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, 20062007
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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 Registrantregistrant 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) (Zip Code)
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 Registrantregistrant (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
Registrantregistrant 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 (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrants'registrants' knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Annual Report on
Form 10-K or any other amendment to this Form 10-K. / //X/
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer X
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Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes No X
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The aggregate market value of the voting and non-voting common equity securities held by
non-affiliates of the Registrantregistrant on March 31, 20062007 was approximately $3.7 million.$7,493,525, computed
by reference to the $23.80 closing price of such common stock equity on
March 30, 2007.
As of December 25, 2006November 5, 2007 there were 527,062529,436 shares of common stock outstanding.
Portions of the following document are incorporated by reference into the
indicated parts of this report: definitive proxy statement for the 2008
annual meeting of stockholders to be filed with the Commission pursuant to
Regulation 14A - Part III.
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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.................................................. 109
Item 1B. Unresolved Staff Comments..................................... 2119
Item 2. Properties.................................................... 2119
Item 3. Legal Proceedings............................................. 2219
Item 4. Submission of Matters to a Vote of Security Holders........... 2319
PART II
Item 5. Market for the Registrant's Common Equity, and Related Stockholder
Matters........................................... 24Matters, and Issuer Purchases of Equity Securities............ 21
Item 6. Selected Financial Data....................................... 2423
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 2625
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 4745
Item 8. Financial Statements and Supplementary Data................... 4846
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 9085
Item 9A. Controls and Procedures....................................... 9085
Item 9B. Other Information............................................. 9086
PART III
Item 10. Directors, and Executive Officers, of the Registrant............ 91and Corporate Governance....... 86
Item 11. Executive Compensation........................................ 9386
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters ............... 9387
Item 13. Certain Relationships and Related Transactions................ 93Transactions, and
Director Independence ........................................ 87
Item 14. Principal AccountantAccounting Fees and Services........................ 9387
PART IV
Item 15. Exhibits, and Financial Statement Schedules.................... 93Schedules....................... 87
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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 thesubsidiaries. The wholesale distribution
segment whichof our Company will be separately referred to as "ADC". Additionally,
the Company's 2007, 2006 and 2005 fiscal years ended September 30, are herein
referred to as fiscal 2007, fiscal 2006 and fiscal 2005, respectively. The
fiscal year-end balance sheet dates of September 30, 2007 and September 30,
2006 are referred to herein as September 2007 and September 2006,
respectively.
This report and the documents incorporated by reference herein, if any,
contain forward looking statements, which are inherently subject to risks and
uncertainties. See "Forward Looking Statements" under Item 7 of this report.
ITEM 1. BUSINESS
COMPANY OVERVIEW
AMCON Distributing Company was incorporated in Delaware in 1986 and our
common stock is listed on the American Stock Exchange (AMEX) under the symbol
"DIT". The Company operates two business segments:
- Wholesale Distribution Segment - The Company is a leading
wholesale distributor of consumer products, including cigarettes and
tobacco products, candy and other confectionery, beverages,
groceries, paper products and health and beauty care products.
- Retail Health Food Segment - The Company operates thirteen retail
health food stores in Florida and the Midwest.
WHOLESALE DISTRIBUTION BUSINESSSEGMENT
OPERATIONS. ADC serves approximately 5,0004,000 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.including convenience stores, grocery
stores, liquor stores, drug stores and tobacco shops. In November 2006, ADC
was ranked as the eighth (8th) largest convenience store distributor based on
annual sales, by Convenience Store News, a trade periodical, rankedperiodical. ADC asaccounted
for approximately 96% of the eighth (8th) largest distributor
in its industry out of approximately 1,000 distributors in the United States
based uponCompany's total revenue for 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.2007.
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 cigarettesIn fiscal 2007,
cigarette sales accounted for approximately 72%75% of the Company's sales volume during fiscal
2006, we continue to evaluate newADC's revenue, with
non-cigarette product lines in an attempt to lessen ADC's
dependence upon cigarette sales.categories comprising 25% of revenues. 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, film, 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,other
products.
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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 corporate office is in Omaha, Nebraska andNebraska. Additionally, ADC
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 224220
delivery vehicles, including straight trucks and over-the-road vehicles with
both refrigerated and nonrefrigerated trailers.
COMPETITIVE STRENGTHS. The wholesale distribution business is a mature,
highly competitive industry. To differentiate itself, ADC applies a number
of strategies focused around providing market leading customer service
programs and flexible delivery capabilities. These strategies have helped
position ADC as a distributor of choice for both small independent retail
outlets and multi-location retail outlets.
ADC's customer service programs include providing assistance in tracking and
maximizing vendor promotions, access to private label and custom food
services, store layout and design consultation, and overall profit
maximization consulting. These programs have proven particularly popular with
our independent retail outlets, many of which have less in-house expertise
and resources than multi-location retailers.
ADC's distribution service capabilities include several programs designed to
assist our customers in managing inventory and cash flow. These programs
include our next-day delivery policy and our acceptance of orders for
cut-case quantities (i.e. small quantity orders). Our customers also have
the ability to place their orders electronically through a number of
automated technologies, in addition to utilizing services such as automated
inventory tracking, access to competitive retail pricing data, and advisement
of new product offerings.
BUSINESS STRATEGY. The wholesale distribution industry (the "Industry")
continues to experience significant changes driven by high fuel costs,
increasing cigarette and tobacco excise taxes, the popularity of deep-
discount cigarette brands, and consolidation within the Industry's customer
base (particularly convenience stores and tobacco shops). Collectively,
these items have pressured profit margins industry-wide.
Cigarette and tobacco sales remain a large percentage of our customers' total
in-store sales volume. Historically, cigarette and tobacco products were
purchased from a variety of sales channels, including grocery stores. In
recent years, however, consumers have increasingly purchased their cigarette
and tobacco products from convenience stores, which is one of ADC's largest
customer segments. ADC remains largely dependent on or subject to the
pricing and promotional programs offered by the major tobacco manufacturers,
which can vary from year-to-year.
To capitalize on the industry-wide changes mentioned above, ADC has
aggressively managed its cost structure, heavily leveraged inventory
management strategies, and deployed new technologies and automation tools
where possible. These actions have allowed ADC to maintain competitive
pricing and position itself to capture new business, sell new services to
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our existing customers, explore acquisition opportunities, and further
penetrate the convenience store market. In addition, ADC remains committed
to growing its sales of non-tobacco products, which offer higher profit
margins and greater revenue stream diversity.
RETAIL HEALTH FOOD BUSINESSSEGMENT
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 34,000thousands of 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 robuststrong 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 key 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.categories. Management
continues to closely monitor the performance of all store locations, for opportunitiesin
addition to expand or identifyidentifying new locations for additional stores.
AMCON's retail health food stores are managed collectively from a central
office in Tulsa, Oklahoma, but utilizeDISCONTINUED OPERATIONS
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At September 2007, discontinued operations include the name recognitionresidual assets,
liabilities, and results of the
established health food retail chains. The Company strives to maintain the
local identityoperations 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"Trinity Springs, Inc. ("TSI") 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
6
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 partwhich were components of the
saleCompany's former beverage segment.
Trinity Springs, Inc. (TSI)
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During fiscal 2006, the Company discontinued the operations of TSI, which
operated a water bottling facility in Idaho, due to recurring losses, a lack
of capital resources to sustain operations, and the litigation discussed in
Note 14 to the Consolidated Financial Statements included in Item 8 of this
Annual Report on Form 10-K.
As described in Note 14 to the Consolidated Financial Statements, AMCON and
TSI were parties to litigation with Crystal Paradise Holdings, Inc. ("CPH")
regarding the April 24, 2004 Asset Purchase Agreement ("Asset Purchase
Agreement"), under which TSI acquired certain assets from CPH. On September
30, 2007, the Company signed a Mutual Release and Settlement Agreement (the
"Settlement Agreement") with CPH related to this litigation. The Settlement
Agreement calls for the mutual release and settlement of all outstanding and
potential litigation and claims among and between AMCON, TSI, and CPH with
respect to the Asset Purchase Agreement and the related acquisition.
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The Settlement Agreement also restructured the Company's obligations arising
from the Asset Purchase Agreement with CPH totaling approximately $6.5
million into a new $5.0 million note payable to CPH. The $5.0 million note
payable is due at the end of five years plus accrued interest at 5.0%. Items
restructured into the $5.0 million note payable included CPH's minority
interest in TSI, water royalties payable to CPH, notes payable to CPH, and
accrued interest payable to CPH. Additionally, the agreement provides CPH
with an eleven month option to purchase TSI's assets for a price equivalent
to the buyers also
assumed all capitalamount due CPH under the $5.0 million note payable, plus accrued
interest. The TSI asset purchase option can be extended an additional seven
months at CPH's election.
No monetary exchanges between the Company and operating leases from HNWC.CPH were required under the
Settlement Agreement. The Company has recorded a $1.5 million pre-tax
deferred gain in connection with the above settlement. This deferred gain
has been classified as a component of noncurrent liabilities of discontinued
operations in the Company's September 2007 Consolidated Balance Sheet.
The deferred gain will be recognized upon the earlier of CPH's election to
exercise its TSI asset purchase option or the expiration of the asset
purchase option.
Hawaiian Natural Water Company, Inc. (HNWC)
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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 throughIn 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 componentssold all 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, LLCHNWC for
approximately $3.8 million in cash andplus the buyer's assumption of all
operating and capital leases. The significant operating assets consisted of
accounts receivable, inventory, furniture and 7
fixtures, intellectual property
and all of its bottling equipment. In connection with the sale, the Company
has recorded a $1.6 million pre-tax gain on disposal of discontinued
operations. 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% -between 71% and 73% of the Company's total
salesrevenue for the fiscal years ending 20042005 through 2006.2007, while sales of candy,
beverages, food service, groceries, health food products, paper products,
health and beauty care products, and tobacco products accounted for between
27% and 29% of total revenue, during the same fiscal periods.
INFORMATION ON SEGMENTS
Information about our segments is presented in Note 17 to the Consolidated
Financial Statements.
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COMPETITION
The distribution industry is highly competitive.
There are many
distribution companiesa number of both small and large wholesale distributors operating
in the same geographical regions as ADC.ADC, resulting in a highly competitive
marketplace. 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.those of ADC. ADC seeks to distinguish itself from its competitors by
offering a higher level of 8
technology to retailers than is offered by its
smaller competitors and a higher level of customer service than is provided
by 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,chain, Whole Foods Market, and Wild Oats, continuecontinues to expand their geographic markets by opening storesthrough new store
openings and acquisitions, and competes with us in new markets, including markets
in which they may compete directly with our stores. In addition,many markets.
Additionally, conventional supermarkets and mass market outlets are also
increasing their emphasis on the sale of natural food 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 federal, state and local health
departments,governmental
agencies, including the U.S. Department of Agriculture, the Food and Drug
Administration, the Occupational Safety and Health Administration, and U.S.
Department of Transportation. These regulatory agencies generally impose
standards for product quality and sanitation, as well as,workplace safety, and 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 wasThe Company is also subject to various state regulations related to the distribution
and sale of cigarettes and tobacco products, generally in the form of
licensing and bonding requirements. Additionally, both federal regulations, designedand state
regulatory agencies have the ability to ensure (but not
guarantee)impose excise taxes on cigarette and
tobacco products. In the qualitypast several years, a number of the productstates have
increased excise taxes on cigarettes 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.tobacco products. Based on these controls, the
9
Company believes it met or exceeded all applicable regulatory standards
concerning the quality of its bottled water.
Inrecent
legislative activity, we expect this trend to continue in addition to
U.S. regulations, HNWC had to meetpossible increases in excise taxes by 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.federal government.
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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 substantial 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, 2006,2007, the Company, including HNWC, had 901874 full-time and part-time employees in
the following areas:
Managerial 3334
Administrative 79105
Delivery 119108
Sales & Marketing 318309
Warehouse 352318
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Total Employees 901874
=====
All of ADC's delivery employees in the Quincy, Illinois distribution center,
representing approximately 3%4% of employees company-wide, are represented by
the International Association of Machinists and Aerospace Workers. The
current 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.satisfactory.
Corporate and Available Information
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 our website address is www.amcon.com. We provide free access to various
reports we file with the United States Securities and Exchange Commission
through our website. These reports include, but are not limited to, our
Annual Reports on Form 10-K and quarterly reports on Form 10-Q, and any
amendments to those reports. Please note that any internet addresses
provided in this report are for information purposes only and are not
intended to be hyperlinks. Accordingly, no information found and/or provided
at such internet addresses is intended or deemed to be incorporated by
reference herein.
ITEM 1A. RISK FACTORS
IN GENERAL
- ----------
You should carefully consider the risks described below before making an
investment decision.decision concerning our securities. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial
may also impair our business operations.
9
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
10
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 AFFECTINGSee "Forward Looking Statements" under Item 7 of this report for a
discussion of forward looking statements.
RISK FACTORS RELATED TO THE WHOLESALE BUSINESS
- -------------------------------------------------------------------------------------
- - The Wholesale Distribution of Cigarettes and Convenience Store Products Is
Significantly Affected by Cigarette Pricing Decisions and Promotional
Programs Offered by Cigarette Manufacturers.
We receive payments from the manufacturers of the products we distribute
for,including 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 Adversely
Affecting Our Business.
Increases in fuel prices have had a negative impact on our profits over the
past fiscal year. If fuel prices remain high, and we are not able to pass on
these costs to customers, it will have a materialan 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 wholesale 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, heightenedHeightened 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-marginsLow 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.
10
The wholesale distribution industry is characterized by a high volume of sales volumes
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
11
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 arecan not be 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,In fiscal 2007, approximately 72%71% of our revenues came from the
distribution of cigarettes. During the same period, approximately 27%25% 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.decline based on recent American Wholesale Marketers Association
("AWMA") studies. 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 cigarette brands. Deep-discount brands are brands
generally 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-mastermanufactured by companies that are not
parties to the master settlement agreement
manufacturers and deep-discount brand growth.agreement. 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.
11
- - 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
12 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.
CigarettesCigarette 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 taxIn particular, the United States Congress
has recently proposed legislation to renew and expand the State Children's
Health Insurance Program ("SCHIP"), funded largely through significant
increases are expected to
continue toin federal excise taxes on cigarette and tobacco products. While
the most recently passed legislation was vetoed by the President and the veto
was upheld by the House, it is likely that Congress will consider similar
legislation in the near term as the current extension of the SCHIP program
expires in November 2007.
12
If such legislation passed, and included increases in federal excise taxes
on cigarette and tobacco products, it could have an adverse impact on
sales of cigarettes due to lower
consumption levels and result in lower sales volumes and/or a sales shift
from higher margin premium cigarette and tobacco products to lower margin
deep-discount brands, which could materially impact the Company's
profitability. Historically, increases in sales from the premium to the non-premium
or discount cigarette segments or to sales outside of legitimate channels.
If theseand tobacco excise taxes
arehave resulted in reduced consumer cigarette demand.
Additionally, higher excise taxes increase the Company's accounts receivable
and inventory carrying cost and could substantially increased, it could have a negative
impact on our liquidity.liquidity
position. 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.
13
RISK FACTORS RELATED TO THE 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.
13
- - 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 materialmaterially adverse 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.
RISKSRISK FACTORS RELATED TO THE 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.future, which could impair our ability to
further expand our business.
- - 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 industryIndustry conditions by
limiting our flexibility in planning for and reacting to changes in our
business and industry.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
14
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.
15
- - 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 of the Board, 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, 20062007 approximately 3%4%, or approximately 31,36, 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.
1716
- - We Are Subject to substantialSignificant 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 RELATINGRISK FACTORS RELATED 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
17
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,fiscal 2007, the Company was notified by the American Stock Exchange
(AMEX) that it was not in compliance with Section 1003(a)(i) (ii)of the AMEX
Company Guide regarding shareholders' equity of less than $2,000,000,$4,000,000, and
losses from continuing operations and/or net losses in twothree of its threefour most
recent fiscal years. In order to maintain its AMEX listing, the Company
submitted a plan outlining steps to regain compliance with the AMEXAMEX's
18
continued listing standards by March 11, 2008. On November 21, 2006, the Company
received notice from the American Stock acceptingAs of September 30, 2007, the
Company's plan to
regain compliance withshareholders' equity of $5.5 million exceeded the threshold set
forth by Section 1003(a)(i)(ii) of the AMEX Company Guide. IfAfter maintaining
the Company's fails to achieve AMEX compliance by March 11, 2008,required shareholders' equity for two successive quarters, the Company
could face delisting proceeding which would likely impact investors' abilitywill have completed its comprehensive plan previously submitted to trade in our common stock and adversely affect its trading price.the AMEX.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.None.
ITEM 2. PROPERTIES
The state location and approximate square footage of the Company's five
distribution centers and 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 2006at September 2007
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 687,600619,600
=======
/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 inOur Quincy, Illinois, Bismarck, North Dakota and Rapid City, South Dakota. TheDakota
distribution facilities are owned by ADC. Our Quincy, Bismarck and Rapid
City distribution centers are subject to first mortgages withby 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
accommodateif the
Company's anticipatedCompany experiences 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 discussionsInformation with respect to this litigation,
pursuantitem may be found in Note 14 to the
Consolidated Financial Statements in Item 8, which the Company is undertaking to divest substantially all of
the assets of TSI as part of a complete settlement of any and all claimsincorporated herein
by CPH against the Company.reference.
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 year2007.
19
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers of our Company are appointed by the board of directors and
serve at the discretion of the board. The following table sets forth certain
information with respect to all executive officers of our Company.
Name Age Position
---- --- --------
William F. Wright 65 Chairman of the Board
Christopher H. Atayan 47 Chief Executive Officer,
Vice Chairman, Director
Kathleen M. Evans 60 President, Director
Andrew C. Plummer 33 Vice President, Chief
Financial Officer, and
Secretary
Philip E. Campbell 46 Senior Vice President of
Planning and Compliance
Eric J. Hinkefent 46 President of Chamberlin's Market
and Cafe and Akin's Natural
Foods Market
William F. Wright has served as the Chairman and Chief Executive Officer
of AMCON Corporation (the former parent of our Company) since 1976, as
Chief Executive Officer of our Company from 1986 until October 2006, and as
Chairman of our Company since 1986. 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 has served as the Company's Chief Executive Officer
since October 2006 and as its Vice Chairman since March 2006. Mr. Atayan
served as the Company's Chief Corporate Officer from March 2006 through
September 2006 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 and is a director of AMCON Corporation.
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.
ANDREW C. PLUMMER became Acting Chief Financial Officer of the Company in
March 2006 and Chief Financial Officer and Secretary in January 2007. 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
seven years primarily with Deloitte and Touche, LLP.
