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, 2006
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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 No X
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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 X No
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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. / /
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, 2006 was approximately $3.7 million.
As of December 25, 2006 there were 527,062 shares of common stock
outstanding.
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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...................................................... 4
Item 1A. Risk Factors.................................................. 10
Item 1B. Unresolved Staff Comments..................................... 21
Item 2. Properties.................................................... 21
Item 3. Legal Proceedings............................................. 22
Item 4. Submission of Matters to a Vote of Security Holders........... 23
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................... 24
Item 6. Selected Financial Data....................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 47
Item 8. Financial Statements and Supplementary Data................... 48
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 90
Item 9A. Controls and Procedures....................................... 90
Item 9B. Other Information............................................. 90
PART III
Item 10. Directors and Executive Officers of the Registrant............ 91
Item 11. Executive Compensation........................................ 93
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters ............... 93
Item 13. Certain Relationships and Related Transactions................ 93
Item 14. Principal Accountant Fees and Services........................ 93
PART IV
Item 15. Exhibits and Financial Statement Schedules.................... 93
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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").
As of September 30, 2006, AMCON operates in two business segments:
- Wholesale Distribution Segment - The Company 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 - The Company operates thirteen retail
health food stores in Florida and the Midwest.
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 segment which will be separately referred to as "ADC".
WHOLESALE DISTRIBUTION BUSINESS
ADC serves approximately 5,000 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 2006. In November 2006, Convenience Store
News, a trade periodical, ranked ADC as the eighth (8th) largest distributor
in its industry out of approximately 1,000 distributors in the United States
based upon fiscal 2005 sales volume. The Company has historically grown by
acquisitions into contiguous regions. This external growth has been
complemented by the introduction of new product lines.
ADC distributes approximately 14,000 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
2006, we continue to evaluate new product lines in an attempt to lessen ADC's
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.
The Company has sought to increase sales to convenience stores and petroleum
marketers. To achieve this, the Company has adopted a number of operating
strategies which management believes provide the Company with distinctive
competitive advantages within this customer segment. One key operating
strategy is our commitment to provide market leading customer service. In a
continuing effort to provide superior customer service, ADC offers a complete
point-of-sale (POS) program to assist customers with image management,
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product promotions, private label and custom food service programs and
overall profit maximization. Additionally, 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). The Company also offers 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 and subsequent reinstatement
of certain promotional programs. Based on these activities, it is difficult
to predict how future changes in cigarette pricing and promotional programs
will impact both the Company and industry. Fluctuations in manufacturer
pricing and promotional programs, in combination with rising fuel costs, have
pressured profit margins industry-wide.
Management has worked to improve ADC's operating efficiency by investing in
information technology systems to help automate our buying and financial
control functions. We have also sought to minimize inventory costs by
maximizing the number of times inventory is renewed ("inventory turns")
during a given period. By managing operating costs, management believes ADC
is better positioned to compete with both smaller and larger competitors who
offer less service than ADC. Inventory turns for the past five years are as
follows:
Fiscal Times
Year Inventory Turned
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2006 28.7
2005 27.0
2004 27.8
2003 27.5
2002 28.5
The increase in inventory turns in 2006, as compared to fiscal 2005, is
primarily related to an increased focus on overall inventory management in
addition to fewer inventory buy-in opportunities available from major product
manufactures throughout fiscal 2006. 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 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 487,000 square feet of floor space and
employ modern equipment for the efficient distribution of our large and
diverse product mix. ADC also operates a fleet of approximately 224 delivery
vehicles, including straight trucks and over-the-road vehicles with
refrigerated trailers.
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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 34,000 different product selections to 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 has experienced robust growth in recent years
driven primarily by the demand for natural products and more health conscious
consumers. Our retail health food segment has benefited from this trend,
experiencing sales growth in many product categories including grocery and
supplements. This growth in consumer demand has also prompted other large
national food chains to increase their organic and natural food products
offerings. Management continues to closely monitor the performance of all
store locations for opportunities to expand or identify new locations for
additional stores.
AMCON's retail health food stores are managed collectively from a central
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.
RECENT EVENTS
Extension of Credit Facility
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In December 2006, the Company extended its existing credit facility with
LaSalle Bank (the "Facility") which extends the maturity date of the Facility
through April 2009 and includes a $57.1 million maximum credit limit and
bears interest at the bank's prime rate. The amendment to extend the
Facility includes certain financial covenants such as quarterly cumulative
earnings before interest, taxes, depreciation and amortization and minimum
debt service ratio.
American Stock Exchange Accepted AMCON's Comprehensive Compliance Plan
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On November 21, 2006, the Company received a notice from the American Stock
Exchange ("AMEX") that they accepted the Company's comprehensive compliance
plan that was submitted by the Company on October 11, 2006 which outlined the
Company's plan to regain compliance with Section 1003(a)(i) of the AMEX
Company Guide ("Company Guide") relating to shareholders' equity and losses
from continuing operations. Under the plan, the Company expects to regain
compliance with Section 1003(a)(i)of the Company Guide by March 11, 2008.
See Item 1A "Risks Relating To Our Common Stock" of this Annual Report on
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Form 10-K for further discussion regarding the Company's compliance with AMEX
listing standards.
Dispositions
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On November 20, 2006, the Company sold substantially all of the operating
assets of Hawaiian Natural Water Company, Inc. ("HNWC"), a wholly owned
subsidiary, for approximately $3.8 million in cash and assumption of certain
leases. HNWC's significant operating assets consisted of accounts
receivable, inventory, furniture and fixtures, intellectual property and all
of its bottling equipment. As part of the sale agreement the buyers also
assumed all capital and operating leases from HNWC.
HNWC, which was headquartered in Pearl City, Hawaii, was a component of the
Company's beverage segment. HNWC bottled, marketed and distributed Hawaiian
natural artesian water, purified water and other limited production
co-packaged products, in Hawaii, the mainland and foreign markets.
HNWC was a fully operational subsidiary of the Company through
November 19, 2006.
Chief Executive Officer
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On October 4, 2006, the Board of Directors of the Company appointed
Christopher H. Atayan as its Chief Executive Officer. William F. Wright
resigned as Chief Executive Officer effective October 4, 2006. Mr. Wright,
the long-time Chief Executive Officer and founder of the Company, will
continue as Chairman of the Board of the Company until December 31, 2007 and
as Vice Chairman through December 31, 2009.
Mr. Atayan is 46 years old, has served as a director of the Company since
2004, and became the Vice Chairman and Chief Corporate Officer in March 2006.
Mr. Atayan is also a consultant to Draupnir, LLC, the parent of Draupnir
Capital, LLC. Mr. Atayan has served as Senior Managing Director of Slusser
Associates, a New York investment banking firm since 1988, he is also
Chairman of Hotlink Incorporated.
DISCONTINUED OPERATIONS
At September 30, 2006, the Company had two subsidiaries, Trinity Springs,
Inc. ("TSI") and HNWC, which were components of the Company's beverage
segment, classified as components of discontinued operations in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets."
Hawaiian Natural Water Company, Inc. (HNWC)
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Effective September 30, 2006, HNWC was classified as a component of
discontinued operations. HNWC bottled, marketed and distributed Hawaiian
natural artesian water, purified water and other limited production co-
packaged products in Hawaii and the mainland.
On November 20, 2006, HNWC signed and completed an agreement to sell
substantially all of its operating assets to a newly formed group of
investors, Hawaiian Springs, LLC for approximately $3.8 million in cash and
the assumption of all operating and capital leases. The significant
operating assets consisted of accounts receivable, inventory, furniture and
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fixtures, intellectual property and all of its bottling equipment. HNWC
remained a fully operational subsidiary of the Company through November 19,
2006.
Trinity Springs, Inc. (TSI)
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In March 2006, TSI discontinued operations due to recurring losses and a lack
of capital resources to sustain operations. TSI, which was purchased in June
2004, produced and sold a bottled natural mineral supplement and geothermal
bottled water under the Trinity/R/ label. TSI was headquartered in Boise,
Idaho and marketed and distributed the Trinity products on a national level
primarily in retail health food stores.
The Beverage Group, Inc. (TBG)
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In March 2005, the Company's subsidiary, TBG, which represented the beverage
marketing and distribution component of the beverage segment, also ceased
on-going operations due to recurring losses since its inception in December
2002, and as such, was classified as a component of discontinued operations.
In the first two quarters of fiscal 2006 TBG was classified as a component of
discontinued operations. In April 2006 the Company successfully concluded
its wind-down plan of TBG's operations and accordingly reclassified its
residual liabilities to continuing operations. This reclassification has
been reflected as such throughout this Annual Report on Form 10-K.
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 the sales, gross profit (loss), selling, general and
administrative, depreciation and amortization, other expenses, and income tax
benefit for HNWC, TSI and TBG (through March 31, 2006) have been aggregated
and reported as a loss from discontinued operations in accordance with SFAS
No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets."
PRINCIPAL PRODUCTS
Cigarette sales represented approximately 72% - 73% of the Company's total
sales for the fiscal years ending 2004 through 2006.
INFORMATION ON SEGMENTS
Information about our segments is presented in Note 17 to the Consolidated
Financial Statements.
COMPETITION
The distribution industry is highly competitive. There are many
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
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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, including markets
in which they may compete directly with our stores. In addition,
conventional supermarkets and mass market outlets are also increasing their
emphasis on the sale of natural products.
SEASONALITY
Sales in the wholesale distribution industry 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 a labor-intensive undertaking. For example, each state
(as well as certain cities and counties) require the Company to collect
excise taxes on each carton of cigarettes sold in its jurisdiction.
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 and U.S. Department of Transportation. These agencies
generally impose standards for product quality and sanitation, as well as,
security and distribution policies.
At September 30, 2006, the Company's only active water bottling facilities
were those operated by HNWC, which was classified as a component of
discontinued operations. Prior to its sale in November 2006, HNWC was
subject to various state and federal regulations, designed to ensure (but not
guarantee) the quality of the product and the truthfulness of its marketing
claims and required our beverage businesses to monitor each aspect of its
bottled water production process, including its water source, bottling
operations and packaging and labeling practices. The Environmental
Protection Agency also required 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 required weekly
microbiological testing of the source water.
To comply with regulatory guidelines and ensure quality control, HNWC
employed an on-site laboratory where samples of finished product were both
visually and chemically tested each day. HNWC also utilized independent
state certified laboratories to test samples from each of its production
runs. Additionally, the production lines were subject to constant inspection
to ensure quality standards were being met. Based on these controls, the
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Company believes it met or exceeded all applicable regulatory standards
concerning the quality of its bottled water.
In addition to U.S. regulations, HNWC had to meet the requirements of foreign
regulatory agencies in order to export and sell its product into other
countries. These requirements were generally similar to, and in certain
respects were more stringent than, U.S. regulations. HNWC believes that it
was in compliance with applicable regulations in all foreign territories
where it marketed its product. Failure to meet the applicable regulations in
the U.S. or foreign markets can lead to costly recalls or loss of
certification to market products.
ENVIRONMENTAL MATTERS
All the facilities and operations of the Company are subject to state and
federal environmental regulations. The Company believes all of its real
property is in compliance with 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. Further, 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 September 30, 2006, the Company, including HNWC, had 901 full-time and
part-time employees in the following areas:
Managerial 33
Administrative 79
Delivery 119
Sales & Marketing 318
Warehouse 352
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Total Employees 901
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All of ADC's delivery employees in the Quincy, Illinois distribution center,
representing approximately 3% of 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.
ITEM 1A. RISK FACTORS
IN GENERAL
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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 materializes, 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
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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
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- 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. 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, business, cash flow and financial condition could be negatively
affected.
- Increases in Fuel Prices Are Reducing Profit Margins and Affecting Our
Business.
Increases in fuel prices have had a negative impact on profits over the past
year. If fuel prices remain high, and we are not able to pass on these costs
to customers, it will have a material adverse impact on our results of
operations, business, cash flow and financial condition.
- Increases in Wholesale Distribution Business Competition May Have an
Adverse Effect on Our Business.
The distribution industry is highly competitive. There are many
distribution companies operating in the same geographical regions as ADC.
ADC's principal competitors are national wholesalers and regional
wholesalers, 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, 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. Gross profit on cigarette sales are generally
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fixed on a cents per carton basis. 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 results from operations, business, cash flow
and financial condition could be negatively impacted.
- 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, 2006, approximately 72% of our
revenues came from the distribution of cigarettes. During the same period,
approximately 27% 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,
and is expected to continue to decline. If this trend continues our results
from operations, business, cash flow and financial condition will be
negatively impacted.
- 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.
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. 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 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. 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. As a result, our
results of operations, business, cash flow 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
avoid collection of applicable taxes. The competitive environment has been
characterized by a continued influx of cheap products that challenge sales of
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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 results of operations,
business, cash flow 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. However, if litigation challenging the
validity of the master settlement agreement 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 could be so large as to eliminate the ability of the
manufacturers to satisfy their indemnification obligations. Our results of
operations, business, cash flow 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.
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.
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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. 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. 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 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. Our success is also dependent 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.
- 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.
14
- Compliance with the USDA's Organic Rules may Prove Burdensome for Our
Suppliers Resulting in a Disruption in Our Business.
Compliance with the USDA's Organic Rule, implemented into federal law on
October 21, 2002, might pose a significant burden on some of our suppliers,
which may cause a disruption in some of our product offerings.
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.
- 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 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.
- 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 are particularly 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
15
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 involved in litigation regarding the ownership of the
assets of TSI, which is a consolidated subsidiary of AMCON and classified as
a component of discontinued operations. The dispute, which began in June
2004, arose over the sale of substantially all of the assets of Trinity
Springs, Ltd. (which later changed its name to Crystal Paradise Holdings,
Inc. ("CPH"). The Plaintiffs in the lawsuit are a group of minority
shareholders, and the Defendants are AMCON, TSL Acquisition Corp (which later
became TSI), CPH, and the former directors of CPH.
On October 16, 2006, the Court approved a settlement in the case which
resolved all disputes between the shareholders plaintiffs, CPH, AMCON, TSI
and the Defendant Directors, with two exceptions that relate to AMCON. The
settlement did not resolve claims that CPH may have against AMCON and TSI or
that AMCON and TSI may have against CPH. The settlement also did not resolve
the claims of a single shareholder plaintiff, who declined to agree to the
settlement. The claims of the single minority shareholder remain pending.
With respect to the remaining claims, AMCON's management, after consulting
with trial counsel, is unable to state that any outcome to AMCON is either
probable or remote and therefore cannot estimate the amount or range of any
potential loss. If these claims are decided against AMCON, it could have a
material adverse impact on AMCON's results of operations, business, cash flow
and financial condition.
- 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
16
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, business, cash
flow 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,
Chairman of the Board, Christopher H. Atayan, AMCON's Chief Executive Officer
and Vice Chairman, Kathleen M. Evans, the Company's President, and Eric J.
Hinkefent, the President of Health Food Associates, Inc. and Chamberlin's
Natural Foods, Inc. While we maintain key person life insurance policies and
have employment agreements with certain of these individuals, 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 Number of Our
Employees Are Covered by Collective Bargaining Agreements.
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, 2006 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.
17
- We Are Subject to substantial 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 ("FDA"). Our operations are also subject
to regulation by the Occupational Safety and Health Administration ("OSHA"),
the Department of Transportation 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.
We cannot predict the impact that future laws, regulations, interpretations
or applications, the effect of 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.
- 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.
- 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.
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.
18
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.
- 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. These rules and regulations increase our legal, audit and
financial compliance costs and make some activities more time-consuming and
costly. For example, as a result of being a public company, we are required
to maintain additional board committees and formalize our internal control
over financial reporting and disclosure controls and procedures. In addition,
we incur additional costs associated with our public company reporting
requirements. These rules and regulations also 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.
19
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
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.
- Weaknesses in Our Internal Controls over Financial Reporting
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. During fiscal 2006, the Company identified certain
material weaknesses that existed in our internal controls over fiscal 2005
financial reporting. During fiscal 2006, we took steps to remedy these
weaknesses, however, if we failed to implement these remedies properly, such
failure could result in a material misstatement in our financial reporting.
- 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. 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.
20
- Failure to Regain Compliance with American Stock Exchange Listing
Standards Could Have a Negative Effect on the Trading Price of Our Stock
and Would likely Adversely Impact Our Investors' Ability to Trade in Our
Common Stock
In September 2006, the Company was notified by the American Stock Exchange
(AMEX) that it was not in compliance with Section 1003(a)(i) of the AMEX
Company Guide regarding shareholders' equity of less than $2,000,000, and
losses from continuing operations and/or net losses in two of its three most
recent fiscal years. In order to maintain its AMEX listing, the Company
submitted a plan outlining steps to regain compliance with the AMEX continued
listing standards by March 11, 2008. On November 21, 2006, the Company
received notice from the American Stock accepting the Company's plan to
regain compliance with Section 1003(a)(i) of the AMEX Company Guide. If the
Company's fails to achieve AMEX compliance by March 11, 2008, the Company
could face delisting proceeding which would likely impact investors' ability
to trade in our common stock and adversely affect its trading price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
The state location and approximate square footage of the five distribution
centers, thirteen retail stores and beverage facilities (including a
warehouse in Idaho, water bottling and packaging plants, and sales and
marketing offices) operated by AMCON as of fiscal year end 2006 are set forth
below:
Location Square Feet
-------- -----------
Distribution - IL, MO, ND, NE & SD 487,000
Retail - FL, KS, MO, NE & OK 132,600
Beverage - HI & ID /1/ 68,000
-------
Total Square Footage 687,600
=======
/1/ As of March 2006, our water bottling and distribution business
headquarter in Idaho, TSI, was closed. As discussed in Item 1 - "Business",
our HNWC subsidiary in Hawaii was sold on November 20, 2006.
