UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM to
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Commission File Number 1-15589
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Delaware 47-0702918
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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Name of each exchange
Title of each class on which registered
None None
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any other amendment to this Form 10-K. / /
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
The aggregate market value of equity securities held by non-affiliates of the Registrant on March 31, 2006 was approximately $3.7 million.
As of December 25, 2006 there were 527,062 shares of common stock outstanding.
Table of Contents
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Page
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PART I
Item 1. Business...................................................... 4
Item 1A. Risk Factors.................................................. 10
Item 1B. Unresolved Staff Comments..................................... 21
Item 2. Properties.................................................... 21
Item 3. Legal Proceedings............................................. 22
Item 4. Submission of Matters to a Vote of Security Holders........... 23
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................... 24
Item 6. Selected Financial Data....................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 47
Item 8. Financial Statements and Supplementary Data................... 48
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 90
Item 9A. Controls and Procedures....................................... 90
Item 9B. Other Information............................................. 90
PART III
Item 10. Directors and Executive Officers of the Registrant............ 91
Item 11. Executive Compensation........................................ 93
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters ............... 93
Item 13. Certain Relationships and Related Transactions................ 93
Item 14. Principal Accountant Fees and Services........................ 93
PART IV
Item 15. Exhibits and Financial Statement Schedules.................... 93
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PART I
ITEM 1. BUSINESS
GENERAL
AMCON Distributing Company ("AMCON" or the "Company") was incorporated in Delaware in 1986. The Company's principal executive offices are located at 7405 Irvington Road, Omaha, Nebraska 68122. The telephone number at that address is 402-331-3727 and the website address is www.amcon.com. The Company makes available free of charge on its website, its reports on Forms 10-K and 10-Q, including amendments thereto, as soon as reasonably practicable after filing with the Securities and Exchange Commission ("SEC").
As of September 30, 2006, AMCON operates in two business segments:
- Wholesale Distribution Segment - The Company is primarily engaged in the wholesale distribution of consumer products including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products and health and beauty care products.
- Retail Health Foods Segment - The Company operates thirteen retail health food stores in Florida and the Midwest.
For purposes of this report, unless the context indicates otherwise, all references to "we", "us", "our", "Company", and "AMCON" shall mean AMCON Distributing Company and its subsidiaries including the wholesale distribution segment which will be separately referred to as "ADC".
WHOLESALE DISTRIBUTION BUSINESS
ADC serves approximately 5,000 retail outlets in the Great Plains and Rocky Mountain regions, the largest of which accounted for approximately 7.6% of ADC's total revenues during fiscal 2006. In November 2006, Convenience Store News, a trade periodical, ranked ADC as the eighth (8th) largest distributor in its industry out of approximately 1,000 distributors in the United States based upon fiscal 2005 sales volume. The Company has historically grown by acquisitions into contiguous regions. This external growth has been complemented by the introduction of new product lines.
ADC distributes approximately 14,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and chilled products and institutional food service products. While cigarettes accounted for approximately 72% of the Company's sales volume during fiscal 2006, we continue to evaluate new product lines in an attempt to lessen ADC's dependence upon cigarette sales. ADC's principal suppliers include Philip Morris USA, RJ Reynolds Tobacco, Proctor & Gamble, Hershey, Mars, William Wrigley and Nabisco. ADC also markets private label lines of tobacco, snuff, water, candy products, batteries and film.
The Company has sought to increase sales to convenience stores and petroleum marketers. To achieve this, the Company has adopted a number of operating strategies which management believes provide the Company with distinctive competitive advantages within this customer segment. One key operating strategy is our commitment to provide market leading customer service. In a continuing effort to provide superior customer service, ADC offers a complete point-of-sale (POS) program to assist customers with image management,
product promotions, private label and custom food service programs and overall profit maximization. Additionally, ADC has a policy of next-day delivery and employs a concept of selling products in cut-case quantities or "by the each" (i.e. individual units). The Company also offers planograms to convenience store customers to assist in the design of their store and display of products within the store. In addition, customers are able to use our web site to manage their inventory and retail prices, as well as obtain periodic velocity management reports.
The wholesale distribution of cigarettes and convenience store products is significantly affected by cigarette pricing decisions and promotional programs offered by cigarette manufacturers. Over the past several years, the industry has experienced the discontinuance and subsequent reinstatement of certain promotional programs. Based on these activities, it is difficult to predict how future changes in cigarette pricing and promotional programs will impact both the Company and industry. Fluctuations in manufacturer pricing and promotional programs, in combination with rising fuel costs, have pressured profit margins industry-wide.
Management has worked to improve ADC's operating efficiency by investing in information technology systems to help automate our buying and financial control functions. We have also sought to minimize inventory costs by maximizing the number of times inventory is renewed ("inventory turns") during a given period. By managing operating costs, management believes ADC is better positioned to compete with both smaller and larger competitors who offer less service than ADC. Inventory turns for the past five years are as follows:
Fiscal Times Year Inventory Turned ------ ---------------- 2006 28.7 2005 27.0 2004 27.8 2003 27.5 2002 28.5 |
The increase in inventory turns in 2006, as compared to fiscal 2005, is primarily related to an increased focus on overall inventory management in addition to fewer inventory buy-in opportunities available from major product manufactures throughout fiscal 2006. By managing operating costs, ADC is better able to price its products in such a manner to achieve an advantage over less efficient distributors in its market areas, yet remain competitively priced with larger distributors who offer less service than ADC.
ADC's main office is in Omaha, Nebraska and operates five distribution centers located in Illinois, Missouri, Nebraska, North Dakota and South Dakota. These distribution centers, combined with two cross-dock facilities, contain a total of approximately 487,000 square feet of floor space and employ modern equipment for the efficient distribution of our large and diverse product mix. ADC also operates a fleet of approximately 224 delivery vehicles, including straight trucks and over-the-road vehicles with refrigerated trailers.
RETAIL HEALTH FOOD BUSINESS
AMCON's retail health food stores, which are operated as Chamberlin's Market & Cafe ("Chamberlin's" or "CNF") and Akin's Natural Foods Market ("Akin's" or "ANF"), offer over 34,000 different product selections to their customers. Chamberlin's, which was first established in 1935, is an award-winning and highly-acclaimed chain of six health and natural product retail stores, all offering an extensive selection of natural supplements and herbs, baked goods, dairy products, delicatessen items and organic produce. Chamberlin's operates all of its stores in and around Orlando, Florida.
Akin's, established in 1935, is also an award winning chain of seven health and natural product retail stores, each offering an extensive line of natural supplements and herbs, dairy products, delicatessen items and organic produce. Akin's has locations in Tulsa (2 stores) and Oklahoma City (2 stores), Oklahoma; Lincoln, Nebraska; Springfield, Missouri; and Topeka, Kansas.
The retail health food industry has experienced robust growth in recent years driven primarily by the demand for natural products and more health conscious consumers. Our retail health food segment has benefited from this trend, experiencing sales growth in many product categories including grocery and supplements. This growth in consumer demand has also prompted other large national food chains to increase their organic and natural food products offerings. Management continues to closely monitor the performance of all store locations for opportunities to expand or identify new locations for additional stores.
AMCON's retail health food stores are managed collectively from a central office in Tulsa, Oklahoma, but utilize the name recognition of the established health food retail chains. The Company strives to maintain the local identity of each chain while providing a means to achieve operating synergies leading to cost savings through centralized management of operations.
RECENT EVENTS
Form 10-K for further discussion regarding the Company's compliance with AMEX listing standards.
HNWC, which was headquartered in Pearl City, Hawaii, was a component of the Company's beverage segment. HNWC bottled, marketed and distributed Hawaiian natural artesian water, purified water and other limited production co-packaged products, in Hawaii, the mainland and foreign markets. HNWC was a fully operational subsidiary of the Company through November 19, 2006.
Mr. Atayan is 46 years old, has served as a director of the Company since 2004, and became the Vice Chairman and Chief Corporate Officer in March 2006. Mr. Atayan is also a consultant to Draupnir, LLC, the parent of Draupnir Capital, LLC. Mr. Atayan has served as Senior Managing Director of Slusser Associates, a New York investment banking firm since 1988, he is also Chairman of Hotlink Incorporated.
DISCONTINUED OPERATIONS
At September 30, 2006, the Company had two subsidiaries, Trinity Springs, Inc. ("TSI") and HNWC, which were components of the Company's beverage segment, classified as components of discontinued operations in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets."
On November 20, 2006, HNWC signed and completed an agreement to sell substantially all of its operating assets to a newly formed group of investors, Hawaiian Springs, LLC for approximately $3.8 million in cash and the assumption of all operating and capital leases. The significant operating assets consisted of accounts receivable, inventory, furniture and
fixtures, intellectual property and all of its bottling equipment. HNWC remained a fully operational subsidiary of the Company through November 19, 2006.
In the first two quarters of fiscal 2006 TBG was classified as a component of discontinued operations. In April 2006 the Company successfully concluded its wind-down plan of TBG's operations and accordingly reclassified its residual liabilities to continuing operations. This reclassification has been reflected as such throughout this Annual Report on Form 10-K.
In our Financial Statements set forth in Item 8 of this Annual Report on Form 10-K and our Management Discussion and Analysis of the Results of Operations set forth under Item 7 of this Annual Report on Form 10-K for all periods presented the sales, gross profit (loss), selling, general and administrative, depreciation and amortization, other expenses, and income tax benefit for HNWC, TSI and TBG (through March 31, 2006) have been aggregated and reported as a loss from discontinued operations in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets."
PRINCIPAL PRODUCTS
Cigarette sales represented approximately 72% - 73% of the Company's total sales for the fiscal years ending 2004 through 2006.
INFORMATION ON SEGMENTS
Information about our segments is presented in Note 17 to the Consolidated Financial Statements.
COMPETITION
The distribution industry is highly competitive. There are many distribution companies operating in the same geographical regions as ADC. ADC is one of the largest distribution companies of its kind operating in its market area. ADC's principal competitors are national wholesalers such as McLane Co., Inc. (Temple, Texas) and Core-Mark International (San Francisco, California) and regional wholesalers such as Eby-Brown LLP (Chicago, Illinois) and Farner-Bocken (Carroll, Iowa), along with a host of smaller grocery and tobacco wholesalers. Most of these competitors generally offer a wide range of products at prices comparable to ADC's. ADC seeks to distinguish itself from its competitors by offering a higher level of
technology to retailers than its smaller competitors and a higher level of customer service than its larger competitors.
The natural food retail industry is highly fragmented, with more than 9,000 stores operating independently or as part of small chains. The two leading natural food chains, Whole Foods Market and Wild Oats, continue to expand their geographic markets by opening stores in new markets, including markets in which they may compete directly with our stores. In addition, conventional supermarkets and mass market outlets are also increasing their emphasis on the sale of natural products.
SEASONALITY
Sales in the wholesale distribution industry are somewhat seasonal by nature and tend to be higher in warm weather months as our convenience store customers experience increased customer traffic. The warm weather months generally fall within the Company's third and fourth fiscal quarters.
GOVERNMENT REGULATION
Various state government agencies regulate the distribution of cigarettes and tobacco products in several ways, including the imposition of excise taxes, licensing and bonding requirements. Complying with these regulations is a very expensive and a labor-intensive undertaking. For example, each state (as well as certain cities and counties) require the Company to collect excise taxes on each carton of cigarettes sold in its jurisdiction. Such excise taxes must be paid in advance and, in most states, is evidenced by a stamp which must be affixed to each package of cigarettes. A number of states increased their excise tax on cigarettes in recent years and more are expected to do so in the future.
The Company is also subject to regulation by state and local health departments, the U.S. Department of Agriculture, the Food and Drug Administration and U.S. Department of Transportation. These agencies generally impose standards for product quality and sanitation, as well as, security and distribution policies.
At September 30, 2006, the Company's only active water bottling facilities were those operated by HNWC, which was classified as a component of discontinued operations. Prior to its sale in November 2006, HNWC was subject to various state and federal regulations, designed to ensure (but not guarantee) the quality of the product and the truthfulness of its marketing claims and required our beverage businesses to monitor each aspect of its bottled water production process, including its water source, bottling operations and packaging and labeling practices. The Environmental Protection Agency also required a yearly analysis of the water sources by a certified laboratory with respect to a comprehensive list of contaminants (including herbicides, pesticides, volatile chemicals and trace metals). In addition, the State Department of Health for Hawaii required weekly microbiological testing of the source water.
To comply with regulatory guidelines and ensure quality control, HNWC employed an on-site laboratory where samples of finished product were both visually and chemically tested each day. HNWC also utilized independent state certified laboratories to test samples from each of its production runs. Additionally, the production lines were subject to constant inspection to ensure quality standards were being met. Based on these controls, the
Company believes it met or exceeded all applicable regulatory standards concerning the quality of its bottled water.
In addition to U.S. regulations, HNWC had to meet the requirements of foreign regulatory agencies in order to export and sell its product into other countries. These requirements were generally similar to, and in certain respects were more stringent than, U.S. regulations. HNWC believes that it was in compliance with applicable regulations in all foreign territories where it marketed its product. Failure to meet the applicable regulations in the U.S. or foreign markets can lead to costly recalls or loss of certification to market products.
ENVIRONMENTAL MATTERS
All the facilities and operations of the Company are subject to state and federal environmental regulations. The Company believes all of its real property is in compliance with regulations regarding the discharge of toxic substances into the environment and is not aware of any condition at its properties that could have a material adverse effect on its financial condition or results of operations. Further, the Company has not been notified by any governmental authority of any potential liability or other claim in connection with any of its properties.
EMPLOYEES
At September 30, 2006, the Company, including HNWC, had 901 full-time and part-time employees in the following areas:
Managerial 33
Administrative 79
Delivery 119
Sales & Marketing 318
Warehouse 352
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Total Employees 901
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All of ADC's delivery employees in the Quincy, Illinois distribution center, representing approximately 3% of employees company-wide, are represented by the International Association of Machinists and Aerospace Workers. The labor agreement with the union was renegotiated in December 2005 and a new agreement was executed that is effective through December 2008. Management believes its relations with its employees are good.
ITEM 1A. RISK FACTORS
If any of the following risks actually materializes, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our common stock could decline substantially. This Annual Report also contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a number of factors, including the risks described below and elsewhere in this Annual Report.
- The Wholesale Distribution of Cigarettes and Convenience Store Products Is Significantly Affected by Cigarette Pricing Decisions and Promotional Programs Offered by Cigarette Manufacturers.
We receive payments from the manufacturers of the products we distribute for, allowances, discounts, volume rebates, and other merchandising incentives in connection with various incentive programs. In addition, we receive discounts from states in connection with the purchase of excise stamps for cigarettes. If the manufacturers or states change or discontinue these programs or we are unable to maintain the volume of our sales, our results of operations, business, cash flow and financial condition could be negatively affected.
- Increases in Fuel Prices Are Reducing Profit Margins and Affecting Our Business.
Increases in fuel prices have had a negative impact on profits over the past year. If fuel prices remain high, and we are not able to pass on these costs to customers, it will have a material adverse impact on our results of operations, business, cash flow and financial condition.
- Increases in Wholesale Distribution Business Competition May Have an Adverse Effect on Our Business.
The distribution industry is highly competitive. There are many distribution companies operating in the same geographical regions as ADC. ADC's principal competitors are national wholesalers and regional wholesalers, along with a host of smaller grocery and tobacco wholesalers. Most of these competitors generally offer a wide range of products at prices comparable to ADC's. Some of our competitors, have substantial financial resources and long-standing customer relationships. In addition, heightened competition may reduce our margins and adversely affect our business. If we fail to successfully respond to these competitive pressures or to implement our strategies effectively, we may lose market share and our results of operations, business, cash flow, and financial condition could suffer.
- Due to the Low-margins on the Products We Distribute, Changes in General Economic Conditions Could Materially Adversely Affect Our Operating Results.
We derive most of our revenues from the distribution of cigarettes, other tobacco products, candy, snacks, fast food, grocery products, non-alcoholic beverages, general merchandise and health and beauty care products. The wholesale distribution industry is characterized by a high volume of sales with relatively low profit margins. Our non-cigarette sales are at prices that are based on the cost of the product plus a percentage markup. As a result, our profit levels may be negatively impacted during periods of cost deflation for these products. Gross profit on cigarette sales are generally
fixed on a cents per carton basis. If the cost of the cigarettes that we purchase increases due to manufacturer price or excise tax rate increases, our inventory costs and accounts receivable could rise. To the extent that product cost increases are not passed on to our customers due to their resistance to higher prices, our results from operations, business, cash flow and financial condition could be negatively impacted.
- Our Sales Volume Is Largely Dependent upon the Distribution of Cigarette Products, Sales of Which Are Declining.
The distribution of cigarettes is currently a significant portion of our business. For the year ended September 30, 2006, approximately 72% of our revenues came from the distribution of cigarettes. During the same period, approximately 27% of our gross profit was generated from cigarettes. Due to increases in the prices of cigarettes, restrictions on advertising and promotions by cigarette manufacturers, increases in cigarette regulation and excise taxes, health concerns, increased pressure from anti-tobacco groups and other factors, the U.S. cigarette market has generally been declining, and is expected to continue to decline. If this trend continues our results from operations, business, cash flow and financial condition will be negatively impacted.
- In the United States, We Purchase Cigarettes from Manufacturers Covered by the Industry's Master Settlement Agreement, Which Results in Competition from Lower Priced Sales of Cigarettes Produced by Manufacturers Who Do Not Participate in the Master Settlement Agreement.
Increased selling prices and higher cigarette taxes have resulted in the growth of deep-discount brands. Deep-discount brands are brands manufactured by companies that are not original participants to the master settlement agreement, and accordingly, do not have cost structures burdened with master settlement agreement related payments to the same extent as the original participating manufacturers. Since the master settlement agreement was signed in November 1998, the category of deep-discount brands manufactured by smaller manufacturers or supplied by importers has grown substantially.
As a result of purchasing premium and discount cigarettes exclusively from manufacturers that are parties to the master settlement agreement, we are adversely impacted by sales of brands from non-master settlement agreement manufacturers and deep-discount brand growth. The premium and discount cigarettes subject to the master settlement agreement that we sell have been negatively impacted by widening price gaps in the prices between those brands and the deep-discount brands for the past several years. As a result, our results of operations, business, cash flow and financial condition may be negatively impacted as sales volumes of premium cigarettes erode.
- We Also Face Competition from Illicit and Other Low Priced Sales of Cigarettes.
We also face competition from the diversion into the United States market of cigarettes intended for sale outside the United States, the sale of counterfeit cigarettes by third parties, the sale of cigarettes in non-taxable jurisdictions, inter-state and international smuggling of cigarettes, increased imports of foreign low priced brands, the sale of cigarettes by third parties over the Internet and by other means designed to avoid collection of applicable taxes. The competitive environment has been characterized by a continued influx of cheap products that challenge sales of
higher priced and taxed cigarettes manufactured by parties to the master settlement agreement. Increased sales of counterfeit cigarettes, sales by third parties over the Internet, or sales by means to avoid the collection of applicable taxes, could have an adverse effect on our results of operations, business, cash flow and financial condition.
- If the Tobacco Industry's Master Settlement Agreement Is Invalidated, or Tobacco Manufacturers Cannot Meet Their Obligations to Indemnify Us, We Could Be Subject to Substantial Litigation Liability.
In connection with the master settlement agreement, we are indemnified by the tobacco product manufacturers from which we purchase cigarettes and other tobacco products for liabilities arising from our sale of the tobacco products that they supply to us. However, if litigation challenging the validity of the master settlement agreement were to be successful and the master settlement agreement is invalidated, we could be subject to substantial litigation due to our sales of cigarettes and other tobacco products, and we may not be indemnified for such costs by the tobacco product manufacturers in the future. In addition, even if we continue to be indemnified by cigarette manufacturers that are parties to the master settlement agreement, future litigation awards against such cigarette manufacturers could be so large as to eliminate the ability of the manufacturers to satisfy their indemnification obligations. Our results of operations, business, cash flow and financial condition could be negatively impacted due to increased litigation costs and potential adverse rulings against us.
- Cigarettes and Other Tobacco Products Are Subject to Substantial Excise Taxes and If These Taxes Are Increased, Our Sales of Cigarettes and Other Tobacco Products Could Decline.
Cigarettes and tobacco products are subject to substantial excise taxes in the United States. Significant increases in cigarette-related taxes and/or fees have been proposed or enacted and are likely to continue to be proposed or enacted within the United States. These tax increases are expected to continue to have an adverse impact on sales of cigarettes due to lower consumption levels and a shift in sales from the premium to the non-premium or discount cigarette segments or to sales outside of legitimate channels. If these excise taxes are substantially increased, it could have a negative impact on our liquidity. Accordingly, we may be required to obtain additional debt financing, which we may not be able to obtain on satisfactory terms or at all. Our inability to prepay the excise taxes may prevent or delay our purchase of cigarettes and other tobacco products, which could materially adversely affect our ability to supply our customers.
The majority of our sales are made under purchase orders and short-term contracts with convenience stores which inherently involve significant risks. These risks include the uncertainty of general economic conditions in the convenience store industry, credit exposure from our customers and termination of customer relationships without notice, consolidation of our customer base, and consumer movement toward purchasing from club stores. Any of these factors could negatively affect the convenience store industry which would negatively affect our results of operations and financial condition.
- Increases in Retail Health Food Store Competition May Have an Adverse Effect on Our Business.
In the retail health food business, our primary competitors currently include national natural foods supermarkets, such as Whole Foods and Wild Oats, conventional and specialty supermarkets, other regional natural foods stores, small specialty stores and restaurants. In addition, conventional supermarkets and mass market outlets are also increasing their emphasis on the sale of natural products. In addition, some traditional and specialty supermarkets are expanding more aggressively in marketing a range of natural foods, thereby competing directly with us for products, customers and locations. Some of these potential competitors may have greater financial or marketing resources than we do and may be able to devote greater resources to sourcing, promoting and selling their products. Increased competition may have an adverse effect on our results of operations, business, cash flow and financial condition as the result of lower sales, lower gross profits and/or greater operating costs such as marketing.
- Part of Our Strategy Is to Expand Our Retail Health Food Business Through The Opening of New Stores, If We Are Unsuccessful it May Have an Adverse Effect on Our Business.
Our expansion strategy is dependent on finding suitable locations, and we face intense competition from other retailers for such sites. We also need to be able to open new stores timely and operate them successfully. In addition, our success is dependant on our ability to hire, train and integrate new qualified team members. Our success is also dependent on our ability to adapt our distribution, management information and other operating systems to adequately supply products to new stores at competitive prices so that we can operate the stores in a successful and profitable manner. If we are not able to find and open new store locations and to close poor performing stores this will have a material adverse impact on our results of operations, business, cash flow and financial condition.
- Changes in the Availability of Quality Natural and Organic Products Could Impact Our Business.
There is no assurance that quality natural and organic products including dietary supplements, fresh and processed foods and vitamins will be available to meet our future needs. If conventional supermarkets increase their natural and organic product offerings or if new laws require the reformulation of certain products to meet tougher standards, the supply of these products may be constrained. Any significant disruption in the supply of quality natural and organic products could have a material impact on our overall sales and cost of goods.
- Perishable Food Product Losses Could Materially Impact Our Results.
We believe our stores more heavily emphasize perishable products than conventional supermarket stores. The Company's emphasis on perishable products may result in significant product inventory losses in the event of extended power outages, natural disasters or other catastrophic occurrences.
- Compliance with the USDA's Organic Rules may Prove Burdensome for Our Suppliers Resulting in a Disruption in Our Business.
Compliance with the USDA's Organic Rule, implemented into federal law on October 21, 2002, might pose a significant burden on some of our suppliers, which may cause a disruption in some of our product offerings.
- Capital Needed for Expansion May Not Be Available.
The acquisition of existing stores, the opening of new retail stores, and the development of new production and distribution facilities requires significant amounts of capital. In the past, our growth has been funded primarily through proceeds from bank debt, private placements of equity and debt and internally generated cash flow. These and other sources of capital may not be available to us in the future.
- Restrictive Covenants in Our Revolving Credit Facility May Restrict Our Ability to React to Changes in Our Business or Industry Because They Restrict Our Ability to Obtain Additional Financing.
Our revolving credit facility imposes restrictions on us that could increase our vulnerability to general adverse economic and industry conditions by limiting our flexibility in planning for and reacting to changes in our business and industry. Specifically, these restrictions limit our ability, among other things, to: incur additional indebtedness, pay dividends and make distributions, issue stock of subsidiaries, make investments, repurchase stock, create liens, enter into transactions with affiliates, merge or consolidate, or transfer and sell our assets.
- Failure to Meet Restrictive Covenants in Our Revolving Credit Facility Could Result in Acceleration of the Facility and We May not be Able to Find Alternative Financing.
Under our credit facility, we are required to meet certain financial ratios and tests. Our ability to comply with these covenants may be affected by factors beyond our control. If we breach any of these covenants or restrictions, it could result in an event of default under our revolving credit facility, which would permit our lenders to declare all amounts outstanding thereunder to be immediately due and payable, and our lenders under our revolving credit facility could terminate their commitments to make further extensions of credit under our revolving credit facility.
- Downturns in Economic Conditions Negatively Impacts Consumer Spending Resulting in a Reduction of Discretionary Spending for Items such as Snack Food, Cigarettes, Bottled Water and Health Foods.
Our results of operations and financial condition are particularly sensitive to changes in overall economic conditions that impact consumer spending, including discretionary spending. Future economic conditions affecting disposable consumer income such as employment levels, business conditions, interest rates and tax rates could reduce consumer spending or cause consumers to shift their spending to our competitors. A general reduction in
the level of discretionary spending or shifts in consumer discretionary spending to our competitors could adversely affect our growth and profitability.
- Legal Proceedings Could Materially Impact Our Results.
As described under Item 3 - Legal Proceedings of this Annual Report on Form 10-K, the Company is involved in litigation regarding the ownership of the assets of TSI, which is a consolidated subsidiary of AMCON and classified as a component of discontinued operations. The dispute, which began in June 2004, arose over the sale of substantially all of the assets of Trinity Springs, Ltd. (which later changed its name to Crystal Paradise Holdings, Inc. ("CPH"). The Plaintiffs in the lawsuit are a group of minority shareholders, and the Defendants are AMCON, TSL Acquisition Corp (which later became TSI), CPH, and the former directors of CPH.
On October 16, 2006, the Court approved a settlement in the case which resolved all disputes between the shareholders plaintiffs, CPH, AMCON, TSI and the Defendant Directors, with two exceptions that relate to AMCON. The settlement did not resolve claims that CPH may have against AMCON and TSI or that AMCON and TSI may have against CPH. The settlement also did not resolve the claims of a single shareholder plaintiff, who declined to agree to the settlement. The claims of the single minority shareholder remain pending. With respect to the remaining claims, AMCON's management, after consulting with trial counsel, is unable to state that any outcome to AMCON is either probable or remote and therefore cannot estimate the amount or range of any potential loss. If these claims are decided against AMCON, it could have a material adverse impact on AMCON's results of operations, business, cash flow and financial condition.
- We May Not Be Able to Obtain Capital or Borrow Funds to Provide Us with Sufficient Liquidity and Capital Resources Necessary to Meet Our Future Financial Obligations.
We expect that our principal sources of funds will be cash generated from our operations and financial condition and, if necessary, borrowings under our revolving credit facility. However, these sources may not provide us with sufficient liquidity and capital resources required to meet our future financial obligations, or to provide funds for our working capital, capital expenditures and other needs for the foreseeable future. We may require additional equity or debt financing to meet our working capital requirements or to fund our capital expenditures. We may not be able to obtain financing on terms satisfactory to us, or at all.
- We Depend on Relatively Few Suppliers for a Large Portion of Our Products, and Any Interruptions in the Supply of the Products That We Distribute Could Adversely Affect Our Results of Operations and Financial Condition.
We do not have any long-term contracts with our suppliers committing them to provide products to us. Although our purchasing volume can provide leverage when dealing with suppliers, suppliers may not provide the products we distribute in the quantities we request or on favorable terms. Because we do not control the actual production of the products we distribute, we are also subject to delays caused by interruption in production based on conditions outside our control. These conditions include job actions or strikes by employees of suppliers, inclement weather, transportation interruptions, and natural disasters or other catastrophic events. Our inability to obtain
adequate supplies of the products we distribute as a result of any of the foregoing factors or otherwise, could cause us to fail to meet our obligations to our customers.
