-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sa5/F03OEZaCLaTpRKurMsRoaJSMhSMsT2lK9P6cRyc2Cf0D1kKPNL9kcKGr1ONl pxPLjJ/MZza/rp5QCjJbZA== 0000928465-05-000040.txt : 20050611 0000928465-05-000040.hdr.sgml : 20050611 20050527171932 ACCESSION NUMBER: 0000928465-05-000040 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050527 DATE AS OF CHANGE: 20050527 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMCON DISTRIBUTING CO CENTRAL INDEX KEY: 0000928465 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 470702918 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15589 FILM NUMBER: 05864924 BUSINESS ADDRESS: STREET 1: 7405 IRVINGTON ROAD STREET 2: POST OFFICE BOX 641940 (68164-7940) CITY: OMAHA STATE: NE ZIP: 68122 BUSINESS PHONE: 4023313727 MAIL ADDRESS: STREET 1: 7405 IRVINGTON ROAD STREET 2: POST OFFICE BOX 641940 (68164-7940) CITY: OMAHA STATE: NE ZIP: 68122 10-Q 1 mar0510q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2005 OR / / Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ------------------------------ COMMISSION FILE NUMBER 1-15589 ------------------------------ AMCON DISTRIBUTING COMPANY (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of Incorporation) 7405 Irvington Road Omaha, NE 68122 (Address of principal executive offices) (Zip Code) 47-0702918 (I.R.S. Employer Identification No.) (402) 331-3727 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ------- ------- The Registrant had 527,062 shares of its $.01 par value common stock outstanding as of May 9, 2005. Form 10-Q 2nd Quarter INDEX ------- PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: -------------------------------------------- Condensed consolidated unaudited balance sheets at March 2005 and September 2004 (as restated) 3 Condensed consolidated unaudited statements of operations for the three and six months ended March 2005 and 2004 4 Condensed consolidated unaudited statements of cash flows for the six months ended March 2005 and 2004 5 Notes to condensed consolidated unaudited financial statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 27 Item 3. Quantitative and Qualitative Disclosures About Market Risk 47 Item 4. Controls and Procedures 47 PART II - OTHER INFORMATION Item 1. Legal Proceedings 48 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 50 Item 3. Defaults Upon Senior Securities 50 Item 4. Submission of Matters to a Vote of Security Holders 50 Item 5. Other Information 51 Item 6. Exhibits 52 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements
AMCON Distributing Company and Subsidiaries Condensed Consolidated Unaudited Balance Sheets March 2005 and September 2004 - ------------------------------------------------------------------------------------------------------- March 2005 September 2004 ------------ -------------- (As Restated - See Notes 1 and 9) ASSETS Current assets: Cash $ 575,302 $ 416,073 Accounts receivable, less allowance for doubtful accounts of $0.6 million, respectively 29,690,797 29,109,826 Inventories 30,304,173 35,088,568 Income tax receivable 957,384 1,162,625 Deferred income taxes 3,729,391 2,548,391 Current assets of discontinued operations 799,600 1,941,950 Other 1,199,903 635,841 ------------ ------------ Total current assets 67,256,550 70,903,274 Fixed assets, net 21,023,642 19,951,664 Goodwill 6,915,657 6,449,741 Other intangible assets 12,638,171 13,271,211 Noncurrent assets from discontinued operations 12,508 143,670 Other assets 1,494,754 1,010,303 ------------ ------------ $109,341,282 $111,729,863 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 13,173,363 $ 17,180,649 Accrued expenses 4,034,660 3,800,506 Accrued wages, salaries and bonuses 1,432,676 1,365,837 Current liabilities of discontinued operations 1,058,699 2,166,414 Current portion of revolving credit facility 5,000,000 44,809,814 Current portion of long-term debt 5,973,850 5,574,397 Current portion of long-term debt due related party 1,500,000 - Current portion of subordinated debt 1,076,219 7,876,219 ------------ ------------ Total current liabilities 33,249,467 82,773,836 ------------ ------------ Revolving credit facility, excluding current portion 44,958,560 - Deferred income taxes 636,942 593,018 Noncurrent liabilities of discontinued operations 582 3,603 Other long-term liabilities 2,807,000 2,807,000 Long-term debt, less current portion 12,527,541 10,250,154 Minority interest - 97,100 Series A cumulative, convertible preferred stock, $.01 par value 1,000,000 authorized and 100,000 issued, liquidation preference $25.00 per share 2,438,355 2,438,355 Series B cumulative, convertible preferred stock, $.01 par value 1,000,000 authorized and 80,000 issued, liquidation preference $25.00 per share 1,857,645 - Commitments and contingencies Shareholders' equity: Common stock, $.01 par value, 3,000,000 shares authorized, 527,062 shares issued 5,271 5,271 Additional paid-in capital 6,218,476 6,218,476 Accumulated other comprehensive income, net of tax of $0.1 million, respectively 131,566 59,900 Retained earnings 4,509,877 6,483,150 ------------ ------------ Total shareholders' equity 10,865,190 12,766,797 ------------ ------------ $109,341,282 $111,729,863 ============ ============ The accompanying notes are an integral part of these condensed consolidated financial statements.
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AMCON Distributing Company and Subsidiaries Condensed Consolidated Unaudited Statements of Operations for the three and six month periods ended March 2005 and 2004 - --------------------------------------------------------------------------------------------------------- For the three months For the six months ended March ended March ----------------------------- ----------------------------- 2005 2004 2005 2004 ------------- ------------- ------------- ------------- Sales (including excise taxes of $45.4 million and $45.6 million, and $95.0 million and $90.9 million, respectively) $ 194,047,854 $ 192,971,686 $ 408,434,481 $ 385,543,394 Cost of sales 180,236,017 179,286,827 378,695,256 356,811,791 ------------- ------------- ------------- ------------- Gross profit 13,811,837 13,684,859 29,739,225 28,731,603 ------------- ------------- ------------- ------------- Selling, general and administrative expenses 13,727,633 12,610,930 27,551,999 24,785,858 Depreciation and amortization 632,940 554,014 1,295,705 1,106,596 ------------- ------------- ------------- ------------- 14,360,573 13,164,944 28,847,704 25,892,454 ------------- ------------- ------------- ------------- (Loss) income from continuing operations (548,736) 519,915 891,521 2,839,149 ------------- ------------- ------------- ------------- Other expense (income): Interest expense 897,542 744,012 1,803,743 1,459,638 Other 43,538 (16,649) (15,851) (446,728) ------------- ------------- ------------- ------------- 941,080 727,363 1,787,892 1,012,910 ------------- ------------- ------------- ------------- (Loss) income from continuing operations before income taxes (1,489,816) (207,448) (896,371) 1,826,239 Income tax (benefit) expense (565,000) (82,000) (341,000) 662,000 Minority interest in loss, net of tax - - (97,100) - ------------- ------------- ------------ ------------- (Loss) income from continuing operations (924,816) (125,448) (458,271) 1,164,239 Preferred stock dividend requirements (73,239) - (145,720) - ------------- ------------- ------------ ------------- (Loss) income from continuing operations available to common shareholders (998,055) (125,448) (603,991) 1,164,239 Loss from discontinued operations, net of income tax benefit of $0.5 million, $0.6 million, $0.8 million and $1.1 million, respectively (889,619) (976,301) (1,369,282) (1,751,744) ------------- ------------- ------------- ------------- Net loss available to common shareholders $ (1,887,674) $ (1,101,749) $ (1,973,273) $ (587,505) ============= ============= ============= ============= Basic earnings (loss) per share available to common shareholders: Continuing operations $ (1.89) $ (0.24) $ (1.14) $ 2.20 Discontinued operations (1.69) (1.85) (2.60) (3.31) ------------- ------------- ------------- ------------- Basic loss per share available to common shareholders $ (3.58) $ (2.09) $ (3.74) $ (1.11) ============= ============= ============= ============= Diluted earnings (loss) per share available to common shareholders: Continuing operations $ (1.89) $ (0.24) $ (1.14) $ 2.20 Discontinued operations (1.69) (1.85) (2.60) (3.31) ------------- ------------- ------------- ------------- Diluted loss per share available to common shareholders $ (3.58) $ (2.09) $ (3.74) $ (1.11) ============= ============= ============= ============= Weighted average shares outstanding: Basic 527,062 528,192 527,062 528,179 Diluted 527,062 528,192 527,062 528,179 The accompanying notes are an integral part of these condensed consolidated financial statements.
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AMCON Distributing Company and Subsidiaries Condensed Consolidated Unaudited Statements of Cash Flows for the six month periods ended March 2005 and 2004 - ------------------------------------------------------------------------------- 2005 2004 ------------ ------------ Cash flows from operating activities: Net income (loss) from continuing operations available to common shareholders $ (603,991) $ 1,164,239 Preferred stock dividend requirements 145,720 - ------------ ------------ Net loss before preferred stock dividend requirements (458,271) 1,164,239 Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation 1,246,577 1,072,462 Amortization 158,054 90,158 (Gain) loss on sale of fixed assets (5,006) (1,508) (Gain) loss on sale of securities - (411,643) Deferred income taxes (1,137,076) (143,515) Provision for losses on doubtful accounts 253,750 (875) Provision for losses on inventory obsolescence 144,852 370,677 Minority interest (97,100) - Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable (834,721) 2,257,403 Inventories 4,639,543 3,783,557 Other current assets (492,396) 194,517 Other assets (37,810) 79,004 Accounts payable (4,007,286) 1,812,226 Accrued expenses and accrued wages, salaries and bonuses 300,993 (712,439) Income tax receivable 205,241 (1,485,036) ------------ ------------ Net cash flows from operating activities - continuing operations (120,656) 8,069,227 Net cash flows from operating activities - discontinued operations (347,156) (2,620,105) ------------ ------------ Net cash flows from operating activities (467,812) 5,449,122 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixed assets (2,290,583) (921,108) Proceeds from sales of fixed assets 77,447 55,700 Proceeds from sale of available-for-sale securities - 457,053 ------------ ------------ Net cash flows from investing activities - continuing operations (2,213,136) (408,355) Net cash flows from investing activities - discontinued operations (21,568) (33,011) ------------ ------------ Net cash flows from investing activities (2,234,704) (441,366) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (payments) on bank credit agreements 11,231,414 (4,838,883) Net proceeds from preferred stock issuance 1,857,645 - Proceeds from borrowings of long-term debt 2,295,988 - Payments on long-term debt and subordinated debt (11,593,158) (295,365) Dividends paid on common stock - (95,044) Dividends paid on preferred stock (145,720) - Proceeds from short-term debt 500,000 - Proceeds from exercise of stock options - 523 Debt issuance costs (446,643) - ------------ ------------ Net cash flows from financing activities - continuing operations 3,699,526 (5,228,769) Net cash flows from financing activities - discontinued operations (837,781) (1,514) ------------ ------------ Net cash flows from financing activities 2,861,745 (5,230,283) ------------ ------------ Net change in cash 159,229 (222,527) Cash, beginning of period 416,073 668,073 ------------ ------------ Cash, end of period $ 575,302 $ 445,546 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 1,748,264 $ 1,431,417 Cash paid (refunded) during the period for income taxes (197,425) 1,131,242 Supplemental disclosure of non-cash information: Acquisition of equipment through capital lease $ 91,343 $ - The accompanying notes are an integral part of these condensed consolidated financial statements.
5 AMCON Distributing Company and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements March 2005 and 2004 - ---------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION As more fully described in Note 9, the Company has restated its September 2004 balance sheet in the accompanying condensed consolidated unaudited financial statements to correct classification errors related to its Preferred Stock and revolving credit facility discussed in Notes 3 and 8, respectively. In addition, as more fully described in Note 2, the Company discontinued the operations of its beverage marketing and distribution business effective March 31, 2005. As a result, the September 2004 balance sheet and fiscal 2004 statement of operations and statement of cash flows have been prepared reflecting this disposition as discontinued operations in accordance with Statement of Financial Accounting Standards ("SFAS") No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." Results for the interim period are not necessarily indicative of results to be expected for the entire year. The accompanying unaudited condensed consolidated financial statements include the accounts of AMCON Distributing Company and its subsidiaries ("AMCON" or the "Company"). As a result of its 85% ownership in Trinity Springs, Inc. ("TSI"), the Company has included the operating results of TSI in the accompanying consolidated financial statements since the date of acquisition (June 17, 2004) and has presented the 15% non-owned interest in this subsidiary as a minority interest. During the first quarter of fiscal 2005, the Company suspended the allocation of TSI's losses to minority shareholders once their basis was reduced to zero because the minority shareholders have not guaranteed TSI debt or committed additional capital to TSI. All significant intercompany transactions and balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the financial information included therein, such adjustments consisting of normal recurring items. The Company believes that, although the disclosures are adequate to prevent the information presented from being misleading, these condensed consolidated financial statements should be read in conjunction with the Company's annual audited consolidated financial statements for the year ended September 24, 2004, as filed with the Securities and Exchange Commission on Form 10-K ("2004 Annual Report") on January 7, 2005. AMCON's fiscal second quarters ended on March 31, 2005 and March 26, 2004. For convenience, the fiscal second quarters of 2005 and 2004 have been indicated as March 2005 and 2004, respectively. During the first quarter of fiscal 2005, the Company changed its reporting period from a 52-53 week year ending on the last Friday in September to a calendar month reporting period ending on September 30. As a result of this change, the first six months 6 of fiscal 2005 comprised 27 weeks of operations as compared to 26 weeks of operations for the first six months of fiscal 2004. The additional week of operations recorded in the first six months of fiscal 2005 increased sales, gross profit and net income by approximately $14.4 million, $0.8 million and $0.1 million, respectively. During fiscal 2004, the shareholders approved a one-for-six reverse stock split of the outstanding shares of its common stock. On May 14, 2004, the Company effected the reverse stock split and those shareholders who held fewer than six shares of AMCON's common stock immediately prior to the reverse stock split received a cash payment in exchange for their shares. All common stock shares and per share data (except par value) for all periods presented have been adjusted to reflect the reverse stock split. Stock-based Compensation - ------------------------ Prior to its expiration in June 2004, AMCON maintained a stock-based compensation plan which provided that the Compensation Committee of the Board of Directors granted incentive stock options and non-qualified stock options. AMCON accounted for these stock option grants in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" using the intrinsic value method under which compensation cost was measured by the excess, if any, of the fair market value of its common stock on the date of grant over the exercise price of the stock option. Accordingly, stock-based compensation cost related to stock option grants was not reflected in income or loss as all options granted under the plan had an exercise price equal to or above the market value of the underlying stock on the date of grant. The following table illustrates the required pro forma effect on income (loss) and earnings (loss) available to common shareholders and the associated per share amounts assuming the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" to stock-based employee compensation:
For the three months For the six months ended March ended March ------------------------- ------------------------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- (Loss) earnings - ------------------------- Loss available to common shareholders, as reported $(1,887,674) $(1,101,749) $(1,973,273) $ (587,505) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (14,008) (15,303) (28,016) (30,606) ----------- ----------- ----------- ----------- Pro forma loss available to common shareholders $(1,901,682) $(1,117,052) $(2,001,289) $ (618,111) =========== =========== =========== =========== 7 Loss per share - ------------------------- As reported: Basic $ (3.58) $ (2.09) $ (3.74) $ (1.11) =========== =========== =========== =========== Diluted $ (3.58) $ (2.09) $ (3.74) $ (1.11) =========== =========== =========== =========== Pro forma: Basic $ (3.61) $ (2.11) $ (3.80) $ (1.17) =========== =========== =========== =========== Diluted $ (3.61) $ (2.11) $ (3.80) $ (1.17) =========== =========== =========== ===========
Related Party Transactions - -------------------------- In December 2004, a director of the Company extended a revolving credit facility to TSI in a principal amount up to $1.0 million at an interest rate of 8% per annum. The entire $1.0 million is outstanding at March 31, 2005. To induce the director to extend this loan to TSI, the Company agreed to allow the director to receive a second mortgage on TSI's real property on an equal basis with the Company's existing second mortgage on TSI's real property. Additionally, on March 30, 2005, a Company that is wholly-owned by three of the Company's directors (including the Chairman and the President) and another significant shareholder of the Company extended $0.5 million to TSI under a promissory note due on or before June 15, 2005. The note bears interest at 7% per annum. The promissory note was intended to serve as an interim loan until the negotiations with the bank were completed so that TSI would be included as a borrower on the New Facility described in Note 8. Interest on these notes that accrued, but remain unpaid until the notes come due for Q2 2005 and the first six months of fiscal 2005, was $16,822 and $18,685, respectively. 2. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES ACQUISITIONS Trinity Springs, Inc. - --------------------- On June 17, 2004, a newly formed subsidiary of AMCON, TSL Acquisition Corp., acquired the tradename, water source, customer list and substantially all of the operating assets of Trinity Springs, Ltd. (the "Seller," which subsequently changed its name to Crystal Paradise Holdings, Inc.), a bottler of geothermal bottled water and a natural mineral supplement. TSL Acquisition Corp. subsequently changed its name to TSI and continues to operate under that name. The total purchase price of $8.8 million was paid through a combination of $2.3 million in cash, $3.3 million in notes which were issued by TSI and guaranteed by AMCON; the assumption of approximately $0.2 million of liabilities and the issuance of TSI common stock representing 15% ownership of TSI which had an estimated fair value of $0.2 million. The TSI common stock is convertible into 16,666 shares of AMCON common stock at the option of the Seller. Additionally, the conversion option had an estimated fair value of $0.2 million. Included in the $2.3 million paid in cash are 8 transaction costs totaling approximately $0.8 million that were incurred to complete the acquisition and consists primarily of fees and expenses for attorneys and investment bankers. In addition, TSI will pay an annual water royalty to the Seller, in perpetuity, in an amount equal to the greater of $0.03 per liter of water extracted from the source or 4% of water revenues (as defined by the purchase agreement) which is guaranteed by AMCON up to a maximum of $5 million, subject to a floor of $206,400 for the first year and $288,000 annually thereafter. The Company has recorded a $2.8 million liability for the present value of future minimum water royalty payments and related brokers fees to be paid in perpetuity. The discount rate utilized by the Company to determine the present value of the future minimum water royalty was based on a weighted average cost of capital which incorporated the Company's equity discount rate, dividend rate on the Series A Convertible Preferred Stock and the Company's average borrowing rate for all outstanding debt. The promissory notes referred to above and the water royalty are secured by a first priority security and mortgage on the acquired assets, other than inventory and accounts receivable. The Seller retains the right to receive any water royalty payment for the first five years in shares of AMCON common stock up to a maximum of 41,666 shares. The water royalty can be cancelled after ten years have elapsed following the closing of the sale of assets of TSI, or if the business of TSI is sold to an unaffiliated third party, in which case the Seller would be entitled to receive the appraised fair market value of the water royalty but not less than $5 million. The Company's Chairman has, in turn, guaranteed AMCON for these payments as well as the promissory notes referred to above. The acquisition has been recorded on the Company's books using the purchase method of accounting. The purchase price was allocated to the assets acquired and liabilities assumed based on their fair values. The initial purchase price allocation performed in the third quarter of fiscal 2004 was based on management's internal preliminary allocation and resulted in an estimated purchase price of approximately $11.1 million, with approximately $7.8 million of the purchase price being allocated to intangible assets, including customer list, the Trinity tradename and the water source. Subsequently, the Company engaged an independent valuation firm to further analyze the transaction and based on preliminary input from the independent valuation firm, the amount of purchase price was reduced from $11.1 million to $8.8 million based on reassessment of the future water royalty obligation and related brokers fees and the weighted average cost of capital rate applied to the payment stream in perpetuity. Accordingly, the amount allocated to intangible assets was also reduced from $7.8 million to $5.5 million. During Q2 2005, the valuation of the identifiable intangible assets was completed and an adjustment of the purchase price was recorded. The results of the completed valuation report did not change the overall purchase price, but rather a change in the allocation of the purchase price amongst the identifiable intangible assets and goodwill. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition (June 2004) and subsequent purchase price allocations (in millions): 9
June September March 2004 2004 2005 ---------- ---------- ---------- Current assets $ 0.5 $ 0.5 $ 0.5 Fixed assets 3.0 3.0 3.0 Tradename 2.3 2.3 0.9 Water source 5.1 2.8 3.7 Customer list 0.4 0.4 0.4 Goodwill - - 0.5 ---------- ---------- ---------- Total assets acquired 11.3 9.0 9.0 ---------- ---------- ---------- Current liabilities 0.2 0.2 0.2 ---------- ---------- ---------- Total liabilities acquired 0.2 0.2 0.2 ---------- ---------- ---------- Net assets acquired $ 11.1 $ 8.8 $ 8.8 ========== ========== ==========
The unique water source acquired as part of the transaction represents an intangible asset that was originally assigned a preliminary value of $2.8 million. The independent third party valuation of this intangible asset assigned a value of approximately $3.7 million. Additionally, the Company acquired the Trinity tradename and assigned a preliminary value of $2.3 million to this intangible asset. The final valuation report indicated the fair value of this intangible asset was $0.9 million. Since both the water source and the Trinity tradename have indefinite lives, as does goodwill, the assets are not amortized. Therefore, the completion of the independent valuation in the allocation of purchase price from water source or tradename to goodwill does not impact operating income (loss). Additionally, the Company has assigned a value of $0.4 million to a customer list which will be amortized over a five year period. Assuming the above acquisition had hypothetically occurred on the first day of fiscal 2004 (September 27, 2003) unaudited pro forma consolidated sales, income from continuing operations, net (loss) income available to common shareholders and the related per share amounts would have been as follows:
For the three months For the six months ended March 2004 ended March 2004 -------------------- -------------------- Sales $ 193,993,109 $ 387,490,264 (Loss) income from continuing operations (33,047) 1,440,122 Net (loss) income available to common shareholders (2,624,802) (2,199,836) Loss per share: Basic $ (4.97) $ (4.16) Diluted $ (4.97) $ (4.16)
10 Nesco Hawaii - ------------ On July 1, 2004, the Company's water bottling subsidiary in Hawaii entered into an agreement to acquire certain water bottling assets and liabilities from a water bottling company on the island of Oahu in Hawaii ("Nesco Hawaii") for $0.5 million in cash, and $0.7 million in notes and the assumption of $0.1 million of liabilities. The acquisition has been recorded on the Company's books using the purchase method of accounting. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The allocation of the purchase price is as follows: At July 1, 2004 (Dollars in millions) ---------------------------------------- Current assets $ 0.1 Fixed assets 0.5 Intangible assets 0.7 ------ Total assets acquired 1.3 ------ Current liabilities 0.1 ------ Total liabilities assumed 0.1 ------ Net assets acquired $ 1.2 ====== The portion of the purchase price in excess of the estimated fair value of the net assets acquired to be allocated to identifiable intangible assets is approximately $0.7 million. The identifiable intangible assets consist of tradenames and a customer list. The tradenames of $0.1 million have indefinite lives and therefore are not amortized. The customer list of $0.2 million is amortized over a five year period. The remaining portion of the excess purchase price allocated to goodwill was $0.4 million. Proforma information is not presented due to the insignificance of the acquisition. DISPOSITIONS The Beverage Group, Inc. - ------------------------ Effective March 31, 2005, the Company's subsidiary, The Beverage Group, Inc. ("TBG") which represented the beverage marketing and distribution component of the beverage segment, ceased on-going operations due to recurring losses since its December 2002 inception. All TBG employees were terminated effective March 31, 2005 and the Company outsourced various responsibilities in order to maximize the value of the assets by collecting receivables and evaluating its payables. In addition, management is working to sell the remaining TBG inventory to unrelated beverage companies, distributors or liquidators. Our water bottling manufacturing subsidiaries in Hawaii (HNWC) and Idaho (TSI), which are also part of the beverage segment, remain unaffected. In March 2005, a charge included in loss from discontinued operations totaling $0.8 million was incurred to adjust the allowance for bad debts and inventory reserve to their net realizable values and to write off fixed assets. In addition, in accordance with SFAS No. 146 "Accounting for Costs 11 Associated with Exit or Disposal Activities" management has accrued one-time termination benefits and rent and related expenses associated with the remaining lease commitment on the office lease totaling less than $0.1 million. This lease will provide no future economic benefit to the Company. The Company is actively seeking tenants to assume the office lease for the remainder of the lease term which ends August 31, 2006. Any differences between these expense estimates and their actual settlement will be recorded when incurred and will change the loss accordingly. This transaction has been reflected as discontinued operations in the condensed consolidated unaudited financial statements in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" because it represents a component of an entity in which the operations and cash flows have (or will be) eliminated from the ongoing operations and the Company will not have any significant continuing involvement in the operations of TBG. Sales from the discontinued operations, which have been excluded from income (loss) from continuing operations in the accompanying condensed consolidated unaudited statements of operations for the three and six month periods ended March 31, 2005 and 2004, are presented below. The effects of the discontinued operations on net (loss) income available to common shareholders and per share data are reflected within the accompanying condensed consolidated unaudited statements of operations.