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. The
Company's subsidiary, TSI, also 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. Additionally, TSI owns a
warehouse in Hammett, Idaho which is subject to a mortgage. See further
discussion of the Company real estate obligations in Item 7 - Liquidity and
Capital Resources of this Annual Report on Form 10-K.
21
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 and a 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 $19.4 million as of fiscal year end 2006. As discussed in Item
1 - Business, HNWC sold substantially all of its assets in November 2006. In
conjunction with that sale, the buyer agreed to assume certain capital and
operating leases from HNWC.
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation regarding the ownership of the assets
of TSI, which is a consolidated subsidiary of AMCON. The dispute, which
began in June 2004, arose over the sale of substantially all of the assets of
Trinity Springs, Ltd. (which later changed its name to Crystal Paradise
Holdings, Inc. ("CPH"). The Plaintiffs in the lawsuit are a group of
minority shareholders, and the Defendants are AMCON, TSL Acquisition Corp
(which later became TSI), CPH, and the former directors of CPH.
In December 2005, the District Court of the Fifth Judicial District of the
State of Idaho ("the Court") issued a ruling granting the minority
shareholder plaintiffs' motion for partial summary judgment declaring that
the stockholders of CPH did not validly approve the sale of its business and
assets to TSI (AMCON's consolidated subsidiary) because the vote of certain
shares issued as a dividend should not have been counted in the vote. The
Court did not rule on the appropriate relief to be granted as a result of the
lack of shareholder approval for the asset sale transaction, nor did it rule
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 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 Court has not taken any action to divest TSI of its ownership of
the assets.
Since the Court's December 2005 ruling, several events have taken place. The
minority shareholder plaintiffs have filed notice with the District Court
that they agree that rescission is not feasible. During approximately the
same time frame, the entire CPH Board of Directors resigned. Upon their
resignation, the Court appointed a custodian to manage and direct the affairs
of CPH. Additionally, the custodian was designated by the Court as CPH's
investigative panel to determine whether the maintenance of a derivative
proceeding is in the best interest of CPH.
During the last several months, the parties have been engaged in settlement
discussions. Recently, a settlement agreement was reached between the
parties. The settlement resolved all disputes between the shareholders
22
plaintiffs, CPH, AMCON, TSI and the Defendant Directors, with two exceptions
that relate to AMCON. The settlement did not resolve claims that CPH may
have against AMCON and TSI or that AMCON and TSI may have against CPH. The
settlement also did not resolve the claims of a single shareholder plaintiff,
who declined to agree to the settlement. On October 16, 2006, the Court
approved the parties' settlement and ordered the dismissal with prejudice of
the lawsuit, except for the claims of the single shareholder plaintiff whose
claims remain pending in the lawsuit and the claims that may exist as between
AMCON/TSI and CPH.
On December 21, 2006, CPH filed a first amended complaint in the Fourth
Judicial District of the State of Idaho (Elmore County) against AMCON and TSI
and other defendants relating to AMCON and TSI's purchase of the assets of
CPH and operation of the business. In its amended complaint, CPH re-asserts
claims of foreclosure; breach of the asset purchase agreement, promissory
notes and water royalty obligations; quantum meruit; unjust enrichment; and
collection and enforcement of its security interest. In addition, CPH again
seeks a declaratory judgement that: (i) AMCON and TSI are obligated to
perform under the asset purchase agreement and other agreements related to
the asset purchase transaction; (ii) the actions AMCON and TSI constitute
events of default; (iii) TSI has not cured the events of default; (iv) TSI's
obligations are accelerated under certain promissory notes; and (v) AMCON is
liable to CPH under a guaranty and suretyship agreement for all amounts owing
to CPH under the asset purchase agreement and related agreements. Finally,
CPH seeks its costs and attorney fees. CPH has not served its amended
complaint on AMCON or TSI.
AMCON disagrees with the assertions made by CPH and intends to vigorously
defend against CPH's claims and to pursue its own claims against CPH.
With respect to the remaining claims in the original lawsuit and the claims
asserted by CPH in its recently filed complaint, 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, if any because
substantial discovery is needed, several unresolved legal issues exist, and
other pretrial work is yet to be completed.
The Company is in settlement discussions with respect to this litigation,
pursuant to which the Company is undertaking to divest substantially all of
the assets of TSI as part of a complete settlement of any and all claims by
CPH against the Company.
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 2006.
23
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 2006 and 2005. As of December 11, 2006,
the closing stock price was $18.00 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 2006 Fiscal Year 2005
---------------- ----------------
High Low High Low
------- ------- ------- -------
4th Quarter $ 13.80 $ 9.15 $ 22.68 $ 20.39
3rd Quarter 12.10 9.15 24.65 17.30
2nd Quarter 16.55 10.80 18.80 16.50
1st Quarter 21.40 16.55 20.70 18.55
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. 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.
During fiscal 2004, 2005 and 2006, the Company issued Series A, B and C
Convertible Preferred Stock, respectively, that were not registered under the
Securities Act. Information regarding the issuance of these securities is
set forth in Note 3 to the Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below have been derived from AMCON
Distributing Company and Subsidiaries' (the "Company's") audited financial
statements. The information set forth below should be read in conjunction
with 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 previously discussed, our
subsidiaries HNWC and TSI, are classified as a component of discontinued
operations at September 30, 2006. As a result, the selected financial data
for all periods presented below has been prepared reflecting discontinued
operations in accordance with Statement of Financial Accounting Standard
24
("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets." Accordingly, all revenues and expenses associated with
discontinued operations have been excluded from income from continuing
operations in the selected financial data.
(Dollars in thousands, except per share data)
--------------------------------------------------------------------------------------------
Fiscal Year 2006 2005 /6/ 2004 2003 2002
--------------------------------------------------------------------------------------------
Sales/1/.......................... $ 839,540 $834,551 $817,286 $768,627 $844,879
Cost of sales..................... 779,406 774,060 757,938 708,780 783,303
---------------------------------------------------------
Gross profit...................... 60,134 60,491 59,348 59,847 61,576
Operating expenses................ 53,658 53,188 50,975 50,854 53,225
Impairment charges/2/............. - 4,235 - - -
---------------------------------------------------------
Operating income.................. 6,476 3,068 8,373 8,993 8,351
Interest expense.................. 4,858 4,211 3,243 2,900 4,159
Other (income) expense, net....... (137) (80) (569) (936) (329)
---------------------------------------------------------
Income (loss) from continuing
operations before income taxes... 1,755 (1,063) 5,699 7,029 4,521
Income tax expense (benefit)...... 432 (196) 2,286 2,519 1,726
Equity in loss of unconsolidated
affiliate........................ - - - - 95
Minority interest................. - (97) (91) - -
---------------------------------------------------------
Income (loss) from continuing
operations....................... 1,323 (770) 3,504 4,510 2,700
Loss from discontinued operations,
net of income tax benefit of
$(1,132) $(5,543), $(4,409),
$(1,890) and $(439) respectively. (2,434) (11,972) (7,643) (3,483) (728)
---------------------------------------------------------
Net (loss) income................. (1,111) (12,742) (4,139) 1,027 1,972
Preferred stock dividend
requirements..................... (366) (295) (49) - -
---------------------------------------------------------
Net loss available to
common shareholders.............. $ (1,477) $(13,037) $ (4,188) $ 1,027 $ 1,972
=========================================================
Basic earnings (loss) per share
available to common shareholders:
Continuing operations........... $ 1.81 $ (2.02) $ 6.54 $ 8.55 $ 5.34
Discontinued operations......... (4.61) (22.71) (14.48) (6.60) (1.44)
---------------------------------------------------------
Net basic (loss) earnings per
share available to common
shareholders................... $ (2.80) $ (24.73) $ (7.94) $ 1.95 $ 3.90
=========================================================
25
--------------------------------------------------------------------------------------------
Fiscal Year 2006 2005 /6/ 2004 2003 2002
--------------------------------------------------------------------------------------------
Diluted earnings (loss) per share
available to common shareholders:
Continuing operations........... $ 1.63 $ (2.02) $ 6.23 $ 8.40 $ 5.21
Discontinued operations......... (3.87) (22.71) (13.59) (6.49) (1.40)
---------------------------------------------------------
Net diluted (loss) earnings
per share available to common
shareholders................... $ (2.24) $ (24.73) $ (7.36) $ 1.91 $ 3.81
=========================================================
Weighted average shares outstanding:
Basic........................... 527,062 527,062 527,774 527,699 505,414
Diluted......................... 627,810 527,062 562,559 537,042 518,197
Working capital (deficit) /3/..... $ 28,004 $ 30,573 $(11,871) $ (8,030) $ (1,989)
Total assets ..................... 94,867 95,309 111,730 99,499 104,586
Long-term obligations and
subordinated debt /4/........... 16,841 16,504 27,104 22,453 21,601
Shareholders' (deficit) equity /5/ (1,747) (228) 12,767 17,301 16,699
Cash dividends declared
per common share................ - - 0.72 0.72 0.72
/1/ 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.
/2/ In fiscal year 2005 certain identifiable intangible assets in the
retail segment were impaired.
/3/ Current assets minus current liabilities.
/4/ Includes deferred taxes, noncurrent liabilities of discontinued
operations, current and long-term portions of subordinated debt and
long-term debt and TSI's water royalty in perpetuity. Excludes the
Company's revolving credit facility.
/5/ Net of dividends declared of $0.4 million in each of the fiscal years
of 2002-2004. The Company declared no dividends in fiscal 2005 or
fiscal 2006.
/6/ During the first quarter of fiscal 2005, the Company changed its
reporting period from a 52-53 week year ending on the last Friday
in September to a calendar month reporting period ending on
September 30. As a result of this change, fiscal 2005 was comprised
of 53 weeks of operations as compared to fiscal 2006 and fiscal 2004
which were comprised of to 52 weeks.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
--------
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes to the Consolidated Financial Statements,
26
Item 8, and other information in this report, including Critical Accounting
Policies and Cautionary Information included at the end of this Item 7.
The following discussion and analysis includes the results of operations for
our continuing operations at September 30, 2006, which is comprised of our
wholesale distribution and retail health food segments. A separate
discussion of our discontinued operations, which includes TSI & HNWC at
September 30, 2006, has been presented following our fiscal 2006
versus fiscal 2005 operating results analysis. Accordingly, the sales, gross
profit (loss), selling, general and administrative, depreciation and
amortization, direct interest, other expenses and income tax benefit for TSI
and HNWC have been aggregated and reported as a loss from discontinued
operations and are not a component of the aforementioned continuing
operations items.
Actual year ends for fiscal 2006, 2005 and fiscal 2004 were September 30,
2006, September 30, 2005, and September 24, 2004, respectively. Years cited
herein refer to AMCON's fiscal years. During the first quarter of fiscal
2005, the Company changed its reporting period from a 52-53 week ending on
the last Friday in September to a calendar month period ending on September
30. As a result of this change, fiscal 2005 consisted of 53 weeks of
operations compared to 52 weeks of operations in fiscal 2006.
For more information regarding our businesses, see Item 1 - Business on this
Annual Report on Form 10-K.
Strategic initiatives
---------------------
During 2006, the Company implemented an internal holding company structure
which resulted in several strategic initiatives, including the evaluation of
the Company's investment in its beverage businesses because of the
significant operating losses which had been incurred over the prior several
years. This evaluation yielded a number of new strategic initiatives which
the Company began executing during fiscal 2006 in an effort to improve
profitability and build long-term shareholder value. The primary elements of
these strategic initiatives include:
- focus on the Company's past success. This entails focusing on the
core wholesale and retail health food business segments;
- close or sell unprofitable business units;
- improve the Company's liquidity position through debt reduction; and
- aggressive management of the Company's cost structure
To achieve these strategic goals, the Company took steps to exit the beverage
businesses (Hawaiian Natural Water Company ("HNWC") and Trinity Springs, Inc.
("TSI")) which had incurred losses before income taxes of $3.6 million, $17.4
million, and $12.4 million in fiscal 2006, 2005 and 2004, respectively. In
March 2006, the Company closed the water bottling operations of TSI and
is pursuing the sale of its remaining assets. Additionally, in November
2006, the Company sold substantially all the operating assets of HNWC.
While management can give no assurances, the Company believes the successful
completion of these actions, in addition to it ongoing strategic initiatives,
will position the Company to improve profitability, enhance its liquidity
position and strengthen its ability to compete and grow its two core
businesses on a long-term basis.
27
Significant Events For Fiscal 2006
----------------------------------
During fiscal 2006, the Company:
Financing
- in December 2006, the Company amended the Facility further extending the
maturity date to April 2009 with a $57.1 million maximum credit limit
and bearing interest at the bank's prime rate. See further discussion
in Item 7 - Liquidity and Capital Resources.
- completed a $2.0 million private placement of Series C
Convertible Preferred Stock representing 80,000 shares at $25 per
share. The proceeds of the issuance were used to reduce the
Company's outstanding balance on its revolving credit facility
with LaSalle Bank.
Operational
- discontinued and closed the operations of its TSI subsidiary in March
2006 and is actively working to resolve the litigation matter and
ultimately sell the assets of TSI. See further discussion in Item 1 -
Business.
- engaged in active negotiations to sell the assets of HNWC which
culminated in the successful sale of the assets after
September 30, 2006.
- experienced a $5.0 million increase in sales and a $2.8 million
increase in income from continuing operations before income taxes
as compared to fiscal 2005.
- recognized income from continuing operations per diluted share of $1.63
in fiscal 2006 compared to a loss from continuing operations per diluted
share of $(2.02)in fiscal 2005.
- recognized loss from discontinued operations per diluted share of
($3.87) in fiscal 2006 as compared to a loss from discontinued
operations per diluted share of ($22.71) in fiscal 2005.
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 2006, 2005
and 2004:
Fiscal Years
-----------------------
2006 2005 2004
-----------------------
Sales............................ 100.0% 100.0% 100.0%
Cost of sales.................... 92.8 92.7 92.7
-----------------------
Gross profit..................... 7.2 7.3 7.3
Selling, general and
administrative expenses......... 6.2 6.1 6.0
28
-----------------------
2006 2005 2004
-----------------------
Depreciation and amortization.... 0.2 0.3 0.3
Impairment charges............... 0.0 0.5 0.0
Operating income ............... 0.8 0.4 1.0
Interest expense................. 0.6 0.5 0.4
Other income, net................ - - 0.1
-----------------------
Income (loss) from continuing
operations before income taxes.. 0.2 (0.1) 0.7
Income tax (expense) benefit..... (0.1) 0.0 (0.3)
-----------------------
Income (loss) from continuing
operations .................... 0.1 (0.1) 0.4
Loss from discontinued
operations, net of tax.......... (0.3) (1.4) (0.9)
-----------------------
Net loss ........................ (0.2) (1.5) (0.5)
Preferred stock dividend
requirements.................... - - -
-----------------------
Net loss available to
common shareholders............. (0.2)% (1.5)% (0.5)%
=======================
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
SALES:
Changes in sales are driven by two primary factors:
(i) changes to selling prices largely controlled by the
manufacturers of the products that we sell, and excise taxes
imposed on cigarettes and tobacco products by various states; and
(ii) changes in the volume of products sold to our customers, either
due to a change in purchasing patterns resulting from consumer
preferences or the fluctuation in the comparable number of
business days in our reporting period.
Sales by business segment for the years ended September 2006 and September
2005 are as follows (dollars in millions):
Sales
-----------------------------------------
Extra Reported Incr
2006 2005/1/ week/2/ 2005 (Decr)
------ ------- ------- --------- ------
Wholesale distribution segment $802.7 $ 786.4 $ 13.6 $ 800.0 $ 2.7
Retail health food stores segment 36.8 34.2 0.4 34.6 2.2
------ ------- ------- --------- ------
$839.5 $ 820.6 $ 14.0 $ 834.6 $ 4.9
====== ======= ======= ========= ======
/1/ Excludes extra week discussed in /2/ below
/2/ During the first quarter of fiscal 2005, the Company changed its reporting period
from a 52-53 week year ending on the last Friday in September to a calendar month
reporting period ending on September 30. As a result of this change, fiscal 2005 was
comprised of 53 weeks of operations as compared to fiscal 2006 and fiscal 2004 which
were comprised of to 52 weeks.
29
FISCAL YEAR 2006 VERSUS FISCAL YEAR 2005 - Continuing Operations
----------------------------------------------------------------
Overall sales for fiscal year 2006 increased by approximately 0.6% to $839.5
million, compared to $834.6 million in fiscal year 2005. Sales are reported
net of costs associated with sales incentives provided to customers, totaling
$15.5 million and $14.7 million for fiscal 2006 and 2005, respectively.