20
Philip E. Campbell became the Senior Vice President of Planning and
Compliance in January 2007. Mr. Campbell has provided consulting services to
the Company since 2004 and most recently was the Chief Financial Officer of
Franchise Concepts, Inc., a leading franchisor in the retail industry from
2001 to 2004. Mr. Campbell has 23 years of accounting, finance and senior
management experience in a number of industries and is an officer and
director of Hotlink Incorporated.
Although not an executive officer of our Company, Eric. J. Hinkefent is an
executive officer of two of our subsidiaries. His business experience is as
follows:
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.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK,EQUITY, 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". As of October 26, 2007, the closing stock
price was $30.95 and there were 529,436 common shares outstanding. As of
that date, the Company had approximately 360 common shareholders of record
(including direct participants in the Depository Trust Company). 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 years2007 and
2006.
Fiscal 2007 Fiscal 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 $ 31.77 $ 22.05 $ 13.80 $ 9.15
$ 22.68 $ 20.39
3rd Quarter 28.85 20.62 12.10 9.15
24.65 17.30
2nd Quarter 33.75 18.25 16.55 10.80
18.80 16.50
1st Quarter 19.85 12.25 21.40 16.55
20.70 18.55
During fiscal 2005 the Board of Directors voted to suspend payment of cashDividend Policy
The Company does not pay dividends on its common stock forbut does periodically
reevaluate this policy based on the foreseeablefunding requirements necessary to finance
operations and 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.growth. The Company's revolving credit facility
provides that the Companyit 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, theThe Company has issued Series A, B and C Convertible Preferred Stock, respectively, that werewhich
are not registered under the Securities Act.and Exchange Act of 1934. Information
regarding the issuance of these securities is set forth in Note 3 toItem 7 under the
Consolidated Financial Statements.caption "Liquidity and Capital Resources".
21
The information under the caption "Equity Compensation Plan Information" in
Item 12 of this Annual Report on Form 10-K, is incorporated into this Item 5
by reference.
COMPANY PERFORMANCE
The following stock performance graph and table provide a comparison over the
five-year period ending September 30, 2007 of the cumulative total return
from a $100 investment in our Company's common stock with the stocks listed
on the American Stock Exchange Composite Total Return Index and the Standard
& Poor's 600 Food Distributors Index.
[GRAPH OMITTED]
The comparison of cumulative total returns presented in the above graph was
plotted using the following index values and common stock price values:
9/27/02 9/26/03 9/24/04 9/30/05 9/30/06 9/30/07
------- -------- -------- -------- -------- --------
AMCON Distributing Company $100.00 $ 89.69 $ 66.03 $ 68.07 $ 42.14 $ 87.47
AMEX Total Return Index $100.00 $ 128.21 $ 148.54 $ 175.67 $ 190.46 $ 215.74
S&P 600 Food Distributors Index $100.00 $ 113.32 $ 108.28 $ 143.42 $ 119.03 $ 122.73
COMPANY REPURCHASE OF SHARES
No purchases of our common stock were made by the Company during the fourth
quarter of our 2007 fiscal year.
22
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 inand
the periods presented. As previously discussed, our
subsidiaries HNWC and TSI, are classified as a componentimpact of discontinued operations at September 30, 2006. As a result, the selected financial data
for allon prior 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.presented.
(Dollars in thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Restated Restated Restated Restated
Fiscal Year 2006 2005 /6/ 2004 2003 20022007 2006/1/ 2005/1//2/ 2004/1/ 2003/1/
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Sales/1/3/.......................... $ 839,540853,567 $839,540 $834,551 $817,286$817,285 $768,627 $844,879
Cost of sales..................... 779,406 774,060 757,938 708,780 783,303
---------------------------------------------------------789,318 779,190 773,292 757,646 709,642
----------------------------------------------------------
Gross profit...................... 60,134 60,491 59,348 59,847 61,57664,249 60,350 61,259 59,639 58,985
Operating expenses................ 52,796 53,658 53,188 50,975 50,854
53,225
Impairment charges/2/4/............. - - 4,235 - -
-
-------------------------------------------------------------------------------------------------------------------
Operating income.................. 6,476 3,068 8,373 8,993 8,35111,453 6,692 3,836 8,664 8,131
Interest expense.................. 4,816 4,858 4,211 3,243 2,900
4,159
Other (income) expense, net....... (195) (137) (80) (569) (936)
(329)
-------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes... 1,755 (1,063) 5,699 7,029 4,5216,832 1,971 (295) 5,990 6,167
Income tax expense (benefit)...... 432 (196) 2,286 2,519 1,726
Equity in loss of unconsolidated
affiliate........................ - - - - 95............... 2,626 514 94 2,396 2,194
Minority interest................. - - (97) (91) -
-
-------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations....................... 1,323 (770) 3,504 4,510 2,7004,206 1,457 (292) 3,685 3,973
Gain on disposal of discontinued
operations, net of income tax
expense of $626 829 - - - -
Loss from discontinued operations,
net of income tax benefit of
$(1,132) $(5,543)$(357), $(4,409)$(1,134), $(1,890)$(5,447),
$(4,682) and $(439) respectively. (2,434) (11,972) (7,643) (3,483) (728)
---------------------------------------------------------$(1,887) respectively (595) (2,436) (11,961) (7,597) (3,478)
----------------------------------------------------------
Net income (loss) income................. (1,111) (12,742) (4,139) 1,027 1,972................. 4,440 (979) (12,253) (3,912) 495
Preferred stock dividend
requirements..................... (419) (366) (295) (49) -
-
-------------------------------------------------------------------------------------------------------------------
Net lossincome (loss) available to
common shareholders.............. $ (1,477) $(13,037)4,021 $ (4,188)(1,345) $(12,548) $ 1,027(3,961) $ 1,972
=========================================================495
==========================================================
23
- ----------------------------------------------------------------------------------------------
Restated Restated Restated Restated
Fiscal Year 2007 2006/1/ 2005/1/&/2/ 2004/1/ 2003/1/
- ----------------------------------------------------------------------------------------------
Basic earnings (loss) per share
available to common shareholders:
Continuing operations........... $ 1.817.19 $ (2.02)2.07 $ 6.54(1.11) $ 8.556.89 $ 5.347.53
Discontinued operations......... (4.61) (22.71) (14.48) (6.60) (1.44)
---------------------------------------------------------0.44 (4.62) (22.70) (14.40) (6.59)
----------------------------------------------------------
Net basic earnings (loss) earnings per
share available to common
shareholders................... $ (2.80)7.63 $ (24.73)(2.55) $ (7.94)(23.81) $ 1.95(7.51) $ 3.90
=========================================================
25
- --------------------------------------------------------------------------------------------
Fiscal Year 2006 2005 /6/ 2004 2003 2002
- --------------------------------------------------------------------------------------------0.94
==========================================================
Diluted earnings (loss) per share
available to common shareholders:
Continuing operations........... $ 1.634.89 $ (2.02)1.82 $ 6.23(1.11) $ 8.406.55 $ 5.217.40
Discontinued operations......... (3.87) (22.71) (13.59) (6.49) (1.40)
---------------------------------------------------------0.27 (3.44) (22.70) (13.50) (6.48)
----------------------------------------------------------
Net diluted earnings (loss) earnings
per share available to common
shareholders................... $ (2.24)5.16 $ (24.73)(1.62) $ (7.36)(23.81) $ 1.91(6.95) $ 3.81
=========================================================0.92
==========================================================
Weighted average shares outstanding:
Basic........................... 527,062 527,062 527,062 527,774 527,699
505,414
Diluted......................... 627,810860,121 708,946 527,062 562,559 537,042
518,197
Working capital (deficit) /3//5/..... $ 28,00434,938 $ 30,573 $(11,871)32,604 $ (8,030)35,312 $ (1,989)(8,460) $ (4,911)
Total assets ..................... 94,867 95,309 111,730 99,499 104,58692,064 98,018 98,327 115,141 102,618
Long-term obligations and
subordinated debt /4/.........../6/......... 16,984 16,841 16,504 27,104 22,453 21,60128,820 23,128
Shareholders' (deficit) equity /5/ (1,747) (228) 12,767 17,301 16,699/7/.......... 5,544 1,404 2,790 15,297 19,604
Cash dividends declared
per common share................ - - 0.72- 0.72 0.72
/1/ Restated for the retroactive application of FIFO inventory valuation
method. See Note 1 to the Consolidated Financial Statements.
/2/ During fiscal 2005, the Company changed its reporting period from a
52-53 week year to a calendar month reporting period ending on
September 30. As a result of this change, fiscal 2005 was comprised
of 53 weeks as compared to 52 weeks in fiscal 2007 and 2006.
/3/ 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//4/ In fiscal year 2005 certain identifiable intangible assets in the
retailour
Retail Health Food segment were impaired.
/3//5/ Current assets minus current liabilities.
/4//6/ 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 payable obligation, and the
deferred gain recorded in perpetuity.connection with the CPH litigation
settlement. Excludes the Company's revolving credit facility.
/5//7/ Net of dividends declared of $0.4 million in each of the fiscal years
of 2002-2004.2003 and 2004.
The Company has declared no dividends insince 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.2004.
24
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,
26under 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 atfor the twelve month period ended
September 30 in fiscal 2007, 2006 which isand 2005. During fiscal 2005, the Company
changed its reporting period from a 52-53 week year to a calendar month
reporting period ending on September 30. As a result of this change, fiscal
2005 was comprised of our
wholesale distribution53 weeks as compared to 52 weeks in fiscal 2007 and
retail health food segments.2006.
A separate discussion of our discontinued operations which includes TSI & HNWC at
September 30, 2006, has been presented following our fiscal 2006
versus fiscalbelow
under the caption "Discontinued Operations (Fiscal 2005 operating results analysis.- 2007)" in this
Item 7. 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 fromour discontinued operations and are not a
component of the aforementionedour analysis of 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.operations. For more information
regarding our businesses, see Item 1 - Business on"Business" of this Annual Report on
Form 10-K.
Strategic initiativesInitiatives
- ---------------------
During 2006, theThe 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 yieldedhas set out a number of newkey initiatives in conjunction
with its long-term strategic initiatives which
the Company began executing during fiscal 2006 in an effortplan 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 therefocusing resources to sustain and grow our two core business
segments - wholesale distribution and retail health food business segments;
- close or sell unprofitable business units;food;
- improve the Company's liquidity position through debt reduction; andreduction
- aggressive management ofaggressively manage the Company's cost structure
To achieve these strategic goals, the Company took steps to exit the beverage
businesses (Hawaiian Natural Water Company ("HNWC")structure; 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.- capitalize on acquisition opportunities
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 Companyare
designed to improve profitability enhance its liquidity
position and strengthen itsthe Company's ability to
compete and grow its two core businesses on a long-term basis.
27
Significant Events For Fiscal 20062007
- ----------------------------------
Operational
- -----------
- In September 2007, the Company fully settled all residual litigation
among and between AMCON, TSI, and Crystal Paradise Holdings, Inc.
("CPH") regarding TSI's fiscal 2004 purchase of assets from CPH. In
connection with this settlement, the Company recorded a $1.5 million
deferred gain during the fourth quarter of fiscal 2007. As part of the
agreement, CPH has received an option to purchase TSI's assets from the
Company for a period of up to eighteen months. See further discussion
in Item 1 and Note 14 to the Consolidated Financial Statements under
Item 8.
25
Significant Events For Fiscal 2007 - continued
- ----------------------------------------------
Operational
- -----------
- During the fourth quarter of fiscal 2007, the Company changed its
inventory valuation method from Last-In, First-Out method (LIFO) to the
First-In, First-Out (FIFO) inventory valuation method. Accordingly, all
prior year information has been restated for the retroactive
application of this change in accounting principle. See additional
discussion in Note 1 to the Consolidated Financial Statements.
- In August 2007, the Company settled outstanding litigation with
Television Events & Marketing, Inc. ("TEAM") as discussed in
Note 14 to the Consolidated Financial Statements under Item 8.
- In November 2006, the Company:Company sold all the operating assets of HNWC for
approximately $3.8 million in cash plus the buyer's assumption of all
operating and capital leases, which resulted in a gain on sale before
income taxes of approximately $1.6 million.
- The Company increased shareholders' equity to $5.5 million, which
exceeds the minimum equity requirements set forth in section
1003 (a)(ii) of the AMEX Company Guide. See further discussion in
Note 14 to the Consolidated Financial Statements under Item 8.
- The Company experienced a $14.1 million increase in sales and a
$2.7 million increase in income from continuing operations before
income taxes for fiscal 2007 as compared to fiscal 2006.
- The Company recognized income from continuing operations per basic
share of $7.19 in fiscal 2007 as compared to $2.07 per basic share
in fiscal 2006.
- The Company recognized earnings from discontinued operations per basic
share of $0.44 in fiscal 2007 as compared to a loss from discontinued
operations per basic share of ($4.62) in fiscal 2006.
Financing
- in---------
- In December 2006, the Company amended the Facility furtherrevolving portion of its
credit facility agreement ("Facility"), extending theits maturity date
to April 2009 with2009. The amendment provides for a $57.1$55.0 million maximum credit limit
and bearing(excluding Term Note A & Term Note B), with interest at the bank's prime
rate. See further discussion in Item 7 - Liquidityunder the caption "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.Resources".
26
Results of Operations
- ---------------------
The following table sets forth an analysis of various components of the
StatementsCompany's Statement of Operations as a percentage of sales for fiscal years
2007, 2006, 2005
and 2004:2005:
Fiscal Years
-----------------------
2006 2005 2004
-----------------------------------------------
Restated Restated
2007 2006/1/ 2005/1/
------------------------
Sales............................ 100.0% 100.0% 100.0%
Cost of sales.................... 92.5 92.8 92.7
92.7
-----------------------------------------------
Gross profit..................... 7.5 7.2 7.3 7.3
Selling, general and
administrative expenses......... 6.0 6.2 6.1 6.0
28
-----------------------
2006 2005 2004
-----------------------
Depreciation and amortization.... 0.2 0.30.2 0.3
Impairment charges............... 0.0- - 0.5
0.0------------------------
Operating income ............................... 1.3 0.8 0.4
1.0
Interest expense................. 0.5 0.6 0.5
0.4
Other income, net................ - - 0.1
-----------------------------------------------
Income (loss) from continuing
operations before income taxes.. 0.8 0.2 (0.1) 0.7
Income tax (expense) benefit..... (0.3) (0.1) 0.0 (0.3)
------------------------
------------------------
Income (loss) from continuing
operations ......................................... 0.5 0.1 (0.1)
0.4
LossIncome (loss) from discontinued
operations, net of tax.......... - (0.3) (1.4)
(0.9)
-----------------------------------------------
Net loss ........................income (loss) ............... 0.5 (0.2) (1.5) (0.5)
Preferred stock dividend
requirements.................... - - -
-----------------------------------------------
Net lossincome (loss) available to
common shareholders............. 0.5% (0.2)% (1.5)%
(0.5)%
===============================================
/1/ Restated for the retroactive application of FIFO inventory valuation
method. See Note 1 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
SALES:
Changes in sales are driven by two primary factors:components:
(i) changes to selling prices, which are largely controlled by
the
manufacturers of the products that we sell,our product suppliers, 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.
2927
FISCAL YEAR 20062007 VERSUS FISCAL YEAR 20052006 - Continuing Operations
- ----------------------------------------------------------------
Overall salesSales for fiscal year 20062007 increased by approximately 0.6% to $839.5$14.1 million, or 1.7%, as
compared to $834.6 million in fiscal year 2005.2006. Sales are reported net of costs associated with
sales incentives provided to customers, totaling
$15.5retailers, which totaled $15.7 million and $14.7$15.5
million for fiscal 20062007 and 2005,2006, 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
------------------------------------------------------------------
Restated Incr
2007 2006 (Decr)
------ ------- -------
Extra Reported Incr
2005/1/ week/2/ 2005 2004 (Decr)
------- ------- --------- ------ -----
Wholesale distribution segment $815.7 $ 786.4802.7 $ 13.6 $ 800.0 $ 784.9 $ 15.113.0
Retail health food stores segment 34.2 0.4 34.6 32.4 2.237.9 36.8 1.1
------ ------- -------
--------- ------- -----$853.6 $ 820.6839.5 $ 14.0 $ 834.6 $ 817.3 $ 17.314.1
====== ======= ======= ========= ======= ======
/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 theour wholesale distribution segment increased by $15.1$13.0 million for
thein
fiscal 20052007 as compared to fiscal 2004. Cigarette sales increased $10.02006. Of this increase, $2.0 million
for fiscal 2005 and sales of tobacco, confectionary and other
products contributedrelated to an additional $5.1 million during the period. Of the increase in cigarette sales $10.4and $11.0 million was a result ofrelated to an
increase in tobacco, confectionary, food service, and other product sales.
Significant items impacting fiscal 2007 sales included the changefollowing items.
During fiscal 2007, certain states imposed sizable increases in the excise
taxes levied on cigarettes. As excise taxes are passed on to our customers,
the associated increase in our monthly reporting period which added an extra weekprices had the impact of increasing our fiscal
2007 sales in fiscal 2005by approximately $15.6 million as compared to fiscal 2004, $9.7 million was attributable to2006. The
increase in excise taxes also had the impact of decreasing the demand for
cigarettes in the related states and accordingly reduced sales by
approximately $19.8 million.
Also impacting fiscal 2007 cigarette sales were price increases implemented
by major cigarette manufacturers during the fiscal year. These price
increases had the effect of increasing fiscal 2007 sales by approximately
$12.4 million as compared to fiscal 2006. The remaining change in December 2004 and $6.5
millioncigarette
sales as compared to fiscal 2006 was dueprimarily attributable to increased excise taxes implemented in certain states
during fiscal 2005. These increases were offset by a $16.6 million0.9%
decrease in cigarette sales due to a 3.7% decreasecarton volumes in carton volume (excluding the
extra week). Of thestates not impacted by excise tax
increases. The $11.0 million increase in tobacco, confectionary, food
service and other products,
$3.2 millionproduct sales was due toprimarily the extra weekresult of price increases
and $1.9 million was attributable
primarily to new business obtained during fiscal 2005 through expansion of
our market area.changes in sales volumes.
Sales from theour retail health food segment increased $1.1 million, or 2.8%,
during fiscal 2005 increased by
$2.2 million when2007 as 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
sales2006. This increase of $0.9 million resulted from sales generated from the opening
of a new store in Oklahoma City in April 2004. Generalwas
attributable to overall growth in same store sales, driven largelyprimarily within our
vitamin and supplements product categories. Our retail health food segment
continues to benefit from increasesthe general increase in vitamins and health and beauty added
an additional $1.9 million in sales. These increases were offset bydemand for natural food
products combined with 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 dueCompany's continued marketing efforts 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.
34grow its
customer base.
