-----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, CidtjPzbccvO3eTAmJarTkTuHlFvfvt7WI3yFxcNhLvBYITJU6Vser8CQiMKmenU Jw2pzf+OZ24WLxTLxHAvAg== 0000928465-06-000064.txt : 20061127 0000928465-06-000064.hdr.sgml : 20061127 20061127082006 ACCESSION NUMBER: 0000928465-06-000064 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20061127 DATE AS OF CHANGE: 20061127 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMCON DISTRIBUTING CO CENTRAL INDEX KEY: 0000928465 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 470702918 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15589 FILM NUMBER: 061238344 BUSINESS ADDRESS: STREET 1: 7405 IRVINGTON ROAD STREET 2: POST OFFICE BOX 641940 (68164-7940) CITY: OMAHA STATE: NE ZIP: 68122 BUSINESS PHONE: 4023313727 MAIL ADDRESS: STREET 1: 7405 IRVINGTON ROAD STREET 2: POST OFFICE BOX 641940 (68164-7940) CITY: OMAHA STATE: NE ZIP: 68122 10-Q 1 june0610q.txt Q3 2006 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2006 OR / / Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ------------------------------ COMMISSION FILE NUMBER 1-15589 ------------------------------ AMCON Distributing Company - ----------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 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 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X ------- ------- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer Non-accelerated filer X ---- ---- ---- The Registrant had 527,062 shares of its $.01 par value common stock outstanding as of November 20, 2006. Form 10-Q 3rd Quarter INDEX ------- PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: -------------------------------------------- Condensed consolidated balance sheets at June 30, 2006 (unaudited)and September 30, 2005 3 Condensed consolidated unaudited statements of operations for the three and nine months ended June 30, 2006 and 2005 (as restated) 4 Condensed consolidated unaudited statements of cash flows for the nine months ended June 30, 2006 and 2005 (as restated) 5 Notes to condensed consolidated unaudited financial statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 28 Item 3. Quantitative and Qualitative Disclosures About Market Risk 40 Item 4. Controls and Procedures 40 PART II - OTHER INFORMATION Item 1. Legal Proceedings 42 Item 1A. Risk Factors 42 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42 Item 3. Defaults Upon Senior Securities 42 Item 4. Submission of Matters to a Vote of Security Holders 42 Item 5. Other Information 42 Item 6. Exhibits 43 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements
AMCON Distributing Company and Subsidiaries Condensed Consolidated Balance Sheets June 30, 2006 and September 30, 2005 - ------------------------------------------------------------------------------------------------------- June 2006 September 2005 (Unaudited) ------------ -------------- ASSETS Current assets: Cash $ 84,020 $ 546,273 Accounts receivable, less allowance for doubtful accounts of $1.0 million and $0.6 million, respectively 30,134,256 28,202,857 Inventories 30,492,996 23,977,889 Deferred income taxes 1,642,212 1,642,212 Current assets of discontinued operations 37,544 1,159,228 Prepaid and other current assets 4,843,534 5,269,784 ------------ ------------ Total current assets 67,234,562 60,798,243 Property and equipment 14,102,301 15,162,007 Deferred income taxes 6,863,737 6,300,503 Noncurrent assets from discontinued operations 2,382,801 2,475,803 Goodwill 5,848,808 5,848,808 Other intangible assets 3,449,736 3,464,534 Other assets 1,084,769 1,258,899 ------------ ------------ $100,966,714 $ 95,308,797 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable $ 15,550,519 $ 17,047,833 Accrued expenses 4,837,193 4,990,814 Accrued wages, salaries and bonuses 1,171,914 1,601,666 Income taxes payable - 118,798 Current liabilities of discontinued operations 4,339,022 4,098,412 Current maturities of revolving credit facility 3,932,000 1,432,000 Current maturities of long-term debt 815,005 936,198 ------------ ------------ Total current liabilities 30,645,653 30,225,721 ------------ ------------ Revolving credit facility, less current maturities 52,768,394 47,730,388 Long-term debt, less current maturities 7,508,260 7,636,468 Noncurrent liabilities of discontinued operations 5,651,744 5,648,648 Series A cumulative, convertible preferred stock, $.01 par value 100,000 shares authorized and issued, liquidation preference $25.00 per share 2,438,355 2,438,355 Series B cumulative, convertible preferred stock, $.01 par value 80,000 shares authorized and issued, liquidation preference $25.00 per share 1,857,645 1,857,645 Series C cumulative, convertible preferred stock, $.01 par value 80,000 shares authorized and issued, liquidation preference $25.00 per share 1,982,372 - Commitments and contingencies (Note 12) Shareholders' equity (deficiency): Preferred stock, $0.01 par, 1,000,000 shares authorized, none outstanding - - Common stock, $.01 par value, 3,000,000 shares authorized, 527,062 shares issued 5,271 5,271 Additional paid-in capital 6,263,476 6,218,476 Accumulated other comprehensive income, net of tax of $0.1 million in 2005 - 101,294 Accumulated deficit (8,154,456) (6,553,469) ------------ ------------ Total shareholders' deficiency (1,885,709) (228,428) ------------ ------------ $100,966,714 $ 95,308,797 ============ ============ The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
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AMCON Distributing Company and Subsidiaries Condensed Consolidated Unaudited Statements of Operations for the three and nine month periods ended June 30, 2006 and 2005 - --------------------------------------------------------------------------------------------------------- For the three months For the nine months ended June ended June ----------------------------- ----------------------------- 2006 2005 2006 2005 (As restated (As restated see notes see notes 1 & 13) 1 & 13) ------------- ------------- ------------- ------------- Sales (including excise taxes of $52.5 million and $50.1 million, and $147.7 million and $145.2 million, respectively) $ 223,954,710 $ 215,124,070 $ 620,973,352 $ 621,859,811 Cost of sales 208,168,019 199,928,910 576,622,438 577,790,948 ------------- ------------- ------------- ------------- Gross profit 15,786,691 15,195,160 44,350,914 44,068,863 ------------- ------------- ------------- ------------- Selling, general and administrative expenses 13,096,950 12,720,659 38,989,674 38,533,701 Depreciation and amortization 525,170 571,940 1,510,767 1,718,209 ------------- ------------- ------------- ------------- 13,622,120 13,292,599 40,500,441 40,251,910 ------------- ------------- ------------- ------------- Operating income 2,164,571 1,902,561 3,850,473 3,816,953 ------------- ------------- ------------- ------------- Other (income) expense: Interest expense 1,227,561 1,063,338 3,505,530 3,114,773 Other (income) expense, net (44,424) (32,827) (94,015) (48,679) ------------- ------------- ------------- ------------- 1,183,137 1,030,511 3,411,515 3,066,094 ------------- ------------- ------------- ------------- Income from continuing operations before income taxes 981,434 872,050 438,958 750,859 Income tax expense 392,000 347,000 246,000 358,000 Minority interest - - - (97,100) ------------- ------------- ------------ ------------- Income from continuing operations 589,434 525,050 192,958 489,959 Loss from discontinued operations, net of income tax benefit of $0.1 million and $0.5 million, $0.9 million and $1.9 million, respectively (243,183) (751,473) (1,533,453) (3,084,832) ------------- ------------- ------------- ------------- Net income (loss) 346,251 (226,423) (1,340,495) (2,594,873) Preferred stock dividend requirements (104,386) (74,053) (260,492) (219,773) ------------- ------------- ------------- ------------- Net income (loss) available to common shareholders $ 241,865 $ (300,476) $ (1,600,987) $ (2,814,646) ============= ============= ============= ============= Basic earnings (loss) per share available to common shareholders: Continuing operations $ 0.92 $ 0.86 $ (0.13) $ 0.51 Discontinued operations (0.46) (1.43) (2.91) (5.85) ------------- ------------- ------------- ------------- Net basic earnings (loss) per share available to common shareholders $ 0.46 $ (0.57) $ (3.04) $ (5.34) ============= ============= ============= ============= Diluted earnings (loss) per share available to common shareholders: Continuing operations $ 0.69 $ 0.73 $ (0.13) $ 0.49 Discontinued operations (0.28) (1.05) (2.91) (5.63) ------------- ------------- ------------- ------------- Net diluted earnings (loss) per share available to common shareholders $ 0.41 $ (0.32) $ (3.04) $ (5.14) ============= ============= ============= ============= Weighted average shares outstanding: Basic 527,062 527,062 527,062 527,062 Diluted 854,187 712,881 527,062 547,774 The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
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AMCON Distributing Company and Subsidiaries Condensed Consolidated Unaudited Statements of Cash Flows for the nine month periods ended June 30, 2006 and 2005 - ------------------------------------------------------------------------------- 2006 2005 (As restated see notes 1 & 13) ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $ (1,340,495) $ (2,594,873) Deduct: (loss) from discontinued operations, net of tax 1,533,453 3,084,832 ------------ ------------ Income from continuing operations 192,958 489,959 Adjustments to reconcile net (loss) income from continuing operations to net cash flows from operating activities: Depreciation 1,606,824 1,735,404 Amortization 29,798 146,196 (Gain) loss on sale of property and equipment 11,570 (20,361) Stock based compensation 45,000 - Deferred income taxes (563,234) (1,558,608) Provision for losses on doubtful accounts 505,295 259,080 Provision for losses on inventory obsolescence 46,204 237,167 Impairment on assets held for sale - 77,680 Minority interest - (97,100) Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable (2,436,694) (3,698,445) Inventories (6,561,311) 7,338,879 Other current assets 324,956 (494,133) Other assets 174,130 (42,286) Accounts payable (1,134,598) (2,391,119) Accrued expenses and accrued wages, salaries and bonuses (583,373) 935,587 Income tax payable and receivable (118,798) 190,445 ------------ ------------ Net cash flows from operating activities - continuing operations (8,461,273) 3,108,345 Net cash flows from operating activities - discontinued operations (779,463) (1,761,749) ------------ ------------ Net cash flows from operating activities (9,240,736) 1,346,596 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (609,637) (2,469,156) Proceeds from sales of property and equipment 50,949 85,265 Purchase of trademark (15,000) - ------------ ------------ Net cash flows from investing activities - continuing operations (573,688) (2,383,891) Net cash flows from investing activities - discontinued operations (2,671) (92,872) ------------ ------------ Net cash flows from investing activities (576,359) (2,476,763) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (payments) on revolving credit facility 7,538,006 10,977,882 Net proceeds from preferred stock issuance 1,982,372 1,857,645 Proceeds from borrowings of long-term debt 125,988 1,399,636 Dividends paid on preferred stock (260,492) (219,773) Principal payments on long-term debt and subordinated debt (738,105) (12,907,705) Debt issue costs - (446,641) ------------ ------------ Net cash flows from financing activities - continuing operations 8,647,769 661,044 Net cash flows from financing activities - discontinued operations 707,073 421,489 ------------ ------------ Net cash flows from financing activities 9,354,842 1,082,533 ------------ ------------ Net change in cash (462,253) (47,634) Cash, beginning of period 546,273 416,073 ------------ ------------ Cash, end of period $ 84,020 $ 368,439 ============ ============ 5 Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 3,488,161 $ 2,661,734 Cash refunded during the period for income taxes (1,577) (185,630) Supplemental disclosure of non-cash information: Issuance of note payable in exchange for accounts payable $ 362,716 $ - Acquisition of equipment through capital leases - 91,343 The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
