------------------------------------------
Fiscal 1998 $ 15.68 1,834 1,834
Fiscal 1999 $ 36.82 - $ 49.09 3,852 3,852
Fiscal 2002 $ 26.94 1,668 1,668
Fiscal 2003 $ 28.26 834 834
------ ------
8,188 8,188
====== ======
108
The stock options have varying vesting schedules ranging up to five years and
expire ten years after the date of grant.
The table below summarizes information about stock options outstanding as of
the following fiscal years:
<Caption>
2005 2004 2003
------------------------------------------------------
Weighted Weighted Weighted
Average Exercise Average Exercise Average Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------
Outstanding at beginning of period 50,753 $29.75 52,475 $30.21 49,125 $29.64
Granted - - - - 6,667 28.74
Exercised - - (33) 15.68 (2,000) 10.26
Forfeited/Expired (6,671) 25.22 (1,689) 44.86 (1,317) 32.10
------------------------------------------------------
Outstanding at end of period 44,082 $30.43 50,753 $29.75 52,475 $30.21
======================================================
Options exercisable at end of period 41,254 45,979 43,549
======== ======== ========
Shares available for options
that may be granted - - 464,523
======== ======== ========
Weighted-average grant date fair
value of options granted during
the period - exercise price equals
stock market price at grant $ - $ - $11.64
====== ====== ======
Weighted-average grant date fair
value of options granted during
the period - exercise price exceeds
stock market price at grant $ - $ - $ -
====== ====== ======
The following summarizes all stock options outstanding at fiscal year end
2005:
<Table>
<Caption>
Exercisable
Remaining ----------------------------
Exercise Number Weighted-Average Weighted-Average Number Weighted-Average
Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------- ----------- ---------------- ---------------- ----------- ----------------
1998 Options $15.68 16,506 2.1 years $15.68 16,506 $15.68
1999 Options $36.82-$51.14 15,945 3.6 years $45.53 15,945 $45.53
2000 Options $34.50 4,416 4.7 years $34.50 4,416 $34.50
2002 Options $26.94 1,668 6.9 years $26.94 1,668 $26.94
2003 Options $28.26-$28.80 5,547 7.2 years $28.72 2,719 $28.63
------ ------ ------ ------
44,082 $30.43 41,254 $30.54
====== ====== ====== ======
109
17. DERIVATIVE INSTRUMENTS:
The Company borrows money at variable interest rates which exposes it to risk
that interest expense will increase if the benchmark interest rate used to set
the variable rates increases. In order to reduce its exposure to this risk,
the Company may use derivative instruments (i.e. interest rate swaps
agreements) pursuant to established Company policies. As of September 2005
and 2004, the Company had interest rate swap agreements outstanding with
notional amounts totaling $10.0 million and $15.0 million, respectively,
related to borrowings on the Facility. These interest rate swaps were used to
effectively convert certain of the Company's floating rate debt to fixed rate
debt. The interest rate swaps outstanding at September 2005 and 2004 are
accounted for as cash flow hedges with gains and losses deferred in
accumulated other comprehensive income, to the extent the hedge is effective.
Any ineffectiveness associated with the interest rate swaps is immediately
recognized in earnings within interest expense.
18. BUSINESS SEGMENTS:
AMCON has three reportable business segments: the wholesale distribution of
consumer products, the retail sale of health and natural food products, and
the bottling and distribution of bottled water products. The retail health
food stores' operations are aggregated to comprise the retail segment because
such operations have similar economic characteristics, as well as similar
characteristics with respect to the nature of products sold, the type and
class of customers for the health food products, and the methods used to sell
the products. The operations of HNWC and TSI (which was acquired in June 2004
) are aggregated in the beverage segment because such operations have similar
economic characteristics and the nature of the products, as well as the
methods used to sell and distribute the products. As discussed in Note 2,
TBG, a business component of the beverage segment ceased operations on March
31, 2005 and its assets accordingly are included in the "Other" column below.
The segments are evaluated on revenues, gross margins, operating income (loss)
and income before taxes.
<Caption>
Wholesale
Distribution Retail Beverage Other/2/ Consolidated
-----------------------------------------------------------------------
FISCAL YEAR ENDED 2005:
External revenues:
Cigarettes $ 607,263,715 $ - $ - $ - $ 607,263,715
Health food - 34,617,325 - - 34,617,325
Confectionery 56,057,063 - - - 56,057,063
Tobacco, beverage & other 136,725,439 - 11,371,251 (112,094) 147,984,596
-----------------------------------------------------------------------
Total external revenues 800,046,217 34,617,325 11,371,251 (112,094) 845,922,699
Depreciation /1/ 1,254,540 784,353 544,533 - 2,583,426
Amortization 57,752 58,678 125,128 - 241,558
Operating income (loss) 6,545,206 (3,490,836) (14,902,691) 13,710 (11,834,611)
Interest expense 970,275 1,580,033 1,180,843 777,741 4,508,892
Income (loss) from continuing
operations before taxes 5,616,368 (5,032,199) (16,083,534) (764,031) (16,263,396)
Total assets 68,484,980 13,012,051 12,417,286 1,394,480 95,308,797
Capital expenditures 2,349,690 115,004 563,882 - 3,028,576
110
FISCAL YEAR ENDED 2004:
External revenues:
Cigarettes $ 597,310,736 $ - $ - $ - $ 597,310,736
Health food - 32,431,573 - - 32,431,573
Confectionery 55,641,415 - - - 55,641,415
Tobacco, beverage & other 131,901,800 - 4,480,065 - 136,381,865
-----------------------------------------------------------------------
Total external revenues 784,853,951 32,431,573 4,480,065 - 821,765,589
Depreciation /1/ 1,121,873 765,371 303,801 - 2,191,045
Amortization 177,050 92,004 28,265 - 297,319
Operating income (loss) 8,340,023 90,133 (5,519,647) (256,664) 2,653,845
Interest expense 1,118,014 1,213,098 670,412 326,948 3,328,472
Income (loss) from continuing
operations before taxes 7,754,389 (1,099,671) (6,182,796) (570,010) (98,088)
Total assets 71,794,523 17,426,436 20,256,937 2,251,967 111,729,863
Capital expenditures 318,988 591,330 790,455 83,232 1,784,005
FISCAL YEAR ENDED 2003:
External revenues:
Cigarettes $ 564,804,865 $ - $ - $ - $ 564,804,865
Health food - 33,110,706 - - 33,110,706
Confectionery 51,400,977 - - - 51,400,977
Tobacco, beverage & other 119,310,355 - 3,166,353 - 122,476,708
-----------------------------------------------------------------------
Total external revenues 735,516,197 33,110,706 3,166,353 - 771,793,256
Depreciation /1/ 1,192,146 750,071 186,191 - 2,128,408
Amortization 195,935 187,809 - - 383,744
Operating income (loss) 8,538,065 503,799 (1,597,662) (77,659) 7,366,543
Interest expense 1,397,631 1,384,295 412,313 - 3,194,239
Income (loss) from continuing
operations before taxes 7,645,028 (847,604) (2,056,992) (77,659) 4,662,773
Total assets 72,589,504 16,778,236 8,192,120 1,939,570 99,499,430
Capital expenditures 732,411 475,775 1,906,409 114,116 3,228,711
/1/ Includes depreciation reported in cost of sales for beverage segment.