Sales from the wholesale distribution segment increased $2.7 million during
fiscal 2006 as compared to fiscal 2005. Cigarette sales decreased $1.5
million during fiscal 2006 while sales of tobacco, confectionary and other
products increased $4.2 million during the period. Of the decrease 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 2006 and $5.6 million was a result of a 1.3% decrease in
the volume of carton shipments (excluding the extra week). These decreases
in cigarette sales were offset by a $8.5 million increase in sales due to
higher excise taxes imposed by certain states. Additionally, cigarette sales
benefitted approximately $6.0 million during fiscal 2006 due to price
increases implemented by major cigarette manufacturers.
Sales from the retail health food segment increased $2.2 million, or 6.4%,
during fiscal 2006 when compared to fiscal 2005. Of this sales increase,
$2.6 million was attributable to sales growth in same store sales, with
particular strength in our grocery and supplements product categories. This
sales volume increase was partially offset by a $0.4 million sales reduction
due to the extra week of sales which was included in the fiscal 2005
resulting from the Company's change in monthly reporting periods. The retail
health food segment experienced strong growth during fiscal 2006 largely
because of the general upturn in the natural products industry combined with
the Company's continued marketing efforts.
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.
30
Gross profit by business segment for the fiscal years ended September 2006
and September 2005 are as follows (dollars in millions):
Gross Profit
------------------------------------------
Extra Reported Incr
2006 2005/1/ week/2/ 2005 (Decr)
------ ------- ------- --------- ------
Wholesale distribution segment $ 45.5 $ 46.3 $ 0.6 $ 46.9 $ (1.4)
Retail health food stores segment 14.6 13.4 0.2 13.6 1.0
------ ------- ------- --------- ------
$ 60.1 $ 59.7 $ 0.8 $ 60.5 $ (0.4)
====== ======= ======= ========= ======
/1/ Excludes extra week discussed in /2/ below
/2/ During the first quarter of fiscal 2005, the Company changed its reporting period
from a 52-53 week year ending on the last Friday in September to a calendar month
reporting period ending on September 30. As a result of this change, fiscal 2005
comprised of 53 weeks of operations as compared to 52 weeks of operations in the
fiscal 2006.
Overall gross profit decreased slightly by approximately 0.6% to $60.1
million in fiscal 2006 compared to $60.5 million in fiscal 2005. Gross
profit as a percentage of sales also decreased slightly from 7.3% in fiscal
2005 to 7.2% in fiscal 2006.
Gross profit from our wholesale distribution segment decreased approximately
$1.4 million from fiscal 2005 to fiscal 2006. Items increasing gross profit
during fiscal 2006 was a $0.5 million smaller LIFO charge in fiscal 2006 as
compared to fiscal 2005, and $1.4 million resulting from higher sales volumes
in our other products categories. These increases were offset by a $0.6
million decrease in gross profit attributable to an extra week of operations
in fiscal 2005 compared to fiscal 2006 resulting from a change in our
reporting period, a $0.5 million reduction in incentive payments received
from cigarette and non-cigarette vendors based on the Company's buying
volumes, and $2.2 million related to a decrease in cigarette carton shipments
volumes.
Gross profit for the retail health food segment increased approximately $1.0
million in fiscal 2006 compared with fiscal 2005. Of this increase,
$0.1 million related to improved management of inventory and throw-out costs,
$0.1 million related to a smaller LIFO charge in fiscal 2006 compared to
fiscal 2005, $0.2 million was due to the extra week of operations in fiscal
2005 and $0.6 million was related to the overall sales mix and volume growth.
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, warehousing costs and cost of picking and
31
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 expenses decreased approximately $3.8 million in fiscal 2006,
or 6.6%, from fiscal 2005. As a percentage of sales, total operating
expenses decreased from 6.9% in fiscal 2005 to 6.4% in fiscal 2006. The
decrease in operating expense from prior year was primarily attributable to a
$4.2 reduction in intangible impairment charges from fiscal 2005 to fiscal
2006. The Company incurred no such impairment charges in 2006. Also
decreasing operating expenses in fiscal 2006 compared to fiscal 2005 was a
$0.6 million reduction in lower workers compensation claims expense. These
decreases were partially offset by $0.7 million in higher fuel costs and $0.3
million related to higher professional services expense.
INTEREST EXPENSE
Interest expense for fiscal year 2006 increased 15.3% to $4.9 million
compared to $4.2 million in fiscal 2005. This increase was primarily related
to increases in the prime interest rate which is the rate at which the
Company primarily borrows, an increase in the Company's average variable rate
borrowings and the impact of the expiration of an interest rate swap in
fiscal 2006 that had the effect of converting $10.0 million of borrowings
under the Facility to 4.87%. On average, the Company's borrowing rates on
variable rate debt were 1.71% higher and the average borrowings on variable
rate debt were $3.5 million higher in fiscal 2006 as compared to fiscal 2005.
OTHER
During fiscal 2005 the Company allocated $0.1 million in losses, net of tax,
to "Minority interest", which was related to a 15% minority ownership
interest in the Company's TSI subsidiary. After this allocation, the 15%
minority ownership interest in TSI had been reduced to zero resulting from
cumulative TSI loss allocations. The minority shareholders have no future
funding obligations to TSI. Accordingly, no further allocations of losses to
minority shareholders were made by the Company in fiscal 2006, or will be in
the future.
The Company's effective income tax rate was 24.6% in fiscal 2006 compared to
18.4% in fiscal 2005. The increase in the effective tax rate was primarily
attributable to valuation allowances placed on state net operating losses in
fiscal 2005 which reduced the income tax benefit and related effective tax
rate.
During fiscal 2006, the Company paid preferred dividends of $0.4 million on
its Series A, B and C Cumulative, Convertible Preferred Stock, compared to
$0.3 million in fiscal 2005. The increase in preferred dividend payments
over fiscal 2005 is primarily attributable to the issuance of the Series C
Cumulative Preferred Stock in March 2006.
DISCONTINUED OPERATIONS (Fiscal 2004 - 2006)
At September 30, 2006, and for all fiscal periods presented throughout this
Annual Report on Form 10-K, discontinued operations consist of our HNWC and
32
TSI subsidiaries. In March 2005 the operations of TBG were discontinued and
in April 2006 the Company successfully completed the wind-down of TBG's
operations, at which time TBG's residual liability balances were reclassified
to continuing operations. Accordingly, TBG's results from operations are
included below for the fiscal years 2004, 2005 and through March of 2006.
Losses from discontinued operations decreased approximately $9.6 million from
fiscal 2005 to fiscal 2006. This change was primarily the result of
impairment charges incurred during fiscal 2005 which totaled $8.9 million.
There were no impairment charges incurred in discontinued operations in
fiscal 2006. Additionally, TSI's closure in March 2006 stemmed further
operating losses.
Losses from discontinued operations increased approximately $4.3 million from
fiscal 2004 to fiscal 2005. This change was primarily the result of an
additional $5.3 million in impairment charges incurred in fiscal 2005 as
compared to fiscal 2004.
HNWC remained fully operational throughout fiscal 2006 and reported a net
loss from operations before income taxes of approximately $0.9 million
compared to a net loss from operations before taxes of approximately $5.5
million in fiscal 2005. As discussed further in Item 1 Part 1 - Recent
Events, and Note 18 of this Annual Report on Form 10-K, HNWC sold
substantially all of its operating assets on November 20, 2006.
A summary of discontinued operations is as follows:
Year ended
September
-----------------------------------------
2006 2005 2004
----------- ------------ -----------
Sales $ 8,635,869 $ 13,185,114 $ 6,519,777
Impairment charges - (8,852,406) (3,578,256)
Operating loss (3,187,117) (17,118,287) (12,126,297)
Income tax benefit (1,132,000) (5,453,000) (4,709,000)
Loss from discontinued operations (2,433,767) (11,971,580) (7,642,472)
FISCAL YEAR 2005 VERSUS FISCAL YEAR 2004 - Continuing Operations
----------------------------------------------------------------
SALES
Sales for fiscal year 2005 increased 2.1% to $834.6 million, compared to
$817.3 million in fiscal 2004. Sales are reported net of costs associated
with sales incentives provided to customers, totaling $14.7 million and $13.6
million for fiscal 2005 and 2004, respectively. Sales increases (decreases)
by business segment are as follows (dollars in millions):
33
Sales
------------------------------------------
Extra Reported Incr
2005/1/ week/2/ 2005 2004 (Decr)
------- ------- --------- ------ -----
Wholesale distribution segment $ 786.4 $ 13.6 $ 800.0 $ 784.9 $ 15.1
Retail health food stores segment 34.2 0.4 34.6 32.4 2.2
------- ------- --------- ------- -----
$ 820.6 $ 14.0 $ 834.6 $ 817.3 $ 17.3
======= ======= ========= ======= ======
/1/ Excludes extra week discussed in /2/ below
/2/ During the first quarter of fiscal 2005, the Company changed its reporting period
from a 52-53 week year ending on the last Friday in September to a calendar month
reporting period ending on September 30. As a result of this change, fiscal 2005
comprises 53 weeks of operations as compared to 52 weeks of operations in fiscal
2004.
Sales from the wholesale distribution segment increased by $15.1 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 $5.1 million during the period. Of the
increase in cigarette sales, $10.4 million was a result of the change in our
monthly reporting period which added an extra week of sales in 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 $1.9 million was attributable
primarily to new business obtained during fiscal 2005 through expansion of
our market area.
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 resulted from the change in the Company's monthly
reporting period contributed approximately $0.4 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
an additional $1.9 million in sales. These increases were offset by the
closure of a non-contributing store in Florida in October 2004 which
decreased sales by $0.8 million, and a $0.5 million reduction in sales due to
lower sales of grocery and low carb products during fiscal 2005 compared to
fiscal 2004.
Additionally, in 2004 a hurricane forced the temporary closure of several of
our stores in Florida. The impact on those temporary store closures in 2004
increased fiscal 2005 sales by $0.3 million on a year-over-year comparison.
34
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.
Gross profit increased 1.9% to $60.5 million for fiscal year 2005 compared to
$59.3 million for the prior fiscal year. Gross profit as a percentage of
sales in fiscal 2005 stayed consistent at 7.3% compared to fiscal 2004.
Gross profit by business segment is as follows (dollars in millions):
Gross Profit
------------------------------------------
Extra Reported Incr
2005/1/ week/2/ 2005 2004 (Decr)
------- ------- --------- ------ ------
Wholesale distribution segment $ 46.3 $ 0.6 $ 46.9 $ 46.3 $ 0.6
Retail health food stores segment 13.4 0.2 13.6 13.0 0.6
------- ------- --------- ------- ------
$ 59.7 $ 0.8 $ 60.5 $ 59.3 $ 1.2
======= ======= ========= ======= ======
/1/ Excludes extra week discussed in /2/ below
/2/ During the first quarter of fiscal 2005, the Company changed its reporting period
from a 52-53 week year ending on the last Friday in September to a calendar month
reporting period ending on September 30. As a result of this change, fiscal 2005
comprises 53 weeks of operations as compared to 52 weeks of operations in fiscal
2004.
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
35
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.
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
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 12.6%, or $6.4 million, to $57.4 million compared to fiscal
2004. As a percentage of sales, total operating expenses increased to 6.9%
from 6.2% as compared to the prior year.
The increase in operating expenses during fiscal 2005 as compared to fiscal
2004 was primarily related to goodwill and identifiable intangible asset
impairment charges totaling $4.2 million in our retail segment during fiscal
2005. The retail segment did not incur similar impairment charges in fiscal
2004. The fiscal 2005 impairment charges were based on valuations obtained
from an independent valuation specialist working in conjunction with
management determined that a portion of the tradenames and goodwill at our
retail segment were impaired. The impairment charges resulted from
shortfalls in operating cash flow necessary to support the carrying value of
the retail segment. The fair values utilized to calculate the impairment
charges 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.
In addition to the impairment charges, our wholesale segment experienced
a $1.1 million increase in professional fees in fiscal 2005 exploring
strategic alternatives for the Company's retail and beverage segments,
Sarbanes-Oxley compliance, and restatement of the Company's 2004 financial
statements. In addition, the wholesale segment had a net increase in
operating expenses of $1.1 million related primarily to higher fuel costs,
workers' compensation claims expense, healthcare insurance, bad debt expense,
administrative salaries, as well as, the extra week of operations previous
mentioned. The Company did not incur similar expenses during fiscal 2004.
INTEREST EXPENSE
Interest expense for fiscal year 2005 increased 30% to $4.2 million compared
to $3.2 million during fiscal 2004. The increase in interest expense year-
over-year was primarily due to higher prime lending rates. The prime lending
rate is the rate at which the Company primarily borrows under its credit
facility. 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.
36
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.
The Company did not have similar sales in fiscal 2005.
During fiscal 2005 and fiscal 2004, the Company allocated $0.1 million in
losses, net of tax, to "Minority interest", related to a 15% minority
ownership interest in the Company's TSI subsidiary. During fiscal 2005, the
15% minority ownership interest in TSI was reduced to zero resulting from
cumulative TSI loss allocations. Accordingly, the Company made no further
loss allocations, or will in the future.
The Company's effective income tax rate was 18.4% in fiscal 2005 compared to
40.1% 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.
Liquidity and Capital Resources
--------------------------------
OVERVIEW
--------
Operating Activities. The Company requires cash to pay its operating
expenses, purchase inventory and make capital investments. In general, the
Company finances these cash needs from the cash flow generated by its
operating activities and from borrowings and preferred stock issuances, as
necessary. During fiscal 2006, the Company used approximately $0.3 million
of cash from operating activities, primarily related to operating losses
incurred by our beverage businesses, which are included in discontinued
operations. Cash used by our discontinued operations was partially offset by
reductions in accounts receivable and inventory levels in our continuing
operations. Our variability in cash flows from operating activities is
heavily dependent on the timing of inventory purchases and seasonal
fluctuations. For example, in the circumstance where we are "buying-in" to
obtain favorable terms on particular product or to maintain our LIFO layers,
we may have to retain the inventory for a period longer than the payment
terms. This generates cash outflow from operating activities that we expect
to reverse in a later period. Additionally, during the 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.
Investing Activities. Approximately $1.0 million in cash was used for
capital expenditures for property, plant and equipment during fiscal 2006.
Financing Activities. The Company generated net cash of $1.3 million from
financing activities during fiscal 2006. Of the net cash generated, $2.0
million was received from the proceeds of a private placement (Series C
37
Convertible Preferred Stock) and $0.8 million was generated from additional
borrowings by our TSI subsidiary before its closure in March 2006. The
Company also used cash of $0.8 million for net payments on its credit
facility and its continuing operations long-term debt, $0.3 million for
discontinued operations long-term debt payments and cash of $0.4 million for
preferred stock dividend payments.
Cash on Hand/Working Capital. As of September 30, 2006, the Company had cash
on hand of $0.5 million and working capital (current assets less current
liabilities) of $28.0 million. This compares to cash on hand of $0.5 million
and a working capital of $30.6 million as of September 30, 2005.
CONTRACTUAL OBLIGATIONS
-----------------------
The following table summarizes our outstanding contractual obligations and
commitments as of fiscal year end 2006:
Payments Due By Period
---------------------------------------------------------------------
Contractual Fiscal Fiscal Fiscal
Obligations Total 2007 2008-2009 2010-2011 Thereafter
---------------------- ---------------------------------------------------------------------
Credit Facility $ 48,823 $ 3,896 $ 44,927 $ - $ -
Long-term debt -
continuing
operations/1/ 7,594 524 6,204 866 -
Long-term debt -
discontinued
operations/2/ 3,690 1,410 2,280 - -
Related party debt 2,750 2,750 - - -
Interest on long-term
debt/3/ 10,132 5,004 5,108 20 -
Operating leases 18,965 3,965 6,342 4,567 4,091
Minimum water royalty/4/ 4,247 288 576 576 2,807
---------------------------------------------------------------------
Total $ 96,201 $17,837 $ 65,437 $ 6,029 $ 6,898
=====================================================================
Other Commercial Fiscal Fiscal Fiscal
Commitments Total 2007 2008-2009 2010-2011 Thereafter
--------------------- ---------------------------------------------------------------------
Lines of credit $ 55,000 $ - $ 55,000 $ - $ -
Lines of credit in use (48,823) - (48,823) - -
---------------------------------------------------------------------
Lines of credit
available 6,177 - 6,177 - -
Water source /5/ 5,000 - - - 5,000
Letters of credit 1,450 450 1,000 - -
---------------------------------------------------------------------
Total $ 12,627 $ 450 $ 7,177 $ - $ 5,000
=====================================================================
/1/ Includes capital leases of $0.2 million with maturities through
2010.
/2/ Includes capital leases of $0.3 million with maturities through
2008.
38
/3/ Represents estimated interest payments on long-term debt, including
capital leases. Certain obligations contain variable interest
rates. For illustrative purposes, the Company has projected future
interest payments assuming that interest rates will remain
unchanged.
/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.
/5/ The Company is in settlement discussions with respect to the TSI
litigation discussed in Items 3 pursuant to which it is undertaking
to divest substantially all of the assets and liabilities of TSI as
part of a complete settlement of any and all claims against the
Company by CPH. As required by SFAS 144, management believes that
the recorded balance of the subject assets and liabilities have been
recognized at their respective fair values.
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 30, 2006, the outstanding balance on the Facility was $47.2
million, including Term Note A. The Facility bears interest at a variable
rate equal to the bank's base rate, which was 8.25% at September 30, 2006.