- We May Be Subject to Product Liability Claims Which Could Materially Adversely Affect Our Business.
AMCON, as with other distributors of food and consumer products, faces the risk of exposure to product liability claims in the event that the use of products sold by us causes injury or illness. With respect to product liability claims, we believe that we have sufficient liability insurance coverage and indemnities from manufacturers. However, product liability insurance may not continue to be available at a reasonable cost, or, if available, may not be adequate to cover all of our liabilities. We generally seek contractual indemnification and insurance coverage from parties supplying the products we distribute, but this indemnification or insurance coverage is limited, as a practical matter, to the creditworthiness of the indemnifying party and the insured limits of any insurance provided by suppliers. If we do not have adequate insurance or if contractual indemnification is not available or if the counterparty can not fulfill its indemnification obligation, product liability relating to defective products could materially adversely impact our results of operations, business, cash flow and financial condition.
- We Depend on Our Senior Management and Key Personnel.
We substantially depend on the continued services and performance of our senior management and other key personnel, particularly William F. Wright, Chairman of the Board, Christopher H. Atayan, AMCON's Chief Executive Officer and Vice Chairman, Kathleen M. Evans, the Company's President, and Eric J. Hinkefent, the President of Health Food Associates, Inc. and Chamberlin's Natural Foods, Inc. While we maintain key person life insurance policies and have employment agreements with certain of these individuals, the loss of the services of any of our executive officers or key employees could harm our business.
- We Operate in a Competitive Labor Market and a Number of Our Employees Are Covered by Collective Bargaining Agreements.
We compete with other businesses in each of our markets with respect to attracting and retaining qualified employees. A shortage of qualified employees could require us to enhance our wage and benefits packages in order to compete effectively in the hiring and retention of qualified employees or to hire more expensive temporary employees.
In addition, at September 30, 2006 approximately 3%, or approximately 31, of our employees are covered by a collective bargaining agreement with a labor organization, which expires December 2008. We may not be able to renew our respective collective bargaining agreement on favorable terms. Employees at other facilities may try to unionize. We may not be able to recover labor cost increases through increased prices charged to customers or suffer business interruptions as a result of strikes or other work stoppages.
- We Are Subject to substantial Governmental Regulation and If We Are Unable to Comply with Regulations That Affect Our Business or If There Are Substantial Changes in These Regulations, Our Business Could Be Adversely Affected.
As a distributor of food products, we are subject to the regulation by the U.S. Food and Drug Administration ("FDA"). Our operations are also subject to regulation by the Occupational Safety and Health Administration ("OSHA"), the Department of Transportation and other federal, state and local agencies. Each of these regulatory authorities have broad administrative powers with respect to our operations. If we fail to adequately comply with government regulations or regulations become more stringent, we could experience increased inspections, regulatory authorities could take remedial action including imposing fines or shutting down our operations or we could be subject to increased compliance costs. If any of these events were to occur, our results of operations, business, cash flow and financial condition would be adversely affected.
We cannot predict the impact that future laws, regulations, interpretations or applications, the effect of additional government regulations or administrative orders, when and if promulgated, or disparate federal, state and local regulatory schemes would have on our business in the future. They could, however, require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling and/or scientific substantiation. Any or all of such requirements could have an adverse effect on our results of operations, business, cash flow and financial condition.
- Self-Insurance Plan Claims Could Materially Impact Our Business.
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers' compensation, general liability, property insurance, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. Our results of operations, business, cash flow and financial condition could be materially impacted by claims and other expenses related to such plans if future occurrences and claims differ from these assumptions and historical trends.
- Our Information Technology Systems May Be Subject to Failure or Disruptions, Which Could Seriously Harm Our Business.
Our business is highly dependent on our information systems ("IS"). The
convenience store industry does not have a standard information technology,
or IT platform. Therefore, actively integrating our customers into our IT
platform is a priority, and our IS platform provides our distribution centers
with the flexibility to adapt to our customers' IT requirements. We also rely
on our IS, and our internal information technology staff, to maintain the
information required to operate our distribution centers and provide our
customers with fast, efficient and reliable deliveries.
If our IS fails or is subject to disruptions, we may suffer disruptions in
service to our customers and our results of operations and financial
condition could suffer.
- The Company Has Very Few Shareholders of Record And, If this Number Drops below 300, the Company Will No Longer Be Obligated to Report under the Securities Exchange Act of 1934 and in Such Case We May Be Delisted from the American Stock Exchange Reducing the Ability of Investors to Trade in Our Common Stock.
If the number of record owners (including direct participants in the Depository Trust Company) of our common stock is less than 300, our obligations to file reports under the Securities Exchange Act of 1934 is suspended. If we take advantage of this right we will likely reduce administrative costs of complying with public company rules, but periodic and current information updates about the Company will not be available to investors. In addition, the common stock of the Company would be removed from listing on the American Stock Exchange. This would likely impact an investors' ability to trade in our common stock.
- In Relation to the Size of Our Company We Incur Significant Costs as a Result of Being a Public Company.
As a public company, we incur significant accounting, legal, governance, compliance and other expenses that private companies do not incur. In addition, the Sarbanes-Oxley Act of 2002 and the rules subsequently implemented by the Securities and Exchange Commission and the American Stock Exchange, have required changes in corporate governance practices of public companies. These rules and regulations increase our legal, audit and financial compliance costs and make some activities more time-consuming and costly. For example, as a result of being a public company, we are required to maintain additional board committees and formalize our internal control over financial reporting and disclosure controls and procedures. In addition, we incur additional costs associated with our public company reporting requirements. These rules and regulations also make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.
- We May Be Unable to Meet Our Obligation to Conform to the Rules Adopted by the Securities and Exchange Commission under Section 404 of the Sarbanes-Oxley Act of 2002.
We are in the process of assessing the effectiveness of our internal control over financial reporting in connection with the rules adopted by the Securities and Exchange Commission under Section 404 of the Sarbanes-Oxley Act of 2002. Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 is required in connection with the filing of our Annual Report on Form 10-K for the fiscal year ending September 30, 2007 but proposed regulations may extend this date. While our management is expending significant resources in an effort to complete this important project, there can be no assurance that we will be able to achieve our objective on a timely basis. There also can be no assurance that our auditors will be able to issue an unqualified opinion on management's assessment of the effectiveness of our internal control over financial reporting.
Any failure to complete our assessment of our internal control over financial reporting, to remediate the material weaknesses we have identified or any other material weaknesses that we may identify or to implement new or improved controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations, or result in material misstatements in our financial statements. Any such failure also could adversely affect the results of the periodic management evaluations of our internal control over financial reporting that are required under Section 404 of the Sarbanes-Oxley Act of 2002. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.
- Weaknesses in Our Internal Controls over Financial Reporting Could Result in Material Misstatements in Our Financial Statements, Cause Investors to Lose Confidence in Our Reported Financial Information and Have a Negative Effect on the Trading Price of Our Common Stock.
A material weakness is defined in standards established by the Public Company Accounting Oversight Board as a deficiency in internal control over financial reporting that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. During fiscal 2006, the Company identified certain material weaknesses that existed in our internal controls over fiscal 2005 financial reporting. During fiscal 2006, we took steps to remedy these weaknesses, however, if we failed to implement these remedies properly, such failure could result in a material misstatement in our financial reporting.
- We Have Various Mechanisms in Place to Discourage Takeover Attempts, Which May Reduce or Eliminate Our Stockholders' Ability to Sell Their Shares for a Premium in a Change of Control Transaction.
Various provisions of our bylaws and of corporate law may discourage, delay or prevent a change in control or takeover attempt of our company by a third party that is opposed to by our management and board of directors. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change of control or change in our management and board of directors. These provisions include:
-classification of our directors into three classes with respect to the time for which they hold office;
-supermajority voting requirements to amend the provision in our certificate of incorporation providing for the classification of our directors into three such classes;
-non-cumulative voting for directors;
-control by our board of directors of the size of our board of directors;
-limitations on the ability of stockholders to call special meetings of stockholders; and
-advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted upon by our stockholders at stockholder meetings.
- Failure to Regain Compliance with American Stock Exchange Listing Standards Could Have a Negative Effect on the Trading Price of Our Stock and Would likely Adversely Impact Our Investors' Ability to Trade in Our Common Stock
In September 2006, the Company was notified by the American Stock Exchange (AMEX) that it was not in compliance with Section 1003(a)(i) of the AMEX Company Guide regarding shareholders' equity of less than $2,000,000, and losses from continuing operations and/or net losses in two of its three most recent fiscal years. In order to maintain its AMEX listing, the Company submitted a plan outlining steps to regain compliance with the AMEX continued listing standards by March 11, 2008. On November 21, 2006, the Company received notice from the American Stock accepting the Company's plan to regain compliance with Section 1003(a)(i) of the AMEX Company Guide. If the Company's fails to achieve AMEX compliance by March 11, 2008, the Company could face delisting proceeding which would likely impact investors' ability to trade in our common stock and adversely affect its trading price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
The state location and approximate square footage of the five distribution centers, thirteen retail stores and beverage facilities (including a warehouse in Idaho, water bottling and packaging plants, and sales and marketing offices) operated by AMCON as of fiscal year end 2006 are set forth below:
Location Square Feet
-------- -----------
Distribution - IL, MO, ND, NE & SD 487,000
Retail - FL, KS, MO, NE & OK 132,600
Beverage - HI & ID /1/ 68,000
-------
Total Square Footage 687,600
=======
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/1/ As of March 2006, our water bottling and distribution business headquarter in Idaho, TSI, was closed. As discussed in Item 1 - "Business", our HNWC subsidiary in Hawaii was sold on November 20, 2006.
AMCON owns its distribution facilities in Quincy, Illinois, Bismarck, North Dakota and Rapid City, South Dakota. The Quincy, Bismarck and Rapid City distribution centers are subject to first mortgages with M&I Bank. The Company's subsidiary, TSI, also owns a water bottling plant, real estate and a lodge in Paradise, Idaho that are subject to the mortgage between AMCON and Crystal Paradise Holdings, Ltd. (formerly Trinity Springs, Ltd.) which is shared on an equal basis with Allen Petersen, one of the Company's directors who extended loans to TSI in December 2004. Additionally, TSI owns a warehouse in Hammett, Idaho which is subject to a mortgage. See further discussion of the Company real estate obligations in Item 7 - Liquidity and Capital Resources of this Annual Report on Form 10-K.
AMCON leases its remaining distribution, warehouse and cross-dock facilities,
retail stores, water bottling plant, offices, and certain equipment under
noncancellable operating and capital leases. Leases for the two distribution
facilities, thirteen retail stores and a water bottling and packaging plant
in Hawaii leased by the Company have base terms expiring through 2052.
Minimum future lease commitments for these properties and equipment total
approximately $19.4 million as of fiscal year end 2006. As discussed in Item
1 - Business, HNWC sold substantially all of its assets in November 2006. In
conjunction with that sale, the buyer agreed to assume certain capital and
operating leases from HNWC.
Management believes that its existing facilities are adequate for the Company's present level of operations; however, larger facilities and additional cross-dock facilities and retail stores may be required to accommodate the Company's anticipated growth in certain market areas.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation regarding the ownership of the assets of TSI, which is a consolidated subsidiary of AMCON. The dispute, which began in June 2004, arose over the sale of substantially all of the assets of Trinity Springs, Ltd. (which later changed its name to Crystal Paradise Holdings, Inc. ("CPH"). The Plaintiffs in the lawsuit are a group of minority shareholders, and the Defendants are AMCON, TSL Acquisition Corp (which later became TSI), CPH, and the former directors of CPH.
In December 2005, the District Court of the Fifth Judicial District of the State of Idaho ("the Court") issued a ruling granting the minority shareholder plaintiffs' motion for partial summary judgment declaring that the stockholders of CPH did not validly approve the sale of its business and assets to TSI (AMCON's consolidated subsidiary) because the vote of certain shares issued as a dividend should not have been counted in the vote. The Court did not rule on the appropriate relief to be granted as a result of the lack of shareholder approval for the asset sale transaction, nor did it rule on the appropriate remedy for any other claim asserted by the parties in this case.
However, based on a legal opinion obtained by management from independent legal counsel, to the extent that TSI owned the assets immediately prior to the ruling by the Court discussed above, and has not otherwise transferred the assets, TSI continues to own the assets. Accordingly, AMCON has continued to account for the operations of TSI as a consolidated subsidiary because the Court has not taken any action to divest TSI of its ownership of the assets.
Since the Court's December 2005 ruling, several events have taken place. The minority shareholder plaintiffs have filed notice with the District Court that they agree that rescission is not feasible. During approximately the same time frame, the entire CPH Board of Directors resigned. Upon their resignation, the Court appointed a custodian to manage and direct the affairs of CPH. Additionally, the custodian was designated by the Court as CPH's investigative panel to determine whether the maintenance of a derivative proceeding is in the best interest of CPH.
During the last several months, the parties have been engaged in settlement discussions. Recently, a settlement agreement was reached between the parties. The settlement resolved all disputes between the shareholders
plaintiffs, CPH, AMCON, TSI and the Defendant Directors, with two exceptions that relate to AMCON. The settlement did not resolve claims that CPH may have against AMCON and TSI or that AMCON and TSI may have against CPH. The settlement also did not resolve the claims of a single shareholder plaintiff, who declined to agree to the settlement. On October 16, 2006, the Court approved the parties' settlement and ordered the dismissal with prejudice of the lawsuit, except for the claims of the single shareholder plaintiff whose claims remain pending in the lawsuit and the claims that may exist as between AMCON/TSI and CPH.
On December 21, 2006, CPH filed a first amended complaint in the Fourth Judicial District of the State of Idaho (Elmore County) against AMCON and TSI and other defendants relating to AMCON and TSI's purchase of the assets of CPH and operation of the business. In its amended complaint, CPH re-asserts claims of foreclosure; breach of the asset purchase agreement, promissory notes and water royalty obligations; quantum meruit; unjust enrichment; and collection and enforcement of its security interest. In addition, CPH again seeks a declaratory judgement that: (i) AMCON and TSI are obligated to perform under the asset purchase agreement and other agreements related to the asset purchase transaction; (ii) the actions AMCON and TSI constitute events of default; (iii) TSI has not cured the events of default; (iv) TSI's obligations are accelerated under certain promissory notes; and (v) AMCON is liable to CPH under a guaranty and suretyship agreement for all amounts owing to CPH under the asset purchase agreement and related agreements. Finally, CPH seeks its costs and attorney fees. CPH has not served its amended complaint on AMCON or TSI.
AMCON disagrees with the assertions made by CPH and intends to vigorously defend against CPH's claims and to pursue its own claims against CPH.
With respect to the remaining claims in the original lawsuit and the claims asserted by CPH in its recently filed complaint, AMCON's management, after consulting with the trial counsel, is unable at this time to state that any outcome unfavorable to AMCON is either probable or remote and therefore cannot estimate the amount or range of any potential loss, if any because substantial discovery is needed, several unresolved legal issues exist, and other pretrial work is yet to be completed.
The Company is in settlement discussions with respect to this litigation, pursuant to which the Company is undertaking to divest substantially all of the assets of TSI as part of a complete settlement of any and all claims by CPH against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of fiscal year 2006.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR COMMON STOCK
The Company's common stock trades on the American Stock Exchange ("AMEX") under the trading symbol "DIT". The following table reflects the range of the high and low closing prices per share of the Company's common stock reported by AMEX for fiscal years 2006 and 2005. As of December 11, 2006, the closing stock price was $18.00 and there were 527,062 common shares outstanding. The Company has approximately 360 common shareholders of record (including direct participants in the Depository Trust Company) and the Company believes that approximately 960 additional persons hold shares beneficially.
Fiscal Year 2006 Fiscal Year 2005
---------------- ----------------
High Low High Low
------- ------- ------- -------
4th Quarter $ 13.80 $ 9.15 $ 22.68 $ 20.39
3rd Quarter 12.10 9.15 24.65 17.30
2nd Quarter 16.55 10.80 18.80 16.50
1st Quarter 21.40 16.55 20.70 18.55
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During fiscal 2005 the Board of Directors voted to suspend payment of cash dividends on common stock for the foreseeable future in order to preserve cash resources. The Company will periodically revisit its dividend policy to determine whether it has adequate internally generated funds, together with other needed financing to fund its growth and operations in order to resume the payment of cash dividends on common stock. The Company's revolving credit facility provides that the Company may not pay dividends on its common shares in excess of $0.72 per common share on an annual basis.
During fiscal 2004, 2005 and 2006, the Company issued Series A, B and C Convertible Preferred Stock, respectively, that were not registered under the Securities Act. Information regarding the issuance of these securities is set forth in Note 3 to the Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below have been derived from AMCON
Distributing Company and Subsidiaries' (the "Company's") audited financial
statements. The information set forth below should be read in conjunction
with Item 7 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION" and Item 8 "FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA" of this Annual Report on Form 10-K.
Results may not be comparable due to acquisitions and/or dispositions that have occurred in the periods presented. As previously discussed, our subsidiaries HNWC and TSI, are classified as a component of discontinued operations at September 30, 2006. As a result, the selected financial data for all periods presented below has been prepared reflecting discontinued operations in accordance with Statement of Financial Accounting Standard
("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." Accordingly, all revenues and expenses associated with discontinued operations have been excluded from income from continuing operations in the selected financial data.
(Dollars in thousands, except per share data)
--------------------------------------------------------------------------------------------
Fiscal Year 2006 2005 /6/ 2004 2003 2002
--------------------------------------------------------------------------------------------
Sales/1/.......................... $ 839,540 $834,551 $817,286 $768,627 $844,879
Cost of sales..................... 779,406 774,060 757,938 708,780 783,303
---------------------------------------------------------
Gross profit...................... 60,134 60,491 59,348 59,847 61,576
Operating expenses................ 53,658 53,188 50,975 50,854 53,225
Impairment charges/2/............. - 4,235 - - -
---------------------------------------------------------
Operating income.................. 6,476 3,068 8,373 8,993 8,351
Interest expense.................. 4,858 4,211 3,243 2,900 4,159
Other (income) expense, net....... (137) (80) (569) (936) (329)
---------------------------------------------------------
Income (loss) from continuing
operations before income taxes... 1,755 (1,063) 5,699 7,029 4,521
Income tax expense (benefit)...... 432 (196) 2,286 2,519 1,726
Equity in loss of unconsolidated
affiliate........................ - - - - 95
Minority interest................. - (97) (91) - -
---------------------------------------------------------
Income (loss) from continuing
operations....................... 1,323 (770) 3,504 4,510 2,700
Loss from discontinued operations,
net of income tax benefit of
$(1,132) $(5,543), $(4,409),
$(1,890) and $(439) respectively. (2,434) (11,972) (7,643) (3,483) (728)
---------------------------------------------------------
Net (loss) income................. (1,111) (12,742) (4,139) 1,027 1,972
Preferred stock dividend
requirements..................... (366) (295) (49) - -
---------------------------------------------------------
Net loss available to
common shareholders.............. $ (1,477) $(13,037) $ (4,188) $ 1,027 $ 1,972
=========================================================
Basic earnings (loss) per share
available to common shareholders:
Continuing operations........... $ 1.81 $ (2.02) $ 6.54 $ 8.55 $ 5.34
Discontinued operations......... (4.61) (22.71) (14.48) (6.60) (1.44)
---------------------------------------------------------
Net basic (loss) earnings per
share available to common
shareholders................... $ (2.80) $ (24.73) $ (7.94) $ 1.95 $ 3.90
=========================================================
25
--------------------------------------------------------------------------------------------
Fiscal Year 2006 2005 /6/ 2004 2003 2002
--------------------------------------------------------------------------------------------
Diluted earnings (loss) per share
available to common shareholders:
Continuing operations........... $ 1.63 $ (2.02) $ 6.23 $ 8.40 $ 5.21
Discontinued operations......... (3.87) (22.71) (13.59) (6.49) (1.40)
---------------------------------------------------------
Net diluted (loss) earnings
per share available to common
shareholders................... $ (2.24) $ (24.73) $ (7.36) $ 1.91 $ 3.81
=========================================================
Weighted average shares outstanding:
Basic........................... 527,062 527,062 527,774 527,699 505,414
Diluted......................... 627,810 527,062 562,559 537,042 518,197
Working capital (deficit) /3/..... $ 28,004 $ 30,573 $(11,871) $ (8,030) $ (1,989)
Total assets ..................... 94,867 95,309 111,730 99,499 104,586
Long-term obligations and
subordinated debt /4/........... 16,841 16,504 27,104 22,453 21,601
Shareholders' (deficit) equity /5/ (1,747) (228) 12,767 17,301 16,699
Cash dividends declared
per common share................ - - 0.72 0.72 0.72
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/1/ In accordance with Emerging Issues Task Force (EITF) No. 01-9 "Accounting For Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)" sales incentives paid to customers have been recorded as a reduction of sales.
/2/ In fiscal year 2005 certain identifiable intangible assets in the retail segment were impaired.
/3/ Current assets minus current liabilities.
/4/ Includes deferred taxes, noncurrent liabilities of discontinued operations, current and long-term portions of subordinated debt and long-term debt and TSI's water royalty in perpetuity. Excludes the Company's revolving credit facility.
/5/ Net of dividends declared of $0.4 million in each of the fiscal years of 2002-2004. The Company declared no dividends in fiscal 2005 or fiscal 2006.
/6/ During the first quarter of fiscal 2005, the Company changed its reporting period from a 52-53 week year ending on the last Friday in September to a calendar month reporting period ending on September 30. As a result of this change, fiscal 2005 was comprised of 53 weeks of operations as compared to fiscal 2006 and fiscal 2004 which were comprised of to 52 weeks.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements,
Item 8, and other information in this report, including Critical Accounting
Policies and Cautionary Information included at the end of this Item 7.
The following discussion and analysis includes the results of operations for
our continuing operations at September 30, 2006, which is comprised of our
wholesale distribution and retail health food segments. A separate
discussion of our discontinued operations, which includes TSI & HNWC at
September 30, 2006, has been presented following our fiscal 2006
versus fiscal 2005 operating results analysis. Accordingly, the sales, gross
profit (loss), selling, general and administrative, depreciation and
amortization, direct interest, other expenses and income tax benefit for TSI
and HNWC have been aggregated and reported as a loss from discontinued
operations and are not a component of the aforementioned continuing
operations items.
Actual year ends for fiscal 2006, 2005 and fiscal 2004 were September 30,
2006, September 30, 2005, and September 24, 2004, respectively. Years cited
herein refer to AMCON's fiscal years. During the first quarter of fiscal
2005, the Company changed its reporting period from a 52-53 week ending on
the last Friday in September to a calendar month period ending on September
30. As a result of this change, fiscal 2005 consisted of 53 weeks of
operations compared to 52 weeks of operations in fiscal 2006.
For more information regarding our businesses, see Item 1 - Business on this Annual Report on Form 10-K.
- focus on the Company's past success. This entails focusing on the
core wholesale and retail health food business segments;
- close or sell unprofitable business units;
- improve the Company's liquidity position through debt reduction; and
- aggressive management of the Company's cost structure
To achieve these strategic goals, the Company took steps to exit the beverage businesses (Hawaiian Natural Water Company ("HNWC") and Trinity Springs, Inc. ("TSI")) which had incurred losses before income taxes of $3.6 million, $17.4 million, and $12.4 million in fiscal 2006, 2005 and 2004, respectively. In March 2006, the Company closed the water bottling operations of TSI and is pursuing the sale of its remaining assets. Additionally, in November 2006, the Company sold substantially all the operating assets of HNWC.
While management can give no assurances, the Company believes the successful completion of these actions, in addition to it ongoing strategic initiatives, will position the Company to improve profitability, enhance its liquidity position and strengthen its ability to compete and grow its two core businesses on a long-term basis.
Financing
- in December 2006, the Company amended the Facility further extending the maturity date to April 2009 with a $57.1 million maximum credit limit and bearing interest at the bank's prime rate. See further discussion in Item 7 - Liquidity and Capital Resources.
- completed a $2.0 million private placement of Series C Convertible Preferred Stock representing 80,000 shares at $25 per share. The proceeds of the issuance were used to reduce the Company's outstanding balance on its revolving credit facility with LaSalle Bank.
Operational
- discontinued and closed the operations of its TSI subsidiary in March 2006 and is actively working to resolve the litigation matter and ultimately sell the assets of TSI. See further discussion in Item 1 - Business.
- engaged in active negotiations to sell the assets of HNWC which culminated in the successful sale of the assets after September 30, 2006.
- experienced a $5.0 million increase in sales and a $2.8 million increase in income from continuing operations before income taxes as compared to fiscal 2005.
- recognized income from continuing operations per diluted share of $1.63 in fiscal 2006 compared to a loss from continuing operations per diluted share of $(2.02)in fiscal 2005.
- recognized loss from discontinued operations per diluted share of ($3.87) in fiscal 2006 as compared to a loss from discontinued operations per diluted share of ($22.71) in fiscal 2005.
Fiscal Years
-----------------------
2006 2005 2004
-----------------------
Sales............................ 100.0% 100.0% 100.0%
Cost of sales.................... 92.8 92.7 92.7
-----------------------
Gross profit..................... 7.2 7.3 7.3
Selling, general and
administrative expenses......... 6.2 6.1 6.0
28
-----------------------
2006 2005 2004
-----------------------
Depreciation and amortization.... 0.2 0.3 0.3
Impairment charges............... 0.0 0.5 0.0
Operating income ............... 0.8 0.4 1.0
Interest expense................. 0.6 0.5 0.4
Other income, net................ - - 0.1
-----------------------
Income (loss) from continuing
operations before income taxes.. 0.2 (0.1) 0.7
Income tax (expense) benefit..... (0.1) 0.0 (0.3)
-----------------------
Income (loss) from continuing
operations .................... 0.1 (0.1) 0.4
Loss from discontinued
operations, net of tax.......... (0.3) (1.4) (0.9)
-----------------------
Net loss ........................ (0.2) (1.5) (0.5)
Preferred stock dividend
requirements.................... - - -
-----------------------
Net loss available to
common shareholders............. (0.2)% (1.5)% (0.5)%
=======================
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RESULTS OF OPERATIONS - CONTINUING OPERATIONS
SALES:
Changes in sales are driven by two primary factors:
(i) changes to selling prices largely controlled by the manufacturers of the products that we sell, and excise taxes imposed on cigarettes and tobacco products by various states; and
(ii) changes in the volume of products sold to our customers, either due to a change in purchasing patterns resulting from consumer preferences or the fluctuation in the comparable number of business days in our reporting period.
Sales by business segment for the years ended September 2006 and September 2005 are as follows (dollars in millions):
Sales
-----------------------------------------
Extra Reported Incr
2006 2005/1/ week/2/ 2005 (Decr)
------ ------- ------- --------- ------
Wholesale distribution segment $802.7 $ 786.4 $ 13.6 $ 800.0 $ 2.7
Retail health food stores segment 36.8 34.2 0.4 34.6 2.2
------ ------- ------- --------- ------
$839.5 $ 820.6 $ 14.0 $ 834.6 $ 4.9
====== ======= ======= ========= ======
/1/ Excludes extra week discussed in /2/ below
/2/ During the first quarter of fiscal 2005, the Company changed its reporting period
from a 52-53 week year ending on the last Friday in September to a calendar month
reporting period ending on September 30. As a result of this change, fiscal 2005 was
comprised of 53 weeks of operations as compared to fiscal 2006 and fiscal 2004 which
were comprised of to 52 weeks.
|
Overall sales for fiscal year 2006 increased by approximately 0.6% to $839.5 million, compared to $834.6 million in fiscal year 2005. Sales are reported net of costs associated with sales incentives provided to customers, totaling $15.5 million and $14.7 million for fiscal 2006 and 2005, respectively.
Sales from the wholesale distribution segment increased $2.7 million during fiscal 2006 as compared to fiscal 2005. Cigarette sales decreased $1.5 million during fiscal 2006 while sales of tobacco, confectionary and other products increased $4.2 million during the period. Of the decrease in cigarette sales, $10.4 million was a result of the change in our monthly reporting period which added an extra week of sales in fiscal 2005 as compared to fiscal 2006 and $5.6 million was a result of a 1.3% decrease in the volume of carton shipments (excluding the extra week). These decreases in cigarette sales were offset by a $8.5 million increase in sales due to higher excise taxes imposed by certain states. Additionally, cigarette sales benefitted approximately $6.0 million during fiscal 2006 due to price increases implemented by major cigarette manufacturers.