Three months ended Six months ended March 31, March 31, -------------------------- --------------------------- 2005 2004 2005 2004 ----------- ------------ ------------ ------------ Sales $ 441,145 $ 445,609 $ 1,232,983 $ 911,021
The carrying amount of the major classes of assets and liabilities that are included in the disposal group are as follows (in millions):
March September 2005 2004 ---------- ---------- Accounts receivable $ 0.2 $ 0.5 Inventories 0.6 1.4 ---------- ---------- Total current assets of discontinued operations $ 0.8 $ 1.9 ========== ========== Fixed assets $ - $ 0.1 ========== ========== Accounts payable $ 0.4 $ 0.6 Accrued expenses 0.7 0.7 Current portion of long-term debt - 0.9 ---------- ---------- Total current liabilities of discontinued operations $ 1.1 $ 2.2 ========== ==========
12 3. CONVERTIBLE PREFERRED STOCK In October 2004, the Company issued $2.0 million of Series B Convertible Preferred Stock ("Series B Preferred") representing 80,000 shares at a purchase price of $25.00 per share (the "Liquidation Preference"). The Series B Preferred is 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 price is initially $24.65 per share, but is subject to customary adjustments in the event of stock splits, stock dividends and certain other distributions on the Common Stock. Cumulative dividends on the Series B Preferred are payable at a rate of 6.37% per annum and are payable in arrears, when, as and if declared by the Board of Directors, on March 31, June 30, September 30 and December 31 of each year. In the event of a liquidation of the Company, the holders of the Series B Preferred Stock are entitled to receive the Liquidation Preference plus any accrued and unpaid dividends prior to the distribution of any amount to the holders of the Common Stock. The Series B Preferred also contains redemption features in certain circumstances such as a change of control, minimum thresholds of ownership by the Chairman and his family in AMCON, or bankruptcy. Finally, the Series B Preferred are optionally redeemable by the Company beginning October 8, 2006 at a redemption price equal to 112% of the Liquidation Preference. The redemption price decreases 1% annually thereafter until October 8, 2018, after which date it remains the Liquidation Preference. In addition, the Company has Series A Convertible Preferred Stock ("Series A Preferred") outstanding as of March 2005 that was issued during fiscal 2004. The Series A Preferred generated gross proceeds of $2.5 million and consisted of 100,000 Series A shares. All terms of the Series A Preferred are the same as Series B Preferred except for the dividend rate which is 6.785% for Series A, the conversion price which is $30.31 per share for Series A and the Series A is optionally redeemable by the Company beginning June 17, 2006. The Company believes that redemption of these securities by the holders is not probable based on the following evaluation. As shown in the table under the caption "Ownership of Our Common Stock By Our Directors And Executive Officers And Other Principal Stockholder," in our proxy statement, our executive officers and directors as a group own approximately 64% of the outstanding common stock. Mr. William Wright, who has been AMCON's Chairman of the Board and Chief Executive Officer from the time AMCON was originally founded, beneficially owns 31% of the outstanding common stock without giving effect to shares owned by his adult children. There is an identity of interest among AMCON and its officers and directors for purposes of the determination of whether the triggering redemption events described above are within the control of AMCON since AMCON can only make decisions on control or other matters through those persons. Moreover, the Series A Preferred Stock is owned by Mr. Wright and a private equity firm of which Mr. Petersen, one of our long-standing directors, is a large owner. In addition, the Series B Preferred Stock is owned by an institutional investor which has elected its representative to AMCON's Board of Directors pursuant to voting rights in the Certificate of Designation creating the Series B Preferred Stock. The Series A and Series B Preferred Stock is thus in friendly hands with no expectation that there would be any effort by the holders of such preferred stock to seek optional redemption without the Board being supportive of the events that may trigger that right. In view of the foregoing, the Company believes that it is not probable under Rule 5-02.28 of Regulation S-X that either Series A or 13 Series B Preferred Stock will become redeemable in the future as a result of redemption features described above. As discussed in Note 9, these financial instruments have been reclassified as mezzanine financing between long-term debt and shareholders' equity in the balance sheets. 4. INVENTORIES Inventories consisted of the following at March 2005 and September 2004: March September 2005 2004 ------------ ------------ Finished goods $ 34,300,761 $ 38,194,478 Raw materials 1,207,209 926,237 LIFO reserve (5,203,797) (4,032,147) ------------ ------------ $ 30,304,173 $ 35,088,568 ============ ============ The wholesale distribution and retail health food segment inventories consist of finished products purchased in bulk quantities to be redistributed to the Company's customers or sold at retail. The wholesale distribution operation's inventories are stated at the lower of cost (last-in, first-out or "LIFO" method) or market and consists of the cost of finished goods. The retail health food operation utilizes the retail inventory method of accounting stated at the lower of cost (LIFO) or market and consists of the costs of finished goods. The beverage operation's inventories are stated at the lower of cost (LIFO) or market and consist of raw materials and finished goods. The beverage operation's finished goods inventory includes raw materials, related plant labor and manufacturing overhead costs to convert raw materials to finished goods. Raw materials inventory consists of pre- forms used to make bottles, caps, labels and various packaging and shipping materials. The LIFO reserve at March 2005 and September 2004 represents the amount by which LIFO inventories were less than the amount of such inventories valued on a first-in, first-out basis, respectively. An allowance for obsolete inventory is maintained in the retail health food and beverage segments to reflect the expected unsaleable or non-refundable inventory based on evaluation of slow moving and discontinued products. 5. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill by reporting segment was as follows:
March September 2005 2004 ------------ ------------ Wholesale $ 3,935,931 $ 3,935,931 Retail 2,155,465 2,155,465 Beverage 824,261 358,345 ------------ ------------ $ 6,915,657 $ 6,449,741 ============ ============
14 Other intangible assets at March 2005 and September 2004 consisted of the following:
March September 2005 2004 ------------ ------------ Trademarks and tradenames $ 8,362,535 $ 9,680,521 Water source 3,650,000 2,807,000 Covenants not to compete (less accumulated amortization of $902,142 and $843,528) 18,084 76,698 Favorable leases (less accumulated amortization of $359,869 and $340,003) 126,131 145,997 Customer lists (less accumulated amortization of ($105,859 and $26,285) 481,421 560,995 ------------ ------------ $ 12,638,171 $ 13,271,211 ============ ============
Trademarks, tradenames and the water source are considered to have indefinite useful lives, therefore, no amortization is taken on these assets. Impairment of the reporting units carrying these assets is evaluated annually in the Company's fourth fiscal quarter in order to coincide with its budgeting process, unless circumstances dictate earlier evaluation is necessary. Should forecasted financial results not be achieved, impairment of these assets may be required. As described in Note 2, the Company received the final independent third party valuation on TSI's identifiable intangible assets and has adjusted the allocation of the purchase price accordingly. Amortization expense for the intangible assets that are considered to have finite lives was $97,118 and $44,241 and $158,054 and $90,158 for the three and six months ended March 2005 and 2004, respectively. Amortization expense related to the amortizing intangible assets held at March 2005 for each of the five years subsequent to September 2004 is estimated to be as follows:
Fiscal Fiscal Fiscal Fiscal Fiscal 2005/1/ 2006 2007 2008 2009 --------- --------- -------- -------- -------- Covenants not to compete $ 18,000 $ - $ - $ - $ - Favorable leases 20,000 40,000 40,000 26,000 - Customer lists 55,000 117,000 117,000 117,000 92,000 --------- --------- -------- -------- -------- $ 93,000 $ 157,000 $157,000 $143,000 $ 92,000 ========= ========= ======== ======== ========
/1/ Fiscal 2005 amortization represents amortization of amortizable intangible assets for the remaining six months of Fiscal 2005. 15 6. EARNINGS (LOSS) PER SHARE Basic (loss) earnings per share available to common shareholders is calculated by dividing (loss) income available to common shareholders by the weighted average common shares outstanding for each period. Diluted earnings per share is calculated by dividing (loss) income available to common shareholders by the sum of the weighted average common shares outstanding and the weighted average dilutive options, using the treasury stock method. Stock options and potential common stock outstanding at March 2005 and 2004 that were anti-dilutive were not included in the computations of diluted earnings per share. Such potential common shares totaled 194,195 with an average exercise price of $29.32 for the three and six months ended March 2005 and 31,440 with an average exercise price of $39.75 for the three and six months ended March 2004.
For the three-month period ended March ------------------------------------------------------- 2005 2004 ------------------------- ------------------------- Basic Diluted Basic Diluted ----------- ----------- ----------- ----------- 1. Weighted average common shares outstanding 527,062 527,062 528,192 528,192 2. Weighted average of net additional shares outstanding assuming dilutive options and warrants exercised and proceeds used to purchase treasury stock /1/ - - - - ----------- ----------- ----------- ----------- 4. Weighted average number of shares outstanding 527,062 527,062 528,192 528,192 =========== =========== =========== =========== 5. (Loss) income from continuing operations available to common shareholders $ (998,055) $ (998,055) $ (125,448) $ (125,448) =========== =========== =========== =========== 6. Loss from discontinued operations $ (889,619) $ (889,619) $ (976,301) $ (976,301) =========== =========== =========== =========== 7. (Loss) income available to common shareholders $(1,887,674) $(1,887,674) $(1,101,749) $(1,101,749) =========== =========== =========== =========== 8. (Loss) earnings per share available to common shareholders from continuing operations $ (1.89) $ (1.89) $ (0.24) $ (0.24) =========== =========== =========== =========== 9. (Loss) earnings per share available to common shareholders from discontinued operations $ (1.69) $ (1.69) $ (1.85) $ (1.85) =========== =========== =========== =========== 10.(Loss) per share available to common shareholders $ (3.58) $ (3.58) $ (2.09) $ (2.09) =========== =========== =========== ===========
16
For the six-month period ended March ------------------------------------------------------- 2005 2004 ------------------------- ------------------------- Basic Diluted Basic Diluted ----------- ----------- ----------- ----------- 1. Weighted average common shares outstanding 527,062 527,062 528,179 528,179 2. Weighted average of net additional shares outstanding assuming dilutive options and warrants exercised and proceeds used to purchase treasury stock /1/ - - - - ----------- ----------- ----------- ----------- 4. Weighted average number of shares outstanding 527,062 527,062 528,179 528,179 =========== =========== =========== =========== 5. (Loss) income from continuing operations available to common shareholders $ (603,991) $ (603,991) $ 1,164,239 $ 1,164,239 =========== =========== =========== =========== 6. Loss from discontinued operations $(1,369,282) $(1,369,282) $(1,751,744) $(1,751,744) =========== =========== =========== =========== 7. (Loss) income available to common shareholders $(1,973,273) $(1,973,273) $ (587,505) $ (587,505) =========== =========== =========== =========== 8. (Loss) earnings per share available to common shareholders from continuing operations $ (1.14) $ (1.14) $ 2.20 $ 2.20 =========== =========== =========== =========== 9. (Loss) earnings per share available to common shareholders from discontinued operations $ (2.60) $ (2.60) $ (3.31) $ (3.31) =========== =========== =========== =========== 10.(Loss) per share available to common shareholders $ (3.74) $ (3.74) $ (1.11) $ (1.11) =========== =========== =========== ===========
/1/ Weighted average of net additional shares not included as such shares are anti-dilutive due to the net losses incurred during the periods. 7. COMPREHENSIVE INCOME (LOSS) The following is a reconciliation of (loss) income available to common shareholders per the accompanying condensed consolidated unaudited statements of operations to comprehensive income for the periods indicated: 17
For the three months For the six months ended March ended March ------------------------- ------------------------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- (Loss) income available to common shareholders $(1,887,674) $(1,101,749) $(1,973,273) $ (587,505) Other comprehensive income (loss): Unrealized holding gains (loss) from investments arising during the period, net of income tax expense (benefit) of $0 and $(2,000) for the three months ended March 2005 and 2004 and $0 and $3,000 for the six months ended March 2005 and 2004, respectively - (3,255) - 4,216 Reclassification adjustments for gains included in net income in prior periods, net of income tax expense of $0 for the three months ended March 2005 and 2004 and $0 and $145,000 for the six months ended March 2005 and 2004, respectively - - - (236,741) Interest rate swap valuation adjustment, net of income tax benefit of $19,000 and $33,000 for the three ended March 2005 and 2004 and $44,000 and $1,000 for six months ended March 31, 2005 and 2004, respectively 31,243 (53,233) 71,666 (2,531) ----------- ----------- ----------- ---------- Comprehensive loss $(1,856,431) $(1,158,237) $(1,901,607) $ (822,561) =========== =========== =========== ==========
The accumulated balances for each classification of accumulated comprehensive income (loss) is as follows:
Unrealized Interest Accumulated gains on rate swap Other securities mark-to Comprehensive -market Income ------------------------------------------- Balance, September 24, 2004 $ 2,638 $ 57,262 $ 59,900 Current period change - 71,666 71,666 --------- --------- ---------- Balance, March 31, 2005 $ 2,638 $ 128,928 $ 131,566 ========= ========= ==========
8. DEBT CREDIT AGREEMENT - ---------------- In October 2004, the Company refinanced its existing credit agreement. The amended credit agreement (the "New Facility") provides for a $55.0 million credit limit consisting of a $53.8 million revolving credit line and a $1.2 18 million term note ("Term Note A"). As payments are made on Term Note A, the revolving credit limit increases accordingly to a maximum of $55.0 million. At March 31, 2005, the credit limit on the New Facility was $53.9 million. In addition, the New Facility provided for a separate term loan in the amount of $5.0 million ("Term Note B"). Prior to May 23, 2005, the New Facility required that the Company maintain a mandatory lock-box arrangement whereby remittances from the Company's customers reduced the borrowings outstanding under the facility. The credit agreement also contains a "material adverse change" clause that allowed for the bank, in its sole judgment, to constitute an event of default should there be a "material adverse change" that causes a "material adverse effect" to any of the Company's collateral, business, property, assets, prospects, operations or condition, financial or otherwise. The Company's credit agreement does not expire or have a maturity date within one year, but rather has a final expiration date in April 2007. However, EITF 95-22, "Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include both a Subjective Acceleration Clause and a Lock-Box Arrangement," requires borrowings under credit agreements with those two provisions to be classified as current liabilities. As a result, as discussed in Note 9, the Company has restated the September 2004 and December 2004 balance sheets to reclassify the borrowings under the credit agreement, which were previously reported as a non-current liability, as a current liability. On May 23, 2005, the Company completed an amendment to the New Facility to provide for a "springing" lock-box arrangement. Under this arrangement, the Company now maintains a lock-box from which it may apply cash receipts to any corporate purpose so long as it is not in default under its credit agreement. The bank maintains a security interest in the Company's lock-box and, upon the occurrence of the foregoing triggering events, may redirect funds from the lock-box to a loan account in the name of the lenders on a daily basis and apply the funds against the revolving loan balance. Effective with the amendment, the Company has classified the outstanding borrowings under the credit facility as long-term liabilities as of March 31, 2005, except for the balance expected to be paid down in the next twelve months. The New Facility with LaSalle Bank extends the credit agreement through April 2007 and retains many of the previous facility's terms including lending limits subject to accounts receivable and inventory limitations, an unused commitment fee and financial covenants. The significant changes under the New Facility are as follows: - Inclusion of the subsidiaries, except TSI, as borrowers. In April 2005, the New Facility was amended to include TSI as a borrower. - Inclusion of Term Note A within the $55.0 million revolving limit that is amortized in equal monthly installments over 60 months. - Replacement of the LIBOR interest rate borrowing option (LIBOR plus 2.50%) on the revolving portion of the New Facility and the $1.2 million term loan with the bank's base rate, except for $15.0 million of the new facility that corresponds with the Company's existing interest rate swap agreements which will remain at LIBOR plus 2.50%. 19 - Inclusion of a fixed charge coverage ratio of 0.8 to 1.0 through June 2005 and 1.0 to 1.0 thereafter, in lieu of a debt service coverage ratio. In Q2 2005, the fixed charge coverage ratio was decreased to 0.7 to 1.0 effective December 2004. - Amendment of the definition of minimum tangible net worth and reduction of the minimum tangible net worth requirement to $3.0 million through June 2005. In Q2 2005, the minimum tangible net worth requirement was decreased to $1.5 million through September 2005 and $2.5 million thereafter, effective December 2004. - Inclusion of a prepayment penalty of $0.6 million and $0.3 million should the loans be paid off prior to September 30, 2005 and September 30, 2006, respectively. The Company's New Facility, including Term Note A, maintains the maximum borrowing limit at $55.0 million, subject to eligible accounts receivable and inventory requirements. As of March 2005, the outstanding balance on the New Facility was $51.0 million, including Term Note A. The New Facility bears interest at the bank's base rate, which was 5.75% at March 2005. The Company is required to pay an unused commitment fee equal to 0.25% per annum on the difference between the maximum loan limit and the average monthly borrowing for the month. The New Facility is collateralized by all of the Company's equipment, intangibles, inventories, and accounts receivable, except those held by TSI. The outstanding balance on Term Note B was $5.0 million at March 2005. It bears interest at the bank's base rate, plus 2.0%, which was 7.75% at March 2005 and is payable in equal monthly installments of $0.3 million beginning May 1, 2005. The Company's Chairman has personally guaranteed repayment of up to $10.0 million of the combined amount of the New Facility and the term loans. AMCON will pay the Company's Chairman an annual fee equal to 2% of the guaranteed principal then outstanding in return for the personal guarantee. This guarantee is secured by a pledge of the shares of Chamberlin Natural Foods, Inc., Health Food Associates, Inc., HNWC and TSI. At March 31, 2005, the Company had minimum tangible net worth, as defined by the New Facility of $1.7 million and was in compliance with the minimum tangible net worth covenant, as amended, and expects to be in compliance for the remainder of fiscal 2005. However, the Company's minimum fixed charge ratio of 0.61 at March 31, 2005 was not in compliance with the minimum fixed charge coverage ratio of 0.7, as amended. As set forth in the loan agreement, the failure to comply with the minimum fixed charge coverage ratio shall not constitute an Event of Default so long as AMCON has sufficient aggregate availability on the revolving credit facility to institute a reserve in an amount equal to the difference between AMCON's calculated fixed charge coverage ratio and the minimum fixed charge coverage ratio. At March 31, 2005, the amount necessary to attain compliance with the fixed charge coverage ratio was approximately $0.4 million. Availability under the revolver will be reduced by this amount until such time as the Company reports a fixed charge ratio of 0.7 or greater, which management expects to occur in Q3 2005. 20 TSI FINANCING - ------------- In December 2004, a director of the Company extended a revolving credit facility to TSI in a principal amount of up to $1.0 million at an interest rate of 8.0% per annum with an initial advance of $0.5 million during Q1 2005. To induce the director to extend this loan to TSI, the Company agreed to allow the director to receive a second mortgage on TSI's real property on an equal basis with the Company's existing second mortgage on TSI's real property. The revolving credit line matures on December 14, 2005 at which time principal and accrued interest will be due. Additionally, on March 30, 2005, an affiliated Company that is wholly-owned by three of the Company's directors (including the Chairman and the President) and another significant shareholder of the Company extended $0.5 million to TSI under a promissory note due on or before June 15, 2005. The note bears interest at 7% per annum. The promissory note was intended to serve as an interim loan until negotiations with the bank were completed so that TSI would be included as a borrower on the New Facility which occurred in April 2005. CONSTRUCTION FINANCING - ---------------------- In December 2004, the Company purchased a building in order to relocate its distribution facility in Rapid City, South Dakota and began construction of an addition to the building. The lease on the existing Rapid City facility was extended through April 2005 to coincide with the completion of construction. The Company expects capital expenditures relating to the building, construction of the addition and related equipment purchases to be approximately $1.8 million. At March 2005, the Company had borrowed $1.0 million from a bank to finance the purchase of the building and the construction of the addition to the building. The terms of repayment are interest only through July 31, 2005 and then payable in 54 equal monthly installments of principal of $4,100 based on a twenty year amortization schedule plus interest with the entire remaining principal due and payable on December 31, 2009. The interest rate is 6.33%. The Company also arranged the financing with the same bank of certain equipment expenditures totaling $0.5 million, of which the Company had borrowed $0.3 million at March 2005. The additional $0.2 million of funds are expected to be borrowed in the third quarter of fiscal 2005 as the Company completes the equipment expenditures and begins operating out of the new distribution center. Payments are due in 60 equal monthly installments of principal of $8,000, plus interest beginning April 1, 2005. The interest rate is 6.33%. INTEREST RATE SWAPS - ------------------- The Company hedges its variable rate risk on $15.0 million of its borrowings under the New Facility by utilizing interest rate swap agreements. The variable interest payable on this amount is subject to interest rate swap agreements which have the effect of converting this amount to fixed rates ranging between 4.38% and 4.87%. 21 9. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS Subsequent to the issuance of its Form 10-K for the year ended September 24, 2004, management and the Company's Audit Committee determined that the Company would restate its balance sheets as of September 24, 2004 and as of December 31, 2004 to reflect (i) a correction in the classification of Series A (issued in June 2004) and Series B (issued in October 2004) Preferred Stock from permanent equity to mezzanine financing, and (ii) a correction in the classification of its revolving credit facility from long-term to short-term debt. The balance sheets as of September 24, 2004 and December 31, 2004 will be restated on Forms 10-K/A and 10-Q/A, respectively, and will be filed with the Securities and Exchange Commission as soon as practicable. Under Emerging Issue Task Force ("EITF") D-98 the possibility of a redemption of securities that is not solely within the control of the issuer without regard to probability requires the security to be classified outside of permanent equity. The Certificates of Designation creating the Series A and Series B Preferred Stock each contain provisions that give the holders the optional right to redeem such stock if either there is a change of control (as defined in the Certificates of Designation) or the Wright Family (as defined in the Certificates of Designation to include William F. Wright, the Company's Chief Executive Officer, Chairman of the Board and largest stockholder) beneficially owns less than 20% of the outstanding shares of common stock. The Company believes it is unlikely that either of those events will occur without support of the Board of Directors since the two owners of the Series A Preferred Stock and the sole owner of the Series B Preferred Stock each have a representative on the Board of Directors, the interests of the Company and those representatives are aligned, and the aggregate ownership of all of the Board members is in excess of two-thirds of the outstanding shares of common stock. However, there can be no assurance that this will not occur. Under EITF 95-22, borrowings under an agreement that includes both a subjective acceleration clause and a lock-box arrangement are required to be classified as short-term indebtedness. Because the Company's agreement contains both of these features, the borrowings have been classified as short-term for September 2004 and December 2004. However, the lending banks and the Company amended the revolving loan agreement after the Company's second fiscal quarter of 2005 but prior to the filing of this report on Form 10-Q to replace the lockbox provision with a springing lockbox arrangement that would require the Company's cash to be placed in a lockbox account that would be used to automatically pay down the revolving indebtedness subsequent to an event of default. The EITF, nevertheless, requires the change in classification of the revolving credit facility to be considered short-term debt for reports filed prior to such amendment to the revolving loan agreement. These restatements do not impact amounts already reported as sales, including (loss) from continuing operations or the respective net income (loss) available to common shareholders or earnings (loss) per share nor will they result in a default under any provisions in the credit agreement. 22 A summary of the significant effects of the restatement is as follows:
September 2004 --------------------------------- As previously As reported (1) restated -------------- ------------- Current liabilities $ 42,964,022 $ 82,773,836 Long-term debt, less current portion 50,059,968 10,250,154 Series A cumulative, convertible preferred stock, $.01 par value 1,000,000 authorized and 100,000 issued, liquidation preference $25.00 per share - 2,438,355 Shareholders' equity 15,205,152 12,766,797 /1/ As previously reported in the Company's Form 10-K for the annual period ended September 24, 2004 filed on January 7, 2005 and giving effect to the discontinued operations of The Beverage Group, Inc. discussed in Note 2.