/2/ Includes interest expense previously allocated to TBG (TBG is now
included in discontinued operations (see Note 20)), intercompany
eliminations and assets related to discontinued operations.
19. SUBSEQUENT EVENTS:
Disposition of Beverage Business and Related Bank Amendments
- ------------------------------------------------------------
During fiscal 2005, the Company entered into an amendment to the loan
agreement for the Company's revolving credit facility requiring the beverage
businesses to be sold or liquidated by December 10, 2005. This timing
generally coincided with the original 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 these loans was for
the amount of $250,000 from Aristide Investments, L.P., a California limited
partnership ("Aristide"). William F. Wright, the Company's Chairman of the
Board, Chief Executive Officer and largest stockholder is a partner of
Aristide. The other loan was for the amount of $250,000 from Draupnir, LLC, a
Delaware limited liability company ("Draupnir"). Allen D. Petersen and Jeremy
W. Hobbs, two of the Company's directors, are members of Draupnir.
In October 2005, the Company entered into a letter of intent ("LOI") with Mr.
Wright for the proposed acquisition of 80% of the outstanding common stock of
The Healthy Edge, Inc. ("THE") which is currently a direct wholly-owned
subsidiary of AMCON. The LOI contemplated that THE would own, at the time of
closing of the proposed acquisition, 100% of the equity of Health Food
Associates, Inc. (d/b/a Akin's Natural Food Market), Chamberlin's Natural
Foods, Inc. (d/b/a Chamberlin's Market and Cafe), and Hawaiian Natural Water
111
Company, Inc. ("HNWC"), as well as the Company's 85% interest in the equity of
Trinity Springs, Inc. ("TSI"), each of which are currently direct or indirect
subsidiaries of AMCON.
The closing for the purchase of THE stock was expected to occur by December
12, 2005 in order to generally coincide with an amendment to the loan
agreement for the Company's revolving credit facility with its bank lenders
requiring the bottled water businesses of HNWC and TSI to be sold or
liquidated by December 10, 2005.
The negotiations related to this transaction were significantly complicated
by, among other things, a ruling in December 2005 by the District Court of the
Fifth Judicial District of the State of Idaho which granted the plaintiff's
motion for partial summary judgment declaring that the stockholders of Trinity
Springs Ltd. (which subsequently changed its name to Crystal Paradise
Holdings, Inc.) did not validly approve the sale of its business and assets to
TSI (Note 2), AMCON's subsidiary, because the vote of certain shares issued as
a dividend should not have been counted. Ultimately, the uncertainty
surrounding this matter led to the termination of the LOI in January 2006.
Immediately after the termination of the LOI, the Company's bank lenders
granted a waiver of any event of default as a result of the failure to agree
to the sale or liquidation of TSI and HNWC. This waiver also encompasses any
event of default that would occur if (a) any proceedings in bankruptcy by or
against TSI or HNWC commenced, or (b) in the event of the liquidation or
reorganization of TSI or HNWC, or (c) in the event of allegations that TSI or
HNWC is insolvent or unable to pay its debts as they mature, or (d) the
readjustment or arrangement of TSI's or HNWC's debts.
As a result of the litigation and subsequent to September 30, 2005, TSI has
not made the originally scheduled installment payments of principal and
interest with respect to the two notes (aggregate balance of $3.0 million at
September 30, 2005) issued by TSI as part of the purchase price for the asset
sale by Crystal Paradise Holdings, Inc. as discussed in Note 2 which was the
subject of the failed stockholder vote described above.
The temporary restraining order granted by the Idaho District Court prevents
the minority shareholder plaintiff's of CPH from pursuing remedies which they
may have under the asset purchase agreement until the litigation discussed
below is resolved.
The loan agreement with the bank lenders was amended again on January 9, 2006
to replace all prior financial covenants, which had previously been suspended,
with a covenant requiring that consolidated earnings before interest, taxes,
depreciation and amortization ("EBITDA") (excluding TSI, HNWC and The Beverage
Group, Inc.) not be less than: (i) $100,000 as of the last day of each month
for the one-month period then ending, except for the month ending February 28,
2006 which is permitted to be zero, (ii) $1,100,000 as of March 31, 2006 for
the three-month period then ending, (iii) $3,200,000 as of June 30, 2006 for
the six-month period then ending, and (iv) $5,500,000 as of September 30, 2006
for the ninth-month period then ending, and (v) $6,500,000 as of December 31,
2006 for the twelve-month period then ending. The amendment also required
AMCON and its subsidiaries to hire a turn-around consultant for the beverage
businesses acceptable to the agent for the bank lenders by January 31, 2006
and to pay to the agent its customary fees and expenses in exercising its
rights under the loan agreement. In addition, the amendment creates a new
event of default if AMCON or its subsidiaries makes any payment (in cash or
other property) or a judgment is entered against AMCON or its subsidiaries
112
requiring a payment (in cash or other property) to be made under or in
connection with the guaranty by AMCON of the TSI acquisition notes or the
water royalty under the Asset Purchase Agreement for the sale of TSI assets.
The amendment also reduced the monthly payment on Term Note B from $275,000
per month to $100,000 per month until paid in full.
As of June 30, 2006, the Company is in compliance with all such covenants, and
based on operating forecasts currently expects to remain in compliance with
such covenants with the possible exception of the December 2006 and February
2007 monthly covenants. Further, management is in preliminary negotiations to
obtain covenant modifications and to extend the current maturity date of April
2007, on similar terms, and management believes it will be successful in
obtaining an extension and covenant modifications.
TSI Litigation Status
- ---------------------
In December 2005, the District Court of the Fifth Judicial District of the
State of Idaho issued a ruling granting the minority shareholder plaintiffs'
motion for partial summary judgment declaring that the stockholders of Trinity
Spring, Ltd. (which subsequently changed its name to CPH Holdings, Inc.
("CPH"), did not validly approve the sale of its business and assets to AMCON
because the vote of certain shares issued as a dividend should not have been
counted in the vote. The District Court has not yet ruled on whether monetary
damages or rescission of the sale transaction will be ordered as the relief
for the lack of shareholder approval for the asset sale transaction, nor has
it ruled on the appropriate remedy for any other claim asserted by the parties
in this case. However, based on a legal opinion obtained by management from
independent legal counsel, to the extent that TSI owned the assets immediately
prior to the ruling by the District Court discussed above, and has not
otherwise transferred the assets, TSI continues to own the assets.
Accordingly, AMCON has continued to account for the operations of TSI as a
consolidated subsidiary because the District Court has not taken any action to
divest TSI of its ownership of the assets.