6 AMCON Distributing Company and Subsidiaries Notes to Condensed Consolidated Unaudited Financial Statements June 30, 2006 and 2005 - ---------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION: AMCON Distributing Company and Subsidiaries ("AMCON" and "the Company") is primarily engaged in the wholesale distribution of consumer products in the Great Plains and Rocky Mountain regions. In addition, the Company operates thirteen retail health food stores in Florida and the Midwest and a non- alcoholic beverage business that includes a natural artesian water bottling operation in the State of Hawaii. AMCON's wholesale distribution business ("ADC") includes five 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"). HNWC bottles natural artesian 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. In March 2006, Trinity Springs, Inc. ("TSI"), which was formerly part of the Company's beverage segment, ceased on-going operations because of recurring losses as discussed further in Note 2. TSI bottled and distributed geothermal water, natural mineral supplements and other premium beverages. As a result, the balance sheets as of June 30, 2006 and September 30, 2005, and the statements of operations for the three and nine month fiscal periods ended June 30, 2006 and June 30, 2005 and cash flows for the nine month fiscal periods ended June 30, 2006 and June 30, 2005 have been prepared reflecting TSI in discontinued operations in accordance with Statement of Financial Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." As previously disclosed in the Company's Fiscal 2005 Annual Report on Form 10-K and described in Note 13 to the Condensed Consolidated Unaudited Financial Statements, the financial statements for the three and nine month fiscal periods ended June 30, 2005, included within this quarterly report, have been restated. The restatement reflects the impact of errors made in certain interest expense allocations to The Beverage Group, Inc. ("TBG"), which ceased operations in March 2005, and inventory production accounting errors made at HNWC, both of which occurred during fiscal 2005. 7 Results for the interim period are not necessarily indicative of results to be expected for the entire year. The accompanying condensed consolidated unaudited financial statements include the accounts of AMCON Distributing Company and its subsidiaries. As a result of its 85% ownership in TSI, the Company has included its operating results in the accompanying consolidated financial statements and has presented the 15% non-owned interest in this subsidiary as a minority interest. Further, the Company has suspended the allocation of TSI's losses to minority shareholders as their equity basis has been reduced to zero and the minority shareholders have not guaranteed TSI's debt or committed additional capital to TSI. As described further in Note 12, the Company is currently involved in litigation regarding the ownership of TSI's assets. Based on independent legal counsel's opinion as described in Note 2, the Company continues to account for TSI as a consolidated subsidiary of AMCON. All significant intercompany transactions and balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In the opinion of management, the accompanying condensed consolidated unaudited financial statements contain all adjustments necessary to fairly present the financial information included therein, such adjustments consisting of normal recurring items. The Company believes that although the disclosures are adequate to prevent the information presented from being misleading, these condensed consolidated financial statements should be read in conjunction with the Company's annual audited consolidated financial statements for the year ended September 30, 2005, as filed with the Securities and Exchange Commission on Form 10-K ("2005 Annual Report"). For convenience, the third fiscal quarters of 2006 and 2005 have been referred to throughout this quarterly report as June 2006 and June 2005, respectively. During the first quarter of fiscal 2005, the Company changed its reporting period from a 52-53 week year ending on the last Friday in September to a calendar month reporting period ending on September 30 of each year. As a result of this change, the first nine months of fiscal 2005 include one additional week of operations compared to the first nine months of fiscal 2006. Stock-based Compensation - ------------------------ Prior to its expiration in June 2004, AMCON maintained a stock-based compensation plan under which the Compensation Committee of the Board of Directors could grant incentive stock options and non-qualified stock options. On October 1, 2005, the Company adopted SFAS No. 123 (revised 2004) (SFAS 123R), Share Based Payment. The Company chose to apply the modified prospective transition method as permitted by SFAS 123R and therefore has not restated prior periods. Under the transition method, compensation cost associated with employee stock options has been recognized for the three and nine month fiscal periods ended June 30, 2006 totaling $15,000 and $45,000, respectively. This expense represents the amortization of unvested stock option awards granted prior to September 30, 2005 and has been reflected in the consolidated statement of operations under "selling, general and administrative expenses." Prior to the adoption of SFAS 123R, the Company accounted for these plans under APB Opinion 25, Accounting for Stock Issued 8 to Employees, and related Interpretations. Under APB Opinion 25, no compensation cost associated with stock options was reflected in net income (loss) available to common shareholders, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) available to common shareholders and income (loss) per share for the three and nine month fiscal periods ended June 2005, had the Company applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
For the three months For the nine months ended June ended June ------------------------- ------------------------- 2005 2005 ----------- ----------- Net loss available to common shareholders - --------------------------------------- Loss available to common shareholders, as reported $ (300,476) $(2,814,646) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (22,594) (67,782) ----------- ----------- Pro forma net loss available to common shareholders $ (323,070) $(2,882,428) =========== =========== Net loss per share available to common shareholders - ------------------------------------- As reported: Basic $ (0.57) $ (5.34) =========== =========== Diluted $ (0.32) $ (5.14) =========== =========== Pro forma: Basic $ (0.61) $ (5.47) =========== =========== Diluted $ (0.35) $ (5.26) =========== ===========
Recently Issued Accounting Pronouncements - ----------------------------------------- On July 13, 2006, the FASB issued Interpretation 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No 109. The Interpretation provides a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring uncertain tax positions for financial statement purposes. The Interpretation also requires expanded disclosure with respect to the uncertainty in income taxes. FIN 48 will be effective at the beginning of the Company's 2007 fiscal year. The Company is currently assessing the effect of this pronouncement on the financial statements. 9 In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for the Company's fiscal year beginning October 1, 2008, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard. 2. DISPOSITIONS In March 2006 the Company's subsidiary, TSI, ceased operations and was classified as a component of discontinued operations in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" and has been reflected as such in the accompanying condensed consolidated unaudited financial statements as of June 30, 2006 and 2005. In first two fiscal quarters of 2006 the Company's subsidiary, The Beverage Group, Inc. ("TBG"), was also classified as a component of discontinued operations. In April 2006 the Company successfully concluded its wind-down plan of TBG's operations. In accordance with SFAS No. 144, the Company has reclassified the residual asset and liability balances for TBG's disposal group to continuing operations and have been reflected as such throughout this Quarterly Report on Form 10-Q. Trinity Springs, Inc. - --------------------- In March 2006 TSI discontinued operations due to recurring losses and a lack of capital resources to sustain operations. TSI operated a water bottling facility in Idaho and was a component of the Company's beverage segment. Management is currently working to sell TSI's remaining assets to unrelated companies, distributors or liquidators. In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", TSI has been reflected in the accompanying condensed consolidated unaudited financial statements as of June 30, 2006 and 2005 as a component of discontinued operations. During the second fiscal quarter of 2006, the Company recorded charges, included in loss from discontinued operations before taxes, of $0.2 million related to the closure of TSI's operations. These charges were incurred primarily to adjust inventory to its net realizable value. There have been no additional charges related to TSI closure. The Beverage Group, Inc. - ------------------------- In March 2005, the Company's subsidiary, TBG, which represented the beverage marketing and distribution component of the beverage segment, also ceased on-going operations due to recurring losses since its inception in December 2002. During the second fiscal quarter of fiscal 2005, the Company recorded a charge, included in loss from discontinued operations, of $0.8 million to adjust TBG's accounts receivable, inventory and fixed assets to their net realizable values. Additionally, in accordance with SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities", the Company recorded a one-time charge of $0.1 million related to the termination of an office lease. 10 In the first two quarters of fiscal 2006 TBG was classified as a component of discontinued operations because it ceased operations on March 31, 2005. In April 2006 the Company successfully concluded its wind-down plan of TBG's operations and accordingly has classified its residual liabilities with continuing operations and has been reflected as such throughout this Quarterly Report on Form 10-Q. Sales from discontinued operations, which have been excluded from income from continuing operations in the accompanying condensed consolidated unaudited statements of operations, are presented as follows. Discontinued operations include TSI's results from operations for the three and nine months ended June 30, 2006 and 2005. Discontinued operations also include TBG's results from operations for the first six fiscal months of 2006 and first nine fiscal months of 2005. As previously discussed, any residual expenses related to TBG (primarily professional fees) have been accounted for as a component of continuing operations effective April 1, 2006. The effects of the discontinued operations on net income (loss) available to common shareholders and per share data are reflected within the accompanying condensed consolidated unaudited statements of operations.
Three months ended Nine months ended June June -------------------------- --------------------------- 2006 2005 2006 2005 ----------- ------------ ------------ ------------ Sales $ 32,994 $ 2,172,791 $ 1,685,204 $ 5,104,515 Income tax benefit (139,000) (475,000) (876,000) (1,943,000) Loss from discontinued operations (243,183) (761,783) (1,533,453) (3,084,832)
The carrying amounts (net of allowances) of the major classes of assets and liabilities that are included in the disposal groups are as follows (in millions):
June September 2006 2005 ---------- ---------- Accounts receivable $ - $ 0.5 Inventories - 0.7 ---------- ---------- Total current assets of discontinued operations $ - $ 1.2 ========== ========== Fixed assets $ 2.4 $ 2.5 ========== ========== Accounts payable $ 0.8 $ 1.0 Accrued expenses 0.5 0.7 Accrued wages, salaries and bonuses - 0.1 Current portion of long-term debt 0.2 0.3 Current portion of long-term debt due related party 2.8 2.0 ---------- ---------- Total current liabilities of discontinued operations $ 4.3 $ 4.1 ========== ========== Water royalty, in perpetuity $ 2.8 $ 2.8 Long-term debt, less current portion 2.9 2.8 ---------- ---------- Noncurrent liabilities of discontinued operations $ 5.7 $ 5.6 ========== ==========
11 Included in the disposal groups are debt obligations payable to related parties from TSI as follows: - TSI owes a director of the Company $1.0 million on a revolving credit facility with an interest rate of 8.0% per annum. The loan is secured by a second mortgage on TSI's real property on an equal basis with the Company's existing second mortgage on TSI's real property. The revolving credit line matured on December 14, 2005 at which time principal and accrued interest were due. - TSI owes $0.5 million on a loan due to a related party which is wholly-owned by three of the Company's directors (including the Chairman and the President) and another significant shareholder. The note bears interest at 7.0% per annum and matured in December 2005. - TSI obtained unsecured, subordinated loans totaling $0.5 million from unaffiliated businesses of two of the Company's directors, including a Company of which the Chairman of the Board is a partner. The loan matured on December 8, 2005 and bears interest of 7.0% per annum. - TSI owes $750,000 to Draupnir, LLC on a note bearing interest at a floating rate of 300 basis points above the ten year treasury note yield, compounded annually and adjusted concurrently with any adjustments to the yield on the ten year treasury note. The notes matured on December 13, 2005. All of the aforementioned notes payable to related parties from TSI are in default as of June 30, 2006 and are classified in current liabilities of discontinued operations. 3. CONVERTIBLE PREFERRED STOCK The Company has the following Convertible Preferred Stock outstanding as of June 2006:
Series A Series B Series C ------------- --------------- --------------- Date of issuance: June 17, 2004 October 8, 2004 March 6, 2006 Optionally redeemable beginning June 18, 2006 October 9, 2006 March 4, 2008 Par value (gross proceeds): $2,500,000 $2,000,000 $2,000,000 Number of shares: 100,000 80,000 80,000 Liquidation preference per share: $25.00 $25.00 $25.00 Conversion price per share: $30.31 $24.65 $13.62 Number of common shares in which to be converted: 82,481 81,136 146,842 Dividend rate: 6.785% 6.370% 6.00%