Sales from the retail health food segment increased $2.2 million, or 6.4%, during fiscal 2006 when compared to fiscal 2005. Of this sales increase, $2.6 million was attributable to sales growth in same store sales, with particular strength in our grocery and supplements product categories. This sales volume increase was partially offset by a $0.4 million sales reduction due to the extra week of sales which was included in the fiscal 2005 resulting from the Company's change in monthly reporting periods. The retail health food segment experienced strong growth during fiscal 2006 largely because of the general upturn in the natural products industry combined with the Company's continued marketing efforts.
GROSS PROFIT
Our gross profit does not include fulfillment costs and costs related to the distribution network which are included in selling, general and administrative costs, and may not be comparable to the gross profit of other entities which do include such costs. Some entities may classify such costs as a component of cost of sales. Cost of sales, a component used in determining gross profit, for our wholesale and retail segments includes the cost of products purchased from manufacturers, less incentives that we receive which are netted against such costs.
Gross profit by business segment for the fiscal years ended September 2006 and September 2005 are as follows (dollars in millions):
Gross Profit
------------------------------------------
Extra Reported Incr
2006 2005/1/ week/2/ 2005 (Decr)
------ ------- ------- --------- ------
Wholesale distribution segment $ 45.5 $ 46.3 $ 0.6 $ 46.9 $ (1.4)
Retail health food stores segment 14.6 13.4 0.2 13.6 1.0
------ ------- ------- --------- ------
$ 60.1 $ 59.7 $ 0.8 $ 60.5 $ (0.4)
====== ======= ======= ========= ======
/1/ Excludes extra week discussed in /2/ below
/2/ During the first quarter of fiscal 2005, the Company changed its reporting period
from a 52-53 week year ending on the last Friday in September to a calendar month
reporting period ending on September 30. As a result of this change, fiscal 2005
comprised of 53 weeks of operations as compared to 52 weeks of operations in the
fiscal 2006.
|
Overall gross profit decreased slightly by approximately 0.6% to $60.1 million in fiscal 2006 compared to $60.5 million in fiscal 2005. Gross profit as a percentage of sales also decreased slightly from 7.3% in fiscal 2005 to 7.2% in fiscal 2006.
Gross profit from our wholesale distribution segment decreased approximately $1.4 million from fiscal 2005 to fiscal 2006. Items increasing gross profit during fiscal 2006 was a $0.5 million smaller LIFO charge in fiscal 2006 as compared to fiscal 2005, and $1.4 million resulting from higher sales volumes in our other products categories. These increases were offset by a $0.6 million decrease in gross profit attributable to an extra week of operations in fiscal 2005 compared to fiscal 2006 resulting from a change in our reporting period, a $0.5 million reduction in incentive payments received from cigarette and non-cigarette vendors based on the Company's buying volumes, and $2.2 million related to a decrease in cigarette carton shipments volumes.
Gross profit for the retail health food segment increased approximately $1.0 million in fiscal 2006 compared with fiscal 2005. Of this increase, $0.1 million related to improved management of inventory and throw-out costs, $0.1 million related to a smaller LIFO charge in fiscal 2006 compared to fiscal 2005, $0.2 million was due to the extra week of operations in fiscal 2005 and $0.6 million was related to the overall sales mix and volume growth.
OPERATING EXPENSE
Operating expense includes selling, general and administrative expenses and depreciation and amortization and impairment charges. Selling, general and administrative expenses include costs related to our sales, warehouse, delivery and administrative departments for all segments. Specifically, purchasing and receiving costs, warehousing costs and cost of picking and
loading customer orders are all classified as selling, general and administrative expenses. Our most significant expenses relate to employee costs, facility and equipment leases, transportation costs, insurance and professional fees.
Total operating expenses decreased approximately $3.8 million in fiscal 2006, or 6.6%, from fiscal 2005. As a percentage of sales, total operating expenses decreased from 6.9% in fiscal 2005 to 6.4% in fiscal 2006. The decrease in operating expense from prior year was primarily attributable to a $4.2 reduction in intangible impairment charges from fiscal 2005 to fiscal 2006. The Company incurred no such impairment charges in 2006. Also decreasing operating expenses in fiscal 2006 compared to fiscal 2005 was a $0.6 million reduction in lower workers compensation claims expense. These decreases were partially offset by $0.7 million in higher fuel costs and $0.3 million related to higher professional services expense.
INTEREST EXPENSE
Interest expense for fiscal year 2006 increased 15.3% to $4.9 million compared to $4.2 million in fiscal 2005. This increase was primarily related to increases in the prime interest rate which is the rate at which the Company primarily borrows, an increase in the Company's average variable rate borrowings and the impact of the expiration of an interest rate swap in fiscal 2006 that had the effect of converting $10.0 million of borrowings under the Facility to 4.87%. On average, the Company's borrowing rates on variable rate debt were 1.71% higher and the average borrowings on variable rate debt were $3.5 million higher in fiscal 2006 as compared to fiscal 2005.
OTHER
During fiscal 2005 the Company allocated $0.1 million in losses, net of tax, to "Minority interest", which was related to a 15% minority ownership interest in the Company's TSI subsidiary. After this allocation, the 15% minority ownership interest in TSI had been reduced to zero resulting from cumulative TSI loss allocations. The minority shareholders have no future funding obligations to TSI. Accordingly, no further allocations of losses to minority shareholders were made by the Company in fiscal 2006, or will be in the future.
The Company's effective income tax rate was 24.6% in fiscal 2006 compared to 18.4% in fiscal 2005. The increase in the effective tax rate was primarily attributable to valuation allowances placed on state net operating losses in fiscal 2005 which reduced the income tax benefit and related effective tax rate.
During fiscal 2006, the Company paid preferred dividends of $0.4 million on its Series A, B and C Cumulative, Convertible Preferred Stock, compared to $0.3 million in fiscal 2005. The increase in preferred dividend payments over fiscal 2005 is primarily attributable to the issuance of the Series C Cumulative Preferred Stock in March 2006.
DISCONTINUED OPERATIONS (Fiscal 2004 - 2006)
At September 30, 2006, and for all fiscal periods presented throughout this Annual Report on Form 10-K, discontinued operations consist of our HNWC and
TSI subsidiaries. In March 2005 the operations of TBG were discontinued and in April 2006 the Company successfully completed the wind-down of TBG's operations, at which time TBG's residual liability balances were reclassified to continuing operations. Accordingly, TBG's results from operations are included below for the fiscal years 2004, 2005 and through March of 2006.
Losses from discontinued operations decreased approximately $9.6 million from fiscal 2005 to fiscal 2006. This change was primarily the result of impairment charges incurred during fiscal 2005 which totaled $8.9 million. There were no impairment charges incurred in discontinued operations in fiscal 2006. Additionally, TSI's closure in March 2006 stemmed further operating losses.
Losses from discontinued operations increased approximately $4.3 million from fiscal 2004 to fiscal 2005. This change was primarily the result of an additional $5.3 million in impairment charges incurred in fiscal 2005 as compared to fiscal 2004.
HNWC remained fully operational throughout fiscal 2006 and reported a net loss from operations before income taxes of approximately $0.9 million compared to a net loss from operations before taxes of approximately $5.5 million in fiscal 2005. As discussed further in Item 1 Part 1 - Recent Events, and Note 18 of this Annual Report on Form 10-K, HNWC sold substantially all of its operating assets on November 20, 2006.
A summary of discontinued operations is as follows:
Year ended
September
-----------------------------------------
2006 2005 2004
----------- ------------ -----------
Sales $ 8,635,869 $ 13,185,114 $ 6,519,777
Impairment charges - (8,852,406) (3,578,256)
Operating loss (3,187,117) (17,118,287) (12,126,297)
Income tax benefit (1,132,000) (5,453,000) (4,709,000)
Loss from discontinued operations (2,433,767) (11,971,580) (7,642,472)
|
Sales for fiscal year 2005 increased 2.1% to $834.6 million, compared to $817.3 million in fiscal 2004. Sales are reported net of costs associated with sales incentives provided to customers, totaling $14.7 million and $13.6 million for fiscal 2005 and 2004, respectively. Sales increases (decreases) by business segment are as follows (dollars in millions):
Sales
------------------------------------------
Extra Reported Incr
2005/1/ week/2/ 2005 2004 (Decr)
------- ------- --------- ------ -----
Wholesale distribution segment $ 786.4 $ 13.6 $ 800.0 $ 784.9 $ 15.1
Retail health food stores segment 34.2 0.4 34.6 32.4 2.2
------- ------- --------- ------- -----
$ 820.6 $ 14.0 $ 834.6 $ 817.3 $ 17.3
======= ======= ========= ======= ======
/1/ Excludes extra week discussed in /2/ below
/2/ During the first quarter of fiscal 2005, the Company changed its reporting period
from a 52-53 week year ending on the last Friday in September to a calendar month
reporting period ending on September 30. As a result of this change, fiscal 2005
comprises 53 weeks of operations as compared to 52 weeks of operations in fiscal
2004.
|
Sales from the wholesale distribution segment increased by $15.1 million for the fiscal 2005 as compared to fiscal 2004. Cigarette sales increased $10.0 million for fiscal 2005 and sales of tobacco, confectionary and other products contributed an additional $5.1 million during the period. Of the increase in cigarette sales, $10.4 million was a result of the change in our monthly reporting period which added an extra week of sales in fiscal 2005 as compared to fiscal 2004, $9.7 million was attributable to price increases implemented by major cigarette manufacturers in December 2004 and $6.5 million was due to increased excise taxes implemented in certain states during fiscal 2005. These increases were offset by a $16.6 million decrease in cigarette sales due to a 3.7% decrease in carton volume (excluding the extra week). Of the increase in tobacco, confectionary and other products, $3.2 million was due to the extra week and $1.9 million was attributable primarily to new business obtained during fiscal 2005 through expansion of our market area.
Sales from the retail health food segment during fiscal 2005 increased by $2.2 million when compared to fiscal 2004. The extra week of operations during fiscal 2005 resulted from the change in the Company's monthly reporting period contributed approximately $0.4 million. In addition, a net sales increase of $0.9 million resulted from sales generated from the opening of a new store in Oklahoma City in April 2004. General growth in same store sales driven largely from increases in vitamins and health and beauty added an additional $1.9 million in sales. These increases were offset by the closure of a non-contributing store in Florida in October 2004 which decreased sales by $0.8 million, and a $0.5 million reduction in sales due to lower sales of grocery and low carb products during fiscal 2005 compared to fiscal 2004.
Additionally, in 2004 a hurricane forced the temporary closure of several of our stores in Florida. The impact on those temporary store closures in 2004 increased fiscal 2005 sales by $0.3 million on a year-over-year comparison.
GROSS PROFIT
Our gross profit does not include fulfillment costs and costs related to the distribution network which are included in selling, general and administrative costs, and may not be comparable to the gross profit of other entities which do include such costs. Some entities may classify such costs as a component of cost of sales. Cost of sales, a component used in determining gross profit, for our wholesale and retail segments includes the cost of products purchased from manufacturers, less incentives that we receive which are netted against such costs.
Gross profit increased 1.9% to $60.5 million for fiscal year 2005 compared to $59.3 million for the prior fiscal year. Gross profit as a percentage of sales in fiscal 2005 stayed consistent at 7.3% compared to fiscal 2004. Gross profit by business segment is as follows (dollars in millions):
Gross Profit
------------------------------------------
Extra Reported Incr
2005/1/ week/2/ 2005 2004 (Decr)
------- ------- --------- ------ ------
Wholesale distribution segment $ 46.3 $ 0.6 $ 46.9 $ 46.3 $ 0.6
Retail health food stores segment 13.4 0.2 13.6 13.0 0.6
------- ------- --------- ------- ------
$ 59.7 $ 0.8 $ 60.5 $ 59.3 $ 1.2
======= ======= ========= ======= ======
/1/ Excludes extra week discussed in /2/ below
/2/ During the first quarter of fiscal 2005, the Company changed its reporting period
from a 52-53 week year ending on the last Friday in September to a calendar month
reporting period ending on September 30. As a result of this change, fiscal 2005
comprises 53 weeks of operations as compared to 52 weeks of operations in fiscal
2004.
|
Gross profit from our wholesale distribution segment for fiscal 2005 increased approximately $0.6 million as compared to the prior year. Items increasing gross profit during fiscal 2005 as compared to fiscal 2004 included $0.6 million attributable to the extra week of operations resulting from a change in our reporting period, $0.3 million due to cigarette price increases implemented by major cigarette manufacturers in December 2004, $1.3 million related to the excise tax increases in certain states that occurred during fiscal 2005, $0.1 million related to candy price increases, incentive payments of $0.3 million received from cigarette and non-cigarette vendors based on the Company's buying volumes and $0.1 million related to increased volume of other products. These increases were offset by decreases in cigarette margin of $1.6 million resulting from decreased carton volume and $0.5 million from a larger LIFO charge during fiscal 2005 as compared to fiscal 2004.
Gross profit for the retail health food segment for fiscal 2005 increased approximately $0.6 million compared with fiscal 2004. The increase was primarily due to the extra week of operations, which contributed approximately $0.2 million in gross profit during the period, and $0.5
million due to improved sales and change in product mix. These increases were offset by a $0.1 million decrease in margin related to higher product costs and disposal of perishable and low-carb products.
OPERATING EXPENSE
Operating expense includes selling, general and administrative expenses and depreciation and amortization and impairment charges. Selling, general and administrative expenses include costs related to our sales, warehouse, delivery and administrative departments for all segments. Specifically, purchasing and receiving costs, inspection costs, warehousing costs and cost of picking and loading customer orders are all classified as selling, general and administrative expenses. Our most significant expenses relate to employee costs, facility and equipment leases, transportation costs, insurance and professional fees.
Total operating expense, which included an extra week of operations in fiscal 2005, increased 12.6%, or $6.4 million, to $57.4 million compared to fiscal 2004. As a percentage of sales, total operating expenses increased to 6.9% from 6.2% as compared to the prior year.
The increase in operating expenses during fiscal 2005 as compared to fiscal 2004 was primarily related to goodwill and identifiable intangible asset impairment charges totaling $4.2 million in our retail segment during fiscal 2005. The retail segment did not incur similar impairment charges in fiscal 2004. The fiscal 2005 impairment charges were based on valuations obtained from an independent valuation specialist working in conjunction with management determined that a portion of the tradenames and goodwill at our retail segment were impaired. The impairment charges resulted from shortfalls in operating cash flow necessary to support the carrying value of the retail segment. The fair values utilized to calculate the impairment charges were estimated with the assistance of an independent valuation specialist using the expected present value of the discounted future cash flows and consideration of the net recoverable values.
In addition to the impairment charges, our wholesale segment experienced a $1.1 million increase in professional fees in fiscal 2005 exploring strategic alternatives for the Company's retail and beverage segments, Sarbanes-Oxley compliance, and restatement of the Company's 2004 financial statements. In addition, the wholesale segment had a net increase in operating expenses of $1.1 million related primarily to higher fuel costs, workers' compensation claims expense, healthcare insurance, bad debt expense, administrative salaries, as well as, the extra week of operations previous mentioned. The Company did not incur similar expenses during fiscal 2004.
INTEREST EXPENSE
Interest expense for fiscal year 2005 increased 30% to $4.2 million compared to $3.2 million during fiscal 2004. The increase in interest expense year- over-year was primarily due to higher prime lending rates. The prime lending rate is the rate at which the Company primarily borrows under its credit facility. On average, the Company's borrowing rates on its variable rate debt were 1.46% higher and average borrowings were $10.7 million higher in fiscal 2005 as compared to fiscal 2004.
OTHER
During fiscal 2005, other income decreased $0.5 million as compared to fiscal 2004 because of the sale of available-for-sale securities in fiscal 2004. The Company did not have similar sales in fiscal 2005.
During fiscal 2005 and fiscal 2004, the Company allocated $0.1 million in losses, net of tax, to "Minority interest", related to a 15% minority ownership interest in the Company's TSI subsidiary. During fiscal 2005, the 15% minority ownership interest in TSI was reduced to zero resulting from cumulative TSI loss allocations. Accordingly, the Company made no further loss allocations, or will in the future.
The Company's effective income tax rate was 18.4% in fiscal 2005 compared to 40.1% in fiscal 2004. The decrease in the effective tax rate was primarily attributable to valuation allowances placed on state net operating losses and impairment of non-deductible intangible assets in fiscal 2005 which reduced the income tax benefit and related effective tax rate. In fiscal 2004, impairment of non-deductible intangible assets increased the effective income tax rate.
During fiscal 2005, the Company paid preferred dividends of $0.3 million on its Series A and B, Cumulative, Convertible Preferred Stock, compared to $0.1 million in fiscal 2004.
Operating Activities. The Company requires cash to pay its operating expenses, purchase inventory and make capital investments. In general, the Company finances these cash needs from the cash flow generated by its operating activities and from borrowings and preferred stock issuances, as necessary. During fiscal 2006, the Company used approximately $0.3 million of cash from operating activities, primarily related to operating losses incurred by our beverage businesses, which are included in discontinued operations. Cash used by our discontinued operations was partially offset by reductions in accounts receivable and inventory levels in our continuing operations. Our variability in cash flows from operating activities is heavily dependent on the timing of inventory purchases and seasonal fluctuations. For example, in the circumstance where we are "buying-in" to obtain favorable terms on particular product or to maintain our LIFO layers, we may have to retain the inventory for a period longer than the payment terms. This generates cash outflow from operating activities that we expect to reverse in a later period. Additionally, during the warm weather months, which is our busiest time of the year, we generally carry larger inventory back stock to ensure high fill rates to maintain customer satisfaction.
Investing Activities. Approximately $1.0 million in cash was used for capital expenditures for property, plant and equipment during fiscal 2006.
Financing Activities. The Company generated net cash of $1.3 million from financing activities during fiscal 2006. Of the net cash generated, $2.0 million was received from the proceeds of a private placement (Series C
Convertible Preferred Stock) and $0.8 million was generated from additional borrowings by our TSI subsidiary before its closure in March 2006. The Company also used cash of $0.8 million for net payments on its credit facility and its continuing operations long-term debt, $0.3 million for discontinued operations long-term debt payments and cash of $0.4 million for preferred stock dividend payments.
Cash on Hand/Working Capital. As of September 30, 2006, the Company had cash on hand of $0.5 million and working capital (current assets less current liabilities) of $28.0 million. This compares to cash on hand of $0.5 million and a working capital of $30.6 million as of September 30, 2005.
Payments Due By Period
---------------------------------------------------------------------
Contractual Fiscal Fiscal Fiscal
Obligations Total 2007 2008-2009 2010-2011 Thereafter
---------------------- ---------------------------------------------------------------------
Credit Facility $ 48,823 $ 3,896 $ 44,927 $ - $ -
Long-term debt -
continuing
operations/1/ 7,594 524 6,204 866 -
Long-term debt -
discontinued
operations/2/ 3,690 1,410 2,280 - -
Related party debt 2,750 2,750 - - -
Interest on long-term
debt/3/ 10,132 5,004 5,108 20 -
Operating leases 18,965 3,965 6,342 4,567 4,091
Minimum water royalty/4/ 4,247 288 576 576 2,807
---------------------------------------------------------------------
Total $ 96,201 $17,837 $ 65,437 $ 6,029 $ 6,898
=====================================================================
Other Commercial Fiscal Fiscal Fiscal
Commitments Total 2007 2008-2009 2010-2011 Thereafter
--------------------- ---------------------------------------------------------------------
Lines of credit $ 55,000 $ - $ 55,000 $ - $ -
Lines of credit in use (48,823) - (48,823) - -
---------------------------------------------------------------------
Lines of credit
available 6,177 - 6,177 - -
Water source /5/ 5,000 - - - 5,000
Letters of credit 1,450 450 1,000 - -
---------------------------------------------------------------------
Total $ 12,627 $ 450 $ 7,177 $ - $ 5,000
=====================================================================
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/1/ Includes capital leases of $0.2 million with maturities through 2010.
/2/ Includes capital leases of $0.3 million with maturities through 2008.
/3/ Represents estimated interest payments on long-term debt, including capital leases. Certain obligations contain variable interest rates. For illustrative purposes, the Company has projected future interest payments assuming that interest rates will remain unchanged.
/4/ Fiscal 2006 - 2010 represents the annual minimum water royalty and the balance thereafter represents the minimum water royalty in perpetuity. Both amounts are representative of the present value of the obligation reflected in our balance sheet together with the imputed interest portions of required payments.
/5/ The Company is in settlement discussions with respect to the TSI litigation discussed in Items 3 pursuant to which it is undertaking to divest substantially all of the assets and liabilities of TSI as part of a complete settlement of any and all claims against the Company by CPH. As required by SFAS 144, management believes that the recorded balance of the subject assets and liabilities have been recognized at their respective fair values.
In December 2006, the Company executed a new amendment to the Facility with LaSalle Bank. The significant terms of the new amendment include a $57.1 million credit limit, a April 2009 maturity date and an interest rate at bank's prime rate. The Facility is collateralized by all of the Company's equipment, intangibles, inventories, and accounts receivable. The amendment also includes quarterly cumulative earnings before interest, taxes, depreciation and amortization ("EBITDA") and a quarterly minimum debt service ratio financial covenant of one to one beginning with the fiscal quarter ending September 30, 2007 for the twelve month period then ended.
The cumulative minimum EBITDA requirements are as follows (a) $1,000,000 for the three months ending December 31, 2006, December 31, 2007 and December 31, 2008 (b) $2,000,000 for the six months ending March 31, 2007, March 31, 2008, and March 31, 2009, (c) $4,500,000 for the nine months ending June 30, 2007, June 30, 2008 and $7,000,000 for the twelve months ending September 30, 2007 and September 30, 2008.
The Company has a $5.0 million (face amount) Term Note B from LaSalle Bank, which had an outstanding balance of $1.6 million at September 30, 2006. Term Note B bears interest at the bank's base rate plus 2.00%, which was 10.25% at September 30, 2006 and is required to be repaid in monthly installments of $0.1 million.
The Company's maximum revolving credit limit on the Facility was $54.2 million at September 30, 2006, however, the amount available for use at any given time is subject to many factors including eligible accounts receivable and inventory balances that are evaluated on a daily basis. On September 30, 2006, the balance on the revolving portion of the Facility, including Note A, was $47.3 million. Based on our collateral and loan limits, the Company's
excess availability under the Facility at September 30, 2006 was approximately $5.5 million. During fiscal 2006 our peak borrowings under the Facility were $54.7 million and our average borrowings and average availability were $48.5 and $1.8 million, respectively. Our availability to borrow under the Facility generally decreases as inventory and accounts receivable levels go up because of the borrowing limitations that are placed on the collateralized assets. At September 30, 2006 the Company was in violation of the revolving credit facility's financial covenant requiring minimum monthly EBITDA of $100,000. This covenant violation was subsequently waived in connection with the eighth amendment to the Restated Loan and Security Agreement with LaSalle Bank in December 2006.
The Company's Chairman has personally guaranteed repayment of the Facility and the term loans. However, the amount of his guaranty is capped at $10.0 million and is automatically reduced by the amount of the repayment on Term Loan B and certain other deductions, which resulted in the guaranteed principal outstanding being reduced to $6.6 million as of September 30, 2006. AMCON will pay the Company's Chairman an annual fee equal to 2% of the guaranteed principal in return for the personal guarantee.
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.
AMCON has issued a letter of credit for approximately $1.0 million to its workers' compensation insurance carrier as part of its self-insured loss control program.
On July 13, 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, and Related Implementation Issues" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a Company's financial statements in accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS 109"). FIN 48 prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective as of the beginning of fiscal years that begin after December 15, 2006. The Company is currently evaluating the effects of implementing this new standard.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for the Company's fiscal year beginning October 1, 2008, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard.
CRITICAL ACCOUNTING ESTIMATES
Certain accounting estimates used in the preparation of the Company's financial statements require us to make judgments and estimates and the financial results we report may vary depending on how we make these judgments and estimates. Our critical accounting estimates are set forth below and have not changed during fiscal 2006.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
NATURE OF ESTIMATES REQUIRED. The allowance for doubtful accounts represents our estimate of uncollectible accounts receivable at the balance sheet date. We monitor our credit exposure on a weekly basis and assess the adequacy of our allowance for doubtful accounts on a quarterly basis. Because credit losses can vary significantly over time, estimating the required allowance requires a number of assumptions that are uncertain.
ASSUMPTIONS AND APPROACH USED. We estimate our required allowance for doubtful accounts using the following key assumptions.
- Historical collections - Represented as the amount of historical uncollectible accounts as a percent of total accounts receivable.
- Specific credit exposure on certain accounts - Identified based on management's review of the accounts receivable portfolio and taking into account the financial wherewithal of particular customers that management deems to have a higher risk of collection. For example, a customer in bankruptcy would indicate that an amount could be uncollectible.
SENSITIVITY ANALYSIS. We believe that our current level of allowance for doubtful accounts is adequate at the balance sheet date and that our credit exposure is very low compared with the high volume of sales and the nature of our industry in which collections are generally made quickly. However, for every 1% percent of receivables deemed to require an additional reserve at September 30, 2006, the impact on the statement of operations would be to increase selling, general and administrative expenses by approximately $288,000.
INVENTORIES
NATURE OF ESTIMATES REQUIRED. In our businesses, we carry large quantities and dollar amounts of inventory. Inventories consist primarily of finished products purchased in bulk quantities to be sold to our customers. Given the large quantities and broad range of products that we carry to better serve our customers, there is a risk of impairment in inventory that is unsaleable or unrefundable, slow moving, obsolete or is discontinued. The use of estimates is required in determining the salvage value of this inventory.
ASSUMPTIONS AND APPROACH USED. We estimate our inventory obsolescence reserve at each balance sheet date based on the following criteria:
-Slow moving products - Items identified as slow moving are evaluated on a case-by-case basis for impairment.
-Obsolete/discontinued inventory - Products identified that are near or beyond their expiration dates. In addition, we may discontinue carrying certain product lines for our customers. As a result, we estimate the market value of this inventory as if it were to be liquidated.
-Estimated salvage value/sales price - The salvage value of the inventory is estimated using management's evaluation of the congestion in the distribution channels and experience with brokers and inventory liquidators to determine the salvage value of the inventory.
DEPRECIATION, AMORTIZATION AND IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets consist primarily of fixed assets and intangible assets that were acquired in business combinations. Fixed assets and amortizable identified intangible assets are assigned useful lives ranging from 2 to 40 years. Goodwill is not amortized. Impairment of reporting units, which is measured in the Company's fourth fiscal quarter in order to coincide with its budgeting process, is evaluated annually with the assistance of an independent valuation specialist. The reporting units are valued using after-tax cash flows from operations (less capital expenditures) discounted to present value.
A summary of the impairment charges by entity for fiscal year 2005 are as follows (in millions):
Continuing Discontinued Total
Operations Operations
---------- ---------------- -----
Retail TSI HNWC Total
Long-lived assets $ - $ 0.4 $ 2.5 $ 2.9
Goodwill 0.3 0.4 0.4 1.1
Water source - 3.7 - 3.7
Customer list - 0.3 0.1 0.4
Tradename 3.9 0.9 0.2 5.0
----- ----- ----- -----
$ 4.2 $ 5.7 $ 3.2 $13.1
===== ===== ===== =====
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The impairment charges for our Retail segment are recorded in the Company's statement of operations as a component of (loss) income from continuing operations. The impairment charges for TSI and HNWC have been included in the loss from discontinued operations in the statement of operations.
NATURE OF ESTIMATES REQUIRED. Management has to estimate the useful lives of the Company's long lived assets. In regard to the impairment analysis, the most significant assumptions include management's estimate of the annual growth rate used to project future sales and expenses used by the independent third party valuation specialist.