Since the District Court's December ruling, the minority shareholder
plaintiffs have filed notice with the District Court that they agree that
rescission is not feasible. However, the District Court has made no
determination as to the appropriate remedy for the lack of shareholder
approval of the asset sale transaction or for any other claim asserted by the
parties in this matter. Because substantial discovery is needed, several
unresolved legal issues exist, and other pretrial work is yet to be completed,
AMCON'S management, after consulting with the trial counsel, is unable at this
time to state that any outcome unfavorable to AMCON is either probable or
remote and therefore cannot estimate the amount or range of any potential
loss.
Series C Convertible Preferred Stock Offering
- ---------------------------------------------
On March 7, 2006, the Company issued and sold 80,000 shares of its Series C
Convertible Preferred Stock to Draupnir Capital, LLC ("Draupnir") the proceeds
of which were approximately $2.0 million. The Series C Convertible Preferred
Stock is convertible at any time into 146,842 shares of our common stock,
subject to customary anti-dilution adjustments in the event of stock splits,
stock dividends and certain other events with respect to our common stock. The
Certificate of Designations, Preferences and Rights for the Series C
113
Convertible Preferred Stock provides that the holder of the Series C Preferred
Stock, voting separately as a single class, would be entitled to elect one
additional director to our Company's Board of Directors. Draupnir designated
Jeremy W. Hobbs to serve as such director. On March 29, 2006, Mr. Hobbs was
appointed to serve as a Class III director of our Company for an initial term
expiring at the annual meeting of stockholders in 2006 or until his earlier
resignation, removal from office, death or disability. To accommodate this
appointment, the size of our Board of Directors was increased from nine to ten
members.
20. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Subsequent to the issuance of the September 30, 2004 financial statements,
Management and the Company's Audit Committee determined that the Company had
incorrectly allocated interest expense to one of its wholly-owned subsidiaries
that had ceased operations on March 31, 2005 (The Beverage Group, Inc.).
Emerging Issues Task Force ("EITF") 87-24 "Allocation of Interest to
Discontinued Operations", requires that (a) interest on debt that is to be
assumed by the buyer or is required to be repaid as a result of the disposal
transaction should be allocated to discontinued operations and (b) the
allocation to discontinued operations of other consolidated interest that is
not directly attributable to or related to other operations of the enterprise
is permitted but not required. Any interest allocated to discontinued
operations should be determined by a ratio of net assets to total net assets
after adjusting for all interest and debt directly attributable to
other aspects of the business. The Company allocated interest to its
discontinued operation in fiscal 2004 and its quarterly reporting in fiscal
2005 using an invested capital calculation which resulted in higher interest
being allocated to discontinued operations than permitted by EITF 87-24.
Although indirect interest of $0.1 million would be permitted under EITF 87-24
to be allocated to discontinued operations, the Company has concluded that
only direct interest of $0.1 million resulting from debt required to be repaid
as part of the discontinuation of the business should be allocated to
discontinued operations. Accordingly, the fiscal 2004 financial statements
have been restated as shown below. The fiscal 2005 impact of this restatement
was corrected in the fourth quarter of fiscal 2005 with the reclassification
of $0.5 million of interest expense, net of income tax benefit of $0.3 million
from discontinued operations to income (loss) from continuing operations.
A summary of the impact of the interest restatement on fiscal 2004 financial
information is set forth in the following table:
<Caption>
Consolidated Statement of Operations
- -----------------------------------------------
As previously
reported Corrections As restated
------------- ------------ ------------
Interest expense $ 3,001,525 $ 326,947 $ 3,328,472
Income tax (benefit) expense 147,000 (111,000) 36,000
(Loss) income from continuing operations 172,859 (215,947) (43,088)
Loss from discontinued operations, net of tax (4,311,406) 215,947 (4,095,459)
114
Basic (loss) earning per share available to common
shareholders:
Continuing operations 0.23 (0.41) (0.18)
Discontinued operations (8.17) 0.41 (7.76)
Basic (loss) earnings per share available to
common shareholders (7.94) - (7.94)
Diluted (loss) earnings per share available to
common shareholders:
Continuing operations 0.23 (0.41) (0.18)
Discontinued operations (7.99) 0.41 (7.76)/1/
Diluted (loss) earnings per share available to
common shareholders (7.76) - (7.94)
/1/ Before this restatement, the impact of the conversion of stock options 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 antidilutive. This antidilutive impact results in loss per diluted share of ($7.76).
Consolidated Statement of Cash Flows
- ----------------------------------------------
Income (loss) from continuing operations $ 172,859 $ (215,947) $ (43,088)
Net cash flows from operating activities -
discontinued operations (4,260,491) 215,947 (4,044,544)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 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.
115
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
the fiscal year ended September 30, 2005, 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. The recording of such incorrect entries represent material weaknesses
in internal control over financial reporting.
In addition, the Company incorrectly allocated interest expense to one of its
wholly-owned subsidiaries that had ceased operations on March 31, 2005 (The
Beverage Group, Inc.). Emerging Issues Task Force ("EITF") 87-24 "Allocation
of Interest to Discontinued Operations", requires that (a) interest on debt
that is to be assumed by the buyer or is required to be repaid as a result of
the disposal transaction should be allocated to discontinued operations and
(b) the allocation to discontinued operations of other consolidated interest
that is not directly attributable to or related to other operations of the
enterprise is permitted but not required. Any interest to be allocated to
discontinued operations should be determined by a ratio of net assets to total
net assets after adjusting for all interest and debt directly attributable to
other aspects of the business. The Company allocated interest to its
discontinued operation in fiscal 2004 and its quarterly reporting in fiscal
2005 using an invested capital calculation which resulted in higher interest
being allocated to discontinued operations than permitted by EITF 87-24.
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 aspects of inventory
and manufacturing accounting;
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 material weaknesses in the internal
control over financial reporting at HNWC in a timely manner; and
c) The Company did not correctly apply the accounting guidance contained
in certain Emerging Issues Task Force Applications ("EITF's") relating
to the allocation of interest expense to the Company's discontinued
operation (TBG).
116
The following changes in our internal control over financial reporting were
made to correct the deficiencies noted above. These changes occurred during
fiscal year 2006 and have strengthened our internal control over financial
reporting:
1) AMCON's corporate management terminated the employment of HNWC's then
current President and Chief Financial Officer.
2) AMCON's corporate management hired a new acting president and a
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 now reviewing all product cost summaries and
all inventory cost changes as part of its ongoing internal controls.
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 as part of its ongoing internal controls.
6) The Company has enhanced the training of our accounting staff and
required periodic review of a wider variety of current technical
accounting literature to obtain a reasonable level of assurance that
all appropriate accounting guidance is applied to transactions such as
discontinued operations and will retain financial expertise as deemed
necessary.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
THE BOARD OF DIRECTORS
The table below sets forth certain information regarding the directors of the
Company. The Board of Directors has determined that Messrs. Bentele, Hobbs,
Loyack, Mayer, Pestotnik and Petersen, are independent directors of the
Company under the listing standards adopted by the American Stock Exchange.