The Series A Convertible Preferred Stock ("Series A"), Series B Convertible Preferred Stock ("Series B") and Series C Convertible Preferred Stock ("Series C"), collectively (the "Preferred Stock"), are convertible at any time by the holders into a number of shares of AMCON common stock equal to the number of preferred shares being converted times a fraction equal to $25.00 divided by the conversion price. The conversion prices for the 12 Preferred Stock are subject to customary adjustments in the event of stock splits, stock dividends and certain other distributions on the Common Stock. Cumulative dividends for the Preferred Stock are payable in arrears, when, as and if declared by the Board of Directors, on March 31, June 30, September 30 and December 31 of each year. In the event of a liquidation of the Company, the holders of the Preferred Stock, are entitled to receive the liquidation preference plus any accrued and unpaid dividends prior to the distribution of any amount to the holders of the Common Stock. The Preferred Stock also contain redemption features which trigger based on certain circumstances such as a change of control, minimum thresholds of ownership by the Chairman and his family in AMCON, or bankruptcy. The Preferred Stock are optionally redeemable by the Company beginning on various dates, as listed above, at redemption prices equal to 112% of the liquidation preference. The redemption prices decrease 1% annually thereafter until the redemption price equals the liquidation preference after which date it remains the liquidation preference. The Company's credit facility also prohibits the redemption of the Series A and Series B. Series C is only redeemable so long as no event of default is in existence at the time of, or would occur after giving effect to, any such redemption, and the Company has excess availability under the credit facility of not less than $2.0 million after giving effect to any such redemption. The Company believes that redemption of these securities by the holders is not probable based on the following evaluation. Our executive officers and directors as a group own approximately 60% of the outstanding common stock as of June 30, 2006. Mr. William Wright, who has been AMCON's Chairman of the Board since AMCON's founding, beneficially owns 29% of the outstanding common stock without giving effect to shares owned by his adult children. There is an identity of interest among AMCON and its officers and directors for purposes of the determination of whether the triggering redemption events described above are within the control of AMCON since AMCON can only make decisions on control or other matters through those persons. Moreover, the Preferred Stock is in friendly hands with no expectation that there would be any effort by the holders of such Preferred Stock to see optional redemption without the Board being supportive of the events that may trigger that right. The Series A is owned by Mr. Wright, the Company's Chairman, and a private equity firm (Draupnir, LLC) of which Mr. Petersen and Mr. Jeremy Hobbs, both of whom are directors of the Company, are Members. The Series B Preferred Stock is owned by an institutional investor which has elected Mr. Chris Atayan, now AMCON's Vice Chairman and Chief Executive Officer, to AMCON's Board of Directors pursuant to voting rights in the Certificate of Designation creating the Series B Preferred Stock. The Series C is owned by Draupnir Capital LLC, which is the parent company of Draupnir, LLC (the owner of Series A). Mr. Petersen and Mr. Hobbs are also Members of Draupnir Capital, LLC. In view of the foregoing considerations, the Company believes it is not probable under Rule 5-02.28 of Regulation S-X that the Series A, Series B or Series C Preferred Stock will become redeemable in the future. 13 4. INVENTORIES Inventories consisted of the following at June 2006 and September 2005: June September 2006 2005 ------------ ------------ Finished goods $ 34,840,643 $ 28,270,556 Raw materials 561,909 540,773 LIFO reserve (4,909,556) (4,833,440) ------------ ------------ $ 30,492,996 $ 23,977,889 ============ ============ 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 inventories are stated at the lower of cost (last-in, first-out or "LIFO" method) or market and consist of the cost of finished goods. The retail health food operation utilizes the retail inventory method of accounting stated at the lower of cost (LIFO) or market and consists of the costs of finished goods. The beverage operation's inventories are stated at the lower of cost (LIFO) or market and consist of raw materials and finished goods. The beverage operation's finished goods inventory includes raw materials, related plant labor and manufacturing overhead costs to convert raw materials to finished goods. Raw materials inventory consists of pre-forms used to make bottles, caps, labels and various packaging and shipping materials. The LIFO reserves at June 2006 and September 2005 represent the amount by which LIFO inventories were less than the amount of such inventories valued on a first-in, first-out basis, respectively. The allowance for obsolete inventory of $0.3 million and $0.4 million at June 2006 and September 2005, respectively, reflects estimated unsaleable or non-refundable inventory based upon an evaluation of slow moving and discontinued products. 5. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill by reporting segment for continuing operations of the Company was as follows:
June September 2006 2005 ------------ ------------ Wholesale $ 3,935,931 $ 3,935,931 Retail 1,912,877 1,912,877 ------------ ------------ $ 5,848,808 $ 5,848,808 ============ ============
Other intangible assets for continuing operations of the Company at June 2006 and September 2005 consisted of the following: 14
June September 2006 2005 ------------ ------------ Trademarks and tradenames $ 3,373,269 $ 3,358,269 Favorable leases (less accumulated amortization of $409,534 and $379,736) 76,467 106,265 ------------ ------------ $ 3,449,736 $ 3,464,534 ============ ============
Goodwill, trademarks and tradenames are considered to have indefinite useful lives and therefore no amortization has been taken on these assets. The Company performs an annual impairment testing of goodwill and other intangible assets after the completion of its third fiscal quarter. Amortization expense for intangible assets that are considered to have finite lives was $9,933 and $29,798 and $38,762 and $146,196 for the three and nine months ended June 2006 and 2005, respectively. Amortization expense related to intangible assets held at June 2006 for each of the five years subsequent to September 30, 2005 is estimated to be as follows:
Fiscal Fiscal Fiscal Fiscal Fiscal 2006 /1/ 2007 2008 2009 2010 --------- --------- -------- -------- -------- Favorable leases 10,000 40,000 26,000 - - ========= ========= ======== ======== ========
/1/ Represents amortization expense of finite life intangible assets for the remaining three months of Fiscal 2006. 6. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share available to common shareholders is calculated by dividing income (loss) from continuing operations less preferred stock dividend requirements and loss from discontinued operations by the weighted average common shares outstanding for each period. Diluted earnings (loss) per share available to common shareholders is calculated by dividing income (loss) from continuing operations less preferred stock dividend requirements (when anti-dilutive) and loss from discontinued operations by the sum of the weighted average common shares outstanding and the weighted average dilutive options, using the treasury stock method. Stock options and potential common stock outstanding at June 2006 and June 2005 that were anti-dilutive were not included in the computations of 15 diluted earnings per share. Such potential common shares totaled 354,537 with an average exercise price of $22.12 for the nine months ended June 2006 and 197,199 with an average exercise price of $29.20 for the nine months ended June 2005.
For the three months ended June ------------------------------------------------------- 2006 2005 ------------------------- ------------------------- Basic Diluted Basic Diluted ----------- ----------- ----------- ----------- 1. Weighted average common shares outstanding 527,062 527,062 527,062 527,062 2. Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock - 327,125 - 185,819 ----------- ----------- ----------- ----------- 3. Weighted average number of shares outstanding 527,062 854,187 527,062 712,881 =========== =========== =========== =========== 4. Income from continuing operations $ 589,434 $ 589,434 $ 525,050 $ 525,050 Deduct: preferred stock dividend requirements (104,386) - (74,053) - ----------- ----------- ----------- ----------- 485,048 589,434 450,997 525,050 =========== =========== =========== =========== 5. Loss from discontinued operations $ (243,183) $ (243,183) $ (751,473) $ (751,473) =========== =========== =========== =========== 6. Net income (loss) available to common shareholders $ 241,865 $ 346,251 $ (300,476) $ (226,423) =========== =========== =========== =========== 7. Earnings per share from continuing operations $ 0.92 $ 0.69 $ 0.86 $ 0.73 =========== =========== =========== =========== 8. Loss per share from discontinued operations $ (0.46) $ (0.28) $ (1.43) $ (1.05) =========== =========== =========== =========== 9. Net earnings (loss) per share available to common shareholders $ 0.46 $ 0.41 $ (0.57) $ (0.32) =========== =========== =========== ===========
16
For the nine months ended June ------------------------------------------------------- 2006 2005 ------------------------- ------------------------- Basic Diluted Basic Diluted ----------- ----------- ----------- ----------- 1. Weighted average common shares outstanding 527,062 527,062 527,062 527,062 2. Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock - - - 20,712 ----------- ----------- ----------- ----------- 3. Weighted average number of shares outstanding 527,062 527,062 527,062 547,774 =========== =========== =========== =========== 4. Income from continuing operations $ 192,958 $ 192,958 $ 489,959 $ 489,959 Deduct: preferred stock dividend requirements (260,492) (260,492) (219,773) (219,773) ----------- ----------- ----------- ----------- (67,534) (67,534) 270,186 270,186 =========== =========== =========== =========== 5. Loss from discontinued operations $(1,533,453) $(1,533,453) $(3,084,832) $(3,084,832) =========== =========== =========== =========== 6. Net loss available to common shareholders $(1,600,987) $(1,600,987) $(2,814,646) $(2,814,646) =========== =========== =========== =========== 7. (Loss) earnings per share from continuing operations $ (0.13) $ (0.13) $ 0.51 $ 0.49 =========== =========== =========== =========== 8. Loss per share from discontinued operations $ (2.91) $ (2.91) $ (5.85) $ (5.63) =========== =========== =========== =========== 9. Loss per share available to common shareholders $ (3.04) $ (3.04) $ (5.34) $ (5.14) =========== =========== =========== ===========
7. COMPREHENSIVE INCOME (LOSS) The following is a reconciliation of net income (loss) per the accompanying condensed consolidated unaudited statements operations to comprehensive income (loss) for the periods indicated: 17
For the three months For the nine months ended June ended June ------------------------- ------------------------- 2006 2005 2006 2005 ----------- ----------- ----------- ----------- Net income (loss) $ 346,251 $ (226,423) $(1,340,495) $(2,594,873) Interest rate swap valuation adjustment, net of income tax benefit (expense) of $39,000 and $18,000 for the three months ended June 30, 2006 and 2005 and $53,000 and ($26,000) for nine months ended June 30, 2006 and 2005, respectively (53,814) (28,604) (101,294) 43,062 ----------- ----------- ----------- ----------- Comprehensive income (loss) $ 292,437 $ (255,027) $(1,441,789) $(2,551,811) =========== =========== =========== ===========
The accumulated balances for each classification of accumulated comprehensive income (loss) is as follows:
Interest rate swap mark-to -market --------- Balance, September 30, 2005 $ 101,294 Current period change (101,294) --------- Balance, June 30, 2006 $ - =========
8. DEBT Credit Agreement - ---------------- The Company's credit agreement with LaSalle Bank (the "Facility") provides for a $55.0 million credit limit consisting of a $53.8 million revolving credit line and a $1.2 million term note ("Term Note A"). As payments are made on Term Note A, the revolving credit limit increases accordingly to a maximum of $55.0 million. At June 30, 2006, the credit limit on the revolving portion of the Facility was $54.2 million. In addition, the Facility provides for a separate term loan in the initial amount of $5.0 million ("Term Note B"). The Facility, which expires in July 2007 (as amended in November 2006), includes lending limits subject to accounts receivable and inventory limitations, an unused commitment fee equal to 0.25% per annum on the difference between the maximum loan limit and average monthly borrowing for the month and financial covenants. Additionally, management is in negotiations to execute an early renewal of the Facility agreement under terms similar to those currently in place including certain financial covenant modifications. 18 The significant provisions of the Facility at June 2006 are as follows: - Inclusion of the subsidiaries as part of the Facility. - Inclusion of Term Note A within the $55.0 million revolving limit that is amortized in equal monthly installments over 60 months. - The Company borrows at the bank's base interest rate. - Inclusion of a prepayment penalty of $0.3 million should the loans be paid off prior to September 30, 2006. The Facility contains covenants (as amended in January 2006) that (i) restrict permitted investments, (ii) restrict intercompany advances to certain subsidiaries, (iii) restrict incurrence of additional debt, (iv) restrict mergers and acquisitions and changes in business or conduct of business and (v) requires that consolidated EBITDA (excluding TSI, TBG and HNWC) not be less than: (a) $100,000 as of the last day of each month for the one-month period then ending, except for the month ending February 28, 2006 which was permitted to be zero, (b) $1,100,000 as of March 31, 2006 for the three-month period then ending, (c) $3,200,000 as of June 30, 2006 for the six-month period then ending, and (d) $5,500,000 as of September 30, 2006 for the ninth-month period then ending, and (e) $6,500,000 as of December 31, 2006 for the twelve-month period then ending. The Facility also provides that the Company may not pay dividends on its common stock in excess of $0.72 per share on an annual basis. The January 2006 amendment also required AMCON and its subsidiaries to hire a turn-around consultant for the beverage businesses acceptable to the agent for the bank lenders by January 31, 2006 and to pay to the agent its customary fees and expenses in exercising its rights under the loan agreement. In addition, the amendment created a new event of default if AMCON or its subsidiaries makes any payment (in cash or other property) or a judgment is entered against AMCON or its subsidiaries requiring a payment (in cash or other property) to be made under or in connection with the guaranty by AMCON of the TSI acquisition notes or the water royalty under the asset purchase agreement for the purported sale of TSI assets. The amendment also reduced the monthly payment on Term Note B from $275,000 per month to $100,000 per month until paid in full. The Facility also provides for a "springing" lock-box arrangement, under which, the Company maintains a lock-box from which it may apply cash receipts to any corporate purpose so long as it is not in default under the Facility. The bank maintains a security interest in the Company's lock-box and upon the occurrence of default may redirect funds from the lock-box to a loan account in the name of the lenders on a daily basis and apply the funds against the revolving loan balance. In November 2006 the Company and Lasalle Bank amended the Credit Facility to extend the maturity date of the credit agreement to July 2007. As of June 30, 2006, the outstanding balance on the Facility was $54.8 million, including Term Note A. The Facility bears interest at the bank's base rate, which was 8.0% as of June 30, 2006 and is collateralized by all of the Company's equipment, intangibles, inventories, and accounts receivable. Based on our collateral and loan limits, the Company was over the borrowing base credit limits on the Facility by $0.3 million at June 30, 2006 but was under the over-advance provision of $1.5 million provided by the facility. 