-----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, HRq401kn5hcftBwFhwJ8WTBS45gFqLOgPG7EBwJfV70Ex7+3tqiS0SJnngx2LeC/ htAUVoylepwdMK7oAPj7bA== 0000928465-05-000058.txt : 20050822 0000928465-05-000058.hdr.sgml : 20050822 20050822172304 ACCESSION NUMBER: 0000928465-05-000058 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040924 FILED AS OF DATE: 20050822 DATE AS OF CHANGE: 20050822 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-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-15589 FILM NUMBER: 051041881 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-K/A 1 sec10ka2004.txt FISCAL 2004 FORM 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (Amendment No. 1) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED September 24, 2004 ------------------ / / TRANSITION REPORT PURSUANT TO SECTION 13 OF 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 47-0702918 - ------------------------------ -------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 7405 Irvington Road, Omaha NE 68122 - ----------------------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (402) 331-3727 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None None ---- ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value - ----------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any other amendment to this Form 10-K. /X/ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ---- ---- The aggregate market value of equity securities held by non-affiliates of the Registrant on March 25, 2004 was approximately $6.9 million. As of December 31, 2004 there were 527,062 shares of common stock outstanding. - Documents Incorporated by Reference - --------------------------------------- Portions of the Company's 2004 Annual Report to Shareholders, as amended are incorporated herein by reference into Parts I, II and IV. Portions of the Company's Proxy Statement pertaining to the 2005 Annual Shareholders' Meeting are incorporated herein by reference into Part III. 1 AMCON DISTRIBUTING COMPANY ---------------------------- 2004 FORM 10-K/A ANNUAL REPORT ---------------------------- Table of Contents ---------------------------- Page ---- PART I Item 1. Business...................................................... 5 Item 2. Properties.................................................... 15 Item 3. Legal Proceedings............................................. 16 Item 4. Submission of Matters to a Vote of Security Holders........... 17 Item 4A. Executive Officers of the Company............................. 17 PART II Item 5. Market for the Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities. 18 Item 6. Selected Financial Data....................................... 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 19 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 19 Item 8. Financial Statements and Supplementary Data................... 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................... 19 Item 9A. Controls and Procedures....................................... 19 Item 9B. Other Information............................................. 20 PART III Item 10. Directors and Executive Officers of the Registrant............ 20 Item 11. Executive Compensation........................................ 21 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 21 Item 13. Certain Relationships and Related Transactions................ 21 Item 14. Principal Accountant Fees and Services........................ 21 2 PART IV Item 15. Exhibits and Financial Statement Schedules.................... 22 3 EXPLANATORY NOTE Subsequent to the issuance of the Company's 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 sheet as of September 24, 2004 to reflect (i) a correction to the classification of Series A Preferred Stock from permanent equity to mezzanine financing, and (ii) a correction to the classification of its revolving credit facility from long-term to short-term debt. Management and the Company's Audit Committee also determined that the provision for nonoperating asset impairment which was reported as a component of "Other income, net" for the year ended September 26, 2003 should be corrected and reclassified as a component of operating expenses under the title "Impairment charges." The statement of operations for fiscal 2003 has been restated to reflect this change. In accordance with Emerging Issue Task Force ("EITF") Topic No. D-98, "Classification and Measurement of Redeemable Securities", 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 Company's Certificate of Designations creating the Series A Preferred Stock contains provisions that give the holders the optional right to redeem such stock if either there is a change of control (as defined in the Certificate of Designations) or the Wright Family (as defined in the Certificate of Designations 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 are represented 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. 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 an agreement that includes both a subjective acceleration clause and a lock-box arrangement to be classified as short-term indebtedness. Because the Company's agreement contains both of these features, the borrowings have been restated to be classified as short-term for September 2004 and 2003. The lending banks and the Company amended the revolving loan agreement after the Company's second fiscal quarter of 2005 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 only in the instance of an event of default. EITF 92- 22, nevertheless, requires the correction to the classification of the revolving credit facility for reports filed prior to such amendment to the revolving loan agreement. These restatements do not impact amounts already reported as sales, net income (loss) available to common shareholders or earnings (loss) per share, nor will it result in a default under any provisions in the credit agreement. In addition, in March 2005, the Company discontinued the operations of its beverage marketing and distribution business. As a result, the balance sheets as of September 24, 2004 and September 26, 2003 and the statements of 4 operations and statements of cash flows for the fiscal years ended September 24, 2004 and September 26, 2003 have been prepared reflecting this disposition as discontinued operations in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." The beverage marketing and distribution business was started in fiscal 2003, so there is no change to the fiscal 2002 amounts. This amendment is being filed to restate the September 24, 2004 Consolidated Balance Sheets and the Fiscal 2003 Consolidated Statement of Operations and effect the discontinued operations subsequent event discussed in Notes 22 and 19, respectively, to the Consolidated Financial Statements. Except for Items 1 and 2 of Part I, Item 9A of Part II and Item 15 of Part IV and the associated certifications, no other information included in the original reports on Form 10-K is amended by this Form 10-K/A. PART I ITEM 1. BUSINESS GENERAL AMCON Distributing Company ("AMCON" or the "Company") was incorporated in Delaware in 1986. The Company's principal executive offices are located at 7405 Irvington Road, Omaha, Nebraska 68122. The telephone number at that address is 402-331-3727 and the website address is www.amcon.com. The Company makes available free of charge on its website, its reports on Forms 10-K and 10-Q, including amendments thereto, as soon as reasonably practicable after filing with the SEC. AMCON is primarily engaged in the wholesale distribution of consumer products including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products and health and beauty care products. In addition, the Company operates thirteen retail health food stores in Florida and the Midwest and a non-alcoholic beverage business that includes a natural spring and a geothermal water bottling operations in the States of Hawaii and Idaho. As used herein, unless the context indicates otherwise, the term "ADC" means the wholesale distribution business and "AMCON" or the "Company" means AMCON Distributing Company and its subsidiaries. WHOLESALE DISTRIBUTION BUSINESS ADC serves approximately 6,500 retail outlets in the Great Plains and Rocky Mountain regions, the largest of which accounted for less than 7.0% of AMCON's total revenues during fiscal 2004. Convenience Store News, a trade periodical, ranked ADC as the ninth (9th) largest distributor in its industry out of approximately 1,000 distributors in the United States based upon fiscal 2003 sales volume. From its inception, ADC has pursued a strategy of growth through increased sales and acquisitions. Since 1993, ADC has focused on increasing operating efficiency in its distribution business by merging smaller branch distribution facilities into larger ones. In addition, ADC has grown through expansion of its market area into contiguous regions and by introduction of new product lines to customers. ADC distributes approximately 13,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and 5 chilled products and institutional food service products. While cigarettes accounted for approximately 73% of the Company's sales volume during fiscal 2004, ADC continues to diversify its businesses and product lines in an attempt to lessen its dependence upon cigarette sales. ADC's principal suppliers include Philip Morris USA, RJ Reynolds Tobacco, Proctor & Gamble, Hershey, Mars, William Wrigley and Nabisco. ADC also markets private label lines of cigarettes, tobacco, snuff, water, candy products, batteries and film. ADC has sought to increase sales to convenience stores and petroleum marketers by adopting a number of operating strategies which it believes gives it a competitive advantage with these types of retailers. One key operating strategy is a commitment to customer service. In a continuing effort to provide better service than its competitors, ADC offers a complete point-of-sale (POS) program to assist with customer image building and product promotions, health and beauty programs, profit building private label programs and custom food service programs, all of which have proven to be advantageous to convenience store customers. ADC has a policy of next-day delivery and employs a concept of selling products in cut-case quantities or "by the each" (i.e. individual units). ADC also offers planograms to convenience store customers to assist in the design of their store and display of products within the store. In addition, customers are able to use ADC's web site to manage their inventory and retail prices, as well as obtain periodic velocity management reports. ADC has worked to improve its operating efficiency by investing in the latest systems technology, including computerization of buying and financial control functions. Due to the significant price of cigarettes, inventory management has become even more critical. ADC has also sought to reduce inventory costs by improving the number of times its inventory is renewed during a period ("inventory turns") for the same level of sales. Inventory turned 27.8 times in fiscal year 2004. Inventory turns for the past five years are as follows: Fiscal Times Year Inventory Turned ------ ---------------- 2004 27.8 2003 27.5 2002 28.5 2001 26.8 2000 25.4 By managing its operating costs, ADC is better able to price its products in such a manner to achieve an advantage over less efficient distributors in its market areas. ADC's main office is in Omaha, Nebraska. ADC has six distribution centers located in Illinois, Missouri, Nebraska, North Dakota, South Dakota, and Wyoming. These distribution centers contain a total of approximately 495,000 square feet of floor space and employ modern equipment for the efficient distribution of the large and diverse product mix. ADC also operates a fleet of approximately 227 delivery vehicles, including straight trucks and over-the-road vehicles with refrigerated trailers. 6 RETAIL HEALTH FOOD BUSINESS AMCON's retail health food stores, which are operated as Chamberlin's Market & Cafe ("Chamberlin's" or "CNF") and Akin's Natural Foods Market ("Akin's" or "ANF"), offer over 35,000 different product selections for their customers. Chamberlin's, which was first established in 1935, is an award-winning and highly-acclaimed chain of six health and natural product retail stores, all offering an extensive selection of natural supplements and herbs, baked goods, dairy products, delicatessen items and organic produce. Chamberlin's operates all of its stores in and around Orlando, Florida. Akin's, also established in 1935, is also an award winning chain of seven health and natural product retail stores, each offering an extensive line of natural supplements and herbs, dairy products, delicatessen items and organic produce. Akin's has locations in Tulsa (2 stores) and Oklahoma City (2 stores), Oklahoma; Lincoln, Nebraska; Springfield, Missouri; and Topeka, Kansas. Management is currently evaluating the possibility of adding at least one new store in fiscal 2005. AMCON's retail health food stores are managed collectively through a main office in Tulsa, OK, but utilize the name recognition of the established health food retail chains that were acquired. The Company endeavors to maintain the local identity of each chain while providing a means to achieve operating synergies leading to cost savings through centralized management of operations. BEVERAGE BUSINESS AMCON's beverage business consists of Hawaiian Natural Water Company, Inc. ("HNWC") and Trinity Springs, Inc. ("TSI"). HNWC, which is headquartered in Pearl City, HI, was formed in 1994 for the purpose of bottling, marketing and distributing Hawaiian natural spring water in Hawaii, the mainland and foreign markets. HNWC's Hawaiian Springs/R/ brand is the only bottled "natural" spring water available from Hawaii. All other bottled waters produced in Hawaii contain "purified" water, from which chemicals and minerals have been removed by means of reverse osmosis filtration. HNWC draws its Hawaiian Springs water from an artesian well located at the base of the Mauna Loa mountain in Kea'au (near Hilo) on the big island of Hawaii. The water is "bottled at the source" in polyethylene terepthalate ("PET") plastic bottles, which are produced from pre-forms at HNWC's bottling facility. All of HNWC's retail PET products are bottled at its facility in Kea'au, HI. These products consist of the Hawaiian Springs natural spring water line and various limited production co-packaged products. In July 2004, HNWC acquired the business and operating assets of Nesco Hawaii, a small established purified water bottler on the island of Oahu. This acquisition enables HNWC to more effectively differentiate the premium natural spring water from purified bottled water products in the market place and provides a more competitive price point in which to provide private label water to the island of Oahu. TSI, purchased in June 2004, produces and sells a bottled natural mineral supplement and geothermal bottled water under the Trinity/R/ label. The Trinity brands are bottled at the source from one of the world's deepest and purest sources at the base of the Trinity Mountains in Idaho at a place called Paradise. The Trinity source flows to the surface of the earth 7 through crystal-lined granite faults by means of geothermal pressure, and reaches the surface at 138 degrees Fahrenheit. TSI is headquartered in Boise, ID and markets and distributes the Trinity products on a national level primarily to the retail health food market. TSI plans to develop its market to include mainstream grocery stores and mass merchandise stores. ACQUISITIONS Since 1981, the Company has acquired twenty-four consumer product distributors in the Great Plains, Rocky Mountain and Southern regions of the United States. In addition, the Company has acquired two retail health food store chains and two water bottling operations. HAWAIIAN NATURAL WATER COMPANY. On December 17, 2001 the Company completed a merger with HNWC, pursuant to which HNWC merged with and into, and thereby became, a wholly-owned subsidiary of AMCON Distributing Company. The merger consideration valued the entire common equity interest in HNWC at approximately $2.9 million, which was paid in cash of $0.8 million during fiscal 2001 and in common stock of the Company valued at $2.1 million. As a result, the Company issued 62,260 shares of its common stock to outside HNWC shareholders, representing 12.0% of the Company's outstanding shares after giving effect to the merger. HNWC option holders and warrant holders also received comparable options and warrants of the Company, but with the exercise price and number of shares covered thereby being adjusted to reflect the exchange ratio. TRINITY SPRINGS, INC. On June 17, 2004, a newly formed subsidiary of AMCON, TSL Acquisition Corp. (which subsequently changed its name to Trinity Springs, Inc.) acquired the tradename, water source, customer list and substantially all of the operating assets of Trinity Springs, Ltd. (which subsequently changed its name to Crystal Paradise Holdings, Inc.). The Seller was headquartered in Sun Valley/Ketchum, Idaho, and once bottled and sold a geothermal bottled water and a natural mineral supplement. 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 Trinity Springs, Inc. (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 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 8 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 estimated fair values. 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 $5.5 million. 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. At this stage, the purchase price allocation remains preliminary and is subject to completion of an independent appraisal. The Company has engaged an independent valuation firm to value the intangible assets and it is expected that a final report will be completed by the end of the second quarter, at which time any differences between the preliminary purchase price allocation will be recorded. The Company has determined that it has acquired a unique water source as part of the transaction which represents an intangible asset and the Company has assigned a preliminary value of $2.8 million to this intangible asset. Additionally, the Company has acquired the Trinity tradename and has assigned a preliminary value of $2.3 million to this intangible asset. Upon completion of the independent valuation, the amount assigned to the water source and/or the Trinity tradename could be different and any residual amount would then be assigned to goodwill. Since both the water source and the Trinity tradename have indefinite lives, as does any goodwill, the assets are not amortized. Therefore, any change resulting from completion of the independent valuation in the allocation of purchase price from water source or tradename to goodwill would not have any impact on operating income. Additionally, the Company has assigned a preliminary value of $0.4 million to a customer list which will be amortized over a five year period. 9 NESCO HAWAII. On July 1, 2004, the Company's water bottling subsidiary in Hawaii entered into an agreement to acquire certain water bottling assets and liabilities from a water bottling company in Hawaii (Nesco Hawaii) for $0.5 million in cash, and $0.7 million in notes and the assumption of $0.1 million of liabilities. The 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 portion of the purchase price in excess of the estimated fair value of the net assets acquired to be allocated to identifiable intangible assets is approximately $0.7 million. The identifiable intangible assets consists of tradenames and a customer list. The tradenames have indefinite lives and therefore are not amortized. The customer list of $0.2 million is amortized over a five year period. The remaining portion of the excess purchase price allocated to goodwill was $0.4 million. 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 remaining 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. This transaction has been retroactively reflected as discontinued operations in the consolidated 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. The disposition is further described under footnote 19 "Restatement of Previously Issued Financial Statements" on page F-38 of the amended 2004 Annual Report to Shareholders and is incorporated herein by reference. 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, marketing and distribution of bottled water and other beverage products. The results of the retail health food stores are included in the retail segment due to similar economic characteristics, as well as similar characteristics with respect to the nature of products sold, the type and class of customers for the health food products and the methods used to sell the products. The results of HNWC and TSI (which was acquired in June 2004) comprise the beverage segment due to their unique economic characteristics and the nature of the products, as well as the methods used to sell and 10 distribute the products. The segments are evaluated on revenues, gross margins, operating income (loss) and income (loss) before taxes. The information required by this item is incorporated by reference from the Company's Annual Report to Shareholders, as amended, for the fiscal year ended September 24, 2004 under footnote 21 "Business Segments." PRINCIPAL PRODUCTS CIGARETTES. Sales of cigarettes and the gross margin derived therefrom for the fiscal years ending 2004, 2003 and, 2002 are set forth below (dollars in millions): Fiscal Year Ended ------------------------------ 2004 2003 2002 ------ ------ ------ Sales $597.3 $564.8 $640.4 Sales as a % of Total Sales 72.7% 73.2% 75.6% Gross Margin $ 19.4 $ 22.5 $ 24.4 Gross Margin as a % of Total Gross Margin 32.6% 37.4% 39.5% Gross Margin Percentage 3.3% 4.0% 3.8% Revenues from the sale of cigarettes during fiscal 2004 increased by 5.6% as compared to fiscal 2003, while gross profit from the sale of cigarettes decreased by 3.2% during the same period (see "MANAGEMENT'S DISCUSSION AND ANALYSIS-Results of Operations-Fiscal Year Ended 2004 Versus Year Ended 2003" in the Annual Report to Shareholders for the Fiscal Year Ended September 24, 2004, as amended, which is incorporated herein by reference). Sales of cigarettes represented approximately 72.7% of the Company's sales volume during fiscal 2004. This represents a 0.5% decrease but is primarily because the Company continues to diversify its product offerings and sales. Cigarette carton volumes increased 7.5% and the Company had benefits from price increases implemented in response to the elimination of vendor program incentives during the year. These increases were offset by a decrease in cigarette prices on Philip Morris and a permanent decrease on RJ Reynolds (successor in merger to Brown & Williamson) brands beginning in the second quarter of 2003. Although the Philip Morris price reduction program was communicated as a temporary reduction, Philip Morris has extended the program through January 2005 and could extend it further. Both companies, however, did increase prices of certain cigarette brands in December 2004 by as much as $1.00 per carton. ADC markets its own private label cigarettes as an alternative to premium cigarettes. However, significant manufacturers' price decreases in premium brand cigarettes, aimed at recapturing market share, occurred in 1993 and caused a steady decline in the sales of private label cigarettes since that time. Sales of ADC's private label cigarettes have declined an average of 34% annually since 1993. Philip Morris USA manufactures ADC's private label cigarettes under an exclusive agreement that ends on December 31, 2004, with two one-year renewal options. The terms of the agreement are such that sales of the Company's private label cigarettes no longer represent a significant source of gross profit for the Company. 11 CONFECTIONERY. Candy, related confectionery items and snacks constitute the Company's second largest-selling product line, representing approximately 6.8% of the Company's total sales volume during fiscal 2004. Sales of confectionery items and the gross margin derived therefrom for the fiscal years ending 2004, 2003, and 2002 are set forth below (dollars in millions): Fiscal Year Ended ------------------------------ 2004 2003 2002 ------ ------ ------ Sales $ 55.6 $ 51.4 $ 52.6 Gross Margin 7.3 6.4 6.1 Gross Margin Percentage 13.1% 12.5% 11.5% AMCON supplies customers with over 1,900 different types of candy and related products, including chocolate bars, cookies, chewing gum, nuts and other snack items. Major brand names include products manufactured by Hershey (Reese's, Kit Kat, and Hershey), Mars (Snickers, M&M's, and Milky Way), William Wrigley and Nabisco. The Company also markets its own private label candy under a manufacturing agreement with Palmer Candy Company. OTHER TOBACCO PRODUCTS. Sales of other tobacco products (cigars, snuff, chewing tobacco, etc.) represents AMCON's third largest-selling product line, representing approximately 6.6% of the Company's total sales volume during fiscal 2004. Sales of other tobacco products and the gross margin derived therefrom for the fiscal years ending 2004, 2003 and 2002 are set forth below (dollars in millions): Fiscal Year Ended ------------------------------ 2004 2003 2002 ------ ------ ------ Sales $ 54.2 $ 48.3 $ 46.7 Gross Margin 4.7 4.0 3.7 Gross Margin Percentage 8.6% 8.3% 7.9% NATURAL FOODS AND RELATED PRODUCTS. Natural foods and related products, which are primarily sold by the retail segment, constitute the Company's fourth largest-selling product line, representing approximately 3.9% of the Company's total sales volume during fiscal 2004. Sales of natural foods and related products and the gross margin derived therefrom for the fiscal years ending 2004, 2003 and 2002 are set forth below (dollars in millions): Fiscal Year Ended ------------------------------ 2004 2003 2002 ------ ------ ------ Sales $ 32.4 $ 33.1 $ 31.6 Gross Margin 13.0 13.2 13.2 Gross Margin Percentage 40.0% 39.8% 41.7% 12 OTHER PRODUCT LINES. Over the past decade, AMCON's strategy has been to expand its portfolio of consumer products in order to better serve its customer base. AMCON's other product lines include bottled water and other beverages, groceries, paper products, health and beauty care products, frozen and chilled products and institutional food products. During fiscal 2004, AMCON's sales of other products increased $8.0 million or 10.8% due primarily to new customers in the wholesale distribution segment and an increase in the beverage segment's sales of bottled water. During fiscal 2004, the gross profit margin on these types of products was 15.1% compared to 18.9% for fiscal 2003. COMPETITION The distribution industry is highly competitive. There are many similar distribution companies operating in the same geographical regions as ADC. ADC is one of the largest distribution companies of its kind operating in its market area. ADC's principal competitors are national wholesalers such as McLane Co., Inc. (Temple, TX) and Core-Mark International (San Francisco, CA) and regional wholesalers such as Eby-Brown LLP (Chicago, IL) and Farner-Bocken (Carroll, IA), along with a host of smaller grocery and tobacco wholesalers. Most of these competitors generally offer a wide range of products at prices comparable to ADC's. ADC seeks to distinguish itself from its competitors by offering a higher level of technology than its smaller competitors and a higher level of customer service than its larger competitors. The natural food retail industry is highly fragmented, with more than 9,000 stores operating independently or as part of small chains. The two leading natural food chains, Whole Foods Market and Wild Oats, continue to expand their geographic markets by opening stores in new markets. In addition, conventional supermarkets and mass market outlets are also increasing their emphasis on the sale of natural products. These strategies have contributed to the saturation of health food retail stores in some markets. This has increased competition in the health food sector and has had a restraining impact on same store sales increases in some markets and a slight reduction in same store sales in other markets. The bottled water market is highly competitive, with numerous participants selling products often perceived as generic by consumers. The principal bases of competition in the industry are brand recognition, price, water source for bottled water products, and packaging. Price competition has become more pronounced as the industry has matured. The Company seeks to develop recognition for its brands by differentiating its products from more recognized products in the brand category. The Hawaiian Springs and Trinity brands of water are unique because of their water source. HNWC is the only producer of natural spring water from Hawaii. Most other popular brands, such as Aquafina/R/, Dasani/R/, Crystal Geyser/R/, and Arrowhead/R/ are all bottled on the mainland and sell "purified" municipal water, not "natural" or "spring" water. HNWC generally prices this product at or slightly below the price for other premium brands. HNWC's purchase of Nesco Hawaii has allowed HNWC to more effectively differentiate the premium natural spring water from the purified bottled water products and services at more competitive price points in which to provide private label water to the island of Oahu. The Trinity geothermal water and natural mineral supplement are sold primarily in health food stores and the Company plans to extend distribution channels outside the health food market. 13 SEASONALITY Sales in the wholesale distribution and beverage segments are somewhat seasonal by nature and tend to be higher in warm weather months, which generally fall within the Company's third and fourth quarters. GOVERNMENT REGULATION Various state government agencies regulate the distribution of cigarettes and tobacco products in several ways, including the imposition of excise taxes, licensing and bonding requirements. Complying with these regulations is a very time-consuming, expensive and labor-intensive undertaking. For example, each state (as well as certain cities and counties) requires the Company to collect excise taxes ranging from $1.70 to $9.80 ($17.00 beginning January 1, 2005) per carton on all cigarettes sold by it in the state. Such excise taxes must be paid in advance and, in most states, is evidenced by a stamp which must be affixed to each package of cigarettes. A number of states increased their excise tax on cigarettes in recent years, and more are expected to do so in the future. For example, Colorado, Montana and Oklahoma all have excise tax increases scheduled to go into effect on January 1, 2005. The increases range from $4.40 to $10.00 per carton. The Company is also subject to regulation by state and local health departments, the U.S. Department of Agriculture, the Food and Drug Administration, U.S. Department of Transportation and the Drug Enforcement Agency. These agencies generally impose standards for product quality and sanitation, as well as, for security and distribution policies. The bottled water industry is regulated both in the United States and abroad. Various state and Federal regulations, designed to ensure (but not guarantee) the quality of the product and the truthfulness of its marketing claims, require HNWC and TSI to monitor each aspect of its production process, including its water source, bottling operations and packaging and labeling practices. The Environmental Protection Agency requires a yearly analysis of the water sources by a certified laboratory with respect to a comprehensive list of contaminants (including herbicides, pesticides, volatile chemicals and trace metals). In addition, the State Department of Health for Hawaii and Idaho require weekly microbiological testing of the source water. Both HNWC's and TSI's bottling facilities have on-site laboratories, where samples of finished product are visually and chemically tested daily. Both facilities utilize independent state certified laboratories to test samples from each production run. In addition, the production lines are subject to constant visual inspection. The Company believes that it meets or exceeds all applicable regulatory standards concerning the quality of its bottled water. In addition to U.S. regulations, HNWC must meet the requirements of foreign regulatory agencies in order to export and sell its product into other countries. These requirements are generally similar to, and in certain respects more stringent than, U.S. regulations. HNWC believes that it is in compliance with applicable regulations in all foreign territories where it currently markets its product. 