In December 2006, the Company executed a new amendment to the Facility with
LaSalle Bank. The significant terms of the new amendment include a $57.1
million credit limit, a April 2009 maturity date and an interest rate at
bank's prime rate. The Facility is collateralized by all of the Company's
equipment, intangibles, inventories, and accounts receivable. The amendment
also includes quarterly cumulative earnings before interest, taxes,
depreciation and amortization ("EBITDA") and a quarterly minimum debt service
ratio financial covenant of one to one beginning with the fiscal quarter
ending September 30, 2007 for the twelve month period then ended.
The cumulative minimum EBITDA requirements are as follows (a) $1,000,000 for
the three months ending December 31, 2006, December 31, 2007 and December 31,
2008 (b) $2,000,000 for the six months ending March 31, 2007, March 31, 2008,
and March 31, 2009, (c) $4,500,000 for the nine months ending June 30, 2007,
June 30, 2008 and $7,000,000 for the twelve months ending September 30, 2007
and September 30, 2008.
The Company has a $5.0 million (face amount) Term Note B from LaSalle Bank,
which had an outstanding balance of $1.6 million at September 30, 2006.
Term Note B bears interest at the bank's base rate plus 2.00%, which was
10.25% at September 30, 2006 and is required to be repaid in monthly
installments of $0.1 million.
The Company's maximum revolving credit limit on the Facility was $54.2
million at September 30, 2006, 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,
2006, the balance on the revolving portion of the Facility, including Note A,
was $47.3 million. Based on our collateral and loan limits, the Company's
39
excess availability under the Facility at September 30, 2006 was
approximately $5.5 million. During fiscal 2006 our peak borrowings under the
Facility were $54.7 million and our average borrowings and average
availability were $48.5 and $1.8 million, respectively. 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. At September 30, 2006 the Company was in
violation of the revolving credit facility's financial covenant requiring
minimum monthly EBITDA of $100,000. This covenant violation was subsequently
waived in connection with the eighth amendment to the Restated Loan and
Security Agreement with LaSalle Bank in December 2006.
The Company's Chairman has personally guaranteed repayment of the Facility
and the term loans. However, the amount of his guaranty is capped at
$10.0 million and is automatically reduced by the amount of the repayment on
Term Loan B and certain other deductions, which resulted in the guaranteed
principal outstanding being reduced to $6.6 million as of September 30, 2006.
AMCON will pay the Company's Chairman an annual fee equal to 2% of the
guaranteed principal in return for the personal guarantee.
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 8.0%, 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 in July 2007
(as amended). The Real Estate Loan is collateralized by two of the Company's
owned distribution facilities (Quincy and Bismarck). As of September 2006,
the outstanding balance on the Real Estate Loan was approximately $6.0
million. In connection with the early renewal of the credit facility
discussed above, this note was also extended to April 2009.
TSI Financing
-------------
In March 2006, the Company's subsidiary, TSI, which is classified as a
component of discontinued operations at September 30, 2006, borrowed
$750,000 from Draupnir, LLC to help sustain its current operating needs.
Draupnir, LLC is a private equity firm, whose Members include Allen Petersen
and Jeremy Hobbs, both of whom are directors of the Company. The note bears
a floating rate of 300 basis points above the yield on ten year treasury
notes and was due December 12, 2005. The note was in default at September
30, 2006.
Preferred Stock
---------------
In March 2006, the Company completed a $2.0 million private placement of
Series C Convertible Preferred Stock representing 80,000 shares at $25 per
share under Section 4(2) of the Securities Act of 1933. The proceeds of the
issuance were used to reduce the Company's outstanding balance on its
revolving credit facility with LaSalle Bank. The Series C Convertible
Preferred Stock is convertible into shares of the Company's common stock
based upon a predetermined conversion formula and is subject to customary
anti-dilution adjustments in the event of stock splits, stock dividends and
certain other events with respect to our common stock. As discussed more
fully in Note 3 to the Consolidated Financial Statements, the Series C
Convertible Preferred Stock was purchased by a related party of the Company.
40
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 Marshall and Ilsley (the "M & I Loans"),
which 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.
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.
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.
OTHER
-----
The Company has several capital leases for office, warehouse and water
bottling equipment. As of September 30, 2006, the outstanding balances on
the capital leases totaled approximately $0.5 million.
AMCON has issued a letter of credit for approximately $1.0 million to its
workers' compensation insurance carrier as part of its self-insured loss
control program.
Off-Balance Sheet Arrangements
------------------------------
The Company does not have any off-balance sheet arrangements.
Other Matters
-------------
Certain Accounting Considerations
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.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 clarifies the principle that fair value
should be based on the assumptions market participants would use when pricing
an asset or liability and establishes a fair value hierarchy that prioritizes
41
the information used to develop those assumptions. Under the standard, fair
value measurements would be separately disclosed by level within the fair
value hierarchy. SFAS 157 is effective for the Company's fiscal year
beginning October 1, 2008, with early adoption permitted. The Company is
currently evaluating the impact of adopting this 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 2006.
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
September 30, 2006, the impact on the statement of operations would be to
increase selling, general and administrative expenses by approximately
$288,000.
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.
42
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
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):
Continuing Discontinued Total
Operations Operations
---------- ---------------- -----
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
===== ===== ===== =====
43
The impairment charges for our Retail segment are recorded in the Company's
statement of operations as a component of (loss) income from continuing
operations. The impairment charges for TSI and HNWC have been included in
the loss from discontinued operations in the statement of operations.
Fiscal 2004 impairment
----------------------
Due to operating profit and cash flows shortfalls during fiscal 2004, our
HNWC subsidiary recorded an impairment charge of $3.6 million related to the
the HNWC tradename. The fair values of tradenames was estimated with the
assistance of an independent valuation specialist using the expected present
value of the discounted future cash flows. The 2004 HNWC impairment charges
are included in the Company's statement of operations as a component of loss
from discontinued operations.
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.
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 $565,000.
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.
44
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 $57,000 would be required at September 30, 2006, 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
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 2006, we recorded a valuation
allowance of $0.5 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.
45
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; and
- tax planning strategies.
SENSITIVITY ANALYSIS. Based on our analysis, we have determined that a
valuation allowance of $0.5 million was required at September 30, 2006. 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.
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
46
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 and litigation,
- 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,
- poor weather conditions,
- increases in fuel prices,
- 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk on its variable rate debt.
At September 30, 2006, the Company had $48.8 million of variable rate debt
outstanding with maturities through April 2009. The interest rate on this
debt was 8.25% at September 30, 2006. We estimate that our annual cash flow
exposure relating to interest rate risk based on our current borrowings is
approximately $0.3 million for each 1% change in our lender's prime interest
rate.
We do not utilize financial instruments for trading purposes and hold no
derivative financial instruments which could expose us to significant market
risk.
47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to 2006 Consolidated Financial Statements
Report of Independent Registered Public
Accounting Firms......................................... 49
Consolidated Financial Statements .......................... 51
Notes to Consolidated Financial Statements.................. 56
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
AMCON Distributing Company
Omaha, Nebraska
We have audited the consolidated balance sheet of AMCON Distributing Company
and subsidiaries as of September 30, 2006, and the related consolidated
statements of operations, shareholders' equity (deficiency) and comprehensive
income (loss) and cash flows for the year then ended September 30, 2006.
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 audit.
We conducted our audit 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AMCON
Distributing Company and subsidiaries as of September 30, 2006, and the
results of their operations and their cash flows for the year ended September
30, 2006 in conformity with U.S. generally accepted accounting principles.
As more fully described in Note 14 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) and the operation of the business.
The plaintiff seeks to compel the Company to perform under the June 2004
purchase agreement and other agreements related to the purchase and to
recover damages alleged due to the Company's failure to perform under these
agreements. A prior complaint related to the same purchase involving the
same parties was addressed by action of the court in October of 2006.
McGLADREY & PULLEN
Omaha, Nebraska
December 28, 2006
49
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 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 and September 24, 2004. Our
audits also included the financial statement schedule for each of the fiscal
years ended September 30, 2005 and September 24, 2004 listed in the Index at
Item 15. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
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 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 provides 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 the results of their operations
and their cash flows for each of the fiscal years ended September 30, 2005
and September 24, 2004 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
financial statement schedule for each of the fiscal years ended September 30,
2005 and September 24, 2004, 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 14 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.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
August 21, 2006 (December 28, 2006 as to Notes 2 and 17)
50
CONSOLIDATED BALANCE SHEETS
AMCON Distributing Company and Subsidiaries
--------------------------------------------------------------------------------------------------
September 30, 2006 2005
--------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 481,138 $ 546,273
Accounts receivable, less allowance
for doubtful accounts of $0.9 million
and $0.4 million in 2006 and 2005, respectively 27,815,751 27,180,031
Inventories, net 24,443,063 23,341,289
Deferred income taxes 1,972,988 1,642,212
Current assets of discontinued operations 1,172,805 2,823,809
Prepaid and other current assets 5,369,154 5,264,629
------------------------------
Total current assets 61,254,899 60,798,243
Property and equipment, net 12,528,539 13,514,942
Goodwill 5,848,808 5,848,808
Other intangible assets 3,439,803 3,464,534
Deferred income taxes 6,772,927 6,300,503
Non-current assets of discontinued operations 3,774,106 4,145,194
Other assets 1,247,464 1,236,573
------------------------------
$ 94,866,546 $ 95,308,797
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 14,633,124 $ 15,438,359
Accrued expenses 4,687,789 4,456,421
Accrued wages, salaries and bonuses 1,879,699 1,469,204
Income taxes payable 168,936 118,798
Current liabilities of discontinued operations 7,461,549 6,655,272
Current maturities of credit facility 3,896,000 1,432,000
Current maturities of long-term debt 524,130 655,667
------------------------------
Total current liabilities 33,251,227 30,225,721
Credit facility, less current maturities 44,927,429 47,730,388
Long-term debt, less current maturities 7,069,357 7,371,520
Noncurrent liabilities of discontinued operations 5,087,230 5,913,596
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 1,857,645
Series C cumulative, convertible preferred stock, $.01 par value
80,000 authorized and issued, liquidation preference
$25.00 per share 1,982,372 -
Commitments and contingencies (Note 14)
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 5,271 5,271
Additional paid-in capital 6,278,476 6,218,476
Accumulated other comprehensive income, net of tax
of $0.05 million in 2005 - 101,294
Accumulated deficit (8,030,816) (6,553,469)
------------------------------
Total shareholders' deficiency (1,747,069) (228,428)
------------------------------
$ 94,866,546 $ 95,308,797
==============================
The accompanying notes are an integral part of these consolidated financial
statements
51
CONSOLIDATED STATEMENTS OF OPERATIONS
AMCON Distributing Company and Subsidiaries
---------------------------------------------------------------------------------------------
Fiscal Years Ended September 2006 2005 2004
---------------------------------------------------------------------------------------------
Sales (including excise taxes of $200.6 million,
$197.7 million and $191.6 million in 2006, 2005
and 2004, respectively) $ 839,539,780 $ 834,551,448 $ 817,285,523
Cost of sales 779,406,125 774,060,331 757,937,989
-------------------------------------------
Gross profit 60,133,655 60,491,117 59,347,534
-------------------------------------------
Selling, general and administrative expenses 51,721,525 51,032,197 48,908,769
Depreciation and amortization 1,936,897 2,155,983 2,065,876
Impairment charges - 4,234,856 -
-------------------------------------------
53,658,422 57,423,036 50,974,645
-------------------------------------------
Operating income 6,475,233 3,068,081 8,372,889
Other expense (income):
Interest expense 4,858,012 4,211,685 3,243,238
Other (income), net (137,241) (80,105) (569,274)
-------------------------------------------
4,720,771 4,131,580 2,673,964
-------------------------------------------
Income (loss) from continuing operations
before income taxes 1,754,462 (1,063,499) 5,698,925
Income tax expense (benefit) 432,000 (196,000) 2,286,000
Minority interest in loss, net of tax - (97,100) (91,000)
-------------------------------------------
Income (loss) from continuing operations 1,322,462 (770,399) 3,503,925
Loss from discontinued operations, net of
income tax benefit of $1.1 million,
$5.5 million and $4.7 million, respectively (2,433,767) (11,971,580) (7,642,472)
-------------------------------------------
Net loss (1,111,305) (12,741,979) (4,138,547)
Preferred stock dividend requirements (366,042) (294,640) (49,474)
-------------------------------------------
Net loss available to common shareholders $ (1,477,347) $ (13,036,619) $ (4,188,021)
===========================================
Basic earnings (loss) per share
available to common shareholders:
Continuing operations $ 1.81 $ (2.02) $ 6.54
Discontinued operations (4.61) (22.71) (14.48)
-------------------------------------------
Net loss earnings per share
available to common shareholders $ (2.80) $ (24.73) $ (7.94)
===========================================
Diluted earnings (loss) per share
available to common shareholders:
Continuing operations $ 1.63 $ (2.02) $ 6.23
Discontinued operations (3.87) (22.71) (13.59)
-------------------------------------------
Net diluted loss per share
available to common shareholders $ (2.24) $ (24.73) $ (7.36)
===========================================
Weighted average shares outstanding:
Basic 527,062 527,062 527,774
Diluted 627,810 527,062 562,559
The accompanying notes are an integral part of these consolidated financial
statements
52
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
AND COMPREHENSIVE INCOME (LOSS)
AMCON Distributing Company and Subsidiaries
----------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other Retained
----------------- Paid in Comprehensive Earnings
Shares Amount Capital Income (Deficit) Total
----------------------------------------------------------------------------------------------------------
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)
Dividends on preferred stock - - - - (366,042) (366,042)
Stock option plan compensation 60,000 60,000
Net loss - - - - (1,111,305) (1,111,305)
Change in fair value of
interest rate swap, net of
tax of $0.05 million - - - (101,294) - (101,294)
-----------
Total comprehensive loss (1,212,599)
--------------------------------------------------------------------------
Balance, September 30, 2006 527,062 $ 5,271 $ 6,278,476 $ - $(8,030,816) $(1,747,069)
==========================================================================
The accompanying notes are an integral part of these consolidated financial
statements
53
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMCON Distributing Company and Subsidiaries
----------------------------------------------------------------------------------------------------------
Fiscal Years 2006 2005 2004
----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(1,111,305) $(12,741,979) $(4,138,547)
Deduct: Loss from discontinued operations, net of tax 2,433,767 11,971,580 7,642,472
----------- ----------- -----------
(Loss) income from continuing operations 1,322,462 (770,399) 3,503,925
Adjustments to reconcile (loss) income from
continuing operations to net cash flows
from operating activities:
Depreciation 1,897,166 2,039,553 1,887,244
Amortization 39,731 116,430 178,632
Impairment charges - 4,234,856 -
(Gain) loss on sale of property and equipment 30,082 (13,116) (7,774)
Stock based compensation 60,000 - -
Deferred income taxes (803,200) (5,987,341) (1,754,264)
Provision for losses on doubtful accounts 179,196 (189,604) (338,928)
Provision for losses on inventory obsolescence 77,940 (33,520) 206,925
Gain on sale of securities - - (507,418)
Minority interest - (97,100) (91,000)
Changes in assets and liabilities,
net of effect of acquisitions:
Accounts receivable (814,916) 1,383,923 (530,149)
Inventories (1,179,714) 10,056,784 (3,241,622)
Other current assets (205,819) (4,848,246) 223,901
Other assets (10,891) (160,509) 282,100
Accounts payable (805,235) (670,130) 1,804,427
Accrued expenses and accrued wages, salaries and bonuses 641,863 1,280,966 211,343
Income taxes payable and receivable 50,138 1,281,423 (1,703,039)
----------- ----------- -----------
Net cash flows from operating activities
- continuing operations 478,803 7,623,970 124,303
Net cash flows from operating activities
- discontinued operations (822,124) 903,906 (3,786,719)
----------- ----------- -----------
Net cash flows from operating activities (343,321) 8,527,876 (3,662,416)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (980,510) (2,464,694) (910,318)
Proceeds from sales of property and equipment 39,665 116,597 84,652
Acquisitions, net of cash acquired - - 407,986
Purchase of trademark (15,000) - -
Proceeds from sales of available-for-sale securities - - 561,910
----------- ----------- -----------
Net cash flows from investing activities
- continuing operations (955,845) (2,348,097) 144,230
Net cash flows from investing activities
- discontinued operations (16,818) (585,451) (4,035,108)
----------- ----------- -----------
Net cash flows from investing activities (972,663) (2,933,548) (3,890,878)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on bank credit agreements (338,959) 4,352,573 6,828,533
Net proceeds from preferred stock issuance 1,982,372 1,857,645 2,438,355
Proceeds from borrowings of long-term debt 237,266 1,399,638 -
Payments on long-term and subordinated debt (670,966) (8,413,374) (1,270,528)
Debt issuance costs - (446,641) -
Dividends paid on common stock - - (379,827)
Dividends paid on preferred stock (366,042) (294,640) (49,474)
Purchase of common stock, retired - - (26,328)
Proceeds from exercise of stock options - - 522
----------- ----------- -----------
Net cash flows from financing activities
- continuing operations 843,671 (1,544,799) 7,541,253
54
----------------------------------------------------------------------------------------------------------
Fiscal Years 2006 2005 2004
----------------------------------------------------------------------------------------------------------
Net cash flows from financing activities
- discontinued operations 407,178 (3,919,329) (239,959)
----------- ----------- -----------
Net cash flow from financing activities 1,250,849 (5,464,128) 7,301,294
----------- ----------- -----------
Net change in cash (65,135) 130,200 (252,000)
Cash, beginning of year 546,273 416,073 668,073
----------- ----------- -----------
Cash, end of year $ 481,138 $ 546,273 $ 416,073
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $4,858,960 $ 4,376,251 $ 3,632,384
Cash (refunded) paid during the year for
income taxes (647) (911,278) 1,253,768
Supplemental disclosure of non-cash information:
Issuance of note payable in exchange for
accounts payable - discontinued operations $ 362,716 $ - $ -
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
The accompanying notes are an integral part of these consolidated financial
statements
55
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.