19 The outstanding balance on Term Note B was $1.9 million at June 30, 2006. It bears interest at the bank's base rate, plus 2.0%, which was 10.0% as of June 30, 2006 and, as amended, is payable in equal monthly installments of $0.1 million. The Company's Chairman has personally guaranteed repayment of up to $10.0 million ($6.9 million at June 30, 2006) of the combined amount of the Facility and the term loans. AMCON pays the Company's Chairman a fee equal to 2.0% per annum of the guaranteed principal then outstanding in return for the personal guarantee. This guarantee is secured by a pledge of the shares of Chamberlin's Natural Foods, Inc., Health Food Associates, Inc., HNWC and TSI. Cross Default and Co-Terminus Provisions - ----------------------------------------- The Company's owned real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, and certain warehouse equipment in the Rapid City, SD warehouse is financed through term loans with M&I Bank (formerly known as Gold Bank), who is also a participant lender on the Company's revolving line of credit. The M&I owned real estate term loans contain cross default provisions which cause all loans with M&I to be considered in default if any one of the loans where M&I is a lender, including the revolving credit facility, is in default. In addition, the M&I owned real estate loans contain co-terminus provisions which require all loans with M&I to be paid in full if any of the loans are paid in full prior to the end of their specified terms. Self-Insured Loss Control Program - --------------------------------- In connection with the Company's self-insured loss control program, AMCON has issued a letter of credit in the amount of $1.0 million to its workers' compensation insurance carrier. 9. WATER ROYALTY In connection with the assets purchased by the Company to form its subsidiary, TSI, the Company entered into an agreement with the former owners of those assets, Crystal Paradise Holdings, Inc. (CPH). The agreement calls for TSI to pay CPH, in perpetuity, an amount equal to the greater of $0.03 per liter of water extracted from the source or 4.0% of water revenues (as defined by the purchase agreement). The agreement is guaranteed by AMCON up to a maximum of $5.0 million, subject to a floor of $288,000 annually. Accordingly, the Company has recorded a $2.8 million liability related to the present value of the future minimum water royalty payments and related broker fees to be paid in perpetuity. The water royalty is secured by a first priority security and mortgage on the acquired assets, other than inventory and accounts receivable. CPH retains the right to receive any water royalty payment for the first five years in shares of AMCON common stock up to maximum of 41,666 shares. The water royalty can be cancelled after ten years have elapsed and the business of TSI is sold to an unaffiliated third party, in which case CPH would be entitled to receive the appraised fair market value of the water royalty but not less than $5.0 million. The Company's Chairman has in turn guaranteed AMCON in connection with AMCON's obligation for these payments. 20 10. STOCK PLANS Prior its expiration in June 2004, AMCON maintained a stock-based compensation plan which provided that the Compensation Committee of the Board of Directors granted incentive stock options and non-qualified stock options pursuant to the Stock Option Plan of up to 550,000 shares. In fiscal 2005, the Compensation Committee evaluated various equity based compensation programs and chose not to implement a new plan. The Company accounted for the stock option grants in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" using the intrinsic value method under which compensation cost was measured by the excess, if any, of the fair market value of its common stock on the date of grant over the exercise price of the stock option using the Black-Scholes option pricing model. Accordingly, stock-based compensation cost related to stock option grants was not reflected in income or loss as all options granted under the plan had an exercise price equal to or above the market value of the underlying stock on the date of grant. Options are generally granted at the stock's fair market value at date of grant. Options issued to shareholders holding 10% or more of the Company's stock are generally issued at 110% of the stock's fair market value at date of grant. On October 1, 2005, the Company adopted SFAS No. 123R, Shared Based Payment (SFAS 123R). The Company chose to apply the modified prospective transition method as permitted by SFAS 123R and therefore has not restated prior periods. Under this transition method, compensation cost associated with employee stock options recognized for the three and nine months ended June 30, 2006, includes amortization related to the remaining unvested portion of stock options granted prior to September 30, 2005. At June 30, 2006, the amount of unrecognized stock option compensation cost, to be recognized over a weighted average period of 1.1 years, was approximately $29,000. As a result of adopting SFAS 123R, net income (loss) before taxes included share-based compensation expense of $15,000 and $45,000 for the three and nine months ended June 30, 2006. At June 30, 2006, there were 33,066 options fully vested and exercisable under the Stock Option Plan. Options issued and outstanding to management employees pursuant to the Stock Option Plan are summarized below: Number of Number Date Exercise Price Options Outstanding Exercisable ------------------------------------------------------------------ Fiscal 1998 $ 15.68 14,672 14,672 Fiscal 1999 $ 36.82 - $ 51.14 12,093 12,093 Fiscal 2000 $ 34.50 4,416 4,416 Fiscal 2003 $ 28.80 4,713 1,885 ------ ------ 35,894 33,066 ====== ====== 21 At June 30, 2006, there were 8,188 options fully vested and exercisable issued to outside directors outside the Stock Option Plan as summarized as follows: Number of Number Date Exercise Price Options Outstanding Exercisable ------------------------------------------------------------------ Fiscal 1998 $ 15.68 1,834 1,834 Fiscal 1999 $ 36.82 - $ 49.09 3,852 3,852 Fiscal 2002 $ 26.94 1,668 1,668 Fiscal 2003 $ 28.26 834 834 ------ ------ 8,188 8,188 ====== ====== The stock options have varying vesting schedules ranging up to five years and expire ten years after the date of grant. The following is a summary of the activity of the stock plans during the quarter ended June 30, 2006.
2006 ----------------- Weighted Number Average of Exercise Shares Price ----------------- Outstanding at beginning of period 44,082 $30.43 Granted - - Exercised - - Forfeited/Expired - - ----------------- Outstanding at end of period 44,082 $30.43 ================= Options exercisable at end of period 41,254 ======== Shares available for options that may be granted - ======== Weighted-average grant date fair value of options granted during the period - exercise price equals stock market price at grant $ - ======== Weighted-average grant date fair value of options granted during the period - exercise price exceeds stock market price at grant $ - ========
22 The following summarizes all stock options outstanding at June 30, 2006:
Exercisable Remaining ---------------------------- Exercise Number Weighted-Average Weighted-Average Number Weighted-Average Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price ------------- ----------- ---------------- ---------------- ----------- ---------------- 1998 Options $15.68 16,506 2.1 years $15.68 16,506 $15.68 1999 Options $36.82-$51.14 15,945 3.6 years $45.53 15,945 $45.53 2000 Options $34.50 4,416 4.7 years $34.50 4,416 $34.50 2002 Options $26.94 1,668 6.9 years $26.94 1,668 $26.94 2003 Options $28.26-$28.80 5,547 7.2 years $28.72 2,719 $28.63 ------ ------ ------ ------ 44,082 $30.43 41,254 $30.54 ====== ====== ====== ======
11. BUSINESS SEGMENTS AMCON has three reportable business segments: the wholesale distribution of consumer products, the retail sale of health and natural food products, and the bottling and distribution of bottled water products. The retail health food stores' operations are aggregated to comprise the retail segment because such operations have similar economic characteristics, as well as similar characteristics with respect to the nature of products sold, the type and class of customers for the health food products, and the methods used to sell the products. The beverage segment is comprised of HNWC's operations. As discussed in Note 2, TBG and TSI, formerly part of the beverage segment, ceased operations on March 2005 and March 2006, respectively, and have accordingly been included in the "Other" column. Also included in the "Other" column are the charges incurred by the AMCON's holding company (The Holding Company). The segments are evaluated on revenues, gross margins, operating income (loss) and income before taxes.
Wholesale Distribution Retail Beverage Other /2/ Consolidated ------------- ----------- ----------- ---------- ------------- QUARTER ENDED JUNE 2006: External revenue: Cigarettes $ 159,182,489 $ - $ - $ - $ 159,182,489 Confectionery 15,236,546 - - - 15,236,546 Health food - 9,046,326 - - 9,046,326 Tobacco, beverage & other 38,724,884 - 1,764,465 - 40,489,349 ------------- ----------- ----------- ---------- ------------- Total external revenue 213,143,919 9,046,326 1,764,465 - 223,954,710 Depreciation /1/ 317,828 141,590 72,751 - 532,169 Amortization - 9,933 - - 9,933 Operating income (loss) 2,803,727 447,693 (113,166) (973,683) 2,164,571 Interest expense 456,854 382,080 218,532 170,095 1,227,561 Income (loss) from continuing operations before taxes 2,381,877 75,009 (331,698) (1,143,754) 981,434 Total assets 78,906,392 12,357,226 6,172,599 3,530,497 100,966,714 Capital expenditures, net 122,503 94,786 - - 217,289 23 Wholesale Distribution Retail Beverage Other /2/ Consolidated ------------- ----------- ----------- ---------- ------------- QUARTER ENDED JUNE 2005: External revenue: Cigarettes $ 154,059,881 $ - $ - $ - $ 154,059,881 Confectionery 15,048,473 - - - 15,048,473 Health food - 8,483,253 - - 8,483,253 Tobacco, beverage & other 35,959,648 - 1,612,261 (39,446) 37,532,463 ------------- ----------- ----------- ---------- ------------- Total external revenue 205,068,002 8,483,253 1,612,261 (39,446) 215,124,070 Depreciation /1/ 321,872 179,225 76,234 - 577,331 Amortization 14,438 14,674 9,650 - 38,762 Operating income (loss) 2,177,436 174,347 (440,815) (8,407) 1,902,561 Interest expense 117,836 393,701 209,356 342,445 1,063,338 Income (loss) from continuing operations before taxes 2,084,544 (211,471) (650,171) (350,852) 872,050 Total assets 72,505,484 16,248,674 8,937,477 11,543,109 109,234,744 Capital expenditures, net 94,988 - 124,083 30,805 249,876 NINE MONTHS ENDED JUNE 2006: External revenue: Cigarettes $ 445,431,863 $ - $ - $ - $ 445,431,863 Confectionery 40,480,330 - - - 40,480,330 Health food - 27,772,201 - - 27,772,201 Tobacco, beverage & other 102,526,723 - 4,762,235 - 107,288,958 ------------- ------------ ----------- ---------- ------------- Total external revenue 588,438,916 27,772,201 4,762,235 - 620,973,352 Depreciation /1/ 935,021 466,119 205,684 - 1,606,824 Amortization - 29,798 - - 29,798 Operating income (loss) 5,672,572 1,893,803 (900,982) (2,814,920) 3,850,473 Interest expense 1,159,707 1,188,287 656,521 501,015 3,505,530 Income (loss) from continuing operations before taxes 4,578,696 733,676 (1,557,503) (3,315,911) 438,958 Total assets 78,906,392 12,357,226 6,172,599 3,530,497 100,966,714 Capital expenditures, net 445,093 150,397 14,147 2,671 612,308 NINE MONTHS ENDED JUNE 2005: External revenue: Cigarettes $ 448,994,765 $ - $ - $ - $ 448,994,765 Confectionery 41,947,673 - - - 41,947,673 Health food - 25,872,441 - - 25,872,441 Tobacco, beverage & other 100,855,016 - 4,302,010 (112,094) 105,044,932 ------------- ------------ ----------- ---------- ------------- Total external revenue 591,797,454 25,872,441 4,302,010 (112,094) 621,859,811 Depreciation /1/ 910,618 566,474 258,312 - 1,735,404 Amortization 57,752 49,840 38,604 - 146,196 Operating income (loss) 4,672,086 598,113 (1,462,197) 8,951 3,816,953 Interest expense 415,214 1,169,303 566,845 963,411 3,114,773 Income (loss) from continuing operations before taxes 4,274,583 (540,222) (2,029,042) (954,460) 750,859 Total assets 72,505,484 16,248,674 8,937,477 11,543,109 109,234,744 Capital expenditures, net 2,074,324 14,127 380,705 92,872 2,562,028