28
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 isfor the fiscal years ended September 2007
and September 2006 are as follows (dollars in millions):
Gross Profit
------------------------------------------
Extra Reported Incr
2005/1/ week/2/ 2005 2004 (Decr)
------- ------- --------- ------ ------------------------------
Restated Incr
2007 2006/1/ (Decr)
------ ------- -------
Wholesale distribution segment $ 46.348.8 $ 0.645.8 $ 46.9 $ 46.3 $ 0.63.0
Retail health food stores segment 13.4 0.2 13.6 13.0 0.615.4 14.6 0.8
------ ------- -------
--------- ------- ------
$ 59.764.2 $ 0.860.4 $ 60.5 $ 59.3 $ 1.23.8
====== ======= =======
========= ======= ======
/1/ Excludes extra week discussed in /2/ below
/2/ DuringRestated for the first quarterretroactive application of fiscal 2005,FIFO inventory valuation
method. See Note 1 to 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.Consolidated Financial Statements.
Gross profit fromfor fiscal 2007 increased approximately $3.8 million, or 6.5%
as compared to fiscal 2006, while gross profit as a percent of sales
increased to 7.5% as compared to 7.2% in fiscal 2006.
During fiscal 2007, gross profit in our wholesale distribution segment
for fiscal 2005
increased approximately $0.6$3.0 million, or 6.6% as compared to the prior year. Items
increasingfiscal 2006.
Increasing wholesale segment gross profit during fiscal 2005 as compared to fiscal 2004
included $0.62007 was a $1.7
million attributable to the extra week of operationsbenefit resulting from athe impact of excise tax increases. The
remaining change in our reporting period, $0.3 million due to cigarettewholesale distribution segment gross profit was
primarily the result of fluctuations in product mix sold, promotional
allowances received from manufacturers, 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 fromwithin both our
cigarette and non-cigarette vendors
based on the Company's buyingproduct categories, and changes in unit 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.sold.
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$0.8 million in gross profit during the period, and $0.5
35fiscal 2007 as compared to fiscal 2006. Of this increase,
approximately $0.4 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
costssales volumes, with the
remaining change primarily resulting from improved sales mix and disposal of perishableimproved
inventory shrink and low-carb products.throw-out costs.
29
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, inspectionwarehousing 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 expenses decreased approximately $0.9 million in fiscal 2007,
or 1.6%, as compared to fiscal 2006. The decrease in operating costs was
primarily related to a $0.8 million reduction in professional fees, with the
remaining decrease primarily resulting from lower insurance and bad debt
expense, partially offset by higher compensation costs.
INTEREST EXPENSE
Interest expense for fiscal 2007 decreased slightly from fiscal 2006.
The Company's variable rate debt primarily consists of borrowing on its
Facility, which bears interest at the prime interest rate. During fiscal
2007, the Company's average borrowing rate on variable rate debt increased
approximately 0.69% and average borrowings on variable rate debt decreased
approximately $2.5 million, as compared to fiscal 2006.
OTHER
The Company's effective income tax rate was 38.4% in fiscal 2007 as compared
to 26.1% in fiscal 2006. The increase in the effective tax rate was
primarily attributable to state net operating losses recorded in fiscal 2006,
which reduced fiscal 2006 income tax expense and the related effective tax
rate.
DISCONTINUED OPERATIONS (Fiscal 2005 - 2007)
For the fiscal years 2007, 2006 and 2005, HNWC and TSI have been reflected in
the Company's Consolidated Financial Statements as components of discontinued
operations. The Beverage Group, Inc. ("TBG") is also included in
discontinued operations for the fiscal year 2005 and the first two quarters
of fiscal 2006. TBG was a component of the Company's former beverage
segment, which was closed in March 2005. TBG's final wind-down was completed
in April 2006 at which time its residual liabilities were classified to
continuing operations.
As previously discussed in Item 1, in September 2007 the Company settled all
outstanding litigation among and between AMCON, TSI and CPH, resulting in a
$1.5 million deferred gain for fiscal 2007, which has been classified as a
component of noncurrent liabilities of discontinued operations in the
Company's Consolidated Balance Sheet. The deferred gain will be recognized
upon the earlier of CPH's election to exercise its TSI asset purchase option
or the expiration of the asset purchase option. During fiscal 2007, the
Company also sold the assets of HNWC resulting in a $1.6 million pre-tax
gain.
30
Earnings from discontinued operations increased approximately $2.7 million
from fiscal 2006 to fiscal 2007. This change primarily resulted from HNWC's
asset sale in November 2006, which resulted in a $1.6 million pre-tax gain.
Additionally, the sale of HNWC in November 2006 and the closure of TSI's
operations in March 2006, prevented further operating losses in fiscal 2007
as compared to fiscal 2006.
Losses from discontinued operations decreased approximately $9.5 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 such impairment charges incurred in discontinued operations
during fiscal 2006. Additionally, TSI's closure in March 2006 stemmed
further operating losses through the remainder of fiscal 2006.
A summary of discontinued operations is as follows:
Year ended
September
-----------------------------------------
Restated Restated
2007 2006/1/ 2005/1/
----------- ------------ ------------
Sales $ 862,852 $ 8,635,869 $ 13,185,114
Impairment charges - - (8,852,406)
Operating loss (576,101) (3,190,327) (17,101,139)
Gain on disposal of discontinued
operations, before income taxes 1,455,333 - -
Income tax expense (benefit) 269,000 (1,134,000) (5,446,000)
Earnings (loss) from
discontinued operations 234,551 (2,435,766) (11,960,904)
/1/ Restated for the retroactive application of FIFO inventory valuation
method. See Note 1 to the Consolidated Financial Statements.
FISCAL YEAR 2006 VERSUS FISCAL YEAR 2005 - Continuing Operations
- ----------------------------------------------------------------
Sales for fiscal 2006 increased approximately $4.9 million, or 0.6%, as
compared to fiscal 2005. Sales are reported net of costs associated with
sales incentives provided to retailers, which totaled $15.5 million and $14.7
million for fiscal 2006 and 2005, respectively. Sales increases by business
segment 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 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 fiscal 2005, the Company changed its reporting period from a 52-53 week
year to a calendar month reporting period ending on September 30. As a result
of this change, fiscal 2005 was comprised of 53 weeks as compared to 52 weeks
in fiscal 2006.
31
Sales in our wholesale distribution segment increased $2.7 million during
fiscal 2006 as compared to fiscal 2005. This increase in sales included a
$1.5 million decrease in cigarette sales and a $4.2 million increase in the
sales of our tobacco, confectionary and other product categories. 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 the 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 and a $6.0 million
benefit to sales attributable to price increases implemented by major
cigarette manufacturers.
Sales from our 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, primarily
within our grocery and supplements product categories. This increase in
sales volume was partially offset by a $0.4 million reduction in sales due to
an extra week of sales in the fiscal 2005, resulting from the Company's
change in reporting periods. The retail health food segment experienced
strong growth during fiscal 2006 largely due to an increase in the demand for
natural food products and combined with the Company's continued marketing
efforts to grow its customer base.
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 by business segment for fiscal 2006 and fiscal 2005 are as
follows (dollars in millions):
Gross Profit
----------------------------------------------
Extra Reported Incr
2006/1/ 2005/2/ week/3/ 2005/1/ (Decr)
------- ------- ------- --------- ------
Wholesale distribution segment $ 45.8 $ 47.0 $ 0.6 $ 47.6 $ (1.8)
Retail health food segment 14.6 13.5 0.2 13.7 0.9
------- ------- ------- --------- ------
$ 60.4 $ 60.5 $ 0.8 $ 61.3 $ (0.9)
======= ======= ======= ========= ======
32
/1/ Restated for the retroactive application of the FIFO inventory
valuation method. See Note 1 to the Consolidated Financial Statements.
/2/ Excludes extra week discussed in /3/ below
/3/ During fiscal 2005, the Company changed its reporting period from a 52-53 week
year to a calendar month reporting period ending on September 30. As a result
of this change, fiscal 2005 was comprised of 53 weeks as compared to 52 weeks
in fiscal 2006.
Gross profit for fiscal 2006 decreased approximately $0.9 million, or 1.5%,
as compared to fiscal 2005. Gross profit as a percentage of sales decreased
slightly from 7.3% in fiscal 2005 to 7.2% in fiscal 2006.
Gross profit from our wholesale distribution segment decreased approximately
$1.8 million from fiscal 2005 to fiscal 2006. Items decreasing gross profits
during fiscal 2006 were a $2.2 million reduction in gross profit related to a
decrease in cigarette volumes sold, a $0.5 million reduction in incentive
payments received from cigarette and non-cigarette vendors, and a $0.6
million decrease in gross profit attributable to an extra week of operations
in fiscal 2005 as compared to fiscal 2006. These items were partially offset
by a $1.4 million increase in gross profit resulting from higher sales in our
tobacco, confectionary and other product categories.
Gross profit for the retail health food segment increased approximately
$0.9 million in fiscal 2006 as compared to fiscal 2005. Of this increase,
$0.1 million related to improved management of inventory and throw-out costs,
$0.2 million was due to the extra week of operations in fiscal 2005, and
$0.6 million was related to changes in 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
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 operationsexpenses decreased approximately $3.8 million in fiscal 2006,
or 6.6%, from fiscal 2005. The decrease in operating expense from fiscal
2005 increased 12.6%, or $6.4 million,was primarily attributable to $57.4 million compared toa $4.2 reduction in intangible impairment
charges incurred during fiscal 2004. As a percentage of sales, total operating expenses increased to 6.9%
from 6.2% as compared to the prior year.2005. The increaseCompany incurred no such impairment
charges in fiscal 2006. Other significant items impacting operating expenses
during fiscal 20052006 included higher fuel and professional services expenses of
$0.7 million and $0.3 million, respectively, and a $0.6 million reduction in
workers compensation expense, 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 2004.33
INTEREST EXPENSE
Interest expense for fiscal year 20052006 increased 30% to $4.20.6 million, or 15.3%, as compared
to $3.2 million during fiscal 2004. The2005. This increase was primarily related to an increase in the
Company's average variable rate borrowings, the impact of the expiration of
an interest expense year-
over-year was primarily duerate swap in fiscal 2006 which had the effect of converting
$10.0 million in variable rate borrowings under the Company's credit facility
to highera fixed borrowing rate of 4.87%, and increases in the prime lending rates. The prime lendinginterest rate,
which is the rate at which the Company primarily borrows under its credit
facility.borrows. On average, the
Company's borrowing rates on its variable rate debt were 1.46%1.71% higher and the
average borrowings on variable rate debt were $10.7$3.5 million higher in fiscal
20052006 as compared to fiscal 2004.
362005.
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", which was related to a 15% minority ownership
interest in the Company's TSI subsidiary. During fiscal 2005,After this allocation, the 15%
minority ownership interest in TSI washad been reduced to zero resulting from
cumulative TSI loss allocations. The minority shareholders provided no
additional funding to TSI. Accordingly, no further allocations of losses to
minority shareholders were made by the Company made no further
loss allocations,in fiscal 2006 or will in the future.thereafter.
The Company's effective income tax rate was 18.4%26.1% in fiscal 2005 compared to
40.1%2006. The change
in fiscal 2004. The decrease in the effective tax raterates from fiscal 2005 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. Inrate in that
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.year.
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 fromcredit facility borrowings and preferred stock issuances, as
necessary. During fiscal 2006,2007, the Company usedgenerated cash of approximately
$0.3$8.7 million
of cash from operating activities,activities. The cash generated was primarily related to operating losses
incurred by our beverage businesses, which are includedthe
result of net income generated, changes in discontinued
operations. Cash used by our discontinued operations wasdeferred income tax balances, and
adjustments for depreciation, partially offset by reductions ina pay down of accounts
receivablepayable and inventory levels in our continuingaccrued expenses related to discontinued 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 whereperiodically we are "buying-in" to
obtainhave inventory "buy-in" opportunities which offer more
favorable terms on particular product or to maintain our LIFO layers,pricing terms. As a result, we may have to retain thehold inventory for a
period longer than the payment terms. This generates a cash outflow from
operating activities thatwhich we expect to reverse in a later period.periods.
Additionally, during the warm weather months, which is our busiestpeak time of
the year,operations, we generally carry largerhigher amounts of inventory
back stock to ensure high
fill rates toand maintain customer satisfaction.
34
Investing Activities. Approximately $1.0The Company generated approximately $3.6 million in
cash was used forfrom investing activities during fiscal 2007. Of the cash generated,
approximately $3.8 million resulted from the sale of HNWC's assets in
November 2006 and $0.2 million related to the sale of TSI's distribution
warehouse. Both of these items were included as components of our
discontinued operations. These items were partially offset by $0.5 million
in capital expenditures forless $0.1 million in cash proceeds received from the
sale of property, plant and equipment during fiscal 2006.equipment.
Financing Activities. The Company generatedused net cash of $1.3$12.0 million fromfor
financing activities during fiscal 2006.2007. Of this net change in cash, 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$10.0 million for netprincipal payments on its bank credit
facility, and its continuing operations$1.5 million for principal payments on long-term debt $0.3 million for both
continuing and discontinued operations, long-term$0.1 million related to debt paymentsissuance
costs, and cash of $0.4 million for the payment of preferred stock dividend payments.
Cash on Hand/Working Capital. As of September 30, 2006,2007, the Company had cash on
hand of $0.5$0.7 million and working capital (current assets less current
liabilities) of $28.0$34.9 million. This compares to cash on hand of $0.5 million
and a working capital of $30.6$32.6 million as of September 30, 2005.2006.
CONTRACTUAL OBLIGATIONS
- -----------------------
The following table summarizes our outstanding contractual obligations and
commitments as of fiscal year end 2006:at September 2007:
Payments Due By Period
---------------------------------------------------------------------
Contractual-------------------------------------------------------------------
Fiscal Fiscal Fiscal
Contractual Obligations Total 2007 2008-2009 2010-20112008 2009-2010 2011-2012 Thereafter
- ---------------------- -------------------------------------------------------------------------------------------- -------------------------------------------------------------------
Credit Facility $ 48,82338,854 $ 3,8963,046 $ 44,92735,808 $ - $ -
Long-term debt -
continuing operations/1/ 7,594 524 6,204 866operations 7,691 568 6,927 196 -
Long-term debt -
discontinued operations/2/ 3,690 1,410 2,280operations 5,000 - - 5,000 -
Related party debt 2,750 2,750 - - -
Interest on credit
facility and
long-term debt/3/ 10,132 5,004 5,108 201/ 6,508 3,944 1,174 1,390 -
Operating leases 18,965 3,965 6,342 4,567 4,091
Minimum water royalty/4/ 4,247 288 576 576 2,807
---------------------------------------------------------------------18,169 3,349 6,060 4,700 4,060
-------------------------------------------------------------------
Total $ 96,201 $17,83778,972 $13,657 $ 65,43749,969 $ 6,02911,286 $ 6,898
=====================================================================4,060
===================================================================
Other Commercial Fiscal Fiscal Fiscal
Commitments Total 2007 2008-2009 2010-20112008 2009-2010 2011-2012 Thereafter
- --------------------- ----------------------------------------------------------------------------------------------------------------------------------------
Lines of creditcredit/2/ $ 55,00055,917 $ - $ 55,00055,917 $ - $ -
Lines of credit in use (48,823)(38,854) - (48,823)(38,854) - -
---------------------------------------------------------------------Letters of credit (1,300) (450) (850) $ - -
-------------------------------------------------------------------
Lines of credit available 6,177 - 6,177 - -
Water source /5/ 5,000 - - - 5,000
Letters of credit 1,450 450 1,000 - -
---------------------------------------------------------------------
Total $ 12,62715,763 $ 450(450) $ 7,17716,213 $ - $ 5,000
=====================================================================-
===================================================================
35
/1/ Represents estimated interest payments on long-term debt, capital leases, and the
Facility. Certain obligations contain variable interest rates. For illustrative
purposes, the Company has projected future interest payments assuming that
interest rates will remain unchanged.
/2/ Includes Term Note A and Term Note B.
/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 $57.1Facility at September 2007 include:
- A $55.0 million revolving credit limit, plus the outstanding balances
on two term notes ("Term Note A" and "Term Note B") which totaled
approximately $0.9 million at September 2007 for a total credit
facility limit of $55.9 million at September 2007.
- Bears interest at the bank's prime interest rate, except for Term Note B
which bears interest at the bank's prime rate plus 2%.
- Maturity and expiration dates for the Facility and Term Note A of
April 2009 maturity date and March 2008 for Term Note B.
- Lending limits subject to accounts receivable and inventory limitations,
an interest rate at
bank's prime rate.unused commitment fee equal to 0.25% per annum on the difference
between the maximum loan limit and average monthly borrowings.
- A prepayment penalty of one percent (1%) of the prepayment loan limit of
$55.0 million if prepayment occurs on or before April 30, 2008.
- 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 is collateralized by all of the Company's
equipment, intangibles, inventories, and accounts receivable. The amendment
also includes quarterly debt service and cumulative earnings
before interest, taxes, depreciation and amortization ("EBITDA") andfinancial
covenants. Beginning with the fiscal quarter ended September 30, 2007, the
Company must maintain a quarterly minimum debt service ratio financial covenant of one1.0 to one beginning with the fiscal quarter
ending September 30, 2007 for1.0, as measured
by the twelve month period then ended.
The cumulative minimum EBITDA requirements are as followsfollows:
(a) $1,000,000 for the three months ending December 31, 2006, December 31, 2007 and
December 31, 2008 and;
(b) $2,000,000 for the six months ending March 31, 2007, March 31, 2008, and
March 31, 2009 and;
(c) $4,500,000 for the nine months ending June 30, 2007,
June 30, 2008 andand;
(d) $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 balancewas in compliance with the required debt service and minimum
EBITDA covenants at September 30, 2007.
36
The Company's maximum available credit limit of $1.6the revolving portion of the
Facility was $49.3 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, 2006,2007, 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. OnAt September 30,
2006,2007, the outstanding balance on the revolving portion
of the Facility including Note A,
was $47.3$37.9 million. The Facility bears interest at a variable
rate equal to the bank's prime rate, which was 7.75% at September 2007.
Based on our collateral and loan limits as defined by the Facility agreement,
the Company's
39 excess availability under the Facility at September 30, 20062007 was
approximately $5.5$11.4 million.
During fiscal 20062007, our peak borrowings under the Facility were $54.7$52.6 million
and our average borrowings and average availability were $48.5$46.1 and $1.8$4.9
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, 2006As a component of the credit agreement, the Company washas two term notes,
Term Note A and Term Note B, with LaSalle Bank. Term Note A bears interest
at the bank's prime rate (7.75% at September 2007) and is payable in violationmonthly
installments of $16,333. Term Note B bears interest at the revolving credit facility's financial covenant requiring
minimumbank's prime rate
plus 2% (9.75% at September 2007) and is payable in monthly EBITDAinstallments of
$100,000. This covenant violation was subsequently
waived in connection with the eighth amendment to the Restated LoanThe outstanding balances on Term Note A and Security Agreement with LaSalle Bank in December 2006.Term Note B were $0.6
million and $0.3 million, respectively, as of September 2007.