All members of the Board of Directors have held their positions with the
companies (or their predecessors) set forth under "Principal Occupation" for
at least five years, unless otherwise indicated.
117
<Caption>
Principal Director Term To
Name Age Occupation Since Expires
- ------------------ - ---------------------------------------- -------- -------
NOMINEES
Kathleen M. Evans 59 President of the Company 1986 2006
Jeremy W. Hobbs 45 President and Chief Executive Officer
of Draupnir, LLC /1/ 2006 2006
John R. Loyack 43 President and Chief Operating Officer
of Compression Polymers Holdings, Inc./2/ 2003 2006
Timothy R. Pestotnik 45 Attorney, Partner in the law firm Luce,
Forward, Hamilton & Scripps, LLP 1998 2006
DIRECTORS CONTINUING IN OFFICE
William F. Wright 64 Chairman and Principal Executive Officer
of the Company 1986 2007
Christopher H. Atayan 46 Vice Chairman of the Company;
Senior Managing Director of Slusser
Associates, Inc. /3/ 2004 2008
Allen D. Petersen 65 Chairman of Draupnir LLC /4/ 1993 2008
Raymond F. Bentele 69 Retired, Former Chairman, President and
Chief Executive Officer of
Mallinckrodt, Inc. /5/ 2002 2008
Stanley Mayer 60 Consultant /6/ 2002 2007
William R. Hoppner 56 Consultant /7/ 1994 2007
/1/ Prior to serving in his current position, Mr. Hobbs served as a founding
member and executive officer for Draupnir, LLC from 2002 through December
2005. From 1987 to 2002, Mr. Hobbs was an attorney in the law firm of
Krasnow, Cornbath and Hobbs in Chicago, IL where he served as managing partner
from 1997 to 2002. Mr. Hobbs was appointed to the Board of Directors in March
2006.
/2/ Prior to serving in his current position, Mr. Loyack served as Senior Vice
President and Chief Financial Officer and Vice President and Chief Accounting
Officer at PNM Resources and Director of Financial Accounting and Reporting
for Union Pacific Corporation. Mr. Loyack was appointed to the Board of
Directors in September 2003.
/3/ Mr. Atayan has served as Senior Managing Director of Slusser Associates, a
New York investment banking firm since 1988. Mr. Atayan was appointed to the
Company's Board of Directors in October 2004 and became Vice Chairman of the
Company in March 2006.
/4/ Mr. Petersen became Chairman of Draupnir, LLC in June 2002. For over 10
years prior to that time, Mr. Petersen was Chairman and Chief Executive
Officer of American Tool Companies, Inc.
/5/ Mr. Bentele served as President and Chief Executive Officer of
Mallinckrodt, Inc. from 1981 until his retirement in 1992. He currently
serves as a director of The Mosaic Company and Leggett & Platt, Inc.
118
/6/ Since 2002, Mr. Mayer has been a consultant to various companies regarding
financial and strategic planning matters. Mr. Mayer served as Chief Financial
Officer for Donruss Playoff, Inc. from 2001 to 2002 and as Vice President of
Southern Union Company from 1998 through 2001.
/7/ Mr. Hoppner recently served the Company as its Sr. Vice President from
February 2004 through April 2006. Prior to that time he was engaged in the
private practice of law. From 1999 to 2003, he served in an Of Counsel
position to the law firm Rehm and Bennett, P.C. From 1997 through 1998, Mr.
Hoppner pursued a political career during which he resigned from our Board of
Directors.
The Board of Directors has established and assigned certain responsibilities
to an Audit Committee. The members of the Audit Committee are John R. Loyack
(Chairman), Timothy R. Pestotnik, and Stanley Mayer. The Board of Directors
has determined that all members of the Audit Committee are independent
directors under the rules of the Securities and Exchange Commission and under
the listing standards of the American Stock Exchange. In addition, the Board
of Directors has determined that Mr. Loyack and Mr. Mayer qualify as "audit
committee financial experts" under the rules of the Securities and Exchange
Commission.
EXECUTIVE OFFICERS OF THE COMPANY
The Company's day-to-day affairs are managed by its executive officers, who
are appointed by the Board of Directors for terms of one year. The Company
has entered into employment agreements with Mr. Wright and Ms. Evans each with
a term expiring on December 31, 2006. These executive officers are as
follows:
119
Name Age Position
---- --- --------
William F. Wright 64 Chairman of the Board, Director
Christopher H. Atayan 46 Vice Chairman, Director
Kathleen M. Evans 59 President, Director
Eric J. Hinkefent 44 President of CNF and HFA
Andrew C. Plummer 31 Vice President, Acting Chief
Financial Officer and Assistant
Secretary
WILLIAM F. WRIGHT has served as the Chairman and Chief Executive Officer of
AMCON Corporation (the former parent of AMCON) since 1976 and as Chairman of
the Company since 1981. From 1968 to 1984, Mr. Wright practiced corporate and
securities law in Lincoln, Nebraska. Mr. Wright is a graduate of the
University of Nebraska and Duke University School of Law and is a certified
public accountant.
CHRISTOPHER H. ATAYAN became the Vice Chairman and Chief Corporate Officer for
the Company in March 2006. Mr. Atayan has served the Company as a director
since 2004. Mr. Atayan is also a consultant to Draupnir, LLC, the parent of
Draupnir Capital, LLC.
KATHLEEN M. EVANS became President of the Company in February 1991. Prior to
that time she served as Vice President of AMCON Corporation from 1985 to 1991.
From 1978 until 1985, Ms. Evans acted in various capacities with AMCON
Corporation and its operating subsidiaries.
ERIC J. HINKEFENT has served as President of both Chamberlin's Natural Foods,
Inc. and Health Food Associates, Inc. since October 2001. Prior to that time
he served as President of Health Food Associates, Inc. beginning in 1993. He
has also served on the board of The Healthy Edge, Inc. from 1999 through 2003.
Mr. Hinkefent is a graduate of Oklahoma State University.
ANDREW C. PLUMMER became Acting Chief Financial Officer of the Company in
March 2006. Prior to his appointment as Acting Chief Financial Officer, he
served the Company as its Corporate Controller and Manager of SEC Compliance.
Prior to joining AMCON in 2004, Mr. Plummer practiced public accounting for
approximately 7 years primarily with Deloitte and Touche, LLP and attained the
position of Audit Manager. Mr. Plummer is a graduate of Peru State College.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and certain persons who own more than ten
percent of the Company's Common Stock, to file with the Securities and
Exchange Commission (the "SEC") reports of their ownership of Company Common
Stock. Officers, directors and greater-than-ten-percent shareowners are
required by SEC regulation to furnish the Company with copies of such Section
16(a) reports they file. Based solely upon review of the copies of such
reports received by the Company and written representations from each such
person who did not file an annual report with the SEC (Form 5) that no other
reports were required, the Company believes that there was compliance for the
fiscal year ended 2005 with all Section 16(a) filing requirements applicable
to the Company officers, directors and greater-than-ten-percent beneficial
owners.