14 Failure to meet applicable regulations in the U.S. or foreign markets could lead to costly recalls or loss of certification to market products. Even in the absence of governmental action, loss of revenue could result from adverse market reaction to negative publicity. ENVIRONMENTAL MATTERS The Company believes that all of its real property is in compliance with all regulations regarding the discharge of toxic substances into the environment and is not aware of any condition at its properties that could have a material adverse effect on its financial condition or results of operations. In that regard, the Company has not been notified by any governmental authority of any potential liability or other claim in connection with any of its properties. EMPLOYEES At fiscal year end 2004, the Company had 976 full-time and part-time employees in the following areas: Managerial 52 Administrative 93 Delivery 114 Sales & Marketing 381 Warehouse 336 ----- Total Employees 976 ===== All of ADC's delivery employees in the Quincy distribution center, representing 36% of ADC's delivery employees company-wide, are represented by the International Association of Machinists and Aerospace Workers. Management believes its relations with its employees are generally good. ITEM 2. PROPERTIES The location and approximate square footage of the six distribution centers, thirteen retail stores, water bottling and packaging plants and sales and marketing offices operated by AMCON as of fiscal year end 2004 are set forth below: Location Square Feet -------- ----------- Distribution - IL, MO, ND, NE, SD & WY 494,600 Retail - FL, KS, MO, NE & OK 134,600 Beverage - HI & ID 70,500 ------- Total Square Footage 699,700 ======= AMCON owns its distribution facilities in Quincy, Illinois and Bismarck, North Dakota. These facilities are subject to a first mortgage securing borrowings under the Company's mortgage loan and a second mortgage securing future payments owed in connection with the Merchants Wholesale acquisition that occurred in fiscal 2001 (see "MANAGEMENT'S DISCUSSION AND ANALYSIS- Liquidity and Capital Resources" in the Annual Report to Shareholders, as 15 reference). In addition, AMCON owns a water bottling plant, real estate and a lodge in Paradise, Idaho that are subject to the mortgage between AMCON and Trinity Springs, Ltd. which is shared on an equal basis with one of the Company's directors who extended loans to Trinity Springs, Inc. in December 2004. AMCON leases its remaining distribution and warehouse facilities, retail stores, water bottling plant, offices, and certain equipment under noncancellable operating and capital leases. Leases for the four distribution facilities, thirteen retail stores, warehouse in Idaho and water bottling and packaging plant in Hawaii leased by the Company have base terms expiring from 2004 to 2052. Minimum future lease commitments for these properties and equipment total approximately $22.0 million as of fiscal year end 2004. In December 2004, the Company purchased and began construction of an addition to a distribution facility in Rapid City, SD to replace its current facility when the lease expires. The new facility will increase square footage by 14,000 square feet and provides space for a more efficient distribution operation. AMCON also has future lease obligations for a facility and equipment related to the discontinued operations of its former health food distribution business. The Company estimated its ultimate liabilities related to these leases and recorded a charge to earnings during the second quarter of fiscal 2001. The Company negotiated a termination settlement during fiscal 2002 on its former Arizona facility and entered into a sublease agreement on the remaining facility in Florida. The sub-tenant of the Florida facility was in default as of fiscal year end 2003 and the Company evicted the sub-tenant. The Company incurred approximately $0.1 million of expenses associated with the facility during fiscal 2004. The Company entered into a sublease agreement with a new sub-tenant prior to the end of fiscal 2004 and therefore, expects there will be no further expenditures incurred on the Florida facility. Accordingly, no amount related to the lease obligation has been recorded in the reserve for discontinued operations. Any differences between these expense estimates and their actual settlement will change the loss accordingly. Management believes that its existing and contracted new facilities are adequate for the Company's present level of operations; however, larger facilities and additional cross-dock facilities and retail stores may be required to accommodate the Company's anticipated growth in certain market areas. ITEM 3. LEGAL PROCEEDINGS 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. 16 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 receive 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. On the basis of advice from trial counsel, 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. 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 considering amounts already recorded in the Company's consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of fiscal year 2004. ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY The Company's day-to-day affairs are managed by its executive officers, who are appointed by the Board of Directors for terms of one year. The Company has entered into employment agreements with Mr. Wright and Ms. Evans each with a term expiring on December 31, 2005. These executive officers are as follows: Name Age Position ---- --- -------- William F. Wright 62 Chairman of the Board, Director Kathleen M. Evans 57 President, Director William R. Hoppner 54 Senior Vice President, Director Eric J. Hinkefent 43 President of CNF and HFA Michael D. James 43 Secretary, Treasurer and Chief Financial Officer 17 WILLIAM F. WRIGHT has served as the Chairman and Chief Executive Officer of AMCON Corporation (the former parent of AMCON) since 1976 and as Chairman of the Company since 1981. From 1968 to 1984, Mr. Wright practiced corporate and securities law in Lincoln, Nebraska. Mr. Wright is a graduate of the University of Nebraska and Duke University School of Law and is a certified public accountant. KATHLEEN M. EVANS became President of the Company in February 1991. Prior to that time she served as Vice President of AMCON Corporation from 1985 to 1991. From 1978 until 1985, Ms. Evans acted in various capacities with AMCON Corporation and its operating subsidiaries. WILLIAM R. HOPPNER became Senior Vice President of the Company in February 2004. Prior to that time he was engaged in the private practice of law and served as a consultant to the Company. Most recently, from 1999-2004, he served in an Of Counsel position with the law firm of Rehm and Bennett, P.C. From 1997 through 1998, Mr. Hoppner pursued a political career. Prior to that time he served as Executive Vice President of International Transportation Specialists, Inc. and Chief of Staff to former Nebraska Governors and U.S. Senators, J.J. Exon and Robert Kerry. Mr. Hoppner is a graduate of the University of Nebraska and Nebraska School of Law. ERIC J. HINKEFENT has served as President of both Chamberlin Natural Foods, Inc. and Health Food Associates, Inc. since October 2001. Prior to that time he served as President of Health Food Associates, Inc. beginning in 1993. He has also served on the board of The Healthy Edge, Inc. from 1999 through 2003. Mr. Hinkefent is a graduate of Oklahoma State University. MICHAEL D. JAMES became Treasurer and Chief Financial Officer of the Company in June 1994. In November 1997, he assumed the responsibilities of Secretary of the Company. He is a certified public accountant and is responsible for all financial and reporting functions within the Company. Prior to joining AMCON, Mr. James practiced accounting for ten years with the firm of PricewaterhouseCoopers LLP, serving as the senior tax manager of the Omaha, Nebraska office from 1992 until 1994. Mr. James is a graduate of Kansas State University. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The information required by this item is incorporated by reference from the Company's Annual Report to Shareholders, as amended, for the fiscal year ended September 24, 2004 under the heading "Market for Common Stock", except for the issuer purchases of equity securities described below. The Company made no repurchases of its common stock during fiscal 2004 or 2003. However, in May 2004, the shareholders approved and the Company effected a one-for-six reverse stock split of the outstanding shares of its common stock. 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 remaining fractional shares after the reverse stock split. As a result, the Company paid $26,328 for approximately 960 post reverse split common shares. 18 ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference from the Company's Annual Report to Shareholders, as amended, for the fiscal year ended September 24, 2004 under the heading "Selected Financial Data." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference from the Company's Annual Report to Shareholders, as amended, for the fiscal year ended September 24, 2004 under the heading "Management's Discussion and Analysis." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated by reference from the Company's Annual Report to Shareholders, as amended, for the fiscal year ended September 24, 2004 under the heading "Management's Discussion and Analysis - Quantitative and Qualitative Disclosures About Market Risk." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and accompanying notes, together with the report of independent registered public accounting firm, are incorporated by reference from the Company's Annual Report to Shareholders, as amended, for the fiscal year ended September 24, 2004 under the heading "Consolidated Financial Statements." Supplemental financial information is incorporated by reference from the Annual Report to Shareholders, as amended, for the fiscal year ended September 24, 2004 under the heading "Selected Quarterly Financial Data." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) 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. 19 As more fully described in footnote 22 of the Company's Annual Report to Shareholders, as amended, for the fiscal year ended September 24, 2004 under the heading "Consolidated Financial Statements,", the Company has restated its September 2004 consolidated balance sheet to correct classification errors of the Series A Preferred Stock and the Company's revolving credit facility. In addition, the Company has restated its consolidated statement of operations to correct the classification of a provision for impairment of a nonoperating asset from "Other income, net" to operating expenses under the title "Impairment charges." The Company's Chief 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 ("EITF's") and other accounting standards relating to the Company's recent financing transactions. This material weakness resulted in the restatements described above. The Company has enhanced the training of our accounting staff and required periodic review of a wider variety of current technical accounting literature to obtain a reasonable level of assurance that all appropriate accounting guidance is applied to the classification of indebtedness it incurs and equity securities it issues which we believe has corrected this material weakness. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Registrant's Proxy Statement to be used in connection with the 2005 Annual Meeting of Shareholders (the "Proxy Statement") will contain under the caption "Election of Directors", "Employment Agreements" and "Compensation of Executive Officer" certain information required by Item 10 of Form 10-K and such information is incorporated herein by this reference. The information required by Item 10 of Form 10-K as to executive officers is set forth in Item 4A of Part I hereof. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and certain persons who own more than ten percent of the Company's Common Stock, to file with the Securities and Exchange Commission (the "SEC") reports of their ownership of Company Common Stock. Officers, directors and greater-than-ten-percent shareowners are required by SEC regulation to furnish the Company with copies of such Section 16(a) reports they file. Based solely upon review of the copies of such reports received by the Company and written representations from each such person who did not file an annual report with the SEC (Form 5) that no other reports were required, the Company believes that there was compliance for the fiscal year ended 2004 with all Section 16(a) filing requirements applicable to the Company officers, directors and greater-than-ten-percent beneficial owners. 20 CODE OF ETHICS The Company has adopted a Code of Ethics that applies to the Chairman, President, Chief Financial Officer, Controller and directors of the Company. In addition, the Company has adopted a Code of Business Conduct and Ethics which includes more extensive requirements than those required by Section 406 of the Sarbanes Oxley Act of 2002. The Company's Code of Business Conduct and Ethics applies to all of its directors, officer and employees of the Company while section 406 of the Sarbanes Oxley Act of 2002 applies its more limited ethical requirements only to the Company's principal executive officers and controller or senior accounting officer (or persons performing similar functions). A copy of the Code of Ethics is incorporated by reference in this Form 10-K/A as Exhibit 14.1. ITEM 11. EXECUTIVE COMPENSATION The Registrant's Proxy Statement will contain under the captions "Compensation of Directors", "Compensation of Executive Officers" and "Compensation Committee Interlocks and Insider Participation", the information required by Item 11 of Form 10-K, and such information is incorporated herein by this reference. The information set forth under the captions "Report of Compensation Committee on Executive Compensation" and "Company Performance" is expressly excluded from such incorporation. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Registrant's Proxy Statement will contain under the captions "Ownership of Our Common Stock by Our Directors and Executive Officers and Other Principal Stockholders" and "Equity Compensation Plan Information" the information required by Item 12 of Form 10-K and such information is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Registrant's Proxy Statement will contain under the caption "Certain Relationships and Related Transactions" the information required by Item 13 of Form 10-K and such information is incorporated herein by this reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The Registrant's Proxy Statement will contain under the caption "Ratification of Appointment of Independent Auditor" the information required by Item 14 of Form 10-K and such information is incorporated herein by this reference. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1) Financial Statements The following financial statements of AMCON Distributing Company are incorporated by reference under Item 8. The Annual Report to Shareholders, as amended, for the Fiscal Year Ended September 24, 2004 is attached as Exhibit 13.1. 21 Reference Page -------------- Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheets as of Fiscal Years Ended September 2004 and 2003 (as restated) F-2 Consolidated Statements of Operations for the Fiscal Years Ended September 2004, 2003 and 2002 (as restated) F-3 Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss) for the Fiscal Years Ended September 2004, 2003 and 2002 (as restated) F-4 Consolidated Statements of Cash Flows for the Fiscal Years Ended September 2004, 2003 and 2002 F-5 Notes to Consolidated Financial Statements F-6 (2) Financial Statement Schedules Report of Independent Registered Public Accounting Firm Schedule II - Valuation and Qualifying Accounts (3) Exhibits 2.1 Fifth Amended and Restated Agreement and Plan of Merger dated September 27, 2001 by and between AMCON Distributing Company, AMCON Merger Sub, Inc. and Hawaiian Natural Water Company Inc. (incorporated by reference to Exhibit 2.1 of AMCON's Registration Statement on Form S-4 (Registration No. 333-71300) filed on November 13, 2001) 2.2 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) 2.3 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) 2.4 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) 2.5 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) 2.6 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) 22 2.7 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) 2.8 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) 2.9 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) 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 4.3 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 4.5 of AMCON's Annual Report on Form 10-K filed on January 7, 2005) 23 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 10.1 of AMCON's Annual Report on Form 10-K filed on January 7, 2005) 10.2 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) 10.3 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) 10.4 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)* 10.5 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)* 10.6 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 10.6 of AMCON's Annual Report on Form 10-K filed on January 7, 2005)* 10.7 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 10.7 of AMCON's Annual Report on Form 10-K filed on January 7, 2005)* 10.8 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) 10.9 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) 10.10 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) 10.11 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) 10.12 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) 24 10.13 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) 10.14 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) 10.15 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) 10.16 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) 10.17 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 10.17 of AMCON's Annual Report on Form 10-K filed on January 7, 2005) 10.18 Unconditional Guaranty, dated as of September 30, 2004 between William F. Wright and LaSalle Bank, N.A.(incorporated by reference to Exhibit 10.18 of AMCON's Annual Report on Form 10-K filed on January 7, 2005) 10.19 Secured Promissory Note ($1,000,000), dated December 14, 2004, issued by Trinity Springs, Inc. to Allen D. Petersen (incorporated by reference to Exhibit 10.19 of AMCON's Annual Report on Form 10-K filed on January 7, 2005) 10.20 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 10.20 of AMCON's Annual Report on Form 10-K filed on January 7, 2005) 10.21 Director and Officer Compensation (incorporated by reference to Exhibit 10.8 of AMCON's Quarterly Report on Form 10-Q filed on May 27, 2005) 11.1 Statement re: computation of per share earnings (incorporated by reference to footnote 3 to the financial statements which are incorporated herein by reference to Item 8 of Part II herein) 13.1 Annual Report to Shareholders for the Fiscal Year Ended September 24, 2004, as amended. 14.1 Code of Ethics for Principal Executive and Financial Officers (incorporated by reference to Exhibit 14.1 of AMCON's Annual Report on Form 10-K filed on December 24, 2003) 21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 of AMCON's Annual Report on Form 10-K filed on January 7, 2005) 25 23.1 Consent of Independent Registered Public Accounting Firm 31.1 Certification by William F. Wright, Chairman and Principal Executive Officer, furnished pursuant to section 302 of the Sarbanes-Oxley Act 31.2 Certification by 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 * Represents management contract or compensation plan or arrangement SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of 1934, the Registrant, AMCON Distributing Company, a Delaware corporation, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Omaha, State of Nebraska, on the 19th day of August, 2005. AMCON DISTRIBUTING COMPANY By: /s/ William F. Wright ------------------------- William F. Wright, Chairman Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons in the capacities indicated on the 19th day of August, 2005. Signature Title --------- ----- /s/ William F. Wright Chairman of the Board, (Principal Executive - ------------------------ Officer), and Director William F. Wright /s/ Kathleen M. Evans President and Director - ------------------------ Kathleen M. Evans /s/ William R. Hoppner Senior Vice President, Director - ------------------------ William R. Hoppner /s/ Michael D. James Secretary, Treasurer and Chief Financial - ------------------------ Officer (Principal Financial and Michael D. James Accounting Officer) 26 /s/ Raymond F. Bentele Director - ------------------------ Raymond F. Bentele /s/ J. Tony Howard Director - ------------------------ J. Tony Howard /s/ John R. Loyack Director - ------------------------ John R. Loyack /s/ Stanley Mayer Director - ------------------------ Stanley Mayer /s/ Allen D. Petersen Director - ------------------------ Allen D. Petersen /s/ Timothy R. Pestotnik Director - ------------------------ Timothy R. Pestotnik 27 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of AMCON Distributing Company: We have audited the consolidated financial statements of AMCON Distributing Company and its subsidiaries (the "Company") as of September 24, 2004 and September 26, 2003, and for each of the three fiscal years in the period ended September 24, 2004 and have issued our report thereon dated January 7, 2005 (August 19, 2005 as to Notes 19 and 22), which report expresses an unqualified opinion and includes explanatory paragraphs relating to the change in method of accounting for goodwill and intangibles assets in 2003 and the restatements of the Company's consolidated financial statements described in Note 22; such consolidated financial statements and report are included in your amended 2004 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of the Company, listed in Item 15. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Omaha, Nebraska January 7, 2005 (August 19, 2005 as to the effects of the subsequent event discussed in Note 19 and as to the effects of the restatements discussed in Note 22) S-1 AMCON Distributing Company Consolidated Financial Statement Schedule SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - -----------------------------------------------
Net Amounts Balance at Provision (Written Off) Balance at Description Beginning of Period (Benefit) Recovered End of Period - ------------------ ---------------------- --------- ------------- ----------------------- Allowance for doubtful accounts Sep 28, 2001 616,179 390,063 (364,768) Sep 27, 2002 641,474 Sep 27, 2002 641,474 166,417 27,725 Sep 26, 2003 835,616 Sep 26, 2003 835,616 (12,757) (126,256) Sep 24, 2004 696,603 Allowance for inventory obsolescence Sep 29, 2001 304,708 (5,868) - Sep 27, 2002 298,840 Sep 27, 2002 298,840 34,410 (21,000) Sep 26, 2003 312,250 Sep 26, 2003 312,250 99,474 - Sep 24, 2004 411,724
S-2 EX-13 2 ex131annualreport.txt FISCAL 2004 ANNUAL REPORT Exhibit 13.1 AMCON Distributing Company Index to 2004 Annual Report Letter to Shareholders...................................... 1 Selected Financial Data..................................... 5 Selected Quarterly Financial Data........................... 7 Market for Common Stock..................................... 9 Management's Discussion and Analysis Forward Looking Statements............................... 9 Restatements............................................. 10 Discontinued Operations.................................. 10 Company Overview......................................... 10 Industry Segment Overviews............................... 11 Certain Accounting Considerations........................ 12 Critical Accounting Estimates............................ 13 Results of Operations.................................... 18 Liquidity and Capital Resources.......................... 26 Off-Balance Sheet Arrangements........................... 32 Acquisitions and Dispositions of Businesses.............. 32 Quantitative and Qualitative Disclosures About Market Risk..................................... 34 Report of Management........................................ 36 Report of Independent Registered Public Accounting Firm.......................................... F-1 Consolidated Financial Statements (as restated)............. F-2 Notes to Consolidated Financial Statements.................. F-6 Corporate Directory January 7, 2005 TO OUR SHAREHOLDERS: Our Fiscal 2004 was a difficult year to characterize. Some very positive things occurred; some negative things also occurred. In reviewing the year, perhaps it would be helpful to consider the overall strategic direction of your Company. Our Company has been primarily engaged in the wholesale distribution of consumer products since its inception. AMCON Distributing Company's six distribution centers serve the Great Plains and Rocky Mountain regions. They distribute primarily convenience store products including, cigarettes and tobacco, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and chilled products, and institutional food service products. This business conducted by AMCON Distributing Company makes up the Wholesale Distribution segment of the Company. This segment has historically generated a large and relatively stable source of earnings and cash flow. However, due primarily to competitive pressures and the nature of the products being distributed, the profit margins it generates are lean (but consistent with the industry) and the potential for organic growth has been limited. Growth in revenues and profits in this segment are also largely dependent upon the volume of cigarette sales, price increases in cigarettes and changes in promotional programs by the major cigarette manufacturers, each of which is largely outside the control of the Company. The Company expects 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. In recognition of these market forces, the Company has developed and implemented over time a strategy that would redeploy the cash resources generated by the Wholesale Distribution segment into new businesses that have the long-term potential for much more significant growth in revenues and profits. In seeking to develop significant new sources of revenues and profits, the Company intends to diversify the risk associated with its current dependence on cigarette sales. The selection of these new businesses is also guided by our desire to generate future revenue and cost synergies among the businesses currently owned and those being acquired. One of the first of our acquisitions to achieve these goals was that of retail health food stores. AMCON operates six retail health food stores in Florida under the name Chamberlin's Market & Cafe ("Chamberlin's") and seven stores in the Midwest under the name Akin's Natural Foods Market ("Akin's"), which collectively constitute our Retail health and natural food products segment. These stores carry natural supplements, groceries, health and beauty care products and other food products, most of which generate significant gross profit margins. This segment has been profitable on an operating basis prior to acquisition carrying costs. 1 The trend toward profitability of this segment is expected to be enhanced by the development of a new marketing department and implementation of a new central point-of-sale inventory control system which was completed in fiscal 2004. However, this segment experienced a decline in sales and gross profit in the third and fourth quarters of fiscal 2004 because of an extraordinarily horrible hurricane season and a planned reduction in the size of the deli/bakery operations in the Florida stores, reduced supplement sales resulting from unfavorable media coverage related to the government ban on ephedra-based products, and a general softening of the low-carb market coupled with continued expansion of low-carb offerings and sales through mainstream grocery channels. Management is currently reviewing 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 in fiscal 2005. In this regard, a new retail health food store was opened in Oklahoma City, Oklahoma in fiscal 2004 and we expect to continue to open additional stores in the future. The potential for attractive growth and return on investment, as well as potential synergy with the Company's retail and wholesale distribution capabilities, drew the Company to the non-alcoholic natural beverage business. This segment consists of Hawaiian Natural Water Company, Inc. ("HNWC") and Trinity Springs, Inc. ("TSI"). HNWC bottles natural spring water from a source located on the Big Island of Hawaii and bottles purified drinking water on the island of Oahu. HNWC currently markets its products primarily in the State of Hawaii, but has expanded marketing to the mainland United States and certain international markets. HNWC's water bottling operation has historically operated at a loss. However, the Company is hopeful that this operation generates profits in fiscal 2005 as HNWC focuses on expansion of its markets and takes advantage of its new operations. TSI began operations for our Company in June 2004 following the acquisition of substantially all of the assets of its unaffiliated predecessor. TSI bottles geothermal water and a natural mineral supplement that are currently sold primarily in health food stores. TSI is the market leader in the health food store channel, having doubled its sales over the past twelve months and expects to continue strong sales growth in fiscal 2005. TSI intends to build on the brand identity created by its unique source by accessing broader channels of distribution. In addition, certain beverage products, including Hawaiian Springs/R/ and Royal Kona Coffee/R/, previously handled by The Beverage Group, Inc. have been transferred to Trinity in order to avoid duplicative expenses. The beverage marketing and distribution business conducted by The Beverage Group, Inc. ("TBG") incurred significant losses during 2004 as substantial expenditures were made for product development, distribution network development, and marketing efforts to promote our portfolio of specialty beverages. Subsequent to fiscal year end the decision was made to close down the operations of TBG The Beverage Group Inc. ("TBG") and focus our efforts on our other businesses. 