ASSUMPTIONS AND APPROACH USED. For fixed assets, depreciable lives are based
on our accounting policy which is intended to mirror the expected useful life
of the asset. In determining the estimated useful life of amortizable
intangible assets, such as customer lists, we rely on our historical
experience to estimate the useful life of the applicable asset and consider
industry norms as a benchmark. In evaluating potential impairment of long-
lived assets we primarily use an income based approach (discounted cash flow
method) and guideline public and private company information. A discounted
cash flow methodology requires estimation in (i) forecasting future earnings
(ii) determining the discount rate applicable to the earnings stream being
discounted, and (iii) computing a terminal value at some point in the future.
The forecast of future earnings is an estimate of future financial performance based on current year results and management's evaluation of the market potential for growth. The discount rate is a weighted average cost of capital using a targeted debt-to-equity ratio using the industry average under the assumption that it represents our optimal capital structure and can be achieved in a reasonable time period. The terminal value is determined using a commonly accepted growth model.
SENSITIVITY ANALYSIS. We believe that the estimated useful lives of our fixed assets and amortizable intangibles are appropriate. If we shortened the estimated useful lives of our fixed assets by one year, the impact on the statement of operations for the current period would be to increase depreciation expense by approximately $565,000.
INSURANCE
The Company's insurance for workers' compensation, general liability and employee-related health care benefits are provided through high-deductible or self-insured programs. As a result, the Company accrues for its workers' compensation liability based upon claim reserves established with the assistance of a third-party administrator which are then trended and developed. The reserves are evaluated at the end of each reporting period. Due to the uncertainty involved with the realization of claims incurred but unreported, management is required to make estimates of these claims.
ASSUMPTIONS AND APPROACH USED. In order to estimate our reserve for incurred but unreported claims we consider the following key factors:
Employee Health Insurance Claims
- Historical claims experience - We review loss runs for each month to calculate the average monthly claims experience.
- Lag period for reporting claims - Based on analysis and consultation with our third party administrator, our experience is such that we have a one month lag period in which claims are reported.
Workers' Compensation Insurance Claims
- Historical claims experience - We review prior year's loss runs to estimate the average annual expected claims and review monthly loss runs to compare our estimates to actual claims.
- Lag period for reporting claims - We utilize the assistance of our insurance agent to trend and develop reserves on reported claims in order to estimate the amount of incurred but unreported claims. Our insurance agent uses standard insurance industry loss development models.
SENSITIVITY ANALYSIS. We believe that our current reserve for incurred but unreported insurance claims is adequate at the balance sheet date. However, for every 5% percent increase in claims, an additional reserve of approximately $57,000 would be required at September 30, 2006, the impact of which would increase selling, general and administrative expenses by that amount in the same period.
INCOME TAXES
The Company accounts for its income taxes by recording taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. As required by SFAS No. 109, "Accounting for Income Taxes", these expected future tax consequences are measured based on provisions of tax law as currently enacted; the effects of future changes in tax laws are not anticipated. Future tax law changes, such as a change in the corporate tax rate, could have a material impact on our financial condition or results of operations. When appropriate, we record a valuation allowance against deferred tax assets to offset future tax benefits that may not be realized. During fiscal 2006, we recorded a valuation allowance of $0.5 million against state net operating loss carryforwards for the beverage and retail health companies in the consolidated group who have historically incurred losses and file separate state tax returns.
ASSUMPTIONS AND APPROACH USED. In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion of our deferred tax assets will not be realized, based in part upon management's judgments regarding future events.
In making that estimate we consider the following key factors:
- our current financial position;
- historical financial information;
- future reversals of existing taxable temporary differences;
- future taxable income exclusive of reversing temporary differences
and carryforwards;
- taxable income in prior carryback years; and
- tax planning strategies.
SENSITIVITY ANALYSIS. Based on our analysis, we have determined that a valuation allowance of $0.5 million was required at September 30, 2006. The valuation allowance reduced the deferred tax asset to the amount that is more likely than not to be realized and a corresponding reduction to net income resulted.
REVENUE RECOGNITION
We recognize revenue in our wholesale and beverage segments when products are delivered to customers (which generally is the same day products are shipped) and in our retail health food segment when the products are sold to consumers. Sales are shown net of returns, discounts, and sales incentives to customers.
NATURE OF ESTIMATES REQUIRED. We estimate and reserve for anticipated sales discounts as part of our periodic evaluation of allowance for doubtful accounts. We also estimate and provide a reserve for anticipated sales incentives to customers based on volume.
ASSUMPTIONS AND APPROACH USED. We estimate the sales reserves using the following criteria:
- Sales discounts - We use historical experience to estimate the amount of accounts receivable that will not be collected due to customers taking advantage of authorized term discounts.
- Volume sales incentives - We use historical experience in combination with quarterly reviews of customers' sales progress in order to estimate the amount of volume incentives due to the customers on a periodic basis.
SENSITIVITY ANALYSIS. Based on the historical information used to estimate the reserves for sales discounts and volume sales incentives, we do not anticipate significant variances from the amounts reserved. However, there could be significant variances from period-to-period based on customer make- up and programs offered.
Our estimates and assumptions for each of the aforementioned critical accounting estimates have not changed materially during the periods presented, nor are we aware of any reasons that they would be reasonably likely to change in the future.
management's current beliefs and estimates of future economic circumstances, industry conditions, company performance and financial results. Forward looking statements include information concerning the possible or assumed future results of operations of the Company and those statements preceded by, followed by or that include the words "future," "position," "anticipate(s)," "expect," "believe(s)," "see," "plan," "further improve," "outlook," "should" or similar expressions. For these statements, we claim the protection of the safe harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. You should understand that the following important factors, in addition to those discussed elsewhere in this document, including Item 1A-Risk Factors of this Annual Report on Form 10-K, could adversely affect our results of operations, business, cash flow and financial condition and could cause our results of operations to differ materially from those expressed in our forward looking statements:
- treatment of TSI transaction and litigation,
- changing market conditions with regard to cigarettes,
- changes in promotional and incentive programs offered by
cigarette manufacturers,
- the demand for the Company's products,
- new business ventures,
- domestic regulatory risks,
- competition,
- collection of guaranteed amounts,
- poor weather conditions,
- increases in fuel prices,
- other risks over which the Company has little or no control, and
- any other factors not identified herein could also have such an effect.
Changes in these factors could result in significantly different results. Consequently, future results may differ from management's expectations. Moreover, past financial performance should not be considered a reliable indicator of future performance. Any forward looking statement contained herein is made as of the date of this document. The Company undertakes no obligation to publicly update or correct any of these forward looking statements in the future to reflect changed assumptions, the occurrence of material events or changes in future operating results, financial conditions or business over time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk on its variable rate debt. At September 30, 2006, the Company had $48.8 million of variable rate debt outstanding with maturities through April 2009. The interest rate on this debt was 8.25% at September 30, 2006. We estimate that our annual cash flow exposure relating to interest rate risk based on our current borrowings is approximately $0.3 million for each 1% change in our lender's prime interest rate.
We do not utilize financial instruments for trading purposes and hold no derivative financial instruments which could expose us to significant market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to 2006 Consolidated Financial Statements
Report of Independent Registered Public Accounting Firms......................................... 49 Consolidated Financial Statements .......................... 51 Notes to Consolidated Financial Statements.................. 56 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
AMCON Distributing Company
Omaha, Nebraska
We have audited the consolidated balance sheet of AMCON Distributing Company and subsidiaries as of September 30, 2006, and the related consolidated statements of operations, shareholders' equity (deficiency) and comprehensive income (loss) and cash flows for the year then ended September 30, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AMCON Distributing Company and subsidiaries as of September 30, 2006, and the results of their operations and their cash flows for the year ended September 30, 2006 in conformity with U.S. generally accepted accounting principles.
As more fully described in Note 14 to the consolidated financial statements, the Company is a defendant in litigation relating to the Company's June 2004 purchase of Trinity Springs, Inc. (TSI) and the operation of the business. The plaintiff seeks to compel the Company to perform under the June 2004 purchase agreement and other agreements related to the purchase and to recover damages alleged due to the Company's failure to perform under these agreements. A prior complaint related to the same purchase involving the same parties was addressed by action of the court in October of 2006.
McGLADREY & PULLEN
Omaha, Nebraska
December 28, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of AMCON Distributing Company:
We have audited the accompanying consolidated balance sheets of AMCON Distributing Company and subsidiaries (the "Company") as of September 30, 2005, and the related consolidated statements of operations, shareholders' equity (deficiency) and comprehensive income (loss) and cash flows for each of the fiscal years ended September 30, 2005 and September 24, 2004. Our audits also included the financial statement schedule for each of the fiscal years ended September 30, 2005 and September 24, 2004 listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of AMCON Distributing Company and subsidiaries as of September 30, 2005, and the results of their operations and their cash flows for each of the fiscal years ended September 30, 2005 and September 24, 2004 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule for each of the fiscal years ended September 30, 2005 and September 24, 2004, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 14 to the consolidated financial statements, the Company is a defendant in litigation relating to the Company's June 2004 purchase of Trinity Springs, Inc. ("TSI"). The Company is being challenged in the District Courts by the former shareholders of TSI regarding the validity of the Company's purchase of TSI. The plaintiffs seek rescissory damages and other remedies against the Company.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
August 21, 2006 (December 28, 2006 as to Notes 2 and 17)
CONSOLIDATED BALANCE SHEETS
AMCON Distributing Company and Subsidiaries
--------------------------------------------------------------------------------------------------
September 30, 2006 2005
--------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 481,138 $ 546,273
Accounts receivable, less allowance
for doubtful accounts of $0.9 million
and $0.4 million in 2006 and 2005, respectively 27,815,751 27,180,031
Inventories, net 24,443,063 23,341,289
Deferred income taxes 1,972,988 1,642,212
Current assets of discontinued operations 1,172,805 2,823,809
Prepaid and other current assets 5,369,154 5,264,629
------------------------------
Total current assets 61,254,899 60,798,243
Property and equipment, net 12,528,539 13,514,942
Goodwill 5,848,808 5,848,808
Other intangible assets 3,439,803 3,464,534
Deferred income taxes 6,772,927 6,300,503
Non-current assets of discontinued operations 3,774,106 4,145,194
Other assets 1,247,464 1,236,573
------------------------------
$ 94,866,546 $ 95,308,797
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 14,633,124 $ 15,438,359
Accrued expenses 4,687,789 4,456,421
Accrued wages, salaries and bonuses 1,879,699 1,469,204
Income taxes payable 168,936 118,798
Current liabilities of discontinued operations 7,461,549 6,655,272
Current maturities of credit facility 3,896,000 1,432,000
Current maturities of long-term debt 524,130 655,667
------------------------------
Total current liabilities 33,251,227 30,225,721
Credit facility, less current maturities 44,927,429 47,730,388
Long-term debt, less current maturities 7,069,357 7,371,520
Noncurrent liabilities of discontinued operations 5,087,230 5,913,596
Series A cumulative, convertible preferred stock, $.01 par value
100,000 authorized and issued, liquidation preference
$25.00 per share 2,438,355 2,438,355
Series B cumulative, convertible preferred stock, $.01 par value
80,000 authorized and issued, liquidation preference
$25.00 per share 1,857,645 1,857,645
Series C cumulative, convertible preferred stock, $.01 par value
80,000 authorized and issued, liquidation preference
$25.00 per share 1,982,372 -
Commitments and contingencies (Note 14)
Shareholders' equity (deficiency):
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, none outstanding - -
Common stock, $.01 par value, 3,000,000 shares
authorized, 527,062 outstanding 5,271 5,271
Additional paid-in capital 6,278,476 6,218,476
Accumulated other comprehensive income, net of tax
of $0.05 million in 2005 - 101,294
Accumulated deficit (8,030,816) (6,553,469)
------------------------------
Total shareholders' deficiency (1,747,069) (228,428)
------------------------------
$ 94,866,546 $ 95,308,797
==============================
|
The accompanying notes are an integral part of these consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
AMCON Distributing Company and Subsidiaries
---------------------------------------------------------------------------------------------
Fiscal Years Ended September 2006 2005 2004
---------------------------------------------------------------------------------------------
Sales (including excise taxes of $200.6 million,
$197.7 million and $191.6 million in 2006, 2005
and 2004, respectively) $ 839,539,780 $ 834,551,448 $ 817,285,523
Cost of sales 779,406,125 774,060,331 757,937,989
-------------------------------------------
Gross profit 60,133,655 60,491,117 59,347,534
-------------------------------------------
Selling, general and administrative expenses 51,721,525 51,032,197 48,908,769
Depreciation and amortization 1,936,897 2,155,983 2,065,876
Impairment charges - 4,234,856 -
-------------------------------------------
53,658,422 57,423,036 50,974,645
-------------------------------------------
Operating income 6,475,233 3,068,081 8,372,889
Other expense (income):
Interest expense 4,858,012 4,211,685 3,243,238
Other (income), net (137,241) (80,105) (569,274)
-------------------------------------------
4,720,771 4,131,580 2,673,964
-------------------------------------------
Income (loss) from continuing operations
before income taxes 1,754,462 (1,063,499) 5,698,925
Income tax expense (benefit) 432,000 (196,000) 2,286,000
Minority interest in loss, net of tax - (97,100) (91,000)
-------------------------------------------
Income (loss) from continuing operations 1,322,462 (770,399) 3,503,925
Loss from discontinued operations, net of
income tax benefit of $1.1 million,
$5.5 million and $4.7 million, respectively (2,433,767) (11,971,580) (7,642,472)
-------------------------------------------
Net loss (1,111,305) (12,741,979) (4,138,547)
Preferred stock dividend requirements (366,042) (294,640) (49,474)
-------------------------------------------
Net loss available to common shareholders $ (1,477,347) $ (13,036,619) $ (4,188,021)
===========================================
Basic earnings (loss) per share
available to common shareholders:
Continuing operations $ 1.81 $ (2.02) $ 6.54
Discontinued operations (4.61) (22.71) (14.48)
-------------------------------------------
Net loss earnings per share
available to common shareholders $ (2.80) $ (24.73) $ (7.94)
===========================================
Diluted earnings (loss) per share
available to common shareholders:
Continuing operations $ 1.63 $ (2.02) $ 6.23
Discontinued operations (3.87) (22.71) (13.59)
-------------------------------------------
Net diluted loss per share
available to common shareholders $ (2.24) $ (24.73) $ (7.36)
===========================================
Weighted average shares outstanding:
Basic 527,062 527,062 527,774
Diluted 627,810 527,062 562,559
|
The accompanying notes are an integral part of these consolidated financial statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
AND COMPREHENSIVE INCOME (LOSS)
AMCON Distributing Company and Subsidiaries
----------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other Retained
----------------- Paid in Comprehensive Earnings
Shares Amount Capital Income (Deficit) Total
----------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 26, 2003 528,159 $ 31,690 $ 5,997,977 $ 220,732 $11,050,998 $17,301,397
Exercise of options 33 2 520 - - 522
Options issued in connection
with TSI acquisition - - 219,886 - - 219,886
Reverse stock split (1,130) (26,421) 93 - - (26,328)
Dividends on common stock - - - - (379,827) (379,827)
Dividends on preferred stock - - - - (49,474) (49,474)
Net loss - - - - (4,138,547) (4,138,547)
Change in fair value of
interest rate swap, net of
tax of $0.1 million - - - 123,257 - 123,257
Unrealized loss on investments
available-for-sale, net of
tax of $0.2 million - - - (284,089) - (284,089)
-----------
Total comprehensive loss (4,299,379)
--------------------------------------------------------------------------
Balance, September 24, 2004 527,062 5,271 6,218,476 59,900 6,483,150 12,766,797
Dividends on preferred stock - - - - (294,640) (294,640)
Net loss - - - - (12,741,979) (12,741,979)
Change in fair value of
interest rate swap, net of
tax of $0.03 million - - - 41,394 - 41,394
-----------
Total comprehensive loss (12,700,585)
--------------------------------------------------------------------------
Balance, September 30, 2005 527,062 5,271 6,218,476 101,294 (6,553,469) (228,428)
Dividends on preferred stock - - - - (366,042) (366,042)
Stock option plan compensation 60,000 60,000
Net loss - - - - (1,111,305) (1,111,305)
Change in fair value of
interest rate swap, net of
tax of $0.05 million - - - (101,294) - (101,294)
-----------
Total comprehensive loss (1,212,599)
--------------------------------------------------------------------------
Balance, September 30, 2006 527,062 $ 5,271 $ 6,278,476 $ - $(8,030,816) $(1,747,069)
==========================================================================
|
The accompanying notes are an integral part of these consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMCON Distributing Company and Subsidiaries
----------------------------------------------------------------------------------------------------------
Fiscal Years 2006 2005 2004
----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(1,111,305) $(12,741,979) $(4,138,547)
Deduct: Loss from discontinued operations, net of tax 2,433,767 11,971,580 7,642,472
----------- ----------- -----------
(Loss) income from continuing operations 1,322,462 (770,399) 3,503,925
Adjustments to reconcile (loss) income from
continuing operations to net cash flows
from operating activities:
Depreciation 1,897,166 2,039,553 1,887,244
Amortization 39,731 116,430 178,632
Impairment charges - 4,234,856 -
(Gain) loss on sale of property and equipment 30,082 (13,116) (7,774)
Stock based compensation 60,000 - -
Deferred income taxes (803,200) (5,987,341) (1,754,264)
Provision for losses on doubtful accounts 179,196 (189,604) (338,928)
Provision for losses on inventory obsolescence 77,940 (33,520) 206,925
Gain on sale of securities - - (507,418)
Minority interest - (97,100) (91,000)
Changes in assets and liabilities,
net of effect of acquisitions:
Accounts receivable (814,916) 1,383,923 (530,149)
Inventories (1,179,714) 10,056,784 (3,241,622)
Other current assets (205,819) (4,848,246) 223,901
Other assets (10,891) (160,509) 282,100
Accounts payable (805,235) (670,130) 1,804,427
Accrued expenses and accrued wages, salaries and bonuses 641,863 1,280,966 211,343
Income taxes payable and receivable 50,138 1,281,423 (1,703,039)
----------- ----------- -----------
Net cash flows from operating activities
- continuing operations 478,803 7,623,970 124,303
Net cash flows from operating activities
- discontinued operations (822,124) 903,906 (3,786,719)
----------- ----------- -----------
Net cash flows from operating activities (343,321) 8,527,876 (3,662,416)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (980,510) (2,464,694) (910,318)
Proceeds from sales of property and equipment 39,665 116,597 84,652
Acquisitions, net of cash acquired - - 407,986
Purchase of trademark (15,000) - -
Proceeds from sales of available-for-sale securities - - 561,910
----------- ----------- -----------
Net cash flows from investing activities
- continuing operations (955,845) (2,348,097) 144,230
Net cash flows from investing activities
- discontinued operations (16,818) (585,451) (4,035,108)
----------- ----------- -----------
Net cash flows from investing activities (972,663) (2,933,548) (3,890,878)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on bank credit agreements (338,959) 4,352,573 6,828,533
Net proceeds from preferred stock issuance 1,982,372 1,857,645 2,438,355
Proceeds from borrowings of long-term debt 237,266 1,399,638 -
Payments on long-term and subordinated debt (670,966) (8,413,374) (1,270,528)
Debt issuance costs - (446,641) -
Dividends paid on common stock - - (379,827)
Dividends paid on preferred stock (366,042) (294,640) (49,474)
Purchase of common stock, retired - - (26,328)
Proceeds from exercise of stock options - - 522
----------- ----------- -----------
Net cash flows from financing activities
- continuing operations 843,671 (1,544,799) 7,541,253
54
----------------------------------------------------------------------------------------------------------
Fiscal Years 2006 2005 2004
----------------------------------------------------------------------------------------------------------
Net cash flows from financing activities
- discontinued operations 407,178 (3,919,329) (239,959)
----------- ----------- -----------
Net cash flow from financing activities 1,250,849 (5,464,128) 7,301,294
----------- ----------- -----------
Net change in cash (65,135) 130,200 (252,000)
Cash, beginning of year 546,273 416,073 668,073
----------- ----------- -----------
Cash, end of year $ 481,138 $ 546,273 $ 416,073
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $4,858,960 $ 4,376,251 $ 3,632,384
Cash (refunded) paid during the year for
income taxes (647) (911,278) 1,253,768
Supplemental disclosure of non-cash information:
Issuance of note payable in exchange for
accounts payable - discontinued operations $ 362,716 $ - $ -
Acquisition of equipment through capital leases - 91,343 125,840
Business combinations:
Fair value of assets acquired - - 10,307,042
Subordinated debt assumed and notes payable issued - - 4,028,440
Present value of future water royalty payments - - 2,807,000
Other liabilities assumed - - 289,336
Issuance of common stock, stock options and
minority interest - - 407,986
|
The accompanying notes are an integral part of these consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Company Operations:
AMCON Distributing Company and Subsidiaries ("AMCON" and "the Company") is
primarily engaged in the wholesale distribution of consumer products in the
Great Plains and Rocky Mountain regions. In addition, the Company operates
thirteen retail health food stores in Florida and the Midwest.
AMCON's wholesale distribution business ("ADC") includes five distribution centers that sell approximately 14,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and chilled products and institutional food service products. The Company distributes products primarily to retailers such as convenience stores, discount and general merchandise stores, grocery stores and supermarkets, drug stores and gas stations. In addition, the Company services institutional customers, including restaurants and bars, schools, sports complexes and vendors, as well as other wholesalers.
AMCON also operates six retail health food stores in Florida under the name Chamberlin's Market & Cafe (Chamberlin's) and seven in the Midwest under the name Akin's Natural Foods Market (Akin's). These stores carry natural supplements, groceries, health and beauty care products and other food items.
The Company's operations are subject to a number of factors which are beyond the control of management, such as changes in manufacturers' cigarette pricing, state excise tax increases or competing retail stores opening in close proximity to the Company's retail stores. While the Company sells a diversified product line, it remains dependent upon cigarette sales which represented approximately 72% of its revenue and 27% of its gross profit in fiscal 2006 compared to 73% of its revenue and 32% of its gross profit in fiscal 2005 and 73% of its revenue and 33% of its gross profit in fiscal 2004.
(b) Accounting Period:
During the first quarter of fiscal 2005, the Company changed its reporting
period from 52-53 week year ending on the last Friday in September to a
calendar month reporting period ending on September 30. As a result of this
change, fiscal 2005 consisted of 53 weeks of operations compared to 52 weeks
of operations in fiscal 2006 and 2004. Actual year ends for fiscal 2006,
2005 and 2004 were September 30, 2006, September 30, 2005 and September 24,
2004, respectively. Years cited herein refer to AMCON's fiscal years.
(c) Principles of Consolidation:
The consolidated financial statements include the accounts of AMCON and its
wholly-owned subsidiaries. As a result of the Company's 85% ownership in
Trinity Springs, Inc ("TSI"), the Company has included the operating results
of TSI in the accompanying consolidated financial statements since the date
of acquisition (June 17, 2004) and has presented the 15% non-owned interest
in this subsidiary as a minority interest. As described further in Note 14,
the Company is currently involved in litigation regarding its ownership of
the assets acquired by TSI. Given the uncertainty surrounding the potential
recession alternatives and the related accounting ramifications, the Company
engaged independent legal counsel to review the case documents and to provide
management an opinion regarding the ownership of the TSI assets as of the
date of the financial statements. Independent legal counsel concluded that the court has not taken any action to divest TSI of its ownership of the acquired assets and accordingly, to the extent that TSI owned the assets immediately prior to the issuance of the court order discussed in Note 14, and has not otherwise transferred the assets, TSI continues to own the assets. As a result, the Company continues to account for TSI as a consolidated subsidiary. Additionally, as discussed in Note 2, TSI has been classified as a component of discontinued operations at September 30, 2006.
During the first quarter of fiscal 2005, the Company suspended the allocation of TSI's losses to minority shareholders once their basis was reduced to zero because the minority shareholders have not guaranteed TSI debt or committed additional capital to TSI.
All significant intercompany accounts and transactions have been eliminated.
(d) Cash and Accounts Payable:
AMCON uses a cash management system under which an overdraft is the normal
book balance in the primary disbursing accounts. The overdrafts included in
accounts payable of $3.2 million and $3.8 million at fiscal year end 2006 and
2005, respectively, reflect checks drawn on the disbursing accounts that have
been issued but have not yet cleared through the banking system. The
Company's policy has been to fund these outstanding checks as they clear with
borrowings under its revolving credit facility (see Note 9). These
outstanding checks (book overdrafts) are classified as cash flows from
operating activities in the Consolidated Statements of Cash Flows.
(e) Accounts Receivable:
Accounts receivable consist primarily of amounts due to the Company from its
normal business activities. An allowance for doubtful accounts is maintained
to reflect the expected uncollectibility of accounts receivable based on past
collection history and specific risks identified in the portfolio.
(f) Inventories:
Inventories consisted of the following at September 30, 2006 and 2005 (in
millions):
September September
2006 2005
--------- ---------
Finished Goods $ 29.4 $ 28.0
LIFO Reserve (5.0) (4.7)
--------- ---------
$ 24.4 $ 23.3
========= =========
|
The wholesale distribution and retail health food segment inventories consist of finished products purchased in bulk quantities to be redistributed to the Company's customers or sold at retail. The wholesale distribution operation's inventories are stated at the lower of cost (last-in, first-out or "LIFO" method) or market and consists of the costs of finished goods. The retail health food operation utilizes the retail inventory method of accounting stated at the lower of cost (LIFO) or market and consists of finished goods.
The LIFO reserve at September 2006 and 2005 represents the amount by which LIFO inventories were less than the amount of such inventories valued on a first-in, first-out basis. The liquidation of certain LIFO layers decreased cost of goods sold by $0.5 million and $0.1 million during fiscal 2005 and 2004, respectively. There were no LIFO layers liquidated during fiscal 2006. An allowance for obsolete inventory of $0.4 million and $0.3 million at September 2006 and 2005, respectively, is maintained to reflect the expected unsaleable or non-refundable inventory based on evaluation of slow moving products and discontinued products.
(g) Prepaid Expenses and Other Current Assets:
A summary of prepaid expenses and other current assets is as follows (in
millions):
September September
2006 2005
--------- ---------
Prepaid expenses $ 1.2 $ 0.7
Prepaid inventory 4.2 4.5
Interest rate swap - 0.1
--------- ---------
$ 5.4 $ 5.3
========= =========
|
Prepaid inventory represents inventory in transit that has been paid for but has not yet been received.
(h) Fixed Assets:
Fixed assets are stated at cost less accumulated depreciation or
amortization. Major renewals and improvements are capitalized and charged to
expense over their useful lives through depreciation or amortization charges.
Repairs and maintenance are charged to expense in the period incurred. The
straight-line method of depreciation is used to depreciate assets over the
estimated useful lives as follows:
Years
-------
Buildings 40
Warehouse equipment 5 - 7
Furniture, fixtures and
leasehold improvements 5 - 18
Vehicles 5
|
Costs and accumulated depreciation applicable to assets retired or sold are eliminated from the accounts, and the resulting gains or losses are reported as a component of operating income.
(i) Long-Lived Assets:
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such asset may
not be recoverable. Long-lived assets are reviewed annually for impairment
and are reported at the lower of the carrying amount or fair value less the
cost to sell. During fiscal 2005 the Company recorded a $2.5 million and
$0.4 million impairment on long-lived assets at our Hawaiian Natural Water
Company ("HNWC") and TSI subsidiaries, respectively, which as of September
30, 2006, are reported as a component of discontinued operations as discussed
in Note 2. The impairments were due to the shortfall of expected future
cash flows to support the assets as well as a need for additional capital to sustain the same level of operations. The Company did not incur similar impairment charges during fiscal 2006.
(j) Goodwill, Intangible and Other Assets:
Goodwill consists of the excess purchase price paid in business acquisitions
over the fair value of assets acquired. At September 30, 2006, intangible
assets consist primarily of tradenames and favorable leases assumed in
acquisitions. These assets are initially recorded at an amount equal to the
purchase price paid or allocated to them. Other assets consist primarily of
the cash surrender value of life insurance policies and debt issuance costs.
The Company employs the nonamortization approach to account for purchased goodwill and intangible assets having indefinite useful lives. Under a nonamortization approach, goodwill and intangible assets having indefinite useful lives are not amortized into results of operations, but instead are reviewed at least annually for impairment. Subsequent to the third fiscal quarter of each year, the Company engages an external consulting firm to assist in performing this valuation. If the recorded value of goodwill and intangible assets having indefinite useful lives is determined to exceed their fair value, the asset is written down to fair value and a charge taken against results of operations in the period. AMCON considers its tradenames to have indefinite lives.