/1/ Includes depreciation reported in cost of sales for the beverage segment. /2/ Includes interest expense previously allocated to TBG and TSI while classified as a component of discontinued operations as discussed in Note 2, intercompany eliminations, assets related to discontinued operations and charges incurred by AMCON's holding company. 24 12. CONTINGENCIES As described in the Company's 2005 Annual Report on Form 10-K, the Company is involved in litigation regarding the ownership of the assets of Trinity Springs, Inc. ("TSI"), which is a consolidated subsidiary of AMCON. The dispute, which began in June 2004, arose over the sale of substantially all of the assets of Trinity Springs, Ltd. (which later changed its name to Crystal Paradise Holdings, Inc. ("CPH"). The Plaintiffs in the lawsuit are a group of minority shareholders, and the Defendants are AMCON, TSL Acquisition Corp (which later became TSI), CPH, and the former directors of CPH. In December 2005, the District Court of the Fifth Judicial District of the State of Idaho ("the Court") issued a ruling granting the minority shareholder plaintiffs' motion for partial summary judgment declaring that the stockholders of CPH did not validly approve the sale of its business and assets to TSI (AMCON's consolidated subsidiary) because the vote of certain shares issued as a dividend should not have been counted in the vote. The Court did not rule on the appropriate relief to be granted as a result of the lack of shareholder approval for the asset sale transaction, nor did it rule on the appropriate remedy for any other claim asserted by the parties in this case. However, based on a legal opinion obtained by management from independent legal counsel, to the extent that TSI owned the assets immediately prior to the ruling by the Court discussed above, and has not otherwise transferred the assets, TSI continues to own the assets. Accordingly, AMCON has continued to account for the operations of TSI as a consolidated subsidiary because the Court has not taken any action to divest TSI of its ownership of the assets. Since the Court's December 2005 ruling, several events have taken place. The minority shareholder plaintiffs have filed notice with the District Court that they agree that rescission is not feasible. During approximately the same time frame, the entire CPH Board of Directors resigned. Upon their resignation, the Court appointed a custodian to manage and direct the affairs of CPH. Additionally, the custodian was designated by the Court as CPH's investigative panel to determine whether the maintenance of a derivative proceeding is in the best interest of CPH. During the last several months, the parties have been engaged in settlement discussions. Recently, a settlement agreement was reached between the parties. The settlement resolved all disputes between the shareholders plaintiffs, CPH, AMCON, TSI and the Defendant Directors, with two exceptions that relate to AMCON. The settlement did not resolve claims that CPH may have against AMCON and TSI or that AMCON and TSI may have against CPH. The settlement also did not resolve the claims of a single shareholder plaintiff, who declined to agree to the settlement. On October 16, 2006, the Court approved the parties' settlement and ordered the dismissal with prejudice of the lawsuit, except for the claims of the single shareholder plaintiff whose claims remain pending in the lawsuit and the claims that may exist as between AMCON/TSI and CPH. With respect to the remaining claims, AMCON's management, after consulting with the trial counsel, is unable at this time to state that any outcome unfavorable to AMCON is either probable or remote and therefore cannot estimate the amount or range of any potential loss, if any because substantial discovery is needed, several unresolved legal issues exist, and other pretrial work is yet to be completed. 25 13. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS As previously disclosed in the Company's Fiscal 2005 Annual Report on Form 10-K, the unaudited condensed consolidated financial statements for the three and nine month fiscal periods ended June 30, 2005, included within this quarterly report, have been restated. As discussed in Item 4 - Controls and Procedures, in performing year end audit procedures as of and for the period ended September 30, 2005 of the Company's wholly-owned subsidiary, HNWC, the auditors noted discrepancies in the inventory records. These discrepancies led the Company's Audit Committee to initiate an internal investigation which resulted in the identification of several areas where journal entries were recorded incorrectly including inventory production accounting errors; the overstatement of inventory when integrating fiscal 2005 production systems and records of an operation acquired in fiscal 2004; capitalization of certain fixed overhead costs as inventory which should have been expensed; failure to reserve an appropriate amount for inventory that became obsolete; and capitalization of certain product development costs that should have been expensed as incurred. In addition, management and the Company's Audit Committee determined that the Company had incorrectly allocated interest expense to one of its wholly-owned subsidiaries that had ceased operations on March 31, 2005 (The Beverage Group, Inc.). Emerging Issues Task Force ("EITF") 87-24 "Allocation of Interest to Discontinued Operations", requires that (a) interest on debt that is to be assumed by the buyer or is required to be repaid as a result of the disposal transaction should be allocated to discontinued operations and (b) the allocation of discontinued operations of other consolidated interest that is not directly attributable to or related to other operations of the enterprise is permitted but not required. If interest is allocated to discontinued operations it should be determined by a ratio of net assets to total net assets after adjusting for all interest and debt directly attributable to other aspects of the business. The Company allocated interest to its discontinued operation in its quarterly reporting in fiscal 2005 using an invested capital calculation which resulted in higher interest expense being allocated to discontinued operations than permitted by EITF 87-24. Accordingly, the Company concluded that only direct interest expense, which totaled $0.1 million should have been allocated to discontinued operations. The fiscal 2005 impact of this restatement was corrected in the fourth quarter of fiscal 2005 with the reclassification of $0.5 million of interest expense, net of income tax benefit of $0.3 million from discontinued operations to income (loss) from continuing operations. The table set forth below gives effect to the restatements that have been reflected in the June 30, 2005 balance sheet, statement of operations, and statement of cash flows for the three and nine months ended June 2005. 26
THIRD FISCAL QUARTER ENDED JUNE 30, 2005 - ------------------------------------------ Condensed Consolidated Unaudited Balance Sheet - ---------------------------------------------- As previously Discontinued reported Corrections operations/1/ As restated ------------- ------------ ------------ ------------ Inventory $ 28,939,608 $ (889,612) $ (999,362) $ 27,050,634 Deferred income taxes 3,780,391 353,000 - 4,133,391 Other assets 1,570,434 (148,884) - 1,421,550 Retained earnings 4,354,000 (685,496) - 3,668,504 Condensed Consolidated Unaudited Statement of Operations - -------------------------------------------------------- Three months ended June 30, 2005 --------------------------------------------------------- As previously Discontinued reported Corrections operations/1/ As restated ------------- ----------- ------------- ------------ Cost of sales $ 201,251,586 $ 199,619 $ (1,522,295) $199,928,910 Selling, general and administrative expenses 13,693,711 18,980 (992,032) 12,720,659 Interest expense 942,585 189,964 (69,211) 1,063,338 Income tax expense (benefit) 138,000 (139,000) 348,000 347,000 Loss from discontinued operations (318,257) 124,964 (558,180) (751,473) Net income (loss) (81,824) (144,599) - (226,423) Basic income (loss) per share Continuing operations 0.30 (0.51) 1.07 0.86 Discontinued operations (0.60) 0.24 (1.07) (1.43) Basic income (loss) per share (0.30) (0.27) - (0.57) Diluted income (loss) per share Continuing operations 0.30 (0.51) 0.94 0.73 Discontinued operations (0.60) 0.24 (0.69) (1.05) Diluted income (loss) per share (0.30) (0.27) 0.25 (0.32) Condensed Consolidated Unaudited Statement of Operations - -------------------------------------------------------- Nine months ended June 30, 2005 --------------------------------------------------------- As previously Discontinued reported Corrections operations/1/ As restated ------------- ----------- ------------- ------------ Cost of sales $ 579,946,842 $ 889,612 $ (3,045,506) $577,790,948 Selling, general and administrative expenses 41,245,710 148,884 (2,860,893) 38,533,701 Interest expense 2,746,328 535,580 (167,135) 3,114,773 Income tax (benefit) expense (203,000) (535,000) 1,096,000 358,000 Loss from discontinued operations (1,687,541) 353,580 (1,750,871) (3,084,832) Net income (loss) (1,909,377) (685,496) - (2,594,873) Basic income (loss) per share Continuing operations (0.84) (1.97) 3.32 0.51 Discontinued operations (3.20) 0.67 (3.32) (5.85) Basic income (loss) per share (4.04) (1.30) - (5.34) Diluted income (loss) per share Continuing operations (0.84) (1.97) 3.30 0.49 Discontinued operations (3.20) 0.67 (3.10) (5.63) Diluted income (loss) per share (4.04) (1.30) 0.20 (5.14) 27 Condensed Consolidated Unaudited Statement of Cash Flows - -------------------------------------------------------- Nine months ended June 30, 2005 -------------------------------------------------------- As previously Discontinued reported Corrections operations/1/ As restated ------------- ------------ ------------ ------------ Net income from continuing operations $ (221,836) $ (1,039,076) $ 1,750,871 $ 489,959 Deferred income taxes (1,205,608) (353,000) - (1,558,608) Inventory 5,911,793 889,612 537,474 7,338,879 Other assets (191,170) 148,884 - (42,286) Net cash flows from operating activities - discontinued operations (327,211) 353,580 (1,788,118) (1,761,749) /1/ Effective March 31, 2006, TSI ceased operations and was classified as a component of discontinued operations. This presentation is intended to link the previously reported restatement amounts to the amounts presented in the unaudited condensed consolidated financial statements as of June 30, 2005.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q, including the Management's Discussion and Analysis and other sections, contains forward looking statements that are subject to risks and uncertainties and which reflect management's current beliefs and estimates of future economic circumstances, industry conditions, company performance and financial results. Forward looking statements include information concerning the possible or assumed future results of operations of the Company and those statements preceded by, followed by or that include the words "future," "position," "anticipate(s)," "expect," "believe(s)," "see," "plan," "further improve," "outlook," "should" or similar expressions. For these statements, we claim the protection of the safe harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. You should understand that the following important factors, in addition to those discussed elsewhere in this document, could affect the future results of the Company and could cause those results to differ materially from those expressed in our forward looking statements: - treatment of TSI transaction, - changing market conditions with regard to cigarettes, - changes in promotional and incentive programs offered by cigarette manufacturers, - the demand for the Company's products, - new business ventures, - domestic regulatory risks, - competition, - collection of guaranteed amounts, - other risks over which the Company has little or no control, and - any other factors not identified herein could also have such an effect. Changes in these factors could result in significantly different results. Consequently, future results may differ from management's expectations. Moreover, past financial performance should not be considered a reliable 28 indicator of future performance. Any forward looking statement contained herein is made as of the date of this document. Except as required by law, the Company undertakes no obligation to publicly update or correct any of these forward looking statements in the future to reflect changed assumptions, the occurrence of material events or changes in future operating results, financial conditions or business over time. 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 in our 2005 Annual Report to Shareholders on Form 10-K for the fiscal year ended September 30, 2005 filed with the Securities and Exchange Commission. There have been no significant changes with respect to these policies during the first nine months of fiscal 2006. RESTATEMENT As previously disclosed in the Company's fiscal 2005 Annual Report on Form 10-K and as discussed in Note 13 to the unaudited condensed consolidated financial statements, the Company's June 30, 2005 Consolidated Balance Sheet, Statement of Operations and Statement of Cash Flows have been restated from the amounts previously reported. The accompanying management's discussion and analysis and results of operations gives effect to the restatement. DISCONTINUED OPERATIONS In March 2006, the Company's subsidiary, TSI, ceased operations and was classified as a component of discontinued operations in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" and has been reflected as such in the accompanying condensed consolidated unaudited financial statements as of June 30, 2006 and 2005. During the last two fiscal quarters of 2005, and the first two fiscal quarters of 2006, the Company's subsidiary, The Beverage Group, Inc. ("TBG"), was also classified as a component of discontinued operations. In April 2006 the Company successfully concluded its wind-down plan of TBG's operations. In accordance with SFAS No. 144, the Company has reclassified the residual asset and liability balances for TBG's disposal group to continuing operations and has been reflected as such throughout this Quarterly Report on Form 10-Q. Additionally, management's discussion and analysis of the results of operations for the three and nine months ended June 30, 2006 and June 30, 2005, excludes TBG's and TSI's sales, gross profit (loss), selling, general and administrative, depreciation and amortization, direct interest, other expenses and income tax benefit which have been aggregated and reported as a loss from discontinued operations and are therefore not a component of the discussion of the aforementioned items. 