2 As described under "Liquidity and Capital Resources," entry into and development of these new businesses has required the expenditure of significant cash resources for the costs of acquiring these businesses and funding their operations and growth. These cash needs include the financing of growing accounts receivable and inventory associated with increased sales, making capital investments in equipment, and conducting promotional efforts. In order to assist in meeting these cash needs, the Company has 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. As discussed in more detail under "Management's Discussion and Analysis," annually we engage an independent valuation firm to perform a review of our intangible assets, which include goodwill and tradenames, for impairment. This year, that review resulted in impairment charges in our Beverage segments of $3.6 million. While we believe that these businesses will produce profits in the future, our conservative approach in projecting growth warranted taking an impairment charge this year. In November 2004, the Company renewed its bank line for a period of approximately two and a half years. In addition, during the period June through October 2004, the Company placed $4.5 million of new preferred stock at competitive rates. These factors allowed us to retire all of our subordinated indebtedness related to an acquisition in our Retail Segment and pay for the initial cash commitments required to purchase TSI. In addition, we plan to secure a separate line of credit to assist in the growth of TSI and we will continue to evaluate additional funding alternatives for our Beverage segment. Finally, Chris Atayan, the Senior Managing Director of Slusser & Associates, Inc., a New York City Investment Banking firm, has recently joined our Board of Directors. In addition to Chris' wealth of experience in investment banking and a long-term relationship with the Company since the late 1980s, Chris has been a successful investor and director in retail and beverage enterprises and grew up in a family owned convenience wholesale distribution business, so he is very familiar with all our industry segments. We welcome Chris to our Board. Also, Bill Hoppner, a long-term director of the Company, was elected Senior Vice President of the Company in charge of our retail health food and beverage segments this year. We believe fiscal 2005 will start to show the fruits of our efforts in reorganization and hope that we continue to receive your support as Shareholders of our Company. As always, we appreciate your past support and the ongoing support of our hardworking loyal employees at AMCON Distributing Company. Very truly yours, William F. Wright Kathleen M. Evans Chairman of the Board President 3 EXPLANATORY NOTE Subsequent to the issuance of these financial statements for the year ended September 24, 2004, management and the Company's Audit Committee determined that the Company would restate its balance sheet as of September 24, 2004 to reflect (i) a correction to the classification of Series A Preferred Stock from permanent equity to mezzanine financing, and (ii) a correction to the classification of its revolving credit facility from long-term to short-term debt. Management and the Company's Audit Committee also determined that the provision for nonoperating asset impairment which was reported as a component of "Other income, net" for the year ended September 26, 2003 should be corrected and reclassified as a component of operating expenses under the title "Impairment charges." The statement of operations for fiscal 2003 has been restated to correct this error. In accordance with Emerging Issue Task Force ("EITF") Topic No. D-98 "Classification and Measurement of Redeemable Securities," 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 Company's Certificate of Designations creating the Series A Preferred Stock contains provisions that give the holders the optional right to redeem such stock if either there is a change of control (as defined in the Certificate of Designations) or the Wright Family (as defined in the Certificate of Designations 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 are represented 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. 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 an agreement that includes both a subjective acceleration clause and a lock-box arrangement to be classified as short-term indebtedness. Because the Company's agreement contains both of these features, the borrowings have been restated to be classified as short-term for September 2004 and 2003. The lending banks and the Company amended the revolving loan agreement after the Company's second fiscal quarter of 2005 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 only in the instance of an event of default. EITF 92- 22, nevertheless, requires the correction to the classification of the revolving credit facility for reports filed prior to such amendment to the revolving loan agreement. This restatement does not impact amounts already reported as sales, net income (loss) available to common shareholders or earnings (loss) per share, nor will it result in a default under any provisions in the credit agreement. 4 In addition, in March 2005, the Company discontinued the operations of its beverage marketing and distribution business. As a result, the balance sheets as of September 24, 2004 and September 26, 2003 and the statements of operations and statements of cash flows for the fiscal years ended September 24, 2004 and September 26, 2003 have been prepared reflecting this disposition as discontinued operations in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." The beverage marketing and distribution business was started in fiscal 2003, so there is no change to the fiscal 2002 amounts. SELECTED FINANCIAL DATA The selected financial data presented below have been derived from AMCON Distributing Company and Subsidiaries' (the "Company's") audited financial statements. The information set forth below should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS" and with the Consolidated Financial Statements and Notes thereto included in this Annual Report. Results may not be comparable due to acquisitions and/or dispositions that have occurred in the periods presented. As described in the footnotes to the consolidated financial statements, in June 2004 (Fiscal 2004) and December 2001 (Fiscal 2002), we acquired Trinity Springs, Inc.(TSI), and Hawaiian Natural Water Company, Inc. ("HNWC"), respectively. In June 2001 (Fiscal 2001), we acquired substantially all of the distribution business assets and net assets of Merchants Wholesale, Inc., as well as, the distribution facility building owned by the sole shareholder of Merchants Wholesale, Inc. for $36.7 million. The transaction was accounted for using the purchase method of accounting. Also, in March 2001 (Fiscal 2001), we sold The Healthy Edge, Inc. (formerly Food For Health Co. Inc.), our health food distribution business for $10.3 million and accounted for the transaction as discontinued operations in the consolidated financial statements in accordance with Accounting Principles Board Opinion No. 30. The Company discontinued the operations of its beverage marketing and distribution business effective March 2005. As a result, the selected financial data presented below has been prepared reflecting this disposition as discontinued operations in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." Revenues and expenses from the discontinued operations have been excluded from income from continuing operations in the selected financial data. 5
(Dollars in thousands, except per share data) - -------------------------------------------------------------------------------------------- Fiscal Year 2004 2003/1/ 2002 2001 2000 - -------------------------------------------------------------------------------------------- Sales/2/.......................... $ 821,766 $ 771,793 $ 847,117 $ 577,589 $ 422,901 Cost of sales..................... 762,203 711,614 785,193 531,903 378,138 --------------------------------------------------------- Gross profit...................... 59,563 60,179 61,924 45,686 44,763 Operating expenses................ 53,331 52,413 54,774 44,706 37,847 Impairment charges/3/............. 3,578 399 - - - --------------------------------------------------------- Operating income.................. 2,654 7,367 7,150 980 6,916 Interest expense.................. 3,002 3,194 4,273 3,877 2,499 Other income, net................. (577) (490) (506) (202) (2,248) --------------------------------------------------------- Income (loss) from continuing operations before income taxes... 229 4,663 3,383 (2,695) 6,665 Income tax expense (benefit)...... 147 1,771 1,316 (1,018) 2,354 Equity in loss of unconsolidated affiliate........................ - - 95 95 - Minority interest, net of tax..... (91) - - - - --------------------------------------------------------- Income (loss) from continuing operations....................... 173 2,892 1,972 (1,772) 4,311 Loss from discontinued operations, net of income taxes of $(2,570), $(1,142), $0, $(963), and $(239), respectively..................... (4,311) (1,865) - (1,570) (407) Preferred stock dividend requirements..................... 50 - - - - --------------------------------------------------------- Net (loss) income available to common shareholders........... $ (4,188) $ 1,027 $ 1,972 $ (3,342) $ 3,904 ========================================================= Basic earnings (loss) per share: Continuing operations........... $ 0.23 $ 5.48 $ 3.90 $ (3.88) $ 9.46 Discontinued operations......... (8.17) (3.53) - (3.44) (0.89) --------------------------------------------------------- Net basic earnings (loss) per share...................... $ (7.94) $ 1.95 $ 3.90 $ (7.32) $ 8.57 ========================================================= Diluted earnings (loss) per share: Continuing operations........... $ 0.32 $ 5.38 $ 3.81 $ (3.88) $ 9.07 Discontinued operations......... (7.99) (3.47) - (3.44) (0.86) --------------------------------------------------------- Net diluted earnings (loss) per share...................... $ (7.67) $ 1.91 $ 3.81 $ (7.32) $ 8.21 ========================================================= Weighted average shares outstanding: Basic........................... 527,774 527,699 505,414 456,362 455,810 Diluted......................... 539,648 537,042 518,197 456,362 475,553 Working capital /1/ /4/........... $ (11,871) $ (8,030) $ (1,989) $ 482 $ 11,546 Total assets ..................... 111,730 99,499 104,586 99,197 73,192 Long-term obligations and subordinated debt /1/ /5/....... 27,104 22,453 21,601 22,873 18,922 Shareholders' equity /6/.......... 12,767/1/ 17,301 16,699 13,363 16,855 Cash dividends declared per common share................ 0.72 0.72 0.72 0.72 0.72
6 /1/ Amounts restated as described in Note 22 to the Consolidated Financial Statements. /2/ In accordance with Emerging Issues Task Force (EITF) No. 01-9 "Accounting For Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)" sales incentives paid to customers have been recorded as a reduction of sales. /3/ Includes impairment of certain identifiable intangibles and nonoperating assets in the beverage segment. /4/ Current assets minus current liabilities. /5/ Includes deferred taxes, noncurrent liabilities of discontinued operations, current and long-term portions of subordinated debt and long-term debt and other long-term liabilities, but excludes the revolving credit facility. /6/ Net of dividends declared of $0.4 million, $0.4 million, $0.4 million in fiscal 2002-2004 and $0.3 million fiscal 2000-2001. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth selected financial information for each of the eight quarters in the two fiscal years ended September 2004 and 2003. This information has been prepared by the Company on the same basis as the consolidated financial statements and includes all normal and recurring adjustments necessary to present fairly this information when read in conjunction with the Company's audited Consolidated Financial Statements and Notes thereto included in this Annual Report. As described in more detail in the Notes to the Consolidated Financial Statements, in performing its annual impairment test for goodwill and other intangible assets during the fourth quarter of Fiscal 2004 the Company recognized a pre-tax $3.6 million impairment of its goodwill carried by its subsidiary, Hawaiian Natural Water Company Inc., which is a reporting unit in the beverage segment. This impairment was the result of competitive pressures in the natural spring water bottling business which have resulted in lower than expected operating profits and cash flow. Quarterly earnings or loss per share are based on weighted average shares outstanding for the quarter, therefore, the sum of the quarters may not equal the full year earnings or loss per share amount. The following selected quarterly financial data gives effect to the retroactive presentation for discontinued operations as discussed in Note 19 to the Consolidated Financial Statements. 7
(Dollars in thousands, except per share data) - ------------------------------------------------------------------------------------------ Fiscal Year 2004 Fourth Third Second First - ------------------------------------------------------------------------------------------ Sales...................................... $ 218,121 $ 218,102 $ 192,971 $ 192,572 Gross profit............................... 15,609 15,223 13,685 15,046 (Loss) income from continuing operations before income taxes...................... (2,677) 1,081 (208) 2,033 (Loss) income from continuing operations .. (1,661) 671 (126) 1,289 Loss from discontinued operations.......... (1,624) (936) (976) (775) Preferred stock dividend requirements...... (50) - - - --------------------------------------------- Net (loss) income available to common shareholders.............................. $ (3,335) $ (265) $ (1,102) $ 514 ============================================= Basic earnings (loss) per share: Continuing operations.................... $ (3.25) $ 1.27 $ (0.24) $ 2.44 Discontinued operations.................. (3.08) (1.77) (1.85) (1.47) --------------------------------------------- Net basic earnings (loss) per share...... $ (6.33) $ (0.50) $ (2.09) $ 0.97 ============================================= Diluted earnings (loss) per share: Continuing operations.................... $ (3.25) $ 1.25 $ (0.24) $ 2.41 Discontinued operations.................. (3.08) (1.74) (1.85) (1.45) --------------------------------------------- Net diluted earnings (loss) per share.... $ (6.33) (0.49) $ (2.09) $ 0.96 =============================================
The following selected quarterly financial data gives effect to the restatements and to the retroactive presentation for discontinued operations as discussed in Notes 22 and 19, respectively, to the Consolidated Financial Statements.
(Dollars in thousands, except per share data) - ------------------------------------------------------------------------------------------- Fiscal Year 2003 Fourth Third Second First - ------------------------------------------------------------------------------------------- Sales...................................... $ 207,395 $ 189,860 $ 176,817 $ 197,721 Gross profit............................... 16,545 16,011 13,779 13,844 Income from continuing operations before income taxes...................... 1,843 2,276 42 502 Income from continuing operations.......... 1,145 1,410 24 313 Loss from discontinued operations.......... (810) (719) (298) (38) --------------------------------------------- Net income (loss) available to common shareholders.............................. $ 335 $ 691 $ (274) $ 275 ============================================= Basic earnings (loss) per share: Continuing operations.................... $ 2.17 $ 2.67 $ 0.04 $ 0.59 Discontinued operations.................. (1.54) (1.36) (0.56) (0.07) --------------------------------------------- Net basic earnings (loss) per share...... $ 0.63 $ 1.31 $ (0.52) $ 0.52 ============================================= Diluted earnings (loss) per share Continuing operations.................... $ 2.13 $ 2.63 $ 0.04 $ 0.58 Discontinued operations.................. (1.51) (1.34) (0.55) (0.07) --------------------------------------------- Net diluted earnings (loss) per share.... $ 0.62 $ 1.29 $ (0.51) $ 0.51 =============================================
8 MARKET FOR COMMON STOCK The Company's common stock trades on the American Stock Exchange ("AMEX") under the trading symbol "DIT". The following table reflects the range of the high and low closing prices per share of the Company's common stock reported by AMEX for fiscal years 2004 and 2003, after adjustment for a one- for-six reverse stock split effected on May 14, 2004. As of December 31, 2004, the closing stock price was $18.80 and there were 527,062 common shares outstanding. The Company has approximately 300 common shareholders of record and the Company believes that approximately 1,250 additional persons hold shares beneficially. Fiscal Year 2004 Fiscal Year 2003 ---------------- ---------------- High Low High Low ------- ------- ------- ------- 4th Quarter $ 25.10 $ 20.60 $ 31.80 $ 26.02 3rd Quarter 29.40 24.48 28.12 17.70 2nd Quarter 28.80 21.83 35.02 20.48 1st Quarter 27.60 21.90 36.52 27.30 During fiscal years 2004 and 2003, the Board of Directors declared cash dividends of $0.18 per share per quarter or $0.72 per common share for each year. The Company's revolving credit facility provides that the Company may not pay dividends on its common shares in excess of $0.72 per common share on an annual basis. As discussed more fully in the "Letter to Shareholders," 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. MANAGEMENT'S DISCUSSION AND ANALYSIS Forward Looking Statements This Annual Report, including the Letter to Shareholders, Management's Discussion and Analysis, and other sections, contains forward looking statements that are subject to risks and uncertainties and which reflect management's current beliefs and estimates of future economic circumstances, industry conditions, company performance and financial results. Forward looking statements include information concerning the possible or assumed future results of operations of the Company and those statements preceded by, followed by or that include the words "future," "position," "anticipate(s)," "expect," "believe(s)," "see," "plan," "further improve," "outlook," "should" or similar expressions. For these statements, we claim the protection of the safe harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. You should understand that the following important factors, in addition to those discussed elsewhere in this document, could affect the future results of the Company and could cause those results to differ materially from those expressed in our forward looking statements: 9 - 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. 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. Restatements As discussed in Note 22 to the Consolidated Financial Statements, the Company's September 24, 2004 consolidated balance sheet and Statement of Operations for the year ended September 30, 2003 have been restated from the amounts previously reported. The accompanying management discussion and analysis and results of operations give effect to the restatement. Discontinued Operations As more fully described in Note 19 to the Consolidated Financial Statements, the Company discontinued the operations of its beverage marketing and distribution business in March 2005. As a result, the balance sheets as of September 24, 2004 and September 26, 2003 and the statements of operations and statements of cash flows for the fiscal years ended September 24, 2004 and September 26, 2003 have been prepared reflecting this disposition as discontinued operations in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." The beverage marketing and distribution business was started in fiscal 2003, so there is no change to the fiscal 2002 amounts. Company Overview 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 the States of 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. During fiscal 2004, the Company: - generated a 6.5% increase in sales compared to fiscal 2003 primarily due to a 7.5% increase in cigarette carton volume. 10 - generated a non-recurring increase in income before taxes of $0.8 million from a wholesale industry cigarette price increase in response to the elimination of vendor program incentive payments during the first quarter of the year. - completed construction of a new packaging and warehouse facility at our natural spring water bottling plant in Hawaii. - opened a new retail health food store in Oklahoma City, OK. - acquired the tradename, water source, customer list and substantially all of the operating assets of Trinity Springs, Ltd. for approximately $8.8 million through a combination of cash, notes, issuance of a 15% interest in Trinity Springs, Inc. (a newly formed subsidiary of AMCON) and payment of an annual water royalty. - completed a $2.5 million private placement of Series A Convertible Preferred Stock - completed a one-for-six reverse stock split as approved by the shareholders at the May 2004 Annual Meeting. - incurred a $3.6 million before tax charge related to the impairment of intangible assets in our recently restructured beverage segment. - recognized earnings per diluted share from continuing operations of $0.32 for the fiscal year ended September 2004 compared to earnings per diluted share from continuing operations of $5.38 for the prior fiscal year. - recognized a loss per diluted share from discontinued operations of $7.99 for the fiscal year ended September 2004 compared to a loss per diluted share from discontinued operations of $3.47 for the prior fiscal year. - declared and paid cash dividends of $0.72 per common share. Industry Segment Overviews Wholesale Distribution Segment The wholesale distribution of cigarettes 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. Due to timing of recognition of manufacturer program incentive payments, the price increase in the first quarter provided the Company with a $0.8 million non-recurring boost in gross profit during fiscal 2004. Certain manufacturers changed their promotional programs again for the second quarter of fiscal 2004, therefore, it is difficult to predict how these changes will impact the Company and the industry in the future. 11 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 segment experienced a decline in sales and gross profit in the third and fourth quarters of fiscal 2004 resulting from extreme adverse weather in Florida, a planned reduction in the size of the deli/bakery operations in the Florida stores, reduced supplement sales resulting from unfavorable media coverage related to the government ban on ephedra based products and a general softening of the low-carb market coupled with continued expansion of low-carb offerings and sales through mainstream grocery channels. Management is currently reviewing 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 in fiscal 2005. As a result of this analysis, management closed a small under performing store in the Florida market in October 2004. Beverage Segment Construction of an expanded warehouse and packaging building at our plant in Hawaii, which began in the second quarter of 2003, was completed in the first quarter of fiscal 2004. Our water bottling operation in Hawaii has historically operated at a loss; however, we are hopeful that this operation generates operating profits in fiscal 2005 as the Company focuses on expansion of its markets and takes advantage of its new operations. In June 2004, the Company acquired substantially all of the operating assets of Trinity Springs, Ltd., headquartered in Sun Valley/Ketchum, Idaho, which bottles and sells geothermal bottled water and a natural mineral supplement. The new company, which is an 85% owned subsidiary of AMCON, was relocated to Boise, Idaho. The Trinity Springs water and mineral supplements are currently sold primarily in health food stores where they represent the number one selling water products. The Company plans to extend the distribution channels 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. This business was discontinued in March 2005. Certain Accounting Considerations In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151 "Inventory Costs." This statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing" and removes the "so abnormal" criterion that under certain circumstances could have led to the capitalization of certain items. SFAS No. 151 requires that idle facility expense, excess spoilage, double freight and rehandling costs be recognized 12 as current-period charges regardless of whether they meet the criterion of "so abnormal." SFAS 151 also requires that allocation of fixed production overhead expenses to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for all fiscal years beginning after June 15, 2005 (fiscal 2006 for the Company). Management does not believe there will be a significant impact as a result of adopting this Statement. In December 2004, the FASB issued Statement No. 123 (revised 2004) ("SFAS 123R"), "Share-Based Payment." SFAS No. 123R will require the Company to measure the cost of all employee stock-based compensation awards based on the grant date fair value of those awards and to record that cost as compensation expense over the period during which the employee is required to perform service in exchange for the award (generally over the vesting period of the award). SFAS No. 123R is effective for the Company's fiscal 2006. Management is currently assessing the impact that this standard will have on the Company's financial position, 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 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. We are currently assessing the impact that this standard will have on the Company. Years cited herein refer to AMCON's fiscal years. AMCON maintains a 52-53 week fiscal year which ends on the last Friday in September. The actual years ended September 24, 2004, September 26, 2003,and September 27, 2002. Fiscal years 2004, 2003, and 2002 each comprised 52 weeks. 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 2004. 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 13 losses can vary significantly over time, estimating the required allowance requires a number of assumptions that are uncertain. ASSUMPTIONS AND APPROACH USED. We estimate our required allowance for doubtful accounts using the following key assumptions. - Historical collections - Represented as the amount of historical uncollectible accounts as a percent of total accounts receivable. - Specific credit exposure on certain accounts - Identified based on management's review of the accounts receivable portfolio and taking into account the financial wherewithal of particular customers that management deems to have a higher risk of collection. For example, a customer in bankruptcy would indicate that an amount could be uncollectible. SENSITIVITY ANALYSIS. We believe that our current level of allowance for doubtful accounts is adequate at the balance sheet date and that our credit exposure is very low compared with the high volume of sales and the nature of our industry in which collections are generally made quickly. However, for every 1% percent of receivables deemed to require an additional reserve at September 2004, the impact on the statement of operations would be to increase selling, general and administrative expenses by approximately $300,000. INVENTORIES NATURE OF ESTIMATES REQUIRED. In our businesses, we carry large quantities and dollar amounts of inventory. Inventories consist primarily of finished products purchased in bulk quantities to be sold to our customers. Given the large quantities and broad range of products that we carry to better serve our customers, there is a risk of impairment in inventory that is unsaleable or unrefundable, slow moving, obsolete or is discontinued. The use of estimates is required in determining the salvage value of this inventory. ASSUMPTIONS AND APPROACH USED. We estimate our inventory obsolescence reserve at each balance sheet date based on the following criteria: -Slow moving products - Items identified as slow moving are evaluated on a case-by-case basis for impairment. -Obsolete/discontinued inventory - Products identified that are near or beyond their expiration dates. In addition, we may discontinue carrying certain product lines for our customers. As a result, we estimate the market value of this inventory as if it were to be liquidated. -Estimated salvage value/sales price - The salvage value of the inventory is estimated using management's evaluation of the congestion in the distribution channels and experience with brokers and inventory liquidators to determine the salvage value of the inventory. 14 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 change 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/decrease by approximately $60,000. 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. Due to competitive pressures in the natural spring water bottling industry, operating profits and cash flows were lower than expected. Based on this trend, the future cash flow forecasts have been revised for this reporting unit and an impairment has been recorded in the Company's statement of operations as a component of income (loss) from operations. In September 2004, HNWC a reporting unit in the beverage segment, recognized impairment of $3.6 million to its tradename as a result of the annual impairment test. NATURE OF ESTIMATES REQUIRED. Management has to estimate the useful lives of the Company's long lived assets. In regard to the impairment analysis, the most significant assumptions include management's estimate of the annual growth rate used to project future sales and expenses used by the independent third party valuation firm. ASSUMPTIONS AND APPROACH USED. For fixed assets, depreciable lives are based on our accounting policy which is intended to mirror the expected useful life of the asset. In determining the estimated useful life of amortizable intangible assets, such as customer lists, we rely on our historical experience to estimate the useful life of the applicable asset and consider industry norms as a benchmark. In evaluating potential impairment of long- lived assets we primarily use an income based approach (discounted cash flow method) and guideline public and private company information. A discounted cash flow methodology requires estimation in (i) forecasting future earnings (ii) determining the discount rate applicable to the earnings stream being discounted, and (iii) computing a terminal value at some point in the future. The forecast of future earnings is an estimate of future financial performance based on current year results and management's evaluation of the market potential for growth. The discount rate is a weighted average cost of capital using a targeted debt-to-equity ratio using the industry average under the assumption that it represents our optimal capital structure and can be achieved in a reasonable time period. The terminal value is determined using a commonly accepted growth model. 15 SENSITIVITY ANALYSIS. We believe that the estimated useful lives of our fixed assets and amortizable intangibles are appropriate. If we shortened the estimated useful lives of our fixed assets by one year, the impact on the statement of operations for the current period would be to increase depreciation expense by approximately $550,000. A decrease in the estimate of future sales or increase of estimated expenses for reporting units evaluated for impairment could result in additional impairment of intangibles being recorded up to the amount of the carrying amount of the intangible assets which was approximately $19.7 million as of September 24, 2004. 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 approximately $45,000 would be required at September 2004, the impact of which would increase selling, general and administrative expenses by that amount in the same period. 16 INCOME TAXES The Company accounts for its income taxes by recording taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. As required by SFAS No. 109, "Accounting for Income Taxes", these expected future tax consequences are measured based on provisions of tax law as currently enacted; the effects of future changes in tax laws are not anticipated. Future tax law changes, such as a change in the corporate tax rate, could have a material impact on our financial condition or results of operations. When appropriate, we record a valuation allowance against deferred tax assets to offset future tax benefits that may not be realized. 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 September 24, 2004. 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. 17 - Volume sales incentives - We use historical experience in combination with quarterly reviews of customers' sales progress in order to estimate the amount of volume incentives due to the customers on a periodic basis. SENSITIVITY ANALYSIS. Based on the historical information used to estimate the reserves for sales discounts and volume sales incentives, we do not anticipate significant variances from the amounts reserved. However, there could be significant variances from period to period based on customer make- up and programs offered. Our estimates and assumptions for each of the aforementioned critical accounting estimates have not changed materially during the periods presented, nor are we aware of any reasons that they would be reasonably likely to change in the future. Results of Operations The following table sets forth an analysis of various components of the Statements of Operations as a percentage of sales for fiscal years 2004, 2003 and 2002:
Fiscal Years ----------------------- 2004 2003 2002 ----------------------- Sales............................ 100.0% 100.0% 100.0% Cost of sales.................... 92.8 92.2 92.7 ----------------------- Gross profit..................... 7.2 7.8 7.3 Selling, general and administrative expenses........ 6.2 6.5 6.1 Depreciation and amortization.... 0.3 0.3 0.4 Impairment charges............... 0.4 - - ----------------------- Operating income ................ 0.3 1.0 0.8 Interest expense................. 0.4 0.4 0.5 Other income, net................ (0.1) - (0.1) ----------------------- Income from continuing operations before income taxes............. - 0.6 0.4 Income tax expense .............. - 0.2 0.2 ----------------------- Income from continuing operations .................... - 0.4 0.2 Loss from discontinued operations, net of tax.......... (0.5) (0.3) - Preferred stock dividend requirements................... - - - ----------------------- Net (loss) income available to common shareholders......... (0.5)% 0.1% 0.2% =======================
18 FISCAL YEAR 2004 VERSUS FISCAL YEAR 2003. - ----------------------------------------- SALES Sales for fiscal year 2004 increased 6.5% to $821.8 million, compared to $771.8 million for fiscal year 2003. Sales are reported net of costs associated with sales incentives provided to customers, totaling $13.9 million and $9.0 million for fiscal 2004 and 2003, respectively. Sales increases (decreases) by business segment are as follows (dollars in millions): Wholesale distribution segment $ 49.3 Retail health food stores segment (0.7) Beverage segment 1.4 Intersegment eliminations - ------- $ 50.0 ======= Cigarette sales in the wholesale distribution segment increased by $32.5 million, and sales of tobacco, confectionary and other products contributed an additional $16.8 million in sales as compared to fiscal 2003. Of the increase in sales of cigarettes, $5.8 million related to price increases implemented by the Company in response to the elimination of vendor program incentives during the year, and $49.4 million related to a 7.5% increase in carton volume, primarily due to new customers within our current market area. These increases were offset by a $22.7 million decrease in cigarette sales related to a decrease in prices on Philip Morris and a permanent decrease on RJ Reynolds' (successor in merger to Brown & Williamson) brands which began in the second quarter of 2003. Although the Philip Morris price reduction program was communicated as a temporary reduction, Philip Morris has extended the program through January 2005 and could extend it further. Both companies, however, did increase prices of certain cigarette brands in December 2004 by as much as $1.00 per carton. See discussion above under INDUSTRY SEGMENT OVERVIEWS for additional information regarding cigarette sales trends. The $16.8 million increase in sales of tobacco, confectionary and other products was attributable primarily to sales to new customers in our current market area. 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. However, pricing continues to be the primary criteria considered by convenience store retailers when considering suppliers. Sales from the retail health food segment's new Oklahoma City store, which opened in April 2004, were $0.8 million. Sales declined in the remaining stores by $1.5 million primarily because of the extreme adverse weather in Florida, a planned elimination of the deli operation in the Florida stores, reduced supplement sales resulting from unfavorable media coverage related to the government ban on ephedra based products and a general softening of the low-carb market coupled with continued expansion of low-carb offerings and sales through mainstream grocery channels. 19 The beverage segment accounted for $4.8 million of sales for fiscal 2004, compared to $3.4 million in fiscal 2003. The improvement was due to increases in case volume of our Hawaiian Springs natural spring water, which was possible due to completion of plant construction and a change to a new distributor in the Hawaii market in October 2003. In addition, the acquisition of substantially all of the operating assets of Trinity Springs, Ltd. at the end of June 2004 contributed $1.1 million of sales for fiscal 2004. Hawaiian Natural Water Company (HNWC), also acquired a water bottling operation on the island of Oahu that contributed $0.3 million of sales in fiscal 2004. This acquisition enables HNWC to more effectively differentiate the premium natural spring water from purified bottled water products and provides a more competitive price point in which to provide private label water. Additionally, there were no sales from our home and office bottling and delivery business in Hawaii for fiscal 2004 because it was sold in October 2003. Sales from the home and office bottling and delivery business totaled $0.3 million in fiscal 2003. GROSS PROFIT Our gross profit does not include fulfillment costs and costs related to the distribution network which are included in selling, general and administrative costs, and may not be comparable to those of other entities. Some entities may classify such costs as a component of cost of sales. Cost of sales, a component used in determining gross profit, for wholesale and retail segments includes the cost of products purchased from manufacturers, less incentives that we receive which are netted against such costs. In the beverage segment, cost of sales includes the cost of the raw materials and related factory labor and manufacturing overhead costs required to convert raw materials into finished goods, including; labor, depreciation and utilities. Gross profit decreased 1.0% to $59.6 million for fiscal year 2004 compared to $60.2 million for the prior fiscal year. Gross profit as a percentage of sales decreased to 7.2% for the year compared to 7.8% for fiscal 2003. Gross profit by business segment is as follows (dollars in millions): Incr/ 2004 2003 (Decr) ------------------------- Wholesale distribution segment $ 46.2 $ 46.6 $ (0.4) Retail health food stores segment 13.0 13.2 (0.2) Beverage segment 0.4 0.4 - ------------------------- $ 59.6 $ 60.2 $ (0.6) ========================= Gross profit of $5.5 million was generated from our wholesale distribution business from cigarette price increases implemented during fiscal 2004 in response to the elimination of vendor program incentive payments that the Company historically received. Because vendor program incentive payments are generally received and recognized by the Company in the quarter following the period in which the related cigarette sales were made, as that is when it is estimable, gross profit for fiscal 2004 includes both the normal vendor program incentive payments relating to the fourth quarter 2003 but received during the first quarter 2004 of approximately $0.8 million, and the amount earned from the price increases that were implemented to replace vendor 20 program incentive payments. This increase in gross profit was partially offset by a decrease of $1.3 million in incentive payments received on our private label cigarettes, a decrease in incentive allowances received from manufacturers of approximately $5.4 million (net of amounts paid to customers), a decrease of $0.9 million related to increases in cigarette excise taxes in certain states in fiscal 2003 and a $1.2 million larger charge to cost of sales for fiscal 2004 as compared to the fiscal 2003 related to the change in the required LIFO inventory reserve balance. The remainder of the increase in gross profit of $2.9 million was primarily due to increased sales in all other products to new customers. Gross profit from our retail health food segment decreased $0.2 million to $13.0 million primarily due to the decreased sales discussed above. Gross profit from our beverage segment was consistent with the prior year. The increase in sales produced additional gross profit of $0.2 million which was offset by a decrease of $0.2 million in gross profit from our home and office bottling and delivery business in Hawaii which was sold in October 2003. OPERATING EXPENSE Operating expense includes selling, general and administrative expenses and depreciation and amortization. Selling, general and administrative expenses include costs related to our sales, warehouse, delivery and administrative departments for all segments. Specifically, purchasing and receiving costs, inspection costs, warehousing costs and cost of picking and loading customer orders are all classified as selling, general and administrative expenses. Our most significant expenses relate to employee costs, facility and equipment leases, transportation costs, insurance and professional fees. Total operating expense, which includes selling, general and administrative expenses, depreciation and amortization, and impairment charges increased 7.8%, or $4.1 million, to $56.9 million compared to fiscal 2003. As a percentage of sales, total operating expenses increased to 6.9% from 6.8% as compared to the prior year. Operating expenses in the beverage segment accounted for $3.9 million of the increase, primarily due to impairment of intangibles of $3.6 million discussed below and expenses associated with TSI which was acquired in June 2004 and the water bottling operation acquired by HNWC in July 2004. Operating expense in the beverage segment in fiscal 2003 included $0.4 million associated with writing down nonoperating assets held for sale to their fair market value. The wholesale distribution segment reduced operating costs by $0.2 million during fiscal 2004 as compared to fiscal 2003 primarily due to the decrease in the required allowance for bad debt reserve that is calculated based on historical collection trends. Total operating expenses in our retail segment increased $0.2 million due to the opening of a new store in Oklahoma City. These expenses were partially offset by savings incurred as a result of a reduced emphasis on the deli operations in the Florida stores. In addition, the Company incurred $0.2 million of rent expense and professional fees associated with a warehouse formerly used by the discontinued health food distribution business when the subtenant of the warehouse defaulted on the rental agreement. 21 As a result of the Company's annual goodwill and intangible asset impairment review as required by SFAS No. 142 "Goodwill and Other Intangible Assets," the Company determined that certain intangible assets in the beverage segment were impaired by $3.6 million. Due to competitive pressures in the natural spring water bottling business, operating profits and cash flows were lower than expected for the year. Based on this trend, future expected cash flows were revised for this reporting unit and an impairment was recorded and is included in operating expenses. As a result of the above, the operating income for fiscal 2004 was $2.7 million, a decrease of $4.7 million as compared to operating income of $7.4 million in fiscal 2003. INTEREST EXPENSE Interest expense for fiscal year 2004 decreased 6.0% to $3.0 million compared to $3.2 million during the prior year. The increase was due primarily to additional borrowings on the Company's revolving line to support the beverage bottling operations. The impact of the increased borrowings is somewhat offset by lower average interest rates in fiscal 2004 as compared to fiscal 2003. OTHER Other income for fiscal 2004 of $0.6 million was generated primarily from gains on sales of available-for-sale securities, as well as, interest income, dividends and royalty payments. Other income for fiscal 2003 of $0.5 million was generated primarily from $0.1 million received from a settlement related to a former distribution facility, $0.3 million from gains on sales of available-for-sale securities, and $0.1 million in interest on income tax refunds, as well as, interest income and dividends on investment securities. The Company's effective income tax rate was 36.4% in fiscal 2004, compared to 38.0% in 2003. The decrease in the effective tax rate was primarily attributable to an increase in net operating loss carryforwards which resulted from new IRS guidance issued in December 2003 allowing additional carryover of net operating losses related to acquired companies. In fiscal 2004, minority interest net of tax totaled $0.1 million and represented the allocation of the current years net loss of TSI to the minority shareholders. As a result of the above factors, income from continuing operations for fiscal year 2004 was $0.2 million compared to $2.9 million in prior year. 22 FISCAL YEAR 2003 VERSUS FISCAL YEAR 2002. - ----------------------------------------- SALES Sales for fiscal year 2003 decreased 8.9% to $771.8 million, compared to $847.1 million for fiscal year 2002. Sales increases (decreases) by business segment are as follows (dollars in millions): Wholesale distribution segment $ (77.7) Retail health food stores segment 1.4 Beverage segment 1.1 Intersegment eliminations (0.1) -------- $ (75.3) ======== Of the total decrease in sales from the wholesale distribution business, $75.6 million was attributable to a decrease in sales of cigarettes, with $44.0 million of the decrease related to a decrease in cigarette prices on Philip Morris and RJ Reynolds' (successor in merger to Brown & Williamson) brands beginning in the second quarter of 2003. The remaining decrease in cigarette sales of $31.6 million resulted primarily from a 9.0% reduction in carton volume. See discussion above under INDUSTRY SEGMENT OVERVIEWS for additional information regarding cigarette sales trends. Sales of tobacco, confectionery and other products accounted for the remainder of the decrease as sales of these products decreased by $2.1 million or 1.2% over the prior year primarily due to loss of several key customers during the year. Sales from the retail health food segment increased in part due to increased demand for low carbohydrate products. Improvements in the Midwest retail stores increased sales 9.1% over the prior year, more than offsetting lower than expected sales in the Florida market, which continues to suffer from decreased tourist trade and general economic depression. The beverage segment accounted for $3.4 million of sales for fiscal 2003, compared to $2.2 million in fiscal 2002. The water bottling operation, which was acquired during the latter part of the first quarter of fiscal 2002, generated sales of $3.4 million during fiscal 2003. There were $0.1 million of intersegment sales eliminated in consolidation for fiscal 2003, all of which related to beverage segment sales to wholesale distribution. There were no intersegment sales for the same period in 2002. 23 GROSS PROFIT Gross profit decreased 2.8% to $60.2 million for fiscal year 2003 compared to $61.9 million for the prior fiscal year. Gross profit by business segment is as follows (dollars in millions): Incr/ 2003 2002 (Decr) ------------------------ Wholesale distribution segment $ 46.6 $ 48.4 $ (1.8) Retail health food stores segment 13.2 13.2 - Beverage segment 0.4 0.3 0.1 ------------------------ $ 60.2 $ 61.9 $ (1.7) ======================== Gross profit from our wholesale distribution business decreased primarily due to a decrease of $1.6 million in incentive payments received on our private label cigarettes, the absence of cigarette price increases and state excise tax increases during fiscal 2003 which together contributed $1.9 million to gross profit in fiscal 2002, and a decrease in incentive allowances received primarily from cigarette manufacturers on products other than private label cigarettes of approximately $1.5 million (net of amounts paid to customers). The above decrease in gross profit was partially offset by a $1.8 million decrease in cost of sales to account for a reduction in the LIFO reserve and a $1.4 million increase in gross profit from sales of other products. Gross profit from our retail health food segment of $13.2 million was constant compared to the prior year even with a $0.3 million charge to cost of sales (or a decrease in gross profit) resulting from an increase in the LIFO reserve. Gross profit increased slightly in our Midwest stores, but was partially offset by a decrease in gross profit in our Florida stores. Gross profit from our beverage segment increased due to a full year of sales in the current year from HNWC compared to nine months in the prior year. Gross profit as a percentage of sales increased to 7.8% for the year compared to 7.3% for fiscal 2002 primarily due to the manufacturers' cigarette price decreases discussed above. Since our gross profit per cigarette carton sold did not change materially after the price decrease, gross profit expressed as a percentage of sales increased. OPERATING EXPENSE Total operating expense, which includes selling, general and administrative expenses, depreciation and amortization, decreased 3.6% or $2.0 million to $52.8 million compared to fiscal 2002. Our wholesale distribution segment reduced operating costs by approximately $2.3 million due to efficiencies gained in its selling, warehousing and delivery areas, primarily in the Quincy distribution center. In addition, the absence of goodwill amortization accounted for a reduction of approximately $0.2 million. Administrative costs increased by approximately $0.2 million, compared to fiscal 2002, primarily due to increased professional fees principally related to compliance with the Sarbanes-Oxley Act, related AMEX listing standards, and SEC rules. 24 Total operating expense in our retail health food segment decreased by approximately $0.1 million. Operating costs increased by approximately $0.5 million primarily due to additional labor and travel costs, but were offset by the absence of tradename and goodwill amortization of approximately $0.6 million. The beverage segment, which began late in the first quarter of fiscal 2002 with the acquisition of HNWC, incurred $2.0 million in operating expenses during fiscal 2003, which was $0.4 million greater than the prior year primarily due to an impairment charge to write down non-operating assets to fair market value. As a percentage of sales, total operating expenses increased to 6.8% from 6.5% for the prior year. This increase is primarily the result of the reduction in sales due to the cigarette manufacturers' price decrease and other factors discussed above. We did not experience a significant increase in operating expenses; therefore, since total sales decreased but operating expenses only increased slightly, operating expense expressed as a percentage of sales increased. As a result of the above, operating income for fiscal 2003 increased $0.2 million to $7.4 million, compared to fiscal 2002. INTEREST EXPENSE Interest expense for fiscal year 2003 decreased 25.2% to $3.2 million compared to $4.3 million during the prior year. The decrease was primarily due to a reduction in average interest rates of approximately 0.65% and a reduction in average debt outstanding of approximately $5.5 million in the wholesale segment, partially offset by an increase in average debt outstanding of approximately $1.1 million in the beverage segment. OTHER Other income for fiscal year 2003 of $0.5 million was comprised primarily of interest income on income tax refunds of $0.1 million, proceeds from a settlement related to a former distribution facility of $0.1 million, and gains on sales of available-for-sale securities of $0.3 million. Other income for fiscal 2002 of $0.5 million was generated primarily by gains of $0.3 million associated with the sale of available-for-sale securities, $0.2 million related to forgiveness of certain debts from former suppliers to the natural spring water bottling operation, interest income and dividends received on available-for-sale securities. In fiscal 2002 there was $0.1 million of equity in losses from our minority investment in HNWC before we acquired this company in December 2001. As a result of the above factors, income from continuing operations for fiscal year 2003 was $2.9 million compared to $2.0 million in fiscal 2002. 25 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, sales of investment securities and from borrowings, as necessary. During fiscal 2004, the Company used $3.7 million of cash from operating activities, primarily the result of slower accounts receivable turns and build up of inventory. These uses of cash were offset by increases in accounts payable and accrued expenses resulting from extended terms received on product promotions and vendor payment incentives. Our variability in cash flows from operating activities is heavily dependent on the timing of inventory purchases and seasonal fluctuations. For example, in the circumstance where we are "buying-in" to obtain favorable terms on particular product or to maintain our LIFO layers, we may have to retain the inventory for a period longer than the payment terms. This generates cash outflow from operating activities that we expect to reverse in a later period. Additionally, during the summer, which is our busiest time of the year, we generally carry larger inventory back stock to ensure high fill rates to maintain customer satisfaction. Our inventory levels are usually at their highest levels in the third and fourth fiscal quarters but at any given month can vary based on the day of the week that month end occurs. We generally experience reductions in inventory levels during the first fiscal quarter, as compared to year end, and maintain these levels until the beginning of the third fiscal quarter when we begin building for increased summer business. Cash of $4.5 million was utilized during fiscal 2004 for capital expenditures and the Company's acquisition of certain business and operating assets from Trinity Springs, Ltd. and Nesco Hawaii. These expenditures were partially offset by the sales of certain fixed assets and available-for-sale securities which generated a net cash inflow during the year of $0.7 million. The Company generated net cash of $7.3 million from financing activities primarily from borrowings of $6.8 million on bank credit agreements and the private placement of $2.5 million of Series A Convertible Preferred Stock. Cash of $1.5 million was used in financing activities to pay down long-term debt and subordinated debt during the period and $0.5 million was used to pay dividends on common and preferred stock and retire fractional shares of common stock resulting from a one-for-six reverse stock split in May 2004. As of September 2004, the Company had cash on hand of $0.4 million and negative working capital (current assets less current liabilities) of $11.9 million. This compares to cash on hand of $0.7 million and negative working capital of $8.0 million as of September 2003. The Company's working capital is significantly impacted by the classification of the revolving credit facility as a short-term obligation. The amounts on the revolving credit facility classified as current were $44.8 million and $38.0 million at September 2004, and September 2003, respectively. The Company expects that the revolving credit facility will be reduced through net payments on the revolver of approximately $5.0 million over the next year and that working capital would be increased by the incremental difference. 26 The Company's ratio of debt to equity increased to 5.37 at September 2004 compared to 3.40 in September 2003. For purposes of this calculation, Series A Preferred Stock and other long-term liabilities (the water royalty) are excluded. For the first six months of 2004 the Company was paying down the outstanding balance on the Facility. Subsequently, the Company increased borrowing on the Facility to fund the beverage operations and used a combination of cash raised from the issuance of preferred stock discussed above and other debt to fund the acquisition of the business and operating assets of Trinity Springs, Ltd. and Nesco Hawaii. The Company's maximum revolving credit limit on it credit facility was $55.0 million at September 2004, 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. As of September 2004, the balance on the facility was $44.8 million and availability on the revolver was $9.3 million, based on our collateral and the loan limits. During the year ended September 2004 our peak borrowing was $49.5 million and our average borrowing was $36.9 million. Our availability to borrow under the credit 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 credit facility, will provide sufficient liquidity for the operation of its wholesale distribution and retail segments for the next twelve months. Management is presently negotiating with LaSalle Bank to bring Trinity Springs, Inc. into the Company's revolving credit facility and with investors to privately place debt or equity to provide additional funding for the beverage operations. Although management is optimistic that such financing will be committed, the ultimate outcome of this financing is not certain at this time. DIVIDEND PAYMENTS - ----------------- During fiscal year 2004, the Board of Directors declared cash dividends of $0.18 per share per quarter or $0.72 per common share for the year. The Company's revolving credit facility provides that the Company may not pay dividends in excess of $0.72 per common share on an annual basis. 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 as of fiscal year end 2004: 27
Payments Due By Period --------------------------------------------------------------------- Contractual Fiscal Fiscal Fiscal Fiscal Fiscal Obligations Total 2005 2006 2007 2008 2009 Thereafter - ---------------------- --------------------------------------------------------------------- Long-term debt/1/, /2/ $ 61,473 $ 11,409 $ 12,005 $ 35,974 $ 282 $ 1,803 $ - Subordinated debt/2/ 7,876 7,876 - - - - - Interest on long-term and subordinated debt/3/ 6,969 2,936 2,449 1,212 98 274 - Operating leases 20,454 5,383 4,489 2,712 1,963 1,505 4,402 Minimum water royalty/4/ 4,165 206 288 288 288 288 2,807 --------------------------------------------------------------------- Total $100,937 $ 27,810 $ 19,231 $ 40,186 $ 2,631 $ 3,870 $ 7,209 ===================================================================== Other Commercial Fiscal Fiscal Fiscal Fiscal Fiscal Commitments Total 2005 2006 2007 2008 2009 Thereafter - ---------------------- --------------------------------------------------------------------- Lines of credit/2/ $ 59,750 $ 59,750 $ - $ - $ - $ - $ - Lines of credit in use (49,548) (49,548) - - - - - --------------------------------------------------------------------- Lines of credit available 10,202 10,202 - - - - - Water source guarantee 5,000 - - - - - 5,000 Letters of credit 837 837 - - - - - --------------------------------------------------------------------- Total $ 16,039 $ 11,039 $ - $ - $ - $ - $ 5,000 =====================================================================