As discussed in Note 7, during fiscal 2005 the Company determined, based on a valuation report provided by the independent valuation specialist, that certain goodwill and intangible assets at TSI and HNWC, both components of the beverage segment reporting unit, were impaired. Additionally, the Company determined that a portion of the tradenames and goodwill carried by the Company's retail segment were impaired. The total amount of the impairment of goodwill and identifiable intangible assets before tax was $10.2 million. In fiscal 2004, the Company also determined that the tradenames at HNWC, part of the Company's beverage segment, were impaired and accordingly recorded an impairment charge of $3.6 million. At September 30, 2006, both HNWC and TSI were classified as components of discontinued operations. The Company did not incur an impairment charge during fiscal 2006 upon the completion of its annual review.
The Company's only intangible assets that are considered to have definite useful lives are favorable leases which continue to be charged to expense through amortization on the straight-line method over their estimated useful lives of three to seven years.
The benefit related to increases in the cash surrender value of split dollar life insurance policies are recorded as a reduction to insurance expense. The cash surrender value of life insurance policies is limited to the lesser of the cash value or premiums paid in accordance with regulatory guidance.
(k) Water Royalty in Perpetuity:
Water royalty in perpetuity consists of a balance representing the present
value of the future minimum water royalty payments and related brokers fees
to be paid in perpetuity incurred in connection with the TSI acquisition that
occurred in June 2004. TSI and the water royalty associated with its
purchase, are classified as a component of discontinued operations at
September 30, 2006 as discussed in Note 2.
(l) Debt Issuance Costs:
The costs related to the issuance of debt are capitalized in other assets and
amortized on an effective interest method to interest expense over the terms
of the related debt agreements.
(m) Revenue Recognition:
AMCON recognizes revenue in its wholesale distribution division when products
are delivered to customers (which generally is the same day products are
shipped) and in its retail health food business when products are sold to
consumers. Sales are shown net of returns and discounts.
(n) Insurance:
The Company's workers' compensation, general liability and employee-related
health care benefits are provided through high-deductible or self-insurance
programs. As a result, the Company accrues for its workers' compensation and
general liability based upon the claim reserves established with the
assistance of a third-party administrator which are trended and developed.
The Company has issued a letter of credit in the amount of $1.0 million to
its workers' compensation insurance carrier as part of its loss control
program. The reserve for incurred but not reported employee health care
benefits is based on one month of average claims using the Company's
historical claims experience rate plus specific reserves for large claims.
The reserves associated with the exposure to these liabilities are reviewed
by management for adequacy at the end of each reporting period.
(o) Income Taxes:
Deferred income taxes are determined based on temporary differences between
the financial reporting and tax bases of the Company's assets and
liabilities, using enacted tax rates in effect during the years in which the
differences are expected to reverse.
(p) Comprehensive Income (Loss):
Comprehensive income (loss) for the Company includes net income or loss and
changes in the valuation of interest rate swap contracts treated as hedging
instruments that are charged or credited to shareholders' equity.
This interest rate swap expired in fiscal 2006.
(q) Stock-Based Compensation:
Prior to its expiration in June 2004, AMCON maintained a stock-based
compensation plan under which the Compensation Committee of the Board of
Directors could grant incentive stock options and non-qualified stock
options. On October 1, 2005, the Company adopted SFAS No. 123 (revised 2004)
(SFAS 123R), Share Based Payment. The Company chose to apply the modified
prospective transition method as permitted by SFAS 123R and therefore has not
restated prior periods. Under the transition method, compensation cost
associated with employee stock options has been recognized in the statement
of operations for fiscal 2006. This expense represents the amortization of
unvested stock option awards granted prior to September 30, 2005 and has been
reflected in the consolidated statement of operations under "selling, general
and administrative expenses." Prior to the adoption of SFAS 123R, the
Company accounted for these plans under APB Opinion 25, Accounting for Stock
Issued to Employees, and related Interpretations. Under APB Opinion 25, no
compensation cost associated with stock options was reflected in net income
(loss) available to common shareholders, as all options granted under these
plans had an exercise price equal to the market value of the underlying
common stock on the date of grant.
The following table illustrates the effect on the net loss available to common shareholders had the Company applied the fair value recognition provisions of FASB Statement No. 123R, Accounting for Stock-Based Compensation, to stock-based employee compensation for fiscal 2005 and fiscal 2004.
2005 2004
-----------------------------
Loss available to common shareholders
------------------------------------------------
Net loss available to common
shareholders, as reported $(13,036,619) $(4,188,021)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (53,108) (60,273)
-----------------------------
Pro forma loss $(13,089,727) $(4,248,294)
=============================
Loss per share available to common shareholders
------------------------------------------------
As reported: Basic $ (24.73) $ (7.94)
Diluted $ (24.73) $ (7.36)
Pro forma: Basic $ (24.84) $ (8.05)
Diluted $ (24.84) $ (7.46)
|
The fair value of the weighted average of each year's option grants was estimated as of the date of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions: dividend yield of 3.0% for 2003 grants; expected volatility of 50.68% for 2003 grants; risk free interest rate based on U.S. Treasury strip yield at the date of grant of 3.68% - 4.12% for 2003 grants; and expected lives of 5 to 10 years. The Company did not grant any stock options in fiscal 2006, 2005 or 2004.
(r) Per-share results:
Basic earnings or loss per share data are based on the weighted-average
number of common shares outstanding during each period. Diluted earnings or
loss per share data are based on the weighted-average number of common shares
outstanding and the effect of all dilutive potential common shares including
stock options and conversion features of the Company's preferred stock
issuances.
(s) Use of Estimates:
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(t) Recently Issued Accounting Standards:
On July 13, 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, and Related Implementation Issues" ("FIN 48").
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
a Company's financial statements in accordance with Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS 109"). FIN
48 prescribes a recognition threshold and measurement attribute for a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. FIN 48 is effective as of the
beginning of fiscal years that begin after December 15, 2006. The Company is
currently evaluating the effects of implementing this new standard.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for the Company's fiscal year beginning October 1, 2008, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard.
2. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES:
ACQUISITIONS
The total TSI purchase price of $8.8 million was paid through a combination of $2.3 million in cash, $3.3 million in notes issued by TSI and guaranteed by AMCON; the assumption of approximately $0.2 million of liabilities and the issuance of TSI common stock representing 15% ownership of TSI which had an estimated fair value of $0.4 million and is convertible into 16,666 shares of AMCON common stock at the option of the Seller. Included in the $2.3 million paid in cash were transaction costs totaling approximately $0.8 million that were incurred to complete the acquisition and consisted primarily of fees and expenses for attorneys and investment bankers. In addition, TSI was obligated to pay an annual water royalty to the Seller, in perpetuity, in an amount equal to the greater of $0.03 per liter of water extracted from the source or 4% of water revenues (as defined by the purchase agreement) which is guaranteed by AMCON up to a maximum of $5.0 million, subject to a floor of $206,400 for the first year and $288,000 annually thereafter. The Company has recorded a $2.8 million liability for the present value of future minimum water royalty payments and related brokers fees to be paid in perpetuity. The discount rate utilized by the Company to determine the present value of the future minimum water royalty was based on a weighted
average cost of capital which incorporated the Company's equity discount rate, dividend rate on the Series A Convertible Preferred Stock and the Company's average borrowing rate for all outstanding debt.
The promissory notes referred to above and the water royalty are secured by a first priority security and mortgage on the acquired assets, other than inventory and accounts receivable. The Seller retains the right to receive any water royalty payment for the first five years in shares of AMCON common stock up to a maximum of 41,666 shares. The water royalty can be cancelled after ten years have elapsed following the closing of the sale of assets of TSI, or if the business of TSI is sold to an unaffiliated third party, in which case the Seller would be entitled to receive the appraised fair market value of the water royalty but not less than $5.0 million. The Company's Chairman has, in turn, guaranteed AMCON in connection with AMCON's obligation for these payments as well as for the payments of the promissory notes referred to above. The Company is in settlement discussions with respect to the TSI litigation discussed in Note 14 to the Consolidated Financial Statements, pursuant to which it is undertaking to divest substantially all of the assets and liabilities of TSI as part of a complete settlement of any and all claims against the Company by CPH. As required by SFAS 144, management believes that the recorded balances of the subject assets and liabilities have been recognized at their respective fair values.
The acquisition was recorded on the Company's books using the purchase method of accounting. The purchase price was initially allocated to the assets acquired and liabilities during fiscal 2004 based on estimated fair values. This allocation, however, was subsequently revised during fiscal 2005 based upon a valuation report received from independent valuation specialist. Additionally, during the Company's fiscal 2005 intangible asset valuation testing as discussed in Note 7, management determined that certain TSI intangible assets were impaired.
DISPOSITIONS AND DISCONTINUED OPERATIONS
Discontinued operations includes the disposal groups of TSI and HNWC at September 30, 2006 and TBG for all periods prior to March 31, 2006. TBG ceased on-going operations effective March 31, 2005 at which time it was classified as discontinued operations. The wind down of TBG was completed as of March 31, 2006 and no additional expenses have been recorded as a component of discontinued operations since that time. The accompanying consolidated financial statements for all periods presented have been prepared reflecting this classification.
Prior to the classification of these businesses as discontinued operations, the Company allocated interest expense to its wholly-owned subsidiaries using an invested capital calculation. As part of the application of discontinued operations to the disposal groups, the Company classified the interest expense previously allocated to the disposal groups as part of continuing operations in accordance with Emerging Issues Task Force ("EITF") 87-24 "Allocation of Interest to Discontinued Operations."
in Note 18, on November 20, 2006, substantially all of HNWC's operating assets were sold. HNWC, which is headquartered in Pearl City, Hawaii, is part of the Company's former beverage segment. HNWC bottles, markets and distributes Hawaiian natural artesian water, purified water and other limited production co-packaged products, in Hawaii, the mainland and foreign markets.
TSI has been reflected in the accompanying consolidated financial statements as of September 30, 2006 and 2005 as a component of discontinued operations. During the second fiscal quarter of 2006, the Company recorded charges, included in loss from discontinued operations before taxes, of $0.2 million related to the closure of TSI's operations. These charges were incurred primarily to adjust inventory to its net realizable value. There have been no additional charges related to TSI closure.
In the first two quarters of fiscal 2006 TBG was classified as a component of discontinued operations. In April 2006 the Company successfully concluded its wind-down plan of TBG's operations and accordingly reclassified its residual liabilities to continuing operations. This reclassification has been reflected as such throughout this Annual Report on Form 10-K.
Sales from discontinued operations, which have been excluded from income from continuing operations in the accompanying condensed consolidated audited statements of operations, are presented as follows. Discontinued operations include the results from operations for HNWC, TSI and TBG (through March 31, 2006) for the fiscal years 2006, 2005 and 2004. The effects of the discontinued operations on net loss available to common shareholders and per share data are reflected within the consolidated financial statements.
Year ended
September
--------------------------------------------
2006 2005 2004
----------- ------------ ------------
Sales $ 8,635,869 $ 13,185,114 $ 6,519,777
Impairment charges - (8,852,406) (3,578,255)
Operating loss (3,187,117) (17,118,287) (12,126,297)
Income tax benefit (1,132,000) (5,453,000) (4,709,000)
Loss from discontinued operations (2,433,767) (11,971,580) (7,642,472)
|
The carrying amounts (net of allowances) of the major classes of assets and liabilities included in discontinued operations are as follows (in millions):
September September
2006 2005
---------- ----------
Accounts receivable $ 0.7 $ 1.5
Inventories 0.5 1.3
---------- ----------
Total current assets of discontinued operations $ 1.2 $ 2.8
========== ==========
Fixed assets - Total noncurrent assets of
discontinued operations $ 3.8 $ 4.1
========== ==========
Accounts payable $ 2.0 $ 2.7
Accrued expenses 1.0 1.2
Accrued wages, salaries and bonuses 0.3 0.2
Current portion of long-term debt 1.4 0.6
Current portion of long-term debt due related party 2.8 2.0
---------- ----------
Total current liabilities of discontinued operations $ 7.5 $ 6.7
========== ==========
Water royalty, in perpetuity $ 2.8 $ 2.8
Long-term debt, less current portion 2.3 3.1
---------- ----------
Noncurrent liabilities of discontinued operations $ 5.1 $ 5.9
========== ==========
|
Included in discontinued operations are debt obligations payable to related parties from TSI as follows:
- TSI owes a director of the Company $1.0 million on a revolving credit facility with an interest rate of 8.0% per annum. The loan is secured by a second mortgage on TSI's real property on an equal basis with the Company's existing second mortgage on TSI's real property. The revolving credit line matured on December 14, 2005 at which time principal and accrued interest were due.
- TSI owes $0.5 million on a loan due to a related party which is wholly-owned by three of the Company's directors (including the Chairman and the President) and another significant shareholder. The note bears interest at 7.0% per annum and matured in December 2005.
- TSI obtained unsecured, subordinated loans totaling $0.5 million from unaffiliated businesses of two of the Company's directors, including a Company of which the Chairman of the Board is a partner. The loan matured on December 8, 2005 and bears interest of 7.0% per annum.
- TSI owes $750,000 to Draupnir, LLC on a note bearing interest at a floating rate of 300 basis points above the ten year treasury note yield, compounded annually and adjusted concurrently with any adjustments to the yield on the ten year treasury note. The notes matured on December 13, 2005.
All of the aforementioned notes payable to related parties from TSI are in default as of September 30, 2006 and are classified in current liabilities of discontinued operations.
3. CONVERTIBLE PREFERRED STOCK:
The Company has the following Convertible Preferred Stock outstanding as of September 2006:
Series A Series B Series C
------------- --------------- ---------------
Date of issuance: June 17, 2004 October 8, 2004 March 6, 2006
Optionally redeemable beginning June 18, 2006 October 9, 2006 March 4, 2008
Par value (gross proceeds): $2,500,000 $2,000,000 $2,000,000
Number of shares: 100,000 80,000 80,000
Liquidation preference per share: $25.00 $25.00 $25.00
Conversion price per share: $30.31 $24.65 $13.62
Number of common shares in
which to be converted: 82,481 81,136 146,842
Dividend rate: 6.785% 6.370% 6.00%
|
The Series A Convertible Preferred Stock ("Series A"), Series B Convertible Preferred Stock ("Series B") and Series C Convertible Preferred Stock ("Series C"), collectively (the "Preferred Stock"), are convertible at any time by the holders into a number of shares of AMCON common stock equal to the number of preferred shares being converted times a fraction equal to $25.00 divided by the conversion price. The conversion prices for the Preferred Stock are subject to customary adjustments in the event of stock splits, stock dividends and certain other distributions on the Common Stock. Cumulative dividends for the Preferred Stock are payable in arrears, when, as and if declared by the Board of Directors, on March 31, June 30, September 30 and December 31 of each year.
In the event of a liquidation of the Company, the holders of the Preferred Stock, are entitled to receive the liquidation preference plus any accrued and unpaid dividends prior to the distribution of any amount to the holders of the Common Stock. The Preferred Stock also contain redemption features which trigger based on certain circumstances such as a change of control, minimum thresholds of ownership by the Chairman and his family in AMCON, or bankruptcy. The Preferred Stock are optionally redeemable by the Company beginning on various dates, as listed above, at redemption prices equal to 112% of the liquidation preference. The redemption prices decrease 1% annually thereafter until the redemption price equals the liquidation preference after which date it remains the liquidation preference. The Company's credit facility also prohibits the redemption of the Series A and Series B. Series C is only redeemable so long as no event of default is in existence at the time of, or would occur after giving effect to, any such redemption, and the Company has excess availability under the credit facility of not less than $2.0 million after giving effect to any such redemption.
The Company believes that redemption of these securities by the holders is not probable based on the following evaluation. Our executive officers and directors as a group own approximately 60% of the outstanding common stock as of September 30, 2006. Mr. William Wright, who has been AMCON's Chairman of the Board since AMCON's founding, beneficially owns 29% of the outstanding common stock without giving effect to shares owned by his adult children. There is an identity of interest among AMCON and its officers and directors for purposes of the determination of whether the triggering redemption events described above are within the control of AMCON since AMCON can only make
decisions on control or other matters through those persons. Moreover, the Preferred Stock is in friendly hands with no expectation that there would be any effort by the holders of such Preferred Stock to see optional redemption without the Board being supportive of the events that may trigger that right. The Series A is owned by Mr. Wright, the Company's Chairman, and a private equity firm (Draupnir, LLC) of which Mr. Petersen and Mr. Jeremy Hobbs, both of whom are directors of the Company, are Members. The Series B Preferred Stock is owned by an institutional investor which has elected Mr. Chris Atayan, now AMCON's Vice Chairman and Chief Executive Officer, to AMCON's Board of Directors pursuant to voting rights in the Certificate of Designation creating the Series B Preferred Stock. The Series C is owned by Draupnir Capital LLC, which is a subsidiary of Draupnir, LLC (the owner of Series A). Mr. Petersen and Mr. Hobbs are also Members of Draupnir Capital, LLC.
In view of the foregoing considerations, the Company believes it is not probable under Rule 5-02.28 of Regulation S-X that the Series A, Series B or Series C Preferred Stock will become redeemable in the future.
4. EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share available to common shareholders is calculated by dividing income (loss) from continuing operations less preferred stock dividend requirements and loss from discontinued operations by the weighted average common shares outstanding for each period. Diluted earning (loss) per share available to common shareholders is calculated by dividing income (loss) from continuing operations less preferred stock dividend requirements (when anti-dilutive) and loss from discontinued operations by the sum of the weighted average common shares outstanding and the weighted average dilutive options, using the treasury stock method. Stock options and potential common stock outstanding at fiscal year end 2006, 2005 and 2004 that were anti-dilutive were not included in the computations of diluted earnings per share. Such potential common shares totaled 356,308, 198,620 and 113,921 with average exercise prices of $22.09, $29.13 and $32.92, respectively.
For Fiscal Years
-----------------------------------------
2006 2005 2004
-----------------------------------------
Basic Basic Basic
-----------------------------------------
Weighted average number of
shares outstanding 527,062 527,062 527,774
=========================================
Income (loss) from continuing
operations $ 1,322,462 $ (770,399) $ 3,503,925
Deduct: preferred stock dividend
requirements (366,042) (294,640) (49,474)
-----------------------------------------
$ 956,420 $ (1,065,039) $ 3,454,451
=========================================
Loss from discontinued operations $ (2,433,767) $(11,971,580) $(7,642,472)
=========================================
Net loss income available to
common shareholders $ (1,477,347) $(13,036,619) $(4,188,021)
=========================================
67
2006 2005 2004
-----------------------------------------
Basic Basic Basic
-----------------------------------------
Earnings (loss) per share from
continuing operations $ 1.81 $ (2.02) $ 6.54
Loss per share from discontinued
operations (4.61) (22.71) (14.48)
-----------------------------------------
Loss per share available
to common shareholders $ (2.80) $ (24.73) $ (7.94)
=========================================
Diluted Diluted Diluted
-----------------------------------------
Weighted average common
shares outstanding 527,062 527,062 527,774
Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds used
to purchase treasury stock /1/ 100,748 - 34,785
-----------------------------------------
Weighted average number of
shares outstanding 627,810 527,062 562,559
=========================================
Income (loss) from continuing
operations $ 1,322,462 $ (770,399) $ 3,503,925
Deduct: preferred stock dividend
requirements /2/ (297,042) (294,640) -
-----------------------------------------
$ 1,025,420 $ (1,065,039) $ 3,503,925
=========================================
Loss from discontinued operations $ (2,433,767) $(11,971,580) $(7,642,472)
=========================================
Net loss available to
common shareholders $ (1,408,347) $(13,036,619) $(4,138,547)
=========================================
Earnings (loss) per share
from continuing operations $ 1.63 $ (2.02) $ 6.23
Loss per share from discontinued
operations (3.87) (22.71) (13.59)
-----------------------------------------
Loss per share available
to common shareholders $ (2.24) $ (24.73) $ (7.36)
=========================================
/1/ Includes stock option plus the weighted-average of Series C Convertible Preferred Stock
outstanding in fiscal 2006. Includes stock option plus the weighted average of Series A
Convertible Preferred Stock outstanding in fiscal 2004.
/2/ Series A and Series B Convertible Preferred Stock is anti-dilutive in fiscal 2006 and
fiscal 2005 because the dividends accumulated per common share obtainable on conversion exceeds
basic earning (loss) per share. The Series C Convertible preferred stock is dilutive in fiscal
2006.
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5. OTHER COMPREHENSIVE INCOME (LOSS):
The components of other comprehensive income (loss) were as follows:
2006 2005 2004
-----------------------------------
Unrealized holding gains during the period:
Unrealized gains $ - $ - $ 6,800
Related tax (expense) - - (2,584)
-----------------------------------
Net - - 4,216
-----------------------------------
Less reclassification adjustments
for gains which were included in
comprehensive income in prior periods:
Realized net gains - 2,638 465,008
Related tax (expense) - - (176,703)
-----------------------------------
Net - 2,638 288,305
-----------------------------------
Interest rate swap valuation adjustment
during the period:
Unrealized gains (losses) (154,002) 71,018 199,354
Related tax (expense) benefit 52,708 (26,986) (76,097)
-----------------------------------
Net (101,294) 44,032 123,257
-----------------------------------
Total other comprehensive income (loss) $ (101,294) $ 41,394 $ (160,832)
===================================
|
The accumulated balances for each classification of accumulated other comprehensive income (loss) are as follows:
Unrealized Interest Accumulated
gains on rate swap Other
securities mark-to Comprehensive
-market Income
-------------------------------------------
Balance, September 26, 2003 $ 286,727 $ (65,995) $ 220,732
Current period change (284,089) 123,257 (160,832)
--------- --------- ----------
Balance, September 24, 2004 2,638 57,262 59,900
Current period change (2,638) 44,032 41,394
--------- --------- ----------
Balance, September 30, 2005 - 101,294 101,294
Current period change - (101,294) (101,294)
--------- --------- ----------
Balance, September 30, 2006 $ - $ - $ -
========= ========= ==========
|
6. PROPERTY AND EQUIPMENT, NET:
Property and equipment at fiscal year ends 2006 and 2005 consisted of the following:
2006 2005
---------------------------
Land $ 648,818 $ 648,818
Buildings and improvements 9,048,798 9,040,496
Warehouse equipment 5,358,310 5,075,605
Furniture, fixtures and
leasehold improvements 7,107,293 7,146,563
Vehicles 1,554,553 1,106,911
Capital equipment leases 1,158,657 1,158,657
---------------------------
24,876,429 24,177,050
Less accumulated depreciation
and amortization:
Owned buildings and equipment (11,512,799) (10,019,917)
Capital equipment leases (835,091) (642,191)
---------------------------
$ 12,528,539 $ 13,514,942
===========================
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7. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill by reporting segment at fiscal year ends 2006 and 2005 was as
follows:
2006 2005
------------ ------------
Wholesale $ 3,935,931 $ 3,935,931
Retail 1,912,877 1,912,877
------------ ------------
$ 5,848,808 $ 5,848,808
============ ============
|
Other intangible assets at fiscal year ends 2006 and 2005 consisted of the following:
2006 2005
---------------------------
Trademarks and tradenames $ 3,373,269 $ 3,358,269
Favorable leases (less accumulated
amortization of $419,466 and $379,735) 66,534 106,265
---------------------------
$ 3,439,803 $ 3,464,534
===========================
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The Company performs its annual impairment test for goodwill and other intangible assets after the completion of the fiscal third quarter. During fiscal 2006, management concluded that no impairment was required. During this evaluation in fiscal 2005, management concluded that there had been an impairment of certain goodwill and identifiable intangible assets.
A summary of the impairment charges by entity for fiscal year 2005 are as follows (in millions):
Continuing Discontinued Total
Operations Operations
---------- ---------------- -----
Retail TSI HNWC Total
Long-lived assets $ - $ 0.4 $ 2.5 $ 2.9
Goodwill 0.3 0.4 0.4 1.1
Water source - 3.7 - 3.7
Customer list - 0.3 0.1 0.4
Tradename 3.9 0.9 0.2 5.0
----- ----- ----- -----
$ 4.2 $ 5.7 $ 3.2 $13.1
===== ===== ===== =====
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The impairment charges for our Retail segment were recorded in the Company's statement of operations as a component of (loss) income from continuing operations. The impairment charges for TSI and HNWC have been included in the loss from discontinued operations in the statement of operations.
Tradenames are considered to have indefinite useful lives and no amortization was taken during fiscal 2006, 2005, or 2004. However, as discussed above, certain tradenames and the water source were impaired in fiscal 2005 and 2004.
In fiscal 2005 the Company's covenants not to compete became fully amortized. Amortization expense related to covenants not to compete was $76,698 and $118,902 for fiscal 2005 and fiscal 2004, respectively.
Favorable leases represent the amount by which the lease rates of acquired leases were below fair market lease rates for the leased properties on the acquisition date. The favorable variances between the contract lease rates and the fair market lease rates on the acquisition date are recorded as assets which are then amortized over the remaining terms of the leases which ranged from three to seven years. Amortization expense was $39,731, $39,732 and $59,730, for the fiscal years ended 2006, 2005 and 2004, respectively.
Amortization expense related to the amortizing intangible assets held at September 2006 for each of the five subsequent years is estimated to be as follows:
Fiscal Fiscal Fiscal Fiscal Fiscal
2007 2008 2009 2010 2011
--------- --------- -------- -------- --------
Favorable leases $ 40,000 $ 27,000 $ - $ - $ -
========= ========= ======== ======== ========
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8. OTHER ASSETS:
Other assets at fiscal year ends 2006 and 2005 consisted of the following:
2006 2005
-------------------------
Cash surrender value of life
insurance policies $ 801,238 $ 795,830
Debt issuance costs 97,880 332,406
Other 348,346 108,337
-------------------------
$1,247,464 $1,236,573
=========================
|
Debt issuance costs represent fees incurred to obtain the revolving credit facility and real estate loan and are amortized over the terms of the respective loan agreements. Amortization expense was $385,487, $410,764, and $90,422 for the fiscal years ended 2006, 2005 and 2004, respectively.
9. DEBT:
The Company finances certain obligations and, in the case of its former beverages segment, its operations, through the credit agreement (the "Facility"), long-term debt arrangements with banks and third parties and related party debt arrangements.
The Facility consisted of the following at fiscal year end 2006 and 2005:
2006 2005
---------------------------
Revolving portion of the Facility, interest payable
at the bank's base rate (8.25% at fiscal year end 2006),
principal due April 2009 (as renewed in December 2006) $46,502,896 $44,563,654
Term Note A, payable in monthly installments of $16,333
plus interest at the bank's base rate (8.25% at fiscal
year end 2006), remaining principal due April 2009
(as renewed in December 2006) 770,533 973,734
72
2006 2005
---------------------------
Term Note B, payable in monthly installments of $100,000
plus interest at the bank's base rate plus 2%
(10.25% at fiscal year end 2006) through March 2008
(as renewed in December 2006) 1,550,000 3,625,000
---------------------------
48,823,429 49,162,388
Less current maturities 3,896,000 1,432,000
---------------------------
$44,927,429 $47,730,388
===========================
|
The Facility provides for a $55.0 million credit limit consisting of a $53.8 million revolving credit line and a $1.2 million term note ("Term Note A"). As monthly payments are made on Term Note A, the revolving credit limit increases accordingly to a maximum of $55.0 million. At September 30, 2006, the credit limit on the revolving portion of the Facility was $54.2 million. In addition, the Facility provides for a separate term loan in the initial amount of $5.0 million ("Term Note B").
The Facility, which was set to expire in July 2007 based on the November 2006 amendment, will now expire in April 2009 as discussed in Note 18. The Facility includes lending limits subject to accounts receivable and inventory limitations, an unused commitment fee equal to 0.25% per annum on the difference between the maximum loan limit and average monthly borrowing for the month and financial covenants.
The significant provisions of the Facility at September 30, 2006 are as follows:
- Inclusion of the subsidiaries as part of the Facility.
- Inclusion of Term Note A within the $55.0 million revolving limit that is amortized in equal monthly installments over 60 months.
- The Company borrows at the bank's base interest rate.