10. BUSINESS SEGMENTS AMCON has three reportable business segments: the wholesale distribution of consumer products, the retail sale of health and natural food products, and the bottling and distribution of bottled water and other beverage products. As discussed in Note 2, TBG, a business component of the beverage segment was closed on March 31, 2005. The segments are evaluated on revenue, gross margins, operating income (loss) and income (loss) before taxes.
Wholesale Distribution Retail Beverage Other /2/ Consolidated ------------- ----------- ----------- ---------- ------------- QUARTER ENDED MARCH 2005: External revenue: Cigarettes $ 139,373,746 $ - $ - $ - $ 139,373,746 Confectionery 12,860,855 - - - 12,860,855 Health food - 8,815,057 - - 8,815,057 Tobacco, beverage & other 30,655,044 - 2,374,693 (31,541) 32,998,196 ------------- ----------- ----------- ---------- ------------- Total external revenue 182,889,645 8,815,057 2,374,693 (31,541) 194,047,854 Depreciation /1/ 297,448 192,718 100,118 - 590,284 Amortization 21,657 17,583 57,878 - 97,118 Operating income (loss) 254,831 285,769 (1,090,332) 996 (548,736) Interest expense 237,335 374,101 286,106 - 897,542 (Loss) income from continuing operations before taxes (35,487) (78,886) (1,376,439) 996 (1,489,816) Total assets 72,111,810 16,404,341 18,626,805 2,198,326 109,341,282 Capital expenditures, net 598,474 7,471 187,261 - 793,206 QUARTER ENDED MARCH 2004: External revenue: Cigarettes $ 141,409,400 $ - $ - $ - $ 141,409,400 Confectionery 12,529,455 - - - 12,529,455 Health food - 8,654,830 - - 8,654,830 Tobacco, beverage & other 30,072,013 - 398,069 (92,081) 30,378,001 ------------- ----------- ----------- ---------- ------------- Total external revenue 184,010,868 8,654,830 398,069 (92,081) 192,971,686 Depreciation /1/ 299,410 192,900 45,475 - 537,785 Amortization 21,657 22,584 - - 44,241 Operating income (loss) 503,583 222,376 (172,090) (33,954) 519,915 Interest expense 332,733 283,643 127,636 - 744,012 (Loss) income from continuing operations before taxes 179,183 (52,952) (299,725) (33,954) (207,448) Total assets 63,938,403 16,903,524 8,783,572 4,406,729 94,032,228 Capital expenditures, net 147,966 133,144 219,608 31,278 531,996 23 SIX MONTHS ENDED MARCH 2005: External revenue: Cigarettes $ 294,934,884 $ - $ - $ - $ 294,934,884 Confectionery 26,899,200 - - - 26,899,200 Health food - 17,389,188 - - 17,389,188 Tobacco, beverage & other 64,895,369 - 4,388,488 (72,648) 69,211,209 ------------- ------------ ----------- ---------- ------------- Total external revenue 386,729,453 17,389,188 4,388,488 (72,648) 408,434,481 Depreciation /1/ 588,746 387,249 270,582 - 1,246,577 Amortization 43,314 35,166 79,574 - 158,054 Operating income (loss) 2,494,650 423,766 (2,044,253) 17,358 891,521 Interest expense 498,596 775,602 529,545 - 1,803,743 (Loss) income from continuing operations before taxes 1,988,820 (328,751) (2,573,798) 17,358 (896,371) Total assets 72,111,810 16,404,341 18,626,805 2,198,326 109,341,282 Capital expenditures, net 1,979,336 14,127 275,552 21,568 2,290,583 SIX MONTHS ENDED MARCH 2004: External revenue: Cigarettes $ 282,644,067 $ - $ - $ - $ 282,644,067 Confectionery 24,915,812 - - - 24,915,812 Health food - 16,823,830 - - 16,823,830 Tobacco, beverage & other 60,172,836 - 1,125,117 (138,268) 61,159,685 ------------- ------------ ----------- ---------- ------------- Total external revenue 367,732,715 16,823,830 1,125,117 (138,268) 385,543,394 Depreciation /1/ 594,876 388,636 88,950 - 1,072,462 Amortization 43,314 46,844 - - 90,158 Operating income (loss) 2,583,304 500,250 (170,745) (73,660) 2,839,149 Interest expense 627,482 582,324 249,832 - 1,459,638 (Loss) income from continuing operations before taxes 2,386,318 (65,843) (420,576) (73,660) 1,826,239 Total assets 63,938,403 16,903,524 8,783,572 4,406,729 94,032,228 Capital expenditures, net 242,060 243,712 435,336 33,011 954,119
/1/ Includes depreciation reported in cost of sales for the beverage segment. /2/ Includes charges to operations incurred by discontinued operations and intercompany eliminations. 11. CONTINGENCIES The Company is exposed to contingencies that occur in the normal course of business. The significant contingencies as summarized below. TSI ACQUISITION - --------------- AMCON announced in May 2004 that it was filing suit against Trinity Springs, Ltd. in order to obtain an order from the United States District Court for the District of Idaho declaring that a majority of the votes entitled to be cast by the shareholders of Trinity Springs, Ltd. were cast in favor of the sale of substantially all of its assets to AMCON's subsidiary, TSL Acquisition Corp. and thereby satisfied the shareholder approval condition of the asset purchase transaction. Subsequent to AMCON's filing of its lawsuit, the Inspectors of Election and the Board of Directors of Trinity Springs, Ltd. certified the shareholder voting results in favor of the asset purchase transaction. After the certification of the voting results, certain minority shareholders filed a complaint and motion seeking injunctive relief in the District Court of the Fifth Judicial District of the State of Idaho. The Court granted a temporary restraining order on June 11, 2004, which prevented the closing of the asset purchase transaction until the Court had an opportunity to review additional briefing on the issues presented and the parties could be heard by 24 the Court. On June 16, 2004, the Court heard arguments on whether to extend the temporary restraining order and grant the minority shareholders' motion for preliminary injunction. As a result of the parties' briefing and the arguments presented, the Court dissolved the temporary restraining order and thereby enabled the asset sale transaction to be consummated. On July 19, 2004, several of the same minority shareholders, along with some additional shareholders filed an amended complaint in the same Idaho state court action. The minority shareholders' amended complaint seeks (i) a declaration that the asset sale transaction is void and injunctive relief rescinding that transaction or, alternatively, that a new shareholder vote on the asset sale transaction be ordered, (ii) damages for the alleged breaches of fiduciary duty which are claimed to have arisen out of the disclosure made in connection with the solicitation of proxies, how the votes were counted, and conducting the closing without the requisite shareholder vote, and (iii) imposition of a constructive trust on the sale proceeds and requiring separate books to be maintained. AMCON continues to believe that the shareholders of Trinity Springs, Ltd. approved the sale of assets to the Company in accordance with applicable law and that the asset sale transaction was properly completed. PACIFIC VENTURES HAWAII - ----------------------- On or about April 15, 2005, plaintiff Pacific Ventures Hawaii served a Complaint on The Beverage Group, Inc. ("TBG"), naming TBG and certain other unaffiliated parties as defendants. The dispute centers around a series of contracts entered into by the various parties to import, broker, market and distribute the Hype Classic Energy Drink line of products. TBG was to act as the master distributor for the product. The Complaint alleges five causes of action against the defendants: breach of contract; common counts; intentional interference with contract; intentional interference with prospective economic advantage; and negligent interference with business relationships. The plaintiff does not specifically allege how TBG breached the contracts or how it acted wrongfully. The Complaint seeks compensatory damages "in excess of $500,000 and according to proof"; punitive damages in an unspecified amount; attorney's fees, witness fees and costs incurred; and all other relief the Court deems just and proper. On May 6, 2005 outside counsel for TBG faxed a letter to plaintiff's counsel demanding that the case be dismissed with prejudice because TBG believes: it did not breach any of its obligations under those contracts to which it is a party; the plaintiff has stated in writing that TBG does not have any liability; and the applicable contract has provisions mandating submission of any disputes to arbitration by the American Arbitration Association in New York. If the plaintiff does not voluntarily dismiss before May 16, 2005, TBG will file an answer or motion to dismiss and vigorously defend the action. At this point it is too early to determine the likely outcome of the action. TELEVISION EVENTS & MARKETING, INC. VS. AMCON DISTRIBUTING CO., ET AL., - ------------------------------ An action entitled Television Events & Marketing, Inc. vs. AMCON Distributing Co., et al., Civil No. CV 05-00259 ACK BMK, was filed in the First Circuit Court of the State of Hawaii in Honolulu, Hawaii on March 8, 2005 and then removed on April 12, 2005 to the United States District Court for the 25 District of Hawaii. This action concerns the alleged breach of two trademark licensing agreements involving Television Events & Marketing, Inc. The complaint seeks (i) an unstated amount of damages for an alleged breach of those agreements; (ii) an unstated amount of damages for alleged fraudulent transfer of assets to Trinity Springs, Inc., a subsidiary of the Company; (iii) interest and reasonable attorney's fees and costs; and (iv) such other relief as the court deems just and proper. On May 4, 2005, the Company, together with its named subsidiaries, moved to dismiss the complaint or for summary judgment on the complaint. On April 28, 2005, the Company offered to settle this matter with the plaintiff for $100,000. The plaintiff rejected that written settlement offer. The plaintiff's attorney asserts that the amount of the plaintiff's damages for the alleged breach of the two agreements exceeds $400,000. IN GENERAL - ---------- The Company is also party to other lawsuits and claims arising out of the operation of its businesses. Management believes the ultimate resolution of such matters should not have a material adverse effect on the Company's financial condition, results of operations or liquidity after giving consideration to amounts already recorded in the Company's financial statements. 12. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 151 "Inventory Costs." This statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing" and removes the "so abnormal" criterion that under certain circumstances could have led to the capitalization of these items. SFAS No. 151 requires that idle facility expense, excess spoilage, double freight and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." SFAS 151 also requires that allocation of fixed production overhead expenses to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for all fiscal years beginning after June 15, 2005 (fiscal 2006 for AMCON). Management does not believe there will be a significant impact on the Company's results of operations or financial condition as a result of adopting this Statement. In December 2004, the FASB issued Statement No. 123R (revised 2004), "Share- Based Payment." SFAS No. 123R will require the Company to measure the cost of all employee stock-based compensation awards based on the grant date fair value of those awards and to record that cost as compensation expense over the period during which the employee is required to perform service in exchange for the award (generally over the vesting period of the award). Accordingly, the adoption of SFAS No. 123R will have some impact on the Company's results of operations, although it will have no impact on the Company's overall financial position. SFAS No. 123R is effective for the Company's fiscal 2006. Management is currently assessing the impact that this standard will have on the Company's result of operations and cash flows. In December 2004, the FASB issued Statement No. 153, "Exchanges of Nonmonetary Assets," an amendment of APB Opinion No. 29, "Accounting for Nonmonetary Transactions." The amendments made by Statement 153 are based on 26 the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 (fiscal 2006 for the Company). Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. Management is currently assessing the impact that this standard will have on the Company. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD LOOKING STATEMENTS This Quarterly Report, including the Management's Discussion and Analysis and other sections, contains forward looking statements that are subject to risks and uncertainties and which reflect management's current beliefs and estimates of future economic circumstances, industry conditions, company performance and financial results. Forward looking statements include information concerning the possible or assumed future results of operations of the Company and those statements preceded by, followed by or that include the words "future," "position," "anticipate(s)," "expect," "believe(s)," "see," "plan," "further improve," "outlook," "should" or similar expressions. For these statements, we claim the protection of the safe harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. You should understand that the following important factors, in addition to those discussed elsewhere in this document, could affect the future results of the Company and could cause those results to differ materially from those expressed in our forward looking statements: - changing market conditions with regard to cigarettes, - changes in promotional and incentive programs offered by cigarette manufacturers, - the demand for the Company's products, - new business ventures, - domestic regulatory risks, - competition, - other risks over which the Company has little or no control, and - any other factors not identified herein could also have such an effect. Changes in these factors could result in significantly different results. Consequently, future results may differ from management's expectations. Moreover, past financial performance should not be considered a reliable indicator of future performance. Any forward looking statement contained herein is made as of the date of this document. Except as required by law, the Company undertakes no obligation to publicly update or correct any of these forward looking statements in the future to reflect changed assumptions, the occurrence of material events or changes in future operating results, financial conditions or business over time. 27 CRITICAL ACCOUNTING ESTIMATES Certain accounting estimates used in the preparation of the Company's financial statements require us to make judgments and estimates and the financial results we report may vary depending on how we make these judgments and estimates. Our critical accounting estimates are set forth below and have not changed during Fiscal 2005. ALLOWANCE FOR DOUBTFUL ACCOUNTS NATURE OF ESTIMATES REQUIRED. The allowance for doubtful accounts represents our estimate of uncollectible accounts receivable at the balance sheet date. We monitor our credit exposure on a weekly basis and assess the adequacy of our allowance for doubtful accounts on a quarterly basis. Because credit losses can vary significantly over time, estimating the required allowance requires a number of assumptions that are uncertain. ASSUMPTIONS AND APPROACH USED. We estimate our required allowance for doubtful accounts using the following key assumptions. - Historical collections - Represented as the amount of historical uncollectible accounts as a percent of total accounts receivable. - Specific credit exposure on certain accounts - Identified based on management's review of the accounts receivable portfolio and taking into account the financial wherewithal of particular customers that management deems to have a higher risk of collection. For example, a customer in bankruptcy would indicate that an amount could be uncollectible. SENSITIVITY ANALYSIS. We believe that our current level of allowance for doubtful accounts is adequate at the balance sheet date and that our credit exposure it very low compared with the high volume of sales and the nature of our industry in which collections are made relatively quickly. However, for every 1% percent of receivables deemed to require an additional reserve at March 2005, the impact on the statement of operations would be to increase selling, general and administrative expenses by approximately $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. 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. 28 -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. SENSITIVITY ANALYSIS. We believe that our current level of reserve for inventory obsolescence is adequate at the balance sheet date. However, if there was a decrease in the estimated net realizable value of the inventory identified as obsolete/discontinued inventory (change in estimated selling price) of 5% the reserve and costs of goods sold, respectively, would increase by less than $0.1 million. DEPRECIATION, AMORTIZATION AND IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets consist primarily of fixed assets and intangible assets that were acquired in business combinations. Fixed assets and amortizable identified intangible assets are assigned useful lives ranging from 2 to 40 years. Goodwill is not amortized. Impairment of reporting units, which is measured in the Company's fourth fiscal quarter in order to coincide with its budgeting process, is evaluated annually with the assistance of an independent third party. The reporting units are valued using after-tax cash flows from operations (less capital expenditures) discounted to present value. NATURE OF ESTIMATES REQUIRED. Management has to estimate the useful lives of the Company's long lived assets. In regards 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. ASSUMPTIONS AND APPROACH USED. For fixed assets, depreciable lives are based on our accounting policy which is intended to mirror the expected useful life of the asset. In determining the estimated useful life of amortizable intangible assets, such as customer lists, we rely on our historical experience to estimate the useful life of the applicable asset and consider industry norms as a benchmark. In evaluating potential impairment of long- lived assets we primarily use an income based approach (discounted cash flow method) and guideline public and private company method. A discounted cash flow methodology requires estimation in (i) forecasting future earnings (ii) determining the discount rate applicable to the earnings stream being discounted, and (iii) computing a terminal value at some point in the future. The forecast of future earnings is an estimate of future financial performance based on current year results and management's evaluation of the market potential for growth. The discount rate is a weighted average cost of capital using a targeted debt-to-equity ratio using the industry average under the assumption that it represents our optimal capital structure and can be achieved in a reasonable time period. The terminal value is determined using a commonly accepted growth model. SENSITIVITY ANALYSIS. We believe that the estimated useful lives of our fixed assets and amortizable intangibles are appropriate. If we shortened the 29 estimated useful lives of our fixed assets by one year, the impact on the statement of operations for the current period would be to increase depreciation expense by approximately $550,000. A decrease in the estimate of future sales or increase of estimated expenses for reporting units evaluated for impairment could result in additional impairment of intangibles being recorded up to the amount of the carrying amount of the intangible assets which was approximately $19.6 million as of March 31, 2005. INSURANCE. The Company's insurance for worker's 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 worker's compensation liability based upon claim reserves established with the assistance of a third-party administrator which are then trended and developed with the assistance of our insurance agent. The reserves are evaluated at the end of each reporting period. Due to the uncertainty involved with the realization of claims incurred but unreported, management is required to make estimates of these claims. ASSUMPTIONS AND APPROACH USED. In order to estimate our reserve for incurred but unreported claims we consider the following key factors: Employee Health Insurance Claims - Historical claims experience - We review loss runs for each month to calculate the average monthly claims experience. - Lag period for reporting claims - Based on analysis and consultation with our third party administrator, our experience is such that we have a one month lag period in which claims are reported. Workers Compensation Insurance Claims - Historical claims experience - We review prior year's loss runs to estimate the average annual expected claims and review monthly loss runs to compare our estimates to actual claims. - Lag period for reporting claims - We utilize the assistance of our insurance agent to trend and develop reserves on reported claims in order to estimate the amount of incurred but unreported claims. Our insurance agent uses standard insurance industry loss development models. SENSITIVITY ANALYSIS. We believe that our current reserve for incurred but unreported insurance claims is adequate at the balance sheet date. However, for every 5% percent increase in claims, an additional reserve of less than $0.1 million would be required at March 31, 2005, the impact of which would increase selling, general and administrative expenses by that amount in the same period. INCOME TAXES. The Company accounts for its income taxes by recording taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our 30 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. ASSUMPTIONS AND APPROACH USED. In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion of our deferred tax assets will not be realized, based in part upon management's judgments regarding future events. In making that estimate we consider the following key factors: - our current financial position - historical financial information - future reversals of existing taxable temporary differences - future taxable income exclusive of reversing temporary differences and carryforwards - taxable income in prior carryback years - tax planning strategies SENSITIVITY ANALYSIS. Based on our analysis, we have determined that a valuation allowance is not required at March 31, 2005. A valuation allowance would reduce the deferred tax asset to the amount that is more likely than not to be realized and a corresponding reduction to net income as a result. REVENUE RECOGNITION. We recognize revenue in our wholesale and beverage segments when products are delivered to customers (which generally is the same day products are shipped)and in our retail health food segment when the products are sold to consumers. Sales are shown net of returns, discounts, and sales incentives to customers. NATURE OF ESTIMATES REQUIRED. We estimate and reserve for anticipated sales discounts as part of our periodic evaluation of allowance for doubtful accounts. We also estimate and provide a reserve for anticipated sales incentives to customers based on volume. ASSUMPTIONS AND APPROACH USED. We estimate the sales reserves using the following criteria: - Sales discounts - We use historical experience to estimate the amount of accounts receivable that will not be collected due to customers taking advantage of authorized term discounts. - Volume sales incentives - We use historical experience in combination with quarterly reviews of customers sales progress in order to estimate the amount of volume incentives due to the customers on a periodic basis. SENSITIVITY ANALYSIS. Based on the historical information used to estimate the reserves for sales discounts and volume sales incentives, we do not 31 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. RESTATEMENT As discussed in Note 9 to the condensed consolidated financial statements, subsequent to the issuance of its Form 10-K for the year ended September 24, 2004, management and the Company's Audit Committee determined that the Company would restate its balance sheets as of September 24, 2004 and as of December 31, 2004 to reflect (i) a correction in the classification of Series A (issued in June 2004) and Series B (issued in October 2004) Preferred Stock from permanent equity to mezzanine financing, and (ii) a correction in the classification of its revolving credit facility from long-term to short-term debt. The balance sheets as of September 24, 2004 and December 31, 2004 will be restated on Forms 10-K/A and 10-Q/A and will be filed with the Securities and Exchange Commission as soon as practicable. Under Emerging Issue Task Force ("EITF") D-98 the possibility of a redemption of securities that is not solely within the control of the issuer without regard to probability requires the security to be classified outside of permanent equity. The Certificates of Designation creating the Series A and Series B Preferred Stock each contain provisions that give the holders the optional right to redeem such stock if either there is a change of control (as defined in the Certificates of Designation) or the Wright Family (as defined in the Certificates of Designation to include William F. Wright, the Company's Chief Executive Officer, Chairman of the Board and largest stockholder) beneficially owns less than 20% of the outstanding shares of common stock. The Company believes it is unlikely that either of those events will occur without support of the Board of Directors since the two owners of the Series A Preferred Stock and the sole owner of the Series B Preferred Stock each have a representative on the Board of Directors, the interests of the Company and those representatives are aligned, and the aggregate ownership of all of the Board members is in excess of two-thirds of the outstanding shares of common stock. However, there can be no assurance that this will not occur. Under EITF 95-22, borrowings under an agreement that includes both a subjective acceleration clause and a lock-box arrangement are required to be classified as short-term indebtedness. Because the Company's agreement contains both of these features, the borrowings have been classified as short- term for September 2004 and December 2004. However, the lending banks and the Company amended the revolving loan agreement after the Company's second fiscal quarter of 2005 but prior to the filing of this report on Form 10-Q to replace the lockbox provision with a springing lockbox arrangement that would require the Company's cash to be placed in a lockbox account that would be used to automatically pay down the revolving indebtedness subsequent to an event of default. The EITF, nevertheless, requires the change in classification of the revolving credit facility to be considered short-term debt for reports filed prior to such amendment to the revolving loan agreement. These restatements do not impact amounts already reported as sales, including (loss) from continuing operations or the respective net income (loss) 32 available to common shareholders or earnings (loss) per share nor will they result in a default under any provisions in the credit agreement. A summary of the significant effects of the restatement on our Form 10-K for the year ended September 24, 2004 and our Form 10-Q for the three months ended December 31, 2004 are as follows:
September 2004 --------------------------------- As previously As reported (1) restated -------------- ------------- Current liabilities $ 42,964,022 $ 82,773,836 Long-term debt, less current portion 50,059,968 10,250,154 Series A cumulative, convertible preferred stock, $.01 par value 1,000,000 authorized and 100,000 issued, liquidation preference $25.00 per share - 2,438,355 Shareholders' equity 15,205,152 12,766,797 /1/ As previously reported in the Company's Form 10-K for the annual period ended September 24, 2004 filed on January 7, 2005 and giving effect to the discontinued operations of The Beverage Group, Inc. discussed in Note 2.