29 COMPANY OVERVIEW - THIRD FISCAL QUARTER 2006 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 consists of a natural artesian water bottling operation in the state of Hawaii. As used herein, unless the context indicates otherwise, the term "ADC" means the wholesale distribution segment and "AMCON" or the "Company" means AMCON Distributing Company and its consolidated subsidiaries. AMCON's fiscal third quarters ended on June 30, 2006 and June 30, 2005. For ease of discussion, these fiscal quarters are referred to herein as June 2006 and 2005, respectively or Q3 2006 and Q3 2005, respectively. During the third quarter of fiscal 2006, the Company: - experienced a 4.1% increase in sales compared to the third quarter of fiscal 2005. - recognized earnings (loss) from continuing operations per diluted share of $0.69 and ($0.13) for the three and nine months ended June 2006, respectively, compared to earnings (loss) from continuing operations per diluted share of $0.73 and $0.49 for the same periods in the prior year. - recognized loss from discontinued operations per diluted share of ($0.28) and ($2.91) for the three and nine months ended June 2006, respectively, compared to a loss from discontinued operations per diluted share of ($1.05) and ($5.63) for the same periods in the prior year. - - Successfully concluded its wind-down plan of its TBG subsidiary which was classified in discontinued operations in the Company's unaudited condensed consolidated financial statements. INDUSTRY SEGMENT OVERVIEWS Wholesale Distribution Segment - ----------------------------- The wholesale distribution business represents approximately 95% of our consolidated sales. ADC places significant importance on an alliance with the major cigarette manufacturers that comprise over 90% of the cigarette industry volume. While some of our competitors have focused on the lower priced cigarette brands, ADC has made a conscious decision to support and grow our national brand segment and align our business with the major players in the industry. We believe that it is important not to compete against the major cigarette manufacturers because of their obligation to their shareholders, the importance they place on branding, their commitment to growing their market share in a declining category and their price gap management strategies. We believe that the consumer's preference for premium brands currently drives the category volume. ADC is ranked as a top ten convenience store supplier and our retailers are provided a broad selection of merchandise in all product categories. We continue to increase our food service product line selections to our customer base to respond to current market trends. 30 We have worked to improve ADC's operating efficiency by investing in newer information technology systems to help automate our buying and financial control functions. We have also sought to minimize inventory costs by maximizing the number of times inventory is renewed during a given period. By managing operating costs, management believes ADC is better positioned to compete with both smaller and larger competitors who offer less service than ADC. The increases in fuel prices across the United States are having a significant impact on all distributors without any indications that fuel prices will return to past levels. Therefore, we expect that competition and pressure on profit margins will continue to affect both large and small distributors and demand that distributors continue to consolidate in order to become more efficient. Retail Health Food Segment - -------------------------- The retail health food industry is experiencing an increase in sales and gross profit driven primarily by the demand for natural products and more health conscious consumers. Our retail health food segment has benefitted from this trend, experiencing sales growth in many product categories including grocery and supplements. Management continues to closely review all store locations for opportunities to close or relocate marginally performing stores, remodel and expand strong performing stores, and identify locations for additional stores. AMCON's retail health food stores are managed collectively through a main office in Tulsa, Oklahoma. The Company strives to maintain the local identity of each store while leveraging the operating synergies of centralized management operations. Beverage Segment - ---------------- AMCON's beverage business consists of Hawaiian Natural Water Company, Inc. ("HNWC"). HNWC, which is headquartered in Pearl City, Hawaii, was formed in 1994 for the purpose of bottling, marketing and distributing Hawaiian natural artesian water in Hawaii, the mainland and foreign markets. HNWC's Hawaiian Springs/R/ brand is the only bottled natural artesian water available from Hawaii. All other bottled waters produced in Hawaii contain purified water, from which chemicals and minerals have been removed by means of reverse osmosis filtration. HNWC draws its Hawaiian Springs water from an artesian well located at the base of the Mauna Loa mountain in Kea'au (near Hilo) on the big island of Hawaii. The water is filtered and "bottled at the source" in polyethylene terepthalate ("PET") plastic bottles, which are produced from pre-forms at HNWC's bottling facility. All of HNWC's retail PET products are bottled at its facility in Kea'au, Hawaii. These products consist of the Hawaiian Springs natural artesian water line and various limited production co- packaged products. In addition to its premium water brands, HNWC also competes in the purified water bottling niche. We believe that competing in this market enables HNWC to more effectively differentiate the premium natural artesian 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. 31 RESULTS OF OPERATIONS SALES Changes in sales are driven by two primary components as follows: (i) changes to selling prices largely controlled by the manufacturers of the products that we sell, and, excise taxes imposed on cigarettes and tobacco products by various states; and (ii) changes in the volume of products sold to our customers, either due to a change in purchasing patterns resulting from consumer preferences or the fluctuation in the comparable number of business days in our reporting period. Sales by business segment for the three and nine month periods ended June 2006 and June 2005 are as follows (dollars in millions):
Three months Nine months ended June ended June --------------- ------------------------------------------ Incr Extra Reported Incr 2006 2005 (Decr) 2006 2005/1/ week/2/ 2005 (Decr) ------ ------ ------ ------ ------- ------- --------- ------ Wholesale distribution segment $213.1 $205.0 $ 8.1 $588.4 $ 578.2 $ 13.6 $ 591.8 $ (3.4) Retail health food stores segment 9.0 8.5 0.5 27.8 25.5 0.4 25.9 1.9 Beverage segment 1.8 1.6 0.2 4.8 4.2 0.1 4.3 0.5 Intersegment eliminations - - - - (0.1) - (0.1) 0.1 ------ ------ ------ ------ ------- ------- --------- ------ $223.9 $215.1 $ 8.8 $621.0 $ 607.8 $ 14.1 $ 621.9 $ (0.9) ====== ====== ====== ====== ======= ======= ========= ====== /1/ Excludes extra week discussed in /2/ below /2/ During the first quarter of fiscal 2005, the Company changed its reporting period from a 52-53 week year ending on the last Friday in September to a calendar month reporting period ending on September 30. As a result of this change, the first nine months of fiscal 2005 comprises 40 weeks of operations as compared to 39 weeks of operations in the first nine months of fiscal 2006.
Three months ended June 2006 comparison - ---------------------------------------- Sales for Q3 2006 increased 4.1%, or $8.8 million, compared to Q3 2005. Sales are reported net of costs associated with sales incentives provided to retailers, totaling $4.2 million and $4.0 million, for Q3 2006 and Q3 2005, respectively. The sales of cigarettes in the wholesale distribution segment increased by $5.1 million and the sales of tobacco, confectionary and other products in our wholesale distribution segment increased $3.0 million in Q3 2006 compared to Q3 2005. Of the increase in cigarette sales, $2.3 million related to higher excise taxes imposed by certain states, $1.1 million related to a price increase on certain brands of cigarettes in December 2005, and $1.7 million was attributable to a 1.6% increase in the volume of cigarette carton sales. Additionally, tobacco, confectionary and other product sales increased $3.0 million primarily due to increased volumes in Q3 2006 compared to Q3 2005. 32 Sales from the retail health food segment increased $0.5 million during Q3 2006 compared to Q3 2005. This increase was primarily attributable to volume growth in same store sales. The retail health food segment has experienced robust growth during fiscal 2006, largely, because of the general upturn in the natural products industry combined with the Company's continued marketing efforts. The beverage segment accounted for $1.8 million in sales in Q3 2006 compared to $1.6 million in Q3 2005. The increase in sales was primarily the result of efforts by HNWC's management to expand the market penetration of its bottled water products and grow brand awareness. Nine months ended June 2006 comparison - -------------------------------------- Sales for the nine months ended June 2006 decreased to $621.0 million, compared to $621.9 million for the same period in the prior fiscal year. Sales from the wholesale distribution segment decreased by $3.4 million for the nine months ended June 2006 as compared to the same period in the prior year. Cigarette sales decreased $3.6 million for the first nine months of fiscal 2006 offset by a $0.2 million increase in the sales of tobacco, confectionary and other products during the period. Cigarette sales benefitted approximately $4.5 million during the first nine months of fiscal 2006, as compared to the same period in the prior year, because of price increases implemented by major cigarette manufacturers. Additionally, $8.7 million of the increase in cigarette sales was attributable to higher excise taxes imposed by certain states. The above increases in cigarette sales were offset by a net decrease of $10.4 million resulting from a change in our monthly reporting period which added an extra week of sales in the first nine months of fiscal 2005. Additionally, there was a $6.4 million decrease in cigarette sales primarily attributable to a 1.7% decrease in the volume of cigarette carton sales (excluding the extra week of sales). Of the increase in tobacco, confectionary and other products, $3.4 million was attributable to increased volume compared to the same period in the prior year, offset by a $3.2 million decrease in sales due to the net impact of the change in our monthly reporting period which added an extra week of sales in the first nine months of fiscal 2005. During the first nine months of fiscal 2006, sales from the retail health food segment increased by $1.9 million compared to the same period in 2005. Of this increase, $2.3 million was attributable to volume growth in same store sales. This volume increase was partially offset by $0.4 million due to the extra week of sales included in the first nine months of fiscal 2005, which resulted from the Company's change in monthly reporting periods. The retail health food segment has experienced robust growth during the first nine months of fiscal 2006 largely because of the general upturn in the natural products industry combined with the Company's continued marketing efforts. The beverage segment accounted for $4.8 million in sales for first nine months of fiscal 2006, compared to $4.2 million for the same period in 2005. The increase in sales was primarily attributable to a $0.7 million increase in bottled water sales at the Company's HNWC subsidiary offset by 33 $0.1 million due to the extra week of sales included in the first nine months of fiscal 2005, which resulted from the change in the Company's monthly reporting period. GROSS PROFIT Our gross profit does not include fulfillment costs and costs related to the distribution network which are included in selling, general and administrative costs, and may not be comparable to those of other entities. Some entities may classify such costs as a component of cost of sales. Cost of sales, a component used in determining gross profit, for wholesale and retail segments includes the cost of products purchased from manufacturers, less incentives that we receive which are netted against such costs. In the beverage segment, cost of sales includes the cost of the raw materials and related plant labor and manufacturing overhead costs required to convert raw materials into finished goods (including labor, warehousing, depreciation and utilities). Gross profit by business segment for the three and nine month periods ended June 2006 and June 2005 are as follows (dollars in millions):
Quarter ended Year to date June June --------------- ------------------------------------------ Incr Extra Reported Incr 2006 2005 (Decr) 2006 2005/1/ week/2/ 2005 (Decr) ------ ------ ------ ------ ------- ------- --------- ------ Wholesale distribution segment $ 12.1 $ 12.0 $ 0.1 $ 33.3 $ 33.7 $ 0.6 $ 34.3 $ (1.0) Retail health food stores segment 3.5 3.2 0.3 11.0 9.9 0.2 10.1 0.9 Beverage segment 0.2 0.0 0.2 0.1 (0.3) - (0.3) 0.4 ------ ------ ------ ------ ------- ------- --------- ------ $ 15.8 $ 15.2 $ 0.6 $ 44.4 $ 43.3 $ 0.8 $ 44.1 $ 0.3 ====== ====== ====== ====== ======= ======= ========= ====== /1/ Excludes extra week discussed in /2/ below /2/ During the first quarter of fiscal 2005, the Company changed its reporting period from a 52-53 week year ending on the last Friday in September to a calendar month reporting period ending on September 30. As a result of this change, the first nine months of fiscal 2005 comprises 40 weeks of operations as compared to 39 weeks of operations in the first nine months of fiscal 2006.