/1/ Includes capital leases of $1.4 million and amounts borrowed on the Company's revolving credit facility allocated to discontinued operations of $3.7 million. /2/ In October 2004, the Company's revolving credit facility was amended to increase the total facility to $60.0 million and add the subsidiaries, except for Trinity Springs, Inc., as borrowers. The new facility includes $5.0 million of term debt that was used, in addition to the proceeds from issuance of $2.0 million of Series B Convertible Preferred Stock to retire $6.8 million of subordinated debt. /3/ Represents estimated interest payments on long-term debt, including capital leases and subordinated debt. Certain obligations contain variable interest rates. For illustrative purposes, the Company has projected future interest payments assuming that interest rates will remain unchanged and additionally, that the 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. 28 CREDIT AGREEMENT - ---------------- The Company's primary source of borrowing for liquidity purposes is its revolving credit facility with LaSalle Bank (the "Facility"). As of September 2004, the outstanding balance on the Facility was $44.8 million. In October 2004, the Facility was amended to add $5.0 million of term debt to the total borrowing limit, which increased the limit from $55.0 million to $60.0 million, and to add the subsidiaries, except Trinity Springs, Inc., as borrowers. The revolving portion of the Facility bears interest at a variable rate equal to the bank's base rate, which was 4.75% at September 2004. In addition, the Company may select a rate equal to LIBOR plus 2.50%, for an amount of the Facility up to $15.0 million. The $5.0 million term debt bears interest at the bank's base rate plus 2.00% and is required to be repaid in eighteen monthly installments of $0.3 million beginning March 2005. The amended Facility continues to restrict borrowing for intercompany advances to certain subsidiaries. The Company hedges its variable rate risk on $15.0 million of its borrowings under the 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. As discussed in Note 19, the Facility was amended in October 2004 and extended to April 30, 2007. As discussed under "Qualitative and Quantitative Disclosures about Market Risk", a notional amount of $15.0 million is subject to interest rate swap agreements which have the effect of converting this amount to a fixed rate ranging between 4.38% and 4.87%. In addition, the Company is required to pay an unused commitment fee equal to 0.25% per annum on the difference between the maximum loan limit and average monthly borrowing for the month. The Facility is collateralized by all of the Company's equipment, intangibles, inventories, and accounts receivable, except those held by Trinity Springs, Inc. The amended Facility expires in April 2007. The Facility contains covenants which, among other things, set certain financial ratios and net worth requirements. The Facility includes covenants that (i) restrict permitted investments, (ii) restrict intercompany advances to certain subsidiaries, (iii) restrict incurrence of additional debt, (iv) restrict mergers and acquisitions and changes in business or conduct of business and (v) require the maintenance of certain financial ratios and net worth levels including an average annual fixed charge ratio of 0.8 to 1.0, and a minimum tangible net worth of $3.0 million for fiscal 2005. The Facility also provides that the Company may not pay dividends on its common stock in excess of $0.72 per share on an annual basis. The Company was in compliance with its debt covenants at September 2004. PREFERRED STOCK - --------------- In June 2004 the Company completed a $2.5 million private placement of Series A Convertible Preferred Stock representing 100,000 shares at $25 per share, the proceeds of which were primarily used to fund the acquisition of the business and operating assets of Trinity Springs, Ltd. 29 SUBORDINATED RETAIL DEBT - ------------------------ In September 2004, the holders of $6.8 million of subordinated debt related to the acquisition of Health Food Associates, Inc. in September 1999, agreed to extend the due date of the debt to October 2004, at which time the Company completed the private placement of $2.0 million of Series B Convertible Preferred Stock and restructuring of the Facility to provide the funds to pay off the subordinated debt. The excess funds from the preferred stock offering that were not used to pay the subordinated debt of approximately $0.2 million were used to fund the beverage operations. However, the Company's beverage segment is still expected to require additional funding through fiscal 2005 and the Company's ability to fund those operations is limited by the Facility. The Company had borrowings of $4.8 million under an 8% Collateralized Promissory Note (the "Collateralized Promissory Note")and $2.0 million under a Convertible Subordinated Note (the "Convertible Note"), which were due in September 2004. However, the terms were extended until October 2004 at which time they were paid in full. REAL ESTATE TERM DEBT - --------------------- In December 2004, the Company purchased a distribution facility in Rapid City, South Dakota and began construction of an addition to the building. The lease on the current Rapid City building was extended to coincide with the completion of construction in the second quarter of fiscal 2005. The Company expects capital expenditures relating to the building, construction of the addition and related equipment purchases to be approximately $1.8 million. The Company has arranged permanent financing for the building and equipment in an amount equal to 80% of the acquisition cost or approximately $1.4 million. The remainder of the capital expenditures related to the building and the building addition will be provided from the Facility. TSI REVOLVING DEBT - ------------------ In December 2004, a director of the Company extended a revolving credit facility to Trinity Springs, Inc., ("Trinity") in a principal amount of up to $1.0 million at an interest rate of 8% per annum with an initial advance of $0.5 million. To induce the director to extend this loan to Trinity, the Company agreed to allow the director to receive a second mortgage on Trinity's real property on an equal basis with the Company's existing second mortgage on Trinity's real property. BANK DEBT - --------- 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. QUINCY ACQUISITION DEBT - ----------------------- The Company borrowed $6.9 million from a bank, at a fixed rate of 7.5%, to purchase the distribution facility in Quincy, IL in June 2001, referred to herein as the Real Estate Loan, and to retire term debt. The Real Estate 30 Loan is amortized on a 20 year basis with a balloon payment due on June 1, 2006. The Real Estate Loan is collateralized by the Company's two owned distribution facilities. As of September 2004, the outstanding balance on the Real Estate Loan was approximately $6.4 million. The acquisition of a distribution business in Quincy, IL in 2001 provides for deferred payments to be made to the seller totaling $3.4 million (plus interest). These deferred payments are subordinate to the Facility and the Real Estate Loan and are due in installments of $0.9 million (including interest) on the first, second, third and fourth anniversaries of the closing date of the transaction. In addition, the Company entered into a noncompetition agreement with the seller that requires the Company to make payments of $0.1 million annually on the first through fourth anniversary dates of the closing of the transaction. The Company has recorded the obligations at their fair values utilizing a 6% effective interest rate which was determined based on the Company's approximate average borrowing rate. As of September 2004, the outstanding obligation to the seller was approximately $1.0 million. TSI ACQUISITION DEBT - -------------------- In connection with the acquisition of TSI, the Company financed the acquisition in part through notes to the former owners totaling approximately $3.3 million. The Company borrowed $2.8 million at a fixed rate of 5.0%, payable in monthly installments over a 5 year period with the remainder due on June 1, 2009. As of September 2004, the outstanding balance was approximately $2.8 million. In addition, the Company borrowed $0.5 million at a fixed rate of 5.0% with interest due quarterly commencing in September 2004. The principal, along with unpaid interest, is due in June 2007. As of September 2004 the outstanding balance was approximately $0.5 million. The Company also assumed a note from the former owners totaling $0.1 million that has a fixed rate of 5.0% and is payable in annual installments through June 2007. As of September 2004, the outstanding balance was approximately $0.1 million. The notes are collateralized by substantially all of TSI's assets. The Company has also recorded a $2.8 million liability for the present value of the future minimum water royalty payment and the related brokers fees, utilizing a 6.6% after-tax effective interest rate, to be paid in perpetuity to the seller. NESCO ACQUISITION DEBT - ---------------------- In connection with the acquisition of Nesco Hawaii by HNWC in July 2004, HNWC issued $0.7 million of notes to the sellers at a fixed rate of 5.0% and payable in two installments. The first payment is due in December 2004 and the balance due in March 2005. As of September 2004, the outstanding balance was approximately $0.7 million. OTHER - ----- The Company has several capital leases for office, warehouse and water bottling equipment. As of September 2004, the outstanding balances on the capital leases totaled approximately $1.4 million. AMCON has issued a letter of credit in the amount of approximately $0.8 million to its workers compensation insurance carrier as part of its self- insured loss control program. 31 CROSS DEFAULT AND CO-TERMINUS PROVISIONS - ---------------------------------------- The Company's owned real estate in Bismarck, ND and Quincy, IL are 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. 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. Acquisitions and Dispositions of Businesses HAWAIIAN NATURAL WATER COMPANY On December 17, 2001, the Company completed a merger with HNWC, pursuant to which HNWC merged with and into, and thereby became, a wholly-owned subsidiary of AMCON Distributing Company. The merger consideration valued the entire common equity interest in HNWC at approximately $2.9 million, which was paid in cash of $0.8 million during fiscal 2001 and in common stock of the Company valued at $2.1 million. As a result, the Company issued 62,260 shares of its common stock to outside HNWC shareholders, representing 12.0% of the Company's outstanding shares after giving effect to the merger. HNWC option holders and warrant holders also received comparable options and warrants of the Company, but with the exercise price and number of shares covered thereby being adjusted to reflect the exchange ratio. TRINITY SPRINGS, INC. On June 17, 2004, a newly formed subsidiary of AMCON, TSL Acquisition Corp. (which subsequently changed its name to Trinity Springs, Inc.) acquired the tradename, water source, customer list and substantially all of the operating assets of Trinity Springs, Ltd. (which subsequently changed its name to Crystal Paradise Holdings, Inc.). The Seller was headquartered in Sun Valley/Ketchum, Idaho, and once bottled and sold a geothermal bottled water and a natural mineral supplement. 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 Trinity Springs, Inc. (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 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 32 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 estimated fair values. 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 $5.5 million. 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. At this stage, the purchase price allocation remains preliminary and is subject to completion of an independent appraisal. The Company has engaged an independent valuation firm to value the intangible assets and it is expected that a final report will be completed by the end of the second quarter, at which time any differences between the preliminary purchase price allocation will be recorded. The Company has determined that it has acquired a unique water source as part of the transaction which represents an intangible asset and the Company has assigned a preliminary value of $2.8 million to this intangible asset. Additionally, the Company has acquired the Trinity tradename and has assigned a preliminary value of $2.3 million to this intangible asset. Upon completion of the independent valuation, the amount assigned to the water 33 source and/or the Trinity tradename could be different and any residual amount would then be assigned to goodwill. Since both the water source and the Trinity tradename have indefinite lives, as does any goodwill, the assets are not amortized. Therefore, any change resulting from completion of the independent valuation in the allocation of purchase price from water source or tradename to goodwill would not have any impact on operating income. Additionally, the Company has assigned a preliminary value of $0.4 million to a customer list which will be amortized over a five year period. NESCO HAWAII On July 1, 2004, the Company's water bottling subsidiary in Hawaii entered into an agreement to acquire certain water bottling assets and liabilities from a water bottling company in Hawaii (Nesco Hawaii) for $0.5 million in cash, and $0.7 million in notes and the assumption of $0.1 million of liabilities. The 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 portion of the purchase price in excess of the estimated fair value of the net assets acquired to be allocated to identifiable intangible assets is approximately $0.7 million. The identifiable intangible assets consists of tradenames and a customer list. The tradenames have indefinite lives and therefore are not amortized. The customer list of $0.2 million is amortized over a five year period. The remaining portion of the excess purchase price allocated to goodwill was $0.4 million. DISPOSITIONS In March 2005, the Company discontinued the operations of its beverage marketing and distribution business. As a result, the balance sheets as of September 24, 2004 and September 26, 2003 and the statements of operations and statements of cash flows for the fiscal years ended September 24, 2004 and September 26, 2003 have been prepared reflecting this disposition as discontinued operations in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." The beverage marketing and distribution business was started in fiscal 2003, so there is no change to the fiscal 2002 amounts. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to interest rate risk on its variable rate debt. At September 2004, we had $34.5 million of variable rate debt outstanding (excluding $15.0 million variable rate debt which is fixed through the swaps described below), with maturities through June 2005. The interest rates on this debt ranged from 3.60% to 6.75% at September 2004. During most of fiscal 2003 and all of fiscal 2004 the Company had the option of selecting an interest rate based on our lender's base interest rate or based on LIBOR. This provides management with some control of our variable interest rate risk. We estimate that our annual cash flow exposure relating to interest rate risk based on our current borrowings is approximately $0.2 million for each 1% change in our lender's prime interest rate. As discussed in Note 19 to the consolidated financial statements, the LIBOR interest rate borrowing option was removed as part of the revolving credit facility restructuring in October 2004. 34 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. 35 REPORT OF MANAGEMENT Management is responsible for the preparation of the accompanying consolidated financial statements. The consolidated financial statements and the notes thereto have been prepared in accordance with accounting principles generally accepted in the United States of America to reflect, in all material aspects, the substance of financial events and transactions occurring during the year. Deloitte & Touche LLP, independent registered public accounting firm, has conducted an audit of our consolidated financial statements as of and for the fiscal years ended September 24, 2004, September 26, 2003 and September 27, 2002. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's financial statements is properly reported. The accompanying financial statements have been restated to properly classify preferred stock issued in fiscal 2004 as mezzanine equity, to classify the Company's revolving credit facility as current debt and to correct the classification of the provision for nonoperating asset impairment which was originally reported as a component of "Other income, net" for the year ended September 26, 2003 to operating expenses under the title "Impairment charges" as discussed in Note 22. As a result of the restatement of these financial statements, management has determined that these disclosure controls and procedures were ineffective as of September 24, 2004 and that a material weakness existed in the disclosure controls and procedures with respect to the application of accounting guidance relating to the Company's recent financing transactions as of such date. The Company has enhanced the training of our accounting staff and requires periodic review of a wider variety of technical accounting literature to obtain a reasonable level of assurance that all appropriate accounting guidance is applied to the classification of debt and equity instruments which we believe corrected this material weakness. The Company also maintains financial control systems designed to provide reasonable assurance that assets are safeguarded and that transactions are executed and recorded in accordance with management authorization. These control systems are evaluated annually by the Company and were determined to be effective as of September 24, 2004, at the reasonable level of assurance. William F. Wright Kathleen M. Evans Michael D. James Chairman President Secretary, Treasurer and Chief Financial Officer August 19, 2005 36 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of AMCON Distributing Company: We have audited the accompanying consolidated balance sheets of AMCON Distributing Company and subsidiaries (the "Company") as of September 24, 2004 and September 26, 2003, and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss) and cash flows for each of the three fiscal years in the period ended September 24, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of AMCON Distributing Company and subsidiaries as of September 24, 2004 and September 26, 2003, and the results of their operations and their cash flows for each of the three fiscal years in the period ended September 24, 2004 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, in 2003 the Company changed its method of accounting for goodwill and other intangible assets. As discussed in Note 22, the accompanying consolidated financial statements have been restated. DELOITTE & TOUCHE LLP Omaha, Nebraska January 7, 2005 (August 19, 2005, as to the effects of the subsequent event discussed in Note 19 and as to the effects of the restatements discussed in Note 22) F-1
CONSOLIDATED BALANCE SHEETS AMCON Distributing Company and Subsidiaries - -------------------------------------------------------------------------------------------------- Fiscal Year End September 2004 2003 (As restated (As restated -see Note 22) -see Note 22 - -------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash $ 416,073 $ 668,073 Accounts receivable, less allowance for doubtful accounts of $0.6 million and $0.8 million in 2004 and 2003, respectively 29,109,826 27,871,362 Available-for-sale investments - 512,694 Inventories 35,088,568 31,019,047 Income tax receivable 1,162,625 - Deferred income taxes 2,548,391 1,568,476 Current assets of discontinued operations 1,941,952 1,780,061 Other 635,839 570,660 ------------------------------ Total current assets 70,903,274 63,990,373 Fixed assets, net 19,951,664 16,845,405 Non-current assets of discontinued operation 143,670 113,460 Goodwill 6,449,741 6,091,397 Other intangible assets 13,271,211 11,420,542 Other assets 1,010,303 1,038,253 ------------------------------ $ 111,729,863 $ 99,499,430 ============================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 17,180,649 $ 14,556,959 Accrued expenses 3,800,506 3,295,977 Accrued wages, salaries, bonuses 1,365,837 1,422,684 Income tax payable - 540,414 Current liabilities of discontinued operations 2,166,414 1,946,968 Revolving credit facility 44,809,814 37,981,281 Current portion of long-term debt 5,574,397 4,513,330 Current portion of subordinated debt 7,876,219 7,762,666 ------------------------------ Total current liabilities 82,773,836 72,020,279 Deferred income taxes 593,018 1,367,367 Noncurrent liabilities of discontinued operations 3,603 166,754 Other long-term liabilities 2,807,000 - Long-term debt, less current portion 10,250,154 7,667,413 Subordinated debt, less current portion - 976,220 Minority interest 97,100 - Series A cumulative, convertible preferred stock, $.01 par value 100,000 authorized and issued, liquidation preference $25.00 per share 2,438,355 - Commitments and contingencies (Note 17) Shareholders' equity: Preferred stock, $0.01 par value, 1,000,000 shares authorized, none outstanding - - Common stock, $.01 par value, 15,000,000 shares authorized, 527,062 and 528,159 issued in 2004 and 2003, respectively 5,271 31,690 Additional paid-in capital 6,218,476 5,997,977 Accumulated other comprehensive income, net of tax of $0.1 million in 2004 and 2003, respectively 59,900 220,732 Retained earnings 6,483,150 11,050,998 ------------------------------ 12,766,797 17,301,397 ------------------------------ $ 111,729,863 $ 99,499,430 ==============================
The accompanying notes are an integral part of these consolidated financial statements F-2
CONSOLIDATED STATEMENTS OF OPERATIONS AMCON Distributing Company and Subsidiaries - --------------------------------------------------------------------------------------------- Fiscal Years Ended September 2004 2003 2002 (As restated - see Note 22) - --------------------------------------------------------------------------------------------- Sales (including excise taxes of $191.6 million, $172.2 million and $166.5 million in 2004, 2003 and 2002, respectively) $ 821,765,589 $ 771,793,256 $ 847,116,997 Cost of sales 762,202,743 711,613,810 785,192,882 ------------------------------------------- Gross profit 59,562,846 60,179,446 61,924,115 ------------------------------------------- Selling, general and administrative expenses 50,992,469 50,136,766 51,610,419 Depreciation and amortization 2,338,277 2,276,702 3,163,549 Impairment charges 3,578,255 399,435 - ------------------------------------------- 56,909,001 52,812,903 54,773,968 ------------------------------------------- Operating income 2,653,845 7,366,543 7,150,147 Other expense (income): Interest expense 3,001,525 3,194,239 4,272,783 Other income, net (576,539) (490,469) (505,712) ------------------------------------------- 2,424,986 2,703,770 3,767,071 Income from continuing operations before income taxes 228,859 4,662,773 3,383,076 Income tax expense 147,000 1,771,000 1,316,000 Equity in loss of unconsolidated affiliate, net of tax - - 95,007 Minority interest, net of tax (91,000) - - ------------------------------------------- Income from continuing operations 172,859 2,891,773 1,972,069 Loss from discontinued operations, net of income tax benefit of $2.6 million and $1.1 million, respectively (4,311,406) (1,865,300) - Preferred stock dividend requirements (49,474) - - ------------------------------------------- Net (loss) income available to common shareholders $ (4,188,021) $ 1,026,473 $ 1,972,069 =========================================== Basic (loss) earnings per share available to common shareholders: Continuing operations $ 0.23 $ 5.48 $ 3.90 Discontinued operations (8.17) (3.53) - ------------------------------------------- Net basis (loss) earnings per share $ (7.94) $ 1.95 $ 3.90 =========================================== Diluted (loss) earnings per share available to common shareholders: Continuing operations $ 0.32 $ 5.38 $ 3.81 Discontinued operations (7.99) (3.47) - ------------------------------------------- Net basis (loss) earnings per share $ (7.67) $ 1.91 $ 3.81 =========================================== Weighted average shares outstanding: Basic 527,774 527,699 505,414 Diluted 539,648 537,042 518,197
The accompanying notes are an integral part of these consolidated financial statements F-3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (AS RESTATED) AMCON Distributing Company and Subsidiaries - ---------------------------------------------------------------------------------------------------------- Additional Paid in Accumulated Common Stock Capital Other ----------------- Common Comprehensive Retained Shares Amount Stock Income Earnings Total - ---------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 28, 2001 456,531 $ 27,392 $ 4,125,127 $ 404,362 $ 8,806,078 $13,362,959 Exercise of options 7,369 442 126,383 - - 126,825 Issuance of common stock from acquisition 62,260 3,736 1,726,133 - - 1,729,869 Dividends on common stock - - - - (382,823) (382,823) Net income - - - - 1,972,069 1,972,069 Unrealized loss on investments available-for-sale, net of tax of $0.1 million - - - (109,591) - (109,591) ----------- Total comprehensive income 1,862,478 -------------------------------------------------------------------------- BALANCE, SEPTEMBER 27, 2002 526,160 31,570 5,977,643 294,771 10,395,324 16,699,308 Exercise of options 2,000 120 20,370 - - 20,490 Retirement of common stock (1) - (36) - - (36) Dividends on common stock - - - - (370,799) (370,799) Net income - - - - 1,026,473 1,026,473 Change in fair value of interest rate swap, net of tax of $0.04 million - - - (65,995) - (65,995) Unrealized loss on investments available-for-sale, net of tax of $0.0 million - - - (8,044) - (8,044) ----------- Total comprehensive income 952,434 -------------------------------------------------------------------------- BALANCE, SEPTEMBER 26, 2003 528,159 31,690 5,997,977 220,732 11,050,998 17,301,397 Exercise of options 33 2 520 - - 522 Options issued in connection with TSI acquisition - - 219,886 - - 219,886 Reverse stock split (1,130) (26,421) 93 - - (26,328) Dividends on common stock - - - - (379,827) (379,827) Dividends on preferred stock - - - - (49,474) (49,474) Net loss - - - - (4,138,547) (4,138,547) Change in fair value of interest rate swap, net of tax of $0.1 million - - - 123,257 - 123,257 Unrealized loss on investments available-for-sale, net of tax of $0.2 million - - - (284,089) - (284,089) ----------- Total comprehensive loss (4,348,853) -------------------------------------------------------------------------- Balance, September 24, 2004 527,062 $ 5,271 $6,218,476 $ 59,900 $ 6,483,150 $12,766,797 ==========================================================================
The accompanying notes are an integral part of these consolidated financial statements F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS AMCON Distributing Company and Subsidiaries - ---------------------------------------------------------------------------------------------------------- Fiscal Years 2004 2003 2002 - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations available to common shareholders $ 123,385 $ 2,891,773 $ 1,972,069 Preferred stock dividend requirements 49,474 - - ----------- ----------- ----------- Income from continuing operations 172,859 2,891,773 1,972,069 Adjustments to reconcile income from continuing operations to net cash flows from operating activities: Depreciation 2,195,743 2,128,408 2,169,934 Amortization 295,339 383,744 1,283,334 Impairment charges 3,578,255 - - (Gain) loss on sale of fixed assets (7,773) 58,739 194,678 (Gain) loss on sale of assets held for sale 1,475 - - (Gain) loss on sale of securities (507,418) (266,690) (257,521) Equity in loss of unconsolidated affiliate - - 95,007 Deferred income taxes (1,754,264) (660,306) 1,368,445 Provision for losses on doubtful accounts, inventory obsolescence and assets held for sale 22,912 675,828 45,681 Minority interest (91,000) - - Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable (1,046,449) 3,151,279 768,582 Inventories (3,704,957) 4,674,992 (5,710,095) Other current assets 129,691 (177,294) (29,514) Other assets 186,999 (137,619) 147,490 Accounts payable 2,623,690 (5,316,892) 2,506,111 Accrued expenses and accrued wages, salaries and bonuses 206,012 (620,198) (1,094,380) Income taxes payable and receivable (1,703,039) 1,521,468 769,087 ----------- ----------- ----------- Net cash flows from operating activities - continuing operations 598,075 8,307,232 4,228,908 Net cash flows from operating activities - discontinued operations (4,260,491) (2,770,744) (2,084,866) ----------- ----------- ----------- Net cash flows from operating activities (3,662,416) 5,536,488 2,144,042 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixed assets (1,700,773) (3,114,595) (2,680,214) Acquisitions, net of cash acquired (2,774,280) - (95,321) Proceeds from sales of fixed assets and intangibles 105,497 129,994 93,082 Proceeds from sales of available-for-sale securities 561,910 303,018 303,911 ----------- ----------- ----------- Net cash flows from investing activities - continuing operations (3,807,646) (2,681,583) (2,378,542) Net cash flows from investing activities - discontinued operations (83,232) (114,116) - ----------- ----------- ----------- Net cash flows from investing activities (3,890,878) (2,795,699) (2,378,542) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings of long-term debt - 919,864 - Net (payments) proceeds on bank credit agreements 6,828,533 (1,379,372) 3,827,287 Payments on long-term and subordinated debt (1,508,361) (2,233,519) (3,163,994) Net proceeds from preferred stock offering 2,438,355 - - Dividends paid on common stock (379,827) (370,799) (382,823) Dividends paid on preferred stock (49,474) - - Retirement of common stock (26,328) - - Purchase of treasury stock - (36) - Proceeds from exercise of stock options 522 20,490 126,825 Payment of registration costs - - (339,644) ----------- ----------- ----------- Net cash flows from financing activities - continuing operations 7,303,420 (3,043,372) 67,651 Net cash flows from financing activities - discontinued operations (2,126) 840,565 - ----------- ----------- ----------- Net cash flow from financing activities 7,301,294 (2,202,807) (166,849) ----------- ----------- ----------- Net change in cash (252,000) 537,982 (166,849) Cash, beginning of year 668,073 130,091 296,940 ----------- ----------- ----------- Cash, end of year $ 416,073 $ 668,073 $ 130,091 =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 3,632,384 $ 4,244,482 $ 5,029,754 Cash paid during the year for income taxes 1,253,768 454,110 187,815 Supplemental disclosure of non-cash information: Acquisition of equipment through capital leases $ 125,840 $ - $ - Business combinations: Fair value of assets acquired 10,307,042 - 5,972,598 Subordinated debt assumed and notes payable issued 4,028,440 - 457,905 Present value of future water royalty payments 2,807,000 - - Other liabilities assumed 289,336 - 1,508,435 Issuance of common stock, stock options and minority interest 407,986 - 2,069,511 Conversion of notes receivable and acquisition costs - - 692,058