December 31, 2004 --------------------------------- As previously As reported (1) restated -------------- ------------- Current liabilities $ 29,512,070 $ 77,015,087 Long-term debt, less current portion 61,622,121 13,619,104 Series A cumulative, convertible preferred stock, $.01 par value 1,000,000 authorized and 100,000 issued, liquidation preference $25.00 per share - 2,438,355 Series B cumulative, convertible preferred stock, $.01 par value 1,000,000 authorized and 80,000 issued, liquidation preference $25.00 per share - 1,857,645 Shareholders' equity 17,017,620 12,721,620 /1/ As previously reported in the Company's Form 10-Q for the quarterly period ended December 31, 2004 filed on February 14, 2005
The accompanying management discussion and analysis and results of operations give effect to the restatements. COMPANY OVERVIEW - SECOND FISCAL QUARTER 2005 AMCON Distributing Company ("AMCON" or the "Company") is primarily engaged in the wholesale distribution business in the Great Plains and Rocky Mountain regions of the United States. In addition, AMCON operates thirteen retail health food stores and a non-alcoholic beverage business that includes natural spring and geothermal water bottling operations in Hawaii and Idaho. As used herein, unless the context indicates otherwise, the term "ADC" means the wholesale distribution segment and "AMCON" or the "Company" means AMCON Distributing Company and its consolidated subsidiaries. AMCON's fiscal second quarters ended on March 31, 2005 and March 26, 2004. For ease of discussion, these fiscal quarters are referred to herein as March 2005 and 2004, respectively or Q2 2005 and Q2 2004, respectively. 33 During the second quarter of fiscal 2005, the Company: - discontinued operations of the beverage segment's marketing and distribution business which had been incurring losses since its inception in December 2002 which resulted in a pre-tax charge of approximately $0.8 million. The business component is now accounted for as a discontinued operation. - experienced a significant increase in producer price indexes which increased the required LIFO reserve by approximately $1.0 million as compared to the same quarter in prior year. - recognized income (loss) from continuing operations per diluted share of ($1.89) and ($1.14) for the three and six months ended March 2005, respectively, compared to income (loss) from continuing operations per diluted share of ($0.24) and $2.20 for the same periods in the prior year. - identified errors in its classification on the balance sheet of its Preferred Stock and of its revolving credit facility, and, as a consequence, the Company has restated certain historical results in the accompanying condensed consolidated financial statements (See Note 9 thereto) and will be restating its financial statements for fiscal year 2004 and first quarter of fiscal 2005 to reflect the correction of these errors as soon as practicable. INDUSTRY SEGMENT OVERVIEWS Wholesale Distribution Segment - ------------------------------ The wholesale distribution of cigarettes and convenience store products has been significantly affected during the past year due to changing promotional programs implemented by the major cigarette manufacturers. Reductions in these promotional programs have caused wholesalers to react by increasing cigarette prices to retailers. This occurred for the first time at the beginning of fiscal 2004 without a corresponding price increase from manufacturers and occurred again at the beginning of the second quarter of fiscal 2004. The manufacturers followed by implementing promotional programs later in fiscal 2004 and then increased prices in Q1 2005 on certain brands. Based on these activities, it is difficult to predict how future changes in promotional programs will impact the Company and the industry in the future. As a result of one of the manufacturer program changes discussed above, certain small wholesalers filed suit against Philip Morris and RJ Reynolds alleging unfair trade practices. In addition, due to the heightened level of competition in the marketplace from both a wholesale and retail convenience store perspective, a number of wholesalers and retailers have sought bankruptcy protection, been acquired or are on the market to be sold. Therefore, we expect that competition and pressure on profit margins will continue to affect both large and small distributors and demand that distributors consolidate in order to become more efficient. Retail Health Food Segment - -------------------------- The retail health food industry has experienced declining sales and gross profit over the past several periods. Our retail health food segment has felt 34 the impacts of this trend as our sales increase primarily is due to a new store that opened in Q2 2004. The impact of reduced supplement sales resulting from unfavorable media coverage related to the government ban on ephedra based products and a general softening of the low-carb market coupled with continued expansion of low-carb offerings and sales through mainstream grocery channels has caused management to closely review all store locations for opportunities to close or relocate marginally performing stores, remodel and expand good performing stores and identify new locations for one or two additional stores. Beverage Segment - ---------------- With the discontinuation of The Beverage Group, Inc.("TBG") in March 2005, which comprised the beverage marketing and distribution business portion of the beverage segment, the segment now consists of Hawaiian Natural Water Co., Inc. ("HNWC") and Trinity Springs, Inc. ("TSI") which both operate in the bottled water manufacturing industry. HNWC completed the construction of an expanded warehouse and packaging building at our plant on the Big Island in Hawaii in the first quarter of fiscal 2004 and management is hopeful that HNWC will now generate profits as we focus on expansion of our markets and take advantage of the new operations. In addition, the acquisition of a purified water bottling operations on the island of Oahu in Hawaii ("Nesco Hawaii") in Q4 2004 has positioned us to more effectively compete in the private label water bottling channel and diversify our water production to include premium spring water and purified water. TSI, acquired in June 2004, bottles and sells geothermal bottled water, a natural mineral supplement and introduced a vitamin enhanced bottled water in April 2005. TSI, which is an 85% owned subsidiary of AMCON, is now headquartered in Boise, Idaho. The TSI water and mineral supplements are currently sold primarily in health food stores where they represent the number two packaged non-carbonated water brand in the United States. The Company is extending the distribution channels for this water and mineral supplement outside the health food market by adding distributor relationships that are outside the health food market. The beverage marketing and distribution business incurred significant losses during 2004 as significant expenditures were made for product development, distribution network development and marketing efforts to promote our portfolio of specialty beverages. The resulting sales were less than expected due to lack of market penetration of our new beverage products. In October 2004, management took steps to reduce on-going operating expenses by reducing the work force and consolidating certain activities of marketing and distribution with other companies in the affiliated group. However, the results that we had hoped to achieve were not being realized and as a result, management decided to exit this business line in March 2005. In management's discussion and analysis of the results of operations for Q2 2005 compared to Q2 2004 and the six month results through March 31, 2005 and 2004, TBG's sales, gross profit (loss), selling, general and administrative, depreciation and amortization, interest, other expenses and income tax benefit have been aggregated and reported as a loss from discontinued operations in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" and is therefore not a component of the discussion of the aforementioned items. 35 RESULTS OF OPERATIONS Comparison of the three and six months periods ended March 2005 and 2004 - ------------------------------------------------------------------------ SALES Sales for Q2 2005 increased 0.6%, or $1.1 million, compared to Q2 2004. Sales are reported net of costs associated with sales incentives provided to retailers, totaling $3.7 million and $3.4 million, for Q2 2005 and Q2 2004, respectively. The increase (decrease) in sales by business segment from Q2 2004 to Q2 2005 is as follows: Wholesale distribution segment $ (1.1) million Retail health food stores segment 0.2 million Beverage segment 2.0 million Intersegment eliminations - million ------ $ 1.1 million ====== Cigarette sales in the wholesale distribution segment decreased by $2.0 million while the sales of tobacco, confectionary and other products increased $0.9 million in Q2 2005 compared to Q2 2004. The decrease in cigarette sales was primarily attributable to a 4.8% decrease in carton volume in Q2 2005 compared to Q2 2004 which reduced sales by approximately $6.5 million. This reduction was partially offset by $2.9 million of increased sales that were attributable to price increases implemented by major cigarette manufacturers in December 2004 and by $1.6 million due to excise tax increases implemented in certain states on January 1, 2005. In addition, sales of tobacco, confectionary and other products increased by $0.9 million due to increased volume during Q2 2005 as compared to Q2 2004. Sales from the retail health food segment during Q2 2005 increased by $0.2 million when compared to Q2 2004 primarily from the segment's new Oklahoma City store, which opened in April 2004 and contributed an incremental $0.3 million in sales for Q2 2005. The retail health food segment experienced lower sales of grocery and low carb products in Q2 2005 as these products continued to move to mainstream grocery channels, but the impacts were mitigated by improving vitamin and supplement sales which have been showing steady signs of improvement. The beverage segment accounted for $2.4 million in sales for Q2 2005 compared to $0.4 million in Q2 2004. TSI, which was acquired in June 2004, accounted for $1.0 million of the increase in sales during Q2 2005. The addition of Nesco Hawaii increased sales in Q2 2005 by $0.3 million. The remaining $0.7 million increase was due primarily to increased sales of HNWC's spring water made possible due to completion of plant construction in Q1 2004 and a change to a new distributor in the Hawaii market during Fiscal 2004. Sales for the six months ended March 2005 increased to $408.4 million, compared to $385.5 million for the same period in the prior fiscal year. 36 Sales changes by business segment are as follows: Incr (Decr) ------ Wholesale distribution segment $ 19.0 million Retail health food stores segment 0.6 million Beverage segment 3.3 million Intersegment eliminations - million ------ $ 22.9 million ====== Sales from the wholesale distribution segment increased by $19.0 million for the six months ended March 2005 as compared to the same period in the prior year. Cigarette sales increased $12.3 million for the first six months of fiscal 2005 and the sales of tobacco, confectionary and other products contributed an additional $6.7 million during the period. Of the increase in cigarette sales, $10.4 million was a result of the change in our monthly reporting period which added an extra week of sales in the first six months of fiscal 2005 as compared to the same period in fiscal 2004, $3.6 million was attributable to price increases implemented by major cigarette manufacturers in December 2004 and $1.6 million was due to increased excise taxes implemented in certain states on January 1, 2005. These increases were offset by a $3.3 million decrease in sales due to a 1.2% decrease in carton volume (excluding the extra week). Of the increase in tobacco, confectionary and other products, $3.2 million was due to the extra week and $3.5 million was attributable primarily to new business obtained through expansion of our market area. We continue to market our full service capabilities in an effort to differentiate our Company from competitors who utilize pricing as their primary marketing tool. Sales from the retail health food segment during the first six months of fiscal 2005 increased by $0.6 million when compared to the same period in 2004. The extra week of operations during the first six months of fiscal 2005 resulting from the change in the Company's monthly reporting period contributed approximately $0.4 million. In addition, a net sales increase of $1.1 million resulted from sales generated from the opening of a new store in Oklahoma City in April 2004. These increases were offset by the closure of a non contributing store in Florida in October 2004 which decreased sales by $0.4 million and lower sales of grocery and low carb products of $0.5 million during the first six months of fiscal 2005 compared to the same period in prior year as these products continued to move to mainstream grocery channels which offset these increases. The beverage segment accounted for $4.4 million in sales for first six months of fiscal 2005, compared to $1.1 million for the same period in 2004. TSI, which was acquired in June 2004, accounted for $1.7 million of the increase in sales. The Nesco Hawaii acquisition increased sales during the first six months of fiscal 2005 by $0.6 million as compared to the same period in 2004. Additionally, the extra week of operations during the first six months of fiscal 2005 resulting from the change in the Company's monthly reporting period increased sales by $0.2 million compared to the same period in 2004. There was also significant sales improvement of HNWC's spring water, due to completion of plant construction in Q1 2004 and a change to a new distributor in the Hawaii market in Fiscal 2004 which accounted for the additional $0.8 million in sales for the six months. 37 GROSS PROFIT Our gross profit does not include fulfillment costs and costs related to the distribution network which are included in selling, general and administrative costs, and may not be comparable to those of other entities. Some entities may classify such costs as a component of cost of sales. Cost of sales, a component used in determining gross profit, for wholesale and retail segments includes the cost of products purchased from manufacturers, less incentives that we receive which are netted against such costs. In the beverage segment, cost of sales includes the cost of the raw materials and related plant labor and manufacturing overhead costs required to convert raw materials into finished goods (including labor, warehousing, depreciation and utilities). During Q2 2005, gross profit of $13.8 million increased 0.9%, or $0.1 million, compared to Q2 2004. Gross profit as a percent of sales increased slightly to 7.12% in Q2 2005 compared to 7.09% in Q2 2004. Gross profit by business segment is as follows (dollars in millions):
Quarter ended March ---------------- Incr 2005 2004 (Decr) ------ ------ ----- Wholesale distribution segment $ 10.1 $ 10.2 $(0.1) Retail health food stores segment 3.4 3.4 0.0 Beverage segment 0.3 0.1 0.2 ------ ------ ----- $ 13.8 $ 13.7 $ 0.1 ====== ====== =====
Gross profit from our wholesale distribution segment for Q2 2005 decreased $0.1 million compared to Q2 2004 primarily due to a larger quarterly LIFO charge of $0.9 million in Q2 2005 as compared to Q2 2004. Items increasing gross profit during Q2 2005 included $0.5 million related to the excise tax increases in certain states that occurred on January 1, 2005 and incentive payments of $0.3 million received from non-cigarette vendors based on the Company's buying volumes. Gross profit for the retail health food segment was flat at $3.4 million compared with Q2 2004. Gross profit for the beverage segment increased $0.2 million in Q2 2005 primarily due to the incremental sales from TSI which was acquired in June 2004 and the process improvements that have occurred at HNWC since the completion of the plant construction in fiscal 2004. For the six months ended March 2005, gross profit increased 3.5% to $29.7 million from $28.7 million for the same period during the prior fiscal year. Gross profit as a percent of sales decreased to 7.28% from 7.45% for the six month period ended March 2005 compared to the same period in 2004. Gross profit by business segment is as follows (dollars in millions): 38
Six months ended March ---------------- Incr 2005 2004 (Decr) ------ ------ ----- Wholesale distribution $ 22.4 $ 21.7 $ 0.7 Retail health food stores 6.8 6.8 0.0 Beverage segment 0.5 0.2 0.3 Intersegment elimination 0.0 0.0 0.0 ------ ------ ----- $ 29.7 $ 28.7 $ 1.0 ====== ====== =====
Gross profit from our wholesale distribution segment for the six months ended March 2005 increased approximately $0.7 million as compared to the prior year. Items increasing gross profit during the first six months of fiscal 2005 as compared to the same period in fiscal 2004 included $0.6 million attributable to the extra week of operations resulting from a change in our reporting period, $0.3 million due to cigarette price increases implemented by major cigarette manufacturers in December 2004, $0.5 million related to the excise tax increases in certain states that occurred on January 1, 2005 and incentive payments of $0.8 million received from a non-cigarette vendors based on the Company's buying volumes. These increases were offset by decreases in cigarette manufacturer promotional allowances of $0.7 million resulting from changes in promotional programs and $0.8 million from a larger LIFO charge during the first six months of fiscal 2005 as compared to the same period in fiscal 2004. Gross profit for the retail health food segment for the first six months of fiscal 2005 was flat at $6.8 million compared with the same period in fiscal 2004, including the extra week of operations which contributed approximately $0.2 million in gross profit during the period. Gross profit for the beverage segment increased $0.3 million in Q2 2005 primarily due to the incremental sales from TSI which was acquired in June 2004 and the process improvements that have occurred at HNWC since the completion of the plant construction in fiscal 2004. OPERATING EXPENSE Operating expense includes selling, general and administrative expenses and depreciation and amortization. Selling, general and administrative expenses include costs related to our sales, warehouse, delivery and administrative departments for all segments. Specifically, purchasing and receiving costs, inspection costs, warehousing costs and costs of picking and loading customer orders are all classified as selling, general and administrative expenses. Our most significant expenses relate to employee costs, facility and equipment leases, transportation costs, insurance and professional fees. In Q2 2005 operating expense increased 9.1% or approximately $1.2 million as compared to Q2 2004. The increase is primarily related to the addition of TSI in June 2004 which added $1.0 million of additional operating expenses in Q2 39 2005 compared to Q2 2004. In addition, the wholesale distribution segment incurred $0.3 million higher professional fees during Q2 2005 as compared to Q2 2004 as the Company works towards Sarbanes-Oxley compliance. The Company also experienced a slight increase of $0.1 million in bad debt expense. These increases were offset by lower salary and health insurance expenses of $0.2 million. For the six month period ended March 2005, total operating expense increased 11.4% or approximately $3.0 million to $28.8 million compared to the same period in the prior year. The increase is primarily related to the addition of TSI in June 2004 which added $1.9 million of additional operating expenses and the extra week of operations which increased the amount of payroll and certain other expenses during the first six months of fiscal 2005 by $0.6 million, as compared to the same period in prior year. In addition, the wholesale distribution segment incurred increased professional fees of $0.4 million during the first six months of fiscal 2005 as compared to the same period in prior year as the Company works towards Sarbanes-Oxley compliance and experienced a slight increase in bad debt expense of $0.1 million. As a result of the above, income (loss) from continuing operations for Q2 2005 decreased by $1.1 million compared to Q2 2004 to a net loss of $0.5 million. Income (loss) from operations for the six months ended March 2005 decreased by $1.9 million to $0.9 million. INTEREST EXPENSE Interest expense for Q2 2005 increased 20.6%, or $0.2 million, during Q2 2005 compared to Q2 2004. The increase was primarily due to increases in the prime rate since March 31, 2004, which under the terms of the amended and restated credit facility, is the rate at which the Company primarily borrows. On average, the Company's borrowing rates on its variable rate debt were 1.45% higher and average borrowings were $16.6 million higher in Q2 2005 as compared to Q2 2004, of which $4.5 million related to acquisition debt incurred to purchase TSI in June 2004 and Nesco Hawaii in July 2004. Interest expense of $1.8 million for the six months ended March 2005 represented an increase of 23.6% from the same period in the prior fiscal year. The increase was primarily due to increases in the prime rate since March 31, 2004, which under the terms of the amended and restated credit facility, is the rate at which the Company primarily borrows. On average, the Company's borrowing rates on its variable rate debt were 1.19% higher and average borrowings were $16.2 million higher for the first six months of fiscal 2005 compared to same period in fiscal 2004, of which $4.5 million related to acquisition debt incurred to purchase TSI in June 2004 and Nesco Hawaii in July 2004. OTHER For the first six months of fiscal 2005, other income decreased $0.4 million as compared to same period in fiscal 2004 because of the sale of available- for-sale securities in the first six months of 2004 that did not recur in 2005. During Q2 2005 and the first six months of fiscal 2005, the Company paid preferred dividends of $0.1 million, respectively, on its Series A and B, Cumulative, Convertible Preferred Stock. 