- Inclusion of a prepayment penalty of $0.3 million should the loans be paid off prior to September 30, 2006.
The Facility contains covenants that (i) restrict permitted investments, (ii) restrict intercompany advances to certain subsidiaries, (iii) restrict incurrence of additional debt, (iv) restrict mergers and acquisitions and changes in business or conduct of business and (v) requires that consolidated EBITDA (excluding TSI, TBG and HNWC) not be less than: (a) $100,000 as of the last day of each month for the one-month period then ending, except for the month ending February 28, 2006 which was permitted to be zero, (b) $1,100,000 as of March 31, 2006 for the three-month period then ending, (c) $3,200,000 as of June 30, 2006 for the six-month period then ending, and (d) $5,500,000 as of September 30, 2006 for the ninth-month period then ending, and (e) $6,500,000 as of December 31, 2006 for the twelve-month period then ending. The Facility also provides that the Company may not pay dividends on its common stock in excess of $0.72 per share on an annual basis.
The facility also contains an event of default if AMCON or its subsidiaries makes any payment (in cash or other property) or a judgment is entered against AMCON or its subsidiaries requiring a payment (in cash or other property) to be made under or in connection with the guaranty by AMCON of the
TSI acquisition notes or the water royalty under the asset purchase agreement for the purported sale of TSI assets.
The Facility also provides for a "springing" lock-box arrangement, under which, the Company maintains a lock-box from which it may apply cash receipts to any corporate purpose so long as it is not in default under the Facility. The bank maintains a security interest in the Company's lock-box and upon the occurrence of default may redirect funds from the lock-box to a loan account in the name of the lenders on a daily basis and apply the funds against the revolving loan balance.
As of September 30, 2006, the outstanding balance on the Facility was $47.3 million, including Term Note A. The Facility bears interest at the bank's base rate, which was 8.25% as of September 30, 2006 and is collateralized by all of the Company's equipment, intangibles, inventories, and accounts receivable.
The outstanding balance on Term Note B was $1.6 million at September 2006. It bears interest at the bank's base rate, plus 2.0%, which was 10.25% as of September 30, 2006 and, as amended, is payable in equal monthly installments of $0.1 million.
At September 30, 2006 the Company was in violation of the revolving credit facility's financial covenant requiring minimum monthly EBITDA of $100,000. As discussed in Note 18, in December 2006, the Company executed a new amendment to the Facility with LaSalle Bank which extended the maturity date of the Facility to April 2009. In connection with the new amendment, the minimum monthly EBITDA covenant violation at September 30, 2006 was waived.
The Company's Chairman has personally guaranteed repayment of the Facility and the term loans. However, the amount of his guaranty is capped at $10.0 million and is automatically reduced by the amount of the repayment on Term Loan B and certain other deductions, which resulted in the guaranteed principal outstanding being reduced to $6.6 million as of September 30, 2006. AMCON will pay the Company's Chairman an annual fee equal to 2% of the guaranteed principal in return for the personal guarantee.
2006 2005
---------------------------
Continuing operations
---------------------
Note payable to a bank ("Real Estate Loan"),
interest payable at a fixed rate of 8.0% with
monthly installments of principal and interest
of $56,531 per month through April 2009 (as amended);
remaining principal due April 2009 (as amended),
collateralized by two owned distribution facilities $6,005,175 $ 6,203,543
Note payable to a bank, interest payable monthly at a
fixed rate of 6.33% plus monthly principal payments of
$4,100 through December 2009 at which time the remaining
principal is due, collateralized by the Rapid City
building and equipment 918,400 967,600
74
2006 2005
---------------------------
Note payable to a bank, interest payable monthly at a
fixed rate of 6.33% plus monthly principal payments of
$8,000 through July 2009 collateralized by the Rapid City
building and equipment 263,429 359,429
Obligations under capital leases, payable in monthly
installments with interest rates from 4.91% to 16.4%
through January 2010 184,811 496,615
Notes payable, interest payable at a fixed rates between
8.0% - 9.5% with monthly installments of principal and
interest of $2,226 - $2,677 per month through July 2011
collateralized by delivery vehicles 221,672 -
---------------------------
7,593,487 8,027,187
Less current maturities - continuing operations 524,130 655,667
---------------------------
$7,069,357 $7,371,520
Discontinued operations ===========================
-----------------------
Note payable, interest payable at a fixed rate of 5%
with monthly installments of principal and interest of
$30,000 per month through June 2009 and the remaining
balance due June 2009, collateralized by
substantially all of the assets of TSI 2,488,700 2,527,716
Note payable, interest payable quarterly at a fixed rate
of 5% with interest due quarterly commencing in September
2004. The principal along with any unpaid interest is due
in June 2007, collateralized by substantially all of the
assets of TSI 500,000 500,000
Note payable, interest payable at a fixed rate of 5% with
annual installments of principal and interest of $49,655
through June 2007, collateralized a warehouse owned by TSI 92,328 92,328
Note payable, interest payable at a fixed rate of 5%, due
currently with accrued interest 14,042 49,042
Obligations under capital leases, payable in monthly
installments an interest rate of 5.55% through October 2007 265,287 501,138
Note payable, interest payable at a fixed rate of 10.0%
with weekly installments of principal and interest of
$3,000 per week through Sept 2008; remaining principal
due Oct 2008 329,763 -
Revolving credit facility due to a related party, principal
and interest due December 2005, bearing interest at 8%
per annum, collateralized by a second mortgage on an
equal basis with the Company's existing second mortgage
on TSI's real property 1,000,000 1,000,000
Notes due to related parties, principal and interest
due December 2005, interest at 7% 1,000,000 1,000,000
Notes due to related party, principal and interest
due December 2005, bearing interest at 300 basis
points above the yield on 10-year treasury notes
(7.72% at September 2006) 750,000 -
---------------------------
6,440,120 5,670,224
Less current maturities - discontinued operations 4,159,890 2,563,628
---------------------------
$2,280,230 $3,106,596
===========================
|
Long-term obligations, excluding obligations under the Facility and related party debt, have contractual maturities as follows:
Fiscal Year Ending
------------------
2007 $ 1,934,021
2008 907,142
2009 7,577,311
2010 830,740
2011 34,393
Thereafter -
------------
$ 11,283,607
============
|
Market rate risk for fixed rate debt is estimated as the potential increase in fair value of debt obligations resulting from decreases in interest rates. Based on discounted cash flows using current market rates for similar agreements, the fair value of the Company's long-term debt obligations approximated carrying value at fiscal year end 2006.
In addition to the note above, TSI assumed $0.1 million as part of the purchase of the assets in 2004 in connection with a warehouse that TSI owns. The note had a fixed rate of 5.0% with quarterly interest payments due beginning in July 2004 and a maturity date in January 2007. The note and the unpaid interest are in default at September 30, 2006 and in November 2006 the Company received notice of foreclosure from the lender. At September 30, 2006, the outstanding balance on the note was approximately $0.1 million and is included with TSI as a component of discontinued operations as discussed in Note 2.
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.
10. OTHER INCOME, NET:
Other income, net consisted of the following for fiscal years 2006, 2005 and
2004:
2006 2005 2004
------------------------------------------
Interest income $ (51,865) $ (45,831) $ (37,372)
Dividends - - (4,250)
Rent income (3,503) (4,289) (4,135)
Gain from sale of investments - - (507,418)
Royalty (72,771) (15,211) -
Other (9,102) (14,774) (16,100)
------------------------------------------
$ (137,241) $ (80,105) $ (569,275)
==========================================
|
11. INCOME TAXES:
Components of income tax expense (benefit) from continuing operations for the fiscal years ended 2006, 2005 and 2004 consisted of the following:
2006 2005 2004
----------------------------------------
Current:
Federal $ - $ 1,181,938 $ 1,964,103
State 113,489 129,409 175,591
----------------------------------------
113,489 1,311,347 2,139,694
----------------------------------------
Deferred:
Federal 634,501 (1,709,836) 82,070
State (315,990) 202,489 64,236
----------------------------------------
318,511 (1,507,347) 146,306
----------------------------------------
Income tax expense (benefit) $ 432,000 $ (196,000) $ 2,286,000
========================================
|
The difference between the Company's income tax expense (benefit) in the accompanying financial statements and that which would be calculated using the statutory income tax rate of 34% on income (loss) before taxes is as follows for the fiscal years ended 2006, 2005 and 2004:
2006 2005 2004
-----------------------------------------
Tax at statutory rate $ 596,517 $ (361,590) $ 1,937,635
Amortization of goodwill and
other intangibles (5,302) (4,777) (4,777)
Nondeductible business expenses 34,675 12,224 20,826
Minority interest in subsidiary - (53,074) -
State income taxes, net of
federal tax benefit 74,903 369,912 206,800
Valuation allowance, state net
operating losses - 52,297 -
State net operating loss (257,965) - -
Other (10,828) (210,992) 125,516
-----------------------------------------
$ 432,000 $ (196,000) $ 2,286,000
=========================================
|
Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities giving rise to the net deferred tax asset at fiscal year ends 2006 and 2005 relate to the following:
2006 2005
---------------------------
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 492,796 $ 418,294
Accrued expenses 526,685 528,811
Inventory 844,894 593,110
AMT credit carry forwards 285,333 285,333
Other 75,272 81,545
---------------------------
2,224,980 1,907,093
Noncurrent:
Fixed assets $ 1,842,605 $ 1,705,661
Intangible assets 2,167,630 2,530,848
Net operating loss carry
forwards - federal 4,582,108 4,214,883
Net operating loss carry
forwards - state 1,290,904 -
Other 88,815 -
---------------------------
9,972,062 8,451,392
---------------------------
Total deferred tax assets 12,197,042 10,358,485
Valuation allowance (1,139,585) (635,338)
---------------------------
Net deferred tax assets $ 11,057,457 $ 9,723,147
===========================
|
2006 2005
---------------------------
Deferred tax liabilities:
Current:
Trade discounts $ 251,992 $ 205,570
Inventory - 35,880
Unrealized gains on interest
rate swap contracts - 23,431
---------------------------
251,992 264,881
Noncurrent:
Fixed assets 1,629,454 1,204,800
Goodwill 430,096 310,751
---------------------------
2,059,550 1,515,551
---------------------------
Total deferred tax liabilities $ 2,311,542 $ 1,780,432
===========================
Net deferred tax assets (liabilities):
Current $ 1,972,988 $ 1,642,212
Noncurrent 6,772,927 6,300,503
---------------------------
$ 8,745,915 $ 7,942,715
===========================
|
During fiscal 2006 and 2005, the Company recorded a valuation allowance of $0.5 million and $0.6 million, respectively, against deferred tax assets, consisting primarily of state net operating losses of Hawaiian Water and Trinity Springs for which realization of the deferred tax asset is no longer more likely than not.
No additional valuation allowance was recorded against the remaining federal and state net operating losses as of September 30, 2006 and 2005, as management believes future taxable income would more likely than not be sufficient to realize such net operating losses prior to the expiration dates.
The Company's deferred tax asset related to the net operating loss
carryforward at fiscal year end 2006 was $4.6 million and includes the net
operating losses of TSI and HNWC. If the Company chooses to sell the stock of
these companies, as opposed to an asset transaction, the net operating losses
would be part of the contemplated purchase price and be available to the
successor stockholders. Of this amount, $0.6 million expires in 2024, $2.3
expires in 2025 and $0.6 million in 2026. The remaining $1.1 million was
acquired in connection with the acquisition of HNWC in fiscal 2002. The
utilization of the HNWC deferred tax asset related to the net operating loss
of $1.1 million at fiscal year end 2006 is limited (by Internal Revenue Code
Section 382) to approximately $0.8 million in fiscal year 2007 and $0.1
million per year thereafter through 2022.
12. PROFIT SHARING PLAN:
AMCON maintains a profit sharing plan (i.e. a section 401(k) plan) covering substantially all employees. The plan allows employees to make voluntary contributions up to 100% of their compensation, subject to Internal Revenue Service limits. The Company matches 50% of the first 4% contributed and 100%
of the next 2% contributed for a maximum match of 4% of employee compensation. The Company contributed $0.6 million, $0.6 million and $0.5 million (net of employee forfeitures) to the profit sharing plans during each of the fiscal years ended 2006, 2005 and 2004, respectively.
13. RELATED PARTY TRANSACTIONS:
For the fiscal years ended 2006, 2005 and 2004, the Company was charged $72,000, $72,000 and $66,000, respectively, by AMCON Corporation, the former parent of the Company, as consideration for office rent and management services, which is included in selling, general and administrative expenses. The Company also contracted with one of its outside directors for consulting services in connection with its retail health food operations during part of fiscal year 2004. The amount paid for consulting services during fiscal 2004 was $37,500, plus reimbursement of expenses.
The Company's Chairman has personally guaranteed repayment of the Facility and the term loans. However, the amount of his guaranty is capped at $10.0 million and is automatically reduced by the amount of the repayment on Term Loan B and certain other deductions, which resulted in the guaranteed principal outstanding being reduced to $6.6 million as of September 30, 2006. AMCON will pay the Company's Chairman an annual fee equal to 2% of the guaranteed principal in return for the personal guarantee.
In addition, a director of the Company has extended a $1.0 million revolving line of credit to TSI, and a Company that is wholly-owned by the three directors of the Company (including the Chairman and President) and another significant shareholder lent TSI $0.5 million. Both of the loans are currently in default.
TSI has also obtained unsecured, subordinated loans of $500,000 on August 8, 2005, with a maturity of December 8, 2005, of which $250,000 was from Aristide Investments, L.P., a California limited partnership (of which, William F. Wright, the Company's Chairman of the Board, Chief Executive Officer and largest stockholder, is a partner). The other $250,000 was from Draupnir, LLC, a Delaware limited company (of which, Allen D. Petersen and Jeremy W. Hobbs, two of the Company's directors, are members). The loans bear interest at seven percent per annum and are currently in default.
During the first quarter of fiscal 2006, Draupnir, LLC, a private equity firm whose Members include two of the Company's directors, extended an additional $750,000 note to TSI. The note bears a floating rate of 300 basis points above the yield on ten year treasury notes and was due December 12, 2005. The note was in default at September 30, 2006.
In connection with the acquisition of TSI in fiscal 2004, the Company's Chairman has guaranteed the Company in connection with certain of the Company's obligations as more fully described in Note 2 but is not being paid a fee in connection with this guarantee.
14. COMMITMENTS AND CONTINGENCIES:
At September 30, 2006, minimum future lease commitments for continuing and discontinued operations were as follows:
Capital Operating
Fiscal Year Ending Leases Leases
------------------ --------------------------
2007 $ 402,813 $ 3,965,435
2008 41,714 3,246,935
2009 20,640 3,094,780
2010 6,879 2,521,601
2011 - 2,045,089
Thereafter - 4,091,299
--------------------------
Total minimum lease payments $ 472,046 $ 18,965,139
============
Less amount representing interest 21,948
-----------
Present value of net minimum
lease payments $ 450,098
===========
|
The Company's insurance programs for worker's compensation, general liability and employee related health care benefits are provided through high deductible or self-insured programs. Claims in excess of self-insurance levels are fully insured. Accruals are based on claims filed and estimates of claims incurred but not reported.
The Company's liabilities for unpaid and incurred but not reported claims for workers' compensation and health insurance at fiscal year end 2006 and 2005 was $1.1 million and $1.1 million, respectively, under its current risk management program and are included in other current liabilities in the accompanying consolidated balance sheets. While the ultimate amount of claims incurred are dependent on future developments, in management's opinion, recorded reserves are adequate to cover the future payment of claims previously incurred. However, it is reasonably possible that recorded reserves may not be adequate to cover the future payment of claims.
Adjustments, if any, to estimates recorded resulting from the ultimate claim payments will be reflected in operations in the periods in which such adjustments are known.
In December 2005, the District Court of the Fifth Judicial District of the State of Idaho ("the Court") issued a ruling granting the minority shareholder plaintiffs' motion for partial summary judgment declaring that the stockholders CPH did not validly approve the sale of its assets to TSI (AMCON's consolidated subsidiary) because the vote of certain shares issued as a dividend should not have been counted in the vote. The Court did not rule on the appropriate relief to be granted as a result of the lack of shareholder approval for the asset sale transaction, nor did it rule on the appropriate remedy for any other claim asserted by the parties in this case.
However, based on a legal opinion obtained by management from independent legal counsel, to the extent that TSI owned the assets immediately prior to the ruling by the Court discussed above, and has not otherwise transferred the assets, TSI continues to own the assets. Accordingly, AMCON has continued to account for the operations of TSI as a consolidated subsidiary because the Court has not taken any action to divest TSI of its ownership of the assets.
Since the Court's December ruling, several events have taken place. The minority shareholder plaintiffs have filed notice with the District Court that they agree that rescission is not feasible. During approximately the same time frame, the entire CPH Board of Directors resigned. Upon their resignation, the Court appointed a custodian to manage and direct the affairs of CPH. Additionally, the custodian was designated by the Court as CPH's investigative panel to determine whether the maintenance of a derivative proceeding is in the best interest of CPH.
During the last several months, the parties have been engaged in settlement discussions. Recently, a settlement agreement was reached between the parties. The settlement, resolved all disputes between the minority shareholders plaintiffs, CPH, AMCON, TSI and the Defendant Directors, with two exceptions. The settlement did not resolve claims that CPH may have against AMCON and TSI or that AMCON and TSI may have against CPH. The settlement also did not resolve the claims of a single minority shareholder plaintiff, who did decline to sign on to the settlement. On October 16, 2006, the Court approved the parties' settlement and ordered the dismissal with prejudice of the lawsuit, except for the claims of the single minority shareholder plaintiff. Those claims remain pending in the lawsuit.
On December 21, 2006, CPH filed a first amended complaint in the Fourth Judicial District of the State of Idaho (Elmore County) against AMCON and TSI and other defendants relating to AMCON and TSI's purchase of the assets of CPH and operation of the business. In its amended complaint, CPH re-asserts claims of foreclosure; breach of the asset purchase agreement, promissory notes and water royalty obligations; quantum meruit; unjust enrichment; and collection and enforcement of its security interest. In addition, CPH again seeks a declaratory judgement that: (i) AMCON and TSI are obligated to perform under the asset purchase agreement and other agreements related to the asset purchase transaction; (ii) the actions AMCON and TSI constitute events of default; (iii) TSI has not cured the events of default; (iv) TSI's obligations are accelerated under certain promissory notes; and (v) AMCON is liable to CPH under a guaranty and suretyship agreement for all amounts owing to CPH under the asset purchase agreement and related agreements. Finally, CPH seeks its costs and attorney fees. CPH has not served its amended complaint on AMCON or TSI.
AMCON disagrees with the assertions made by CPH and intends to vigorously defend against CPH's claims and to pursue its own claims against CPH.
With respect to the remaining claims in the original lawsuit and the claims asserted by CPH in its recently filed complaint, AMCON's management, after consulting with the trial counsel, is unable at this time to state that any outcome unfavorable to AMCON is either probable or remote and therefore cannot estimate the amount or range of any potential loss, if any because substantial discovery is needed, several unresolved legal issues exist, and other pretrial work is yet to be completed.
The Company is in settlement discussions with respect to this litigation, pursuant to which the Company is undertaking to divest substantially all of the assets of TSI as part of a complete settlement of any and all claims by CPH against the Company. As required by SFAS 144, management believes that the recorded balance of the subject assets and liabilities have been recognized at their respective fair values.
15. STOCK OPTION PLAN:
Prior to its expiration in June 2004, AMCON maintained a stock-based compensation plan ("the Plan") which provided that the Compensation Committee of the Board of Directors granted incentive stock options and non-qualified stock options pursuant to the Stock Option Plan of up to 550,000 shares. In fiscal 2005, the Compensation Committee evaluated various equity based compensation programs and chose not to implement a new plan.
The Company accounted for the stock option grants in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" using the intrinsic value method under which compensation cost was measured by the excess, if any, of the fair market value of its common stock on the date of grant over the exercise price of the stock option using the Black-Scholes option pricing model. Accordingly, stock-based compensation cost related to stock option grants was not reflected in income or loss as all options granted under the plan had an exercise price equal to or above the market value of the underlying stock on the date of grant. Options are generally granted at the stock's fair market value at date of grant. Options issued to shareholders holding 10% or more of the Company's stock are generally issued at 110% of the stock's fair market value at date of grant.
On October 1, 2005, the Company adopted SFAS No. 123R, Shared Based Payment (SFAS 123R). The Company chose to apply the modified prospective transition method as permitted by SFAS 123R and therefore has not restated prior periods. Under this transition method, compensation cost associated with employee stock options recognized for fiscal 2006, includes amortization related to the remaining unvested portion of stock options granted prior to September 30, 2005. The Company did not grant any stock options in fiscal 2006, 2005 or 2004.
As a result of adopting SFAS 123R, net income (loss) before taxes included share-based compensation expense of $60,000 for fiscal 2006. At September 30, 2006, there were 29,635 options fully vested and exercisable under the Stock Option Plan and unamortized compensation expense totaled approximately $12,000. Options issued and outstanding to management employees pursuant to the Stock Option Plan are summarized below:
Number of Number
Date Exercise Price Options Outstanding Exercisable
------------------------------------------------------------------
Fiscal 1998 $ 15.68 9,171 9,171
Fiscal 1999 $ 45.68 - $ 51.14 6,683 6,683
Fiscal 2000 $ 34.50 3,165 3,165
Fiscal 2003 $ 28.80 4,046 2,428
------ ------
23,065 21,447
|
At September 30, 2006, there were 8,188 options fully vested and exercisable issued to outside directors outside the Stock Option Plan as summarized as follows:
Number of Number
Date Exercise Price Options Outstanding Exercisable
------------------------------------------------------------------
Fiscal 1998 $ 15.68 1,834 1,834
Fiscal 1999 $ 36.82 - $ 49.09 3,852 3,852
Fiscal 2002 $ 26.94 1,668 1,668
Fiscal 2003 $ 28.26 834 834
------ ------
8,188 8,188
====== ======
|
The stock options have varying vesting schedules ranging up to five years, and expire ten years after the date of grant. The Plan expired in June 2004 and therefore there were no new stock options were granted in fiscal 2004, 2005 and 2006. The table below summarizes information about stock options outstanding as of the following fiscal years:
2006 2005 2004
------------------------------------------------------
Weighted Weighted Weighted
Average Exercise Average Exercise Average Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------
Outstanding at beginning of period 44,082 $30.43 50,753 $29.75 52,475 $30.21
Granted - - - - - -
Exercised - - - - (33) 15.68
Forfeited/Expired (12,829) 29.96 (6,671) 25.22 (1,689) 44.86
------------------------------------------------------
Outstanding at end of period 31,253 $30.62 44,082 $30.43 50,753 $29.75
======================================================
Options exercisable at end of period 29,635 41,254 45,979
======== ======== ========
|
The following summarizes all stock options outstanding at the end of fiscal 2006:
Exercisable
Remaining ----------------------------
Exercise Number Weighted-Average Weighted-Average Number Weighted-Average
Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------- ----------- ---------------- ---------------- ----------- ----------------
1998 Options $15.68 11,005 1.1 years $15.68 11,005 $15.68
1999 Options $36.82-$51.14 10,535 2.6 years $46.53 10,535 $46.53
2000 Options $34.50 3,165 3.7 years $34.50 3,165 $34.50
2002 Options $26.94 1,668 5.9 years $26.94 1,668 $26.94
2003 Options $28.26-$28.80 4,880 6.2 years $28.71 3,262 $28.66
------ ------ ------ ------
31,253 $30.62 29,635 $30.72
====== ====== ====== ======
|
16. DERIVATIVE INSTRUMENTS:
The Company borrows money at variable interest rates which exposes it to risk that interest expense will increase if the benchmark interest rate used to set the variable rates increases. In order to reduce its exposure to this risk, the Company may use derivative instruments (i.e. interest rate swaps agreements) pursuant to established Company policies. As of September 2005 and 2004, the Company had interest rate swap agreements outstanding with notional amounts totaling $10.0 million and $15.0 million, respectively, related to borrowings on the Facility. The Company had no derivative instruments at September 30, 2006.
These interest rate swaps were used to effectively convert certain of the Company's floating rate debt to fixed rate debt. The interest rate swaps outstanding at September 2005 and 2004 are accounted for as cash flow hedges with gains and losses deferred in accumulated other comprehensive income, to the extent the hedge is effective. Any ineffectiveness associated with the interest rate swaps is immediately recognized in earnings within interest expense.
17. BUSINESS SEGMENTS:
AMCON has two reportable business segments: the wholesale distribution of consumer products and the retail sale of health and natural food products. The retail health food stores' operations are aggregated to comprise the retail segment because such operations have similar economic characteristics, as well as similar characteristics with respect to the nature of products sold, the type and class of customers for the health food products, and the methods used to sell the products. Also included in the "Other" column are the charges incurred by the AMCON's holding company. The segments are evaluated on revenues, gross margins, operating income (loss) and income before taxes.
Wholesale
Distribution Retail Other/1/ Consolidated
---------------------------------------------------------------------
FISCAL YEAR ENDED 2006:
External revenues:
Cigarettes $ 605,798,030 $ - $ - $ 605,798,030
Health food - 36,848,392 - 36,848,392
Confectionery 55,427,905 - - 55,427,905
Tobacco, beverage & other 141,465,453 - - 141,465,453
---------------------------------------------------------------------
Total external revenues 802,691,388 36,848,392 - 839,539,780
Depreciation 1,287,994 609,172 - 1,897,166
Amortization - 39,731 - 39,731
Operating income (loss) 8,001,265 2,369,070 (3,895,102) 6,475,233
Interest expense 1,700,935 1,611,619 1,545,458 4,858,012
Income (loss) from continuing
operations before taxes 6,400,162 794,835 (5,440,535) 1,754,462
Total assets 66,533,513 12,139,370 16,193,663 94,866,546
Capital expenditures 803,179 177,331 - 980,510
FISCAL YEAR ENDED 2005:
External revenues:
Cigarettes $ 607,263,715 $ - $ - $ 607,263,715
Health food - 34,617,325 - 34,617,325
Confectionery 56,057,063 - - 56,057,063
Tobacco, beverage & other 136,725,439 - (112,094) 136,613,345
---------------------------------------------------------------------
Total external revenues 800,046,217 34,617,325 (112,094) 834,551,448
Depreciation 1,255,200 784,353 - 2,039,553
Amortization 57,752 58,678 - 116,430
Operating income (loss) 9,671,475 (3,490,836) (3,112,558) 3,068,081
Interest expense 1,042,685 1,580,033 1,588,967 4,211,685
Income (loss) from continuing
operations before taxes 8,670,227 (5,032,199) (4,701,527) (1,063,499)
Total assets 67,586,067 13,012,051 14,710,679 95,308,797
Capital expenditures 2,349,690 115,004 - 2,464,694
FISCAL YEAR ENDED 2004:
External revenues:
Cigarettes $ 597,310,736 $ - $ - $ 597,310,736
Health food - 32,431,573 - 32,431,573
Confectionery 55,641,414 - - 55,641,414
Tobacco, beverage & other 131,901,800 - - 131,901,800
---------------------------------------------------------------------
Total external revenues 784,853,950 32,431,573 - 817,285,523
Depreciation 1,121,873 765,371 - 1,887,244
Amortization 86,628 92,004 - 178,632
Operating income (loss) 8,430,445 90,133 (147,689) 8,372,889
Interest expense 1,208,436 1,213,098 821,704 3,243,238
Income (loss) from continuing
operations before taxes 7,754,389 (1,099,671) (955,793) 5,698,925
Total assets 71,794,523 17,426,436 22,508,904 111,729,863
Capital expenditures 318,988 591,330 - 910,318
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/1/ Includes interest expense previously allocated to TBG, TSI and HNWC which are classified as components of discontinued operations. Also includes intercompany eliminations, assets related to discontinued operations and charges incurred by the holding company.
18. SUBSEQUENT EVENTS:
The amendment also includes quarterly cumulative earnings before interest, taxes, depreciation and amortization ("EBITDA") and a quarterly minimum debt service ratio financial covenant of one to one beginning with the fiscal quarter ending September 30, 2007 for the twelve month period then ended. The cumulative minimum EBITDA requirements are as follows (a) $1,000,000 for the three months ending December 31, 2006, December 31, 2007 and December 31, 2008 (b) $2,000,000 for the six months ending March 31, 2007, March 31, 2008, and March 31, 2009, (c) $4,500,000 for the nine months ending June 30, 2007, June 30, 2008 and $7,000,000 for the twelve months ending September 30, 2007 and September 30, 2008.
19. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following tables set forth selected financial information for each of the eight quarters in the two fiscal years ended September 30, 2006 and September 30, 2005. This information has been prepared by the Company on the same basis as the consolidated financial statements and includes all normal and recurring adjustments necessary to present fairly this information when read in conjunction with the Company's audited Consolidated Financial Statements and Notes thereto included in this Annual Report.
The Company's quarterly earnings or loss per share are based on weighted average shares outstanding for the quarter, therefore, the sum of the quarters may not equal the full year earnings or loss per share amount.
(Dollars in thousands, except per share data)
------------------------------------------------------------------------------------------
Fiscal Year 2006 First Second Third Fourth
------------------------------------------------------------------------------------------
Sales...................................... $ 198,217 $ 195,803 $ 222,190 $ 223,330
Gross profit .............................. 14,027 14,640 15,603 15,864
(Loss) income from continuing operations ---------------------------------------------
before income taxes ..................... (238) 494 1,108 390
(Loss) income from continuing operations... (159) 289 673 519
Loss from discontinued operations.......... (1,028) (789) (327) (289)
---------------------------------------------
Net (loss) income ......................... (1,187) (500) 346 230
Preferred stock dividend requirements...... (75) (81) (104) (106)
Net (loss) income available to common ---------------------------------------------
shareholders ............................. $ (1,262) $ (581) $ 242 $ 124
=============================================
Basic earnings (loss) per share available
to common shareholders:
Continuing operations ................... $ (0.42) $ 0.39 $ 1.08 $ 0.78
Discontinued operations ................. (1.97) (1.49) (0.62) (0.55)
---------------------------------------------
Net basic loss per share available
to common shareholders ................. $ (2.39) $ (1.10) $ 0.46 $ 0.23
=============================================
Diluted earnings (loss) per share available
to common shareholders:
Continuing operations ................... $ (0.42) $ 0.37 $ 0.79 $ 0.61
Discontinued operations ................. (1.97) (1.35) (0.38) (0.34)
---------------------------------------------
Net diluted (loss) earnings per share
available to common shareholders ....... $ (2.39) $ (0.98) $ 0.41 $ 0.27
=============================================
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(Dollars in thousands, except per share data)
------------------------------------------------------------------------------------------
Fiscal Year 2005 First Second Third Fourth
------------------------------------------------------------------------------------------
Sales...................................... $ 212,373 $ 191,673 $ 213,512 $ 216,993
Gross profit .............................. 15,564 13,563 15,206 16,158
Impairment charges ........................ - - - 4,235
Income (loss) from continuing operations ---------------------------------------------
before income taxes ...................... 1,401 (506) 1,313 (3,271)
Income (loss) from continuing operations... 956 (327) 800 (2,199)
Loss from discontinued operations (1,420) (1,578) (1,026) (7,948)
---------------------------------------------
Net loss................................... (464) (1,905) (226) (10,147)
Preferred stock dividend requirements...... (73) (73) (74) (75)
---------------------------------------------
Net loss available to common shareholders $ (537) $ (1,978) $ (300) $ (10,222)
=============================================
88
------------------------------------------------------------------------------------------
Fiscal Year 2005 First Second Third Fourth
------------------------------------------------------------------------------------------
Basic earnings (loss) per share available
to common shareholders:
Continuing operations ................... $ 1.68 $ (0.76) $ 1.38 $ (4.31)
Discontinued operations ................. (2.70) (2.99) (1.95) (15.08)
---------------------------------------------
Net basic loss per share available to
common shareholders............... ....... $ (1.02) $ (3.75) $ (0.57) $ (19.39)
=============================================
Diluted earnings (loss) per share available
to common shareholders:
Continuing operations ................... $ 1.36 $ (0.76) $ 1.12 $ (4.31)
Discontinued operations ................. (2.02) (2.99) (1.44) (15.08)
---------------------------------------------
Net diluted loss per share available
to common shareholders.......... ....... $ (0.66) $ (3.75) $ (0.32) $ (19.39)
=============================================
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Based upon valuations obtained from an independent valuation specialist in fiscal 2005, management determined that a portion of the tradenames and goodwill at the Company's retail and beverage segments were impaired. The entities comprising our beverage segment, HNWC and TSI, are classified as a component of discontinued operations at September 30, 2006 in accordance Statement of Financial Accounting Standard ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets".
The impairments recorded in the retail and beverage segments were the result of projected shortfalls in operating cash flows necessary to support the reporting units carrying values. The fair values of the reporting units were estimated with the assistance of an independent valuation specialist using the expected present value of the discounted future cash flows and consideration of net recoverable values. The impairment charges for our retail segment are reflected in the Company's statement of operations as a component of income (loss) from continuing operations before income taxes. Impairment charges incurred by our beverage segment are reflected in the Company's statement of operations as a component of loss from discontinued operations, net of income tax benefit. The Company incurred no impairment charges in fiscal 2006.
A summary of the impairment charges by entity for fiscal 2005 are as follows (in millions):
Continuing Discontinued Total
Operations Operations
---------- ------------------- -----
Retail TSI HNWC Total
Long-lived assets $ - $ 0.4 $ 2.5 $ 2.9
Goodwill 0.3 0.4 0.4 1.1
Water source - 3.7 - 3.7
Customer list - 0.3 0.1 0.4
Tradename 3.9 0.9 0.2 5.0
----- ----- ----- -----
$ 4.2 $ 5.7 $ 3.2 $13.1
===== ===== ===== =====
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In addition to the impairment charges incurred during fiscal 2005, our HNWC subsidiary also incurred $3.6 million impairment charge in fiscal 2004 related to the HNWC tradename. Based on competitive pressures in the natural
spring water bottling business, operating profits and cash flows were lower than expected in fiscal 2004. The impairment charges were calculated based on fair value estimates provided with the assistance of an independent valuation specialist using the expected present value of the discounted future cash flows. The resulting $3.6 million impairment charge is reflected in the Company's statement of operations as a component of loss from discontinued operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(f) and 15d-15(e) under the Exchange Act of 1934, as amended (the "Exchange Act")), that are designed to ensure that information required to be disclosed in the Company's reports filed or furnished under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Exchange Act related rules and forms of the SEC. Such information is accumulated and communicated to the Company's management, including its Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.
The Company carried out the evaluation required by paragraph (b) of the Exchange Act Rules 13a-15 and 15d-15, under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of our disclosure controls and procedures. As previously disclosed, in the connection with the Company's fiscal year 2005 audit, and the Company's evaluation of disclosure and controls procedures, management determined that material weaknesses existed at September 30, 2005 related to incorrect accounting entries made at the Company's HNWC subsidiary, and interest expense allocations made by the Company to its one of its wholly- owned subsidiaries (The Beverage Group, Inc.) which was a component of discontinued operations. During fiscal 2006, the Company implemented a plan which resulted in the successful remediation and elimination of our material weaknesses in internal control over financial reporting as disclosed in Form 10-K for the fiscal year ended September 30, 2005.
Except for the changes related to the remediated material weaknesses described above, there has been no change during the Company's fiscal year ended September 30, 2006, in the Company's internal controls over financial reporting (as such term is defined in Rules 13(a)-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Registrant's Proxy Statement to be used in connection with the 2007 Annual Meeting of Shareholders (the "Proxy Statement") will contain under the caption "Election of Directors", "Employment Agreements" and "Compensation of Executive Officer" certain information required by Item 10 of Form 10-K and such information is incorporated herein by this reference. Executive officers are as follows:
Name Age Position
---- --- --------
William F. Wright 64 Chairman of the Board, Director
Christopher H. Atayan 46 Chief Executive Officer,
Vice Chairman, Director
Kathleen M. Evans 59 President, Director
Eric J. Hinkefent 45 President of CNF and HFA
Andrew C. Plummer 32 Vice President, Acting Chief
Financial Officer and Assistant
Secretary
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WILLIAM F. WRIGHT has served as the Chairman and Chief Executive Officer of AMCON Corporation (the former parent of AMCON) since 1976 and as Chairman of the Company since 1981. From 1968 to 1984, Mr. Wright practiced corporate and securities law in Lincoln, Nebraska. Mr. Wright is a graduate of the University of Nebraska and Duke University School of Law.
CHRISTOPHER H. ATAYAN became Chief Executive Officer of the Company effective October 4, 2006. During fiscal 2006, Mr. Atayan served as the Company's Vice Chairman and Chief Corporate Officer and has been a director of the Company since 2004. Mr. Atayan is also Chairman of Hotlink Incorporated and a consultant to Draupnir, LLC, the parent of Draupnir Capital, LLC. Mr. Atayan has served as the Senior Managing Director of Slusser Associates, a New York investment banking firm since 1988.
KATHLEEN M. EVANS became President of the Company in February 1991. Prior to that time she served as Vice President of AMCON Corporation from 1985 to 1991. From 1978 until 1985, Ms. Evans acted in various capacities with AMCON Corporation and its operating subsidiaries.
ERIC J. HINKEFENT has served as President of both Chamberlin's Natural Foods, Inc. and Health Food Associates, Inc. since October 2001. Prior to that time he served as President of Health Food Associates, Inc. beginning in 1993. He has also served on the board of The Healthy Edge, Inc. from 1999 through 2003. Mr. Hinkefent is a graduate of Oklahoma State University.
ANDREW C. PLUMMER became Acting Chief Financial Officer of the Company in March 2006. Prior to his appointment as Acting Chief Financial Officer, he served the Company as its Corporate Controller and Manager of SEC Compliance. Prior to joining AMCON in 2004, Mr. Plummer practiced public accounting for approximately 7 years primarily with Deloitte and Touche, LLP and attained the position of Audit Manager. Mr. Plummer is a graduate of Peru State College.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and certain persons who own more than ten percent of the Company's Common Stock, to file with the Securities and Exchange Commission (the "SEC") reports of their ownership of Company Common Stock. Officers, directors and greater-than-ten-percent shareowners are required by SEC regulation to furnish the Company with copies of such Section 16(a) reports they file. To the Company's knowledge, based solely upon review of the copies of Forms 3,4 and 5 furnished to the Company between October 1, 2005 and September 30, 2006, the Company's officers, directors and greater than 10% beneficial owners complied with all Section 16(a) filing requirements except as follows: Jeremy W. Hobbs and Allen D. Petersen will file a late Form 3 and Form 4, respectively, for a transaction that occurred on March 6, 2006 and Jeremy W. Hobbs, Allen D. Petersen and William F. Wright will file a late Form 4 for a transaction that occurred on August 31, 2006.
CHANGE OF CONTROL AGREEMENTS
On December 29, 2006, we entered into a change of control agreement with each of Christopher H. Atayan, our Chief Executive Officer, and Kathleen M. Evans, our President (each an "Agreement"). The initial term of the Agreement extends for two years until December 31, 2008. Beginning on December 31, 2007 and each December 31 following, the Agreement term will be automatically extended for one additional year unless we give the applicable officer notice by September 30 of that year. In addition, if a Change in Control (as defined in the Agreement) occurs during the term of the Agreement, the term of this Agreement shall continue for a period of 24 months after the month in which such Change in Control occurred.
The Agreement requires Mr. Atayan or Ms. Evans, as applicable, to remain in our employ for a period of six months after a Change in Control, unless involuntarily terminated by us other than for Cause (as defined in the Agreement) or terminated by the officer for Good Reason (as defined in the Agreement).
If a Change of Control occurs and the term of the Agreement has not expired, we will owe the applicable officer the following:
- During any period prior to termination of employment that the officer fails to perform full-time duties as a result of disability, total compensation, including base salary, bonus and any benefits, will continue unaffected until either the officer returns to the full-time performance of duties or employment is terminated.
- If the officer is terminated for Cause or by other than for Good Reason, we shall pay the officer his or her full base salary through the date of termination plus all other amounts to which the officer is then entitled to under any of our compensation or benefit plans.
- If employment terminates by reason of death, benefits shall be determined in accordance with our retirement, survivor's benefits, insurance and other applicable programs and plans then in effect.
- If employment is either terminated (other than for Cause or disability) or terminated by the officer for Good Reason, the officer shall be entitled to the following benefits.
- All accrued compensation and benefits.
- Subject to adjustment, a severance payment in the form of a cash lump sum distribution equal to Current Annual Compensation (as defined in the Agreement) multiplied by two.
- Subject to adjustment, life and health insurance benefits (for 24 months after termination or until the officer turns 65 if earlier) that are substantially similar to those received immediately prior to the date of termination. These benefits will be provided at a cost that is no greater than the amount paid for such benefits by active employees who participate in such Corporation-sponsored welfare benefit plan or, if less, the amount paid for such benefits by the officer immediately prior to the event date.
ITEM 11. EXECUTIVE COMPENSATION
The Registrant's Proxy Statement will contain under the captions "Compensation of Directors", "Compensation of Executive Officers" and "Compensation Committee Interlocks and Insider Participation", the information required by Item 11 of Form 10-K, and such information is incorporated herein by this reference. The information set forth under the captions "Report of Compensation Committee on Executive Compensation" and "Company Performance" is expressly excluded from such incorporation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Registrant's Proxy Statement will contain under the captions "Ownership of Our Common Stock by Our Directors and Executive Officers and Other Principal Stockholders" and "Equity Compensation Plan Information" the information required by Item 12 of Form 10-K and such information is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Registrant's Proxy Statement will contain under the caption "Certain Relationships and Related Transactions" the information required by Item 13 of Form 10-K and such information is incorporated herein by this reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Registrant's Proxy Statement will contain under the caption "Ratification of Appointment of Independent Auditor" the information required by Item 14 of Form 10-K and such information is incorporated herein by this reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements, Financial Statement Schedules, and Exhibits
(1) Financial Statements
The financial statements filed as part of this filing are listed on the index to Consolidated Financial Statements, Item 8, page 58.
(2) Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not applicable or not required or the information required to be set forth therein is included in the Consolidated Financial Statements, Item 8, or notes thereto.
(3) Exhibits
2.1 Asset Purchase Agreement, dated April 24, 2004, between TSL Acquisition Corp., AMCON Distributing Company and Trinity Springs, Ltd. (incorporated by reference to Exhibit 2.8 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004)
2.2 First Amendment to Asset Purchase Agreement dated June 17, 2004 between TSL Acquisition Corp., AMCON Distributing Company and Trinity Springs, Ltd. (incorporated by reference to Exhibit 2.9 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004)
3.1 Restated Certificate of Incorporation of the Company, as amended May 11, 2004 (incorporated by reference to Exhibit 3.1 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004)
3.2 Amended and Restated Bylaws of the Company dated December 27, 2006
3.3 Second Corrected Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Securities of AMCON Distributing Company dated August 5, 2004 (incorporated by reference to Exhibit 3.3 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004)
3.4 Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Securities of AMCON Distributing Company dated October 8, 2004 (incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed on January 7, 2005)
3.5 Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock dated March 6, 2006 (incorporated by reference to Exhibit 4.1 of AMCON's Current Report on Form 8-K filed on March 13, 2006)
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of AMCON's Registration Statement on Form S-1 (Registration No. 33-82848) filed on August 15, 1994)
4.2 Specimen Series A Convertible Preferred Stock Certificate (incorporated by reference to Exhibit 4.2 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004)
4.3 Specimen Series B Convertible Preferred Stock Certificate (incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed on January 7, 2005)
4.4 Specimen Series C Convertible Preferred Stock Certificate (incorporated by reference to Exhibit 4.2 of AMCON's Current Report on Form 8-K filed on March 13, 2006)
94
4.5 Securities Purchase Agreement dated June 17, 2004 between AMCON
Distributing Company, William F. Wright and Draupnir, LLC (incorporated
by reference to Exhibit 4.3 of AMCON's Quarterly Report on Form 10-Q
filed on August 9, 2004)
4.6 Securities Purchase Agreement dated October 8, 2004 between AMCON
Distributing Company and Spencer Street Investments, Inc. (incorporated
by reference to Exhibit 4.5 of AMCON's Annual Report on Form 10-K filed
on January 7, 2005)
4.7 Securities Purchase Agreement dated March 3, 2006 between AMCON
Distributing Company and Draupnir Capital, LLC. (incorporated
by reference to Exhibit 4.3 of AMCON's Current Report on Form 8-K filed
on March 13, 2006)
10.1 Amended and Restated Loan and Security Agreement, dated September 30,
2004, between the Company and LaSalle National Bank, as agent
(incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on
Form 10-K filed on January 7, 2005)
10.2 Revised First Amendment To Amended and Restated Loan and Security
Agreement, dated April 14, 2005 (incorporated by reference to Exhibit
10.2 of AMCON's Form 10-Q filed on May 27, 2005)
10.3 Revised Second Amendment to Amended and Restated Loan and Security
Agreement, dated May 23, 2005 (incorporated by reference to Exhibit
10.3 of AMCON's Quarterly Report on Form 10-Q filed on May 27, 2005)
10.4 Third Amendment to Amended and Restated Loan and Security Agreement,
dated August 12, 2005 (incorporated by reference to Exhibit 10.4 of
AMCON's Quarterly Report on Form 10-Q filed on August 22, 2005)
10.5 Fourth Amendment and Waiver to Amended and Restated Loan and Security
Agreement, dated January 9, 2006 (incorporated by reference to Exhibit
10.5 of AMCON's annual report on Form 10-K
filed on August 23, 2006)
10.6 Fifth Amendment to Amended and Restated Loan and Security Agreement,
dated February 8, 2006 (incorporated by reference to Exhibit 10.6 of
AMCON's annual report on Form 10-K filed on August 23, 2006)
10.7 Sixth Amendment to Amended and Restated Loan and Security Agreement,
dated March 3, 2006 (incorporated by reference to Exhibit
10.1 of AMCON's Current Report on Form 8-K filed on March 13, 2006)
10.8 Seventh Amendment to Amended and Restated Loan and Security Agreement,
dated November 6, 2006 (incorporated by reference to Exhibit 10.37 of
AMCON's quarterly report on Form 10-Q filed on November 20, 2006)
10.9 Eighth Amendment to Amended and Restated Loan and Security Agreement,
dated December 28, 2006
|
10.10 First Amended and Restated AMCON Distributing Company 1994 Stock Option Plan (incorporated by reference to Exhibit 10.17 of AMCON's Current Report on Form 10-Q filed on August 4, 2000)*
10.11 AMCON Distributing Company Profit Sharing Plan (incorporated by reference to Exhibit 10.8 of Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-82848) filed on November 8, 1994)*
10.12 Agreement, dated September 26, 2006, between the Company and William F. Wright regarding Mr. Wright's services to the Company (incorporated by reference to Exhibit 10.1 of AMCON's Interim Report on Form 8-K filed on October 10, 2006)*
10.13 Employment Agreement, dated May 22, 1998, between the Company and Kathleen M. Evans (incorporated by reference to Exhibit 10.15 of AMCON's Quarterly Report on Form 10-Q filed on August 6, 1998)*
10.14 Agreement, dated December 10, 2004 between AMCON Distributing Company and William F. Wright with respect to split dollar life insurance (incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed on January 7, 2005)
10.15 Agreement, dated December 15, 2004 between AMCON Distributing Company and Kathleen M. Evans with respect to split dollar life insurance (incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed on January 7, 2005)
10.16 ISDA Master Agreement, dated as of May 12, 2003 between the Company and LaSalle Bank National Association (incorporated by reference to Exhibit 10.13 of AMCON's Quarterly Report on Form 10-Q filed on August 11, 2003)
10.17 Swap Transaction Confirmation ($10,000,000) dated as of May 23, 2003 between the Company and LaSalle Bank National Association (incorporated by reference to Exhibit 10.14 of AMCON's Quarterly Report on Form 10-Q filed on August 11, 2003)
10.18 Promissory Note ($2,828,440), dated as of June 17, 2004 between the Company and Trinity Springs, Ltd. (incorporated by reference to Exhibit 10.15 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004)
10.19 Promissory Note ($500,000), dated as of June 17, 2004 between the Company and Trinity Springs, Ltd. (incorporated by reference to Exhibit 10.16 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004)
10.20 Security Agreement, dated June 17, 2004 by and between TSL Acquisition Corp., AMCON Distributing Company and Trinity Springs, Ltd.(incorporated by reference to Exhibit 10.17 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004)
10.21 Shareholders Agreement, dated June 17, 2004, by and between TSL Acquisition Corp, AMCON Distributing Company and Trinity Springs, Ltd. (incorporated by reference to Exhibit 10.18 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004)
10.22 Guaranty and Suretyship Agreement, dated June 17, 2004, by and between AMCON Distributing Company and Trinity Springs, Ltd. (incorporated by reference to Exhibit 10.19 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004)
10.23 Mortgage, dated June 17, 2004, by and between TSL Acquisition Corp., AMCON Distributing Company and Trinity Springs, Ltd.(incorporated by reference to Exhibit 10.20 of AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004)
10.24 Guaranty Fee, Reimbursement and Indemnification Agreement, dated as of September 30, 2004, between AMCON Distributing Company and William F. Wright (incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed on January 7, 2005)
10.25 Unconditional Guaranty, dated as of September 30, 2004 between William F. Wright and LaSalle Bank, N.A.(incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed on January 7, 2005)
10.26 Guaranty and Suretyship Agreement between William F. Wright and the Company, dated June 17, 2004, regarding the guaranty of the Company's indebtedness to Trinity Springs, Ltd. (now Crystal Paradise Holdings) under the Three Year Note, the Ten Year Note and the Water Royalty (subject to a $5.0 million cap on the Water Royalty).
10.27 Secured Promissory Note ($1,000,000), dated December 14, 2004, issued by Trinity Springs, Inc. to Allen D. Petersen (incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed on January 7, 2005)
10.28 Modification and Extension of Second Lien Commercial Mortgage, Assignment of Leases and Rents, and Fixture Filing, dated as of December 14, 2004 between Trinity Springs, Inc. and Allen D. Petersen (incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed on January 7, 2005)
10.29 Term Real Estate Promissory Note, dated December 21, 2004, issued by AMCON Distributing Company to M&I (incorporated by reference to Exhibit 10.21 of AMCON's quarterly report on Form 10-Q filed on February 14, 2005)
10.30 Term Equipment Promissory Note, dated December 21, 2004 issued by AMCON Distributing Company to M&I (incorporated by reference to Exhibit 10.22 of AMCON's quarterly report on Form 10-Q filed on February 14, 2005)
10.31 One Hundred Eighty Day Redemption Mortgage and Security Agreement by and between AMCON Distributing Company and M&I (incorporated by reference to Exhibit 10.23 of AMCON's quarterly report on Form 10-Q filed on February 14, 2005)
10.32 Security Agreement by and between AMCON Distributing Company and M&I (incorporated by reference to Exhibit 10.24 of AMCON's quarterly report on Form 10-Q filed on February 14, 2005)
10.33 Promissory Note, dated March 30, 2005 issued by Trinity Springs, Inc. to Nebraska Distributing Company (incorporated by reference to Exhibit 10.28 of AMCON's quarterly report on Form 10-Q filed on August 22, 2005)
10.34 Subordinated Promissory Note, dated August 8, 2005 issued by Trinity Springs, Inc. to Draupnir, LLC (incorporated by reference to Exhibit 10.29 of AMCON's quarterly report on Form 10-Q filed on August 22, 2005)
10.35 Subordinated Promissory Note, dated August 8, 2005 issued by Trinity Springs, Inc. to Aristide Investments, L.P.(incorporated by reference to Exhibit 10.30 of AMCON's quarterly report on Form 10-Q filed on August 22, 2005)
10.36 Subordination Agreement, dated as of August 8, 2005, among Trinity Springs, Inc., Artiside Investment L.P., and Draupnir, LLC (incorporated by reference to Exhibit 10.31 of AMCON's quarterly report on Form 10-Q filed on August 22, 2005)
10.37 $400,000 Subordinated Promissory Note by and between Trinity Springs, Inc. and Draupnir, LLC dated October 20, 2005 (incorporated by reference to Exhibit 10.34 of AMCON's quarterly report on Form 10-Q filed on September 29, 2006)
10.38 $200,000 Subordinated Promissory Note by and between Trinity Springs, Inc. and Draupnir, LLC dated November 7, 2005 (incorporated by reference to Exhibit 10.35 of AMCON's quarterly report on Form 10-Q filed on September 29, 2006)
10.39 $150,000 Subordinated Promissory Note by and between Trinity Springs, Inc. and Draupnir, LLC dated December 1, 2005 (incorporated by reference to Exhibit 10.36 of AMCON's quarterly report on Form 10-Q filed on September 29, 2006)
10.40 Change of Control Agreement between the Company and Christopher H.
Atayan, dated December 29, 2006
10.41 Change of Control Agreement between the Company and Kathleen M. Evans,
dated December 29, 2006
11.1 Statement re: computation of per share earnings (incorporated by
reference to footnote 4 to the financial statements which are
incorporated herein by reference to Item 8 of Part II herein)
14.1 Code of Ethics for Principal Executive and Financial Officers
(incorporated by reference to Exhibit 14.1 of AMCON's Annual Report on
Form 10-K filed on December 24, 2003)
21.1 Subsidiaries of the Company
23.1 Consent of Independent Registered Public Accounting Firm (McGladery &
Pullen)
23.2 Consent of Independent Registered Public Accounting Firm (Deloitte &
Touche LLP)
31.1 Certification by Christopher H. Atayan, Chief Executive Officer and
Vice Chairman, furnished pursuant to section 302 of the
Sarbanes-Oxley Act
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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
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* Represents management contract or compensation plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of 1934, the Registrant, AMCON Distributing Company, a Delaware corporation, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Omaha, State of Nebraska, on the 28th day of December 2006.
AMCON DISTRIBUTING COMPANY
(registrant)
By: /s/ Christopher H. Atayan ----------------------------- Christopher H. Atayan, Chief Executive Officer and Vice Chairman |
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons in the capacities indicated on the 28th day of December 2006.
Signature Title
--------- -----
/s/ William F. Wright Chairman of the Board and Director
------------------------
William F. Wright
/s/ Christopher H. Atayan Chief Executive Officer
------------------------ and Vice Chairman
Christopher H. Atayan
/s/ Kathleen M. Evans President and Director
------------------------
Kathleen M. Evans
/s/ Andrew C. Plummer Vice President and Acting Chief Financial
------------------------ Officer (Principal Financial and
Andrew C. Plummer Accounting Officer)
/s/ Allen D. Petersen Director
------------------------
Allen D. Petersen
|
/s/ Jeremy W. Hobbs Director ------------------------ Jeremy W. Hobbs /s/ John R. Loyack Director ------------------------ John R. Loyack /s/ Raymond F. Bentele Director ------------------------ Raymond F. Bentele /s/ Stanley Mayer Director ------------------------ Stanley Mayer /s/ Timothy R. Pestotnik Director ------------------------ Timothy R. Pestotnik /s/ William R. Hoppner Director ------------------------ William R. Hoppner |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
AMCON Distributing company
Omaha, Nebraska
We have audited the consolidated financial statements of AMCON Distributing Company and its subsidiaries (the "Company") as of September 30, 2006 and for the year then ended and have issued our report thereon dated December 28, 2006, which report expresses an unqualified opinion. Our audits also included the 2006 information in the consolidated financial statement schedule of the Company, listed in Item 15. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
McGLADREY & PULLEN
Omaha, Nebraska
December 28, 2006
AMCON Distributing Company Consolidated Financial Statement Schedule
Net
Amounts
Balance at Provision (Written Off) Balance at
Description Beginning of Period (Benefit) Recovered End of Period
------------------ ---------------------- --------- ------------- -----------------------
Allowance for
doubtful accounts Sep 26, 2003 833,532 (167,920) (126,008) Sep 24, 2004 539,604
Sep 24, 2004 539,604 220,233 (409,837) Sep 30, 2005 350,000
Sep 30, 2005 350,000 780,247/1/ (195,790) Sep 30, 2006 934,457
Allowance for
inventory
obsolescence Sep 26, 2003 312,250 77,473 - Sep 24, 2004 389,723
Sep 24, 2004 389,723 - (33,519) Sep 30, 2005 356,204
Sep 30, 2005 356,204 77,939 - Sep 30, 2006 434,143
/1/ Includes $405,261 allowance for doubtful accounts for TBG which
was reclassified from discontinued operations to continuing
operations during fiscal 2006.