AMCON's wholesale distribution business ("ADC") includes five distribution
centers that sell approximately 14,000 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.
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, state excise tax increases or competing retail stores opening in
close proximity to the Company's retail stores. While the Company sells a
diversified product line, it remains dependent upon cigarette sales which
represented approximately 72% of its revenue and 27% of its gross profit in
fiscal 2006 compared to 73% of its revenue and 32% of its gross profit in
fiscal 2005 and 73% of its revenue and 33% of its gross profit in fiscal
2004.
(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 consisted of 53 weeks of operations compared to 52 weeks
of operations in fiscal 2006 and 2004. Actual year ends for fiscal 2006,
2005 and 2004 were September 30, 2006, September 30, 2005 and September 24,
2004, 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 the Company's 85% ownership in
Trinity Springs, Inc ("TSI"), the Company has included the operating results
of TSI in the accompanying consolidated financial statements since the date
of acquisition (June 17, 2004) and has presented the 15% non-owned interest
in this subsidiary as a minority interest. As described further in Note 14,
the Company is currently involved in litigation regarding its ownership of
the assets acquired by TSI. 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
56
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 14,
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. Additionally, as discussed in Note 2, TSI has been
classified as a component of discontinued operations at September 30, 2006.
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 $3.2 million and $3.8 million at fiscal year end 2006 and
2005, 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) Accounts Receivable:
Accounts receivable consist primarily of amounts due to the Company from its
normal business activities. An allowance for doubtful accounts is maintained
to reflect the expected uncollectibility of accounts receivable based on past
collection history and specific risks identified in the portfolio.
(f) Inventories:
Inventories consisted of the following at September 30, 2006 and 2005 (in
millions):
September September
2006 2005
--------- ---------
Finished Goods $ 29.4 $ 28.0
LIFO Reserve (5.0) (4.7)
--------- ---------
$ 24.4 $ 23.3
========= =========
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.
57
The LIFO reserve at September 2006 and 2005 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 and $0.1 million during fiscal 2005 and
2004, respectively. There were no LIFO layers liquidated during fiscal 2006.
An allowance for obsolete inventory of $0.4 million and $0.3 million at
September 2006 and 2005, respectively, is maintained to reflect the expected
unsaleable or non-refundable inventory based on evaluation of slow moving
products and discontinued products.
(g) Prepaid Expenses and Other Current Assets:
A summary of prepaid expenses and other current assets is as follows (in
millions):
September September
2006 2005
--------- ---------
Prepaid expenses $ 1.2 $ 0.7
Prepaid inventory 4.2 4.5
Interest rate swap - 0.1
--------- ---------
$ 5.4 $ 5.3
========= =========
Prepaid inventory represents inventory in transit that has been paid for but
has not yet been received.
(h) Fixed Assets:
Fixed assets are stated at cost less accumulated depreciation or
amortization. Major renewals and improvements are capitalized and charged to
expense over their useful lives through depreciation or amortization charges.
Repairs and maintenance are charged to expense in the period incurred. The
straight-line method of depreciation is used to depreciate assets over the
estimated useful lives as follows:
Years
-------
Buildings 40
Warehouse equipment 5 - 7
Furniture, fixtures and
leasehold improvements 5 - 18
Vehicles 5
Costs and accumulated depreciation applicable to assets retired or sold are
eliminated from the accounts, and the resulting gains or losses are reported
as a component of operating income.
(i) Long-Lived Assets:
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such asset may
not be recoverable. Long-lived assets 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 our Hawaiian Natural Water
Company ("HNWC") and TSI subsidiaries, respectively, which as of September
30, 2006, are reported as a component of discontinued operations as discussed
in Note 2. The impairments were due to the shortfall of expected future
58
cash flows to support the assets as well as a need for additional capital to
sustain the same level of operations. The Company did not incur similar
impairment charges during fiscal 2006.
(j) Goodwill, Intangible and Other Assets:
Goodwill consists of the excess purchase price paid in business acquisitions
over the fair value of assets acquired. At September 30, 2006, intangible
assets consist primarily of tradenames and favorable leases assumed in
acquisitions. These assets are initially recorded at an amount equal to the
purchase price paid or allocated to them. Other assets consist primarily of
the cash surrender value of life insurance policies and debt issuance costs.
The Company employs the 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 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
to have indefinite lives.
As discussed in Note 7, during fiscal 2005 the Company determined, based on a
valuation report provided by the independent valuation specialist, that
certain goodwill and intangible assets at TSI and HNWC, both components of
the beverage segment reporting unit, were impaired. Additionally, the
Company determined that a portion of the tradenames and goodwill carried by
the Company's retail segment 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 also determined that the
tradenames at HNWC, part of the Company's beverage segment, were impaired and
accordingly recorded an impairment charge of $3.6 million. At September 30,
2006, both HNWC and TSI were classified as components of discontinued
operations. The Company did not incur an impairment charge during fiscal
2006 upon the completion of its annual review.
The Company's only intangible assets that are considered to have definite
useful lives are favorable leases which continue to be charged to expense
through amortization on the straight-line method over their estimated useful
lives of three to seven years.
The benefit related to increases in the cash surrender value of split dollar
life insurance policies are 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 in accordance with regulatory guidance.
(k) 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. TSI and the water royalty associated with its
purchase, are classified as a component of discontinued operations at
September 30, 2006 as discussed in Note 2.
59
(l) 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.
(m) Revenue Recognition:
AMCON recognizes revenue in its wholesale distribution division 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.
(n) 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 $1.0 million to
its workers' compensation insurance carrier as part of its loss control
program. The reserve for incurred but not reported employee health care
benefits is based on one month of average claims using the Company's
historical claims experience rate 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.
(o) 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.
(p) Comprehensive Income (Loss):
Comprehensive income (loss) for the Company includes net income or loss and
changes in the valuation of interest rate swap contracts treated as hedging
instruments that are charged or credited to shareholders' equity.
This interest rate swap expired in fiscal 2006.
(q) Stock-Based Compensation:
Prior to its expiration in June 2004, AMCON maintained a stock-based
compensation plan under which the Compensation Committee of the Board of
Directors could grant incentive stock options and non-qualified stock
options. On October 1, 2005, the Company adopted SFAS No. 123 (revised 2004)
(SFAS 123R), Share Based Payment. The Company chose to apply the modified
prospective transition method as permitted by SFAS 123R and therefore has not
restated prior periods. Under the transition method, compensation cost
associated with employee stock options has been recognized in the statement
of operations for fiscal 2006. This expense represents the amortization of
unvested stock option awards granted prior to September 30, 2005 and has been
reflected in the consolidated statement of operations under "selling, general
and administrative expenses." Prior to the adoption of SFAS 123R, the
Company accounted for these plans under APB Opinion 25, Accounting for Stock
Issued to Employees, and related Interpretations. Under APB Opinion 25, no
compensation cost associated with stock options was reflected in net income
(loss) available to common shareholders, as all options granted under these
plans had an exercise price equal to the market value of the underlying
common stock on the date of grant.
60
The following table illustrates the effect on the net loss available to
common shareholders had the Company applied the fair value recognition
provisions of FASB Statement No. 123R, Accounting for Stock-Based
Compensation, to stock-based employee compensation for fiscal 2005 and fiscal
2004.
2005 2004
-----------------------------
Loss available to common shareholders
------------------------------------------------
Net loss available to common
shareholders, as reported $(13,036,619) $(4,188,021)
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)
-----------------------------
Pro forma loss $(13,089,727) $(4,248,294)
=============================
Loss per share available to common shareholders
------------------------------------------------
As reported: Basic $ (24.73) $ (7.94)
Diluted $ (24.73) $ (7.36)
Pro forma: Basic $ (24.84) $ (8.05)
Diluted $ (24.84) $ (7.46)
The fair value of the weighted average of each year's option grants was
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.
The Company did not grant any stock options in fiscal 2006, 2005 or 2004.
(r) 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.
(s) 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.
61
(t) Recently Issued Accounting Standards:
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.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 clarifies the principle that fair value
should be based on the assumptions market participants would use when pricing
an asset or liability and establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. Under the standard, fair
value measurements would be separately disclosed by level within the fair
value hierarchy. SFAS 157 is effective for the Company's fiscal year
beginning October 1, 2008, with early adoption permitted. The Company is
currently evaluating the impact of adopting this standard.
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 below, TSI's operations were closed in March 2006. Further, there is
on-going litigation regarding the ownership of TSI's assets as discussed in
Note 14.
The total TSI purchase price of $8.8 million was paid through a combination
of $2.3 million in cash, $3.3 million in notes 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 were transaction costs totaling approximately $0.8 million that
were incurred to complete the acquisition and consisted primarily of fees and
expenses for attorneys and investment bankers. In addition, TSI was
obligated to 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
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
62
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 Company is in settlement discussions with respect to
the TSI litigation discussed in Note 14 to the Consolidated Financial
Statements, pursuant to which it is undertaking to divest substantially all
of the assets and liabilities of TSI as part of a complete settlement of any
and all claims against the Company by CPH. As required by SFAS 144,
management believes that the recorded balances of the subject assets and
liabilities have been recognized at their respective fair values.
The acquisition was recorded on the Company's books using the purchase method
of accounting. The purchase price was initially allocated to the assets
acquired and liabilities during fiscal 2004 based on estimated fair values.
This allocation, however, was subsequently revised during fiscal 2005 based
upon a valuation report received from independent valuation specialist.
Additionally, during the Company's fiscal 2005 intangible asset valuation
testing as discussed in Note 7, management determined that certain TSI
intangible assets were impaired.
DISPOSITIONS AND DISCONTINUED OPERATIONS
Discontinued operations includes the disposal groups of TSI and HNWC at
September 30, 2006 and TBG for all periods prior to March 31, 2006. TBG
ceased on-going operations effective March 31, 2005 at which time it was
classified as discontinued operations. The wind down of TBG was completed as
of March 31, 2006 and no additional expenses have been recorded as a
component of discontinued operations since that time. The accompanying
consolidated financial statements for all periods presented have been
prepared reflecting this classification.
Prior to the classification of these businesses as discontinued operations,
the Company allocated interest expense to its wholly-owned subsidiaries using
an invested capital calculation. As part of the application of discontinued
operations to the disposal groups, the Company classified the interest
expense previously allocated to the disposal groups as part of continuing
operations in accordance with Emerging Issues Task Force ("EITF") 87-24
"Allocation of Interest to Discontinued Operations."
Hawaiian Natural Water Company, Inc.
-------------------------------------
Effective September 30, 2006, HNWC was classified as a component of
discontinued operations. In conjunction with management's on-going strategic
initiative to refocus on its core wholesale and retail operations, the
Company has been actively pursuing the sale of HNWC's assets. As discussed
63
in Note 18, on November 20, 2006, substantially all of HNWC's operating
assets were sold. HNWC, which is headquartered in Pearl City, Hawaii, is
part of the Company's former beverage segment. HNWC bottles, markets and
distributes Hawaiian natural artesian water, purified water and other limited
production co-packaged products, in Hawaii, the mainland and foreign markets.
Trinity Springs, Inc.
---------------------
In March 2006 TSI discontinued operations due to recurring losses and a lack
of capital resources to sustain operations. TSI operated a water bottling
facility in Idaho and was a component of the Company's former beverage
segment.
TSI has been reflected in the accompanying consolidated financial statements
as of September 30, 2006 and 2005 as a component of discontinued operations.
During the second fiscal quarter of 2006, the Company recorded charges,
included in loss from discontinued operations before taxes, of $0.2 million
related to the closure of TSI's operations. These charges were incurred
primarily to adjust inventory to its net realizable value. There have been
no additional charges related to TSI closure.
The Beverage Group, Inc. ("TBG")
--------------------------------
In March 2005, the Company's subsidiary, TBG, which represented the beverage
marketing and distribution component of the Company's former beverage
segment, also ceased on-going operations due to recurring losses since its
inception in December 2002, and as such was classified as a component of
discontinued operations. During the second fiscal quarter of fiscal 2005,
the Company recorded a charge, included in loss from discontinued operations,
of $0.8 million to adjust TBG's accounts receivable, inventory and fixed
assets to their net realizable values. Additionally, in accordance with SFAS
No. 146 "Accounting for Costs Associated with Exit or Disposal Activities",
the Company recorded a one-time charge of $0.1 million related to the
termination of an office lease.
In the first two quarters of fiscal 2006 TBG was classified as a component of
discontinued operations. In April 2006 the Company successfully concluded
its wind-down plan of TBG's operations and accordingly reclassified its
residual liabilities to continuing operations. This reclassification has
been reflected as such throughout this Annual Report on Form 10-K.
Sales from discontinued operations, which have been excluded from income from
continuing operations in the accompanying condensed consolidated audited
statements of operations, are presented as follows. Discontinued operations
include the results from operations for HNWC, TSI and TBG (through March 31,
2006) for the fiscal years 2006, 2005 and 2004. The effects of the
discontinued operations on net loss available to common shareholders and per
share data are reflected within the consolidated financial statements.
Year ended
September
--------------------------------------------
2006 2005 2004
----------- ------------ ------------
Sales $ 8,635,869 $ 13,185,114 $ 6,519,777
Impairment charges - (8,852,406) (3,578,255)
Operating loss (3,187,117) (17,118,287) (12,126,297)
Income tax benefit (1,132,000) (5,453,000) (4,709,000)
Loss from discontinued operations (2,433,767) (11,971,580) (7,642,472)
64
The carrying amounts (net of allowances) of the major classes of assets and
liabilities included in discontinued operations are as follows (in millions):
September September
2006 2005
---------- ----------
Accounts receivable $ 0.7 $ 1.5
Inventories 0.5 1.3
---------- ----------
Total current assets of discontinued operations $ 1.2 $ 2.8
========== ==========
Fixed assets - Total noncurrent assets of
discontinued operations $ 3.8 $ 4.1
========== ==========
Accounts payable $ 2.0 $ 2.7
Accrued expenses 1.0 1.2
Accrued wages, salaries and bonuses 0.3 0.2
Current portion of long-term debt 1.4 0.6
Current portion of long-term debt due related party 2.8 2.0
---------- ----------
Total current liabilities of discontinued operations $ 7.5 $ 6.7
========== ==========
Water royalty, in perpetuity $ 2.8 $ 2.8
Long-term debt, less current portion 2.3 3.1
---------- ----------
Noncurrent liabilities of discontinued operations $ 5.1 $ 5.9
========== ==========
Included in discontinued operations are debt obligations payable to related
parties from TSI as follows:
- TSI owes a director of the Company $1.0 million on a revolving credit
facility with an interest rate of 8.0% per annum. The loan is
secured by a second mortgage on TSI's real property on an equal basis
with the Company's existing second mortgage on TSI's real property.
The revolving credit line matured on December 14, 2005 at which time
principal and accrued interest were due.
- TSI owes $0.5 million on a loan due to a related party which is
wholly-owned by three of the Company's directors (including the
Chairman and the President) and another significant shareholder.
The note bears interest at 7.0% per annum and matured in
December 2005.
- TSI obtained unsecured, subordinated loans totaling $0.5 million from
unaffiliated businesses of two of the Company's directors, including a
Company of which the Chairman of the Board is a partner. The loan
matured on December 8, 2005 and bears interest of 7.0% per annum.
- TSI owes $750,000 to Draupnir, LLC on a note bearing interest at a
floating rate of 300 basis points above the ten year treasury note
yield, compounded annually and adjusted concurrently with any
adjustments to the yield on the ten year treasury note. The notes
matured on December 13, 2005.
All of the aforementioned notes payable to related parties from TSI are in
default as of September 30, 2006 and are classified in current liabilities of
discontinued operations.
65
3. CONVERTIBLE PREFERRED STOCK:
The Company has the following Convertible Preferred Stock outstanding as of
September 2006:
Series A Series B Series C
------------- --------------- ---------------
Date of issuance: June 17, 2004 October 8, 2004 March 6, 2006
Optionally redeemable beginning June 18, 2006 October 9, 2006 March 4, 2008
Par value (gross proceeds): $2,500,000 $2,000,000 $2,000,000
Number of shares: 100,000 80,000 80,000
Liquidation preference per share: $25.00 $25.00 $25.00
Conversion price per share: $30.31 $24.65 $13.62
Number of common shares in
which to be converted: 82,481 81,136 146,842
Dividend rate: 6.785% 6.370% 6.00%
The Series A Convertible Preferred Stock ("Series A"), Series B Convertible
Preferred Stock ("Series B") and Series C Convertible Preferred Stock
("Series C"), collectively (the "Preferred Stock"), 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 by the conversion price. The conversion prices for the
Preferred Stock are subject to customary adjustments in the event of stock
splits, stock dividends and certain other distributions on the Common Stock.