40 For the first six months of fiscal 2005, minority interest in loss, net of tax, increased during the period (which decreased the net loss) by $0.1 million as compared to the same period in fiscal 2004 due to the 15% ownership of TSI that is not owned by AMCON. Additionally, losses were not allocated due to the reduction of the third parties investment to zero as a result of the cumulative losses. As a result of the above factors, the net loss from continuing operations available to common shareholders for the three month period ended March 2005 decreased $0.9 million compared to the same period of the prior year to a net loss of $1.0 million. The net loss from continuing operations available to common shareholders for the six months ended March 2005 of $0.6 million represented a decrease of $1.8 million from the same period of the prior year. DISCONTINUED OPERATIONS Effective March 31, 2005, the Company's subsidiary, The Beverage Group, Inc., ceased on-going operations due to recurring losses since its December 2002 inception. In March 2005, a charge included in loss from discontinued operations totaling $0.8 million, before income taxes, was incurred to adjust the allowance for bad debts and inventory reserve to their net realizable values and to write off fixed assets. In addition, in accordance with SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" management has accrued one-time termination benefits and rent and related expenses associated with the remaining lease commitment on the office lease totaling approximately $0.1 million. LIQUIDITY AND CAPITAL RESOURCES Overview - ---------- The Company requires cash to pay its operating expenses, purchase inventory and make capital investments and acquisitions of businesses. In general, the Company finances these cash needs from the cash flow generated by its operating activities and from borrowings, as necessary. During the six months ended March 31, 2005, the Company used $0.5 million of cash from operating activities, primarily to fund the reduction of certain liabilities, namely accounts payable. Our variability in cash flows from operating activities is heavily dependent on the timing of inventory purchases and seasonal fluctuations. For example, in the circumstance where we are "buying- in" to obtain favorable terms on a particular product or to maintain our LIFO layers, we may have to retain the inventory for a period longer than the payment terms. This generates cash outflow from operating activities that we expect to reverse in a later period. Additionally, during the summer, which is our busiest time of the year, we generally carry larger back stock of inventory to ensure high fill rates to maintain customer satisfaction. Our inventory levels are usually at their highest levels in the third and fourth fiscal quarters. We generally experience reductions in inventory levels during the first fiscal quarter, as compared to year end, and maintain these levels until the beginning of the third fiscal quarter when we begin building for increased summer business. Cash of $2.2 million was utilized in investing activities during the first six months of fiscal 2005 for capital expenditures primarily related to the purchase of a building and the construction of an addition so that we could relocate one of our wholesale distribution facilities. A significant portion 41 of the cash flows used in investing activities were financed through the real estate term debt discussed below. The Company generated net cash of $2.8 million from financing activities during the first six months of fiscal 2005 primarily from borrowings of $14.0 million on bank credit agreements, other long-term debt arrangements and $1.9 million from the private placement of Series B Convertible Preferred Stock (net of costs incurred to issue the securities). Cash of $12.5 million was used in financing activities during the first six months of fiscal 2005 to pay down revolving lines of credit totaling $4.8 million used to fund our beverage segment, $6.8 million in subordinated debt in the retail segment and other long-term debt totaling $0.9 million. During the first six months of fiscal 2005, $0.1 million was used to pay dividends on preferred stock and $0.4 million was used to pay for costs incurred to amend and restate our revolving credit facility. As of March 2005, the Company had cash on hand of $0.6 million and working capital (current assets less current liabilities) of $34.0 million. This compares to cash on hand of $0.4 million and negative working capital of $11.9 million as of September 2004. The evaluation of the Company's working capital is significantly impacted by the classification of the revolving credit facility as a short-term obligation in September 2004 due to the restatement discussed in Note 9 and treatment as long-term in March 2005, except for the amount to expected to be paid on the revolver in the next twelve months, for the reasons discussed in Note 8. The Company's ratio of debt to equity was 6.93 at March 2005 compared to 5.56 in September 2004. The Company's maximum revolving credit limit on the New Facility was $53.9 million at March 31, 2005, however the amount available for use at any given time is subject to many factors including eligible accounts receivable and inventory balances that are evaluated on a daily basis. On March 31, 2005, the balance on the facility was $51.0 million, including Term Note A, and the amount available to borrow, based on our collateral and the loan limits was approximately $53.5 million. During the six months ended March 31, 2005 our peak borrowing was $52.9 million, our average borrowing was $48.4 million and our average availability was $3.6 million. Our availability to borrow under the New Facility generally decreases as inventory and accounts receivable levels go up because of the borrowing limitations that are placed on the collateralized assets. The Company believes that funds generated from operations, supplemented as necessary with funds available under the New Facility will provide sufficient liquidity for the operation of its wholesale and retail businesses. In April 2005, management negotiated the inclusion of TSI into the Company's revolving credit facility which has incrementally increased collateral by $0.8 million. Additionally, management has been actively negotiating with potential investors and lenders to privately place additional debt or equity to provide additional funding for TSI. Although management is optimistic that additional financing will be committed, the ultimate outcome of this financing is not certain at this time. If the Company is unable to raise the additional funds in the near future, plans for growth within TSI would be negatively impacted and could potentially impact the carrying value of the business. 42 Dividend Payments - ----------------- During the first quarter of fiscal 2005, the Board of Directors suspended payment of cash dividends on our common shares. The Company is implementing a strategy to invest its cash resources into growth-oriented businesses and has therefore determined to suspend the payment of cash dividends on common stock for the foreseeable future. The Company will periodically revisit its dividend policy to determine whether it has adequate internally generated funds, together with other needed financing to fund its growth and operations in order to resume the payment of cash dividends on common stock. Contractual Obligations - ----------------------- The following table summarizes our outstanding contractual obligations and commitments, including interest, as of March 2005. Significant changes to this schedule since fiscal year end 2004, that are reflected below are; (i) the inclusion of interest on the contractual obligations, (ii) the payoff of $4.8 million of revolving credit related to our beverage segment, (iii) the amendment to the $55.0 million credit facility to include a $1.2 million term note ("Term Note A") which reduces the amount available under the $55.0 million revolving limit by the amount outstanding under Term Note A, to include the subsidiaries, except TSI, as borrowers,(iv) the addition of a $5.0 term note ("Term Note B") obtained by the Company which was used in addition to funds raised from the Series B Convertible Preferred Stock offering to retire $6.8 million of subordinated debt at the retail health food segment, and (v) the addition of $1.3 million in real estate term debt incurred in connection with the purchase of, and addition to, a distribution facility. (Amounts in thousands):
Payments Due By Period -------------------------------------------------------------------- Contractual Fiscal Fiscal Fiscal Fiscal Fiscal Obligations Total 2005/1/ 2006 2007 2008 2009 Thereafter - ------------------ --------- -------- -------- ------- ------- ------- ---------- Long-term debt/2/ $ 70,124 $ 7,844 $ 16,700 $41,841 $ 678 $ 2,199 $ 862 Subordinated debt 1,076 1,076 - - - - - Interest on long-term and subordinated debt/3/ 7,866 2,046 3,542 1,715 198 352 13 Operating leases 17,762 2,691 4,489 2,712 1,963 1,505 4,402 Minimum water royalty/4/ 4,058 99 288 288 288 288 2,807 --------- -------- -------- ------- ------- ------- --------- Total $ 100,886 $ 13,756 $ 25,019 $46,556 $ 3,127 $ 4,344 $ 8,084 ========= ======== ======== ======= ======= ======= ========= Total Other Commercial Amounts Fiscal Fiscal Fiscal Fiscal Fiscal Commitments Committed 2005/1/ 2006 2007 2008 2009 Thereafter - ------------------ --------- -------- -------- ------- ------- ------- ---------- Lines of credit (LOC) $ 56,000 $ - $ 1,000 $55,000 $ - $ - $ - LOC in use (52,041) - (1,000) (51,041) - - - --------- -------- -------- ------- ------- ------- ---------- LOC available 3,959 - - 3,959 - - - Water source guarantee 5,000 - - - - - 5,000 Letters of credit 837 837 - - - - - --------- -------- -------- ------- ------- ------- ---------- Total $ 9,796 $ 837 $ - $ 3,959 $ - $ - $ 5,000 ========= ======== ======== ======= ======= ======= ==========
43 /1/ Includes remaining payments scheduled to be made in the last six months of fiscal 2005. /2/ Includes principal portion of capital leases totaling $1.3 million. /3/ Represents estimated interest payments on long-term debt, including capital leases and subordinated debt. Certain obligations contain variable interest rates. For illustrative purposes, the Company has projected future interest payments assuming that interest rates will remain unchanged from March 2005 forward, and additionally, that the outstanding revolving credit facility balance will be reduced by $5.0 million in Fiscal 2005 and 2006 with the remaining principal falling due when the agreement expires in April 2007 /4/ Fiscal 2005 - 2009 represent 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. Credit Agreement - ------------------- The Company's primary source of borrowing for liquidity purposes is its revolving credit facility with LaSalle Bank (the "Facility"). As of March 2005, the outstanding balance on the Facility was $51.0 million, including Term Note A. In October 2004, the Facility was amended (the "New Facility") to transfer $1.2 million of revolving debt to term debt and add the subsidiaries, except TSI, as borrowers. The New Facility bears interest at a variable rate equal to the bank's base rate, which was 5.75% at March 2005. The Company may, however, select a rate equal to LIBOR plus 2.50%, for an amount of the New Facility up to $15.0 million which relates to our swap agreements. The New Facility continues to restrict borrowings for intercompany advances to TBG and TSI to $1.0 million in the aggregate and to the retail health food subsidiaries and HNWC to $0.9 million in the aggregate in fiscal 2005 and $0.1 million in the aggregate in subsequent years. The Company hedges its variable rate risk on a notional $15.0 million of its borrowings under the New Facility by use of interest rate swap agreements. These swap agreements have the effect of converting the interest on this amount of debt to fixed rates ranging between 4.38% and 4.87% per annum. The Company is required to pay an unused commitment fee equal to 0.25% per annum on the difference between the maximum loan limit and average monthly borrowing for the month. The New Facility is collateralized by all of the Company's equipment, intangibles, inventories, and accounts receivable, except those held by TSI. The New Facility expires in April 2007. The New Facility contains covenants that (i) restrict permitted investments, (ii) restrict intercompany advances to certain subsidiaries as described above, (iii) restrict incurrence of additional debt, (iv) restrict mergers and acquisitions and changes in business or conduct of business and (v) require the maintenance of certain financial ratios and net worth levels including an average annual fixed charge ratio of 0.7 to 1.0, and a minimum tangible net worth of $1.5 million through September 2005 and $2.5 million thereafter. The New Facility also provides that the Company may not pay dividends on its common stock in excess of $0.72 per share on an annual basis. 44 At March 31, 2005, the Company had minimum tangible net worth, as defined by the New Facility, of $1.7 million and was in compliance with the minimum tangible net worth covenant as of March 2005 and expects to be in compliance for the remainder of the fiscal year. However, the Company's minimum fixed charge ratio of 0.61 at March 31, 2005 was not in compliance with the minimum fixed charge coverage ratio of 0.7, as amended. As set forth in the loan agreement, the failure to comply with the minimum fixed charge coverage ratio shall not constitute an Event of Default so long as AMCON has sufficient aggregate availability on the revolving credit facility to institute a reserve in an amount equal to the difference between AMCON's calculated fixed charge coverage ratio and the minimum fixed charge coverage ratio. At March 31, 2005, the amount necessary to attain compliance with the fixed charge coverage ratio was approximately $0.4 million. Availability under the revolver will be reduced by this amount until such time as the Company reports a fixed charge ratio of 0.7 or greater, which management expects to occur in Q3 2005. In April 2005, the New Facility was amended to include TSI as a borrower. In addition, the Company obtained Term Note B from LaSalle Bank, which had an outstanding balance of $5.0 million at March 2005. Term Note B bears interest at the bank's base rate plus 2.00%, which was 7.75% at March 2005 and is required to be repaid in eighteen monthly installments of $0.3 million beginning March 2005. The Company's Chairman has personally guaranteed repayment of up to $10 million of the combined amount of the New Facility and the term loans. AMCON will pay the Company's Chairman an annual fee equal to 2% of the guaranteed principal in return for the personal guarantee. This guarantee is secured by a pledge of the shares of Chamberlin Natural Foods, Inc., Health Food Associates, Inc., HNWC and TSI. The Company's $2.8 million and $2.0 million credit facilities with a bank which were used to fund operating activities of our beverage segment were eliminated in October 2004 as they were brought into the Company's revolving credit facility as part of the debt restructuring transaction. Preferred Stock - --------------- In October 2004 the Company completed a $2.0 million private placement of Series B Convertible Preferred Stock representing 80,000 shares at $25 per share, the proceeds of which were used in combination with funds from Term Note B to retire $6.8 million of subordinated debt. Real Estate Term Debt - --------------------- In December 2004, the Company purchased a distribution building in Rapid City, South Dakota and began construction of an addition to the building. The lease on the current building was extended to coincide with the completion of construction in the third quarter of fiscal 2005. The Company has incurred capital expenditures relating to the building, construction of the addition and related equipment purchases in the amount of approximately $1.8 million. The Company arranged permanent financing for the building and equipment in an amount equal to 80% of the acquisition cost or approximately $1.5 million. The remainder of the capital expenditures related to the building and the building addition will be provided from the New Facility. 45 TSI Financing - ------------- In December 2004, a director of the Company extended a revolving credit facility to TSI in a principal amount of up to $1.0 million at an interest rate of 8% per annum. The entire $1.0 million is outstanding at March 31, 2005. To induce the director to extend this loan to TSI, the Company agreed to allow the director to receive a second mortgage on TSI's real property on an equal basis with the Company's existing second mortgage on TSI's real property. Additionally, on March 30, 2005, a Company that is wholly-owned by three of the Company's directors (including the Chairman and the President) and another significant shareholder of the Company, extended $0.5 million to TSI under a promissory note due on or before June 15, 2005. The note bears interest at 7% per annum. The promissory note was intended to serve as an interim loan until the negotiations with the bank were completed so that TSI would be included as a borrower on the New Facility which occurred in April 2005. Cross Default and Co-Terminus Provisions - ----------------------------------------- The Company's owned real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, and certain warehouse equipment in the Rapid City, SD warehouse is financed through term loans with Gold Bank (the "Gold Bank Loans"), who is also a participant lender on the Company's revolving line of credit. The Gold Bank Loans contain cross default provisions which cause all loans with Gold Bank to be considered in default if any one of the loans where Gold Bank is a lender, including the revolving credit facility, if it is in default. In addition, the Gold Bank Loans contain co-terminus provisions which require all loans with Gold Bank to be paid in full if any of the loans are paid in full prior to the end of their specified terms. CERTAIN ACCOUNTING CONSIDERATIONS In December 2004, the FASB issued Statement No. 123R (revised 2004), "Share- Based Payment." SFAS No. 123R will require the Company to measure the cost of all employee stock-based compensation awards based on the grant date fair value of those awards and to record that cost as compensation expense over the period during which the employee is required to perform service in exchange for the award (generally over the vesting period of the award). Accordingly, the adoption of SFAS No. 123R will have some impact on the Company's results of operations, although it will have no impact on the Company's overall financial position. SFAS No. 123R is effective for the Company's fiscal 2006. Management is currently assessing the impact that this standard will have on the Company's result of operations and cash flows. OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any off-balance sheet arrangements that have or are reasonably expected to have a material effect on the Company's financial position or results of operations. RELATED PARTY TRANSACTIONS As described under the headings LIQUIDITY AND CAPITAL RESOURCES - Credit Facilities and TSI Financing, the Company's Chairman has personally guaranteed repayment of certain obligations of the Company and is being paid a guarantee 46 fee for that service. In addition, a director of the Company has extended a $1.0 million revolving line of credit to TSI and a Company that is wholly- owned by the three directors of the Company (including the Chairman and President) and another significant shareholder have issued a promissory note to TSI in the amount of $0.5 million. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company is exposed to interest rate risk on its variable rate debt. At March 2005, we had $36.0 million of variable rate debt outstanding (excluding $15.0 million variable rate debt which is fixed through the swaps described below), with maturities through April 2007. The interest rate on this debt was 5.75% at March 2005. We estimate that our annual cash flow exposure relating to interest rate risk based on our current borrowings is approximately $0.2 million for each 1% change in our lender's prime interest rate. In June 2003, the Company entered into two interest rate swap agreements with a bank in order to mitigate the Company's exposure to interest rate risk on this variable rate debt. Under the agreements, the Company agrees to exchange, at specified intervals, fixed interest amounts for variable interest amounts calculated by reference to agreed-upon notional principal amounts of $10.0 million and $5.0 million. The interest rate swaps effectively convert $15.0 million of variable-rate senior debt to fixed-rate debt at rates of 4.87% and 4.38% on the $10.0 million and $5.0 million notional amounts through the maturity of the swap agreements on June 2, 2006 and 2005, respectively. These interest rate swap agreements have been designated as hedges and are accounted for as such for financial accounting purposes. We do not utilize financial instruments for trading purposes and hold no derivative financial instruments other than the interest rate swaps which could expose us to significant market risk. Item 4. Controls and Procedures The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Company's reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. As set forth below, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the design and operation of these disclosure controls and procedures were ineffective. As more fully described in Note 9 to the condensed consolidated financial statements, the Company has restated its September 2004 condensed consolidated balance sheet to correct classification errors of the Series A and B Preferred Stock and the Company's revolving credit facility. The Company's Chief 47 Executive Officer and Chief Financial Officer concluded that a material weakness (as defined under standards established by the American Institute of Certified Public Accountants) existed in the Company's disclosure controls and procedures with respect to the application of accounting guidance contained in certain Emerging Issues Task Force Applications ("EITFs") and other accounting standards relating to the Company's recent financing transactions. This material weakness resulted in the restatements described above. The Company is in the process of enhancing its internal controls by enhancing the training of our accounting staff and requiring periodic review of a wider variety of current technical accounting literature to obtain a reasonable level of assurance that all appropriate accounting guidance is applied to the classification of indebtedness it incurs and equity securities it issues. PART II - OTHER INFORMATION Item 1. Legal Proceedings TSI ACQUISITION AMCON announced in May 2004 that it was filing suit against Trinity Springs, Ltd. in order to obtain an order from the United States District Court for the District of Idaho declaring that a majority of the votes entitled to be cast by the shareholders of Trinity Springs, Ltd. were cast in favor of the sale of substantially all of its assets to AMCON's subsidiary, TSL Acquisition Corp. and thereby satisfied the shareholder approval condition of the asset purchase transaction. Subsequent to AMCON's filing of its lawsuit, the Inspectors of Election and the Board of Directors of Trinity Springs, Ltd. certified the shareholder voting results in favor of the asset purchase transaction. After the certification of the voting results, certain minority shareholders filed a complaint and motion seeking injunctive relief in the District Court of the Fifth Judicial District of the State of Idaho. The Court granted a temporary restraining order on June 11, 2004, which prevented the closing of the asset purchase transaction until the Court had an opportunity to review additional briefing on the issues presented and the parties could be heard by the Court. On June 16, 2004, the Court heard arguments on whether to extend the temporary restraining order and grant the minority shareholders' motion for preliminary injunction. As a result of the parties' briefing and the arguments presented, the Court dissolved the temporary restraining order and thereby enabled the asset sale transaction to be consummated. On July 19, 2004, several of the same minority shareholders, along with some additional shareholders filed an amended complaint in the same Idaho state court action. The minority shareholders' amended complaint seeks (i) a declaration that the asset sale transaction is void and injunctive relief rescinding that transaction or, alternatively, that a new shareholder vote on the asset sale transaction be ordered, (ii) damages for the alleged breaches of fiduciary duty which are claimed to have arisen out of the disclosure made in connection with the solicitation of proxies, how the votes were counted, and conducting the closing without the requisite shareholder vote, and (iii) imposition of a constructive trust on the sale proceeds and requiring separate books to be maintained. AMCON continues to believe that the shareholders of Trinity Springs, Ltd. approved the sale of assets to the Company in accordance with applicable law and that the asset sale transaction was properly completed. 48 PACIFIC VENTURES HAWAII On or about April 15, 2005, plaintiff Pacific Ventures Hawaii served a Complaint on The Beverage Group, Inc. ("TBG"), naming TBG and certain other unaffiliated parties as defendants. The dispute centers around a series of contracts entered into by the various parties to import, broker, market and distribute the Hype Classic Energy Drink line of products. TBG was to act as the master distributor for the product. The Complaint alleges five causes of action against the defendants: breach of contract; common counts; intentional interference with contract; intentional interference with prospective economic advantage; and negligent interference with business relationships. The plaintiff does not specifically allege how TBG breached the contracts or how it acted wrongfully. The Complaint seeks compensatory damages "in excess of $500,000 and according to proof"; punitive damages in an unspecified amount; attorney's fees, witness fees and costs incurred; and all other relief the Court deems just and proper. On May 6, 2005 outside counsel for TBG faxed a letter to plaintiff's counsel demanding that the case be dismissed with prejudice because TBG believes: it did not breach any of its obligations under those contracts to which it is a party; the plaintiff has stated in writing that TBG does not have any liability; and the applicable contract has provisions mandating submission of any disputes to arbitration by the American Arbitration Association in New York. If the plaintiff does not voluntarily dismiss before May 16, 2005, TBG will file an answer or motion to dismiss and vigorously defend the action. At this point it is too early to determine the likely outcome of the action. TELEVISION EVENTS & MARKETING, INC. VS. AMCON DISTRIBUTING CO., ET AL. An action entitled Television Events & Marketing, Inc. vs. AMCON Distributing Co., et al., Civil No. CV 05-00259 ACK BMK, was filed in the First Circuit Court of the State of Hawaii in Honolulu, Hawaii on March 8, 2005 and then removed on April 12, 2005 to the United States District Court for the District of Hawaii. This action concerns the alleged breach of two trademark licensing agreements involving Television Events & Marketing, Inc. The complaint seeks (i) an unstated amount of damages for an alleged breach of those agreements; (ii) an unstated amount of damages for alleged fraudulent transfer of assets to Trinity Springs, Inc., a subsidiary of the Company; (iii) interest and reasonable attorney's fees and costs; and (iv) such other relief as the court deems just and proper. On May 4, 2005, the Company, together with its named subsidiaries, moved to dismiss the complaint or for summary judgment on the complaint. On April 28, 2005, the Company offered to settle this matter with the plaintiff for $100,000. The plaintiff rejected that written settlement offer. The plaintiff's attorney asserts that the amount of the plaintiff's damages for the alleged breach of the two agreements exceeds $400,000. IN GENERAL The Company is also party to other lawsuits and claims arising out of the operation of its businesses. Management believes the ultimate resolution of such matters should not have a material adverse effect on the Company's financial condition, results of operations or liquidity after giving consideration to amounts already recorded in the Company's financial statements. 