120
CODE OF ETHICS
The Company has adopted a Code of Ethics that applies to the Chairman, Vice
Chairman, President, Chief Financial Officer, Controller and directors of the
Company. In addition, the Company has adopted a Code of Business Conduct and
Ethics which includes more extensive requirements than those required by
Section 406 of the Sarbanes Oxley Act of 2002. The Company's Code of Business
Conduct and Ethics applies to all of its directors, officers and employees of
the Company while section 406 of the Sarbanes Oxley Act of 2002 applies its
more limited ethical requirements only to the Company's principal executive
officers and controller or senior accounting officer (or persons performing
similar functions). A copy of the Code of Ethics is incorporated by reference
in this Form 10-K as Exhibit 14.1.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are paid according to the
following annual scale with no payment of meeting fees:
Audit Committee - Chair $40,000
Audit Committee - Member $35,000
Nominating Committee - Chair $35,000
All Other Outside Directors $30,000
In addition, all directors are reimbursed for out of pocket expenses related
to attending board and committee meetings. Prior to June 2004, the Company
had a stock option plan and non-employee directors were eligible to receive
awards of nonqualified stock options which entitled them to purchase shares of
our common stock at an exercise price equal to the fair market value of the
stock on the date of grant. Such option grants were recommended on an annual
basis by the Compensation Committee, subject to approval by the Board of
Directors. These stock options have varying vesting schedules ranging up to
five years and expire ten years after the date of grant. During fiscal year
2005, no stock options were issued to directors.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information regarding the annual and long-term
compensation awarded to, earned by or paid by the Company and its subsidiaries
to the Company's Chairman and the other four highest paid executive officers
of the Company ("Named Executive Officers") for services rendered during
fiscal years 2005, 2004 and 2003. No other executive officers of the Company
earned salary and bonus in fiscal year 2004 in excess of the disclosure
threshold established by federal securities laws.
121
SUMMARY COMPENSATION TABLE
<Caption>
Long-Term Compensation
---------------------------------
Annual Compensation Awards Payouts
--------------------------------------- ------------------------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted Securities
Name and Other Annual Stock Underlying LTIP All Other
Principal Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation
Position Year ($) ($) ($) /1/ ($) (#) ($) /2/ ($) /3/
- ------------ ---- ------- ------- ------------ ---------- ------------ ------- ------------
William F. Wright, 2005 435,000 - 63,645 - - - 10,428
Chairman 2004 421,730 25,000 63,645 - - - 9,933
2003 409,450 102,400 63,645 - - - 9,095
Kathleen M. Evans, 2005 354,000 25,000 - - - - 10,240
President 2004 331,430 104,430 - - - - 9,417
2003 321,710 160,900 - - - - 8,907
William R. Hoppner, 2005 210,000 26,260 - - - - 8,346
Former Sr. Vice 2004 116,667 - - - - - -
President /4/
Michael D. James, 2005 172,500 38,000 - - - - 8,424
Former Secretary 2004 167,500 40,000 - - - - 8,285
Treasurer and Chief 2003 162,500 40,000 - - - - 7,379
Financial Officer/5/
Eric J. Hinkefent, 2005 150,000 25,000 - - - - 6,400
President of Health 2004 150,000 5,000 - - - - 6,000
Food Associates, 2003 125,000 - - - - - 5,103
Inc. and Chamberlin
Natural Foods, Inc.
</Table>
- -------------------------
/1/ Amount for fiscal 2005 consists of (i) the value of split dollar life
insurance of $39,645 and (ii) auto allowance of $24,000 for Mr. Wright. No
disclosure is required in this column for any other Named Executive Officer
pursuant to applicable Securities and Exchange Commission regulations, as the
aggregate value of items covered by this column does not exceed the lesser of
$50,000 or 10% of the total annual salary and bonus shown for each respective
executive officer named.
/2/ The Company does not have a long-term incentive plan as defined in Item 402
of Regulation S-K under the Securities Exchange Act of 1933, as amended.
/3/ These amounts for fiscal year 2005 consist of (i) contributions to the
Company's Profit Sharing Plan of $9,333, $9,333, $8,346, $8,424 and $6,400 for
Mr. Wright, Ms. Evans, Mr. Hoppner, Mr. James and Mr. Hinkefent, respectively,
and (ii) the values of term life insurance of $1,095 and $907 for Mr. Wright
and Ms. Evans, respectively.
/4/ Mr. Hoppner is now a director of the Company. From February 2004 through
April 2006 he served the Company as its Sr. Vice President. His annualized
salary during the 2004 was $175,000. Prior to February 2004, Mr. Hoppner
provided consulting services to the Company and received consulting fees of
$30,000 during fiscal 2004.
/5/ Mr. James resigned his position as Vice President, Chief Financial Officer
and Secretary effective March 2006.
122
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
No options were granted during fiscal year 2005 to the Named Executive Officers
listed in the Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
The following table sets forth certain information concerning options exercised
during fiscal year 2005, the number of unexercised options and the value of
unexercised options at the end of fiscal year 2005 for the Named Officers
listed in the Summary Compensation Table.
<Caption>
(a) (b) (c) (d) (e)
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs at
Options/SARs at Fiscal Year
Shares Fiscal Year End(#) End($)/1/
Acquired
on Value Exercisable/ Exercisable/
Name Exercise(#) Realized ($) Unexercisable Unexercisable
- ----------------- ----------- ------------ ------------------ ------------------
William F. Wright -0- -0- - -
Kathleen M. Evans -0- -0- 6,417 / 0 $31,450 / 0
William R. Hoppner -0- -0- 1,284 / 0 0 / 0
Michael D. James -0- -0- 3,201 / 100 $ 7,342 / 0
Eric J. Hinkefent -0- -0- 917 / 0 0 / 0
</Table>
- -------------------
/1/ Based on the difference between the closing sale price of the Company's
common stock on September 30, 2005 and the exercise price of the options.
LONG-TERM INCENTIVE PLANS AND OTHER MATTERS
The Company does not maintain a long-term incentive plan or pension plan (as
defined in Item 402 of SEC Regulation S-K) for the Named Officers and has not
repriced any options or SARs for any Named Officer during the last fiscal year.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with William F. Wright, the
Chairman of the Board, and Kathleen M. Evans, President of the Company. Each
such agreement has a term expiring on December 31, 2006 and is automatically
extended each December 31 for one additional year unless either the Company or
the executive delivers a notice of non-extension at least 90 days prior to the
scheduled automatic renewal date. Each agreement provides for the payment of a
base salary in each year during the term thereof and provides that the
executive shall be eligible to receive a bonus based upon performance in an
amount determined by the Compensation Committee. As of September 30, 2005, Mr.
Wright's base salary is $435,000. Ms. Evans' base salary is $354,000.
The Company has entered into an employment agreement with Eric J. Hinkefent,
the President of Health Food Associates, Inc. and Chamberlin Natural Foods,
Inc.