Three months ended June 2006 comparison - ---------------------------------------- During Q3 2006, gross profit increased $0.6 million to $15.8 million compared to $15.2 million in Q3 2005. This represents a 3.9% increase in gross profit compared to the same period in the prior year. Gross profit as a percent of sales decreased slightly to 7.05% in Q3 2006 compared to 7.06% in Q3 2005. Gross profit from our wholesale distribution segment for Q3 2006 increased $0.1 million compared to Q3 2005 primarily due to a smaller quarterly LIFO charge of $0.1 million in Q3 2006 as compared to Q2 2005. Gross profit for the retail health food segment increased $0.3 million in Q3 2006 as compared to Q3 2005. Of this increase, $0.2 million related to improved management of inventory and throw-out costs and $0.1 million related to a smaller LIFO charge in Q3 2006 compared to Q3 2005. 34 Gross profit for the beverage segment increased $0.2 million in Q3 2006 compared to Q3 2005. This increase was primarily the result of higher sales volumes and lower production costs. Nine months ended June 2006 comparison - -------------------------------------- For the nine months ended June 2006, gross profit decreased $0.3 million compared to the same period in the prior fiscal year. Gross profit as a percent of sales increased slightly to 7.14% from 7.09% for the nine month period ended June 2006 compared to the same period in 2005. Gross profit from our wholesale distribution segment for the nine months ended June 2006, decreased $1.0 million as compared to the same period in the prior year. Increasing gross profit during the first nine months of fiscal 2006 was a $1.0 million smaller LIFO charge as compared to the same period in the prior year. This increase was offset by a decrease of $0.4 million related to a reduction in manufacturers' promotional allowances net of payments made to our customers. Additionally, $0.6 million of the decrease resulted from the change in our monthly reporting period which added an extra week of sales in the first nine months of fiscal 2005. The remaining decrease in gross profit of $1.0 million is primarily attributable to lower sales volume and reduced gross margins realized on customer accounts because of continued pricing pressures industry-wide. Gross profit for the retail health food segment for the first nine months of fiscal 2006 increased $0.9 million compared with the same period in fiscal 2005. Of this increase, $0.2 million related to improved management of inventory and throw-out costs, $0.2 million related to a smaller LIFO charge in the first three quarters of fiscal 2006 compared to the same period in 2005 and $0.5 million related to the overall growth in sales volume (net of the impact of the extra week in fiscal 2005). Gross profit for the beverage segment increased $0.4 million for the first nine months of fiscal 2006 compared to the same period in 2005. This change is primarily the result of additional sales volume and lower production costs. OPERATING EXPENSE - three and nine months ended June 2006 comparison Operating expense includes selling, general and administrative expenses and depreciation and amortization and impairment charges. Selling, general and administrative expenses include costs related to our sales, warehouse, delivery and administrative departments for all segments. Specifically, purchasing and receiving costs, inspection costs, warehousing costs and costs of picking and loading customer orders are all classified as selling, general and administrative expenses. Our most significant expenses relate to employee costs, facility and equipment leases, transportation costs, fuel costs, insurance and professional fees. 35 In Q3 2006, operating expenses increased 2.48% or approximately $0.3 million, as compared to Q3 2005. This increase was primarily related to higher transportation costs and professional fees incurred by our wholesale segment. For the nine month period ended June 2006, total operating expenses increased approximately $0.2 million or 0.62% as compared to the same period in 2005. This was primarily the result of higher fuel, transportation and professional costs incurred by our wholesale segment offset by lower lease, compensation and professional expenses incurred by our retail segment. INTEREST EXPENSE - three and nine months ended June 2006 comparison Interest expense for Q3 2006 and for the nine months ended June 2006 increased $0.2 million and $0.4 million, respectively, as compared to the same periods in 2005. This increase was primarily related to increases in the prime interest rate, which is the rate at which the Company primarily borrows under its amended credit facility, and an increase in the Company's average variable rate borrowings. On average, the Company's borrowing rates on variable rate debt was 1.90% higher and the average borrowings on variable rate debt was $0.9 million lower in Q3 2006 as compared to Q3 2005. For the nine months ended June 2006, interest rates were on average 1.97% higher and the average borrowings on variable rate debt was $0.9 million higher as compared to the same period in 2005. OTHER - three and nine months ended June 2006 comparison During the first nine months of 2006, the "Minority interest in loss, net of tax", was $0.0 million compared to $0.1 million for the same period in the prior year. The 15% minority ownership interest in TSI has been reduced to zero because of cumulative losses. No future allocations of losses to minority shareholders will be made by the Company. DISCONTINUED OPERATIONS - three and nine months ended June 2006 comparison For the periods presented, discontinued operations consist of the Company's former beverage marketing and distribution business, TBG, and TSI, the former water bottling operation in Idaho. In April 2006, the Company concluded its disposal plan for TBG and accordingly has classified TBG's Q3 2006 results of operations to continuing operations. For the three and nine months ended June 30, 2006, discontinued operations incurred a net loss, net of tax, of $0.2 million and $1.5 million, respectively as compared to a net loss, net of tax, of $0.8 million and $3.1 million for the comparable periods in the prior year. Losses incurred by discontinued operations decreased year-over-year primarily because of charges incurred in the prior fiscal year to adjust TBG's accounts receivable, inventory and fixed assets to their net realizable values. 36 LIQUIDITY AND CAPITAL RESOURCES Overview - ---------- Operating Activities. The Company requires cash to pay its operating expenses, purchase inventory and make capital investments and acquisitions of businesses. In general, the Company finances these cash needs from the cash flow generated by its operating activities and from borrowings and preferred stock issuances, as necessary. During the nine months ended June 30, 2006 the Company used approximately $9.2 million of cash from operating activities, primarily related to inventory purchases. Our variability in cash flows from operating activities is heavily dependent on the timing of inventory purchases and seasonal fluctuations. For example, in the circumstance where we are "buying-in" to obtain favorable terms on particular product or to maintain our LIFO layers, we may have to retain the inventory for a period longer than the payment terms. This generates cash outflow from operating activities that we expect to reverse in a later period. Additionally, during the warm weather months, which is our busiest time of the year, we generally carry larger inventory back stock to ensure high fill rates to maintain customer satisfaction. Investing Activities. Cash of $0.6 million was utilized in investing activities during the first nine months of fiscal 2006 for capital expenditures. Financing Activities. The Company generated net cash of $9.4 million from financing activities during the first nine months of 2006 primarily from borrowing on the Company's revolving credit facility and the issuance of $2.0 million of preferred stock. Cash of $0.7 million was used in financing activities during the first nine months of 2006 to pay down long term debt and bank credit agreements. The Company also generated cash of $0.8 million from long-term debt issued by TSI prior to its closure. During the first nine months of 2006, $0.3 million was used to pay dividends on preferred stock. Cash on Hand/Working Capital. As of June 2006, the Company had cash on hand of $0.1 million and working capital (current assets less current liabilities) of $36.6 million. This compares to cash on hand of $0.5 million and working capital of $30.6 million as of September 2005. The Company's maximum revolving credit limit on the Facility was $54.2 million at June 30, 2006, however, the amount available for use at any given time is subject to many factors including eligible accounts receivable and inventory balances that are evaluated on a daily basis. On June 30, 2006 the balance on the revolving portion of the facility was $54.8 million. Based on our collateral and the loan limits, the Company was over the borrowing base credit limit on the Facility by $0.3 million at June 30, 2006 but was under the over-advance provision of $1.5 million provided by the Facility. During the nine months ended June 30, 2006 our peak borrowing was $54.6 million, our average borrowings were $47.9 million and our average availability was $1.5 million. Our availability to borrow under the Facility generally decreases as inventory and accounts receivable levels go up because of the borrowing limitations that are placed on the collateralized assets. Additional Demands for Capital. Funds generated from operations, supplemented as necessary with funds available under the Facility, have 37 historically provided sufficient liquidity for operation of the wholesale and retail businesses. The Company's beverage businesses, which included HNWC and TSI (prior to the discontinuance of its operations on March 31, 2006) have contributed significant operating losses. These losses have consumed significant cash resources and placed the Company in a restricted liquidity situation. However, during the first nine months of fiscal 2006, management took steps to limit these operating losses and cash requirements going forward. As previously discussed, the TSI bottled water business has been closed; management is currently seeking to resolve pending litigation matters related to TSI (see discussion of TSI litigation in Note 12 to the condensed consolidated unaudited financial statements) to enable the ultimate sale of that business. Should the resolution of the TSI litigation require the Company to fund certain of the TSI obligations, the Company may call upon the guaranty of the Company's Chairman, Mr. William Wright. The HNWC bottled water business has been reorganized and operational improvements have been made, including cost reductions and sales price increases. HNWC is currently operating without requiring additional cash investments by AMCON. The Company is also considering alternatives for the infusion of outside capital and/or the possible sale of the HNWC business. If successful, any proceeds from the sale of those businesses would be utilized to reduce related debt obligations and/or the Company's outstanding balance under the Facility. The Company renegotiated and amended the Facility in January 2006, and all prior covenants were replaced with monthly and cumulative year to date earnings before interest, taxes, depreciation and amortization (EBITDA) covenants (excluding all the beverage operations) that are measured at the end of each month and quarter, respectively. The Company is in compliance with all such covenants, and based on operating forecasts currently expects to remain in compliance with such covenants with the possible exception of the December 2006 and February 2007 monthly covenants. Further, management is in negotiations to execute an early renewal of the Facility agreement under terms similar to those currently in place including certain financial covenant modifications. Although no assurances can be given, management believes it will be successful in obtaining a renewal of the Facility agreement including any financial covenant modifications. Based on its operating forecasts and projected cash requirements, management believes the Company has adequate cash resources to fund its operations and capital expenditure needs as well to meet its debt obligations as they mature through fiscal 2006 and fiscal 2007 with the extension of the maturity date for the credit facility and its covenant modifications. Contractual Obligations - ----------------------- There have been no significant changes to the Company's contractual obligations as set forth in the Company's Annual Report on Form 10-K for the fiscal period ended September 30, 2005. Credit Agreement - ------------------- The Company's primary source of borrowing for liquidity purposes is its revolving credit facility with LaSalle Bank (the "Facility"). As of June 2006, the outstanding balance on the Facility was $54.8 million, including Term Note A and the portion of the revolver attributable to TSI. The Facility, which was amended in October 2004, transferred $1.2 million of 38 revolving debt to term debt and added the subsidiaries, except TSI, as borrowers. TSI was subsequently added as a borrower in April 2005. The Facility bears interest at a variable rate equal to the bank's base rate, which was 8.0% at June 2006. The Facility restricted borrowings for intercompany advances to TBG and TSI to $1.0 million in the aggregate and to the retail health food subsidiaries and HNWC to $0.9 million in the aggregate in fiscal 2005 and $0.1 million in the aggregate in subsequent years. The amended Facility requires the Company 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 and expires in July 2007 (as amended in November 2006). The Facility contains covenants (as amended in January 2006) that (i) restrict permitted investments, (ii) restrict intercompany advances to certain subsidiaries, (iii) restrict incurrence of additional debt, (iv) restrict mergers and acquisitions and changes in business or conduct of business and (v) requires that consolidated EBITDA (excluding TSI, HNWC and The Beverage Group, Inc.) not be less than: (a) $100,000 as of the last day of each month for the one-month period then ending, except for the month ending February 28, 2006 which is permitted to be zero, (b) $1,100,000 as of March 31, 2006 for the three-month period then ending, (c) $3,200,000 as of June 30, 2006 for the six-month period then ending, and (d) $5,500,000 as of September 30, 2006 for the ninth-month period then ending, and (e) $6,500,000 as of December 31, 2006 for the twelve-month period then ending. The Facility also provides that the Company may not pay dividends on its common stock in excess of $0.72 per share on an annual basis. The Company has a $5.0 million (face amount) Term Note B from LaSalle Bank, which had an outstanding balance of $1.9 million at June 2006. Term Note B bears interest at the bank's base rate plus 2.00%, which was 10.00% at June 2006 and is required to be repaid in monthly installments of $0.1 million as amended in January 2006. The Company's Chairman personally guaranteed repayment of up to $10.0 million of the combined amount of the Facility and the term loans. The amount of the guarantee at June 30, 2006 was $6.9 million. AMCON will pay the Company's Chairman an annual fee equal to 2% of the guaranteed principal in return for the personal guarantee. This guarantee is secured by a pledge of the shares of Chamberlin's Natural Foods, Inc., Health Food Associates, Inc., HNWC and TSI. In November 2006 the Company and Lasalle Bank amended the Credit Facility to extend the maturity date of the credit agreement to July 2007. Cross Default and Co-Terminus Provisions - ----------------------------------------- The Company's owned real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, and certain warehouse equipment in the Rapid City, SD warehouse is financed through term loans with Marshall and Ilsley Bank (the "M & I Loans"), formerly Gold Bank, which is also a participant lender on the Company's revolving line of credit. The M & I Loans contain cross default provisions which cause all loans with M & I to be considered in default if any one of the loans where M & I is a lender, including the revolving credit facility, is in default. 