The accompanying notes are an integral part of these consolidated financial statements F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: As more fully described in Note 22, the Company has restated its September 2004 Balance Sheet, Statement of Operations and Statement of Shareholders' Equity in the accompanying consolidated financial statements to correct a classification error related to the Series A Preferred Stock, its revolving credit facility and classification of a nonoperating asset impairment charge originally recorded in "Other income, net." In addition, as described in Note 19, the operations of the beverage marketing and distribution business were discontinued in March 2005 and accordingly have been reflected as discontinued operations in these financial statements. (a) Company Operations: AMCON is primarily engaged in the wholesale distribution of consumer products in the Great Plains and Rocky Mountain regions. In addition, the Company operates thirteen retail health food stores in Florida and the Midwest and a non-alcoholic beverage business that includes a natural spring water bottling operation in the State of Hawaii and a geothermal water and natural mineral supplement bottler in Idaho. AMCON's wholesale distribution business ("ADC") includes six distribution centers that sell approximately 13,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and chilled products and institutional food service products. The Company distributes products primarily to retailers such as convenience stores, discount and general merchandise stores, grocery stores and supermarkets, drug stores and gas stations. In addition, the Company services institutional customers, including restaurants and bars, schools, sports complexes and vendors, as well as other wholesalers. AMCON also operates six retail health food stores in Florida under the name Chamberlin's Market & Cafe (Chamberlin's) and seven in the Midwest under the name Akin's Natural Foods Market (Akin's). These stores carry natural supplements, groceries, health and beauty care products and other food items. In addition, AMCON operates a non-alcoholic beverage business which consists of Hawaiian Natural Water Company, Inc. ("HNWC") and Trinity Springs, Inc. ("TSI"). HNWC bottles natural spring water from an exclusive source located on the Big Island of Hawaii and bottles purified drinking water on the island of Oahu. HNWC currently markets its products primarily in the State of Hawaii, but has expanded marketing to the mainland United States and certain international markets. TSI bottles geothermal water and a natural mineral supplement, and distributes HNWC water products and other premium beverages that are currently sold primarily in health food stores. The Company's operating income is subject to a number of factors which are beyond the control of management, such as changes in manufacturers' cigarette pricing and state excise tax increases, competing retail stores opening in close proximity to the Company's retail stores and intense competition in the bottled water industry. While the Company sells a diversified product line, it remains dependent upon cigarette sales which represented approximately 73% F-6 of its revenue and 33% of its gross profit in fiscal 2004 compared to 73% of its revenue and 37% of its gross profit in fiscal 2003 and 76% of its revenue and 39% of its gross profit in fiscal 2002. However, the Company did not generate significant profits from sales of its private label cigarettes in 2004 and does not expect significant profits from sales of private label cigarettes in 2005. The Company's net income in fiscal 2003 and prior years was heavily dependent on sales of the Company's private label cigarettes and volume discounts received from manufacturers in connection with such sales. (b) Accounting Period: AMCON maintains a 52-53 week fiscal year which ends on the last Friday in September. The actual years ended September 24, 2004, September 26, 2003 and September 27, 2002. Fiscal 2004, 2003 and 2002 were comprised of 52 weeks. Years cited herein refer to AMCON's fiscal years. (c) Principles of Consolidation: The consolidated financial statements include the accounts of AMCON and its wholly-owned subsidiaries. As a result of its 85% ownership in TSI, the Company has included the operating results of TSI in the accompanying consolidated financial statements since the date of acquisition (June 17, 2004) and has presented the 15% non-owned interest in this subsidiary as a minority interest. Investments in, and the operating results of, 50%-or- less-owned entities are included in the consolidated financial statements on the basis of the equity method of accounting. All significant intercompany accounts and transactions have been eliminated. (d) Cash and Accounts Payable: AMCON uses a cash management system under which an overdraft is the normal book balance in the primary disbursing accounts. The overdrafts included in accounts payable of $7.1 million and $4.8 million at fiscal year end 2004 and 2003, respectively, reflect checks drawn on the disbursing accounts that have been issued but have not yet cleared through the banking system. The Company's policy has been to fund these outstanding checks as they clear with borrowings under its revolving credit facility (see Note 11). These outstanding checks (book overdrafts) are classified as cash flows from operating activities in the Consolidated Statements of Cash Flows. (e) Debt and Equity Investments: AMCON classifies marketable securities, debt securities and investments as held to maturity, available-for-sale or trading securities. Investments classified as available-for-sale or trading are stated at fair value. Investments classified as held-to- maturity are stated at amortized cost. The carrying amounts of the securities used in computing unrealized and realized gains and losses are determined by specific identification. Fair values are determined using quoted market prices. For available-for-sale securities, net unrealized holding gains and losses are excluded from net income and reported in other comprehensive income, net of tax. For trading securities, net unrealized holding gains and losses are included in the determination of net income. (f) Accounts Receivable: Accounts receivable consist primarily of amounts due to the Company from its normal business activities. An allowance for doubtful accounts is maintained to reflect the expected uncollectibility of accounts receivable based on past collection history and specific risks identified in the portfolio. F-7 (g) Inventories: Inventories consisted of the following at September 2004 and 2003 (in millions): September September 2004 2003 --------- --------- Finished Goods $ 38.2 $ 34.4 Raw Materials 0.9 0.3 LIFO Reserve (4.0) (3.7) --------- --------- $ 35.1 $ 31.0 ========= ========= The wholesale distribution and retail health food segment inventories consist of finished products purchased in bulk quantities to be redistributed to the Company's customers or sold at retail. The wholesale distribution operation's inventories are stated at the lower of cost (last-in, first-out or "LIFO" method) or market and consists of the costs of finished goods. The retail health food operation utilizes the retail inventory method of accounting stated at the lower of cost (LIFO) or market and consists of finished goods. The beverage operation's inventories are stated at the lower of cost (LIFO) or market and consist of raw materials and finished goods. The beverage operation's finished goods inventory includes raw materials, related plant labor and manufacturing overhead costs required to convert raw materials to finished goods. Raw materials inventory consists of pre-forms used to make bottles, caps, labels and various packaging and shipping materials. The LIFO reserve at September 2004 and 2003 represents the amount by which LIFO inventories were less than the amount of such inventories valued on a first-in, first-out basis. The liquidation of certain LIFO layers decreased cost of goods sold by $0.1 million and $1.5 million during fiscal 2004 and 2003, 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 products and discontinued products. (h) Fixed Assets: Fixed assets are stated at cost less accumulated depreciation or amortization. Major renewals and improvements are capitalized and charged to expense over their useful lives through depreciation or amortization charges. Repairs and maintenance are charged to expense in the period incurred. The straight-line method of depreciation is used to depreciate assets over the estimated useful lives as follows: Years ------- Buildings 40 Warehouse equipment 5 - 7 Furniture, fixtures and leasehold improvements 5 - 18 Vehicles 5 F-8 Costs and accumulated depreciation applicable to assets retired or sold are eliminated from the accounts, and the resulting gains or losses are reported in the statement of operations. (i) Long-Lived Assets: During fiscal 2003, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such asset may not be recoverable. Long-lived assets classified as held for sale, are reviewed annually for impairment and are reported at the lower of the carrying amount or fair value less the cost to sell. During fiscal 2004 no such impairment under SFAS No. 144 was recorded. (j) Goodwill, Intangible and Other Assets: Goodwill consists of the excess purchase price paid in business acquisitions over the fair value of assets acquired. Intangible assets consist primarily of tradenames, water source, customer lists, covenants not to compete and favorable leases assumed in acquisitions. These assets are initially recorded at an amount equal to the purchase price paid or allocated to them. Other assets consist primarily of the cash surrender value of life insurance policies and equipment held for sale. During fiscal 2003, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and intangible assets having indefinite useful lives. Under a nonamortization approach, goodwill and intangible assets having indefinite useful lives are not amortized into results of operations, but instead are reviewed at least annually for impairment. Subsequent to the third fiscal quarter of each year, the Company engages an external consulting firm to assist them in performing this valuation. If the recorded value of goodwill and intangible assets having indefinite useful lives is determined to exceed their fair value, the asset is written down to fair value and a charge taken against results of operations in the period. AMCON considers its tradenames and water source to have indefinite lives. Therefore, upon adoption of SFAS No. 142, goodwill and tradename amortization ceased and the Company did not incur an impairment charge upon implementation of SFAS No. 142. As discussed in Note 9, the Company determined, with the assistance of the independent third party valuations obtained, that one of the beverage segment's reporting units tradenames was impaired and an impairment charge of $3.6 million was recorded in fiscal 2004. The Company did not incur an impairment charge during fiscal 2003 upon completion of the annual review. During fiscal 2002, the Company recognized goodwill amortization of $0.3 million and tradename amortization of $0.6 million. Intangible assets that are considered to have definite useful lives continue to be charged to expense through amortization on the straight-line method over their estimated useful lives as follows: Years ----- Covenants not to compete 2 - 5 Favorable leases 3 - 7 Customer lists 5 F-9 The benefit related to increases in the cash surrender value of split dollar life insurance policies is recorded as a reduction to insurance expense. The cash surrender value of life insurance policies is limited to the lesser of the cash value or premiums paid by the Company through September 2002 due to passing of the Sarbanes-Oxley Act of 2002 which disallowed loans to executives. (k) Other Long-Term Liabilities: Other long-term liabilities consist of a balance representing the present value of the future minimum water royalty payments and related brokers fees to be paid in perpetuity incurred in connection with the Trinity Springs, Inc. acquisition that occurred in June 2004 as discussed in Note 3. (l) Reverse Stock Split: On May 11, 2004, the shareholders' approved a one-for-six reverse stock split of the outstanding shares of its common stock. On May 14, 2004, the Company effected the reverse stock split and those shareholders who held fewer than six shares of AMCON's common stock immediately prior to the reverse stock split received a cash payment in exchange for their shares. The total cash paid for all fractional shares was $26,328. All common stock shares and per share data (except par value) for all periods presented have been adjusted to reflect the reverse stock split. (m) Debt Issue Costs: The costs related to the issuance of debt are capitalized in other assets and amortized on an effective interest method to interest expense over the terms of the related debt agreements. (n) Derivative Instruments: The Company uses derivatives (e.g. interest rate swaps) for the purpose of hedging its exposure to changes in interest rates. The fair value of each derivative is shown on the balance sheet as a current asset or current liability. Changes in the fair value of derivatives are recognized immediately in the income statement for derivatives that do not qualify for hedge accounting. For derivatives designated as hedges and used to hedge an existing asset or liability, both the derivative and hedged item are recognized at fair value within the balance sheet with the changes in both of these fair values being recognized immediately in the income statement. For derivatives designated as a hedge and used to hedge an anticipated transaction or event (e.g. increases or decreases in interest rates), changes in the fair value of the derivatives are deferred in the balance sheet within accumulated other comprehensive income to the extent the hedge is effective in mitigating the exposure to the related anticipated event. Any ineffectiveness associated with the hedge is recognized immediately in the income statement. Amounts deferred within accumulated other comprehensive income are recognized in the income statement in the same period during which the hedged transaction affects earnings (e.g. when interest payments are made). (o) Revenue Recognition: AMCON recognizes revenue in its wholesale distribution and beverage divisions when products are delivered to customers (which generally is the same day products are shipped) and in its retail health food business when products are sold to consumers. Sales are shown net of returns and discounts. F-10 (p) Insurance: The Company's insurance for worker's compensation, general liability and employee-related health care benefits are provided through high-deductible or self-insurance programs. As a result, the Company accrues for its worker's compensation and general liability based upon the claim reserves established with the assistance of a third-party administrator which are trended and developed with the assistance of the Company's insurance agent. The Company has issued a letter of credit in the amount of $0.8 million to its workers compensation insurance carrier as part of its loss control program. The reserve for incurred but not reported employee health care benefits is based on one month of average claims using the Company's historical claims experience rate. The reserves associated with the exposure to these liabilities are reviewed by management for adequacy at the end of each reporting period. (q) Income Taxes: Deferred income taxes are determined based on temporary differences between the financial reporting and tax bases of the Company's assets and liabilities, using enacted tax rates in effect during the years in which the differences are expected to reverse. (r) Comprehensive Income (Loss): Comprehensive income (loss) includes all changes in shareholders' equity with the exception of additional investments by shareholders or distributions to shareholders. Comprehensive income (loss) for the Company includes net income or loss, the changes in net unrealized holding gains or losses on investments and changes in the valuation of interest rate swap contracts treated as hedging instruments that are charged or credited to shareholders' equity. (s) Stock-Based Compensation: Prior to June 2004, AMCON maintained a stock-based compensation plan which provided that the Compensation Committee of the Board of Directors granted incentive stock options and non-qualified stock options. The Compensation Committee is evaluating various equity based compensation programs to be implemented in the future. AMCON accounts for stock option grants in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" using the intrinsic value method under which compensation cost is measured by the excess, if any, of the deemed fair market value of its common stock on the date of grant over the exercise price of the stock option. Accordingly, stock-based compensation costs related to stock option granted are not reflected in net income or loss as all options granted under the plan had an exercise price equal to the market value of the underlying stock on the date of grant. The following table illustrates the required proforma effect on income (loss) and earnings (loss) available to common shareholders and the associated per share amounts assuming the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" to stock-based employee compensation: F-11
2004 2003 2002 ---------------------------------------- (Loss) earnings available to common shareholders - ------------------------------------------------ Net (loss) income available to common shareholders, as reported $ (4,188,021) $ 1,026,473 $ 1,972,069 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (60,273) (68,021) (87,617) ----------------------------------------- Pro forma (loss) income available to common shareholders $ (4,248,294) $ 958,452 $ 1,884,452 ========================================= (Loss) earnings per share available to common shareholders - ----------------------------------------------- As reported: Basic $ (7.94) $ 1.95 $ 3.90 Diluted $ (7.67) $ 1.91 $ 3.81 Pro forma: Basic $ (8.05) $ 1.81 $ 3.73 Diluted $ (7.78) $ 1.78 $ 3.64
The pro forma results are not likely to be representative of the effects on reported income (loss) for future years since additional awards are made periodically. The fair value of the weighted average of each year's option grants is estimated as of the date of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions: dividend yield of 3.0% for 2003 and 2002; expected volatility of 50.68% for 2003 and 51.65% for 2002; risk free interest rate based on U.S. Treasury strip yield at the date of grant of 3.68% - 4.12% for 2003 and 4.49% for 2002; and expected lives of 5 to 10 years. No options were granted in fiscal 2004. (t) Per-share results: Basic earnings or loss per share data are based on the weighted-average number of common shares outstanding during each period. Diluted earnings or loss per share data are based on the weighted-average number of common shares outstanding and the effect of all dilutive potential common shares including stock options. (u) Reclassifications: Certain reclassifications have been made to prior years' financial statements to conform with the current year presentation. (v) Use of Estimates: The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-12 (w) Recently Issued Accounting Standards: In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151 "Inventory Costs." This statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing" and removes the "so abnormal" criterion that under certain circumstances could have led to the capitalization of these items. SFAS No. 151 requires that idle facility expense, excess spoilage, double freight and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." SFAS 151 also requires that allocation of fixed production overhead expenses to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for all fiscal years beginning after June 15, 2005 (fiscal 2006 for AMCON). Management does not believe there will be a significant impact as a result of adopting this Statement. In December 2004, the FASB issued Statement No. 123 (revised 2004) ("SFAS 123R"), "Share-Based Payment." SFAS No. 123R will require the Company to measure the cost of all employee stock-based compensation awards based on the grant date fair value of those awards and to record that cost as compensation expense over the period during which the employee is required to perform service in exchange for the award (generally over the vesting period of the award). SFAS No. 123R is effective for the Company's fiscal 2006. Management is currently assessing the impact that this standard will have on the Company's financial position, 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 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. The Company is currently assessing the impact that this standard will have on the Company. 2. CHANGES IN ACCOUNTING POLICY: The Company adopted SFAS No. 142 at the beginning of fiscal year 2003. Upon adoption of SFAS No. 142, goodwill and tradename amortization ceased as these assets are considered to have indefinite useful lives. Management obtained an independent valuation of its goodwill and intangible assets and did not incur an impairment charge upon implementation of SFAS No. 142. As of September 2004, the Company had approximately $5.6 million of goodwill, $9.7 million of tradenames and $2.8 million of water source reflected on the accompanying consolidated balance sheet. F-13 The Company's fiscal 2002 operating results do not reflect the provisions of SFAS No. 142. The following is certain unaudited pro forma information assuming SFAS No. 142 had been in effect at the beginning of fiscal 2002: 2002 ----------- Reported net income $ 1,972,069 Add goodwill amortization, net of tax 194,567 Add tradename amortization, net of tax 356,653 ----------- Adjusted net income $ 2,523,289 =========== Earnings per share - basic: Reported net income $ 3.90 Add goodwill amortization, net of tax 0.38 Add tradename amortization, net of tax 0.71 ----------- Adjusted net income $ 4.99 =========== Earnings per share - diluted: Reported net income $ 3.81 Add goodwill amortization, net of tax 0.37 Add tradename amortization, net of tax 0.69 ----------- Adjusted net income $ 4.87 =========== 3. ACQUISITIONS OF BUSINESSES: Hawaiian Natural Water Company, Inc. - ------------------------------------ On December 17, 2001, the Company completed a merger with HNWC, pursuant to which HNWC merged with and into, and thereby became, a wholly-owned subsidiary of AMCON Distributing Company. The merger consideration valued the entire common equity interest in HNWC at approximately $2.9 million, which was paid in cash of $0.8 million during fiscal 2001 and in common stock of the Company valued at $2.1 million. As a result, the Company issued 62,260 shares of its common stock to outside HNWC shareholders, representing 12.0% of the Company's outstanding shares after giving effect to the merger. HNWC option holders and warrant holders also received comparable options and warrants of the Company, but with the exercise price and number of shares covered thereby being adjusted to reflect the exchange ratio. Transaction costs, totaling approximately $0.3 million, were incurred to complete the merger and consist primarily of fees and expenses for bankers, attorneys and accountants, SEC filing fees, stock exchange listing fees and financial printing and other related charges. The merger 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 following table summarizes the estimated fair values of the assets acquired and liabilities assumed, including a note payable of $1.1 million due to the Company, at the date of acquisition: F-14 At December 17, 2001 (Dollars in millions) --------------------------------------- Current assets $ 0.4 Fixed assets 1.7 Intangible assets 3.8 Other assets 0.1 ----- Total assets acquired 6.0 Current liabilities 2.9 Long-term liabilities 0.2 ----- Total liabilities assumed 3.1 ----- Net assets acquired $ 2.9 ===== 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 $3.8 million. The identifiable intangible asset, the HNWC tradename, is considered to have an indefinite useful life. Based on an independent valuation obtained to measure the fair value of the intangible asset in 2004, an impairment charge of $3.6 million was recorded for the entire carrying amount of the HNWC tradename in the fourth quarter of 2004. Prior to the acquisition, the Company accounted for its initial common stock investment in HNWC under the equity method. The charge to the Company's results of operations to record its equity in the losses of HNWC from the investment date was approximately $0.1 million in fiscal 2002. Trinity Springs, Inc. - --------------------- On June 17, 2004, a newly formed subsidiary of AMCON, TSL Acquisition Corp. (which subsequently changed its name to Trinity Springs, Inc.) acquired the tradename, water source, customer list and substantially all of the operating assets of Trinity Springs, Ltd. (which subsequently changed its name to Crystal Paradise Holdings, Inc.). The Seller was headquartered in Sun Valley/Ketchum, Idaho, and once bottled and sold a geothermal bottled water and a natural mineral supplement. 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 Trinity Springs, Inc. (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 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 F-15 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 estimated fair values. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition based on a preliminary allocation of the purchase price and are subject to refinement. At June 17, 2004 (Dollars in millions) --------------------------------------- Current assets $ 0.5 Fixed assets 3.0 Intangible assets 5.5 ------ Total assets acquired 9.0 Current liabilities 0.2 ------ Total liabilities assumed 0.2 ------ Net assets acquired $ 8.8 ====== 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 $5.5 million. 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 F-16 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. At this stage, the purchase price allocation remains preliminary and is subject to completion of an independent appraisal. The Company has engaged an independent valuation firm to value the intangible assets and it is expected that a final report will be completed by the end of the second quarter, at which time any differences between the preliminary purchase price allocation will be recorded. The Company has determined that it has acquired a unique water source as part of the transaction which represents an intangible asset and the Company has assigned a preliminary value of $2.8 million to this intangible asset. Additionally, the Company has acquired the Trinity tradename and has assigned a preliminary value of $2.3 million to this intangible asset. Upon completion of the independent valuation, the amount assigned to the water source and/or the Trinity tradename could be different and any residual amount would then be assigned to goodwill. Since both the water source and the Trinity tradename have indefinite lives, as does any goodwill, the assets are not amortized. Therefore, any change resulting from completion of the independent valuation in the allocation of purchase price from water source or tradename to goodwill would not have any impact on operating income. Additionally, the Company has assigned a preliminary value of $0.4 million to a customer list which will be amortized over a five year period. Assuming the above acquisition had occurred on the first day of fiscal 2003 (September 27, 2002) unaudited pro forma consolidated sales, operating income (loss), net loss and net loss per share would have been as follows: For the year ended September ----------------------------- 2004 2003 ------------- ------------- Sales $ 824,474,604 $ 775,120,055 Operating income 673,045 5,120,402 Net (loss) income available to common shareholders (1,340,109) 932,499 Net (loss) income per share: Basic $ (2.54) $ 1.77 Diluted $ (2.54) $ 1.74 Nesco Hawaii - ------------ On July 1, 2004, the Company's water bottling subsidiary in Hawaii entered into an agreement to acquire certain water bottling assets and liabilities from a water bottling company in Hawaii (Nesco Hawaii) for $0.5 million in cash, and $0.7 million in notes and the assumption of $0.1 million of liabilities. The preliminary allocation of the purchase price was allocated as follows: F-17 At July 1, 2004 (Dollars in millions) ---------------------------------------- Current assets $ 0.1 Fixed assets 0.5 Intangible assets 0.7 ------ Total assets acquired 1.3 Current liabilities 0.1 ------ Total liabilities assumed 0.1 ------ Net assets acquired $ 1.2 ====== The acquisition has been recorded on the Company's books using the purchase method of accounting. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The portion of the purchase price in excess of the estimated fair value of the net assets acquired to be allocated to identifiable intangible assets is approximately $0.7 million. The identifiable intangible assets consists of tradenames and a customer list. The tradenames have indefinite lives and therefore are not amortized. The customer list of $0.2 million is 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. 4. CONVERTIBLE PREFERRED STOCK In June 2004, the Company issued $2.5 million of Series A Convertible Preferred Stock representing 100,000 shares at a purchase price of $25 per share (the "Liquidation Preference"). The Series A 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 $30.31 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 A Convertible Preferred Stock are payable at a rate of 6.785% 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. Upon liquidation of the Company, the holders of the Series A Preferred Stock are entitled to receive the Liquidation Preference plus any accrued and unpaid dividends prior to the distribution of any amount to the holders of the Common Stock. The Series A Convertible Preferred Stock 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 A Convertible Preferred Stock is redeemable at the option of the Company beginning June 17, 2006 at a redemption price equal to 112% of the Liquidation Preference. The redemption price decreases 1% annually thereafter until June 16, 2018, after which date it remains the liquidation preference. These securities were issued to the Company's Chairman and Draupnir, LLC., of which one of the Company's directors is a member and director. F-18 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. The Series A 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 Preferred Stock will become redeemable in the future as a result of redemption features described above. However, there can be no assurance that this will not occur. As discussed in Note 22, this financial instrument has been classified as mezzanine financing between long-term debt and shareholders' equity in the balance sheet. 5. EARNINGS (LOSS) PER SHARE: Basic earnings (loss) per share available to common shareholders is calculated by dividing income (loss) from continuing operations less preferred stock dividend requirements, loss from discontinued operations and net (loss) income available to common shareholders by the weighted average common shares outstanding for each period. Diluted earning (loss) per share is calculated by dividing income (loss) from continuing operations, loss from discontinued operations and net (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 fiscal year end 2004, 2003 and 2002 that were anti-dilutive were not included in the computations of diluted earnings per share. Such potential common shares totaled 113,921, 29,773 and 24,058 with average exercise prices of $32.92, $40.47 and $48.28 respectively.