123
The agreement has a term expiring on September 30, 2006 and is automatically
extended each September 30 for one additional year unless either the Company or
the Mr. Hinkefent delivers a notice of non-extension at least 90 days prior to
the scheduled automatic renewal date. As of September 30, 2005, Mr.
Hinkefent's base salary was $150,000 and the agreement provides that Mr.
Hinkefent shall be eligible to receive a bonus of up to a maximum of 75% of his
base salary based upon performance as determined by the Compensation Committee.
If an employment agreement terminates due to an executive's disability or
death, the executive or his or her personal representative are entitled to
receive the executive's base salary for a period of six months following the
termination. If an employment agreement is terminated for reasons other than
serious misconduct (as defined in the agreements), the terminated executive is
entitled to receive a severance package equal to such executive's current base
salary plus his or her previous year's bonus. Each executive was also eligible
to participate in the Company's 1994 Stock Option Plan, prior to its expiration
on June 1, 2004, and in other employee benefit plans maintained by the Company,
including health and life insurance plans. Each agreement contains provisions
under which the executive has agreed to maintain the confidentiality of
information concerning the Company and its affairs and a covenant not to
compete with the Company for a period of one year after such executive's
employment with the Company terminates.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There were no compensation committee interlocks and no insider participation in
compensation decisions during fiscal 2005 that are required to be reported
under the rules and regulations of the Securities Exchange Act of 1934.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF OUR COMMON STOCK BY OUR DIRECTORS AND EXECUTIVE OFFICERS AND OTHER
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of July 31, 2006, the shares of common stock
beneficially owned by each director, each nominee for director, each of the
executive officers named in the Summary Compensation Table in this proxy
statement, and all present executive officers and directors as a group. The
shares beneficially owned by our executive officers and directors, excluding
options, account for approximately 40.6% of the total shares outstanding. We
believe that all of these shares will be voted "FOR" each nominee for director.
In addition to outstanding shares, executive officers and directors are deemed
to beneficially own shares that they may acquire by exercising vested stock
options or options that will vest within 60 days of July 31, 2006. While these
additional shares are included in the following table, none of these additional
shares will be eligible to vote at the Annual Meeting unless the options are
exercised prior to the Record Date. The following table also sets forth the
beneficial ownership of our common stock by each other person believed by us to
beneficially own 5% or more of our outstanding common stock as of July 31,
2006.
124
<Caption>
Number of
Shares Percent
Beneficially of
Name of Beneficial Owner Owned Class/1/
- ------------------------ ------------ -------
DIRECTORS AND EXECUTIVE OFFICERS
- ----------------------------------
William F. Wright, Director, Chairman of the Board 165,455 /2/ 29.54
Christopher H. Atayan, Director, Vice Chairman and
and Chief Corporate Officer 8,169 /3/ 1.55
Kathleen M. Evans, Director, President 30,839 /4/ 5.78
Eric J. Hinkefent, President of Health Food
Associates, Inc. and Chamberlin Natural Foods, Inc. 917 /5/ *
Allen D. Petersen, Director 239,537 /6/ 32.97
Jeremy W. Hobbs, Director 234,307 /7/ 32.39
John R. Loyack, Director 834 /8/ *
Raymond F. Bentele, Director 834 /9/ *
Stanley Mayer, Director 834 /10/ *
Timothy R. Pestotnik, Director 40,049 /11/ 7.58
William R. Hoppner, Director 16,961 /12/ 3.21
All executive officers and directors
as a group (11 persons) 466,706 59.83
OTHER PRINCIPAL STOCKHOLDERS
- --------------------------------
Alexander Dawson Foundation 81,135 /13/ 15.39
Wendy M. Wiseman 34,569 /14/ 6.56
Ane Patterson Shields 26,797 /15/ 5.08
- --------------------------
* Less than 1% of class.
/1/ Unless otherwise noted, each director and executive officer owned his or
her shares directly and has sole voting and investment power over his or her
shares.
/2/ Includes 10,291 shares of common stock held by AMCON Corporation, over
which Mr. Wright has voting and dispositive powers and convertible preferred
stock held by Aristide Investments, LP, a family limited partnership controlled
by Mr. Wright, which can be converted at any time into 32,992 shares of common
stock.
/3/ Consists of 55 shares held directly and shares of convertible preferred
stock which can be converted at any time into 8,114 shares of common stock at
the option of the holder.
125
/4/ Includes options to purchase 6,417 shares of common stock at an average
exercise price of $20.46 per share which may be exercised currently.
/5/ Consists of options to purchase 917 shares of common stock at an exercise
price of $45.68 per share which may be exercised currently.
/6/ Includes 37,849 shares of common stock held by the Lifeboat Foundation,
over which Mr. Petersen shares voting power as a director, 2,240 shares held by
the 2003 Allen D. Petersen Irrevocable Trust, over which Mr. Petersen has sole
voting power as sole trustee and options to purchase 3,118 shares of common
stock at an average exercise price of $25.83 per share which may be exercised
currently. Also includes convertible preferred stock held by Draupnir, LLC and
Draupnir Capital, LLC, over which Mr. Petersen shares voting power as an
officer and director, which can be converted at any time into 196,330 shares of
common stock at the option of the holder.
/7/ Includes 37,849 shares of common stock held by the Lifeboat Foundation,
over which Mr. Hobbs shares voting power as a director. Also includes
convertible preferred stock held by Draupnir, LLC and Draupnir Capital, LLC,
over which Mr. Hobbs shares voting power as an officer and director, which can
be converted at any time into 196,330 shares of common stock at the option of
the holder.
/8/ Consists of options to purchase 834 shares of common stock at an exercise
price of $28.26 per share which may be exercised currently.
/9/ Consists of options to purchase 834 shares of common stock at an exercise
price of $27.00 per share which may be exercised currently.
/10/ Consists of options to purchase 834 shares of common stock at an exercise
price of $26.88 per share which may be exercised currently.
/11/ Includes 37,849 shares of common stock held by the Lifeboat Foundation,
over which Mr. Pestotnik shares voting power as a director, and options to
purchase 1,284 shares of common stock at an average exercise price of $40.33
per share which may be exercised currently.
/12/ Includes options to purchase 1,284 shares of common stock at an average
exercise price of $40.33 per share which may be exercised currently.
/13/ The information provided in this table is based on the Schedule 13D filed
with the Securities and Exchange Commission on November 12, 2004. Consists of
convertible preferred stock which can be converted at any time into 81,135
shares of common stock at the option of the holder. 4045 South Spencer Street,
Suite 312, Las Vegas, NV 89119.
/14/ 9489 North 135th Way, Scottsdale, AZ 85259.
/15/ 3055 St. Thomas Drive, Missoula, Montana 59803.