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
LoanNote B, and certain other deductions, which resulted in the guaranteed principal outstanding being reduced
to $6.6approximately $5.4 million as of September 30, 2006.2007. AMCON will paypays the Company's
Chairman an annual fee equal to 2% of the guaranteed principal in return for
the personal guarantee. Real Estate Loan
- ----------------This guarantee is secured by a pledge of the shares
of Chamberlin's, Akin's, HNWC and TSI.
The Company's Chairman has also personally guaranteed a note payable issued
in conjunction with the Television Events and Marketing, Inc. ("TEAM")
litigation settlement as discussed in Note 14 to the Consolidated Financial
Statements under Item 8. The Company has a note duepays the Chairman an annual fee equal
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 two2% of the Company's
owned distribution facilities (Quincy and Bismarck). As ofguaranteed principal in return for the personal guarantee. The
amount guaranteed in connection with this settlement at September 2006,
the outstanding balance on the Real Estate Loan2007 was
approximately $6.0$0.7 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 314 to the Consolidated Financial Statements
under Item 8, in September 2007 AMCON and TSI settled all litigation among
and between Crystal Paradise Holdings, Inc. ("CPH") regarding an April 24,
2004 Asset Purchase Agreement ("Asset Purchase Agreement"), whereby TSI
acquired certain assets from CPH.
The settlement also restructured the Series C
Convertible Preferred Stock was purchased byCompany's obligations arising from the
Asset Purchase Agreement with CPH totaling approximately $6.5 million into a
related partynew $5.0 million note payable to CPH. The $5.0 million note payable is due
at the end of five years plus accrued interest at 5.0%. Items restructured
into the $5.0 million note payable included CPH's minority interest in TSI,
37
water royalties payable to CPH, notes payable to CPH, and accrued interest
payable to CPH. Additionally, the agreement provides CPH with an eleven
month option to purchase TSI's assets for a price equivalent to the amount
due CPH under the $5.0 million note payable, plus accrued interest. The TSI
asset purchase option can be extended an additional seven months at CPH's
election.
No monetary exchanges between the Company and CPH were required under the
Settlement Agreement. The Company has recorded a $1.5 million pre-tax
deferred gain in connection with the above settlement. This deferred gain
has been classified as a component of noncurrent liabilities of discontinued
operations in the Company's September 2007 Consolidated Balance Sheet.
The deferred gain will be recognized upon the earlier of CPH's election to
exercise its TSI asset purchase option or the expiration of the Company.
40asset
purchase option.
With the final settlement of the CPH litigation, the Company does not expect
its future cash flows to be significantly impacted by future TSI related
litigation.
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"Bank ("M&I"), which is
also a participant lender on the Company's revolving line of credit. The
M & I Loans&I loans contain cross default provisions which cause all loans with M
& I&I to
be considered in default if any one of the loans where M & I&I is a lender,
including the revolving credit facility, is in default. In addition, the M & I Loans&I
loans contain co-terminus provisions which require all loans with M & I&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 cashThe Company does not pay dividends on ourits common stock but does periodically
reevaluate this policy based on the funding requirements necessary to finance
operations and future growth. The Company's revolving credit facility
provides that it may not pay dividends on its 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
paymentexcess of
cash dividends$0.72 per common share on common stock.an annual basis.
OTHER
- -----
The Company has several capital leases for office and warehouse and water
bottling equipment.
As ofAt September 30, 2006,2007, the outstanding balances on the capital leases totaled
approximately $0.5$0.1 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. The letter of credit was reduced to approximately $0.9 million
subsequent to September 2007.
38
Off-Balance Sheet Arrangements
- ------------------------------
The Company does not have any off-balance sheet arrangements.
Other Matters
- -------------
Certain Accounting Considerations
During fiscal 2007, Securities and Exchange Commission ("SEC") Bulletin No.
108, "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108") became
effective for the Company. SAB 108 requires that registrants quantify errors
using both a balance sheet approach and an income statement approach and then
evaluate whether either approach results in a misstated amount that, when all
relevant quantitative and qualitative factors are considered, is material.
The adoption of this bulletin did not have a material effect on the Company's
financial position or results of operations.
The Company is currently evaluating the impact of implementing the following
new accounting standards:
On July 13, 2006, the FASBFinancial Accounting Standards Board ("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 offor fiscal years
that beginbeginning after December 15, 2006. The Company is
currently evaluating2006 (the first fiscal quarter of 2008 for the
effectsCompany). We do not believe that the cumulative effect of implementing this new standard.adopting FIN 48
will have a material impact on the Company's Consolidated Financial
Statements.
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 in fiscal 2008 for the Company'sCompany.
In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair value
accounting but does not affect existing standards which require assets and
liabilities to be carried at fair value. Under SFAS 159, a company may elect
to use fair value to measure accounts and loans receivable, available-for-
sale and held-to-maturity securities, equity method investments, accounts
payable, guarantees, issued debt and other eligible financial instruments.
SFAS 159 is effective for fiscal yearyears beginning October 1, 2008, with early adoption permitted. The Companyafter November 15, 2007
(fiscal 2009 for the Company).
39
In March 2007, the FASB issued Emerging Issues Task Force Issue No. 06-10
"Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements"
(EITF 06-10). EITF 06-10 provides guidance for determining a liability for
the postretirement benefit obligation as well as recognition and measurement
of the associated asset on the basis of the terms of the collateral
assignment agreement. EITF 06-10 is currently evaluatingeffective for fiscal years beginning
after December 15, 2007 (fiscal 2009 for the impact of adopting this standard.Company).
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 2006.2007.
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 dateSeptember 2007 and that our credit exposure
is very low compared with the high volume of sales and the nature of our
industryIndustry in which collections are generally made quickly. However, for every
1% percent of receivables deemed to require an additional reserve at
September 30, 2006,2007, the impact on the statement of operations would be to
increase selling, general and administrative expenses by approximately $288,000.$0.3
million.
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.
4240
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 23 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. No impairment charges were recorded by the Company in
fiscal 2007 or fiscal 2006.
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 in our retail and former beverage segments were impaired, at both the retail and the beverage segments.based
on valuations obtained from an independent valuation specialist. The
impairments recorded in theour retail and former beverage and retail segmentssegment (TSI & HNWC)
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.
The impairment charges for our retail segment are recorded in the Company's
statement of operations as a component of income (loss) from continuing
operations. As previously discussed, the operations of TSI and HNWC were
subsequently closed or sold. Accordingly, the impairment charges for TSI and
HNWC are included in the statement of operations under the caption, loss from
discontinued operations.
41
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
industryIndustry norms as a benchmark. In evaluating potential impairment of long-
lived assets we primarily use an income based approach (discounted cash flow
method) and guidelinein addition to both 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 industryIndustry 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.$0.2 million.
42
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.September 2007. However, for
every 5% percent increase in claims, an additional reserve of approximately
$57,000$71,000 would be required at September 30, 2006,2007, 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.43
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 ano
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.2007.
REVENUE RECOGNITION
We recognize revenue in our wholesale and beverage segmentssegment 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.discounts. We also estimate and provide a reserve for anticipated sales
incentives to customers based on volume.when earned under established program requirements.
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.
44
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, industryIndustry 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""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-Risk1A - 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 transactionincreases in state and litigation,federal excise taxes on cigarette and tobacco
products,
- 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,
- further 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, 2006,2007, the Company had $48.8$38.9 million of variable rate debt
outstanding with maturities through April 2009. The2009 and interest rate on this
debt was 8.25% at September 30, 2006.rates ranging
from 7.75% to 9.75%. We estimate that our annual cash flow exposure relating
to interest rate risk based on our current borrowings is approximately $0.3$0.2
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.
4745
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to 20062007 Consolidated Financial Statements
Reports of Independent Registered Public
Accounting Firms.....................................................47
Consolidated Balance Sheets as of September 2007 and September 2006.....49
Consolidated Statement of Operations for the Fiscal Years Ended
September 2007, September 2006, and September 2005...................50
Consolidated Statement of Shareholders' Equity and Comprehensive
Income (Loss) for the Fiscal Years Ended September 2007,
September 2006, and September 2005...................................51
Consolidated Statement of Cash Flows for the Fiscal Years Ended
September 2007, September 2006, and September 2005...................52
Notes to Consolidated Financial Statements..............................54
46
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 FIRMFirm
To the Board of Directors
AMCON Distributing Company
Omaha, Nebraska
We have audited the consolidated balance sheetsheets of AMCON Distributing Company
and subsidiaries as of September 30, 2007 and 2006, and the related
consolidated statements of operations, shareholders' equity (deficiency) and comprehensive
income (loss) and cash flows for the year thenyears ended September 30, 2007 and 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.audits.
We conducted our auditaudits 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 providesaudits provide 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, 2007 and 2006, and
the results of their operations and their cash flows for the yearyears ended
September 30, 2007 and 2006, in conformity with U.S. generally accepted
accounting principles.
As more fully described in Note 141 to the consolidated financial statements, the Company changed its
method of accounting for inventories in 2007. This change has been applied
retroactively to 2003 and, accordingly, all prior financial statements have
been restated.
We audited the adjustment described in Note 1 that was applied to restate the
2003, 2004, 2005 and 2006 financial statements. In our opinion, such
adjustment is a defendant in litigation relating to the Company's June 2004
purchase of Trinity Springs, Inc. (TSI)appropriate 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.has been properly applied.
/s/ McGLADREY & PULLEN LLP
Omaha, Nebraska
December 28, 2006
49November 6, 2007
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of AMCON Distributing Company:Company
Omaha, Nebraska
We have audited, before the accompanyingeffects of the adjustments to retrospectively
apply the change in accounting discussed in Note 1, the consolidated
balance sheetsstatements of operations, shareholders' equity, and cash flows of AMCON
Distributing Company and subsidiaries (the "Company") as of September 30,
2005, andfor the related consolidated statements of operations, shareholders'
equity (deficiency) and comprehensive income (loss) and cash flows for each
of the fiscal yearsyear ended
September 30, 2005 and September 24, 2004.(the 2005 consolidated financial statements before the
effects of the adjustments discussed in Note 1 to the consolidated financial
statements are not presented herein). Our auditsaudit also included the 2005
financial statement schedule, for eachbefore the effects of the fiscal
years ended September 30, 2005 and September 24, 2004adjustments discussed
in Note 1 to the consolidated financial statements, 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.audit.
We conducted our auditsaudit 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 auditsaudit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
auditsaudit provides a reasonable basis for our opinion.
In our opinion, such 2005 consolidated financial statements, before the
effects of the adjustments to retrospectively apply the change in accounting
discussed in Note 1 to the consolidated financial statements, present fairly,
in all material respects, the financial positionresults of AMCON Distributing Company and
subsidiaries as of September 30, 2005, and the results of theirsubsidiaries' operations and their cash flows for each of the fiscal yearsyear 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 yearsyear ended September 30, 2005, and September 24, 2004,before the
effects of the adjustments to retrospectively apply the change in accounting
discussed in Note 1 to the consolidated financial statements, 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.
Aswithin.
We were not engaged to audit, review, or apply any procedures to the
adjustments to retrospectively apply the change in accounting discussed in
Note 141 to the consolidated financial statements the Company
is a defendant in litigation relating to the Company's June 2004 purchaseand, accordingly, we do not
express an opinion or any other form of Trinity Springs, Inc. ("TSI"). The Company is being challenged in the
District Courtsassurance about whether such
retrospective adjustments are appropriate and have been properly applied.
Those retrospective adjustments were audited 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.auditors.
/s/ DELOITTE & TOUCHE LLP
Omaha, Nebraska
August 21, 2006 (December 28, 2006 as to Notes 2 and 17)
5048
CONSOLIDATED BALANCE SHEETS
AMCON Distributing Company and Subsidiaries
- --------------------------------------------------------------------------------------------------
September 30, 2007 2006
2005(As restated
-see Note 1)
- --------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 481,138717,554 $ 546,273481,138
Accounts receivable, less allowance
for doubtful accounts of $0.3 million
and $0.9 million in 2007 and $0.4 million in 2006, and 2005, respectively 27,848,938 27,815,751 27,180,031
Inventories, net 24,443,063 23,341,28929,738,727 29,407,201
Deferred income taxes 1,972,988 1,642,2121,446,389 1,511,650
Current assets of discontinued operations 1,172,805 2,823,80918,897 1,270,198
Prepaid and other current assets 5,935,208 5,369,154 5,264,629
------------------------------
Total current assets 61,254,899 60,798,24365,705,713 65,855,092
Property and equipment, net 11,190,768 12,528,539 13,514,942
Goodwill 5,848,808 5,848,808
Other intangible assets, net 3,400,070 3,439,803 3,464,534
Deferred income taxes 6,772,927 6,300,5032,768,043 5,324,043
Non-current assets of discontinued operations 2,057,033 3,774,106 4,145,194
Other assets 1,093,150 1,247,464 1,236,573
------------------------------
$ 94,866,54692,063,585 $ 95,308,79798,017,855
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable $ 14,633,12415,253,562 $ 15,438,35914,633,124
Accrued expenses 5,293,923 4,687,789 4,456,421
Accrued wages, salaries and bonuses 2,202,594 1,879,699 1,469,204
Income taxes payable 367,773 168,936 118,798
Current liabilities of discontinued operations 4,035,863 7,461,549 6,655,272
Current maturities of credit facility 3,046,000 3,896,000 1,432,000
Current maturities of long-term debt 568,024 524,130 655,667
------------------------------
Total current liabilities 30,767,739 33,251,227 30,225,721
Credit facility, less current maturities 35,808,180 44,927,429 47,730,388
Long-term debt, less current maturities 7,123,453 7,069,357 7,371,520
Noncurrent liabilities of discontinued operations 6,542,310 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 -1,982,372
Commitments and contingencies (Note 14)
Shareholders' equity (deficiency):equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, none260,000 outstanding and issued in Series A, B and C
referred to above - -
Common stock, $.01 par value, 3,000,000 shares
authorized, 529,436 outstanding for 2007 and
527,062 outstanding 5,271for 2006 5,295 5,271
Additional paid-in capital 6,396,131 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)(857,895) (4,879,507)
------------------------------
Total shareholders' deficiency (1,747,069) (228,428)equity 5,543,531 1,404,240
------------------------------
$ 94,866,54692,063,585 $ 95,308,79798,017,855
==============================
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated financial
statements
5149
CONSOLIDATED STATEMENTS OF OPERATIONS
AMCON Distributing Company and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Fiscal Years Ended September 2007 2006 2005
2004(As restated (As restated
-see Note 1) -see Note 1)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Sales (including excise taxes of $208.2 million,
$200.6 million and $197.7 million, and $191.6 million in 2006, 2005
and 2004, respectively) $ 853,566,512 $ 839,539,780 $ 834,551,448
$ 817,285,523
Cost of sales 779,406,125 774,060,331 757,937,989789,317,758 779,189,369 773,292,164
-------------------------------------------
Gross profit 60,133,655 60,491,117 59,347,53464,248,754 60,350,411 61,259,284
-------------------------------------------
Selling, general and administrative expenses 50,963,645 51,721,525 51,032,197 48,908,769
Depreciation and amortization 1,831,640 1,936,897 2,155,983 2,065,876
Impairment charges - - 4,234,856
-
-------------------------------------------
52,795,285 53,658,422 57,423,036 50,974,645
-------------------------------------------
Operating income 6,475,233 3,068,081 8,372,88911,453,469 6,691,989 3,836,248
Other expense (income):
Interest expense 4,816,324 4,858,012 4,211,685 3,243,238
Other (income), net (194,608) (137,241) (80,105)
(569,274)
-------------------------------------------
4,621,716 4,720,771 4,131,580 2,673,964
-------------------------------------------
Income (loss) from continuing operations
before income taxes 1,754,462 (1,063,499) 5,698,925tax expense 6,831,753 1,971,218 (295,332)
Income tax expense (benefit) 432,000 (196,000) 2,286,0002,626,000 514,000 94,000
Minority interest in loss, net of tax - - (97,100) (91,000)
-------------------------------------------
Income (loss) from continuing operations 1,322,462 (770,399) 3,503,9254,205,753 1,457,218 (292,232)
Discontinued operations (Note 2)
Gain on disposal of discontinued
operations, net of income tax expense
of $0.6 million 829,090 - -
Loss from discontinued operations, net of
income tax benefit of $0.3 million,
$1.1 million $5.5 million and $4.7$5.4 million, respectively (2,433,767) (11,971,580) (7,642,472)(594,539) (2,435,766) (11,960,904)
-------------------------------------------
Income (loss) on discontinued operations 234,551 (2,435,766) (11,960,904)
-------------------------------------------
Net loss (1,111,305) (12,741,979) (4,138,547)income (loss) 4,440,304 (978,548) (12,253,136)
Preferred stock dividend requirements (418,692) (366,042) (294,640)
(49,474)
-------------------------------------------
Net lossincome (loss) available to common shareholders $ (1,477,347)4,021,612 $ (13,036,619)(1,344,590) $ (4,188,021)(12,547,776)
===========================================
Basic earnings (loss) per share
available to common shareholders:
Continuing operations $ 1.817.19 $ (2.02)2.07 $ 6.54(1.11)
Discontinued operations (4.61) (22.71) (14.48)0.44 (4.62) (22.70)
-------------------------------------------
Net lossbasic earnings (loss) per share
available to common shareholders $ (2.80)7.63 $ (24.73)(2.55) $ (7.94)(23.81)
===========================================
Diluted earnings (loss) per share
available to common shareholders:
Continuing operations $ 1.634.89 $ (2.02)1.82 $ 6.23(1.11)
Discontinued operations (3.87) (22.71) (13.59)0.27 (3.44) (22.70)
-------------------------------------------
Net diluted lossearnings (loss) per share
available to common shareholders $ (2.24)5.16 $ (24.73)(1.62) $ (7.36)(23.81)
===========================================
Weighted average shares outstanding:
Basic 527,062 527,062 527,774527,062
Diluted 627,810860,121 708,946 527,062
562,559The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated financial
statements
5250
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DEFICIENCY)
AND COMPREHENSIVE INCOME (LOSS) (As restated - see Note 1)
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$ 9,012,859 $15,296,506
Dividends on preferred stock - - - - (294,640) (294,640)
Net loss - - - - (12,741,979) (12,741,979)(12,253,136) (12,253,136)
Change in the fair value of
interest rate swap, net of
tax of $0.03 million - - - 41,394 - 41,394
-----------
Total comprehensive loss (12,700,585)
--------------------------------------------------------------------------(12,211,742)