For Fiscal Years --------------------------------------- 2004 2003 2002 --------------------------------------- Basic Basic Basic --------------------------------------- Weighted average number of shares outstanding 527,774 527,699 505,414 ======================================= F-19 Income from continuing operations $ 172,859 $2,891,773 $1,972,069 Deduct: preferred stock dividend requirements (49,474) - - --------------------------------------- $ 123,385 $2,891,773 $1,972,069 ======================================= Loss from discontinued operations $ (4,311,406) $(1,865,300) $ - ======================================= Net (loss) income available to common shareholders $ (4,188,021) $1,026,473 $1,972,069 ======================================= Earnings per share from continuing operations available to common shareholders $ 0.23 $ 5.48 $ 3.90 Loss per share from discontinued operations (8.17) (3.53) - --------------------------------------- (Loss) income per share available to common shareholders $ (7.94) $ 1.95 $ 3.90 ======================================= Diluted Diluted Diluted --------------------------------------- Weighted average common shares outstanding 527,774 527,699 505,414 Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock 11,874 9,343 12,783 --------------------------------------- Weighted average number of shares outstanding 539,648 537,042 518,197 ======================================= Income from continuing operations $ 172,859 $2,891,773 $1,972,069 ======================================= Loss from discontinued operations $ (4,311,406) $(1,865,300) $ - ======================================= Net (loss) income available to common shareholders $ (4,138,547) $1,026,473 $1,972,069 ======================================= Earnings per share from continuing operations available to common shareholders $ 0.32 $ 5.38 $ 3.81 Loss per share from discontinued operations (7.99) (3.47) - --------------------------------------- (Loss) income per share available to common shareholders $ (7.67) $ 1.91 $ 3.81 =======================================
F-20 6. COMPREHENSIVE INCOME (LOSS): The components of other comprehensive income (loss) were as follows:
2004 2003 2002 ----------------------------------- Unrealized holding gains during the period: Unrealized gains $ 6,800 $ 255,975 $ 71,565 Related tax expense (2,584) (97,271) (27,194) ----------------------------------- Net 4,216 158,704 44,371 ----------------------------------- Less reclassification adjustments for gains which were included in comprehensive income in prior periods: Realized net gains 465,008 268,948 249,491 Related tax expense (176,703) (102,200) (95,529) ----------------------------------- Net 288,305 166,748 153,962 ----------------------------------- Interest rate swap valuation adjustment during the period: Unrealized gains (losses) 199,354 (106,995) - Related tax benefit (76,097) 41,000 - ----------------------------------- Net 123,257 (65,995) - ----------------------------------- Total other comprehensive income (loss) $ (160,832) $ (74,039) $ (109,591) ===================================
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 28, 2001 $ 404,362 $ - $ 404,362 Current period change (109,591) - (109,591) --------- --------- ---------- Balance, September 27, 2002 294,771 - 294,771 Current period change (8,044) (65,995) (74,039) --------- --------- ---------- Balance, September 26, 2003 286,727 (65,995) 220,732 Current period change (284,089) 123,257 (160,832) --------- --------- ---------- Balance, September 24, 2004 $ 2,638 $ 57,262 $ 59,900 ========= ========= ==========
F-21 7. FIXED ASSETS, NET: Fixed assets at fiscal year ends 2004 and 2003 consisted of the following:
2004 2003 --------------------------- Land $ 849,460 $ 291,460 Buildings 9,550,121 8,125,768 Warehouse equipment 7,410,235 5,257,702 Furniture, fixtures and leasehold improvements 9,163,138 8,396,361 Vehicles 1,370,695 1,301,710 Capital equipment leases 1,924,005 2,017,488 --------------------------- 30,267,654 25,390,489 Less accumulated depreciation and amortization: Owned buildings and equipment (9,860,174) (8,113,114) Capital equipment leases (455,816) (431,970) --------------------------- $ 19,951,664 $ 16,845,405 ===========================
8. DEBT AND EQUITY INVESTMENTS: Available-for-sale investments at fiscal year ends 2004 and 2003 consisted of the following: 2004 2003 ------------------- Cost $ - $ 54,492 Unrealized Gain - 458,202 ------------------- Fair Value $ - $ 512,694 =================== The Company sold 30,000 and 20,000 shares of its available-for-sale investments in fiscal 2004 and 2003, respectively. The Company realized gains on these sales of $507,418, $266,690 and $257,251 in fiscal 2004, 2003 and 2002, respectively. The sale in 2004 represented the final liquidation of available-for-sale investments. 9. GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill by reporting segment at September 2004 and 2003 was as follows:
September September 2004 2003 ------------ ------------ Wholesale $ 3,935,931 $ 3,935,931 Retail 2,155,465 2,155,466 Beverage 358,345 - ------------ ------------ $ 6,449,741 $ 6,091,397 ============ ============
F-22 Other intangible assets at fiscal year ends 2004 and 2003 consisted of the following: 2004 2003 --------------------------- Trademarks and tradenames $ 9,680,521 $ 10,928,793 Water source 2,807,000 - Covenants not to compete (less accumulated amortization of $843,527 and $724,625) 76,698 195,600 Favorable leases (less accumulated amortization of $340,003 and $280,273) 145,997 205,727 Customer lists (less accumulated amortization of $26,285 and $0) 560,995 - Debt issue costs (less accumulated amortization of $489,769 and $399,347) - 90,422 --------------------------- $ 13,271,211 $ 11,420,542 =========================== The Company performs its annual impairment test for goodwill and other intangible assets after the completion of the fiscal third quarter. Due to competitive pressures in the natural spring water bottling business, operating profits and cash flows were lower than expected. Based on this trend, the future cash flow forecasts have been revised for this reporting unit and an impairment of $3.6 million to the HNWC tradename has been recorded in the Company's statement of operations as a component of income (loss) from operations. The fair values of the reporting units were estimated with the assistance of an independent valuation firm using the expected present value of the discounted future cash flows. The $3.6 million impairment of the HNWC tradename was offset by $5.5 million of intangible additions associated with the acquisition of Trinity Springs, Inc. Tradenames and water source are considered to have indefinite useful lives and no amortization of these assets was taken during fiscal 2004 or 2003 in accordance with SFAS No. 142. Amortization expense associated with tradenames was $575,247 for the fiscal year ended 2002. The covenants not to compete arose from business acquisitions and are amortized using the straight-line method over their terms which range from two to five years. Amortization expense of $118,902, $205,370 and $205,370 was recorded for these assets for the fiscal years ended 2004, 2003 and 2002, respectively. Favorable leases represent the amount by which the lease rates of acquired leases were below fair market lease rates for the leased properties on the acquisition date. The favorable variances between the contract lease rates and the fair market lease rates on the acquisition date are recorded as assets which are then amortized over the remaining terms of the leases which ranged from three to seven years. Amortization expense was $59,730, $69,068, and $69,068, for the fiscal years ended 2004, 2003 and 2002, respectively. F-23 The customer lists were purchased as part of the TSI and Nesco Hawaii acquisitions and are amortized over a five year period from the date of acquisition. Amortization expense for 2004 was $26,285. Debt issue costs represent fees incurred to obtain the ADC revolving credit facility and real estate loan and are amortized over the terms of the respective loan agreements. Amortization expense was $90,422, $109,307 and $119,833 for the fiscal years ended 2004, 2003 and 2002, respectively. Amortization expense related to the amortizing intangible assets held at September 2004 for each of the five subsequent years is estimated to be as follows:
Fiscal Fiscal Fiscal Fiscal Fiscal 2005 2006 2007 2008 2009 --------- --------- -------- -------- -------- Covenants not to compete $ 77,000 $ - $ - $ - $ - Favorable leases 40,000 40,000 40,000 27,000 - Customer lists 135,000 125,000 125,000 125,000 50,000 --------- --------- -------- -------- -------- $ 252,000 $ 165,000 $165,000 $152,000 $ 50,000 ========= ========= ======== ======== ========
10. OTHER ASSETS: Other assets at fiscal year ends 2004 and 2003 consisted of the following: 2004 2003 ------------------------- Cash surrender value of life insurance policies $ 743,933 $ 697,035 Equipment held for sale 177,680 200,000 Other 88,690 141,218 ------------------------- $ 1,010,303 $ 1,038,253 ========================= Included in other assets is certain bottling equipment held for sale that was acquired in Fiscal 2002 as part of the HNWC acquisition. HNWC is a reporting unit within our beverage segment. The equipment was not in use at the time of the acquisition and was therefore recorded in other assets as assets held for sale at its estimated fair value, less the estimated cost to sell, in accordance with APB 16 (the applicable purchase accounting guidance at that time). In Fiscal 2003, after having difficulty selling the equipment due to saturation of the bottling equipment market, we determined that the carrying value of this equipment was too high based on prices for similar equipment in the market place. Therefore, we recorded an impairment of $399,435 related to this equipment in operating expenses under the title "Impairment charges." We were unsuccessful in Fiscal 2004 in selling all of the equipment, although we did sell portions and recognized an immaterial loss on the sale. We continue to respond to changes in the market place and the equipment continues to be actively marketed at a price that is reasonable and consistent with its carrying value. F-24 11. DEBT: Revolving Credit Facility - ------------------------- The Company maintains a revolving credit facility (the "Facility") with LaSalle Bank which allows it to borrow up to $55.0 million at any time, subject to eligible accounts receivable and inventory requirements. As of September 2004, the balance on the facility was $44.8 million and availability on the revolver was $9.3 million, based on our collateral and the loan limits. Interest is payable monthly at the bank's base rate which at September 2004, was 4.75% or LIBOR plus 2.50% as selected by the Company. The principal amount of this obligation is due April 2007. The Company is required to pay an unused commitment fee equal to 0.25% per annum on the difference between the maximum loan limit and average monthly borrowing for the month. The Facility is collateralized by all of ADC's equipment, intangibles, inventories, and accounts receivable. The Facility contains covenants which, among other things, set certain financial ratios and net worth requirements. The Facility includes covenants that (i) restrict permitted investments, (ii) restrict intercompany advances to certain subsidiaries, (iii) restrict incurrence of additional debt, (iv) restrict mergers and acquisitions and changes in business or conduct of business and (v) require the maintenance of certain financial ratios and net worth levels including an average annual debt service coverage ratio of 1.0 to 1.0, and a minimum tangible net worth of $10.2 million for fiscal 2004. In addition, the Company must maintain a fill rate percentage of not less than 93% calculated on a weekly basis. The fill rate percentage is determined by dividing the total dollar amount of inventory delivered to the Company's customers each week into the total amount of orders which correspond to such deliveries. The Facility also provides that the Company may not pay dividends on its common shares in excess of $0.72 per common share on an annual basis. At September 2004, the Company was in compliance with each of the Facility's covenants. The Company hedges its variable rate risk on a portion of its borrowings under the Facility by use of interest rate swap agreements. The variable interest payable on notional amounts of $15.0 million 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%. Long-term debt - -------------- Long-term obligations, excluding obligations under the Facility at fiscal year end 2004 and 2003 consisted of the following:
2004 2003 --------------------------- Note payable to a bank ("Real Estate Loan"), interest payable at a fixed rate of 7.5% with monthly installments of principal and interest of $56,531 per month through June 2006; remaining principal due June 2006, collateralized by two owned distribution facilities 6,392,911 6,576,243 F-25 2004 2003 --------------------------- Revolving credit facility with a bank, interest payable monthly at the bank's base rate plus 1% (6.75% at fiscal year end 2004); principal due October 2004 2,750,000 2,750,000 Revolving credit facility with a bank, interest payable monthly at the bank's base rate plus 1% (6.75 % at fiscal year end 2004); principal due October 2004 1,988,403 1,988,403 Note payable, interest payable at a fixed rate of 5% with monthly installments of principal and interest of $30,000 per month through June 2009 and the remaining balance due June 30, 2009, collateralized by substantially all of the assets of TSI 2,773,568 - Note payable, interest payable quarterly at a fixed rate of 5% with interest due quarterly commencing in September 2004. The principal along with any unpaid interest is due in June 2007, collateralized by substantially all of the assets of TSI 500,000 - Note payable, interest payable at a fixed rate of 5% with two installments of $350,000 plus accrued interest due on December 1, 2004 and March 1, 2005 700,000 - Note payable, interest payable at a fixed rate of 5% with monthly installments of principal and interest of $49,655 through June 2007, collateralized by the equipment of TSI 135,222 - Notes payable on equipment, payable in monthly installments with interest rates from 9.4% to 10% through October 2004, collateralized by HNWC equipment 426 5,214 Obligations under capital leases, payable in monthly installments with interest rates from 8% to 16.3% through December 2006 1,422,461 1,701,449 --------------------------- 16,662,991 13,021,309 Less current portion 5,574,397 4,513,331 Less amount attributable to discontinued operations 838,440 840,565 --------------------------- $ 10,250,154 $ 7,667,413 ===========================
The Company has a $2.8 million credit facility with a bank to be used to fund operating activities at our natural spring water bottling operation in Hawaii, (the "Beverage Facility"). Borrowings under the Beverage Facility bear interest at the bank's base rate plus 1.0%, which equaled 6.75% at September 2004. As of September 2004, the outstanding balance under the Beverage Facility was $2.8 million. The Beverage Facility is guaranteed by the Company's Chairman. The Company has a $2.0 million credit facility with a bank collateralized by inventories of the Retail segment (the "Retail Facility"). Borrowings under the Retail Facility bear interest at the bank's base rate plus 1.0%, which equaled 6.75% at September 2004. As of September 2004, the outstanding balance under the Retail Facility was $2.0 million. The Company borrowed $6.9 million from a bank, at a fixed rate of 7.5%, to purchase the distribution facility in Quincy, IL, referred to herein as the Real Estate Loan, and to retire term debt. The Real Estate Loan is amortized F-26 on a 20 year basis with a balloon payment due on June 1, 2006. The Real Estate Loan is collateralized by the Company's two owned distribution facilities. As of September 2004, the outstanding balance on the Real Estate Loan was approximately $6.4 million. In connection with the acquisition of TSI as described in Note 3 the Company financed the acquisition in part through notes to the former owner totaling approximately $3.3 million. The Company borrowed $2.8 million at a fixed rate of 5.0%, payable in monthly installments over a 5 year period with the remainder due on June 1, 2009. As of September 2004, the outstanding balance was approximately $2.8 million. In addition, the Company borrowed $0.5 million at a fixed rate of 5.0% with interest due quarterly commencing in September 2004. The principal, along with unpaid interest, is due in June 2007. As of September 2004 the outstanding balance was approximately $0.5 million. The Company also assumed a note from the former owners totaling $0.1 million that has a fixed rate of 5.0% and is payable in annual installments through June 2007. As of September 2004, the outstanding balance was approximately $0.1 million. The notes are collateralized by substantially all of TSI's assets. In connection with the acquisition of the Nesco assets completed by HNWC in July 2004, HNWC issued a $0.7 million note to the sellers at a fixed rate of 5% and payable in two installments. The first payment is due in December 2004 and the balance due in March 2005. As of September 2004, the outstanding balance was approximately $0.7 million. The Company has several capital leases for office equipment, warehouse and water bottling and packaging equipment. As of September 2004, the outstanding balances on the capital leases totaled approximately $1.4 million. The above long-term obligations, excluding obligations under the Facility, have contractual maturities as follows: Fiscal Year Ending ------------------ 2005 $ 5,574,397 2006 7,001,771 2007 1,163,043 2008 282,047 2009 1,803,293 Thereafter - ------------ $ 15,824,551 Amount attributable to discontinued operations 838,440 ------------ $ 16,662,991 ============ Market rate risk for fixed rate debt is estimated as the potential increase in fair value of debt obligations resulting from decreases in interest rates. Based on discounted cash flows using current market rates for similar agreements, the fair value of the Company's long-term debt obligations approximated carrying value at fiscal year end 2004. In connection with the Company's self-insured loss control program, AMCON has issued a letter of credit in the amount of $0.8 million to its workers compensation insurance carrier. F-27 12. SUBORDINATED DEBT: Subordinated debt at fiscal year end 2004 and 2003 consisted of the following:
2004 2003 --------------------------- Note payable, interest (imputed at 6%) and principal payable annually through June 2005 $ 996,219 $ 1,788,886 Convertible subordinated note payable, interest payable quarterly at 8% per annum; principal due at maturity of the note on September 15, 2004, (the due date of the note was extended to October 2004),convertible into The Healthy Edge, Inc. stock 2,000,000 2,000,000 Collateralized subordinated promissory note payable, interest payable quarterly at 8% per annum; annual principal payments of $800,000 due annually through September 2004 with balance of $4,000,000 due September 2004, (the due date of the note was extended to October 2004), collateralized by Health Food Associates, Inc. stock 4,800,000 4,800,000 Collateralized subordinated promissory note payable, interest payable monthly at 7.0% per annum; annual principal payments ranging from $40,000 to $80,000 due annually from August 2001 through August 2005 80,000 150,000 --------------------------- 7,876,219 8,738,886 Less current portion 7,876,219 7,762,666 --------------------------- $ - $ 976,220 ===========================
In connection with an acquisition that occurred in fiscal 2001, the Company is making deferred payments to the former owner totaling $3.4 million. The deferred payments are subordinate to the Facility and the Real Estate Loan and are due in installments of $0.9 million (including interest) on the first, second, third and fourth anniversaries of the closing date of the transaction. In addition, the Company entered into a covenant not to compete agreement with the seller that requires the Company to make payments of $0.1 million annually on the first through fourth anniversary dates of the closing of the transaction. The Company has recorded the seller obligations at their fair values utilizing a 6% effective interest rate which was determined based on the Company's approximate average borrowing rate. As of fiscal year end 2004, the outstanding obligation to the seller was approximately $1.0 million. Market rate risk for fixed rate subordinated debt is estimated as the potential increase in fair value of debt obligations resulting from decreases in interest rates. Based on discounted cash flows using current market rates for similar agreements, the fair value of the Company's long-term debt obligations approximated carrying value at fiscal year end 2004. F-28 13. OTHER INCOME, NET: Other income, net consisted of the following for fiscal years 2004, 2003 and 2002: 2004 2003 2002 ----------------------------------------- Interest income $ (37,372) $ (94,704) $ (45,091) Dividends (4,250) (18,900) (27,682) Rent income (4,135) (5,272) (4,382) Gain from sale of investments (507,418) (266,690) (257,521) Settlement proceeds on former leased facility - (131,558) - Debt forgiveness - - (176,809) Other (23,502) 26,655 5,773 ----------------------------------------- $ (576,677) $ (490,469) $ (505,712) ========================================= 14. INCOME TAXES: Components of income tax expense (benefit) from continuing operations for the fiscal years ended 2004, 2003 and 2002 consisted of the following: 2004 2003 2002 ----------------------------------------- Current: Federal $ 706,434 $ 2,149,999 $ 63,095 State 149,640 281,143 (115,540) ----------------------------------------- 856,074 2,431,142 (52,445) ----------------------------------------- Deferred: Federal (610,348) (673,880) 1,327,951 State (98,726) 13,738 40,494 ----------------------------------------- (709,074) (660,142) 1,368,445 ----------------------------------------- Income tax (benefit) expense $ 147,000 $ 1,771,000 $ 1,316,000 ========================================= The difference between the Company's income tax expense (benefit) in the accompanying financial statements and that which would be calculated using the statutory income tax rate of 34% on income (loss) before taxes is as follows for the fiscal years ended 2004, 2003 and 2002: 2004 2003 2002 ----------------------------------------- Tax at statutory rate $ 77,812 $ 1,585,343 $ 1,117,943 Amortization of goodwill and other intangibles (4,777) (4,777) 54,155 Nondeductible business expenses 25,148 (21,635) 17,229 State income taxes, net of federal tax benefit 206,800 129,691 73,716 Net operating loss (435,000) - - F-29 2004 2003 2002 ----------------------------------------- Impairment of non-deductible intangibles 308,389 - - Equity in loss of unconsolidated affiliate - - 32,302 Other (31,372) 82,378 20,655 ----------------------------------------- $ 147,000 $ 1,771,000 $ 1,316,000 ========================================= Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities giving rise to the net deferred tax asset at fiscal year ends 2004 and 2003 relate to the following: 2004 2003 ---------------------------- Deferred tax assets: Current: Allowance for doubtful accounts $ 258,808 $ 306,050 Allowance for impairment of assets held for sale 160,237 151,757 Accrued expenses 534,035 446,719 Net operating loss carry forwards 681,904 51,449 Inventory 648,311 759,910 AMT credit carry forwards 380,356 - Other 132,530 46,050 ---------------------------- 2,796,181 1,761,935 Noncurrent: Net operating loss carry forwards 1,102,268 887,492 Other 179 85,533 ---------------------------- 1,102,447 973,025 ---------------------------- Total deferred tax assets $ 3,898,628 $ 2,734,960 ============================ Deferred tax liabilities: Current: Trade discounts $ 222,373 $ 193,459 Unrealized gains on interest rate swap contracts 25,417 - ---------------------------- 247,790 193,459 Noncurrent: Fixed assets 528,753 345,018 Tradenames 887,144 1,659,594 Goodwill 279,568 167,974 Unrealized gains on available-for-sale investments - 167,806 ---------------------------- 1,695,465 2,340,392 ---------------------------- Total deferred tax liabilities $ 1,943,255 $ 2,533,851 ============================ F-30 Net deferred tax assets (liabilities): Current $ 2,548,391 $ 1,568,476 Noncurrent (593,018) (1,367,367) ---------------------------- $ 1,955,373 $ 201,109 ============================ The Company did not record any valuation allowances against deferred tax assets at fiscal year ends 2004 or 2003 because management believes future taxable income will more likely than not be sufficient to realize such amounts. The Company's net operating loss carryforward at fiscal year end 2004 was $4.5 million. Of this amount, $1.2 million expires in 2024. The remaining $3.3 million was acquired in connection with the acquisition of HNWC in fiscal 2002. This includes a deferred tax benefit of $0.4 million recognized during fiscal 2004 to record the impact of $1.4 million of net operating losses that became available as a result of IRS rules issued subsequent to the acquisition. The utilization of the HNWC net operating loss of $3.3 million at fiscal year end 2004 is limited (by Internal Revenue Code Section 382) to approximately $0.8 million in fiscal year 2005, $0.4 million in fiscal year 2006 and $0.1 million per year thereafter through 2022. 15. PROFIT SHARING PLAN: AMCON maintains a profit sharing plan (i.e. a section 401(k) plan) covering substantially all full-time employees. The plan allows employees to make voluntary contributions up to 100% of their compensation, subject to Internal Revenue Service limits. The Company matches 50% of the first 4% contributed and 100% of the next 2% contributed for a maximum match of 4% of employee compensation. The Company contributed $0.5 million, $0.4 million and $0.5 million (net of employee forfeitures) to the profit sharing plans during each of the fiscal years ended 2004, 2003 and 2002, respectively. 