49 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In October 2004, the Company completed a $2.0 million private placement of Series B Convertible Preferred Stock representing 80,000 shares at $25.00 per share which was primarily used to partially fund the repayment of subordinated debt obligations of the Company. The Series B Convertible Preferred Stock is senior to the Company's outstanding common stock and provides for preferential treatment for preferred shareholders in the event of distributions, proceeds upon liquidation of the Company or the redemption of the stock. The Series B Convertible Preferred Stock is 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 price is initially $24.65 per share, but is subject to customary adjustments in the event of stock splits, stock dividends and certain other distributions on the Common Stock. This transaction was affected in reliance upon exemption for securities registration provided by Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D thereunder. Item 3. Defaults Upon Senior Securities During the fiscal quarter ended December 2004, the Company's minimum tangible net worth dropped below that required by the New Facility. LaSalle waived this default and entered into an amendment to the Credit Agreement effective December 31, 2004 which reduced the minimum tangible net worth covenant requirement to $1.5 million through September 29, 2005 and $2.5 million thereafter, and redefined and reduced the minimum fixed charge coverage ratio to 0.7 million for the remainder of fiscal 2005. The Company is in compliance with the minimum tangible net worth covenant at March 31, 2005, but is not in compliance with the fixed charge coverage ratio covenant. As discussed in Note 8 to the condensed consolidated unaudited financial statements, the failure to comply the minimum fixed charge coverage ratio shall not constitute an Event of Default so long as AMCON has sufficient aggregate availability the revolver to institute a reserve in an amount equal to the difference between AMCON's calculated fixed charge coverage ratio and the minimum fixed charge coverage ratio. At March 31, 2005, there was sufficient aggregate availability and thereby does not constitute an event of default. Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Stockholders on March 15, 2005 for the purpose of electing three directors, ratifying the appointment of its auditors and amending the Certificate of Incorporation of the Company in order to reduce the number of authorized common shares from 15,000,000 shares to 3,000,000 shares. The following sets forth the results of the election of directors: NAME OF NOMINEE FOR WITHHELD Mr. Christopher H. Atayan 475,468 100.0% 155 Mr. Raymond F. Bentele 475,462 100.0% 161 Mr. Allen D. Petersen 475,468 100.0% 155 50 There was no solicitation in opposition to the nominees proposed to be elected by the Stockholders in the Proxy Statement. In addition to the directors elected at the Annual Meeting, the following directors continued their term of office: Kathleen M. Evans, Timothy R. Pestotnik, John R. Loyack, William F. Wright, William R. Hoppner and Stanley Mayer. The ratification of the appointment of Deloitte & Touche LLP as independent auditors for the Company for the fiscal year ending September 30, 2005 was approved by the Stockholders with 475,309 votes FOR (99.9% of votes cast), 284 votes AGAINST, and 30 votes ABSTAINED. The proposal to amend the Certificate of Incorporation of the Company to reduce the number of authorized common shares from 15,000,000 to 3,000,000 shares was approved with 474,141 votes FOR (90.0% of total shares outstanding), 1,334 votes AGAINST, and 148 votes ABSTAINED OR BROKER NON- VOTES. Item 5. Other Information On May 25, 2005, the Company received a letter from the American Stock Exchange ("AMEX") notifying the Company that it was not in compliance with Sections 134 and 1101 of the AMEX Company Guide, and accordingly was not in compliance with the AMEX continued listing standards, because the Company had not filed this Quarterly Report on Form 10-Q for the period ended March 31, 2005. With this filing of the Quarterly Report on Form 10-Q for the period ended March 31, 2005, the Company has complied with the listing standards. 51 Item 6. Exhibits (a) EXHIBITS 2.1 Assets Purchase and Sale Agreement by and between Food For Health Company, Inc., AMCON Distributing Company and Tree of Life, Inc. dated March 8, 2001 (incorporated by reference to Exhibit 2.1 of AMCON's Current Report on Form 8-K filed on April 10, 2001) 2.2 Amendment to Assets Purchase and Sale Agreement by and between Food For Health Company, Inc., AMCON Distributing Company and Tree of Life, Inc. effective March 23, 2001 (incorporated by reference to Exhibit 2.2 of AMCON's Current Report on Form 8-K filed on April 10, 2001) 2.3 Asset Purchase Agreement, dated February 8, 2001, between AMCON Distributing Company, Merchants Wholesale Inc. and Robert and Marcia Lansing (incorporated by reference to Exhibit 2.1 of AMCON's Current Report on Form 8-K filed on June 18, 2001) 2.4 Addendum to Asset Purchase Agreement, dated May 30, 2001, between AMCON Distributing Company, Merchants Wholesale Inc. and Robert and Marcia Lansing (incorporated by reference to Exhibit 2.2 of AMCON's Current Report on Form 8-K filed on June 18, 2001) 2.5 Real Estate Purchase Agreement, dated February 8, 2001, between AMCON Distributing Company and Robert and Marcia Lansing (incorporated by reference to Exhibit 2.3 of AMCON's Current Report on Form 8-K filed on June 18, 2001) 2.6 Addendum to Real Estate Purchase Agreement, dated May 30, 2001, between AMCON Distributing Company and Robert and Marcia Lansing (incorporated by reference to Exhibit 2.4 of AMCON's Current Report on Form 8-K filed on June 18, 2001) 2.7 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) 2.8 First Amendment to Asset Purchase Agreement dated June 17, 2004 between TSL Acquisition Corp., AMCON Distributing Company and Trinity Springs, Ltd. (incorporated by reference to Exhibit 2.9 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004) 3.1 Restated Certificate of Incorporation of the Company, as amended May 11, 2004 (incorporated by reference to Exhibit 3.1 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004) 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 of AMCON's Registration Statement on Form S-1 (Registration No. 33-82848) filed on August 15, 1994) 3.3 Second Corrected Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Securities of AMCON Distributing Company dated August 5, 2004 (incorporated by reference to Exhibit 3.3 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004) 52 3.4 Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Securities of AMCON Distributing Company dated October 8, 2004 (incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed on January 7, 2005) 4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of AMCON's Registration Statement on Form S-1 (Registration No. 33-82848) filed on August 15, 1994) 4.2 Specimen Series A Convertible Preferred Stock Certificate (incorporated by reference to Exhibit 4.2 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004) 4.3 Specimen Series B Convertible Preferred Stock Certificate (incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed on January 7, 2005) 4.4 Securities Purchase Agreement dated June 17, 2004 between AMCON Distributing Company, William F. Wright and Draupnir, LLC (incorporated by reference to Exhibit 4.3 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004) 4.5 Securities Purchase Agreement dated October 8, 2004 between AMCON Distributing Company and Spencer Street Investments, Inc. (incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed on January 7, 2005) 10.1 Amended and Restated Loan and Security Agreement, dated September 30, 2004, between the Company and LaSalle National Bank, as agent (incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed on January 7, 2005) 10.2 Revised First Amendment To Amended and Restated Loan and Security Agreement, dated April 14, 2005 10.3 Revised Second Amendment to Amended and Restated Loan and Security Agreement, dated May 23, 2005 10.4 First Amended and Restated AMCON Distributing Company 1994 Stock Option Plan (incorporated by reference to Exhibit 10.17 of AMCON's Current Report on Form 10-Q filed on August 4, 2000) 10.5 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) 10.6 Employment Agreement, dated May 22, 1998, between the Company and William F. Wright (incorporated by reference to Exhibit 10.14 of AMCON's Quarterly Report on Form 10-Q filed on August 6, 1998) 10.7 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) 10.8 Director and Officer Compensation 53 10.9 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) 10.10 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) 10.11 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) 10.12 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) 10.13 Swap Transaction Confirmation ($5,000,000) dated as of May 23, 2003 between the Company and LaSalle Bank National Association (incorporated by reference to Exhibit 10.15 of AMCON's Quarterly Report on Form 10-Q filed on August 11, 2003) 10.14 Promissory Note ($2,828,440), dated as of June 17, 2004 between the Company and Trinity Springs, Ltd. (incorporated by reference to Exhibit 10.15 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004) 10.15 Promissory Note ($500,000), dated as of June 17, 2004 between the Company and Trinity Springs, Ltd. (incorporated by reference to Exhibit 10.16 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004) 10.16 Security Agreement, dated June 17, 2004 by and between TSL Acquisition Corp., AMCON Distributing Company and Trinity Springs,Ltd.(incorporated by reference to Exhibit 10.17 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004) 10.17 Shareholders Agreement, dated June 17,2004, by and between TSL Acquisition Corp, AMCON Distributing Company and Trinity Springs, Ltd. (incorporated by reference to Exhibit 10.18 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004) 10.18 Guaranty and Suretyship Agreement, dated June 17, 2004, by and between AMCON Distributing Company and Trinity Springs, Ltd. (incorporated by reference to Exhibit 10.19 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004) 10.19 Mortgage, dated June 17, 2004, by and between TSL Acquisition Corp., AMCON Distributing Company and Trinity Springs, Ltd.(incorporated by reference to Exhibit 10.20 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004) 10.20 Guaranty Fee, Reimbursement and Indemnification Agreement, dated as of September 30, 2004, between AMCON Distributing Company and William F. Wright (incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed on January 7, 2005) 54 10.21 Unconditional Guaranty, dated as of September 30, 2004 between William F. Wright and LaSalle Bank, N.A.(incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed on January 7, 2005) 10.22 Secured Promissory Note ($1,000,000), dated December 14, 2004, issued by Trinity Springs, Inc. to Allen D. Petersen (incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed on January 7, 2005) 10.23 Modification and Extension of Second Lien Commercial Mortgage, Assignment of Leases and Rents, and Fixture Filing, dated as of December 14, 2004 between Trinity Springs, Inc. and Allen D. Petersen (incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed on January 7, 2005) 10.24 Term Real Estate Promissory Note, dated December 21, 2004, issued by AMCON Distributing Company to Gold Bank (incorporated by reference to Exhibit 10.21 of AMCON's quarterly report on Form 10-Q filed on February 14, 2005) 10.25 Term Equipment Promissory Note, dated December 21, 2004 issued by AMCON Distributing Company to Gold Bank (incorporated by reference to Exhibit 10.22 of AMCON's quarterly report on Form 10-Q filed on February 14, 2005) 10.26 One Hundred Eighty Day Redemption Mortgage and Security Agreement by and between AMCON Distributing Company and Gold Bank (incorporated by reference to Exhibit 10.23 of AMCON's quarterly report on Form 10-Q filed on February 14, 2005) 10.27 Security Agreement by and between AMCON Distributing Company and Gold Bank (incorporated by reference to Exhibit 10.24 of AMCON's quarterly report on Form 10-Q filed on February 14, 2005) 11.1 Statement re: computation of per share earnings (incorporated by reference to footnote 4 to the financial statements which are incorporated herein by reference to Item 1 of Part I herein) 14.1 Code of Ethics for Principal Executive and Financial Officers (incorporated by reference to Exhibit 14.1 of AMCON's Annual Report on Form 10-K filed on December 24, 2003) 31.1 Certification by William F. Wright, Chairman and Principal Executive Officer, furnished pursuant to section 302 of the Sarbanes-Oxley Act 31.2 Certification by Michael D. James, Vice President and Chief Financial Officer, furnished pursuant to section 302 of the Sarbanes-Oxley Act 32.1 Certification by William F. Wright, Chairman and Principal Executive Officer, furnished pursuant to section 906 of the Sarbanes-Oxley Act 32.2 Certification by Michael D. James, Vice President and Chief Financial Officer, furnished pursuant to section 906 of the Sarbanes-Oxley Act 55 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. AMCON DISTRIBUTING COMPANY (registrant) Date: May 27, 2005 /s/ William F. Wright ----------------- ----------------------------- William F. Wright Chairman of the Board and Principal Executive Officer Date: May 27, 2005 /s/ Michael D. James ----------------- ----------------------------- Michael D. James Treasurer & CFO and Principal Financial and Accounting Officer 56 EX-10 2 ex102firstamendment.txt EXHIBIT 10.2 LASALLE FIRST AMENDMENT EXHIBIT 10.2 April 14, 2005 AMCON Distributing Company 7405 Irvington Road Omaha, Nebraska 68122 And The Beverage Group, Inc. 2 North Lake Avenue, Suite 910 Pasadena, California 91101 And Chamberlin Natural Foods, Inc. 430 North Orlando Avenue Winter Park, Florida 32789 And Hawaiian Natural Water Company, Inc. 98-746 Kuahao Place Pearl City, Hawaii 96782 And Health Food Associates, Inc. 7807 East 51st Street Tulsa, Oklahoma 74145 And Trinity Springs, Inc. 1101 West River Street Suite 370 Boise, Idaho 83702 RE: REVISED FIRST AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT Gentlemen: AMCON Distributing Company, a Delaware corporation, ("AMCON"), The Beverage Group, Inc., a Delaware corporation, ("Beverage Group"), Hawaiian Natural Water Company, Inc., a Delaware corporation, ("Hawaiian Natural"), Chamberlin Natural Foods, Inc., a Florida corporation, ("Chamberlin Natural"), and Health Food Associates, Inc., an Oklahoma corporation, ("Health Food") (AMCON, Beverage Group, Hawaiian Natural, Chamberlin Natural, and Health Food are each referred to as a "Borrower" and are collectively referred to as "Borrowers") and LaSalle Bank National Association, a national banking association (in its individual capacity, "LaSalle"), as agent (in such capacity as agent, "Agent") for itself, Gold Bank, a Kansas state bank, and all other lenders from time to time a party hereto ("Lenders"), have entered into that certain Amended and Restated Loan and Security Agreement dated September 30, 2004 (the "Security Agreement"). From time to time thereafter, Borrower, Agent and Lenders may have executed various amendments (each an "Amendment" and collectively the "Amendments") to the Security Agreement (the Security Agreement and the Amendments hereinafter are referred to, collectively, as the "Agreement"). Borrower, Agent and Lenders now desire to further amend the Agreement as provided herein, subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. The Agreement hereby is amended as follows: (a) The definitions of "Maximum Loan Limit", and "Subsidiary Inventory Sublimit" as set forth in Section 1 of the Agreement are hereby amended and restated in their entirety, as follows: "Maximum Loan Limit" shall mean Sixty Million and No/100 Dollars ($60,000,000.00). "Subsidiary Inventory Sublimit" shall mean $5,500,000, as such amount be reduced from time to time pursuant to subsection 2(d)(vi) hereof. (b) Subsection 2(a) of the Agreement is hereby amended and restated in its entirety, as follows: (a) REVOLVING LOANS. Subject to the terms and conditions of this Agreement and the Other Agreements, during the Original Term and any Renewal Term, each Lender, severally and not jointly, agrees absent the occurrence of an Event of Default, to make its Pro Rata Share of revolving loans and advances (the "Revolving Loans") requested by Borrower Representative on behalf of each Borrower up to such Lender's Revolving Loan Commitment so long as after giving effect to such Revolving Loans, the sum of the aggregate unpaid principal balance of the Revolving Loans and the Letter of Credit Obligations does not exceed an amount up to the sum of the following sublimits (the "Revolving Loan Limit"): (i) Up to eighty-five percent (85%) of the face amount (less maximum discounts, credits and allowances which may be taken by or granted to Account Debtors in connection therewith in the ordinary course of AMCON's business) of AMCON's Eligible Accounts; plus (ii) Up to eighty percent (80%) of the face amount (less maximum discounts, credits and allowances which may be taken by or granted to Account Debtors in connection therewith in the ordinary course of such Borrower's business) of such Borrower's Eligible Accounts (other than AMCON's Eligible Accounts) or the Subsidiary Accounts Sublimit; whichever is less, plus (iii) Up to eighty-five percent (85%) of the lower of cost or market value of Eligible Cigarette Inventory or Twenty Million and No/100 Dollars ($20,000,000.00), whichever is less; plus (iv) Up to seventy percent (70%) of the lower of cost or market value of AMCON's Eligible Inventory (consisting solely of AMCON's Eligible Inventory other than Eligible Cigarette Inventory set forth in clause (iii) above) or Twelve Million and No/100 Dollars ($12,000,000.00), whichever is less; plus (v) Up to sixty percent (60%) of the lower of cost or market value of such Borrower's Eligible Inventory (other than AMCON's Eligible Inventory or Eligible Cigarette Inventory) or the Subsidiary Inventory Sublimit, whichever is less; plus (vi) Up to (i) Two Million and No/100 Dollars ($2,000,000.00) from April 14, 2005 through June 30, 2005; and (ii) One Million and No/100 Dollars ($1,000,000.00) from July 1, 2005 through September 29, 2005; as a Special Accommodation to be made available each Monday of every week and to be reduced to Zero and No/100 Dollars ($0.00) by each Thursday of the same week, said Special Accommodation Loan shall be reduced to and remain at Zero and No/100 Dollars ($0.00) on September 30, 2005; minus (vii) such reserves as Agent elects, in its sole discretion to establish from time to time, including without limitation, a reserve with respect to Rate Hedging Obligations; provided, that the Revolving Loan Limit shall in no event exceed Fifty Five Million and No/100 Dollars ($55,000,000.00) less the then-outstanding principal balance of Term Loan A, thereafter (the "Maximum Revolving Loan Limit") except as such amount may be increased or, following the occurrence of an Event of Default, decreased by Agent from time to time, in Agent's sole discretion. The aggregate unpaid principal balance of the Revolving Loans shall not at any time exceed the lesser of the (i) Revolving Loan Limit minus the Letter of Credit Obligations and (ii) the Maximum Revolving Loan Limit minus the Letter of Credit Obligations. If at any time the outstanding Revolving Loans exceeds either the Revolving Loan Limit or the Maximum Revolving Loan Limit, in each case minus the Letter of Credit Obligations, or any portion of the Revolving Loans and Letter of Credit Obligations exceeds any applicable sublimit within the Revolving Loan Limit (the "Overadvance"), Borrowers shall immediately, and without the necessity of demand by Agent, pay to Agent such amount as may be necessary to eliminate such Overadvance and Agent shall apply such payment to the Revolving Loans in such order as Agent shall determine in its sole discretion; provided that Agent may, in its sole discretion, permit such Overadvance (the "Interim Advance") to remain outstanding and continue to advance Revolving Loans to Borrowers on behalf of Lenders without the consent of any Lender for a period of up to thirty (30) calendar days, so long as (i) the amount of the Interim Advances does not exceed at anytime Three Million and No/100 Dollars ($3,000,000.00), (ii) the aggregate outstanding principal balance of the Revolving Loans does not exceed the Maximum Revolving Loan Limit, and (iii) Agent has not been notified by Requisite Lenders to cease making such Revolving Loans. If the Interim Advance is not repaid in full within thirty (30) days of the initial occurrence of the Interim Advance, no future advances may be made to Borrowers without the consent of all Lenders until the Interim Advance is repaid in full. Neither Agent nor any Lender shall be responsible for any failure by any other Lender to perform its obligations to make Revolving Loans hereunder, and the failure of any Lender to make its Pro Rata Share of any Revolving Loan hereunder shall not relieve any other Lender of its obligation, if any, to make its Pro Rata Share of any Revolving Loans hereunder. If Borrower Representative, on behalf of any Borrower, makes a request for a Revolving Loan as provided herein Agent, at its option and in its sole discretion, shall do either of the following: (i) Manually Numbered advance the amount of the proposed Revolving Loan to such Borrower disproportionately (a "Disproportionate Advance") out of Agent's own funds on behalf of Lenders, which advance shall be on the same day as Borrower Representative's request therefor with respect to Prime Rate Loans if Borrower Representative notifies Agent of such request by 1:00 P.M., Chicago time on such day, and request settlement in accordance with Section 19 hereof such that upon such settlement each Lender's share of the outstanding Revolving Loans (including, without limitation, the amount of any Disproportionate Advance) equals its Pro Rata Share; or (ii) Notify each Lender by telecopy, electronic mail or other similar form of teletransmission of the proposed advance on the same day Agent is notified or deemed notified by Borrower Representative of such Borrower's request for an advance pursuant to this Section 2(a). Each Lender shall remit, to the demand deposit account designated by a Borrower (i) with respect to Prime Rate Loans, at or prior to 3:00 P.M., Chicago time, on the date of notification, if such notification is made before 1:00 P.M., Chicago time, or 10:00 A.M., Chicago time, on the Business Day immediately succeeding the date of such notification, if such notification is made after 1:00 P.M., Chicago time, and (ii) with respect to LIBOR Rate Loans, at or prior to 10:30 A.M., Chicago time, on the date such LIBOR Rate Loans are to be advanced, immediately available funds in an amount equal to such Lender's Pro Rata Share of such proposed advance. If and to the extent that a Lender does not settle with Agent as required under this Agreement (a "Defaulting Lender") Borrowers and Defaulting Lender severally agree to repay to Agent