-------------------------------------------------------------------------
Balance, September 30, 2005 527,062 5,271 6,218,476 101,294 (6,553,469) (228,428)(3,534,917) 2,790,124
Dividends on preferred stock - - - - (366,042) (366,042)
Stock option plan compensationexpense - - 60,000 - - 60,000
Net loss - - - - (1,111,305) (1,111,305)(978,548) (978,548)
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)
--------------------------------------------------------------------------(1,079,842)
-------------------------------------------------------------------------
Balance, September 30, 2006 527,062 5,271 6,278,476 - (4,879,507) 1,404,240
Dividends on preferred stock - - - - (418,692) (418,692)
Stock option expense - - 70,993 - - 70,993
Exercise of stock options 2,374 24 46,662 - - 46,686
Net income - - - - 4,440,304 4,440,304
----------
Total comprehensive income 4,440,304
-------------------------------------------------------------------------
Balance, September 30, 2007 529,436 $ 5,2715,295 $ 6,278,4766,396,131 $ - $(8,030,816) $(1,747,069)
==========================================================================$ (857,895) $ 5,543,531
=========================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated financial
statements
5351
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMCON Distributing Company and Subsidiaries
- ----------------------------------------------------------------------------------------------------------
Fiscal Years 2007 2006 2005
2004(As restated (As restated
-see Note 1) -see Note 1)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) income $(1,111,305) $(12,741,979) $(4,138,547)$ 4,440,304 $ (978,548) $(12,253,136)
Deduct: LossIncome (loss) from discontinued operations,
net of tax 2,433,767 11,971,580 7,642,472234,551 (2,435,766) (11,960,904)
----------- ----------- -----------
(Loss) incomeIncome (loss) from continuing operations 1,322,462 (770,399) 3,503,9254,205,753 1,457,218 (292,232)
Adjustments to reconcile income (loss) income from
continuing operations to net cash flows
from operating activities:
Depreciation 1,791,907 1,897,166 2,039,553
1,887,244
Amortization 39,733 39,731 116,430 178,632
Impairment charges - - 4,234,856
-
(Gain) lossLoss (gain) on sale of property and equipment 27,235 30,082 (13,116) (7,774)
Stock based compensation 70,993 60,000 - -
Deferred income taxes (803,200) (5,987,341) (1,754,264)
Provision2,621,261 (722,727) (5,691,019)
(Benefit) provision for losses on doubtful accounts (250,196) 179,196 (189,604)
(338,928)
Provision(Benefit) provision for losses on inventory obsolescence 52,242 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 217,009 (814,916) 1,383,923
(530,149)
Inventories (1,179,714) 10,056,784 (3,241,622)(383,768) (1,396,154) 9,288,767
Other current assets (566,058) (205,819) (4,848,246)
223,901
Other assets 254,314 (10,891) (160,509)
282,100
Accounts payable 739,188 (805,235) (670,130) 1,804,427
Accrued expenses and accrued wages, salaries and bonuses 1,574,429 641,863 1,280,966 211,343
Income taxes payable and receivable 198,837 50,138 1,281,423 (1,703,039)
----------- ----------- -----------
Net cash flows from operating activities
- continuing operations 478,803 7,623,970 124,30310,592,879 477,592 7,630,442
Net cash flows from operating activities
- discontinued operations (822,124) 903,906 (3,786,719)(1,929,323) (820,913) 897,434
----------- ----------- -----------
Net cash flows from operating activities 8,663,556 (343,321) 8,527,876 (3,662,416)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (514,277) (980,510) (2,464,694) (910,318)
Proceeds from sales of property and equipment 101,328 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 (412,949) (955,845) (2,348,097) 144,230
Net cash flows from investing activities
- discontinued operations 3,965,394 (16,818) (585,451) (4,035,108)
----------- ----------- -----------
Net cash flows from investing activities 3,552,445 (972,663) (2,933,548) (3,890,878)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net principal (payments) borrowings (payments) on bank credit
agreements (9,969,248) (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 (734,416) (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 46,686 - -
522Debt issuance costs (100,000) - (446,641)
Dividends paid on preferred stock (418,692) (366,042) (294,640)
----------- ----------- -----------
Net cash flows from financing activities
- continuing operations (11,175,670) 843,671 (1,544,799)
7,541,253
5452
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Fiscal Years 2007 2006 2005
2004(As restated (As restated
-see Note 1) -see Note 1)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities
- discontinued operations (803,915) 407,178 (3,919,329) (239,959)
----------- ----------- -----------
Net cash flow from financing activities (11,979,585) 1,250,849 (5,464,128) 7,301,294
----------- ----------- -----------
Net change in cash 236,416 (65,135) 130,200 (252,000)
Cash, beginning of year 481,138 546,273 416,073 668,073
----------- ----------- -----------
Cash, end of year $ 717,554 $ 481,138 $ 546,273 $ 416,073
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $4,858,960$ 4,890,997 $ 4,858,960 $ 4,376,251
$ 3,632,384
Cash paid (refunded) paid during the year for
income taxes 94,901 (647) (911,278) 1,253,768
Supplemental disclosure of non-cash information:
Forgiveness of debt and related interest in
connection with settlement of TSI litigation $(3,735,145) $ - $ -
Forgiveness of water royalty in connection
with settlement of TSI litigation (2,807,000) - -
Issuance of note payable in connection with
TSI litigation 5,000,000 - -
Issuance of note payable in connection with
settlement of TBG litigation 763,983 - -
Buyer's assumption of HNWC lease in connection with
the sale of HNWC's assets - discontinued operations (225,502) - -
Issuance of note payable in exchange for
accounts payable - discontinued operations $- 362,716 $ - $ -
Acquisition of equipment through capital leases 68,422 - 91,343
125,840
Business combinations:
Fair valueThe accompanying notes are an integral part 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 - - 407,986these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated financial
statements
5553
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 the opening of 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%71% of its revenue and 25% of gross profit in fiscal
2007, as compared to 72% and 27% of itsrevenue and gross profit in fiscal 2006,
compared toand 73% and 33% of its revenue and 32% of its gross profit in fiscal 2005.
(b)Change in Accounting Principle:
In the fourth quarter of fiscal 2007, the Company changed its inventory
valuation method from the Last-In First-Out (LIFO) method to the First-In
First-Out (FIFO) method. The change is preferable as it provides a more
meaningful presentation of the Company's financial position as it values
inventory in a manner which more closely approximates current cost; better
represents the underlying commercial substance of selling the oldest products
first; and more accurately reflects the Company's realized periodic income.
As required by U.S. generally accepted accounting principles, this change in
accounting principle has been reflected in the consolidated statements of
financial position, consolidated statements of operations, and consolidated
statements of cash flows through retroactive application of the FIFO method.
Accordingly, inventories from continuing operations as of the beginning of
fiscal 2005 were increased by the LIFO reserve ($4.0 million), net current
deferred tax assets were decreased ($0.7 million), current assets of
discontinued operations were increased for the impact of related LIFO
reserves ($0.1 million), net non-current deferred tax liabilities were
54
increased ($0.9 million), and 73% of its revenueshareholders' equity was increased by the
after-tax effect ($2.5 million). Previously reported net income (loss)
available to common shareholders' for the fiscal years 2006 and 33% of its gross profit in fiscal
2004.
(b)2005 were also
increased by $0.1 million and $0.5 million after income taxes, respectively.
(c) Accounting Period:
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, the fiscal year 2005 consistedwas comprised of 53 weeks of operations compared to 52
weeks of operations in fiscal 2007 and 2006. The fiscal years 2007, 2006 and 2004. Actual year ends for fiscal 2006,
2005 and 2004 wereended on
September 30 2006, September 30, 2005 and September 24,
2004, respectively. Years citedare herein referreferred to as AMCON's fiscal years.
(c)(d) Principles of Consolidation:
The consolidated financial statements include the accounts of AMCON and its
wholly-owned subsidiaries.
As a resultPrior to the settlement of the Company's 85% ownershiplitigation among and between AMCON, TSI, and
Crystal Paradise Holdings, Inc. ("CPH") 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 subsidiarySeptember 2007, as a minority interest. As described further in
Note 14, the Company is currently involvedhad a 85% ownership in litigation regarding its ownership ofTSI, with a 15% non-owned interest
being held by a minority interest (CPH). For the assets acquired by TSI. Given the uncertainty surrounding the potential
recession alternativesfiscal years 2007, 2006, 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 the2005, 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 accountbeen accounted for TSI as a consolidated subsidiary. Additionally, as discussed in Note 2, TSIsubsidiary of the Company
and has been classifiedincluded as a component of discontinued operations at September 30, 2006.in the
Consolidated Financial Statements. During the first quarter of fiscal 2005,
the Company suspended the allocation of TSI's losses to minority shareholders
onceas their ownership basis wasin TSI had been reduced to zero becauseand the minority
shareholders havedid not guaranteed TSIguarantee TSI's debt or committedcommit additional capital to TSI.
All significant intercompany accounts and transactions have been eliminated.
(d)(e) Cash and Accounts Payable:
AMCON usesutilizes a cash management system under which an overdraft is the normal
book balance in the primary disbursing accounts. The overdraftsOverdrafts included in
accounts payable ofat fiscal 2007 and fiscal 2006 totaled approximately
$3.3 million and $3.2 million, respectively, 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)(f) Accounts Receivable:
Accounts receivable consist primarily of amounts due to the Company from its
normal business activities. An allowance for doubtful accounts is maintained
to reflect the expected uncollectibility of accounts receivable based on past
collection history and specific risks identified in the portfolio.
(f)(g) Inventories:
Inventories consisted of the following at September 30,2007 and 2006 and 2005 (in
millions):
Restated/1/
September September
2007 2006 2005
--------- ---------
Finished Goods $ 29.429.7 $ 28.0
LIFO Reserve (5.0) (4.7)
--------- ---------
$ 24.4 $ 23.329.4
========= =========
/1/ Restated for the retroactive application of the FIFO inventory
valuation method. See Note 1 to the Consolidated Financial Statements.
55
Inventories are stated at the lower of cost, determined on a FIFO basis, or
market. 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)(h) Prepaid Expenses and Other Current Assets:
A summary of prepaid expenses and other current assets is as follows (in
millions):
September September
2007 2006 2005
--------- ---------
Prepaid expenses $ 1.20.8 $ 0.71.2
Prepaid inventory 5.1 4.2 4.5
Interest rate swap - 0.1
--------- ---------
$ 5.45.9 $ 5.35.4
========= =========
Prepaid inventory represents inventory in transit that has been paid for but
has not yet been received.
(h) Fixed Assets:
Fixed assets(i) Property and Equipment:
Property and equipment 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 - 75-7
Furniture, fixtures and
leasehold improvements 5 - 185-18
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)(j) 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 aimpairment charges of
$2.5 million and $0.4 million impairment onrelated to long-lived assets atheld by 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.respectively.
The impairments were due toresulted from a shortfall in the shortfall of expectedprojected future 58
cash flows
necessary to support the assets as well as a need for additional capital toand sustain the same level of operations. The Company did not
incur similar impairment charges duringin fiscal 2007 or fiscal 2006. (j)See further
discussion regarding HNWC and TSI in Note 2.
(k) 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, 2006,2007, intangible assets
consist primarily of tradenames and favorable leases assumed in acquisitions.
56
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 toDuring the third fiscalfourth quarter of each
fiscal 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 is taken against
the results of operations in thethat 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 Company's
former beverage segment reporting unit, were impaired.impaired based on a valuation
report provided by an independent valuation specialist. 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 taxincome taxes
was $10.2 million. In fiscal 2004,million and was included in the Company also determined that the
tradenames at HNWC, partresults 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 componentsoperations of
discontinued operations. The Company did not incur ansimilar impairment chargecharges
during fiscal 2006 upon the completion2007 or fiscal 2006. See further discussion of its annual review.regarding HNWC
and TSI in Note 2.
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)(l) Water Royalty in Perpetuity:
Water royalty in perpetuity consists of a balance representingrepresents the present value of the future minimum
water royalty payments and related brokers fees to be paid in perpetuity
incurred in connection with theassets acquired by 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 asAs discussed
in Note 2.
59
(l)2, in September 2007 AMCON and TSI were released of this obligation in
connection with the terms of the litigation settlement.
(m) 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)(n) 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)57
(o) 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 thea claim reservesreserve established with the assistance
of a third-party administrator which are trended and developed.administrator. 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 letter of credit was reduced to
approximately $0.9 million subsequent to September 2007. The reserve for
incurred, but not reported, employee health care benefits is based on one
month of average claims, calculated 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)(p) Income Taxes:
Deferred income taxes are determined based on temporary differences between
the financial reporting and tax basesbasis 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)(q) Comprehensive Income (Loss):
Comprehensive income (loss) for the Company includes net income or loss, andplus changes in the
valuation of interest rate swap contracts, which are treated as hedging
instruments that areand charged or credited to shareholders' equity.
This interest rate swap expired in fiscal 2006.
(q)(r) 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 2007 and fiscal 2006. This expense represents the
amortization of unvested stock option awards granted prior to September 30,
2005, andin addition to stock options granted the Company's Chief Executive
Officer in April 2007. This expense 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.
58
Restated/1/
2005
2004
-----------------------------------------
Loss available to common shareholders
- ------------------------------------------------
Net loss available to common
shareholders, as reported $(13,036,619) $(4,188,021)$(12,547,776)
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) $(4,248,294)
=============================$(12,600,884)
============
Loss per share available to common shareholders
- ------------------------------------------------
As reported: Basic $ (24.73) $ (7.94)(23.81)
Diluted $ (24.73) $ (7.36)(23.81)
Pro forma: Basic $ (24.84) $ (8.05)(23.91)
Diluted $ (24.84) $ (7.46)(23.91)
/1/ Restated for the retroactive application of the FIFO inventory
valuation method.
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)(s) 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)(t) 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)(u) Recently Issued Accounting Standards:
During fiscal 2007, Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108") became effective for the Company. SAB 108 requires
that registrants quantify errors using both a balance sheet approach and an
income statement approach and then evaluate whether either approach results in
a misstated amount that, when all relevant quantitative and qualitative
factors are considered, is material. The adoption of SAB 108 did not have a
material effect on the Company's financial position or results of operations.
59
The Company is currently evaluating the impact of implementing the following
new accounting standards:
On July 13, 2006, the FASBFinancial Accounting Standards Board ("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 offor fiscal years that beginbeginning
after December 15, 2006. The Company is
currently evaluating2006 (the first fiscal quarter of 2008 for the effectsCompany).
We do not believe that the cumulative effect of implementing this new standard.adopting FIN 48 will have a
material impact on the Company's Consolidated Financial Statements.
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 in fiscal 2008 for the Company.
In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair value
accounting but does not affect existing standards which require assets and
liabilities to be carried at fair value. Under SFAS 159, a company may elect
to use fair value to measure accounts and loans receivable, available-for-
sale and held-to-maturity securities, equity method investments, accounts
payable, guarantees, issued debt and other eligible financial instruments.
SFAS 159 is effective for fiscal years beginning after November 15, 2007
(fiscal 2009 for the Company).
In March 2007, the FASB issued Emerging Issues Task Force Issue No. 06-10
"Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements"
(EITF 06-10). EITF 06-10 provides guidance for determining a liability for
the postretirement benefit obligation as well as recognition and measurement
of the associated asset on the basis of the terms of the collateral assignment
agreement. EITF 06-10 is effective for fiscal years beginning after December
15, 2007 (fiscal 2009 for the Company).
2. DISPOSITIONS
For the fiscal years 2007, 2006 and 2005, HNWC and TSI have been reflected in
the Company's Consolidated Financial Statements as components of discontinued
operations. The Beverage Group, Inc. ("TBG") is also included in discontinued
operations for the fiscal year beginning October 1, 2008, with early adoption permitted. The Company is
currently evaluating2005 and the impactfirst two quarters of adopting this standard.
2. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES:
ACQUISITIONSfiscal 2006.
TBG was a component of the Company's former beverage segment, which was closed
in March 2005. TBG's final wind-down was completed in April 2006 at which
time its residual liabilities were classified to continuing operations.
60
Trinity Springs, Inc. (TSI)
- ---------------------
On June 17, 2004,---------------------------
During fiscal 2006, the Company discontinued the operations of TSI, which
operated a newly formed subsidiarywater bottling facility in Idaho, due to recurring losses, a lack
of AMCON, TSL Acquisition Corp.,
acquired the tradename, water source, customer listcapital resources to sustain operations, 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.
As described in Note 14, AMCON and TSI were parties to litigation with Crystal
Paradise Holdings, Inc. ("CPH") regarding the April 24, 2004 Asset Purchase
Agreement ("Asset Purchase Agreement"), under which TSI acquired certain
assets from CPH. On September 30, 2007, the Company signed a Mutual Release
and Settlement Agreement (the "Settlement Agreement") with CPH related to this
litigation. The total TSI purchase priceSettlement Agreement calls for the mutual release and
settlement of $8.8 million was paid through a combination
of $2.3 million in cash, $3.3 million in notes issued byall outstanding and potential litigation and claims among and
between AMCON, TSI, and guaranteed
by AMCON;CPH with respect to the assumption of approximately $0.2 million of liabilitiesAsset Purchase Agreement and
the issuance of TSI common stock representing 15% ownership of TSI which had an
estimated fair value of $0.4related acquisition.
The Settlement Agreement also restructured the Company's obligations arising
from the Asset Purchase Agreement with CPH totaling approximately $6.5 million
andinto a new $5.0 million note payable to CPH. The $5.0 million note payable is
convertible into 16,666 shares of
AMCON common stockdue at the end of five years plus accrued interest at 5.0%. Items
restructured into the $5.0 million note payable included CPH's minority
interest in TSI, water royalties payable to CPH, notes payable to CPH, and
accrued interest payable to CPH. Additionally, the agreement provides CPH
with an eleven month 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
expensespurchase TSI's assets for attorneys and investment bankers. In addition, TSI was
obligated to pay an annual water royaltya price equivalent to
the Seller, in perpetuity, in an
amount equal todue CPH under 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 fornote payable, plus accrued interest.
The TSI asset purchase option can be extended an additional seven months at
CPH's election.
No monetary exchanges between the first yearCompany and $288,000 annually thereafter.CPH were required under the
Settlement Agreement. The Company has recorded a $2.8$1.5 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 AMCONpre-tax
deferred gain 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 haveabove settlement. This deferred gain
has 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 downcomponent of TBG was completed as
of March 31, 2006 and no additional expenses have been recorded as a
componentnoncurrent liabilities of discontinued
operations since that time.in the Company's Consolidated Balance Sheet. The accompanying
consolidated financial statements for all periods presented have been
prepared reflecting this classification.