Cumulative dividends for the Preferred Stock 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 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 Preferred Stock also contain redemption features
which trigger based on certain circumstances such as a change of control,
minimum thresholds of ownership by the Chairman and his family in AMCON, or
bankruptcy. The Preferred Stock are optionally redeemable by the Company
beginning on various dates, as listed above, at redemption prices equal to
112% of the liquidation preference. The redemption prices decrease 1%
annually thereafter until the redemption price equals the liquidation
preference after which date it remains the liquidation preference. The
Company's credit facility also prohibits the redemption of the Series A
and Series B. Series C is only redeemable 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.
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 September 30, 2006. Mr. William Wright, who has been AMCON's Chairman of
the Board since AMCON's founding, beneficially owns 29% of the outstanding
common stock without giving effect to shares owned by his adult children.
There is an identity of interest among AMCON and its officers and directors
for purposes of the determination of whether the triggering redemption events
described above are within the control of AMCON since AMCON can only make
66
decisions on control or other matters through those persons. Moreover, the
Preferred Stock is in friendly hands with no expectation that there would be
any effort by the holders of such Preferred Stock to see optional redemption
without the Board being supportive of the events that may trigger that right.
The Series A is owned by Mr. Wright, the Company's Chairman, and a private
equity firm (Draupnir, LLC) of which Mr. Petersen and Mr. Jeremy Hobbs, both
of whom are directors of the Company, are Members. The Series B Preferred
Stock is owned by an institutional investor which has elected Mr. Chris
Atayan, now AMCON's Vice Chairman and Chief Executive Officer, to AMCON's
Board of Directors pursuant to voting rights in the Certificate of
Designation creating the Series B Preferred Stock. The Series C is owned by
Draupnir Capital LLC, which is a subsidiary of Draupnir, LLC (the owner of
Series A). Mr. Petersen and Mr. Hobbs are also Members of Draupnir Capital,
LLC.
In view of the foregoing considerations, the Company believes it is
not probable under Rule 5-02.28 of Regulation S-X that the Series A,
Series B or Series C Preferred Stock will become redeemable in the future.
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 2006,
2005 and 2004 that were anti-dilutive were not included in the computations
of diluted earnings per share. Such potential common shares totaled 356,308,
198,620 and 113,921 with average exercise prices of $22.09, $29.13 and
$32.92, respectively.
For Fiscal Years
-----------------------------------------
2006 2005 2004
-----------------------------------------
Basic Basic Basic
-----------------------------------------
Weighted average number of
shares outstanding 527,062 527,062 527,774
=========================================
Income (loss) from continuing
operations $ 1,322,462 $ (770,399) $ 3,503,925
Deduct: preferred stock dividend
requirements (366,042) (294,640) (49,474)
-----------------------------------------
$ 956,420 $ (1,065,039) $ 3,454,451
=========================================
Loss from discontinued operations $ (2,433,767) $(11,971,580) $(7,642,472)
=========================================
Net loss income available to
common shareholders $ (1,477,347) $(13,036,619) $(4,188,021)
=========================================
67
2006 2005 2004
-----------------------------------------
Basic Basic Basic
-----------------------------------------
Earnings (loss) per share from
continuing operations $ 1.81 $ (2.02) $ 6.54
Loss per share from discontinued
operations (4.61) (22.71) (14.48)
-----------------------------------------
Loss per share available
to common shareholders $ (2.80) $ (24.73) $ (7.94)
=========================================
Diluted Diluted Diluted
-----------------------------------------
Weighted average common
shares outstanding 527,062 527,062 527,774
Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds used
to purchase treasury stock /1/ 100,748 - 34,785
-----------------------------------------
Weighted average number of
shares outstanding 627,810 527,062 562,559
=========================================
Income (loss) from continuing
operations $ 1,322,462 $ (770,399) $ 3,503,925
Deduct: preferred stock dividend
requirements /2/ (297,042) (294,640) -
-----------------------------------------
$ 1,025,420 $ (1,065,039) $ 3,503,925
=========================================
Loss from discontinued operations $ (2,433,767) $(11,971,580) $(7,642,472)
=========================================
Net loss available to
common shareholders $ (1,408,347) $(13,036,619) $(4,138,547)
=========================================
Earnings (loss) per share
from continuing operations $ 1.63 $ (2.02) $ 6.23
Loss per share from discontinued
operations (3.87) (22.71) (13.59)
-----------------------------------------
Loss per share available
to common shareholders $ (2.24) $ (24.73) $ (7.36)
=========================================
/1/ Includes stock option plus the weighted-average of Series C Convertible Preferred Stock
outstanding in fiscal 2006. Includes stock option plus the weighted average of Series A
Convertible Preferred Stock outstanding in fiscal 2004.
/2/ Series A and Series B Convertible Preferred Stock is anti-dilutive in fiscal 2006 and
fiscal 2005 because the dividends accumulated per common share obtainable on conversion exceeds
basic earning (loss) per share. The Series C Convertible preferred stock is dilutive in fiscal
2006.
68
5. OTHER COMPREHENSIVE INCOME (LOSS):
The components of other comprehensive income (loss) were as follows:
2006 2005 2004
-----------------------------------
Unrealized holding gains during the period:
Unrealized gains $ - $ - $ 6,800
Related tax (expense) - - (2,584)
-----------------------------------
Net - - 4,216
-----------------------------------
Less reclassification adjustments
for gains which were included in
comprehensive income in prior periods:
Realized net gains - 2,638 465,008
Related tax (expense) - - (176,703)
-----------------------------------
Net - 2,638 288,305
-----------------------------------
Interest rate swap valuation adjustment
during the period:
Unrealized gains (losses) (154,002) 71,018 199,354
Related tax (expense) benefit 52,708 (26,986) (76,097)
-----------------------------------
Net (101,294) 44,032 123,257
-----------------------------------
Total other comprehensive income (loss) $ (101,294) $ 41,394 $ (160,832)
===================================
The accumulated balances for each classification of accumulated other
comprehensive income (loss) are as follows:
Unrealized Interest Accumulated
gains on rate swap Other
securities mark-to Comprehensive
-market Income
-------------------------------------------
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
Current period change - (101,294) (101,294)
--------- --------- ----------
Balance, September 30, 2006 $ - $ - $ -
========= ========= ==========
69
6. PROPERTY AND EQUIPMENT, NET:
Property and equipment at fiscal year ends 2006 and 2005 consisted of the
following:
2006 2005
---------------------------
Land $ 648,818 $ 648,818
Buildings and improvements 9,048,798 9,040,496
Warehouse equipment 5,358,310 5,075,605
Furniture, fixtures and
leasehold improvements 7,107,293 7,146,563
Vehicles 1,554,553 1,106,911
Capital equipment leases 1,158,657 1,158,657
---------------------------
24,876,429 24,177,050
Less accumulated depreciation
and amortization:
Owned buildings and equipment (11,512,799) (10,019,917)
Capital equipment leases (835,091) (642,191)
---------------------------
$ 12,528,539 $ 13,514,942
===========================
7. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill by reporting segment at fiscal year ends 2006 and 2005 was as
follows:
2006 2005
------------ ------------
Wholesale $ 3,935,931 $ 3,935,931
Retail 1,912,877 1,912,877
------------ ------------
$ 5,848,808 $ 5,848,808
============ ============
Other intangible assets at fiscal year ends 2006 and 2005 consisted of the
following:
2006 2005
---------------------------
Trademarks and tradenames $ 3,373,269 $ 3,358,269
Favorable leases (less accumulated
amortization of $419,466 and $379,735) 66,534 106,265
---------------------------
$ 3,439,803 $ 3,464,534
===========================
The Company performs its annual impairment test for goodwill and other
intangible assets after the completion of the fiscal third quarter. During
fiscal 2006, management concluded that no impairment was required. During
this evaluation in fiscal 2005, management concluded that there had been an
impairment of certain goodwill and identifiable intangible assets.
70
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
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):
Continuing Discontinued Total
Operations Operations
---------- ---------------- -----
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 for our Retail segment were recorded in the Company's
statement of operations as a component of (loss) income from continuing
operations. The impairment charges for TSI and HNWC have been included in
the loss from discontinued operations in the statement of operations.
Fiscal 2004 impairment
----------------------
Due to operating profit and cash flows shortfalls during fiscal 2004, our
HNWC subsidiary recorded an impairment charge of $3.6 million related to the
HNWC tradename. The fair values of tradenames was estimated with the
assistance of an independent valuation specialist using the expected present
value of the discounted future cash flows. The 2004 HNWC impairment charges
have been in the Company's statement of operations as a component of loss
from discontinued operations.
Tradenames are considered to have indefinite useful lives and no amortization
was taken during fiscal 2006, 2005, or 2004. However, as discussed above,
certain tradenames and the water source were impaired in fiscal 2005 and
2004.
In fiscal 2005 the Company's covenants not to compete became fully amortized.
Amortization expense related to covenants not to compete was $76,698 and
$118,902 for fiscal 2005 and fiscal 2004, 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 $39,731, $39,732
and $59,730, for the fiscal years ended 2006, 2005 and 2004, respectively.
71
Amortization expense related to the amortizing intangible assets held at
September 2006 for each of the five subsequent years is estimated to be as
follows:
Fiscal Fiscal Fiscal Fiscal Fiscal
2007 2008 2009 2010 2011
--------- --------- -------- -------- --------
Favorable leases $ 40,000 $ 27,000 $ - $ - $ -
========= ========= ======== ======== ========
8. OTHER ASSETS:
Other assets at fiscal year ends 2006 and 2005 consisted of the following:
2006 2005
-------------------------
Cash surrender value of life
insurance policies $ 801,238 $ 795,830
Debt issuance costs 97,880 332,406
Other 348,346 108,337
-------------------------
$1,247,464 $1,236,573
=========================
Debt issuance costs represent fees incurred to obtain the revolving credit
facility and real estate loan and are amortized over the terms of the
respective loan agreements. Amortization expense was $385,487, $410,764, and
$90,422 for the fiscal years ended 2006, 2005 and 2004, respectively.
9. DEBT:
The Company finances certain obligations and, in the case of its former
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 2006 and 2005:
2006 2005
---------------------------
Revolving portion of the Facility, interest payable
at the bank's base rate (8.25% at fiscal year end 2006),
principal due April 2009 (as renewed in December 2006) $46,502,896 $44,563,654
Term Note A, payable in monthly installments of $16,333
plus interest at the bank's base rate (8.25% at fiscal
year end 2006), remaining principal due April 2009
(as renewed in December 2006) 770,533 973,734
72
2006 2005
---------------------------
Term Note B, payable in monthly installments of $100,000
plus interest at the bank's base rate plus 2%
(10.25% at fiscal year end 2006) through March 2008
(as renewed in December 2006) 1,550,000 3,625,000
---------------------------
48,823,429 49,162,388
Less current maturities 3,896,000 1,432,000
---------------------------
$44,927,429 $47,730,388
===========================
The Facility 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, 2006,
the credit limit on the revolving portion of the Facility was $54.2 million.
In addition, the Facility provides for a separate term loan in the initial
amount of $5.0 million ("Term Note B").
The Facility, which was set to expire in July 2007 based on the November 2006
amendment, will now expire in April 2009 as discussed in Note 18. The
Facility includes 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 of the Facility at September 30, 2006 are as
follows:
- Inclusion of the subsidiaries as part of the Facility.
- Inclusion of Term Note A within the $55.0 million revolving limit that
is amortized in equal monthly installments over 60 months.
- The Company borrows at the bank's base interest rate.
- 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) requires that consolidated
EBITDA (excluding TSI, TBG and HNWC) not be less than: (a) $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 was permitted to be zero, (b) $1,100,000
as of March 31, 2006 for the three-month period then ending, (c) $3,200,000
as of June 30, 2006 for the six-month period then ending, and (d) $5,500,000
as of September 30, 2006 for the ninth-month period then ending, and (e)
$6,500,000 as of December 31, 2006 for the twelve-month period then ending.
The Facility also provides that the Company may not pay dividends on its
common stock in excess of $0.72 per share on an annual basis.
The facility also contains an 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 requiring a payment (in cash or other
property) to be made under or in connection with the guaranty by AMCON of the
73
TSI acquisition notes or the water royalty under the asset purchase agreement
for the purported sale of TSI assets.
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 default may redirect funds from the lock-box to a loan account
in the name of the lenders on a daily basis and apply the funds against the
revolving loan balance.
As of September 30, 2006, the outstanding balance on the Facility was $47.3
million, including Term Note A. The Facility bears interest at the bank's
base rate, which was 8.25% as of September 30, 2006 and is collateralized by
all of the Company's equipment, intangibles, inventories, and accounts
receivable.
The outstanding balance on Term Note B was $1.6 million at September 2006.
It bears interest at the bank's base rate, plus 2.0%, which was 10.25% as of
September 30, 2006 and, as amended, is payable in equal monthly installments
of $0.1 million.
At September 30, 2006 the Company was in violation of the revolving credit
facility's financial covenant requiring minimum monthly EBITDA of $100,000.
As discussed in Note 18, in December 2006, the Company executed a new
amendment to the Facility with LaSalle Bank which extended the maturity date
of the Facility to April 2009. In connection with the new amendment, the
minimum monthly EBITDA covenant violation at September 30, 2006 was waived.
The Company's Chairman has personally guaranteed repayment of the Facility
and the term loans. However, the amount of his guaranty is capped at $10.0
million and is automatically reduced by the amount of the repayment on Term
Loan B and certain other deductions, which resulted in the guaranteed
principal outstanding being reduced to $6.6 million as of September 30, 2006.
AMCON will pay the Company's Chairman an annual fee equal to 2% of the
guaranteed principal in return for the personal guarantee.
LONG-TERM DEBT:
---------------
In addition to the Facility, the Company also has other long-term obligations
at fiscal year end 2006 and 2005 that consisted of the following:
2006 2005
---------------------------
Continuing operations
---------------------
Note payable to a bank ("Real Estate Loan"),
interest payable at a fixed rate of 8.0% with
monthly installments of principal and interest
of $56,531 per month through April 2009 (as amended);
remaining principal due April 2009 (as amended),
collateralized by two owned distribution facilities $6,005,175 $ 6,203,543
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 918,400 967,600
74
2006 2005
---------------------------
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 263,429 359,429
Obligations under capital leases, payable in monthly
installments with interest rates from 4.91% to 16.4%
through January 2010 184,811 496,615
Notes payable, interest payable at a fixed rates between
8.0% - 9.5% with monthly installments of principal and
interest of $2,226 - $2,677 per month through July 2011
collateralized by delivery vehicles 221,672 -
---------------------------
7,593,487 8,027,187
Less current maturities - continuing operations 524,130 655,667
---------------------------
$7,069,357 $7,371,520
Discontinued operations ===========================
-----------------------
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 2,488,700 2,527,716
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 a warehouse owned by TSI 92,328 92,328
Note payable, interest payable at a fixed rate of 5%, due
currently with accrued interest 14,042 49,042
Obligations under capital leases, payable in monthly
installments an interest rate of 5.55% through October 2007 265,287 501,138
Note payable, interest payable at a fixed rate of 10.0%
with weekly installments of principal and interest of
$3,000 per week through Sept 2008; remaining principal
due Oct 2008 329,763 -
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 1,000,000
Notes due to related parties, principal and interest
due December 2005, interest at 7% 1,000,000 1,000,000
Notes due to related party, principal and interest
due December 2005, bearing interest at 300 basis
points above the yield on 10-year treasury notes
(7.72% at September 2006) 750,000 -
---------------------------
6,440,120 5,670,224
Less current maturities - discontinued operations 4,159,890 2,563,628
---------------------------
$2,280,230 $3,106,596
===========================
75
Long-term obligations, excluding obligations under the Facility and related
party debt, have contractual maturities as follows:
Fiscal Year Ending
------------------
2007 $ 1,934,021
2008 907,142
2009 7,577,311
2010 830,740
2011 34,393
Thereafter -
------------
$ 11,283,607
============
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 2006.
TSI loans
---------
In connection with the acquisition of TSI in fiscal 2004, the Company
financed a portion of the acquisition through notes payable 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 pending TSI
litigation as discussed in Note 14, TSI has stopped making principal and
interest payments on this debt until such litigation/mediation has been
settled. Accordingly, the notes have been classified based on their
contractual terms. At September 30, 2006, the outstanding balance on the
note was approximately $2.5 million and is included with TSI as a component
of discontinued operations as discussed in Note 2.
In addition to the note above, TSI assumed $0.1 million as part of the
purchase of the assets in 2004 in connection with a warehouse that TSI owns.
The note had a fixed rate of 5.0% with quarterly interest payments due
beginning in July 2004 and a maturity date in January 2007. The note and the
unpaid interest are in default at September 30, 2006 and in November 2006 the
Company received notice of foreclosure from the lender. At September 30,
2006, the outstanding balance on the note was approximately $0.1 million and
is included with TSI as a component of discontinued operations as discussed
in Note 2.
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 (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.
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.
76
Capital leases
--------------
The Company has several capital leases for office equipment, warehouse and
water bottling and packaging equipment. As of September 2006, the
outstanding balances on the capital leases totaled approximately $0.5
million.
OTHER
-----
AMCON has issued a letter of credit in the amount of approximately $1.0
million to its workers' compensation insurance carrier as part of its self-
insured loss control program.