forthwith on demand such amount required to be paid by such Defaulting Lender to Agent, together with interest thereon, for each day from the date such amount is made available to a Borrower until the date such amount is repaid to Agent (x) in the case of a Defaulting Lender at the rate published by the Federal Reserve Bank of New York on the next succeeding Business Day as the "Federal Funds Rate" or if no such rate is published for any Business Day, at the average rate quoted for such day for such transactions from three (3) federal funds brokers of recognized standing selected by Agent, and (y) in the case of Borrowers, at the interest rate applicable at such time for such Loans; provided, that Borrowers' obligation to repay such advance to Agent shall not relieve such Defaulting Lender of its liability to Agent for failure to settle as provided in this Agreement. Each Borrower hereby authorizes Agent, in its sole discretion, to charge any of such Borrower's accounts or advance Revolving Loans to make any payments of principal, interest, fees, costs or expenses required to be made under this Agreement or the Other Agreements. A request for a Revolving Loan shall be made or shall be deemed to be made, each in the following manner: the Borrower Representative, on behalf of the Borrower requesting such Revolving Loan, shall give Agent same day notice, no later than 1:00 P.M. (Chicago time) for such day, of its request for a Revolving Loan as a Prime Rate Loan, and at least three (3) Business Days prior notice of its request for a Revolving Loan as a LIBOR Rate Loan, in which notice the Borrower Representative shall specify the amount of the proposed borrowing and the proposed borrowing date; provided, however, that no such request may be made at a time when there exists an Event of Default or an event which, with the passage of time or giving of notice, will become an Event of Default. In the event that a Borrower maintains a controlled disbursement account at LaSalle, each check presented for payment against such controlled disbursement account and any other charge or request for payment against such controlled disbursement account shall constitute a request for a Revolving Loan as a Prime Rate Loan. As an accommodation to Borrowers, Agent may permit telephone requests for Revolving Loans and electronic transmittal of instructions, authorizations, agreements or reports to Agent by Borrower Representative, on behalf of Borrowers. Unless Borrower Representative specifically directs Agent in writing not to accept or act upon telephonic or electronic communications from Borrower Representative, Agent shall have no liability to Borrowers for any loss or damage suffered by Borrower Representative or any Borrower as a result of Agent's honoring of any requests, execution of any instructions, authorizations or agreements or reliance on any reports communicated to it telephonically or electronically and purporting to have been sent to Agent by Borrower Representative and Agent shall have no duty to verify the origin of any such communication or the authority of the Person sending it. Each Borrower hereby irrevocably authorizes Agent to disburse the proceeds of each Revolving Loan requested by Borrower Representative, or deemed to be requested by Borrower Representative, as follows: the proceeds of each Revolving Loan requested under Section 2(a) shall be disbursed by Agent in lawful money of the United States of America in immediately available funds, in the case of the initial borrowing, in accordance with the terms of the written disbursement letter from Borrower Representative, and in the case of each subsequent borrowing, by wire transfer or Automated Clearing House (ACH) transfer to such bank account as may be agreed upon by Borrower Representative and Agent from time to time, or elsewhere if pursuant to a written direction from Borrower Representative. (c) Subsection 4(a)(i) of the Agreement is hereby amended and restated in its entirety, as follows: (i) Each Loan that is a Prime Rate Loan, other than the Special Accommodation in subsection 2(a)(vi) and Term Loan B, shall bear interest at the Prime Rate in effect from time to time, payable on the last Business Day of each month in arrears. The Special Accommodation in subsection 2(a)(vi) and Term Loan B shall bear interest at the rate of two percent (2%) per annum in excess of the Prime Rate in effect from time to time, payable on the last Business Day of each month in arrears. Said rates of interest shall increase or decrease by an amount equal to each increase or decrease in the Prime Rate effective on the effective date of each such change in the Prime Rate. (d) Subsection 4(c)(i) of the Agreement is hereby amended and restated in its entirety, as follows: (i) Amendment Fee: Borrower shall pay to Agent, for the benefit of Lenders, an amendment fee of Fifty Thousand and No/100 Dollars ($50,000.00), which fee shall be fully earned by Lenders on the date of this amendment and payable on January 31, 2005. (e) Subsection 4(c) of the Agreement is hereby amended in its entirety to add the following provisions: (vi) Transaction Fee: Borrower shall pay to Agent for its benefit a transaction fee of Two Thousand and No/100 Dollars ($2,000.00) with respect to internal costs and expenses (in addition to any reimbursable out-of-pocket costs and expenses of Agent) related to this First Amendment, which fee shall be fully earned by Agent on the date of this First Amendment and payable on April 30, 2005. (vii) Waiver Fee: Borrower shall pay to Agent, for the benefit of Lenders, an amendment fee of Ten Thousand and No/100 Dollars ($10,000.00), which fee shall be fully earned by Lenders on the date of this the Revised First Amendment to the Agreement and payable on April 30, 2005. (f) Subsection 11(f) of the Agreement is hereby amended and restated in its entirety, as follows: (f) ORGANIZATION, AUTHORITY AND NO CONFLICT. AMCON is a corporation, duly organized, validly existing and in good standing in the State of Delaware, its state organizational identification number is 2093842 and such Borrower is duly qualified and in good standing in all states where the nature and extent of the business transacted by it or the ownership of its assets makes such qualification necessary. Chamberlin Natural is a corporation, duly organized, validly existing and in good standing in the State of Florida, its state organizational identification number is 538536 and such Borrower is duly qualified and in good standing in all states where the nature and extent of the business transacted by it or the ownership of its assets makes such qualification necessary. Hawaiian Natural is a corporation, duly organized, validly existing and in good standing in the State of Delaware, its state organizational identification number is 3293592 and such Borrower is duly qualified and in good standing in all states where the nature and extent of the business transacted by it or the ownership of its assets makes such qualification necessary. Beverage Group is a corporation, duly organized, validly existing and in good standing in the State of Delaware, its state organizational identification number is 3607471 and such Borrower is duly qualified and in good standing in all states where the nature and extent of the business transacted by it or the ownership of its assets makes such qualification necessary. Health Food is a corporation, duly organized, validly existing and in good standing in the State of Oklahoma, its state organizational identification number is 1900173205 and such Borrower is duly qualified and in good standing in all states where the nature and extent of the business transacted by it or the ownership of its assets makes such qualification necessary. Trinity Springs, Inc. is a corporation, duly organized, validly existing and in good standing in the State of Delaware, its state organizational identification number is 3791436 and such Borrower is duly qualified and in good standing in all states where the nature and extent of the business transacted by it or the ownership of its assets makes such qualification necessary. Each Borrower has the right and power and is duly authorized and empowered to enter into, execute and deliver this Agreement and the Other Agreements and perform its obligations hereunder and thereunder. Each Borrower's execution, delivery and performance of this Agreement and the Other Agreements does not conflict with the provisions of the organizational documents of such Borrower, any statute, regulation, ordinance or rule of law, or any agreement, contract or other document which may now or hereafter be binding on such Borrower, and each Borrower's execution, delivery and performance of this Agreement and the Other Agreements shall not result in the imposition of any lien or other encumbrance upon any of such Borrower's property under any existing indenture, mortgage, deed of trust, loan or credit agreement or other agreement or instrument by which such Borrower or any of its property may be bound or affected. (g) Subsection 13(d) of the Agreement is hereby amended and restated in its entirety, as follows: (d) MERGERS, SALES, ACQUISITIONS, SUBSIDIARIES AND OTHER TRANSACTIONS OUTSIDE THE ORDINARY COURSE OF BUSINESS. No Borrower shall (i) enter into any merger or consolidation; (ii) change its state of organization or enter into any transaction which has the effect of changing its state of organization (iii) sell, lease or otherwise dispose of any of its assets other than in the ordinary course of business, provided that AMCON may sell and dispose of assets with a value of less than $250,000.00 in any transaction, or series of related transactions, provided that the proceeds thereof, net of reasonable out of pocket disposition expenses, are applied to the Liabilities; (iv) purchase the stock, other equity interests or all or a material portion of the assets of any Person or division of such Person; or (v) enter into any other transaction outside the ordinary course of such Borrower's business, including, without limitation, any purchase, redemption or retirement of any shares of any class of its stock or any other equity interest, and any issuance of any shares of, or warrants or other rights to receive or purchase any shares of, any class of its stock or any other equity interest other than such issuances pursuant to the terms of such Borrower's stock option plan and the issuance by AMCON of Series B Preferred Stock so long as the entire proceeds thereof are used to repay the existing subordinated indebtedness of AMCON, provided that AMCON may redeem odd lot stock in an aggregate amount not to exceed $50,000.00 in any calendar year and other stock up to $100,000.00 in the aggregate during any calendar year. No Borrower shall form any Subsidiaries or enter into any joint ventures or partnerships with any other Person. (h) Subsections 14(a) and 14(b) of the Agreement are hereby amended and restated in their entirety, as follows: (a) TANGIBLE NET WORTH. Borrowers' Tangible Net Worth shall not at any time be less than the Minimum Tangible Net Worth; "Minimum Tangible Net Worth" being defined for purposes of this subsection as (i) One Million Five Hundred Thousand and No/100 Dollars ($1,500,000.00) at all times from December 31, 2004 through September 29, 2005; (ii) Two Million Five Hundred Thousand and No/100 Dollars ($2,500,000.00) at September 30, 2005; and (ii) thereafter, in an amount to be determined by Agent in its sole and reasonable discretion based upon Borrowers' audited year end financial statements; and "Tangible Net Worth" being defined for purposes of this subsection as Borrowers' shareholders' equity (including retained earnings) less the book value of all intangible assets (excluding the Trinity Springs, Inc. water rights) as determined solely by Agent on a consistent basis plus the amount of any LIFO reserve plus the amount of any debt subordinated to Agent and Lenders, all as determined under generally accepted accounting principles applied on a basis consistent with the financial statements dated December 31, 2004 except as set forth herein; (b) FIXED CHARGE COVERAGE. For the three (3) month period ending December 31, 2004, Borrowers shall not permit the ratio of their EBITDA to Fixed Charges to be less than 0.7 to 1.0. For the six (6) month period ending March 31, 2005, Borrowers shall not permit the ratio of their EBITDA to Fixed Charges to be less than 0.7 to 1.0. For the nine (9) month period ending June 30, 2005, Borrowers shall not permit the ratio of their EBITDA to Fixed Charges to be less than 0.7 to 1.0. For the twelve (12) month period ending on September 30, 2005, Borrowers shall not permit the ratio of their EBITDA to Fixed Charges to be less than .7 to 1.0, provided that the failure to comply with such covenant shall not constitute an Event of Default so long as Borrowers have sufficient aggregate availability under subsection 2(a) hereof to institute a reserve in an amount equal to an amount which, when added to the EBITDA for the respective three (3), six (6) or nine (9) month period or when added to the trailing twelve (12) month EBITDA, would cause the ratio of EBITDA to Fixed Charges for such three (3), six (6), nine (9) or trailing twelve (12) month period to equal 0.7 to 1.0. Thereafter, Fixed Charge Coverage shall be equal to an amount to be determined by Agent, in its sole and reasonable discretion. (i) Section 17 of the Agreement is hereby amended in its entirety to add the following provision: (k) Additional-Borrower: Simultaneously herewith, Trinity Springs, Inc. shall become an additional Borrower under the Agreement and wherever the term "Borrower' appears in the Agreement, it shall also include Trinity Springs, Inc., ("Trinity") a Borrower. Trinity hereby grants (i) Bank a first priority security interest in all of its assets and permits Bank to file all necessary UCC-1 financing statements, and (ii) AMCON Distributing Company a second priority security interest in all of its assets. (j) The "Revolving Loan Commitment" as set forth in the signature box for LaSalle Bank National Association of the Agreement is hereby amended and restated in its entirety, as follows: Revolving Loan Commitment: $ 36,666,667.00 (k) The "Revolving Loan Commitment" as set forth in the signature box for Gold Bank of the Agreement is hereby amended and restated in its entirety, as follows: Revolving Loan Commitment: $ 18,333,333.00 (l) Exhibit A of the Agreement is Amended and Restated as the First Amended and Restated Exhibit A of the Agreement. 2. This Amendment shall not become effective until fully executed by all parties hereto. 3. Except as expressly amended hereby and by any other supplemental documents or instruments executed by either party hereto in order to effectuate the transactions contemplated hereby, the Agreement thereto hereby is ratified and confirmed by the parties hereto and remain in full force and effect in accordance with the terms thereof. LASALLE BANK NATIONAL ASSOCIATION, a national banking association, as Agent and a Lender By /s/ Joseph G. Fudacz Title Senior Vice President Revolving Loan Commitment: $35,892,947.00 Term Loan A Commitment: $773,720.00 Term Loan B Commitment: $3,333,000.00 GOLD BANK, a Kansas state bank, as a Lender By /s/ Mark Jannaman Title Vice President Revolving Loan Commitment: $17,947,053.00 Term Loan A Commitment: $386,280.00 Term Loan B Commitment $1,667,000.00 ACKNOWLEDGED AND AGREED TO this 15th day of April, 2005: AMCON DISTRIBUTING COMPANY By /s/ Michael D. James Title Vice President / CFO THE BEVERAGE GROUP, INC. By /s/ Michael D. James Title Secretary HAWAIIAN NATURAL WATER COMPANY, INC. By /s/ Michael D. James Title Secretary CHAMBERLIN NATURAL FOODS, INC. By /s/ Michael D. James Title Secretary HEALTH FOOD ASSOCIATES, INC. By /s/ Michael D. James Title Secretary TRINITY SPRINGS, INC. By /s/ Michael D. James Title Assistant Secretary Consented and agreed to by the following guarantor(s) of the obligations of AMCON DISTRIBUTING COMPANY, THE BEVERAGE GROUP, INC., HAWAIIAN NATURAL WATER COMPANY, INC., CHAMBERLIN NATURAL FOODS, INC., and HEALTH FOOD ASSOCIATES, INC. to LaSalle Bank National Association, as Agent. /s/ William F. Wright Date: April 15, 2005 AMCON Distributing Company The Beverage Group, Inc. Chamberlin Natural Foods, Inc. Hawaiian Natural Water Company, Inc., Health Food Associates, Inc. Trinity Springs, Inc. April 14, 2005 Page 2 BORROWER ADDITION AGREEMENT This Borrower Addition Agreement (this "Agreement") is made as of April __, 2005, between TRINITY SPRINGS, INC., a Delaware corporation ("Company"), GOLD BANK, a Kansas state bank, as a Lender (Gold Bank) 800 West 47th Street, Kansas City, Missouri 64112, LASALLE BANK NATIONAL ASSOCIATION, a national banking association (in its individual capacity, LaSalle), as agent (in such capacity as agent, Agent) for itself, Gold Bank and all other lenders from time to time a party hereto (Lenders), 135 South LaSalle Street, Chicago, Illinois 60603 4105, all other Lenders. WITNESSETH: WHEREAS, AMCON Distributing Company, a Delaware corporation, (AMCON), The Beverage Group, Inc., a Delaware corporation, (Beverage Group), Hawaiian Natural Water Company, Inc., a Delaware corporation, (Hawaiian Natural), Chamberlin Natural Foods, Inc., a Florida corporation, (Chamberlin Natural), and Health Food Associates, Inc., an Oklahoma corporation, (Health Food) (AMCON, Beverage Group, Hawaiian Natural, Chamberlin Natural, and Health Food are each referred to as a Borrower and are collectively referred to as Borrowers) and Agent for itself, Gold Bank, all other Lenders, have entered into that certain Amended and Restated Loan and Security Agreement dated September 30, 2004 (the "Security Agreement"). From time to time thereafter, Borrower, Agent and Lenders may have executed various amendments (each an "Amendment" and collectively the "Amendments") to the Security Agreement (the Security Agreement and the Amendments hereinafter are referred to, collectively, as the "Loan Agreement"); capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Loan Agreement; WHEREAS, the Loan Agreement and the Other Agreements provide for the making of loans and the extension of certain other financial accommodations (the "Loans") by Agent and the Lenders to Borrowers; and WHEREAS, Company has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review the Loan Agreement and each Other Agreement with its legal counsel; and WHEREAS, Company deems it to be in its best interest to become a Borrower under the Loan Agreement and each Other Agreement; and WHEREAS, to induce Agent and the Lenders to deem Company a Borrower under the Loan Agreement, Company desires to execute this Agreement; NOW, THEREFORE, Company agrees with Agent and the Lenders as follows: 1. JOINDER. Subject to the terms and conditions of this Agreement, the Company is hereby joined in the Loan Agreement as a Borrower, and the Company hereby agrees to be bound by the terms and conditions of the Loan Agreement and each Other Agreement, as a Borrower, in each case as if Company were a direct signatory thereto. In furtherance of the preceding sentence, and without limiting any provision of the Loan Agreement or any Other Agreement, Company agrees as follows: (a) Company acknowledges and agrees that it is jointly and severally liable for all of the now existing and hereafter arising Liabilities; (b) To secure the payment, performance and observance of the Liabilities, Company hereby assigns to Agent for the benefit of Agent and Lenders and grants to Agent for the benefit of Agent and Lenders a continuing security interest in the following property of Company, whether now or hereafter owned, existing, acquired or arising and wherever now or hereafter located: (i) All Accounts (whether or not Eligible Accounts) and all Goods whose sale, lease or other disposition by Company has given rise to Accounts and have been returned to, or repossessed or stopped in transit by, Company; (ii) All Chattel Paper, Instruments, Documents and General Intangibles (including, without limitation, all patents, patent applications, trademarks, trademark applications, tradenames, trade secrets, goodwill, copyrights, copyright applications, registrations, licenses, franchises, customer lists, tax refund claims, claims against carriers and shippers, guarantee claims, contracts rights, security interests, security deposits and rights to indemnification); (iii) All Inventory (whether or not Eligible Inventory); (iv) All Goods (other than Inventory), including, without limitation, Equipment, vehicles and fixtures; (v) All Investment Property; (vi) All Deposit Accounts, bank accounts, deposits and cash; (vii) All Letter-of-Credit Rights; (viii) Commercial Tort Claims listed on Exhibit C to the Loan Agreement; (ix) Any other property of Company now or hereafter in the possession, custody or control of Bank or any agent or any parent, affiliate or subsidiary of Bank or any participant with Bank in the Loans, for any purpose (whether for safekeeping, deposit, collection, custody, pledge, transmission or otherwise); and (x) All additions and accessions to, substitutions for, and replacements, products and Proceeds of the foregoing property, including, without limitation, proceeds of all insurance policies insuring the foregoing property, and all of Company's books and records relating to any of the foregoing and to Company's business. 2. COMPANY'S REPRESENTATION AND WARRANTIES. To induce Bank to enter into this Agreement, Company hereby represents and warrants to Bank that the execution, delivery and performance of this Agreement are within its power, do not require the consent or approval of any governmental agency or authority, and do not and will not conflict with any provision of law applicable to Company, the organizational documents of Company, or any court or administrative order or decree applicable to Company or any of its property. 