Priordeferred gain
will be recognized upon the earlier of CPH's election to exercise its TSI
asset purchase option or the classification of these businesses as discontinued operations,
the Company allocated interest expense to its wholly-owned subsidiaries using
an invested capital calculation. As partexpiration 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."asset purchase option.
Hawaiian Natural Water Company, Inc. (HNWC)
- -------------------------------------
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 iswas headquartered in Pearl City, Hawaii, is
part of the Company's former beverage segment. HNWC bottles, marketsbottled, marketed and
distributesdistributed Hawaiian natural artesian water, purified water and other limited
production co-packaged products, in Hawaii, the mainland and foreign markets.
Trinity Springs, Inc.
- ---------------------
In MarchNovember 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 componentthe Company sold all of the Company's former beverage
segment.
TSIoperating assets of HNWC for
approximately $3.8 million in cash plus the buyer's assumption of all
operating and capital leases. The significant operating assets consisted of
accounts receivable, inventory, furniture and fixtures, intellectual property
and all of its bottling equipment. In connection with the sale, the Company
has been reflected in the accompanying consolidated financial statements
as of September 30, 2006 and 2005 asrecorded a component$1.6 million pre-tax gain on disposal of discontinued
operations. During the second fiscal quarterHNWC remained a fully operational subsidiary of 2006, the Company
recorded charges,
included in loss fromthrough November 19, 2006.
61
A summary of 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, andis 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.follows:
Year ended
September
--------------------------------------------
2006 2005 2004-----------------------------------------
Restated Restated
2007 2006/1/ 2005/1/
----------- ------------ ------------
Sales $ 862,852 $ 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)(576,101) (3,190,327) (17,101,139)
Gain on disposal of discontinued
operations, before income taxes 1,455,333 - -
Income tax benefit (1,132,000) (5,453,000) (4,709,000)
Lossexpense (benefit) 269,000 (1,134,000) (5,446,000)
Earnings (loss) from
discontinued operations (2,433,767) (11,971,580) (7,642,472)234,551 (2,435,766) (11,960,904)
/1/ Restated for the retroactive application of FIFO inventory valuation
method. See Note 1 to the Consolidated Financial Statements.
64
The carrying amounts (net of allowances) of the major classes of assets and
liabilities included in discontinued operations are as follows (in millions):
Restated/1/
September September
2007 2006 2005
---------- ----------
Accounts receivable $ - $ 0.7
$ 1.5
Inventories 0.5 1.3- 0.6
---------- ----------
Total current assets of discontinued operations $ 1.2- $ 2.81.3
========== ==========
Fixed assets - Total noncurrent assets of
discontinued operations $ 3.82.1 $ 4.13.8
========== ==========
Accounts payable $ 2.00.7 $ 2.72.0
Accrued expenses 0.5 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 2.02.8
---------- ----------
Total current liabilities of discontinued operations $ 7.54.0 $ 6.77.5
========== ==========
Water royalty, in perpetuity /2/ $ - $ 2.8
$ 2.8Deferred gain on CPH settlement 1.5 -
Long-term debt, less current portion 5.0 2.3 3.1
---------- ----------
Noncurrent liabilities of discontinued operations $ 6.5 $ 5.1
$ 5.9========== ==========
==========/1/ Restated for the retroactive application of FIFO inventory valuation method.
See Note 1 to the Consolidated Financial Statements.
/2/ This obligation payable to CPH was released in conjunction with the legal settlement
previously discussed.
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.
6562
3. CONVERTIBLE PREFERRED STOCK:
The Company has the following Convertible Preferred Stock outstanding as of
September 2006:2007:
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%6.37% 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 beneficially own approximately 60% of the outstanding
common stock as
ofat September 30, 2006.2007. Mr. William Wright, who has been AMCON's Chairman of the
Board, since AMCON's founding, beneficially owns 29%27% 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
63
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 seeseek 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 directorsa director of the Company, are Members.is a member.
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 and Vice Chairman,
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 areis also Membersa Member 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 lossincome (loss) from discontinued operations by the
weighted average common shares outstanding for each period. Diluted earningearnings
(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 lossincome (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 end2007, 2006 2005 and
20042005 that were anti-dilutive were not included in the computations of diluted
earnings per share. Such potential common shares totaled 356,308,20,245, 128,330 and
198,620 and 113,921 with average exercise prices of $22.09,$38.74, $30.17 and $29.13, and
$32.92,
respectively.
For Fiscal Years
-----------------------------------------
Restated/1/ Restated/1/
2007 2006 2005 2004
-----------------------------------------
Basic Basic Basic
-----------------------------------------
Weighted average number of shares outstanding 527,062 527,062 527,774527,062
=========================================
Income (loss) from continuing operations $ 1,322,4624,205,753 $ (770,399)1,457,218 $ 3,503,925(292,232)
Deduct: preferred stock dividend requirements (418,692) (366,042) (294,640)
(49,474)
-----------------------------------------
$ 956,4203,787,061 $ (1,065,039)1,091,176 $ 3,454,451(586,872)
=========================================
LossIncome (loss) from discontinued operations $ (2,433,767) $(11,971,580) $(7,642,472)234,551 $ (2,435,766) $(11,960,904)
=========================================
Net loss income (loss) available to common shareholders $ (1,477,347) $(13,036,619) $(4,188,021)4,021,612 $ (1,344,590) $(12,547,776)
=========================================
6764
Restated/1/ Restated/1/
2007 2006 2005 2004
-----------------------------------------
Basic Basic Basic
-----------------------------------------
Earnings (loss) per share from continuing
operations $ 1.817.19 $ (2.02)2.07 $ 6.54
Loss(1.11)
Earnings (loss) per share from discontinued
operations (4.61) (22.71) (14.48)0.44 (4.62) (22.70)
-----------------------------------------
LossNet earnings (loss) per share available to
common shareholders $ (2.80)7.63 $ (24.73)(2.55) $ (7.94)(23.81)
=========================================
Diluted Diluted Diluted
-----------------------------------------
Weighted average common shares outstanding 527,062 527,062 527,774527,062
Weighted average of net additional shares
outstanding assuming dilutive options
exercised and proceeds used to purchase
treasury stock /1/ 100,748/2/ 333,059 181,884 - 34,785
-----------------------------------------
Weighted average number of shares outstanding 627,810860,121 708,946 527,062 562,559
=========================================
Income (loss) from continuing operations $ 1,322,4624,205,753 $ (770,399)1,457,218 $ 3,503,925(292,232)
Deduct: preferred stock dividend requirements /2/ (297,042)/3/ - (169,641) (294,640) -
-----------------------------------------
$ 1,025,4204,205,753 $ (1,065,039)1,287,577 $ 3,503,925(586,872)
=========================================
LossIncome (loss) from discontinued operations $ (2,433,767) $(11,971,580) $(7,642,472)234,551 $ (2,435,766) $(11,960,904)
=========================================
Net lossincome (loss) available to common shareholders $ (1,408,347) $(13,036,619) $(4,138,547)4,440,304 $ (1,148,189) $(12,547,776)
=========================================
Earnings (loss) per share from continuing
operations $ 1.634.89 $ (2.02)1.82 $ 6.23
Loss(1.11)
Earnings (loss) per share from discontinued
operations (3.87) (22.71) (13.59)0.27 (3.44) (22.70)
-----------------------------------------
LossNet earnings (loss) per share available to
common shareholders $ (2.24)5.16 $ (24.73)(1.62) $ (7.36)(23.81)
=========================================
/1/ Restated for the retroactive application of the FIFO inventory valuation method.
See Note 1 to the Consolidated Financial Statements.
/2/ Includes stock optionoptions plus the weighted-average of Series A, B, and C Convertible Preferred Stock outstandingin fiscal 2007
and stock options plus Series B and C Convertible Preferred Stock in fiscal 2006.
Includes stock option plus the weighted average of/3/ Excludes preferred dividend payments for Series A, B, and C Convertible Preferred Stock
outstanding in fiscal 2004.
/2/ Series A2007 and Series B and C Convertible Preferred Stock is anti-dilutive in fiscal 2006, as these
issues were dilutive and fiscal 2005 becauseassumed to have been converted to common stock of 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.Company.
6865
5. OTHER COMPREHENSIVE INCOME (LOSS):
The components of other comprehensive income (loss) for fiscal 2006 and 2005
are as follows. There were as follows:no such reconciling items to net income or
accumulated other comprehensive income (loss) balances for fiscal 2007.
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
-----------------------------------$ (2,638)
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 20062007 and 20052006 consisted of the
following:
2007 2006 2005
---------------------------
Land $ 648,818 $ 648,818
Buildings and improvements 9,048,798 9,040,4969,048,798
Warehouse equipment 6,341,848 5,358,310 5,075,605
Furniture, fixtures and
leasehold improvements 7,119,859 7,107,293
7,146,563
Vehicles 1,434,548 1,554,553 1,106,911
Capital equipment leases 1,158,65791,343 1,158,657
---------------------------
24,685,214 24,876,429 24,177,050
Less accumulated depreciation
and amortization:
Owned buildings and equipment (13,461,822) (11,512,799) (10,019,917)
Capital equipment leases (32,624) (835,091) (642,191)
---------------------------
$ 12,528,53911,190,768 $ 13,514,94212,528,539
===========================
66
7. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill by reporting segment at fiscal year ends 20062007 and 20052006 was as
follows:
2007 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 20062007 and 20052006 consisted of the
following:
2007 2006
2005
--------------------------------------- ------------
Trademarks and tradenames $ 3,373,269 $ 3,358,2693,373,269
Favorable leases (less accumulated
amortization of $419,466$459,199 and $379,735)$419,466) 26,801 66,534
106,265
--------------------------------------- ------------
$ 3,400,070 $ 3,439,803
$ 3,464,534
======================================= ============
The Company performs its annual impairment test fortesting of goodwill and other
intangible assets afterduring the completionfourth fiscal quarter of each year, with 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
impairmentassistance of certain goodwill and identifiable intangible assets.
70
Fiscal 2005 impairment
- ----------------------
During fiscal 2005, based on valuations obtained from an independent valuation specialist, management determinedspecialist. This annual review
identified no impairments in fiscal 2007 or fiscal 2006.
After completing its fiscal 2005 impairment review, however, the Company
concluded that a portion of the tradenames and goodwill were impaired at both theour retail and
theformer beverage segments.
Thesegment were impaired. These 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 wereare recorded in the Company's
statement of operations as a component of income (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 and67
A summary of 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
$118,902impairment charges 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 ratesentity are as follows
(in millions):
Continuing Discontinued Total
Operations Operations/1/
---------- ---------------- -----
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
===== ===== ===== =====
/1/ See Note 2 to the Consolidated Financial Statements, regarding the
classification of TSI and HNWC at September 2007.
The five year estimated amortization expense 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 years2007 is estimated to be as follows:
Fiscal Fiscal Fiscal Fiscal Fiscal
2007 2008 2009 2010 2011 2012
--------- --------- -------- -------- --------
Favorable leases $ 40,00027,000 $ 27,000- $ - $ - $ -
========= ========= ======== ======== ========
8. OTHER ASSETS:
Other assets at fiscal year ends 20062007 and 20052006 consisted of the following:
2007 2006 2005
-------------------------
Cash surrender value of life
insurance policies $ 801,238806,633 $ 795,830801,238
Debt issuance costs 98,044 97,880
332,406
Other 188,473 348,346
108,337
-------------------------
$1,093,150 $1,247,464 $1,236,573
=========================
Debt issuance costs represent fees incurred to obtain the Company's revolving
credit facility and real estate loanloans, and are being amortized over the terms
of the respective loan agreements. Amortization expense wasrelated to these debt
issuance costs were $219,273, $385,487, $410,764, and $90,422$410,764 for the fiscal years
ended 2007, 2006 and 2005, and 2004, respectively.
68
9. DEBT:
The Company primarily finances certain obligations and, in the case of its former
beverages segment, itsit operations through thea credit facility
agreement with LaSalle Bank (the "Facility"), and long-term debt arrangementsagreements
with banks and third parties and
related party debt arrangements.banks.
CREDIT FACILITY
- ---------------
The Facility consisted of the following at fiscal year end 20062007 and 2005:2006:
2007 2006 2005
---------------------------
Revolving portion of the Facility, interest payable
at the bank's baseprime rate (8.25%(7.75% at fiscal year end 2006)2007),
principal due April 2009 (as renewed in December 2006)$37,936,847 $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%(7.75% at fiscal
year end 2006)2007), remaining principal due April 2009 (as renewed in December 2006)567,333 770,533 973,734
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%(9.75% at fiscal year end 2006)2007) through March 2008 (as renewed in December 2006)350,000 1,550,000
3,625,000
---------------------------
38,854,180 48,823,429 49,162,388
Less current maturities 3,046,000 3,896,000
1,432,000
---------------------------
$35,808,180 $44,927,429 $47,730,388
===========================
The significant terms of the Facility provides for aat September 2007 include:
- A $55.0 million credit limit consisting of a $53.8 million revolving credit line and a $1.2 millionlimit, plus the outstanding balances
on two term notenotes ("Term Note A" and "Term Note B").
As monthly payments are made on which totaled
approximately $0.9 million at September 2007 for a total credit
facility limit of $55.9 million at September 2007.
- Bears interest at the bank's prime interest rate, except for Term Note A,B
which bears interest at 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")bank's prime rate plus 2%.
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- 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 provisionsborrowings.
- Collateral including all of the Facility at September 30, 2006 are as
follows:Company's equipment, intangibles,
inventories, and accounts receivable.
- 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 asone percent (1%) of the last dayprepayment loan limit 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$55.0 million if prepayment occurs on or before April 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 provides2008.
- Provides that the Company may not pay dividends on its common stock in
excess of $0.72 per share on an annual basis.
The facilityFacility 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 connectionincludes quarterly debt service and cumulative earnings
before interest, taxes, depreciation and amortization ("EBITDA") financial
covenants. Beginning with the guarantyfiscal quarter ended September 2007, the
Company must maintain a minimum debt service ratio of 1.0 to 1.0, as measured
by AMCON of the 73
TSI acquisition notes or the water royalty under the asset purchase agreementtwelve month period then ended.
69
The cumulative minimum EBITDA requirements are as follows:
(a) $1,000,000 for the purported sale of TSI assets.
The Facility also providesthree months ending December 31, 2007 and
December 31, 2008 and;
(b) $2,000,000 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 undersix months ending March 31, 2008, and
March 31, 2009 and;
(c) $4,500,000 for the Facility.
The bank maintains a security interest innine months ending June 30, 2008 and;
(d) $7,000,000 for 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 oftwelve months ending 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 of2007
and September 30, 2006 and is collateralized by
all of the Company's equipment, intangibles, inventories, and accounts
receivable.2008.
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 connectioncompliance with the new amendment, therequired debt service and minimum
monthly EBITDA covenant violationcovenants at September 30, 2006 was waived.2007.
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
LoanNote B, and certain other deductions, which resulted in the guaranteed principal outstanding being reduced
to $6.6approximately $5.4 million as of September 30, 2006.2007. AMCON will paypays the Company's
Chairman an annual fee equal to 2% of the guaranteed principal in return for
the personal guarantee. This guarantee is secured by a pledge of the shares
of Chamberlin's, Akin's, HNWC and TSI.
The Company's Chairman has also personally guaranteed a note payable issued in
conjunction with the Television Events and Marketing, Inc. ("TEAM") litigation
settlement as discussed in Note 14. The Company pays the Chairman an annual
fee equal to 2% of the guaranteed principal in return for the personal
guarantee. The amount guaranteed in connection with this settlement at
September 2007 was approximately $0.7 million.
LONG-TERM DEBT:
- ---------------
In addition to the Facility, the Company also has otherthe following long-term
obligations at fiscal year end 20062007 and 2005 that consisted of the following:fiscal 2006:
2007 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$58,303 per month through April 2009 (as amended);with
remaining principal due April 2009, (as amended), collateralized
by two owned distribution facilities $5,786,352 $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 869,200 918,400 967,600
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 167,429 263,429 359,429
Obligations under capital leases, payable in monthly
installments with interest rates from 4.91% to 16.4%8.25%
through JanuaryJuly 2010 108,273 184,811
496,61570
2007 2006
---------------------------
Notes payable, interest payable at a fixed ratesrate 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 180,805 221,672
Note payable, interest payable discounted at a rate of
8.25% with quarterly installments of principal and
interest of $31,250 - $46,875, beginning January 2008
through October 2011 579,418 -
---------------------------
7,691,477 7,593,487 8,027,187
Less current maturities - continuing operations 568,024 524,130
655,667
---------------------------
$7,123,453 $7,069,357
$7,371,520===========================
Discontinued operations ===========================
- -----------------------
Note payable, interest payable at a fixed rate of 5% with monthly installments ofcompounded annually,
principal and interest of
$30,000 per month through June 2009 and the remaining
balance due June 2009,September 2012,
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 329,763TSI/1/ 5,000,000 -
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%(7.52% at September 2006)2007) 750,000 750,000
Note payable, interest payable at a fixed rate of 5%
with monthly installments of principal and interest of
$30,000 per month. Collateralized by substantially
all of the assets of TSI /2/ - 2,488,700
Note payable, interest payable quarterly at a fixed rate
of 5% with interest due quarterly. Collateralized by
substantially all of the assets of TSI /2/ - 500,000
Note payable, interest payable at a fixed rate of 5% with
annual installments of principal and interest of $49,655.
Collateralized by a warehouse owned by TSI/3/ - 92,328
Note payable, interest payable at a fixed rate of 5%, due
currently with accrued interest - 14,042
Obligations under capital leases, payable in monthly
installments with a fixed rate of 5.55% - 265,287
Note payable, interest payable at a fixed rate of 10.0%
with weekly installments of principal and interest of
$3,000 per week. - 329,763
---------------------------
7,750,000 6,440,120 5,670,224
Less current maturities - discontinued operations 2,750,000 4,159,890
2,563,628
---------------------------
$5,000,000 $2,280,230
$3,106,596
===========================
71
/1/ Note payable was issued during fiscal 2007 in conjunction with CPH litigation settlement
as discussed in Note 2.
/2/ The Company was released from this debt obligation in September 2007 in conjunction
with the CPH litigation settlement discussed in Note 14.
/3/ Note was paid off during the year in conjunction with the sale of TSI's warehouse.
75
Long-term obligations, excluding obligations under the Facility and related
party debt, have contractual maturities as follows:
Fiscal Year Ending
------------------
20072008 $ 1,934,021
2008 907,142568,024
2009 7,577,3115,912,836
2010 830,7401,013,947
2011 34,393166,056
2012 5,030,614
Thereafter -
------------
$ 11,283,60712,691,477
============
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&IMarshall and Ilsley Bank (the "M&I Loans"("M&I"), whowhich is
also a participant lender on the Company's revolving line of credit. The
M&I Loansloans 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
Loansloans 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,and warehouse and
water bottling and packaging equipment.