39 In addition, the M & I Loans contain co-terminus provisions which require all loans with M & I to be paid in full if any of the loans are paid in full prior to the end of their specified terms. Off-Balance Sheet Arrangements - ------------------------------ The Company does not have any off-balance sheet arrangements. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company is exposed to interest rate risk on its variable rate debt. At June 30, 2006, the Company had $54.8 million of variable rate debt outstanding with maturities through July 2007. The interest rate on this debt was 8.0% at June 2006. We estimate that our annual cash flow exposure relating to interest rate risk based on our current borrowings is approximately $0.3 million for each 1% change in our lender's prime interest rate. We do not utilize financial instruments for trading purposes and hold no derivative financial instruments which could expose us to significant market risk. Item 4. Controls and Procedures The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the "Exchange Act")), that are designed to ensure that information required to be disclosed in the Company's reports filed or furnished under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Exchange Act related rules and forms of the SEC. Such information is accumulated and communicated to the Company's management, including its Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. The Company carried out the evaluation required by paragraph (b) of the Exchange Act Rules 13a-15 and 15d-15, under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, as a result of the material weaknesses described below, the CEO and CFO concluded that our disclosure controls and procedures were not effective as of the third fiscal quarter ended June 30, 2006. The Company's management conducted a similar evaluation for each of the comparable periods in fiscal 2005. While the CEO and CFO had concluded that our disclosure controls and procedures were effective at the time, they now conclude, as a result of the material weaknesses described below, that our disclosure controls and procedures were not effective, as of June 30, 2005. As more fully described under Item 9A, Controls and Procedures, of the Company's Fiscal 2005 Annual Report on Form 10-K, in connection with the Company's September 30, 2005 year end audit the Company's discovered (i) through a physical inventory count at its subsidiary, Hawaiian Natural Water Co., Inc. ("HNWC"), that incorrect accounting entries had been made and (ii) 40 that the Company had incorrectly allocated interest expense to one of its wholly-owned subsidiaries, The Beverage Group, Inc., that had ceased operations on March 31, 2005. The recording of such incorrect entries represent material weaknesses in internal control over financial reporting. To mitigate the control weaknesses described below, the Company performed additional analysis and other post-closing procedures in order to prepare the condensed consolidated unaudited financial statements in accordance with generally accepted accounting principles in the United States of America. Accordingly, our management believes that the condensed consolidated unaudited financial statements of and for the quarter ended June 30, 2006, as included in this Quarterly Report on Form 10-Q, fairly present in all material respects our financial condition, results of operations, and cash flows for the periods presented. A material weakness is a significant control deficiency, or combination of significant control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management and the Company's independent registered public accountants identified the following material weaknesses: a) The Company did not maintain sufficient levels of appropriately qualified and trained personnel in the accounting office of HNWC, specifically as they related to the integration of new business operations and the application of certain aspects of inventory and manufacturing accounting; b) The Company did not maintain sufficient oversight and review of the disclosure controls and procedures of its subsidiaries during fiscal year 2005 to identify the material weaknesses in the internal control over financial reporting at HNWC in a timely manner; and c) The Company did not correctly apply the accounting guidance contained in certain Emerging Issues Task Force Applications ("EITF's") relating to the allocation of interest expense to the Company's discontinued operation (TBG). Changes in our internal control over financial reporting were made during the first three quarters of fiscal 2006 to correct the deficiencies noted above. The following changes have materially affected or are reasonably likely to affect our internal control over financial reporting: 1) AMCON's corporate management terminated the employment of HNWC's then current President and Chief Financial Officer. 2) AMCON's corporate management hired a new acting president and a qualified accounting consultant at HNWC to investigate the irregularities and guide internal accounting personnel in the application of generally accepted accounting principles related to inventory and production cost accounting. 3) HNWC management hired additional accounting staff at HNWC with more experience. 4) HNWC management is now reviewing all product cost summaries and all inventory cost changes as part of its ongoing internal controls. 41 5) AMCON's corporate management implemented procedures to ensure proper review and approval of all adjusting journal entries posted at HNWC, as well as, increasing monthly review of subsidiary financial statements as part of its ongoing internal controls. 6) The Company has enhanced the training of our accounting staff and required periodic review of a wider variety of current technical accounting literature to obtain a reasonable level of assurance that all appropriate accounting guidance is applied to transactions such as discontinued operations and will retain financial expertise as deemed necessary. PART II - OTHER INFORMATION Item 1. Legal Proceedings As previously disclosed in Item 1 "Legal Proceedings" in our 2005 Annual Report on Form 10-K, the Company is involved in litigation regarding TSI. During the last several months, the parties to the TSI litigation have been engaged in settlement discussions. Recently, a settlement agreement was reached between the parties. The settlement resolved all disputes between the shareholders plaintiffs, CPH, AMCON, TSI and the Defendant Directors, with two exceptions that relate to AMCON. The settlement did not resolve claims that CPH may have against AMCON and TSI or that AMCON and TSI may have against CPH. The settlement also did not resolve the claims of a single shareholder plaintiff, who declined to agree to the settlement. On October 16, 2006, the Court approved the parties' settlement and ordered the dismissal with prejudice of the lawsuit, except for the claims of the single shareholder plaintiff whose claims remain pending in the lawsuit and the claims that may exist as between AMCON/TSI and CPH. Item 1A. Risk Factors There have been no material changes to the Company's risk factors as previously disclosed in Item 1A "Risk Factors" in our 2005 Annual Report to Shareholders on Form 10-K for the fiscal year ended September 30, 2005. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Not applicable. Item 3. Defaults Upon Senior Securities There have been no defaults in the payment of principal and interest with respect to any indebtedness of the Company or any of it subsidiaries exceeding five percent of total asset of the Company. Item 4. Submission of Matters to a Vote of Security Holders There were no submissions of matters to a vote of security holders to be reported during the three and nine month fiscal periods ended June 30, 2006. Item 5. Other Information Not applicable. 42 Item 6. Exhibits (a) Exhibits 10.37 Seventh Amendment to Amended and Restated Loan and Security Agreement, dated November 6, 2006 31.1 Certification by Christopher H. Atayan, Chief Executive Officer and Vice Chairman, furnished pursuant to section 302 of the Sarbanes-Oxley Act 31.2 Certification by Andrew C. Plummer, Vice President and Acting Chief Financial Officer, furnished pursuant to section 302 of the Sarbanes- Oxley Act 32.1 Certification by Christopher H. Atayan, Chief Executive Officer and Vice Chairman, furnished pursuant to section 906 of the Sarbanes-Oxley Act 32.2 Certification by Andrew C. Plummer, Vice President and Acting Chief Financial Officer, furnished pursuant to section 906 of the Sarbanes- Oxley Act SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. AMCON DISTRIBUTING COMPANY (registrant) Date: November 20, 2006 /s/ Christopher H. Atayan ------------------ ----------------------------- Christopher H. Atayan, Chief Executive Officer and Vice Chairman Date: November 20, 2006 /s/ Andrew C. Plummer ------------------ ----------------------------- Andrew C. Plummer, Acting CFO and Principal Financial and Accounting Officer 43 EX-10 2 ex1037seventhamend.txt SEVENTH AMENDMENT EXHIBIT 10.37 November 6, 2006 AMCON Distributing Company 7405 Irvington Road Omaha, Nebraska 68122 And Chamberlin Natural Foods, Inc. 430 North Orlando Avenue Winter Park, Florida 32789 And Hawaiian Natural Water Company, Inc. 98-746 Kuahao Place Pearl City, Hawaii 96782 And Health Food Associates, Inc. 7807 East 51st Street Tulsa, Oklahoma 74145 And Trinity Springs, Inc. 1101 West River Street Suite 370 Boise, Idaho 83702 RE: SEVENTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (THIS "AMENDMENT") Gentlemen: AMCON Distributing Company, a Delaware corporation, ("AMCON"), Chamberlin Natural Foods, Inc., a Florida corporation, ("Chamberlin Natural"), Hawaiian Natural Water Company, Inc., a Delaware corporation, ("Hawaiian Natural"), Health Food Associates, Inc., an Oklahoma corporation, ("Health Food"), and Trinity Springs, Inc., a Delaware corporation, ("Trinity Springs"), (AMCON, Chamberlin Natural, Hawaiian Natural, Health Food, and Trinity Springs are each referred to as a "Borrower" and are collectively referred to as "Borrowers") and LaSalle Bank National Association, a national banking association (in its individual capacity, "LaSalle"), as agent (in such capacity as agent, "Agent") for itself, M&I Marshall & Ilsley Bank (successor by merger to Gold Bank), and all other lenders from time to time party to the Loan Agreement referred to below ("Lenders"), have entered into that certain Amended and Restated Loan and Security Agreement dated September 30, 2004 (the "Loan Agreement"). From time to time thereafter, Borrowers, Agent and Lenders may have executed various amendments (each an "Amendment" and collectively the "Amendments") to the Loan Agreement (the Loan Agreement and the Amendments hereinafter are referred to, collectively, as the "Agreement"). Borrowers, Agent and Lenders now desire to further amend the Agreement as provided herein, subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. The Agreement hereby is amended as follows: (a) The first sentence of Section 10 of the Agreement is amended by deleting the reference to "APRIL 30, 2007" appearing therein and inserting "JULY 31, 2007" in place thereof. 2. This Amendment shall not become effective until each of the following conditions precedent has been satisfied: (a) Agent shall have received this Amendment, duly executed by the parties hereto; and (b) Borrowers shall have paid to Agent, for the benefit of the Lenders, an amendment fee in an amount equal to $8,333.33, which fee shall be deemed fully earned by the Lenders as of the date hereof and shall be nonrefundable. 3. The representations and warranties set forth in Section 11 of the Agreement shall be deemed remade as of the date hereof by each Borrower, except that any and all references to the Agreement in such representations and warranties shall be deemed to include this Amendment. No Event of Default has occurred and is continuing and no event has occurred and is continuing which, with the lapse of time, the giving of notice, or both, would constitute an Event of Default under the Agreement. 4. Borrowers agree to pay on demand all costs and expenses of or incurred by Agent (including, but not limited to, legal fees and expenses) in connection with the negotiation, preparation, execution and delivery of this Amendment. 5. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 6. Except as expressly amended hereby, the Agreement and the Other Agreements are hereby ratified and confirmed by the parties hereto and remain in full force and effect in accordance with the terms thereof. Each Borrower hereby reaffirms its grant of the security interest in the Collateral. 7. This Amendment shall be governed by and construed under the laws of the State of Illinois, without regard to conflict of laws principles of such State. [Signatures appear on following pages.] LASALLE BANK NATIONAL ASSOCIATION, a national banking association, as Agent and a Lender By:/s/ Michael Etienne Title: Vice President M&I MARSHALL & ILSLEY BANK, as a Lender By: /s/ Mark Jannaman Title: Vice President ACKNOWLEDGED AND AGREED TO this 6th day of November 2006: AMCON DISTRIBUTING COMPANY By: /s/ Andrew C. Plummer Title: Vice President and Acting CFO HAWAIIAN NATURAL WATER COMPANY, INC. By: /s/ Philip Campbell Title: Secretary CHAMBERLIN NATURAL FOODS, INC. By: /s/ Clifford Ginn Title: Vice President HEALTH FOOD ASSOCIATES, INC. By: /s/ Clifford Ginn Title: Vice President TRINITY SPRINGS, INC. By: /s/ Andrew C. Plummer Title: Secretary Consented and agreed to by the following guarantor(s) of the obligations of AMCON DISTRIBUTING COMPANY, HAWAIIAN NATURAL WATER COMPANY, INC., CHAMBERLIN NATURAL FOODS, INC., and HEALTH FOOD ASSOCIATES, INC. to LaSalle Bank National Association, as Agent. William F. Wright Date: November 6, 2006 EX-31 3 ex311chacertification.txt CHA CERTIFICATION EXHIBIT 31.1 ------------ CERTIFICATION I, Christopher H. Atayan, certify that: 1. I have reviewed this quarterly report on Form 10-Q of AMCON Distributing Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 20, 2006 /s/ Christopher, H. Atayan -------------------------------- Christopher H. Atayan, Chief Executive Officer and Vice Chairman EX-31 4 ex312acpcertification.txt ACP CERTIFICATION EXHIBIT 31.2 ------------ CERTIFICATION I, Andrew C. Plummer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of AMCON Distributing Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 20, 2006 /s/ Andrew C. Plummer --------------------------------- Andrew C. Plummer, Vice President and Acting Chief Financial Officer EX-32 5 ex321chacertification.txt CHA CERTIFICATION EXHIBIT 32.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Quarterly Report on Form 10-Q (the "Report") of AMCON Distributing Company (the "Company") for the fiscal quarter ended June 30, 2006, I, Christopher H. Atayan, Chief Executive Officer and Vice Chairman 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: November 20, 2006 /s/ Christopher H. Atayan ------------------------- Title: Chief Executive Officer EX-32 6 ex322acpcertification.txt ACP CERTIFICATION EXHIBIT 32.2 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Quarterly Report on Form 10-Q (the "Report") of AMCON Distributing Company (the "Company") for the fiscal quarter ended June 30, 2006, I, Andrew C. Plummer, Vice President and Acting 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: November 20, 2006 /s/ Andrew C. Plummer ------------------------- Title: Vice President and Acting Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----