3. CONDITIONS PRECEDENT. This Agreement shall not be effective until Company has satisfied all of the following conditions precedent, each in form and substance satisfactory to Bank in its sole discretion: (a) This Agreement has been executed and delivered to Bank; (b) A Reaffirmation and Amendment relating to this Borrower Addition Agreement, in the form as attached hereto, has been executed by Borrowers and Company and delivered to Bank; (C) Bank has determined that it has a validly perfected first priority security interest in all or substantially all of Company's assets; (d) Company has executed and delivered to Bank a Secretary's Certificate as to its Certificate of Incorporation, By-Laws, and incumbency of officers of Company; (e) Company has delivered to Bank good standing certificates for Company in its state of organization and all other states in which Company is required to be qualified, unless the failure to be so qualified would likely cause a Material Adverse Effect; (f) An opinion letter has been issued to Bank by the law firm for Company pertaining to this Agreement; (g) [A Blocked Account Agreement in favor of Agent for the Companys account at ____________ Bank]; (h) A Reaffirmation relating to this Borrower, in the form as attached hereto, from William F. Wright confirming the effectiveness of its Continuing Unconditional Guaranty dated September 30, 2004 after giving effect to this Borrower Addition Agreement; (i) [A Trademark Security Agreement that collaterally assigns to Agent all of Companys registered trademarks]; (j) (Intentionally Left Blank); and (k) Company has executed and delivered to Bank such other documents and instruments as Bank may reasonably deem necessary or appropriate in connection with the Company's status as a Borrower under the Loan Agreement and the Other Agreements, such documents and instruments to be in forms similar to documents and instruments executed by other Borrowers under the Loan Agreement and the Other Agreements. EXECUTED as of the date first set forth above, intending to be legally bound hereby. TRINITY SPRINGS, INC. By /s/ Michael D. James Title Asst. Secretary LASALLE BANK NATIONAL ASSOCIATION, a national banking association, as Agent and a Lender By /s/ Joseph G. Fudacz Title Senior Vice President Revolving Loan Commitment: $35,892,947.00 Term Loan A Commitment: $773,720.00 Term Loan B Commitment: $3,333,000.00 GOLD BANK, a Kansas state bank, as a Lender TRINITY SPRINGS, INC. By /s/ Mark Jannaman Title Vice President Revolving Loan Commitment: $17,947,053.00 Term Loan A Commitment: $386,280.00 Term Loan B Commitment $1,667,000.00 REAFFIRMATION Reference is hereby made to that certain Amended and Restated Loan and Security Agreement dated as of September 30, 2004, among AMCON Distributing Company, a Delaware corporation, (AMCON), The Beverage Group, Inc., a Delaware corporation, (Beverage Group), Hawaiian Natural Water Company, Inc., a Delaware corporation, (Hawaiian Natural), Chamberlin Natural Foods, Inc., a Florida corporation, (Chamberlin Natural), and Health Food Associates, Inc., an Oklahoma corporation, (Health Food) (AMCON, Beverage Group, Hawaiian Natural, Chamberlin Natural, and Health Food are each referred to as a Borrower and are collectively referred to as Borrowers) and LaSalle Bank National Association, a national banking association (in its individual capacity, LaSalle), as agent (in such capacity as agent, Agent) for itself, Gold Bank, a Kansas state bank, and all other lenders from time to time a party hereto (Lenders) (as amended or otherwise modified from time to time, the "Loan Agreement"). Each Borrower hereby acknowledges receipt of copies of (i) that certain Borrower Addition Agreement of even date herewith among Trinity Springs, Inc., a Delaware corporation ("Company"), Agent, Gold Bank and the Lenders (the "Borrower Addition Agreement") and (ii) all documents and instruments contemplated by the Borrower Addition Agreement. Each Borrower hereby reaffirms the validity of its Liabilities under the Loan Agreement. Each Borrower acknowledges and agrees that the Company shall hereafter be bound by as, and shall have the rights of, a Borrower under the terms and conditions of the Loan Agreement and each Other Agreement, as if it were a direct signatory thereto. Capitalized terms used herein without definition shall have the meaning ascribed to such terms in the Loan Agreement. This Reaffirmation has been executed by Borrower as of the 15th day of April, 2005. AMCON DISTRIBUTING COMPANY By /s/ Michael D. James Title Vice President / CFO THE BEVERAGE GROUP, INC. By /s/ Michael D. James Title Secretary HAWAIIAN NATURAL WATER COMPANY, INC. By Michael D. James Title Secretary CHAMBERLIN NATURAL FOODS, INC. By /s/ Michael D. James Title Secretary HEALTH FOOD ASSOCIATES, INC. By /s/ Michael D. James Title Secretary ACCEPTED AND AGREED TO AS OF THE DATE SET FORTH ABOVE LASALLE BANK NATIONAL ASSOCIATION, a national banking association, as Agent and a Lender By /s/ Joseph G. Fudacz Title Senior Vice President Revolving Loan Commitment: $35,892,947.00 Term Loan A Commitment: $773,720.00 Term Loan B Commitment: $3,333,000.00 GOLD BANK, a Kansas state bank, as a Lender By /s/ Mark Jannaman Title Vice President Revolving Loan Commitment: $17,947,053.00 Term Loan A Commitment: $386,280.00 Term Loan B Commitment $1,667,000.00 REAFFIRMATION of GUARANTOR Reference is hereby made to that certain Amended and Restated Loan and Security Agreement dated as of September 30, 2004, among AMCON Distributing Company, a Delaware corporation, (AMCON), The Beverage Group, Inc., a Delaware corporation, (Beverage Group), Hawaiian Natural Water Company, Inc., a Delaware corporation, (Hawaiian Natural), Chamberlin Natural Foods, Inc., a Florida corporation, (Chamberlin Natural), and Health Food Associates, Inc., an Oklahoma corporation, (Health Food) (AMCON, Beverage Group, Hawaiian Natural, Chamberlin Natural, and Health Food are each referred to as a Borrower and are collectively referred to as Borrowers) and LaSalle Bank National Association, a national banking association (in its individual capacity, LaSalle), as agent (in such capacity as agent, Agent) for itself, Gold Bank, a Kansas state bank, and all other lenders from time to time a party hereto (Lenders) (as amended or otherwise modified from time to time, the "Loan Agreement"). Further reference is made to that certain Continuing Unconditional Guaranty dated September 30, 2004 (as may have been amended or otherwise modified from time to time, each the Guaranty), executed by William F. Wright in favor of Agent and Lenders. The undersigned hereby acknowledges receipt of copies of (i) that certain Borrower Addition Agreement of even date herewith among Trinity Springs, Inc., Agent, Gold Bank and the Lenders (the "Borrower Addition Agreement") and (ii) all documents and instruments contemplated by the Borrower Addition Agreement. The undersigned hereby reaffirms the validity of its guaranty under the Guaranty executed by it in favor of Agent and Lenders. This Reaffirmation has been executed by the undersigned as of the 15th day of April, 2005. /s/ William F. Wright EX-10 3 ex103secondamendment.txt EXHIBIT 10.3 LASALLE SECOND AMENDMENT EXHIBIT 10.3 May 23, 2005 AMCON Distributing Company 7405 Irvington Road Omaha, Nebraska 68122 And The Beverage Group, Inc. 2 North Lake Avenue, Suite 910 Pasadena, California 91101 And Chamberlin Natural Foods, Inc. 430 North Orlando Avenue Winter Park, Florida 32789 And Hawaiian Natural Water Company, Inc. 98-746 Kuahao Place Pearl City, Hawaii 96782 And Health Food Associates, Inc. 7807 East 51st Street Tulsa, Oklahoma 74145 And Trinity Springs, Inc. 1101 West River Street Suite 370 Boise, Idaho 83702 RE: REVISED SECOND AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT Gentlemen: AMCON Distributing Company, a Delaware corporation, ("AMCON"), The Beverage Group, Inc., a Delaware corporation, ("Beverage Group"), Hawaiian Natural Water Company, Inc., an Oklahoma corporation, ("Hawaiian Natural"), Chamberlin Natural Foods, Inc., a Florida corporation, ("Chamberlin Natural"), and Health Food Associates, Inc., an Oklahoma corporation, ("Health Food") (AMCON, Beverage Group, Hawaiian Natural, Chamberlin Natural, and Health Food are each referred to as a "Borrower" and are collectively referred to as "Borrowers") and LaSalle Bank National Association, a national banking association (in its individual capacity, "LaSalle"), as agent (in such capacity as agent, "Agent") for itself, Gold Bank, a Kansas state bank, and all other lenders from time to time a party hereto ("Lenders"), have entered into that certain Amended and Restated Loan and Security Agreement dated September 30, 2004 (the "Security Agreement"). From time to time thereafter, Borrower, Agent and Lenders may have executed various amendments (each an "Amendment" and collectively the "Amendments") to the Security Agreement (the Security Agreement and the Amendments hereinafter are referred to, collectively, as the "Agreement"). Borrower, Agent and Lenders now desire to further amend the Agreement as provided herein, subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. The Agreement hereby is amended as follows: (a) Section 1 of the Agreement is hereby amended to add the following definition in its appropriate alphabetical order: "Control Agreement" shall mean an agreement among Agent, a Borrower and a financial institution with respect to a Lock Box, Lock Box Account or other Deposit Account, which agreement, among other things, acknowledges Agent's security interest in such account, provides that such financial institution has no right to setoff against account, and provides that such financial institution shall, following the occurrence of an Event of Default, wire, or otherwise transfer in immediately available funds to Agent in a manner satisfactory to Agent, funds deposited in such account on a daily basis as such funds are collected or as otherwise directed by Agent, without requiring any further consent from any Borrower or Borrower Representative. (b) Section 8 of the Agreement is hereby amended and restated in its entirety, as follows: 8. COLLECTIONS. (a) The Borrowers shall maintain one or more depository accounts with the Agent or at another financial institution acceptable to Agent (a "Local Depository Account"). Such financial institutions shall have executed a Control Agreement. With respect to each Borrower, until such time as Agent shall, in its sole discretion, after the occurrence of an Event of Default, notify such Borrower that Agent will require such Borrower to establish and maintain a Lock Box (as defined below) and Lock Box Account (as defined below), such Borrower shall collect and enforce all of its Accounts and shall retain the right to direct the disposition of the funds from any of the Borrowers accounts. All costs of enforcement and collection of such Borrower's Accounts shall be borne solely by such Borrower, whether the same are incurred by Agent or by such Borrower. (b) At such time as Agent shall require, following the occurrence of an Event of Default, each Borrower shall direct all of its Account Debtors to make all payments on the Accounts directly to a post office box (the "Lock Box") designated by, and under the exclusive control of, Agent, at a financial institution acceptable to Agent or as otherwise directed by Agent. Each Borrower shall establish an account (the "Lock Box Account") in Agent's name with a financial institution acceptable to Agent, into which all payments received in the Lock Box shall be deposited, and into which such Borrower will immediately deposit all payments received by such Borrower on Accounts in the identical form in which such payments were received, whether by cash or check. In addition, Agent may exercise its rights under the Control Agreements to direct all amounts received in such accounts to be sent on a daily basis directly to Agent or to the Lock Box Account. If a Borrower, any Affiliate or Subsidiary, any shareholder, officer, director, employee or agent of a Borrower or any Affiliate or Subsidiary, or any other Person acting for or in concert with such Borrower shall receive any monies, checks, notes, drafts or other payments relating to or as Proceeds of Accounts or other Collateral, such Borrower and each such Person shall receive all such items in trust for, and as the sole and exclusive property of, Agent and, immediately upon receipt thereof, shall remit the same (or cause the same to be remitted) in kind to the Lock Box Account. The financial institution with which the Lock Box Account is established shall acknowledge and agree, in a manner satisfactory to Agent, that such financial institution will follow the instructions of Agent with respect to disposition of funds in the Lock Box and Lock Box Account without further consent from Borrowers, that the amounts on deposit in such Lock Box and Lock Box Account are the sole and exclusive property of Agent, that such financial institution has no right to setoff against the Lock Box or Lock Box Account or against any other account maintained by such financial institution into which the contents of the Lock Box or Lock Box Account are transferred, and that such financial institution shall wire, or otherwise transfer in immediately available funds to Lender in a manner satisfactory to Agent, funds deposited in the Lock Box Account on a daily basis as such funds are collected. All checks, drafts, instruments and other items of payment or Proceeds of Collateral received by Agent shall be endorsed by the applicable Borrower to Agent, and, if that endorsement of any such item shall not be made for any reason, Agent is hereby irrevocably authorized to endorse the same on such Borrower's behalf. For the purpose of this section, each Borrower irrevocably hereby makes, constitutes and appoints Agent (and all Persons designated by Lender for that purpose) as such Borrower's true and lawful attorney and agent-in-fact (i) to endorse such Borrower's name upon said items of payment and/or Proceeds of Collateral and upon any Chattel Paper, Document, Instrument, invoice or similar document or agreement relating to any Account of such Borrower or Goods pertaining thereto; (ii) to take control in any manner of any item of payment or Proceeds thereof and (iii) to have access to any lock box or postal box into which any of such Borrower's mail is deposited, and open and process all mail addressed to such Borrower and deposited therein. Each Borrower agrees that, following the occurrence of an Event of Default, all payments made to such Lock Box Account or otherwise received by Agent, whether in respect of the Accounts or as Proceeds of other Collateral or otherwise, will be applied on account of the Liabilities in accordance with the terms of this Agreement. Each Borrower agrees to pay all fees, costs and expenses in connection with opening and maintaining the Local Depository Accounts and/or the Lock Box and Lock Box Account. All of such fees, costs and expenses if not paid by such Borrower, may be paid by Agent and in such event all amounts paid by Agent shall constitute Liabilities hereunder, shall be payable to Agent by Borrowers upon demand, and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder. (c) Agent may, at any time after the occurrence of an Event of Default, whether before or after notification to any Account Debtor and whether before or after the maturity of any of the Liabilities, (i) enforce collection of any of Borrowers' Accounts or other amounts owed to a Borrower by suit or otherwise; (ii) exercise all of such Borrower's rights and remedies with respect to proceedings brought to collect any Accounts or other amounts owed to such Borrower; (iii) surrender, release or exchange all or any part of any Accounts or other amounts owed to such Borrower, or compromise or extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder; (iv) sell or assign any Account of such Borrower or other amount owed to such Borrower upon such terms, for such amount and at such time or times as Agent deems advisable; (v) prepare, file and sign such Borrower's name on any proof of claim in bankruptcy or other similar document against any Account Debtor or other Person obligated to such Borrower; and (vi) do all other acts and things which are necessary, in Agent's sole discretion, to fulfill such Borrower's obligations under this Agreement and the Other Agreements and to allow Agent to collect the Accounts or other amounts owed to such Borrower. In addition to any other provision hereof, Agent may at any time, after the occurrence of an Event of Default, at Borrowers' expense, notify any parties obligated on any of the Accounts to make payment directly to Agent of any amounts due or to become due thereunder. (d) For purposes of calculating interest and fees, Agent shall, on the same Business Day after receipt by Agent at its office in Chicago, Illinois of (i) checks and (ii) cash or other immediately available funds from collections of items of payment and Proceeds of any Collateral, apply the whole or any part of such collections or Proceeds against the Liabilities in such order as Agent shall determine in its sole discretion. For purposes of determining the amount of Loans available for borrowing purposes, checks and cash or other immediately available funds from collections of items of payment and Proceeds of any Collateral shall be applied in whole or in part against the Liabilities, in such order as Agent shall determine in its sole discretion, on the day of receipt, subject to actual collection. (e) On a monthly basis, Agent shall deliver to Borrower Representative an account statement showing all Loans, charges and payments, which shall be deemed final, binding and conclusive upon Borrowers unless Borrower Representative notifies Agent in writing, specifying any error therein, within thirty (30) days of the date such account statement is sent to Borrower Representative and any such notice shall only constitute an objection to the items specifically identified. (c) Subsection 15(n) of the Agreement is hereby amended and restated in its entirety, as follows: (n) Material Adverse Change. Any material adverse change in the Collateral, business, property, assets, prospects, operations or condition, financial or otherwise of any Obligor, as determined by Requisite Lenders in their reasonable discretion or the occurrence of any event which, in Requisite Lenders' reasonable discretion, could have a Material Adverse Effect. (d) Subsection 4(c)(vi) of the Agreement is hereby amended in its entirety to add the following provisions: (vi) Transaction Fee: Borrower shall pay to Agent for its benefit a transaction fee of Two Thousand No/100 Dollars ($2,000.00) with respect to internal costs and expenses (in addition to any reimbursable out-of-pocket costs and expenses of Agent) related to this Second Amendment, which fee shall be fully earned by Agent on the date of this Second Amendment and payable on May 31, 2005. 2. This Amendment shall not become effective until fully executed by all parties hereto and until Lender is in receipt of an original First Amendment and related documents. 3. Except as expressly amended hereby and by any other supplemental documents or instruments executed by either party hereto in order to effectuate the transactions contemplated hereby, the Agreement thereto hereby is ratified and confirmed by the parties hereto and remain in full force and effect in accordance with the terms thereof. LASALLE BANK NATIONAL ASSOCIATION, a national banking association, as Agent and a Lender By /s/ Joseph G. Fudacz ----------------------- Title Senior Vice President ----------------------- Revolving Loan Commitment: $35,975,757.00 Term Loan A Commitment: $709,243.00 Term Loan B Commitment: $3,333,000.00 GOLD BANK, a Kansas state bank, as a Lender By /s/ Mark Jannaman ----------------------- Title Vice President ----------------------- Revolving Loan Commitment: $17,960,910.00 Term Loan A Commitment: $354,090.00 Term Loan B Commitment $1,667,000.00 ACKNOWLEDGED AND AGREED TO this 23rd day of May, 2005: AMCON DISTRIBUTING COMPANY By /s/ Michael D. James ----------------------- Title V.P. and Chief Financial Officer ----------------------- THE BEVERAGE GROUP, INC. By /s/ Michael D. James ----------------------- Title Secretary ----------------------- HAWAIIAN NATURAL WATER COMPANY, INC. By /s/ Michael D. James ----------------------- Title Secretary ----------------------- CHAMBERLIN NATURAL FOODS, INC. By /s/ Michael D. James ----------------------- Title Secretary ----------------------- HEALTH FOOD ASSOCIATES, INC. By /s/ Michael D. James ----------------------- Title Secretary ----------------------- TRINITY SPRINGS, INC. By /s/ Michael D. James ----------------------- Title Assistant Secretary ----------------------- Consented and agreed to by the following guarantor(s) of the obligations of AMCON DISTRIBUTING COMPANY, THE BEVERAGE GROUP, INC., HAWAIIAN NATURAL WATER COMPANY, INC., CHAMBERLIN NATURAL FOODS, INC., and HEALTH FOOD ASSOCIATES, INC. to LaSalle Bank National Association, as Agent. /s/ William F. Wright - ----------------------- Wiliam F. Wright Date: May 23, 2005 EX-10 4 ex108compensation.txt EXHIBIT 10.8 DIRECTORS AND OFFICER COMPENSATION EXHIBIT 10.8 DIRECTOR AND OFFICER COMPENSATION COMPENSATION OF DIRECTORS. Directors who are not employees of the Company are paid according to the following annual scale with no payment of meeting fees: Audit Committee Chair $40,000 Audit Committee Member $35,000 Nominating Committee Chair $35,000 All Other Outside Directors $30,000 In addition, all directors are reimbursed for out of pocket expenses related to attending board and committee meetings. Non-employee directors are eligible to receive awards of nonqualified stock options which entitle them to purchase shares of our common stock at an exercise price equal to the fair market value of the stock on the date of grant. Such option grants are recommended on an annual basis by the Compensation Committee, subject to approval by the Board of Directors. These stock options also have varying vesting schedules ranging up to five years and expire ten years after the date of grant. During fiscal year 2005, no stock options have been issued to directors. NAMED EXECUTIVE OFFICERS COMPENSATION COMPONENTS AND PROCESS. Executive officer compensation generally contains three principal components: (i) a base salary; (ii) a cash bonus; and (iii) grants of options to purchase common stock. Mr. Wright's and Ms. Evans' base salaries are also set forth in their employment agreements. Mr. Wright, Ms. Evans and Mr. Hoppner are subject to annual increases as recommended by the Compensation Committee to the Board of Directors. The base salaries of other officers are determined as a function of their prior base salaries and their supervisors view of specific performance criteria. In general, the Compensation Committee has determined that the base salaries paid to the Company's executive officers have fallen within the median range of base salaries paid by comparable companies. The process utilized by the Committee in determining executive officer compensation levels for all of these components is based upon the Committee's judgment and takes into account objective qualitative and quantitative factors. The Compensation Committee has approved an executive compensation plan which established performance goals and criteria relating to the amounts of cash bonuses to be paid to its executive officers in future years. In past years, under the 1994 Stock Option Plan, the Compensation Committee had granted stock options to executives who met performance criteria on a discretionary basis. The 1994 Stock Option Plan expired on June 1, 2004, and the Company has not adopted a replacement plan. The bonus portion of Mr. Wright's, Ms. Evans's and Mr. Hoppner's compensation is paid based upon the performance goals established by management and approved by the Compensation Committee and the Board of Directors up to 50% of the named executive's salary. In addition to bonuses paid in accordance with the executive compensation plan, the Compensation Committee may recommend additional bonus amounts on a discretionary basis if deemed appropriate. The bonus portion of Mr. James' and Mr. Hinkefent's compensation is determined on a discretionary basis upon their supervisor's assessment of their individual performance and the overall performance of the Company during the most recently completed fiscal year with respect to stockholder value, stock price, sales growth and net income up to 50% of the named executive's salary. In general, the practice has been to award cash bonuses to the executive officers with respect to a particular fiscal year in amounts consistent with cash bonuses awarded in prior fiscal years as long as the Company achieves established financial and performance goals. The following table represents the named executive officers' current base compensation: Executive Officer Position Fiscal 2005 Salary - ------------------- -------------- ------------------ William F. Wright Chairman $435,000 Kathleen M. Evans President $342,000 William R. Hoppner Sr. Vice President $210,000 Michael D. James Secretary, Treasurer and $172,500 Chief Financial Officer Eric. J. Hinkefent President of Health Food $150,000 Associates, Inc. and Chamberlin Natural Foods, Inc. BENEFIT PLANS AND OTHER ARRANGEMENTS Each of the named executives is eligible to participate in the Company's broad-based benefit programs generally available to its salaried employees, including the 401(k) plan; and health, disability and life insurance programs. In addition, Mr. Wright, Ms. Evans, and Mr. Hinkefent receive monthly auto allowances of $2,000, $1,000, and $1,000, respectively. The Company also leases a company vehicle on behalf of Ms. Evans and pays life insurance premiums totaling approximately $40,000 annually on behalf of Mr. Wright." EX-31 5 ex311wfw.txt EXHIBIT 31.1 WFW CERTIFICATION EXHIBIT 31.1 ------------ CERTIFICATION I, William F. Wright, certify that: 1. I have reviewed this quarterly report on Form 10-Q of AMCON Distributing Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 27, 2005 William F. Wright, Chairman and ----------------- ------------------------------- Principal Executive Officer --------------------------- EX-31 6 ex312mdj.txt EXHIBIT 31.2 MDJ CERTIFICATION EXHIBIT 31.2 ------------ CERTIFICATION I, Michael D. James, certify that: 1. I have reviewed this quarterly report on Form 10-Q of AMCON Distributing Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 27, 2005 Michael D James ----------------- --------------- Vice President and Chief ------------------------ Financial Officer ----------------- EX-32 7 ex321wfw.txt EXHIBIT 32.1 WFW CERTIFICATION EXHIBIT 32.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Quarterly Report on Form 10-Q (the "Report") of AMCON Distributing Company (the "Company") for the fiscal quarter ended March 31, 2005, I, William F. Wright, Chairman and Principal Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that: (1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 27, 2005 /s/ William F. Wright ------------------------- Title: Chairman and Principal Executive Officer EX-32 8 ex322mdj.txt EXHIBIT 32.2 MDJ CERTIFICATION EXHIBIT 32.2 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Quarterly Report on Form 10-Q (the "Report") of AMCON Distributing Company (the "Company") for the fiscal quarter ended March 31, 2005, I, Michael D. James, Vice President and Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that: (1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 27, 2005 /s/ Michael D. James ------------------------- Title: Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----