16. Related Party Transactions: For the fiscal years ended 2004, 2003 and 2002, the Company was charged $66,000, $60,000 and $60,000, respectively, by AMCON Corporation, the former parent of the Company, as consideration for office rent and management services, which is included in selling, general and administrative expenses. The Company also contracted with one of its outside directors for consulting services in connection with its retail health food operations during part of fiscal year 2004 and all of fiscal years 2003 and 2002. The amount paid for consulting services was $37,500, $90,000 and $90,000, respectively, plus reimbursement of expenses. The outside director was hired by the Company during the second quarter of 2004 to manage the retail and beverage operations. In connection with the acquisition of TSI, the Company's Chairman has guaranteed the Company for certain obligations as more fully described in Note 3. F-31 17. COMMITMENTS AND CONTINGENCIES: Future Lease Obligations - ------------------------ The Company leases certain office and warehouse equipment under capital leases. The carrying value of these assets was approximately $1.5 million and $1.6 million as of fiscal year ends 2004 and 2003, respectively, net of accumulated amortization of $0.5 million and $0.4 million, respectively. The Company leases various office and warehouse facilities and equipment under noncancellable operating leases. Rent charged to expense during fiscal years 2004, 2003 and 2002 under such lease agreements was $5.2 million, $5.3 million and $5.3 million, respectively. As of fiscal year end 2004, minimum future lease commitments are as follows: Capital Operating Fiscal Year Ending Leases Leases ------------------ -------------------------- 2005 $ 598,171 $ 5,383,047 2006 586,178 4,489,111 2007 383,717 2,712,250 2008 21,072 1,963,120 2009 - 1,504,790 Thereafter - 4,402,174 -------------------------- Total minimum lease payments $ 1,589,138 $ 20,454,492 ============ Less amount representing interest 173,011 ----------- Present value of net minimum lease payments $ 1,416,127 =========== The Company also has future lease obligations for facilities and equipment related to the discontinued operations of its former health food distribution business. The Company estimated its ultimate liabilities related to these leases and recorded a charge to earnings during fiscal 2001. The Company terminated the lease on one facility during fiscal 2002 for a termination fee of $1.5 million and currently subleases the Florida facility at an amount greater than the Company's lease rate which is approximately $0.1 million per year. Liability Insurance - ------------------- The Company carries property, general liability, vehicle liability, directors and officers liability and workers compensation, as well as umbrella liability policies to provide excess coverage over the underlying limits contained in these primary policies. The Company's insurance programs for worker's compensation, general liability and employee related health care benefits are provided through high deductible or self-insured programs. Claims in excess of self-insurance levels are fully insured. Accruals are based on claims filed and estimates of claims incurred but not reported. F-32 The Company's liabilities for unpaid and incurred but not reported claims at fiscal year end 2004 and 2003 was $0.9 million and $1.0 million, respectively, under its current risk management program and are included in other current liabilities in the accompanying consolidated balance sheets. While the ultimate amount of claims incurred are dependent on future developments, in management's opinion, recorded reserves are adequate to cover the future payment of claims. However, it is reasonably possible that recorded reserves may not be adequate to cover the future payment of claims. Adjustments, if any, to estimates recorded resulting from the ultimate claim payments will be reflected in operations in the periods in which such adjustments are known. 18. STOCK OPTION PLAN: In June 1994, the Company adopted the 1994 Stock Option Plan (the "Stock Option Plan") which was subsequently amended to increase the maximum number of shares of common stock which may be issued pursuant to the Stock Option Plan from 300,000 to 550,000. The Stock Option Plan expired on June 1, 2004. The Compensation Committee is evaluating various equity based compensation programs to be implemented in the future. Option shares and prices are adjusted for common stock splits and dividends. Options are generally granted at the stock's fair market value at date of grant. Options issued to shareholders holding 10% or more of the Company's stock are generally issued at 110% of the stock's fair market value at date of grant. At fiscal year end 2004, there were 32,009 options fully vested and exercisable under the Stock Option Plan. Options issued and outstanding to management employees pursuant to the Stock Option Plan are summarized below: Number of Number Date Exercise Price Options Outstanding Exercisable ------------------------------------------------------------------ Fiscal 1998 $ 15.68 14,672 14,672 Fiscal 1999 $ 36.82 - $ 54.00 12,644 12,644 Fiscal 2000 $ 34.50 4,667 3,734 Fiscal 2003 $ 28.80 4,797 959 ------ ------ 36,780 32,009 ====== ====== At fiscal year end 2004, there were 13,970 options fully vested and exercisable issued to management employees and outside directors outside the Stock Option Plan as summarized as follows: Number of Number Date Exercise Price Options Outstanding Exercisable ------------------------------------------------------------------ Fiscal 1998 $ 15.68 5,500 5,500 Fiscal 1999 $ 36.82 - $ 49.09 5,134 5,134 Fiscal 2002 $ 23.64 - $ 26.94 2,502 2,502 Fiscal 2003 $ 28.26 834 834 ------ ------ 13,970 13,970 ====== ====== F-33 The stock options have varying vesting schedules ranging up to five years and expire ten years after the date of grant. The table below summarizes information about stock options outstanding as of the following fiscal years:
2004 2003 2002 ------------------------------------------------------ Weighted Weighted Weighted Average Exercise Average Exercise Average Exercise Shares Price Shares Price Shares Price ------------------------------------------------------ Outstanding at beginning of period 52,475 $29.70 49,125 $29.64 54,170 $28.20 Granted - - 6,667 28.74 2,500 25.80 Exercised (33) 15.68 (2,000) 10.26 (7,370) 17.22 Forfeited/Expired (1,689) 44.86 (1,317) 32.10 (175) 43.20 ------------------------------------------------------ Outstanding at end of period 50,753 $29.75 52,475 $29.70 49,125 $29.64 ====================================================== Options exercisable at end of period 45,979 43,549 41,398 ======== ======== ======== Shares available for options that may be granted - 464,523 480,866 ======== ======== ======== Weighted-average grant date fair value of options granted during the period - exercise price equals stock market price at grant $ - $11.64 $15.48 ====== ====== ====== Weighted-average grant date fair value of options granted during the period - exercise price exceeds stock market price at grant $ - $ - $ - ====== ====== ======
The following summarizes all stock options outstanding at fiscal year end 2004:
Exercisable Remaining ---------------------------- Exercise Number Weighted-Average Weighted-Average Number Weighted-Average Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price ------------- ----------- ---------------- ---------------- ----------- ---------------- 1998 Options $15.68 20,173 3.1 years $15.68 20,172 $15.68 1999 Options $36.82-$54.00 17,780 4.7 years $45.33 17,778 $45.33 2000 Options $34.50 4,667 5.7 years $34.50 3,734 $34.50 2002 Options $23.64-$26.94 2,502 7.9 years $25.84 2,502 $25.84 2003 Options $28.26-$28.80 5,631 8.2 years $28.72 1,793 $28.55 ------ ------ ------ ------ 50,753 $29.75 45,979 $29.73 ====== ====== ====== ======
F-34 19. SUBSEQUENT EVENTS: In order to finance the payment of $6.8 million in subordinated notes related to the Company's acquisition of Health Food Associates, Inc. in 1999, the Company refinanced its existing credit facility (see Note 11) in October 2004 to provide for term loans in addition to the extension and modification of the revolving collateralized borrowings. The Company also issued $2.0 million of Series B Convertible Preferred Stock which is described below. The subordinated note obligations were originally due September 15, 2004, but the due date was extended to October 2004, when they were paid in full. The Company's new revolving credit facility (the "New Facility") with LaSalle Bank extends the agreement through April 2007 and retains many of the existing 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: - Replacement of the LIBOR interest rate borrowing option (LIBOR plus 2.50%) with the bank's base rate, except for portion of the new facility that corresponds with the Company's existing interest rate swap agreements which will remain at LIBOR plus 2.50%. - The requirement 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. - Amendment of the definition of minimum tangible net worth and reduction of the minimum tangible net worth requirement to $3.0 million for fiscal 2005. The New Facility is collateralized by all of the Company's equipment, intangibles, inventories, and accounts receivable, except those held by Trinity Springs, Inc. As part of the credit facility refinancing, the Company obtained two term loans totaling $6,160,000, a portion of which was used in connection with the Series B Convertible Preferred Stock issuance proceeds to pay off the subordinated debt obligations. The Company's Chairman has personally guaranteed repayment of up to $10 million 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., Hawaiian Natural Water Company, Inc., Health Food Associates, Inc. and Trinity Springs, Inc. In October 2004, the Company issued $2.0 million of Series B Convertible Preferred Stock representing 80,000 shares at a purchase price of $25 per share (the "Liquidation Preference"). 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 F-35 adjustments in the event of stock splits, stock dividends and certain other distributions on the Common Stock. Cumulative dividends on the Series B Convertible Preferred Stock 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. Upon 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 Convertible Preferred Stock also contain redemption features in certain circumstances such as a change of control, minimum thresholds of ownership by the Chairman and his family in AMCON, or bankruptcy. Finally, the Series B Convertible Preferred Stock is 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 December 2004, the Company purchased a distribution facility in Rapid City, South Dakota and began construction of an addition to the building. The lease on the current Rapid City facility was extended to coincide with the completion of construction in the second quarter of fiscal 2005. The Company expects capital expenditures relating to the building, construction of the addition and related equipment purchases to be approximately $1.8 million. The Company has arranged permanent financing for the building and equipment in an amount equal to 80% of the acquisition cost or approximately $1.4 million. The remainder of the capital expenditures related to the facility will be provided from the Facility. In December 2004, a director of the Company extended a revolving credit facility to Trinity Springs, Inc., ("Trinity") in a principal amount of up to $1.0 million at an interest rate of 8% per annum with an initial advance of $0.5 million. To induce the director to extend this loan to Trinity, the Company agreed to allow the director to receive a second mortgage on Trinity's real property on an equal basis with the Company's existing second mortgage on Trinity's real property. In addition, in March 2005, the Company discontinued the operations of its beverage marketing and distribution business. As a result, the balance sheets as of September 24, 2004 and September 26, 2003 and the statements of operations and statements of cash flows for the fiscal years ended September 24, 2004 and September 26, 2003 have been prepared reflecting this disposition as discontinued operations in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." The beverage marketing and distribution business was started in fiscal 2003, so there is no change to the fiscal 2002 amounts. 20. DERIVATIVE INSTRUMENTS: The Company borrows money at variable interest rates which exposes it to risk that interest expense will increase if the benchmark interest rate used to set the variable rates increases. In order to reduce its exposure to this risk, the Company may use derivative instruments (i.e. interest rate swaps agreements) pursuant to established Company policies. As of September 2004 F-36 and 2003, the Company had interest rate swap agreements outstanding with notional amounts totaling $15 million related to borrowings on the Facility. These interest rate swaps were used to effectively convert certain of the Company's floating rate debt to fixed rate debt. The interest rate swaps outstanding at September 2004 are accounted for as cash flow hedges with gains and losses deferred in accumulated other comprehensive income, to the extent the hedge is effective. Any ineffectiveness associated with the interest rate swaps is immediately recognized in earnings within interest expense. 21. BUSINESS SEGMENTS: AMCON has three reportable business segments: the wholesale distribution of consumer products, the retail sale of health and natural food products, and the bottling and distribution of bottled water products. The results of retail health food stores comprise the retail segment due to similar economic characteristics, as well as similar characteristics with respect to the nature of products sold, the type and class of customers for the health food products, and the methods used to sell the products. The results of the HNWC and TSI (which was acquired in June 2004) comprise the beverage segment due to their unique economic characteristics and the nature of the products, as well as the methods used to sell and distribute the products. As discussed in Note 19, TBG, a business component of the beverage segment ceased operations on March 31, 2005 and its assets accordingly are included in the "Other" column below. The segments are evaluated on revenues, gross margins, operating income (loss) and income before taxes.
Wholesale Distribution Retail Beverage Other/2/ Consolidated ----------------------------------------------------------------------- FISCAL YEAR ENDED 2004: External revenues: Cigarettes $ 597,310,736 $ - $ - $ - $ 597,310,736 Health food - 32,431,573 - - 32,431,573 Confectionery 55,641,415 - - - 55,641,415 Tobacco, beverage & other 131,901,800 - 4,480,065 - 136,381,865 ----------------------------------------------------------------------- Total external revenues 784,853,951 32,431,573 4,480,065 - 821,765,589 Depreciation /1/ 1,121,873 765,371 306,499 - 2,193,743 Amortization 177,050 92,004 28,265 - 297,319 Operating income (loss) 8,340,023 90,133 (5,519,647) (256,664) 2,653,845 Interest expense 1,118,014 1,213,098 670,413 - 3,001,525 Income (loss) from continuing operations before taxes 7,754,389 (1,099,671) (6,182,795) (243,064) 228,859 Total assets 71,794,523 17,426,436 20,256,937 2,251,967 111,729,863 Capital expenditures 318,988 591,330 790,455 83,232 1,784,005 FISCAL YEAR ENDED 2003: External revenues: Cigarettes $ 564,804,865 $ - $ - $ - $ 564,804,865 Health food - 33,110,706 - - 33,110,706 Confectionery 51,400,977 - - - 51,400,977 Tobacco, beverage & other 119,310,355 - 3,166,353 - 122,476,708 ----------------------------------------------------------------------- Total external revenues 735,516,197 33,110,706 3,166,353 - 771,793,256 Depreciation /1/ 1,192,146 750,071 186,191 - 2,128,408 Amortization 195,935 187,809 - - 383,744 Operating income (loss) 8,538,065 503,799 (1,597,662) (77,659) 7,366,543 Interest expense 1,397,631 1,384,295 412,313 - 3,194,239 Income (loss) from continuing operations before taxes 7,645,028 (847,604) (2,056,992) (77,659) 4,662,773 Total assets 72,589,504 16,778,236 8,192,120 1,939,570 99,499,430 Capital expenditures 732,411 475,775 1,906,409 114,116 3,228,711 F-37 FISCAL YEAR ENDED 2002: External revenues: Cigarettes $ 640,359,587 $ - $ - $ - $ 640,359,587 Health food - 31,655,388 - - 31,655,388 Confectionery 52,566,991 - - - 52,566,991 Tobacco, beverage & other 120,297,206 - 2,237,825 - 122,535,031 ------------------------------------------------------------------------ Total external revenues 813,223,784 31,655,388 2,237,825 - 847,116,997 Depreciation /1/ 1,195,595 739,412 234,927 - 2,169,934 Amortization 394,150 749,774 139,410 - 1,283,334 Operating income (loss) 7,969,125 382,332 (1,201,310) - 7,150,147 Interest expense 2,786,389 1,265,678 220,716 - 4,272,783 Income (loss) from continuing operations before taxes 5,677,906 (1,049,613) (1,245,217) - 3,383,076 Total assets 79,392,521 18,452,752 6,741,196 - 104,586,469 Capital expenditures 1,569,981 674,310 435,923 - 2,680,214
/1/ Includes depreciation reported in cost of sales for beverage segment. /2/ Includes charges to operations incurred by discontinued operations and intercompany eliminations. 22. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS Subsequent to the issuance of these financial statements for the year ended September 24, 2004, management and the Company's Audit Committee determined that the Company would restate its balance sheet as of September 24, 2004 to reflect (i) a correction to the classification of Series A Preferred Stock from permanent equity to mezzanine financing, and (ii) a correction to the classification of its revolving credit facility from long-term to short-term debt. Management and the Company's Audit Committee also determined that the provision for nonoperating asset impairment which was reported as a component of "Other income, net" for the year ended September 26, 2003 should be corrected and reclassified as a component of operating expenses under the title "Impairment charges." The statement of operations for fiscal 2003 has been restated to correct this error. In accordance with Emerging Issue Task Force ("EITF") Topic No. D-98 "Classification and Measurement of Redeemable Securities," 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 Company's Certificate of Designations creating the Series A Preferred Stock contains provisions that give the holders the optional right to redeem such stock if either there is a change of control (as defined in the Certificate of Designations) or the Wright Family (as defined in the Certificate of Designations 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 are represented 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. 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 an agreement that includes both a subjective acceleration clause and a lock-box F-38 arrangement to be classified as short-term indebtedness. Because the Company's agreement contains both of these features, the borrowings have been restated to be classified as short-term for September 2004 and 2003. The lending banks and the Company amended the revolving loan agreement after the Company's second fiscal quarter of 2005 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 only in the instance of an event of default. EITF 92- 22, nevertheless, requires the correction to the classification of the revolving credit facility for reports filed prior to such amendment to the revolving loan agreement. This restatement does not impact amounts already reported as sales, net income (loss) available to common shareholders or earnings (loss) per share, nor will it result in a default under any provisions in the credit agreement. A summary of the significant effects of the restatement is as follows:
September 2004 --------------------------------------------------------------- Retroactive effect of discontinued As previously operations - Restatement As reported See Note 19 Restated -------------- ------------- -------------- ------------- Current liabilities $ 42,964,022 $ - $ 39,809,814 $ 82,773,836 Long-term debt, less current portion 50,063,571 (3,603) (39,809,814) 10,250,154 Series A cumulative, convertible preferred stock, $.01 par value 100,000 authorized and issued liquidation preference $25.00 per share - - 2,438,355 2,438,355 Shareholders' equity 15,205,152 - (2,438,355) 12,766,797
September 2003 --------------------------------------------------------------- Retroactive effect of discontinued As previously operations - As reported See Note 19 Restatement Restated -------------- ------------- -------------- ------------- Current liabilities $ 44,038,998 $ - $ 27,981,281 $ 72,020,279 Long-term debt, less current portion 35,654,423 (5,729) (27,981,281) 7,667,413 Operating expenses 55,334,331 (2,920,863) 399,435 52,812,903 Other income, net (98,384) 7,350 (399,435) (490,469)
F-39 Corporate Directory DIRECTORS AND CORPORATE OFFICERS DIRECTORS William F. Wright Chairman Kathleen M. Evans President William R. Hoppner Senior Vice President Christopher H. Atayan Managing Director of Slusser Associates Raymond F. Bentele /2/, /3/ Retired, Former President and CEO of Mallinckrodt, Inc. J. Tony Howard President of Nebraska Distributing Company John R. Loyack /1/, /2/, /3/ Sr. Vice President and CFO of PNM Resources, Inc. Stanley Mayer /1/, /2/ Consultant Timothy R. Pestotnik /1/, /3/ Partner with the law firm Luce, Forward, Hamilton & Scripps, LLP Allen D. Petersen Chairman of Draupnir LLP, Former Chairman and CEO of American Tool Companies, Inc. /1/ Audit Committee /2/ Compensation Committee /3/ Nominating/Governance Committee CORPORATE OFFICERS William F. Wright Chairman Kathleen M. Evans President William R. Hoppner Senior Vice President Michael D. James Secretary, Treasurer and Chief Financial Officer SUBSIDIARY OFFICERS Eric J. Hinkefent President and Chief Executive Officer of Chamberlin Natural Foods, Inc. and Health Food Associates, Inc. Willard Irwin President and Chief Executive Officer of Hawaiian Natural Water Co., Inc. Andrew S. Mitchell President of Trinity Springs, Inc. CORPORATE HEADQUARTERS AMCON Distributing Company 7405 Irvington Road Omaha, Nebraska 68122 (402) 331-3727 TRANSFER AGENT Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016-3572 INDEPENDENT AUDITORS Deloitte & Touche LLP First National Tower 1601 Dodge Street, Suite 3100 Omaha, Nebraska 68102 ANNUAL STOCKHOLDERS' MEETING Thursday, March 15, 2005 9:00 a.m. LaSalle Bank 135 South LaSalle, 43rd Floor Chicago, IL 60603 ADDITIONAL INFORMATION The Annual Report on Form 10-K to the Securities and Exchange Commission provides certain additional information and is available without charge upon request to Michael D. James, Secretary, Treasurer and Chief Financial Officer of the Company. STOCK INFORMATION AMCON Distributing Company's Common Shares are traded on the American Stock Exchange. The symbol for the Common Stock is "DIT." WEB SITE http://www.amcon.com EX-23 3 ex231deloitteconsent.txt EXHIBIT 23.1 DELOITTE CONSENT Exhibit-23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statement of AMCON Distributing Company on Form S-8, filed on September 7, 2000, of our reports dated January 7, 2005 (August 19, 2005 as to the effects of the subsequent event described in Note 19 and of the restatements described in Note 22), which reports express an unqualified opinion and include explanatory paragraphs relating to the change in method of accounting for goodwill and intangibles assets in 2003 and the restatement of the Company's consolidated financial statements described in Note 22, appearing in and incorporated by reference in this Annual Report on Form 10-K/A of AMCON Distributing Company and subsidiaries for the fiscal year ended September 24, 2004. DELOITTE & TOUCHE LLP Omaha, Nebraska August 19, 2005 EXHIBIT 31.1 ------------ CERTIFICATION ------------- I, William F. Wright, certify that: 1. I have reviewed this annual report on Form 10-K/A of AMCON Distributing Company; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 we 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 annual 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 registrants' fiscal fourth 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 controls 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 controls 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: August 19, 2005 /s/ William F. Wright -------------------------------- William F. Wright, Chairman and Principal Executive Officer EXHIBIT 31.2 ------------ CERTIFICATION ------------- I, Michael D. James, certify that: 1. I have reviewed this annual report on Form 10-K/A of AMCON Distributing Company; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 we 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 annual 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 registrants' fiscal fourth 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 controls 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 controls 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: August 19, 2005 /s/ Michael D. James --------------------------------- Michael D. James, Vice President and Chief Financial Officer 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 Annual Report on Form 10-K/A (the "Report") of AMCON Distributing Company (the "Company") for the fiscal year ended September 24, 2004, 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: August 19, 2005 /s/ William F. Wright ------------------------------ Title: Chairman and Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to AMCON Distributing Company and will be retained by AMCON Distributing Company and furnished to the Securities and Exchange Commission or its staff upon request. 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 Annual Report on Form 10-K/A (the "Report") of AMCON Distributing Company (the "Company") for the fiscal year ended September 24, 2004, 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: August 19, 2005 /s/ Michael D. James ------------------------- Title: Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to AMCON Distributing Company and will be retained by AMCON Distributing Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-31 4 ex311wfw.txt EXHIBIT 31.1 WILLIAM F. WRIGHT CERTIFICATION EXHIBIT 31.1 ------------ CERTIFICATION ------------- I, William F. Wright, certify that: 1. I have reviewed this annual report on Form 10-K/A of AMCON Distributing Company; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 we 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 annual 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 registrants' fiscal fourth 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 controls 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 controls 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: August 19, 2005 /s/ William F. Wright -------------------------------- William F. Wright, Chairman and Principal Executive Officer EX-31 5 ex312mdj.txt EXHIBIT 31.2 MICHAEL D. JAMES CERTIFICATION EXHIBIT 31.2 ------------ CERTIFICATION ------------- I, Michael D. James, certify that: 1. I have reviewed this annual report on Form 10-K/A of AMCON Distributing Company; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 we 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 annual 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 registrants' fiscal fourth 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 controls 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 controls 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: August 19, 2005 /s/ Michael D. James --------------------------------- Michael D. James, Vice President and Chief Financial Officer EX-32 6 ex321wfw.txt EXHIBIT 32.1 WILLIAM F. WRIGHT 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 Annual Report on Form 10-K/A (the "Report") of AMCON Distributing Company (the "Company") for the fiscal year ended September 24, 2004, 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: August 19, 2005 /s/ William F. Wright ------------------------------ Title: Chairman and Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to AMCON Distributing Company and will be retained by AMCON Distributing Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 7 ex322mdj.txt EXHIBIT 32.2 MICHAEL D. JAMES 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 Annual Report on Form 10-K/A (the "Report") of AMCON Distributing Company (the "Company") for the fiscal year ended September 24, 2004, 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: August 19, 2005 /s/ Michael D. James ------------------------- Title: Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to AMCON Distributing Company and will be retained by AMCON Distributing Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----