As of September 2006,2007, the outstanding balances on the capital leases totaled
approximately $0.5$0.1 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-
insuredself-insured loss control program. The letter of credit was reduced to
approximately $0.9 million subsequent to September 2007.
72
10. OTHER INCOME, NET:
Other income, net consisted of the following for fiscal years2007, 2006 and 2005:
2007 2006 2005
and
2004:
2006 2005 2004
-----------------------------------------------------------------------------------
Interest income $ (56,020) $ (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 (66,732) (72,771) (15,211)
-
Other (71,856) (9,102) (14,774)
(16,100)
-----------------------------------------------------------------------------------
$ (194,608) $ (137,241) $ (80,105)
$ (569,275)
===================================================================================
11. INCOME TAXES:
Components of income tax expense (benefit) from continuing operations for
the
fiscal years ended2007, 2006, 2005 and 20042005 consisted of the following:
Restated/1/ Restated/1/
2007 2006 2005
2004
---------------------------------------------------------------------------------
Current:
Federal $ 170,344 $ - $ 1,181,938 $ 1,964,1031,443,115
State 113,489 129,409 175,591
----------------------------------------
113,489 1,311,347 2,139,694
----------------------------------------171,202 121,792 158,232
-----------------------------------------
341,546 121,792 1,601,347
-----------------------------------------
Deferred:
Federal 634,5012,060,146 708,198 (1,709,836)
82,070
State 224,308 (315,990) 202,489
64,236
----------------------------------------
318,511-----------------------------------------
2,284,454 392,208 (1,507,347)
146,306
---------------------------------------------------------------------------------
Income tax expense (benefit) $ 432,0002,626,000 $ (196,000)514,000 $ 2,286,000
========================================
7794,000
=========================================
73
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 ended2007, 2006 and 2005:
Restated Restated/1/ Restated/1/
2007 2006 2005 and 2004:
2006 2005 2004
-----------------------------------------
Tax at statutory rate $ 596,5172,322,795 $ (361,590)670,214 $ 1,937,635(100,413)
Amortization of goodwill and
other intangibles (5,302) (4,777)(5,302) (4,777)
Nondeductible business expenses 34,286 34,675 12,224 20,826
Minority interest in subsidiary - - (53,074) -
State income taxes, net of
federal tax benefit 74,903 369,912 206,800112,993 83,206 398,735
Valuation allowance, state net
operating losses (37,428) - 52,297 -
State net operating loss - (257,965) -
-
Other 198,656 (10,828) (210,992)
125,516
-----------------------------------------
$ 432,0002,626,000 $ (196,000)514,000 $ 2,286,00094,000
=========================================
Temporary differences between the financial statement carrying amountsbalances and
tax basesbasis of assets and liabilities giving rise to the net deferred tax asset
at fiscal year ends 20062007 and 20052006 relate to the following:
Restated/1/
2007 2006 2005
---------------------------
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 492,796207,644 $ 418,294492,796
Accrued expenses 756,854 526,685
528,811
Inventory 844,894 593,110272,234 383,556
AMT credit carry forwards 285,333405,105 285,333
Other 65,054 75,272
81,545
---------------------------
2,224,980 1,907,0931,706,891 1,763,642
Noncurrent:
Fixed assets $ 1,842,605766,457 $ 1,705,6611,842,605
Intangible assets 1,571,628 2,167,630 2,530,848
Net operating loss carry
forwards - federal 4,582,108 4,214,8831,781,297 3,276,583
Net operating loss carry
forwards - state 1,290,904 -944,887 1,147,545
Other 27,173 88,815
-
---------------------------
9,972,062 8,451,3925,091,442 8,523,178
---------------------------
Total deferred tax assets 12,197,042 10,358,4856,798,333 10,286,820
Valuation allowance (1,102,157) (1,139,585) (635,338)
---------------------------
Net deferred tax assets $ 11,057,4575,696,176 $ 9,723,1479,147,235
===========================
7874
Restated/1/
2007 2006 2005
---------------------------
Deferred tax liabilities:
Current:
Trade discounts $ 260,502 $ 251,992
$ 205,570
Inventory - 35,880
Unrealized gains on interest
rate swap contracts - 23,431
---------------------------
260,502 251,992 264,881
Noncurrent:
Fixed assets 696,522 1,629,454
1,204,800
Goodwill 524,720 430,096
310,751
---------------------------
1,221,242 2,059,550 1,515,551
---------------------------
Total deferred tax liabilities $ 2,311,5421,481,744 $ 1,780,4322,311,542
===========================
Net deferred tax assets (liabilities):
Current $ 1,972,9881,446,389 $ 1,642,2121,511,650
Noncurrent 6,772,927 6,300,5032,768,043 5,324,043
---------------------------
$ 8,745,9154,214,432 $ 7,942,7156,835,693
===========================
/1/ Restated for the retroactive application of the FIFO inventory valuation
method. See Note 1 to the Consolidated Financial Statements.
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 ofrelated to state net
operating losses of Hawaiian Waterat TSI and Trinity Springs forHNWC, which realization of the deferred tax asset is no longer more likely than not.not will not be
realized. No additionalsuch 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.in fiscal 2007.
The Company's deferred tax asset at fiscal 2007 related to thefederal net
operating loss carryforward at fiscal year end 2006carryforwards was $4.6$1.8 million, and includesincluding the net operating
losses of TSI and HNWC. IfOf the Company chooses to sell the stock of
these companies, as opposed to an asset transaction, thetotal net operating losses
would be part of the contemplated purchase price and be available to the
successor stockholders. Of this amount, $0.6loss carryforwards $1.1
million expires in 2024, $2.3
expires in 2025 and $0.6 million in 2026. The remaining $1.1$0.7 million was acquired in
connection with the acquisition of HNWC in fiscal 2002. The utilization of
the HNWCHNWC's deferred tax asset related to the net operating loss of $1.1$0.7 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$0.5 million, $0.6 million and $0.5$0.6 million (net of
employee forfeitures) to the profit sharing plans duringin fiscal 2007, 2006, and
2005, respectively.
75
13. RELATED PARTY TRANSACTIONS:
In each of the fiscal years ended2007, 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 isservices. These charges have
been included inas a component of 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
LoanNote B, and certain other deductions, which resulted in the guaranteed principal outstanding being reduced
to $6.6approximately $5.4 million as of September 30, 2006.2007. AMCON will paypays the Company's
Chairman an annual fee equal to 2% of the guaranteed principal in return for
the personal guarantee. In addition,This guarantee is secured by a directorpledge of the Company has extended a $1.0 million revolving
lineshares
of credit to TSI,Chamberlin's, Akin's, HNWC 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 also personally guaranteed a note payable issued in
conjunction with the Television Events and Marketing, Inc. ("TEAM") litigation
settlement as discussed in Note 14. The Company in connection with certainpays the Chairman an annual
fee equal to 2% of the Company's obligations as more fully describedguaranteed principal in Note 2 but is not being paid
a feereturn for the personal
guarantee. The amount guaranteed in connection with this guarantee.
80settlement at
September 2007 was approximately $0.7 million.
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 $0.1 million
and $0.3 million at fiscal 2007 and $0.5 million as of fiscal year ends 2006, and 2005, respectively, net of
accumulated amortization of $0.8$0.04 million and $0.6$0.8 million, respectively.
The Company also leases various office and warehouse facilities and equipment
under noncancellable operating leases. RentRents charged to expense under these
operating leases during fiscal years2007, 2006, and 2005 and 2004 under such lease agreements wastotaled approximately
$4.2 million, $5.0 million $5.1
million and $5.2$5.1 million, respectively.
At September 30, 2006,2007 the minimum future lease commitments for continuing and
discontinued operations were as follows:
Capital Operating
Fiscal Year Ending Leases Leases
------------------ --------------------------
20072008 $ 402,81346,464 $ 3,965,435
2008 41,714 3,246,9353,349,263
2009 20,640 3,094,78046,464 3,105,844
2010 6,879 2,521,60125,652 2,953,749
2011 - 2,045,0892,600,211
2012 - 2,099,733
Thereafter - 4,091,2994,060,656
--------------------------
Total minimum lease payments $ 472,046118,580 $ 18,965,13918,169,456
============
Less amount representing interest 21,94810,307
-----------
Present value of net minimum
lease payments $ 450,098108,273
===========
76
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'sworkers' 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 end2007 and 2006 and 2005
was
$1.1$1.4 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'sthe Company'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 claims estimates previously recorded, resulting from
the ultimateactual claim payments, will beare reflected in operations in the periods in which
such adjustments are known.
Trinity Springs,Springs. Inc. / Crystal Paradise Holdings, Inc. Litigation
- -------------------------------------------------------------------------------------------------
The Company isand its consolidated subsidiary, TSI, were involved in litigation
regarding the ownershipshareholder approval 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 salepurchase of substantially all of the
assets of Trinity Springs, Ltd. (which later changed its name to Crystal
Paradise Holdings, Inc. ("CPH")). The Plaintiffs inThat litigation has been settled and the
presiding Court has approved the settlement and dismissed 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.prejudice.
The settlement resolved all disputes between the minority shareholdersshareholder
plaintiffs and CPH, AMCON, TSI and the Defendant Directors, with
two exceptions.Directors. The settlement did not resolve claimsCompany faces
no further known liability from that CPH may have
against AMCON and TSIlawsuit 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 complaintseparate lawsuit in the Fourth Judicial District of the State of
Idaho (Elmore County)(the "Court") against AMCON and TSI and other defendants relating to AMCON and TSI's purchasethe
transfer of the assets of CPH to TSI and TSI's operation of the business.business
thereafter. In its amended complaint,this lawsuit, CPH re-assertsasserted 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) AMCONThat litigation has now been settled and TSIthe Parties are obligated to
perform under the
asset purchase agreementMutual Release and other agreements relatedSettlement Agreement to file any and all papers with the
asset purchase transaction;Court that are required to dismiss the lawsuit with prejudice.
77
In exchange for (i) a full and complete release from CPH, (ii) cancellation of
the actions AMCONpromissory notes issued in connection with the original acquisition, (iii)
termination of the Asset Purchase Agreement and water royalty contained
therein, and (iv) relinquishment of the TSI constitute
eventsstock owned by CPH, (a) TSI issued
a promissory note in the amount 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$5,000,000 to CPH, under a guarantywith interest accruing
at 5% and suretyship agreementsecured by the assets currently held by TSI (the "New Note"), (b)
AMCON amended and restated the existing Guaranty and Suretyship Agreement to
substitute the New Note for all amounts owingthe cancelled notes, and (c) TSI granted CPH an
eleven-month option 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 TSITSI. If CPH elects to exercise
its purchase option, then CPH will cancel the New Note, including the
obligation to pay any accrued interest. The purchase option may be extended
for an additional seven months upon the discharge of all accrued interest
during the initial option period.
Television Events and Marketing, Inc. vs. AMCON Distributing Company
- --------------------------------------------------------------------
On July 31, 2007, the Company and its subsidiary, The Beverage Group, Inc.
("TBG") settled its outstanding litigation with Television Events & Marketing,
Inc. ("TEAM"). This action, entitled Television Events & Marketing, Inc. vs.
AMCON Distributing Co., The Beverage Group, Inc., The Beverage Group aka AMCON
Beverage Group, AMCON Corporation and William F. Wright, Civil No. CV 05-00259
ACK KSC, was filed in the First Circuit Court of the State of Hawaii in
Honolulu, Hawaii on March 8, 2005 and was moved on April 12, 2005 to the
United States District Court for the District of Hawaii.
This action concerned the alleged breach of two trademark licensing agreements
between TEAM and the Company's subsidiary, TBG and purportedly, the other
named defendants. On December 21, 2005, the Plaintiffs filed a Second Amended
Complaint. This Second Amended Complaint sought (i) an unstated amount of
damages for an alleged breach of those agreements and alleged
misrepresentation; (ii) interest and reasonable attorney's fees and costs; and
(iii) such other relief as the Court deemed just and proper.
The Company, together with its named subsidiary successfully obtained
dismissal of certain legal theories by motions for summary judgment. The
Company and its subsidiary also filed a Counterclaim in the action on July 5,
2006 against TEAM, TEAM's President and Archie Thornton alleging: (1) Thornton
was an undisclosed dual agent and breached his fiduciary duty to TBG; (2) TEAM
tortuously assisted Thornton in breaching his fiduciary duty; (3) unjust
enrichment/restitution; (4) TEAM breached its duty of good faith and fair
dealing; (5) TEAM and Thornton's failure to disclose Thornton's agency
relationship with TEAM constituted fraud and misrepresentation; and (6)
punitive damages.
As part of the settlement, AMCON paid TEAM $187,500 in August 2007 and became
obligated to pay $187,500 in four equal quarterly installments of $46,875
beginning in January 2008 through October 2010 and $125,000 in four equal
quarterly installments of $31,250 beginning in January 2011 through October
2011. The Company's Chairman has personally and unconditionally guaranteed
the payment obligation of $687,500 as of September 30, 2007. AMCON has
received certain promotion sponsorships as part of a complete settlement of any and all claimsthe settlement.
78
American Stock Exchange Compliance Plan
- --------------------------------------------------------------------------
In fiscal 2007, the Company was notified by CPH against the Company. As required by SFAS 144, management believesAmerican Stock Exchange (AMEX)
that the recorded balanceit was not in compliance with Section 1003(a)(ii) of the subject assetsAMEX Company
Guide regarding shareholders' equity of less than $4,000,000, and liabilitieslosses from
continuing operations and/or net losses in three of its four most recent
fiscal years. In order to maintain its AMEX listing, the Company submitted a
comprehensive plan outlining steps to regain compliance with the AMEX's
continued listing standards by March 11, 2008. As of September 30, 2007, the
Company's shareholders' equity of $5.5 million exceeded the threshold set
forth by Section 1003(a)(ii) of the AMEX Company Guide. After maintaining the
required shareholders' equity for two successive quarters, the Company will
have been
recognized at their respective fair values.completed its comprehensive plan previously submitted to the AMEX.
15. STOCK OPTION PLAN:
Prior to its expiration in June 2004, AMCON maintained a stock-based
compensation plan ("the Stock Option Plan") which provided that the Compensation
Committee of the Board of Directors grantedauthorization to grant incentive stock
options and non-qualified stock options, pursuant to the Stock Option Plan, of
up to 550,000 shares. InNo shares have been issued under the Stock Option Plan
since the end of fiscal 2003 and there was no unamortized compensation expense
related to the Plan at September 2007.
On October 1, 2005, the Compensation Committee evaluated various equity based
compensation programs and chose not to implement a new plan.Company adopted SFAS No. 123R, Shared Based Payment
(SFAS 123R). The Company applied the modified prospective transition method
as permitted by SFAS 123R and therefore has not restated prior periods.
Prior to October 1, 2005, 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.option. Accordingly, stock-based compensation costcosts related to
stock option grants was not reflected in income or loss as all options granted
under the planPlan had an exercise price equal to or above the market value of the
underlying stock on the date of grant.
Options are generally granted atOn December 11, 2006, prior to the stock's fair market
value at dateapproval of grant. Options issuedthe Omnibus Plan referred to
shareholders holding 10% or morebelow, the Compensation Committee of the Board of Directors awarded
Christopher Atayan, Chief Executive Officer ("CEO"), Vice Chairman and a
Director of the Company, a non-qualified option to purchase 25,000 shares of
the Company's common stock, are generally issued at 110%subject to shareholder approval. On April 17,
2007, the Company's shareholders approved the stock option grant, which vests
in three equal installments over a three year period and has an exercise price
of $18.00 per share, the December 11, 2006 closing price of the stock'sCompany's
common stock on the American Stock Exchange.
The Company has estimated that the fair market value at date of grant.
83the non-qualified stock
option award to Mr. Atayan was approximately $347,000 using the Black-Scholes
option pricing model. This cost will be amortized to compensation expense
over a three year service period. The following assumptions were used in
connection with the Black-Scholes option pricing calculation:
79
Stock Option Pricing Assumptions
--------------------------------
Fiscal 2007 Awards
------------------
Risk-free interest rate 4.69%
Dividend yield 1.65%
Expected volatility 46%
Expected life in years 7
Forfeiture rate 0%
On October 1, 2005,April 17, 2007, the Board of Directors of the Company adopted SFAS No. 123R, Shared Based Payment
(SFAS 123R).approved an equity
incentive plan, the 2007 Omnibus Incentive Plan ("the Omnibus Plan"), to
encourage employees of the Company and subsidiaries to acquire a proprietary
and vested interest in the growth and performance of the Company. The Company choseOmnibus
Plan permits the issuance of up to apply150,000 shares of 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
employeeCompany's common
stock options recognized for fiscal 2006, includes amortization
related toin the remaining unvested portionform of stock options, restricted stock awards, restricted stock
units, performance share awards as well as awards such as stock appreciation
rights, performance units, performance shares, bonus shares and dividend share
awards payable in the form of common stock or cash. As of September 2007, no
awards have been 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, netunder the Omnibus Plan.
Net income (loss) before incomes taxes for fiscal 2007 and 2006 included
share-based compensation expense of approximately $71,000 and $60,000,
for fiscal 2006.respectively. At September 30, 2006,2007, there were 29,63526,118 stock options fully vested
and exercisable under the Stock Option Plan and no unamortized compensation
expense. Total unamortized compensation expense related to the April 2007
stock option award to the Company's CEO totaled approximately $12,000.$290,000 at
September 2007.
Options issued and outstanding to management employees pursuant to the Stock
Option Plan and April 2007 stock option award to the Company's CEO 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
Number of Number Aggregate
Date Exercise Price Options Exercisable Intrinsic Value
Outstanding September 2007
-------------------------------------------------------------------------------
Fiscal 1998 $ 15.68 7,630 7,630 $ 90,187
Fiscal 1999 $ 45.68 - $ 51.14 6,683 6,683 -
Fiscal 2000 $ 34.50 3,165 3,165 -
Fiscal 2003 $ 28.80 3,212 2,570 -
Fiscal 2007 $ 18.00 25,000 - 237,500
------ ------ --------
45,690 20,048 $327,687
====== ====== ========
80
At September 30, 2006,2007, there were 8,188 options fully vested and exercisable
issued to outside directors, outside of 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
Number of Number Aggregate
Date Exercise Price Options Exercisable Intrinsic Value
Outstanding September 2007
------------------------------------------------------------------------------
Fiscal 1998 $ 15.68 1,834 1,834 $ 21,678
Fiscal 1999 $ 36.82 - $ 49.09 2,568 2,568 -
Fiscal 2002 $ 26.94 834 834 467
Fiscal 2003 $ 28.26 834 834 -
------ ------ --------
6,070 6,070 $ 22,145
====== ====== ========
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 newfollowing is a summary of stock options were granted inoption activity during fiscal 2004,
2005 and 2006. The table below summarizes information about stock options
outstanding as of the following fiscal years:
842007.