EQUITY COMPENSATION PLAN INFORMATION. The following equity compensation plan
information summarizes plans and securities approved and not approved by
security holders as of September 30, 2005:
126
<Caption>
(a) (b) (c)
Number of securities
Number of securities remaining available
to be issued upon Weighted-average for future issuance
exercise of outstanding exercise price of under equity compensation
options, warrants outstanding options, plans (excluding securities
Plan category and rights warrants and rights reflected in column (a))
- ------------------------- ----------------------- -------------------- ---------------------------
Equity compensation plans
approved by security
holders/1/ 35,894 $ 30.33 -
Equity compensation plans
not approved by security
holders/2/ 8,188 $ 30.85 -
---------------------- -------------------- ---------------------------
Total.................... 44,082 $ 30.43 -
====================== ==================== ===========================
</Table>
- -----------------------
/1/ The Company's 1994 Stock Option Plan allowed for the issuance of up to
550,000 shares of common stock. On June 1, 2004, the 1994 Stock Option Plan
expired. The Compensation Committee is evaluating various equity based
compensation programs to be implemented in the future.
/2/ Represents stock options to purchase 8,188 shares of common stock issued to
non-employee directors as described in Item 11 "Compensation of Directors" of
this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
William F. Wright, Kathleen M. Evans, Allen D. Petersen and Jeremy W. Hobbs are
officers, directors or stockholders of AMCON Corporation which is engaged in
the beer distribution business in eastern Nebraska through a wholly owned
subsidiary. AMCON Corporation provides the Company with offices and
administrative services and the Company reimburses AMCON Corporation for a
proportionate share of the costs of these offices and services based upon our
respective usages. The Company paid AMCON Corporation $72,000 during fiscal
2005 under this arrangement and plans to continue to pay $72,000 during fiscal
2006. The Company believes the terms on which AMCON Corporation supplies these
offices and services to the Company are no less favorable than would otherwise
be available from unaffiliated parties.
On December 14, 2004, Mr. Petersen extended a revolving credit facility to
Trinity Springs, Inc., a subsidiary of the Company ("Trinity"), in a principal
amount of up to $1,000,000 at an interest rate of 8% per annum with an initial
advance of $500,000. The credit facility matured on December 14, 2005. The
Company owns 85% of the issued and outstanding common stock of Trinity.
Concurrent with executing this credit facility and to induce Mr. Petersen to
extend this loan to Trinity, the Company, Mr. Petersen and Trinity entered into
an Intercreditor Agreement, dated as of December 14, 2004, pursuant to which
the Company agreed to allow Mr. Petersen to receive a second mortgage on
Trinity's real property on an equal basis with the Company's existing second
mortgage on Trinity's real property. The loan is currently in default.
127
On March 30, 2005, AMCON Corporation, a company controlled by Mr. Wright, Mr.
Petersen and Ms. Evans, loaned Trinity $500,000 under an unsecured,
subordinated promissory note that was due in June 2005 and extended to December
2005. The loan is currently in default.
On August 8, 2005, Aristide Investments, LP, a family partnership controlled by
Mr. Wright, loaned Trinity $250,000 under an unsecured, subordinated promissory
note that was due in December 2005. At the same time, Draupnir, LLC, a company
controlled by Mr. Petersen and Mr. Hobbs, loaned Trinity $250,000 under an
unsecured, subordinated promissory note that was due in December 2005. In
addition, during October and November 2005, Draupnir, LLC loaned Trinity an
additional $750,000 under unsecured promissory notes that were due in December
2005. The Aristide Investments, LP and Draupnir, LLP loans are currently in
default.
On March 7, 2006, the Company issued and sold 80,000 shares of Series C
Convertible Preferred Stock, par value $0.01 per share, at $25 per share in a
private placement under Section 4(2) of the Securities Act of 1933, as amended,
to Draupnir Capital, LLC, a company controlled by Mr. Petersen and Mr. Hobbs,
members of the Company's Board of Directors. The proceeds from the sale of the
Series C Convertible Preferred Stock was used to pay down debt associated with
the Company's existing revolving credit facility. In accordance with the
Securities Purchase Agreement related to the issuance of the Series C
Convertible Preferred Stock, the Company agreed that Draupnir Capital, LLC
could appoint one director to the Board. Draupnir Capital, LLC selected Jeremy
W. Hobbs who is President and Chief Executive Officer of Draupnir Capital, LLC.
Mr. Atayan, Vice Chairman of AMCON provides consulting services to Draupnir,
LLC the parent company of Draupnir Capital, LLC.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following fees were billed to the Company by Deloitte and Touche LLP
("D&T") for professional services for fiscal 2005 and 2004, respectively.
AUDIT FEES. D&T billed the Company a total $842,944 and $235,185 in fiscal
2005 and 2004, respectively, for professional services rendered for the audit
of the Company's annual financial statements for those fiscal years, to review
the Company's interim financial statements included in its Quarterly Reports on
Form 10-Q filed with the SEC during those years and to amend the Annual Report
on Form 10-K for 2004 during fiscal 2005.
AUDIT-RELATED FEES. D&T billed the Company $14,982 and $65,731 in fiscal 2005
and 2004, respectively, for audit-related services. Audit-related services
generally include fees for the audits of the Company's employee benefit plans
and fees incurred in connection with business acquisitions and compliance with
the Sarbanes-Oxley Act and related regulatory matters.
TAX FEES. In fiscal 2005 and 2004, D&T billed the Company $135,151 and
$26,850, respectively, for tax services. Tax services consisted primarily of
preparation of tax returns, research and general advice relating to tax issues
and compliance.
ALL OTHER FEES. D&T billed the Company $39,510 and $0 in fiscal 2005 and 2004,
respectively, for services rendered to the Company, other than the services
described under the above captions. These services consisted primarily of
advice relating to internal control documentation.
128
The Audit Committee approved all services provided by D&T during fiscal year
2005 and 2004 and has determined that the provision of these services did not
adversely affect D&T's independence. It is currently the policy of the Audit
Committee to review and approve all services provided by D&T to the Company.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements, Financial Statement Schedules, and Exhibits
(1) Financial Statements
The financial statements filed as part of this filing are listed on
the index to Consolidated Financial Statements, Item 8, page 69.
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable or not required or the information required to be set
forth therein is included in the Consolidated Financial Statements,
Item 8, or notes thereto.