10. OTHER INCOME, NET:
Other income, net consisted of the following for fiscal years 2006, 2005 and
2004:
2006 2005 2004
------------------------------------------
Interest income $ (51,865) $ (45,831) $ (37,372)
Dividends - - (4,250)
Rent income (3,503) (4,289) (4,135)
Gain from sale of investments - - (507,418)
Royalty (72,771) (15,211) -
Other (9,102) (14,774) (16,100)
------------------------------------------
$ (137,241) $ (80,105) $ (569,275)
==========================================
11. INCOME TAXES:
Components of income tax expense (benefit) from continuing operations for the
fiscal years ended 2006, 2005 and 2004 consisted of the following:
2006 2005 2004
----------------------------------------
Current:
Federal $ - $ 1,181,938 $ 1,964,103
State 113,489 129,409 175,591
----------------------------------------
113,489 1,311,347 2,139,694
----------------------------------------
Deferred:
Federal 634,501 (1,709,836) 82,070
State (315,990) 202,489 64,236
----------------------------------------
318,511 (1,507,347) 146,306
----------------------------------------
Income tax expense (benefit) $ 432,000 $ (196,000) $ 2,286,000
========================================
77
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 2006, 2005 and 2004:
2006 2005 2004
-----------------------------------------
Tax at statutory rate $ 596,517 $ (361,590) $ 1,937,635
Amortization of goodwill and
other intangibles (5,302) (4,777) (4,777)
Nondeductible business expenses 34,675 12,224 20,826
Minority interest in subsidiary - (53,074) -
State income taxes, net of
federal tax benefit 74,903 369,912 206,800
Valuation allowance, state net
operating losses - 52,297 -
State net operating loss (257,965) - -
Other (10,828) (210,992) 125,516
-----------------------------------------
$ 432,000 $ (196,000) $ 2,286,000
=========================================
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 2006 and 2005 relate to the following:
2006 2005
---------------------------
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 492,796 $ 418,294
Accrued expenses 526,685 528,811
Inventory 844,894 593,110
AMT credit carry forwards 285,333 285,333
Other 75,272 81,545
---------------------------
2,224,980 1,907,093
Noncurrent:
Fixed assets $ 1,842,605 $ 1,705,661
Intangible assets 2,167,630 2,530,848
Net operating loss carry
forwards - federal 4,582,108 4,214,883
Net operating loss carry
forwards - state 1,290,904 -
Other 88,815 -
---------------------------
9,972,062 8,451,392
---------------------------
Total deferred tax assets 12,197,042 10,358,485
Valuation allowance (1,139,585) (635,338)
---------------------------
Net deferred tax assets $ 11,057,457 $ 9,723,147
===========================
78
2006 2005
---------------------------
Deferred tax liabilities:
Current:
Trade discounts $ 251,992 $ 205,570
Inventory - 35,880
Unrealized gains on interest
rate swap contracts - 23,431
---------------------------
251,992 264,881
Noncurrent:
Fixed assets 1,629,454 1,204,800
Goodwill 430,096 310,751
---------------------------
2,059,550 1,515,551
---------------------------
Total deferred tax liabilities $ 2,311,542 $ 1,780,432
===========================
Net deferred tax assets (liabilities):
Current $ 1,972,988 $ 1,642,212
Noncurrent 6,772,927 6,300,503
---------------------------
$ 8,745,915 $ 7,942,715
===========================
During fiscal 2006 and 2005, the Company recorded a valuation allowance of
$0.5 million and $0.6 million, respectively, against deferred tax assets,
consisting primarily of state net operating losses of Hawaiian Water and
Trinity Springs for which realization of the deferred tax asset is no longer
more likely than not.
No additional valuation allowance was recorded against the remaining federal
and state net operating losses as of September 30, 2006 and 2005, 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 2006 was $4.6 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, $2.3
expires in 2025 and $0.6 million in 2026. The remaining $1.1 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 $1.1 million at fiscal year end 2006 is limited (by Internal Revenue Code
Section 382) to approximately $0.8 million in fiscal year 2007 and $0.1
million per year thereafter through 2022.
12. 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%
79
of the next 2% contributed for a maximum match of 4% of employee
compensation. The Company contributed $0.6 million, $0.6 million and
$0.5 million (net of employee forfeitures) to the profit sharing plans
during each of the fiscal years ended 2006, 2005 and 2004,
respectively.
13. RELATED PARTY TRANSACTIONS:
For the fiscal years ended 2006, 2005 and 2004, the Company was charged
$72,000, $72,000 and $66,000, 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. The amount
paid for consulting services during fiscal 2004 was $37,500, plus
reimbursement of expenses.
The Company's Chairman has personally guaranteed repayment of the
Facility and the term loans. However, the amount of his guaranty is
capped at $10.0 million and is automatically reduced by the amount
of the repayment on Term Loan B and certain other deductions, which
resulted in the guaranteed principal outstanding being reduced to $6.6
million as of September 30, 2006. AMCON will pay the Company's Chairman
an annual fee equal to 2% of the guaranteed principal 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 company (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.
During the first quarter of fiscal 2006, Draupnir, LLC, a private equity firm
whose Members include two of the Company's directors, extended an additional
$750,000 note to TSI. The note bears a floating rate of 300 basis points
above the yield on ten year treasury notes and was due December 12, 2005.
The note was in default at September 30, 2006.
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.
80
14. 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 $0.3 million
and $0.5 million as of fiscal year ends 2006 and 2005, respectively, net of
accumulated amortization of $0.8 million and $0.6 million, respectively.
The Company leases various office and warehouse facilities and equipment
under noncancellable operating leases. Rent charged to expense during fiscal
years 2006, 2005 and 2004 under such lease agreements was $5.0 million, $5.1
million and $5.2 million, respectively.
At September 30, 2006, minimum future lease commitments for continuing and
discontinued operations were as follows:
Capital Operating
Fiscal Year Ending Leases Leases
------------------ --------------------------
2007 $ 402,813 $ 3,965,435
2008 41,714 3,246,935
2009 20,640 3,094,780
2010 6,879 2,521,601
2011 - 2,045,089
Thereafter - 4,091,299
--------------------------
Total minimum lease payments $ 472,046 $ 18,965,139
============
Less amount representing interest 21,948
-----------
Present value of net minimum
lease payments $ 450,098
===========
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 2006 and 2005
was $1.1 million and $1.1 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.
81
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.
Trinity Springs, Inc. Litigation
--------------------------------
The Company is involved in litigation regarding the ownership of the assets
of Trinity Springs, Inc. ("TSI"), which is a consolidated subsidiary of
AMCON. The dispute, which began in June 2004, arose over the sale of
substantially all of the assets of Trinity Springs, Ltd. (which later changed
its name to Crystal Paradise Holdings, Inc. ("CPH"). The Plaintiffs in the
lawsuit are a group of minority shareholders, and the Defendants are AMCON,
TSL Acquisition Corp (which later became TSI), CPH, and the former directors
of CPH.
In December 2005, the District Court of the Fifth Judicial District of the
State of Idaho ("the Court") issued a ruling granting the minority
shareholder plaintiffs' motion for partial summary judgment declaring that
the stockholders CPH did not validly approve the sale of its assets to TSI
(AMCON's consolidated subsidiary) because the vote of certain shares issued
as a dividend should not have been counted in the vote. The Court did not
rule on the appropriate relief to be granted as a result of the lack of
shareholder approval for the asset sale transaction, nor did it rule 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 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 Court has not taken any action to divest TSI of its ownership of
the assets.
Since the Court's December ruling, several events have taken place. The
minority shareholder plaintiffs have filed notice with the District Court
that they agree that rescission is not feasible. During approximately the
same time frame, the entire CPH Board of Directors resigned. Upon their
resignation, the Court appointed a custodian to manage and direct the affairs
of CPH. Additionally, the custodian was designated by the Court as CPH's
investigative panel to determine whether the maintenance of a derivative
proceeding is in the best interest of CPH.
During the last several months, the parties have been engaged in settlement
discussions. Recently, a settlement agreement was reached between the
parties. The settlement, resolved all disputes between the minority
shareholders plaintiffs, CPH, AMCON, TSI and the Defendant Directors, with
two exceptions. The settlement did not resolve claims that CPH may have
against AMCON and TSI or that AMCON and TSI may have against CPH. The
settlement also did not resolve the claims of a single minority shareholder
plaintiff, who did decline to sign on to the settlement. On October 16,
2006, the Court approved the parties' settlement and ordered the dismissal
with prejudice of the lawsuit, except for the claims of the single minority
shareholder plaintiff. Those claims remain pending in the lawsuit.
82
On December 21, 2006, CPH filed a first amended complaint in the Fourth
Judicial District of the State of Idaho (Elmore County) against AMCON and TSI
and other defendants relating to AMCON and TSI's purchase of the assets of
CPH and operation of the business. In its amended complaint, CPH re-asserts
claims of foreclosure; breach of the asset purchase agreement, promissory
notes and water royalty obligations; quantum meruit; unjust enrichment; and
collection and enforcement of its security interest. In addition, CPH again
seeks a declaratory judgement that: (i) AMCON and TSI are obligated to
perform under the asset purchase agreement and other agreements related to
the asset purchase transaction; (ii) the actions AMCON and TSI constitute
events of default; (iii) TSI has not cured the events of default; (iv) TSI's
obligations are accelerated under certain promissory notes; and (v) AMCON is
liable to CPH under a guaranty and suretyship agreement for all amounts owing
to CPH under the asset purchase agreement and related agreements. Finally,
CPH seeks its costs and attorney fees. CPH has not served its amended
complaint on AMCON or TSI.
AMCON disagrees with the assertions made by CPH and intends to vigorously
defend against CPH's claims and to pursue its own claims against CPH.
With respect to the remaining claims in the original lawsuit and the claims
asserted by CPH in its recently filed complaint, 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, if any because
substantial discovery is needed, several unresolved legal issues exist, and
other pretrial work is yet to be completed.
The Company is in settlement discussions with respect to this litigation,
pursuant to which the Company is undertaking to divest substantially all of
the assets of TSI as part of a complete settlement of any and all claims by
CPH against the Company. As required by SFAS 144, management believes that
the recorded balance of the subject assets and liabilities have been
recognized at their respective fair values.
15. STOCK OPTION PLAN:
Prior to its expiration in June 2004, AMCON maintained a stock-based
compensation plan ("the Plan") which provided that the Compensation Committee
of the Board of Directors granted incentive stock options and non-qualified
stock options pursuant to the Stock Option Plan of up to 550,000 shares. In
fiscal 2005, the Compensation Committee evaluated various equity based
compensation programs and chose not to implement a new plan.
The Company accounted for the stock option grants in accordance with
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees" using the intrinsic value method under which
compensation cost was measured by the excess, if any, of the fair market
value of its common stock on the date of grant over the exercise price of the
stock option using the Black-Scholes option pricing model. Accordingly,
stock-based compensation cost related to stock option grants was not
reflected in income or loss as all options granted under the plan had an
exercise price equal to or above the market value of the underlying stock on
the date of grant. 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.
83
On October 1, 2005, the Company adopted SFAS No. 123R, Shared Based Payment
(SFAS 123R). The Company chose to apply the modified prospective transition
method as permitted by SFAS 123R and therefore has not restated prior
periods. Under this transition method, compensation cost associated with
employee stock options recognized for fiscal 2006, includes amortization
related to the remaining unvested portion of stock options granted prior to
September 30, 2005. The Company did not grant any stock options in fiscal
2006, 2005 or 2004.
As a result of adopting SFAS 123R, net income (loss) before taxes included
share-based compensation expense of $60,000 for fiscal 2006. At September
30, 2006, there were 29,635 options fully vested and exercisable under the
Stock Option Plan and unamortized compensation expense totaled approximately
$12,000. 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 9,171 9,171
Fiscal 1999 $ 45.68 - $ 51.14 6,683 6,683
Fiscal 2000 $ 34.50 3,165 3,165
Fiscal 2003 $ 28.80 4,046 2,428
------ ------
23,065 21,447
At September 30, 2006, 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
====== ======
The stock options have varying vesting schedules ranging up to five years,
and expire ten years after the date of grant. The Plan expired in June 2004
and therefore there were no new stock options were granted in fiscal 2004,
2005 and 2006. The table below summarizes information about stock options
outstanding as of the following fiscal years:
84
2006 2005 2004
------------------------------------------------------
Weighted Weighted Weighted
Average Exercise Average Exercise Average Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------
Outstanding at beginning of period 44,082 $30.43 50,753 $29.75 52,475 $30.21
Granted - - - - - -
Exercised - - - - (33) 15.68
Forfeited/Expired (12,829) 29.96 (6,671) 25.22 (1,689) 44.86
------------------------------------------------------
Outstanding at end of period 31,253 $30.62 44,082 $30.43 50,753 $29.75
======================================================
Options exercisable at end of period 29,635 41,254 45,979
======== ======== ========
The following summarizes all stock options outstanding at the end of fiscal
2006:
Exercisable
Remaining ----------------------------
Exercise Number Weighted-Average Weighted-Average Number Weighted-Average
Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------- ----------- ---------------- ---------------- ----------- ----------------
1998 Options $15.68 11,005 1.1 years $15.68 11,005 $15.68
1999 Options $36.82-$51.14 10,535 2.6 years $46.53 10,535 $46.53
2000 Options $34.50 3,165 3.7 years $34.50 3,165 $34.50
2002 Options $26.94 1,668 5.9 years $26.94 1,668 $26.94
2003 Options $28.26-$28.80 4,880 6.2 years $28.71 3,262 $28.66
------ ------ ------ ------
31,253 $30.62 29,635 $30.72
====== ====== ====== ======
16. 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. The Company had no derivative
instruments at September 30, 2006.
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.
85
17. BUSINESS SEGMENTS:
AMCON has two reportable business segments: the wholesale distribution of
consumer products and the retail sale of health and natural food 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. Also included in the "Other" column are
the charges incurred by the AMCON's holding company. The segments are
evaluated on revenues, gross margins, operating income (loss) and income
before taxes.
Wholesale
Distribution Retail Other/1/ Consolidated
---------------------------------------------------------------------
FISCAL YEAR ENDED 2006:
External revenues:
Cigarettes $ 605,798,030 $ - $ - $ 605,798,030
Health food - 36,848,392 - 36,848,392
Confectionery 55,427,905 - - 55,427,905
Tobacco, beverage & other 141,465,453 - - 141,465,453
---------------------------------------------------------------------
Total external revenues 802,691,388 36,848,392 - 839,539,780
Depreciation 1,287,994 609,172 - 1,897,166
Amortization - 39,731 - 39,731
Operating income (loss) 8,001,265 2,369,070 (3,895,102) 6,475,233
Interest expense 1,700,935 1,611,619 1,545,458 4,858,012
Income (loss) from continuing
operations before taxes 6,400,162 794,835 (5,440,535) 1,754,462
Total assets 66,533,513 12,139,370 16,193,663 94,866,546
Capital expenditures 803,179 177,331 - 980,510
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 - (112,094) 136,613,345
---------------------------------------------------------------------
Total external revenues 800,046,217 34,617,325 (112,094) 834,551,448
Depreciation 1,255,200 784,353 - 2,039,553
Amortization 57,752 58,678 - 116,430
Operating income (loss) 9,671,475 (3,490,836) (3,112,558) 3,068,081
Interest expense 1,042,685 1,580,033 1,588,967 4,211,685
Income (loss) from continuing
operations before taxes 8,670,227 (5,032,199) (4,701,527) (1,063,499)
Total assets 67,586,067 13,012,051 14,710,679 95,308,797
Capital expenditures 2,349,690 115,004 - 2,464,694
FISCAL YEAR ENDED 2004:
External revenues:
Cigarettes $ 597,310,736 $ - $ - $ 597,310,736
Health food - 32,431,573 - 32,431,573
Confectionery 55,641,414 - - 55,641,414
Tobacco, beverage & other 131,901,800 - - 131,901,800
---------------------------------------------------------------------
Total external revenues 784,853,950 32,431,573 - 817,285,523
Depreciation 1,121,873 765,371 - 1,887,244
Amortization 86,628 92,004 - 178,632
Operating income (loss) 8,430,445 90,133 (147,689) 8,372,889
Interest expense 1,208,436 1,213,098 821,704 3,243,238
Income (loss) from continuing
operations before taxes 7,754,389 (1,099,671) (955,793) 5,698,925
Total assets 71,794,523 17,426,436 22,508,904 111,729,863
Capital expenditures 318,988 591,330 - 910,318
86
/1/ Includes interest expense previously allocated to TBG, TSI and HNWC which
are classified as components of discontinued operations. Also includes
intercompany eliminations, assets related to discontinued operations and
charges incurred by the holding company.
18. SUBSEQUENT EVENTS:
Renewal of Credit Facility Agreement
------------------------------------
In December 2006, the Company executed a new amendment to the Facility with
LaSalle Bank. The significant terms of the new amendment include a $57.1
million credit limit, a April 2009 maturity date and an interest rate at
bank's prime rate.
The amendment also includes quarterly cumulative earnings before interest,
taxes, depreciation and amortization ("EBITDA") and a quarterly minimum debt
service ratio financial covenant of one to one beginning with the fiscal
quarter ending September 30, 2007 for the twelve month period then ended.