2006 2005 2004
------------------------------------------------------September 2007
-----------------
Weighted
Weighted WeightedNumber Average
Exercise Average Exercise Averageof Exercise
Shares Price
Shares Price Shares Price
-----------------------------------------------------------------------
Outstanding at beginning of period 44,082 $30.43 50,753 $29.75 52,475 $30.2131,253 $30.62
Granted - - - - - -25,000 $18.00
Exercised - - - - (33) 15.68(2,375) $19.66
Forfeited/Expired (12,829) 29.96 (6,671) 25.22 (1,689) 44.86
------------------------------------------------------(2,118) $35.79
-----------------
Outstanding at end of period 31,253 $30.62 44,082 $30.43 50,753 $29.75
======================================================51,760 $24.81
=================
Options exercisable at end of period 29,635 41,254 45,979
======== ========26,118
========
The following summarizes all stock options outstanding at the end of fiscal
2006:September 2007:
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 1.19,464 0.1 years $15.68 11,0059,464 $15.68
1999 Options $36.82-$51.14 10,535 2.69,251 1.6 years $46.53 10,535 $46.53$47.39 9,251 $47.39
2000 Options $34.50 3,165 3.72.7 years $34.50 3,165 $34.50
2002 Options $26.94 1,668 5.9834 4.9 years $26.94 1,668834 $26.94
2003 Options $28.26-$28.80 4,880 6.24,046 5.2 years $28.71 3,262 $28.66$28.69 3,404 $28.67
2007 Options $18.00 25,000 9.5 years $18.00 - -
------ ------ ------ ------
31,253 $30.62 29,635 $30.7251,760 $24.81 26,118 $31.25
====== ====== ====== ======
81
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 ofAt September 2005,
and 2004, the
Company had an interest rate swap agreementsagreement outstanding with a notional amounts totalingamount
of $10.0 million, and $15.0 million, respectively,with related to borrowings on the Facility. The Company had no
derivative instruments outstanding at September 30,2007 or 2006.
TheseThe interest rate swaps wereswap was used to effectively convert certainportions of the
Company's floating rate debt to fixed rate debt. The interest rate swapsswap
agreement outstanding at September 2005 and 2004 arewas accounted for as cash flow hedgeshedge,
with gains and lossesthe associated gain deferred in accumulated other comprehensive income,
to
the extentas the hedge iswas considered to be effective. Any ineffectiveness associated
with the Company's 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. The table
below has been restated to reflect the change in accounting principle as
discussed in Note 1.
Wholesale
Distribution Retail Other/1/ Consolidated
---------------------------------------------------------------------
FISCAL YEAR ENDED 2007:
External revenues:
Cigarettes $ 607,831,882 $ - $ - $ 607,831,882
Health food - 37,880,246 - 37,880,246
Confectionery 57,515,227 - - 57,515,227
Tobacco, beverage & other 150,339,157 - - 150,339,157
---------------------------------------------------------------------
Total external revenues 815,686,266 37,880,246 - 853,566,512
Depreciation 1,256,223 535,265 419 1,791,907
Amortization - 39,733 - 39,733
Operating income (loss) 12,864,294 3,130,394 (4,541,219) 11,453,469
Interest expense 1,017,846 1,506,402 2,292,076 4,816,324
Income (loss) from continuing
operations before taxes 11,886,864 1,671,275 (6,726,386) 6,831,753
Total assets 73,617,793 11,857,395 6,588,397 92,063,585
Capital expenditures 300,897 213,380 - 514,277
82
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 2,369,0708,208,936 2,378,155 (3,895,102) 6,475,2336,691,989
Interest expense 1,700,935 1,611,619 1,545,458 4,858,012
Income (loss) from continuing
operations before taxes 6,400,162 794,8356,607,833 803,920 (5,440,535) 1,754,4621,971,218
Total assets 66,533,513 12,139,370 16,193,663 94,866,54670,976,007 12,661,013 14,380,835 98,017,855
Capital expenditures 803,179 177,331 - 980,510
FISCAL YEAR ENDED 2005:2005 (53 weeks):
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)10,337,861 (3,389,055) (3,112,558) 3,068,0813,836,248
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)9,336,613 (4,930,418) (4,701,527) (1,063,499)(295,332)
Total assets 67,586,067 13,012,051 14,710,679 95,308,79771,821,207 13,524,609 12,981,533 98,327,349
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/1/ Includes 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
Totalpreviously allocated to HNWC and TSI, intercompany eliminations,
charges incurred by the holding company, and 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, 20062007 and September
30, 2005.2006. This information has been prepared by the Company on the same basis
as the consolidated financial statementsConsolidated 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.
8783
(Dollars in thousands, except per share data)
- ------------------------------------------------------------------------------------------
Fiscal Year 2007 First/1/ Second/1/ Third/1/ Fourth
- ------------------------------------------------------------------------------------------
Sales...................................... $ 209,366 $ 201,177 $ 220,072 $ 222,952
Gross profit .............................. 15,094 15,248 17,045 16,862
Income from continuing operations ---------------------------------------------
before income taxes ..................... 994 540 2,548 2,750
Income from continuing operations.......... 611 332 1,553 1,710
Gain (loss) on disposal of discontinued
operations, net of income tax expense
(benefit) 895 (67) - -
Loss from discontinued operations.......... (258) (124) (132) (80)
---------------------------------------------
Net income................................. 1,248 141 1,421 1,630
Preferred stock dividend requirements...... (105) (103) (104) (106)
Net income available to common ---------------------------------------------
shareholders ............................. $ 1,143 $ 38 $ 1,317 $ 1,524
=============================================
Basic earnings (loss) per share available
to common shareholders:
Continuing operations ................... $ 0.96 $ 0.43 $ 2.75 $ 3.04
Discontinued operations ................. 1.21 (0.36) (0.25) (0.15)
---------------------------------------------
Net basic earnings per share available
to common shareholders ................. $ 2.17 $ 0.07 $ 2.50 $ 2.89
=============================================
Diluted earnings (loss) per share available
to common shareholders:
Continuing operations ................... $ 0.71 $ 0.37 $ 1.80 $ 1.99
Discontinued operations ................. 0.75 (0.27) (0.15) (0.09)
---------------------------------------------
Net diluted earnings (loss) per share
available to common shareholders $ 1.46 $ 0.10 $ 1.65 $ 1.90
=============================================
/1/ Restated for the retroactive application of the FIFO inventory valuation method.
See Note 1 to the Consolidated Financial Statements.
84
(Dollars in thousands, except per share data)
- ------------------------------------------------------------------------------------------
Fiscal Year 2006 (As Restated - see Note 1) First Second Third Fourth
- ------------------------------------------------------------------------------------------
Sales...................................... $ 198,217 $ 195,803195,804 $ 222,190 $ 223,330223,329
Gross profit .............................. 14,027 14,640 15,603 15,86414,109 14,655 15,616 15,970
---------------------------------------------
(Loss) income from continuing operations
---------------------------------------------
before income taxes ..................... (238) 494 1,108 390(157) 510 1,120 498
(Loss) income from continuing operations... (159) 289 673 519(109) 299 681 586
Loss from discontinued operations.......... (1,028) (789) (327) (289)(1,003) (827) (344) (262)
---------------------------------------------
Net (loss) income ......................... (1,187) (500) 346 230income.......................... (1,112) (528) 337 324
Preferred stock dividend requirements...... (75) (81) (104) (106)
Net (loss) income available to common ---------------------------------------------
shareholders .............................shareholders.............................. $ (1,262)(1,187) $ (581)(609) $ 242233 $ 124218
=============================================
Basic (loss) earnings (loss) per share available
to common shareholders:
Continuing operations ................... $ (0.42)(0.35) $ 0.390.41 $ 1.081.09 $ 0.780.91
Discontinued operations ................. (1.97) (1.49) (0.62) (0.55)(1.90) (1.57) (0.65) (0.50)
---------------------------------------------
Net basic loss(loss) earnings per share
available to common shareholders .................shareholders......... $ (2.39)(2.25) $ (1.10)(1.16) $ 0.460.44 $ 0.230.41
=============================================
Diluted (loss) earnings (loss) per share available
to common shareholders:
Continuing operations ................... $ (0.42)(0.35) $ 0.370.39 $ 0.790.80 $ 0.610.69
Discontinued operations ................. (1.97) (1.35) (0.38) (0.34)(1.90) (1.42) (0.41) (0.31)
---------------------------------------------
Net diluted (loss) earnings per share
available to common shareholders .......shareholders........ $ (2.39)(2.25) $ (0.98)(1.03) $ 0.410.39 $ 0.270.38
=============================================
(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) and13a-15(e) or 15d-15(e) under the Securities 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 applicable 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.
85
The Company carried out the evaluation required by paragraph (b) of the
Exchange Act Rules 13a-15 andor 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, inBased on that
evaluation, the connection withCEO and CFO concluded that, as of the end of the period
covered by this report, the Company's fiscal year 2005 audit,disclosure controls and the Company's evaluation of disclosure and controls procedures management
determinedare
effective to provide reasonable assurance that material weaknesses existed at September 30, 2005 relatedinformation required to incorrect accounting entries made at the Company's HNWC subsidiary, and
interest expense allocations madebe
disclosed 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,in the reports 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)files or submits under the
Exchange Act) that has materially affected, orAct is reasonably likely(1) accumulated and communicated to materially
affect,management, including the
Company's internal control over financial reporting.CEO and CFO, to allow timely decisions regarding required
disclosures and (2) recorded, processed, summarized and reported, within the
time periods specified in the Commission's rules and forms.
ITEM 9B. OTHER INFORMATION
None.
90
PART III
ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS OF THE REGISTRANTAND CORPORATE GOVERNANCE
The Registrant's Proxy Statement to be used in connection with the 20072008 Annual
Meeting of Shareholders (the "Proxy Statement") will contain under the
caption "Electioncaptions "Item 1: Election of Directors"Directors--What is the structure of our board
and how often are directors elected?", "Employment Agreements""Item 1: Election of Directors--Who are
this year's nominees?", "Item 1: Election of Directors--What is the business
experience of the nominees and "Compensation of Executive Officer"our continuing board members?", "Section
16(a) Beneficial Ownership Reporting Compliance", and "Corporate Governance
and Board Matters--Committees of the Board--Audit Committee", 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 ChairmanThe information appearing under the caption "Executive Officers of the
Board, Director
Christopher H. Atayan 46 Chief Executive Officer,
Vice Chairman, Director
Kathleen M. Evans 59 President, Director
Eric J. Hinkefent 45 PresidentRegistrant" in Part I 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. Wrightthis report also 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 theincorporated herein by reference.
Our board of The Healthy Edge, Inc. from 1999 through
2003. Mr. Hinkefent isdirectors has adopted a graduatecode of Oklahoma State University.
ANDREW C. PLUMMER became Acting Chief Financial Officer of the Company in
March 2006. Priorethical conduct that applies 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 andour executive officers, including our principal executive officer and certain personsour
principal financial officer. This code of ethical conduct is available
without charge to any person who own more than ten
percentrequests it by writing to our corporate
secretary. It also is available on our internet website (www.amcon.com).
Any substantive amendment to, or waiver from, a provision of the Company's Common Stock,this code that
applies 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 termprincipal executive officer or principal financial officer 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 indisclosed on 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.internet website.
ITEM 11. EXECUTIVE COMPENSATION
The Registrant's Proxy Statement will contain under the captions "Compensation of Directors""Executive
Compensation and Related Matters", "Compensation of Executive Officers""Corporate Governance and "CompensationBoard
Matters--Director Compensation" and "Corporate Governance and Board
Matters--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.86
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 of Executive Officers - 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, AND
DIRECTOR INDEPENDENCE
The Registrant's Proxy Statement will contain under the captioncaptions "Certain
Relationships and Related Transactions", "Item 1: Election of Directors--What
is the structure of our board and how often are directors elected?" and
"Corporate Governance and Board Matters--Committees of the Board", the
information required by Item 13 of Form 10-K and such information is
incorporated herein by this reference.
ITEM 14. PRINCIPAL ACCOUNTANTACCOUNTING FEES AND SERVICES
The Registrant's Proxy Statement will contain under the caption "Ratification
of Appointment of Independent Auditor""Independent
Auditor Fees and Services", 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.
9346.
(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
(incorporated by reference to Exhibit 3.2 of AMCON's Annual Report on
Form 10-K filed December 29, 2006)
87
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 Quarterly Report on Form 10-Q filed on May 27, 2005)
88
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 reportAnnual 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 reportAnnual 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 reportQuarterly 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 (incorporated by reference to Exhibit 10.9 of
AMCON's Annual Report on Form 10-K filed December 29, 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 2007 Omnibus Incentive Plan dated April 17, 2007*
10.13 Nonqualified Stock Option Agreement for Christopher H. Atayan
dated December 12, 2006*
10.14 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)*
10.1310.15 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)*
10.1410.16 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*
89
10.17 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
(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)
10.2210.19 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
10.2310.20 Amended and Restated Guaranty and Suretyship Agreement dated September
30, 2007 by and between AMCON Distributing Company and Crystal Paradise
Holdings, Inc. (formerly known as Trinity Springs, Ltd.)
10.21 Mortgage, dated June 17, 2004, by and between TSL Acquisition Corp.,
AMCON Distributing Company and Trinity Springs, Ltd.(incorporated (incorporated by
reference to Exhibit 10.20 of AMCON's Quarterly Report on Form 10-Q
filed on August 9, 2004)
10.2410.22 Guaranty Fee, Reimbursement and Indemnification Agreement, dated as of
September 30, 2004, between AMCON Distributing Company and William F.
Wright (incorporated by reference to Exhibit 3.4 of AMCON's Annual
Report on Form 10-K filed on January 7, 2005)
10.2510.23 Amendment to Guaranty Fee, Reimbursement and Indemnification Agreement,
dated July 31, 2007, between AMCON Distributing Company and William
F. Wright
10.24 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)
10.2610.25 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(incorporated by
reference to Exhibit 10.26 of AMCON's Report on Form 10-K filed
December 29, 2006)
10.26 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)
10.2890
10.27 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)
10.2910.28 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 reportQuarterly Report on Form 10-Q filed on
February 14, 2005)
10.3010.29 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 reportQuarterly Report on Form 10-Q filed on
February 14, 2005)
10.3110.30 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 reportQuarterly Report on Form 10-Q
filed on February 14, 2005)
10.3210.31 Security Agreement by and between AMCON Distributing Company and M&I
(incorporated by reference to Exhibit 10.24 of AMCON's quarterly
reportQuarterly
Report on Form 10-Q filed on February 14, 2005)
10.3310.32 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 reportQuarterly Report on Form 10-Q filed on August 22,
2005)
97
10.3410.33 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 reportQuarterly Report on Form 10-Q filed on August
22, 2005)
10.3510.34 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 reportQuarterly Report on Form 10-Q
filed on August 22, 2005)
10.3610.35 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 reportQuarterly Report
on Form 10-Q filed on August 22, 2005)
10.3710.36 $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 reportQuarterly Report on Form 10-Q
filed on September 29, 2006)
10.3810.37 $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 reportQuarterly Report on Form 10-Q
filed on September 29, 2006)
10.3991
10.38 $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 reportQuarterly Report on Form 10-Q
filed on September 29, 2006)
10.39 $5,000,000 Secured Promissory Note by and between Trinity Springs, Inc.
and Crystal Paradise Holdings, Inc. (also known as Trinity Springs,
Ltd.) dated September 30, 2007
10.40 Change of Control Agreement between the Company and Christopher H.
Atayan, dated December 29, 2006 (incorporated by reference to Exhibit
10.40 of AMCON's Annual Report on Form 10-K filed on December 29, 2006)*
10.41 Change of Control Agreement between the Company and Kathleen M. Evans,
dated December 29, 2006 (incorporated by reference to Exhibit 10.41 of
AMCON's Annual Report on Form 10-K filed on December 29, 2006)*
10.42 Settlement Agreement and Mutual General Release dated July 31, 2007 by
and between Television Events & Marketing, Inc., Tom Kiely, The Beverage
Group, Inc., AMCON Distributing Company, AMCON Corporation, William F.
Wright, Archie Thornton and The Thornton Works.
10.43 Mutual Release and Settlement Agreement between AMCON Distributing
Company, Trinity Springs, Inc., and Crystal Paradise Holdings, Inc.
dated September 30, 2007
10.44 Asset Purchase Agreement between Hawaiian Natural Water Company, Inc.
and Hawaiian Springs, LLC dated November 20, 2006 (incorporated by
reference to Exhibit 10.42 of AMCON's Quarterly Report on Form 10-Q
filed on January 29, 2007)
11.1 Statement re: computation of per share earnings (incorporated by
reference to footnoteNote 4 to the financial statements which are
incorporated herein by reference toConsolidated Financial Statements included
as a part of this report on Form 10-K under Item 8 of Part II herein)8)
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)
18.1 Preferability Letter Regarding Change in Accounting Principle
21.1 Subsidiaries of the Company
23.1 Consent of Independent Registered Public Accounting Firm (McGladery &
Pullen)Pullen LLP)
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-
OxleySarbanes-Oxley Act
92
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-
OxleySarbanes-Oxley Act
* Represents management contract or compensation plan or arrangement.
9993
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d)15(d) of the Securities Exchange
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 28th6th day of December 2006.November 2007.
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 Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 28th6th day of December 2006.November 2007.
Signature Title
--------- -----
/s/ William F. Wright Chairman of the Board
- ------------------------ and Director
- ------------------------
William F. Wright
/s/ Christopher H. Atayan Chief Executive Officer and
- ------------------------ and Vice Chairman of the Board
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
10094
/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
10195
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
AMCON Distributing companyCompany
Omaha, Nebraska
We have audited the consolidated financial statements of AMCON Distributing
Company and its subsidiaries (the "Company")Company) as of September 30, 20062007 and for the
year then ended September 30, 2007, and have issued our report thereon dated
December 28,
2006,November 6, 2007, which report expresses an unqualified opinion. Our auditsaudit
also included the 2007 and 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.
McGLADREYThe Company's financial statements include a restatement for a change in
accounting method.
McGladrey & PULLENPullen LLP
Omaha, Nebraska
December 28, 2006November 6, 2007
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
Sep 30, 2006 934,457 82,425 (737,882)/1/ Sep 30, 2007 279,000
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
Sep 30, 2006 434,143 49,244 - Sep 30, 2007 483,387
/1/ Includes $405,261 allowance for doubtful accounts for TBG, which was
reclassified from discontinued operations to continuing operations
duringin fiscal 2006.2006 and written off against the associated accounts
receivable in fiscal 2007.
S-2