(3) Exhibits
2.1 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)
2.2 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 Amended and Restated Bylaws of the Company dated April 5, 2006
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)
3.5 Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock dated March 6, 2006 (incorporated by reference
to Exhibit 4.1 of AMCON's Current Report on Form 8-K filed on March 13,
2006)
129
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)
4.4 Specimen Series C Convertible Preferred Stock Certificate (incorporated
by reference to Exhibit 4.2 of AMCON's Current Report on Form 8-K filed
on March 13, 2006)
4.5 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)
4.6 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)
4.7 Securities Purchase Agreement dated March 3, 2006 between AMCON
Distributing Company and Draupnir Capital, LLC. (incorporated
by reference to Exhibit 4.3 of AMCON's Current Report on Form 8-K filed
on March 13, 2006)
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 Quarterly Report on Form 10-Q filed on May 27, 2005)
10.4 Third Amendment to Amended and Restated Loan and Security Agreement,
dated August 12, 2005 (incorporated by reference to Exhibit 10.4 of
AMCON's Quarterly Report on Form 10-Q filed on August 22, 2005)
10.5 Fourth Amendment and Waiver to Amended and Restated Loan and Security
Agreement, dated January 9, 2006
10.6 Fifth Amendment to Amended and Restated Loan and Security Agreement,
dated February 8, 2006
10.7 Sixth Amendment to Amended and Restated Loan and Security Agreement,
dated March 3, 2006 (incorporated by reference to Exhibit
10.1 of AMCON's Current Report on Form 8-K filed on March 13, 2006)
130
10.8 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)*
10.9 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)*
10.10 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)*
10.11 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)*
10.12 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)
10.13 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)
10.14 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)
10.15 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)
10.16 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)
10.17 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)
10.18 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)
10.19 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)
131
10.20 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)
10.21 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)
10.22 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)
10.23 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)
10.24 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)
10.25 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)
10.26 Term Real Estate Promissory Note, dated December 21, 2004, issued by
AMCON Distributing Company to M&I (formerly Gold Bank) (incorporated by
reference to Exhibit 10.21 of AMCON's quarterly report on Form 10-Q filed
on February 14, 2005)
10.27 Term Equipment Promissory Note, dated December 21, 2004 issued by AMCON
Distributing Company to M&I (incorporated by reference to
Exhibit 10.22 of AMCON's quarterly report on Form 10-Q filed on
February 14, 2005)
10.28 One Hundred Eighty Day Redemption Mortgage and Security Agreement by
and between AMCON Distributing Company and M&I (incorporated by
reference to Exhibit 10.23 of AMCON's quarterly report on Form 10-Q
filed on February 14, 2005)
10.29 Security Agreement by and between AMCON Distributing Company and M&I
(incorporated by reference to Exhibit 10.24 of AMCON's quarterly
report on Form 10-Q filed on February 14, 2005)
10.30 Promissory Note, dated March 30, 2005 issued by Trinity Springs, Inc.
to Nebraska Distributing Company (incorporated by reference to Exhibit
10.28 of AMCON's quarterly report on Form 10-Q filed on August 22,
2005)
10.31 Subordinated Promissory Note, dated August 8, 2005 issued
by Trinity Springs, Inc. to Draupnir, LLC (incorporated by reference to
Exhibit 10.29 of AMCON's quarterly report on Form 10-Q filed on August
22, 2005)
132
10.32 Subordinated Promissory Note, dated August 8, 2005 issued
by Trinity Springs, Inc. to Aristide Investments, L.P.(incorporated by
reference to Exhibit 10.30 of AMCON's quarterly report on Form 10-Q
filed on August 22, 2005)
10.33 Subordination Agreement, dated as of August 8, 2005, among Trinity
Springs, Inc., Artiside Investment L.P., and Draupnir, LLC
(incorporated by reference to Exhibit 10.31 of AMCON's quarterly report
on Form 10-Q filed on August 22, 2005)
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 8 of Part II 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)
21.1 Subsidiaries of the Company
23.1 Consent of Independent Registered Public Accounting Firm
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 Andrew C. Plummer, Vice President and Acting Chief
Financial Officer, furnished pursuant to section 302 of the Sarbanes-
Oxley Act
32.1 Certification by William F. Wright, Chairman and Principal Executive
Officer, furnished pursuant to section 906 of the Sarbanes-Oxley Act
32.2 Certification by Andrew C. Plummer, Vice President and Acting 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 Section 13 or 15 (d) of the Securities Act of
1934, the Registrant, AMCON Distributing Company, a Delaware corporation, has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Omaha, State of Nebraska, on the 21st
day of August 2006.
AMCON DISTRIBUTING COMPANY
By: /s/ William F. Wright
-------------------------
William F. Wright, Chairman
133
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons in the capacities indicated on the
21st day of August 2006.
Signature Title
--------- -----
/s/ William F. Wright Chairman of the Board (Principal Executive
- ------------------------ Officer) and Director
William F. Wright
/s/ Christopher H. Atayan Vice Chairman, Chief Corporate Officer
- ------------------------ and Director
Christopher H. Atayan
/s/ Kathleen M. Evans President and Director
- ------------------------
Kathleen M. Evans
/s/ Andrew C. Plummer Vice President and Acting Chief Financial
- ------------------------ Officer (Principal Financial and
Andrew C. Plummer Accounting Officer)
/s/ Allen D. Petersen Director
- ------------------------
Allen D. Petersen
/s/ Jeremy W. Hobbs Director
- ------------------------
Jeremy W. Hobbs
/s/ John R. Loyack Director
- ------------------------
John R. Loyack
/s/ Raymond F. Bentele Director
- ------------------------
Raymond F. Bentele
/s/ Stanley Mayer Director
- ------------------------
Stanley Mayer
134
/s/ Timothy R. Pestotnik Director
- ------------------------
Timothy R. Pestotnik
/s/ William R. Hoppner Director
- ------------------------
William R. Hoppner
135
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of AMCON Distributing Company:
We have audited the consolidated financial statements of AMCON Distributing
Company and its subsidiaries (the "Company") as of September 30, 2005 and
September 24, 2004, and for each of the three fiscal years ended September 30,
2005, September 24, 2004 and September 26, 2003, and have issued our report
thereon dated August 21, 2006, which report expresses an unqualified opinion
and includes explanatory paragraphs relating to the uncertainty surrounding the
TSI litigation and the restatement of the Company's 2004 consolidated
statements of operations and cash flows; such consolidated financial statements
are included elsewhere in this Annual Report on Form 10-K. Our audits also
included the consolidated financial statement schedule of the Company, listed
in Item 15. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Note (A), the 2004 consolidated financial statement schedule
has been restated.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
August 21, 2006
S-1
AMCON Distributing Company
Consolidated Financial Statement Schedule
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------
Net
Amounts
Balance at Provision (Written Off) Balance at
Description Beginning of Period (Benefit) Recovered End of Period
- ------------------ ---------------------- --------- ------------- -----------------------
Allowance for
doubtful accounts Sep 27, 2002 641,474 166,417 27,725 Sep 26, 2003 835,616
Sep 26, 2003 835,616 (115,084) (126,256) Sep 24, 2004 594,276 (A)
Sep 24, 2004 594,276 448,731 (464,577) Sep 30, 2005 578,430
Allowance for
inventory
obsolescence Sep 27, 2002 262,215 71,035 (21,000) Sep 26, 2003 312,250
Sep 26, 2003 312,250 99,474 - Sep 24, 2004 411,724
Sep 24, 2004 411,724 247,516 (33,520) Sep 30, 2005 625,720
</Table>
Note:
(A) Subsequent to the issuance of the consolidated financial schedule,
management identified that the allowance for doubtful accounts at September 30,
2004 incorrectly included TBG's allowance for doubtful accounts. TBG is a
former component of the beverage segment which discontinued its operations in
March 2005. Management previously reported an incorrect provision (benefit)
and fiscal year 2004 ending balance of ($12,757) and $696,603, respectively.
Accordingly, the 2004 amounts have been restated from the amounts previously
reported.
S-2