The cumulative minimum EBITDA requirements are as follows (a) $1,000,000 for
the three months ending December 31, 2006, December 31, 2007 and December 31,
2008 (b) $2,000,000 for the six months ending March 31, 2007, March 31, 2008,
and March 31, 2009, (c) $4,500,000 for the nine months ending June 30, 2007,
June 30, 2008 and $7,000,000 for the twelve months ending September 30, 2007
and September 30, 2008.
Stock Option Grant
------------------
A non-qualified option to purchase 25,000 shares of the Company's common
stock was granted on December 12, 2006 to Christopher Atayan, Chief Executive
Officer, Vice Chairman and Director. The exercise price is $18.00, the
closing price on the American Stock Exchange on December 11, 2006. Because
the Company's stock option plan terminated in 2004, the option is subject to
approval by the stockholders of the Company at the next annual meeting. If
such stockholder approval is not obtained at the meeting, the option will be
automatically terminated.
Sale of HNWC
------------
On November 20, 2006, HNWC signed and completed an agreement to sell
substantially all of its assets for approximately $3.8 million in cash plus
the assumption of operating and capital leases.
19. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following tables set forth selected financial information for each of the
eight quarters in the two fiscal years ended September 30, 2006 and September
30, 2005. 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.
87
(Dollars in thousands, except per share data)
------------------------------------------------------------------------------------------
Fiscal Year 2006 First Second Third Fourth
------------------------------------------------------------------------------------------
Sales...................................... $ 198,217 $ 195,803 $ 222,190 $ 223,330
Gross profit .............................. 14,027 14,640 15,603 15,864
(Loss) income from continuing operations ---------------------------------------------
before income taxes ..................... (238) 494 1,108 390
(Loss) income from continuing operations... (159) 289 673 519
Loss from discontinued operations.......... (1,028) (789) (327) (289)
---------------------------------------------
Net (loss) income ......................... (1,187) (500) 346 230
Preferred stock dividend requirements...... (75) (81) (104) (106)
Net (loss) income available to common ---------------------------------------------
shareholders ............................. $ (1,262) $ (581) $ 242 $ 124
=============================================
Basic earnings (loss) per share available
to common shareholders:
Continuing operations ................... $ (0.42) $ 0.39 $ 1.08 $ 0.78
Discontinued operations ................. (1.97) (1.49) (0.62) (0.55)
---------------------------------------------
Net basic loss per share available
to common shareholders ................. $ (2.39) $ (1.10) $ 0.46 $ 0.23
=============================================
Diluted earnings (loss) per share available
to common shareholders:
Continuing operations ................... $ (0.42) $ 0.37 $ 0.79 $ 0.61
Discontinued operations ................. (1.97) (1.35) (0.38) (0.34)
---------------------------------------------
Net diluted (loss) earnings per share
available to common shareholders ....... $ (2.39) $ (0.98) $ 0.41 $ 0.27
=============================================
(Dollars in thousands, except per share data)
------------------------------------------------------------------------------------------
Fiscal Year 2005 First Second Third Fourth
------------------------------------------------------------------------------------------
Sales...................................... $ 212,373 $ 191,673 $ 213,512 $ 216,993
Gross profit .............................. 15,564 13,563 15,206 16,158
Impairment charges ........................ - - - 4,235
Income (loss) from continuing operations ---------------------------------------------
before income taxes ...................... 1,401 (506) 1,313 (3,271)
Income (loss) from continuing operations... 956 (327) 800 (2,199)
Loss from discontinued operations (1,420) (1,578) (1,026) (7,948)
---------------------------------------------
Net loss................................... (464) (1,905) (226) (10,147)
Preferred stock dividend requirements...... (73) (73) (74) (75)
---------------------------------------------
Net loss available to common shareholders $ (537) $ (1,978) $ (300) $ (10,222)
=============================================
88
------------------------------------------------------------------------------------------
Fiscal Year 2005 First Second Third Fourth
------------------------------------------------------------------------------------------
Basic earnings (loss) per share available
to common shareholders:
Continuing operations ................... $ 1.68 $ (0.76) $ 1.38 $ (4.31)
Discontinued operations ................. (2.70) (2.99) (1.95) (15.08)
---------------------------------------------
Net basic loss per share available to
common shareholders............... ....... $ (1.02) $ (3.75) $ (0.57) $ (19.39)
=============================================
Diluted earnings (loss) per share available
to common shareholders:
Continuing operations ................... $ 1.36 $ (0.76) $ 1.12 $ (4.31)
Discontinued operations ................. (2.02) (2.99) (1.44) (15.08)
---------------------------------------------
Net diluted loss per share available
to common shareholders.......... ....... $ (0.66) $ (3.75) $ (0.32) $ (19.39)
=============================================
Based upon valuations obtained from an independent valuation specialist in
fiscal 2005, management determined that a portion of the tradenames and
goodwill at the Company's retail and beverage segments were impaired. The
entities comprising our beverage segment, HNWC and TSI, are classified as a
component of discontinued operations at September 30, 2006 in accordance
Statement of Financial Accounting Standard ("SFAS") No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets".
The impairments recorded in the retail and beverage segments were the result
of projected shortfalls in operating cash flows necessary to support the
reporting units carrying values. 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. The impairment
charges for our retail segment are reflected in the Company's statement of
operations as a component of income (loss) from continuing operations before
income taxes. Impairment charges incurred by our beverage segment are
reflected in the Company's statement of operations as a component of loss
from discontinued operations, net of income tax benefit. The Company
incurred no impairment charges in fiscal 2006.
A summary of the impairment charges by entity for fiscal 2005 are as follows
(in millions):
Continuing Discontinued Total
Operations Operations
---------- ------------------- -----
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
===== ===== ===== =====
In addition to the impairment charges incurred during fiscal 2005, our HNWC
subsidiary also incurred $3.6 million impairment charge in fiscal 2004
related to the HNWC tradename. Based on competitive pressures in the natural
89
spring water bottling business, operating profits and cash flows were lower
than expected in fiscal 2004. The impairment charges were calculated based
on fair value estimates provided with the assistance of an independent
valuation specialist using the expected present value of the discounted
future cash flows. The resulting $3.6 million impairment charge is reflected
in the Company's statement of operations as a component of loss from
discontinued operations.
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(f) 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. As previously
disclosed, in the connection with the Company's fiscal year 2005 audit, and
the Company's evaluation of disclosure and controls procedures, management
determined that material weaknesses existed at September 30, 2005 related to
incorrect accounting entries made at the Company's HNWC subsidiary, and
interest expense allocations made by the Company to its one of its wholly-
owned subsidiaries (The Beverage Group, Inc.) which was a component of
discontinued operations. During fiscal 2006, the Company implemented a plan
which resulted in the successful remediation and elimination of our material
weaknesses in internal control over financial reporting as disclosed in
Form 10-K for the fiscal year ended September 30, 2005.
Except for the changes related to the remediated material weaknesses
described above, there has been no change during the Company's fiscal year
ended September 30, 2006, in the Company's internal controls over financial
reporting (as such term is defined in Rules 13(a)-15(f) under the Exchange
Act) that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
90
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Registrant's Proxy Statement to be used in connection with the 2007
Annual Meeting of Shareholders (the "Proxy Statement") will contain under the
caption "Election of Directors", "Employment Agreements" and "Compensation of
Executive Officer" certain information required by Item 10 of Form 10-K and
such information is incorporated herein by this reference. Executive
officers are as follows:
Name Age Position
---- --- --------
William F. Wright 64 Chairman of the Board, Director
Christopher H. Atayan 46 Chief Executive Officer,
Vice Chairman, Director
Kathleen M. Evans 59 President, Director
Eric J. Hinkefent 45 President of CNF and HFA
Andrew C. Plummer 32 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.
CHRISTOPHER H. ATAYAN became Chief Executive Officer of the Company effective
October 4, 2006. During fiscal 2006, Mr. Atayan served as the Company's Vice
Chairman and Chief Corporate Officer and has been a director of the Company
since 2004. Mr. Atayan is also Chairman of Hotlink Incorporated and a
consultant to Draupnir, LLC, the parent of Draupnir Capital, LLC. Mr. Atayan
has served as the Senior Managing Director of Slusser Associates, a New York
investment banking firm since 1988.
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.
91
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. To the Company's knowledge, based solely upon
review of the copies of Forms 3,4 and 5 furnished to the Company between
October 1, 2005 and September 30, 2006, the Company's officers, directors and
greater than 10% beneficial owners complied with all Section 16(a) filing
requirements except as follows: Jeremy W. Hobbs and Allen D. Petersen will
file a late Form 3 and Form 4, respectively, for a transaction that occurred
on March 6, 2006 and Jeremy W. Hobbs, Allen D. Petersen and William F. Wright
will file a late Form 4 for a transaction that occurred on August 31, 2006.
CHANGE OF CONTROL AGREEMENTS
On December 29, 2006, we entered into a change of control agreement with each
of Christopher H. Atayan, our Chief Executive Officer, and Kathleen M. Evans,
our President (each an "Agreement"). The initial term of the Agreement
extends for two years until December 31, 2008. Beginning on December 31,
2007 and each December 31 following, the Agreement term will be automatically
extended for one additional year unless we give the applicable officer notice
by September 30 of that year. In addition, if a Change in Control (as
defined in the Agreement) occurs during the term of the Agreement, the term
of this Agreement shall continue for a period of 24 months after the month in
which such Change in Control occurred.
The Agreement requires Mr. Atayan or Ms. Evans, as applicable, to remain in
our employ for a period of six months after a Change in Control, unless
involuntarily terminated by us other than for Cause (as defined in the
Agreement) or terminated by the officer for Good Reason (as defined in the
Agreement).
If a Change of Control occurs and the term of the Agreement has not expired,
we will owe the applicable officer the following:
- During any period prior to termination of employment that the officer
fails to perform full-time duties as a result of disability, total
compensation, including base salary, bonus and any benefits, will continue
unaffected until either the officer returns to the full-time performance of
duties or employment is terminated.
- If the officer is terminated for Cause or by other than for Good
Reason, we shall pay the officer his or her full base salary through the date
of termination plus all other amounts to which the officer is then entitled
to under any of our compensation or benefit plans.
- If employment terminates by reason of death, benefits shall be
determined in accordance with our retirement, survivor's benefits, insurance
and other applicable programs and plans then in effect.
- If employment is either terminated (other than for Cause or disability)
or terminated by the officer for Good Reason, the officer shall be entitled
to the following benefits.
92
- All accrued compensation and benefits.
- Subject to adjustment, a severance payment in the form of a cash lump
sum distribution equal to Current Annual Compensation (as defined in the
Agreement) multiplied by two.
- Subject to adjustment, life and health insurance benefits (for 24 months
after termination or until the officer turns 65 if earlier) that are
substantially similar to those received immediately prior to the date of
termination. These benefits will be provided at a cost that is no greater
than the amount paid for such benefits by active employees who participate in
such Corporation-sponsored welfare benefit plan or, if less, the amount paid
for such benefits by the officer immediately prior to the event date.
ITEM 11. EXECUTIVE COMPENSATION
The Registrant's Proxy Statement will contain under the captions
"Compensation of Directors", "Compensation of Executive Officers" and
"Compensation Committee Interlocks and Insider Participation", the
information required by Item 11 of Form 10-K, and such information is
incorporated herein by this reference. The information set forth under the
captions "Report of Compensation Committee on Executive Compensation" and
"Company Performance" is expressly excluded from such incorporation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Registrant's Proxy Statement will contain under the captions "Ownership
of Our Common Stock by Our Directors and Executive Officers and Other
Principal Stockholders" and "Equity Compensation Plan Information" the
information required by Item 12 of Form 10-K and such information is
incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Registrant's Proxy Statement will contain under the caption "Certain
Relationships and Related Transactions" the information required by Item 13
of Form 10-K and such information is incorporated herein by this reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Registrant's Proxy Statement will contain under the caption "Ratification
of Appointment of Independent Auditor" the information required by Item 14 of
Form 10-K and such information is incorporated herein by this reference.
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 58.
93
(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 December 27, 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)
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)
94
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 (incorporated by reference to Exhibit
10.5 of AMCON's annual report on Form 10-K
filed on August 23, 2006)
10.6 Fifth Amendment to Amended and Restated Loan and Security Agreement,
dated February 8, 2006 (incorporated by reference to Exhibit 10.6 of
AMCON's annual report on Form 10-K filed on August 23, 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)
10.8 Seventh Amendment to Amended and Restated Loan and Security Agreement,
dated November 6, 2006 (incorporated by reference to Exhibit 10.37 of
AMCON's quarterly report on Form 10-Q filed on November 20, 2006)
10.9 Eighth Amendment to Amended and Restated Loan and Security Agreement,
dated December 28, 2006
10.10 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)*
95
10.11 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)*
10.12 Agreement, dated September 26, 2006, between the Company and
William F. Wright regarding Mr. Wright's services to the Company
(incorporated by reference to Exhibit 10.1 of AMCON's Interim Report on
Form 8-K filed on October 10, 2006)*
10.13 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)*
10.14 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)
10.15 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)
10.16 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)
10.17 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)
10.18 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)
10.19 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)
10.20 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)
10.21 Shareholders Agreement, dated June 17, 2004, by and between TSL
Acquisition Corp, AMCON Distributing Company and Trinity Springs, Ltd.
(incorporated by reference to Exhibit 10.18 of AMCON's Quarterly Report
on Form 10-Q filed on August 9, 2004)
10.22 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)
96
10.23 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)
10.24 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)
10.25 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)
10.26 Guaranty and Suretyship Agreement between William F. Wright and the
Company, dated June 17, 2004, regarding the guaranty of the Company's
indebtedness to Trinity Springs, Ltd. (now Crystal Paradise Holdings)
under the Three Year Note, the Ten Year Note and the Water Royalty
(subject to a $5.0 million cap on the Water Royalty).
10.27 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)
10.28 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)
10.29 Term Real Estate Promissory Note, dated December 21, 2004, issued by
AMCON Distributing Company to M&I (incorporated by reference to
Exhibit 10.21 of AMCON's quarterly report on Form 10-Q filed on
February 14, 2005)
10.30 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)
10.31 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)
10.32 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)
10.33 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)
97
10.34 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)
10.35 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)
10.36 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)
10.37 $400,000 Subordinated Promissory Note by and between Trinity Springs,
Inc. and Draupnir, LLC dated October 20, 2005 (incorporated by
reference to Exhibit 10.34 of AMCON's quarterly report on Form 10-Q
filed on September 29, 2006)
10.38 $200,000 Subordinated Promissory Note by and between Trinity Springs,
Inc. and Draupnir, LLC dated November 7, 2005 (incorporated by
reference to Exhibit 10.35 of AMCON's quarterly report on Form 10-Q
filed on September 29, 2006)
10.39 $150,000 Subordinated Promissory Note by and between Trinity Springs,
Inc. and Draupnir, LLC dated December 1, 2005 (incorporated by
reference to Exhibit 10.36 of AMCON's quarterly report on Form 10-Q
filed on September 29, 2006)
10.40 Change of Control Agreement between the Company and Christopher H.
Atayan, dated December 29, 2006
10.41 Change of Control Agreement between the Company and Kathleen M. Evans,
dated December 29, 2006
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 (McGladery &
Pullen)
23.2 Consent of Independent Registered Public Accounting Firm (Deloitte &
Touche LLP)
31.1 Certification by Christopher H. Atayan, Chief Executive Officer and
Vice Chairman, furnished pursuant to section 302 of the
Sarbanes-Oxley Act
98
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 Christopher H. Atayan, Chief Executive Officer and
Vice Chairman, 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.
99
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
28th day of December 2006.
AMCON DISTRIBUTING COMPANY
(registrant)
By: /s/ Christopher H. Atayan
-----------------------------
Christopher H. Atayan,
Chief Executive Officer
and Vice Chairman
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
28th day of December 2006.
Signature Title
--------- -----
/s/ William F. Wright Chairman of the Board and Director
------------------------
William F. Wright
/s/ Christopher H. Atayan Chief Executive Officer
------------------------ and Vice Chairman
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
100
/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
/s/ Timothy R. Pestotnik Director
------------------------
Timothy R. Pestotnik
/s/ William R. Hoppner Director
------------------------
William R. Hoppner
101
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
AMCON Distributing company
Omaha, Nebraska
We have audited the consolidated financial statements of AMCON Distributing
Company and its subsidiaries (the "Company") as of September 30, 2006 and for
the year then ended and have issued our report thereon dated December 28,
2006, which report expresses an unqualified opinion. Our audits also
included the 2006 information in 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.
McGLADREY & PULLEN
Omaha, Nebraska
December 28, 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 26, 2003 833,532 (167,920) (126,008) Sep 24, 2004 539,604
Sep 24, 2004 539,604 220,233 (409,837) Sep 30, 2005 350,000
Sep 30, 2005 350,000 780,247/1/ (195,790) Sep 30, 2006 934,457
Allowance for
inventory
obsolescence Sep 26, 2003 312,250 77,473 - Sep 24, 2004 389,723
Sep 24, 2004 389,723 - (33,519) Sep 30, 2005 356,204
Sep 30, 2005 356,204 77,939 - Sep 30, 2006 434,143
/1/ Includes $405,261 allowance for doubtful accounts for TBG which
was reclassified from discontinued operations to continuing
operations during fiscal 2006.
S-2