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EXHIBIT 3.2
BYLAWS OF
AMCON DISTRIBUTING COMPANY
As Amended and Restated on December 27, 2006
ARTICLE I
STOCKHOLDERS
Page
Section 1. Time and Place of Meetings 1
Section 2. Annual Meetings 1
Section 3. Special Meetings 1
Section 4. Notice of Meetings 1
Section 5. Quorum and Adjournment 2
Section 6. Voting 2
Section 7. Stockholder Proposals and Nominations of Directors 3
Section 8. Inspectors of Elections 3
Section 9. Opening and Closing of Polls 4
ARTICLE II
DIRECTORS
Section 1. General Powers 5
Section 2. Number and Term of Office 5
Section 3. Vacancies 5
Section 4. Regular Meetings 6
Section 5. Special Meetings 6
Section 6. Quorum 6
Section 7. Written Action 6
Section 8. Participation in Meetings by Conference Telephone 6
Section 9. Committees 6
Section 10. Compensation 8
Section 11. Regulations; Manner of Acting 8
ARTICLE III
NOTICES
Section 1. Generally 8
Section 2. Waivers 9
ARTICLE IV
OFFICERS
Section 1. Generally 9
Section 2. Compensation 9
Section 3. Election 9
Section 4. Authority and Duties 9
Section 5. Removal and Resignation; Vacancies 9
Section 6. Chairman 10
Section 7. Vice Chairman 10
Section 8. Chief Executive Officer 10
Section 9. President 10
Section 10. Execution of Documents and Action With Respect to
Securities of Other Corporations 10
Section 11. Vice President 11
Section 12. Secretary and Assistant Secretaries 11
Section 13. Chief Financial Officer, Treasurer and Assistant
Treasurer 11
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ARTICLE V
INDEMNIFICATION
Section 1. Right to Indemnification 12
Section 2. Right of Indemnitee To Bring Suit 13
Section 3. Nonexclusivity of Rights 13
Section 4. Insurance 14
Section 5. Indemnification of Agents of the Corporation 14
Section 6. Indemnification Contracts 14
Section 7. Effect of Amendment 14
ARTICLE VI
STOCK
Section 1. Certificates 14
Section 2. Transfer 14
Section 3. Lost, Stolen or Destroyed Certificates 15
Section 4. Record Date 15
ARTICLE VII
GENERAL PROVISIONS
Section 1. Fiscal Year 15
Section 2. Corporate Seal 16
Section 3. Reliance Upon Books, Reports and Records 16
Section 4. Time Periods 16
Section 5. Dividends 16
ARTICLE VIII
AMENDMENTS 16
BYLAWS
As Amended and Restated on December 27, 2006
ARTICLE I
STOCKHOLDERS
SECTION 1. TIME AND PLACE OF MEETINGS. All meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, within or without the State of Delaware, as may be designated by the Board of Directors or, in the absence of a designation by the Board of Directors, by the Chairman of the Board or the President and such time and place shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof.
SECTION 2. ANNUAL MEETINGS. An annual meeting of the stockholders commencing with the year 1995 shall be held on the third Thursday in February if not a legal holiday, and if a legal holiday, then on the next business day following, at 10:00 a.m., or at such other date and time as shall be designated from time to time by the Board of Directors, at which meeting the stockholders shall elect by a plurality vote the directors to succeed those whose terms expire at that meeting and shall transact such other business as may properly be brought before the meeting.
SECTION 3. SPECIAL MEETINGS. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by statute or
by the Restated Certificate of Incorporation, may only be called by
(a) the Chairman of the Board, (b) the Board of Directors pursuant to
a resolution adopted by a majority of the total number of authorized
directors or (c) the President.
SECTION 4. NOTICE OF MEETINGS. Notice of every meeting of the stockholders, stating the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given in the manner specified in Section 1 of Article III hereof not less than 10 or more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting, except as otherwise provided herein or by law. When a meeting is adjourned to another place, date or time, notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the place, date and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting.
SECTION 5. QUORUM AND ADJOURNMENT. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by law or by the Restated Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented; provided, however, that if the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting, conforming to the requirements of Section 4 of Article I hereof, shall be given to each stockholder of record entitled to vote at such meeting. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted on the original date of the meeting.
SECTION 6. VOTING. Except as otherwise provided by law or by the Restated Certificate of Incorporation, each stockholder shall be entitled at every meeting of the stockholders to one vote for each share of stock having voting power standing in the name of such stockholder on the books of the Corporation on the record date for the meeting, and such votes may be cast either in person or by proxy. A stockholder may authorize one or more persons to act for such stockholder as proxy (a) in a writing executed by such stockholder or to which such stockholder's signature is affixed, including by facsimile signature, or (b) by the transmission of a telegram, cablegram, or other means of electronic transmission to the person, firm, organization or agent authorized by the stockholder to be the holder of the proxy if such telegram, cablegram or other means of electronic transmission sets forth or is submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. A complete copy, facsimile telecommunication or other reliable reproduction of such writing or transmission may be substituted or used in lieu of the original writing or transmission for any and all purposes. Every proxy must be filed with the Secretary of the Corporation. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy, or another duly authorized proxy bearing a later date, with the Secretary of the Corporation. No vote of the stockholders need be taken by written ballot unless otherwise required by law. If authorized by the board of directors, any vote required to be taken by written ballot shall be satisfied by a ballot submitted by electronic transmission if such electronic transmission sets forth or is submitted with information from which it can be determined that the electronic transmission was authorized by the stockholder or proxy holder. Any vote which need not be taken by ballot may be conducted in any manner approved by the meeting. When a quorum is present at any meeting, the vote of the holders of a majority of the stock which
has voting power present in person or represented by proxy shall decide any question properly brought before such meeting, unless the question is one upon which by express provision of law, the Restated Certificate of Incorporation or these By laws, a different vote is required, in which case such express provision shall govern and control the decision of such question.
SECTION 7. STOCKHOLDER PROPOSALS AND NOMINATIONS OF DIRECTORS. Nominations for election to the Board of Directors of the Corporation at a meeting of the stockholders may be made by the Board of Directors, or on behalf of the Board of Directors by a Nominating Committee appointed by the Board of Directors, or by any stockholder of the Corporation entitled to vote for the election of directors at such meeting. Any nominations, other than those made by or on behalf of the Board of Directors, and any proposal by any stockholder to transact any corporate business at an annual or special stockholders' meeting, shall be made by notice in writing and mailed by certified mail to the Secretary of the Corporation and (a) in the case of an annual meeting, received no later than 35 days prior to the date of the annual meeting; provided, however, that if less than 35 days' notice of a meeting of stockholders is given to the stockholders, such notice of proposed business or nomination by such stockholder shall have been made or delivered to the Secretary of the Corporation not later than the close of business on the seventh day following the day on which the notice of a meeting was mailed, and (b) in the case of a special meeting of stockholders, received not later than the close of business on the tenth day following the day on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever occurs first. A notice of nominations by stockholders shall set forth as to each proposed nominee who is not an incumbent director (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee and the nominating stockholder and (iv) any other information concerning the nominee that must be disclosed regarding nominees in proxy solicitations pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended, and the rules under such section.
The Chairman of the Board, or in his absence the President or any Vice President, may, if the facts warrant, determine and declare to the meeting of stockholders that a nomination was not made in accordance with the foregoing procedure and that the defective nomination shall be disregarded.
SECTION 8. INSPECTORS OF ELECTIONS. Preceding any meeting of the stockholders, the Board of Directors shall appoint one or more persons to act as Inspectors of Elections and may designate one or more alternate inspectors. In the event no inspector or alternate is able to act, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering
upon the discharge of the duties of an inspector, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector shall:
(a) ascertain the number of shares outstanding and the voting power
of each;
(b) determine the shares represented at a meeting and the validity of
proxies and ballots;
(c) count all votes and ballots;
(d) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors; and
(e) certify his or her determination of the number of shares represented at the meeting and his or her count of all votes and ballots.
The inspector may appoint or retain other persons or entities to
assist in the performance of the duties of inspector.
When determining the shares represented and the validity of proxies
and ballots, the inspector shall be limited to an examination of the
proxies, any envelopes submitted with those proxies, any information
relating to the authorization of a proxy through the transmission of a
telegram, cablegram, or other means of electronic transmission, any
information relating to the authorization of a ballot submitted by
electronic transmission, ballots and the regular books and records of
the Corporation. The inspector may consider reliable information for
the limited purpose of reconciling proxies and ballots submitted by or
on behalf of banks, brokers or their nominees or similar persons which
represent more votes than the holder of a proxy is authorized by the
record owner to cast or more votes than the stockholder holds of
record. If the inspector considers other reliable information as
outlined in this Section, the inspector, at the time of his or her
certification pursuant to (e) of this Section, shall specify the
precise information considered, the person or persons from whom the
information was obtained, when this information was obtained, the
means by which the information was obtained, and the basis for the
inspector's belief that such information is accurate and reliable.
SECTION 9. OPENING AND CLOSING OF POLLS. The date and time for the opening and the closing of the polls for each matter to be voted upon at a meeting of stockholders shall be announced at the meeting. The inspector of the election shall be prohibited from accepting any ballots, proxies or votes or any revocations thereof or changes thereto after the closing of the polls, unless the Court of Chancery upon application by a stockholder shall determine otherwise.
ARTICLE II
DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or by the Restated Certificate of Incorporation directed or required to be exercised or done by the stockholders.
SECTION 2. NUMBER AND TERM OF OFFICE.
(a) The Board of Directors shall be divided into three classes, designated Classes I, II and III, which shall be as nearly equal in number as possible. Directors of Class I shall be elected to hold office for a term expiring at the annual meeting of stockholders to be held in 1995, directors of Class II shall be elected to hold office for a term expiring at the annual meeting of stockholders to be held in 1996 and directors of Class III shall be elected to hold office for a term expiring at the annual meeting of stockholders to be held in 1997. At each annual meeting of stockholders following such initial classification and election, the respective successors of each class shall be elected for three year terms. The holders of a majority of the shares then entitled to vote generally for the election of directors may remove any director or the entire Board of Directors, but only for cause.
(b) The number of directors shall be fixed from time to time by resolution of the Board of Directors. In case of any increase in the number of directors in advance of an annual meeting of stockholders, each additional director shall be elected by the directors then in office, although less than a quorum, to hold office until the next election of the class for which such director shall have been chosen (as provided in the last sentence of this subsection (b)) or until his successor shall have been duly chosen. No decrease in the number of directors shall shorten the term of any incumbent director. Any newly created or eliminated directorships resulting from an increase or decrease shall be apportioned by the Board among the three classes of directors so as to maintain such classes as nearly equal as possible.
(c) No less than two directors shall be persons other than (i) officers or employees of the Corporation or its subsidiaries or (ii) individuals having a relationship which, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
SECTION 3. VACANCIES. Vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only
by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class of which they have been elected expires and until such directors' successors shall have been duly elected or qualified.
SECTION 4. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice immediately after the annual meeting of the stockholders and at such other times and places as shall from time to time be determined by the Board of Directors.
SECTION 5. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President or any Vice President on one day's written notice to each director by whom such notice is not waived, given either personally or by courier, mail, facsimile transmission or telegram, and shall be called by the President or the Secretary in like manner and on like notice on the written request of any two directors.
SECTION 6. QUORUM. At all meetings of the Board of Directors, a majority of the total number of directors then in office shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time to another place, time or date, without notice other than announcement at the meeting, until a quorum shall be present.
SECTION 7. WRITTEN ACTION. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or such committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes or proceedings of the Board or such committee.
SECTION 8. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any such committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.
SECTION 9. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the entire Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation and each to have such lawfully delegable powers and duties as the Board may confer. Each such committee shall serve at
the pleasure of the Board of Directors. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Except as otherwise provided by law, any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it. Any committee or committees so designated by the Board shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Unless otherwise prescribed by the Board of Directors, a majority of the members of the committee shall constitute a quorum for the transaction of business, and the act of a majority of the members present at a meeting at which there is a quorum shall be the act of such committee. Each committee shall prescribe its own rules for calling and holding meetings and its method of procedure, subject to any rules prescribed by the Board of Directors, and shall keep a written record of all actions taken by it. No such committee shall have the power or authority:
(a) to amend the Restated Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of the State of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series);
(b) to adopt an agreement of merger or consolidation under Section 251 or Section 252 of the General Corporation Law of the State of Delaware;
(c) to recommend to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets;
(d) to recommend to the stockholders a dissolution of the Corporation or a revocation of a dissolution; or
(e) to amend the Bylaws of the Corporation. Unless the resolution, Bylaws or Restated Certificate of Incorporation expressly so provides, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to the General Corporation Law of the State of Delaware.
SECTION 10. COMPENSATION. The Board of Directors may establish such compensation for, and reimbursement of the expenses of, directors for attendance at meetings of the Board of Directors or committees, or for other services by directors to the Corporation, as the Board of Directors may determine.
SECTION 11. REGULATIONS; MANNER OF ACTING. To the extent consistent with applicable law, the Restated Certificate of Incorporation and these Bylaws, the Board of Directors may adopt such special rules and regulations for the conduct of their meetings and for the management of the property, affairs and business of the Corporation as the Board of Directors may deem appropriate. The directors shall act only as a Board, and the individual directors shall have no power as such.
ARTICLE III
NOTICES
SECTION 1. GENERALLY. Whenever by law or under the provisions of the Restated Certificate of Incorporation or these By laws notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail. Any such notice also may be given to any director by telephone, facsimile transmission, telegram or other electronic transmission and to any stockholder by a form of electronic transmission consented to by such stockholder. A stockholder's consent to the receipt of notice by a form of electronic transmission shall be deemed revoked if (a) the Corporation receives a written notice of such revocation from such stockholder, or (b) the Corporation is unable to deliver by electronic transmission two consecutive notices given by the Corporation in accordance with such consent and such inability becomes known to the secretary or an assistant secretary of the Corporation or to the transfer agent or other person responsible for the giving of notice. Notice shall be deemed given: (i) if by mail, when deposited in the United States mail, with postage thereon prepaid and addressed to the intended recipient at his or her address as it appears on the records of the Corporation; (ii) if by facsimile telecommunication, when directed to a number at which the intended recipient has consented to receive notice; (iii) if by electronic mail, when directed to an electronic mail address at which the intended recipient has consented to receive notice; (iv) if by a posting on an electronic network together with separate notice to the intended recipient of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (v) if by any other form of electronic transmission, when directed to the intended recipient. As used in these Bylaws, the term "electronic transmission" means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process, including email.
SECTION 2. WAIVERS. Whenever any notice is required to be given by law or under the provisions of the Restated Certificate of Incorporation or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to such notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.
ARTICLE IV
OFFICERS
SECTION 1. GENERALLY. The officers of the Corporation shall be elected by the Board of Directors and shall consist of a Chairman, Vice Chairman, President and Secretary. The Board of Directors may also choose any or all of the following: a Chief Financial Officer, Treasurer, one or more Vice Presidents, and one or more Assistant Secretaries and Assistant Treasurers or any other officers deemed necessary by the Board of Directors. The Office of the Chairman shall be comprised of the Chairman, Vice Chairman and Chief Financial Officer. The President and other executive officers shall report to the Office of the Chairman. Any number of offices may be held by the same person.
SECTION 2. COMPENSATION. The compensation of all officers and agents of the Corporation who are also directors of the Corporation shall be fixed by the Board of Directors. The Board of Directors may delegate the power to fix the compensation of other officers and agents of the Corporation to an officer of the Corporation.
SECTION 3. ELECTION. The officers of the Corporation shall hold office until their successors are elected and qualified. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the directors. Any vacancy occurring in any office of the Corporation may be filled by the Board of Directors.
SECTION 4. AUTHORITY AND DUTIES. Each of the officers of the Corporation shall have such authority and shall perform such duties as are customarily incident to their respective offices or as may be specified from time to time by the Board of Directors in a resolution which is not inconsistent with these Bylaws.
SECTION 5. REMOVAL AND RESIGNATION; VACANCIES. Any officer may be removed for or without cause at any time by the Board of Directors. Any officer may resign at any time by delivering a written notice of resignation, signed by such officer, to the Board of Directors, Chairman, Vice Chairman or President. Unless otherwise specified
therein, such resignation shall take effect upon delivery. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise shall be filled by the Board of Directors.
SECTION 6. CHAIRMAN. The Chairman shall preside at all meetings of the stockholders and of the Board of Directors and shall have such other duties and responsibilities as may be assigned to him or her by the Board of Directors. The Chairman may delegate to any qualified person his or her authority, including to chair any meeting of the stockholders, either on a temporary or a permanent basis.
SECTION 7. VICE CHAIRMAN. In case of the inability or failure of the Chairman to perform the duties of that office, the Vice Chairman shall perform such duties, unless otherwise determined by the Board of Directors. The Vice Chairman shall have such other duties and responsibilities as may be assigned to him or her by the Board of Directors.
Section 8. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall direct the business and affairs of the Corporation and shall have such executive duties, powers, responsibilities and authorities as are usually vested in the office of the chief executive officer of a corporation. He or she shall also carry into effect all directions and resolutions of the Board of Directors. The Chief Executive Officer may also serve as the Chairman, the Vice Chairman or in any other officer position as determined by the Board of Directors.
SECTION 9. PRESIDENT. The President shall be the chief operating officer of the Corporation and, as such, shall be responsible for the active management of the business and affairs of the Corporation. In case of the inability or failure of both the Chairman and Vice Chairman to perform the duties of those offices, the President shall perform such duties, unless otherwise determined by the Board of Directors.
SECTION 10. EXECUTION OF DOCUMENTS AND ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. The Chairman, Vice Chairman and President shall each have and each is hereby given full power and authority, acting alone or together, except as otherwise required by law or directed by the Board of Directors, (a) to execute, on behalf of the Corporation, all duly authorized contracts, agreements, deeds, conveyances or other obligations of the Corporation, applications, consents, proxies and other powers of attorney and other documents and instruments and (b) to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders (or with respect to any action of such stockholders) of any other corporation in which the Corporation may hold securities and otherwise to exercise any and all rights and powers which the Corporation may possess by reason of its ownership of securities of such other corporation. In addition, the Chairman, Vice Chairman and President, or any of them, may delegate to other officers, employees and agents
of the Corporation the power and authority to take any such action which each is authorized to take under this Section 9 of this Article IV, with such limitations as they or any of them may specify; such authority so delegated shall not be redelegated by the person to whom such execution authority has been delegated.
SECTION 11. VICE PRESIDENT. Each Vice President, however titled, shall perform such duties and services and shall have such authority and responsibilities as shall be assigned to or required from time to time by the Board of Directors, Chairman, Vice Chairman or President.
SECTION 12. SECRETARY AND ASSISTANT SECRETARIES.
(a) The Secretary shall attend all meetings of the stockholders and all meetings of the Board of the Board of Directors and record all proceedings of the meetings of the stockholders and of the Board of Directors and shall perform like duties for the standing committees when requested by the Board of Directors, Chairman, Vice Chairman or President. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and meetings of the Board of Directors. The Secretary shall perform such duties as may be prescribed by the Board of Directors, Chairman, Vice Chairman or President. The Secretary shall have charge of the seal of the Corporation and authority to affix the seal to any instrument. The Secretary or any Assistant Secretary may attest to the corporate seal by handwritten of facsimile signature. The Secretary shall keep and account for all books, documents, papers and records of the Corporation except those for which some other officer or agent has been designated or is otherwise properly accountable. The Secretary shall have authority to sign stock certificates.
(b) Assistant Secretaries, in order of their seniority, shall assist the Secretary and, if the Secretary is unavailable or fails to act, perform the duties and exercise the authorities of the Secretary.
SECTION 13. CHIEF FINANCIAL OFFICER, TREASURER AND ASSISTANT TREASURER.
(a) The Chief Financial Officer shall be the chief financial officer of the Corporation and, as such, shall perform the duties customarily incident to such office, including executing certifications with respect to financial statements of the Corporation as may be required by law, and such other duties as shall be assigned to or required from time to time by the Board of Directors, Chairman or Vice Chairman.
(b) The Treasurer shall have the custody of the funds and securities belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Treasurer with the prior approval of the Board of Directors, Chairman, Vice Chairman or President. The Treasurer shall disburse the funds and pledge the
credit of the Corporation as may be directed by the Board of Directors and shall render to the Board of Directors, Chairman, Vice Chairman or President, as and when required by them, or any of them, an account of all transactions by the Treasurer.
(c) Assistant Treasurers, in order of their seniority, shall assist the Treasurer and, if the Treasurer is unable or fails to act, perform the duties and exercise the powers of the Treasurer.
ARTICLE V
INDEMNIFICATION
SECTION 1. RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer or employee or in any other capacity while serving as a director, officer or employee, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators; provided, however, that, except as provided in Section 2 of this Article V with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section 2 of this Article V shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); and provided, further, that, if the General Corporation Law of the State of Delaware requires it, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to
an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses under this Article V or otherwise (hereinafter an "undertaking").
SECTION 2. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under
Section 1 of this Article V is not paid in full by the Corporation
within 60 days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be 20 days, the
indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful
in whole or part in any such suit or in a suit brought by the
Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid
also the expense of prosecuting or defending such suit. In (a) any
suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a
right to an advancement of expenses) it shall he a defense that, and
(b) any suit by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking the Corporation shall be
entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met the applicable standard of conduct set forth in
the General Corporation Law of the State of Delaware. Neither the
failure of the Corporation (including its Board of Directors,
independent legal counsel or its stockholders) to have made a
determination prior to the commencement of such suit that
indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set
forth in the General Corporation Law of the State of Delaware nor an
actual determination by the Corporation (including its Board of
Directors, independent legal counsel or its stockholders) that the
indemnitee has not met such applicable standard of conduct shall
create a presumption that the indemnitee has not met the applicable
standard of conduct or, in the case of such a suit brought by
indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right hereunder, or by the Corporation to
recover an advancement of expenses pursuant to the terms of an
undertaking, the burden of proving that the indemnitee is not entitled
to be indemnified or to such advancement of expenses under this
Article V or otherwise shall be on the Corporation.
SECTION 3. NONEXCLUSIVITY OF RIGHTS. The rights of indemnification and to the advancement of expenses conferred in this Article V shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Restated Certificate of Incorporation, bylaw, contract, agreement, vote of stockholders or disinterested directors or otherwise.
SECTION 4. INSURANCE. The Corporation may maintain insurance, at its expense, to protect itself and any indemnitee against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware.
SECTION 5. INDEMNIFICATION OF AGENTS OF THE CORPORATION. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article V or as otherwise permitted under the General Corporation Law of the State of Delaware with respect to the indemnification and advancement of expenses of directors and officers of the Corporation.
SECTION 6. INDEMNIFICATION CONTRACTS. The Board of Directors is authorized to enter into a contract with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing for indemnification rights equivalent to or, if the Board of Directors so determines, greater than those provided for in this Article V.
SECTION 7. EFFECT OF AMENDMENT. Any amendment, repeal or modification of any provision of this Article V by the stockholders or the directors of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such amendment, repeal or modification.
ARTICLE VI
STOCK
SECTION 1. CERTIFICATES. Certificates representing shares of stock of the Corporation shall be in such form as shall be determined by the Board of Directors, subject to applicable legal requirements. Such certificates shall be numbered and their issuance recorded in the books of the Corporation, and such certificates shall exhibit the holder's name and the number of shares and shall be signed by, or in the name of the Corporation by, the President and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer of the Corporation. Any or all of the signatures and the seal of the Corporation, if any, upon such certificates may be facsimiles, engraved or printed.
SECTION 2. TRANSFER. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignment
or authority to transfer, it shall be the duty of the Corporation to
issue, or to cause its transfer agent to issue, a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
SECTION 3. LOST, STOLEN OR DESTROYED CERTIFICATES. The Secretary may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact, satisfactory to the Secretary, by the person claiming the certificate of stock to be lost, stolen or destroyed. As a condition precedent to the issuance of a new certificate or certificates, the Secretary may require the owner of such lost, stolen or destroyed certificate or certificates to give the Corporation a bond in such sum and with such surety or sureties as the Secretary may direct as indemnity against any claims that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed or the issuance of the new certificate.
SECTION 4. RECORD DATE.
(a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 or less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
ARTICLE VII
GENERAL PROVISIONS
SECTION 1. FISCAL YEAR. The fiscal year of the Corporation shall end on September 30 of each year or on such other date as shall be fixed from time to time by the Board of Directors.
SECTION 2. CORPORATE SEAL. The Board of Directors may adopt a corporate seal and use the same by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
SECTION 3. RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each member of a committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporation's officers or employees, or committees of the Board of Directors, or by any other person as to matters the director, committee member or officer believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation.
SECTION 4. TIME PERIODS. In applying any provision of these Bylaws which requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded and the day of the event shall be included.
SECTION 5. DIVIDENDS. The Board of Directors may from time to time declare and the Corporation may pay dividends upon its outstanding shares of capital stock, in the manner and upon the terms and conditions provided by law and the Restated Certificate of Incorporation.
ARTICLE VIII
AMENDMENTS
In furtherance and not in limitation of the powers conferred upon it by law, the Board of Directors is expressly authorized to adopt, repeal, alter or amend the Bylaws of the Corporation by the vote of a majority of the entire Board of Directors. In addition to any requirements of law and any provision of the Restated Certificate of Incorporation, the stockholders of the Corporation may adopt, repeal, alter or amend any provision of the Bylaws upon the affirmative vote of the holders of 75% or more of the combined voting power of the then outstanding stock of the Corporation entitled to vote generally in the election of directors.
EXHIBIT 10.9
December 28, 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: EIGHTH AMENDMENT AND WAIVER TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (THIS "AMENDMENT")
Ladies and 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 definitions of "Beverage Accounts Sublimit", "Beverage Inventory Sublimit" and "Beverage Subsidiary" as set forth in Section 1 of the Agreement are amended and restated in their entirety, to read as follows:
"Beverage Accounts Sublimit" shall mean Two Hundred Thousand and No/100 Dollars ($200,000.00), as such amount is reduced from time to time pursuant to subsection 2(d)(iv) hereof.
"Beverage Inventory Sublimit" shall mean Two Hundred Thousand and No/100 Dollars ($200,000.00), as such amount is reduced from time to time pursuant to subsection 2(d)(iv) hereof.
"Beverage Subsidiary" shall mean Trinity.
(b) Section 1 of the Agreement is amended by adding thereto the following definitions of "Debt Service Coverage Ratio", "Prepayment Loan Limit" and "Term B Loan Maturity Date" in alphabetical order:
"Debt Service Coverage Ratio" shall mean, with respect to any
period, the ratio of (a) the sum for such period of (i) EBITDA (on a
consolidated basis for all Borrowers), plus (ii) cash proceeds
received by the Borrowers pursuant to a sale of substantially all of
the assets of Hawaiian Natural but not to exceed $2,454,000.00, plus
(iii) cash proceeds received by the Borrowers pursuant to a sale of
substantially all of the assets or equity interests of Trinity, to (b)
the sum for such period of (i) cash interest paid by Borrowers, plus
(ii) scheduled payments of Borrowers' current principal maturities of
long term debt and capitalized leases, plus (iii) Capital Expenditures
paid in cash, plus (iv) income and franchise taxes paid in cash by the
Borrowers, plus (v) any cash dividends or cash distributions made by
AMCON. Nothing in this definition shall be construed to constitute
Agent's or any Lender's consent to any transaction that is not
permitted by other provisions of this Agreement or the Other
Agreements.
"Prepayment Loan Limit" shall mean Fifty-Five Million and No/100 Dollars ($55,000,000.00).
"Term Loan B Maturity Date" shall mean March 30, 2008.
(c) The first sentence of Subsection 2(a) of the Agreement is amended and restated in its entirety, to read as follows:
Subject to the terms and conditions of this Agreement and the Other Agreements, during the Original Term and any Renewal Term, each Lender, severally and not jointly, agrees absent the occurrence of an Event of Default, to make its Pro Rata Share of revolving loans and advances (the "Revolving Loans") requested by Borrower Representative on behalf of each Borrower up to such Lender's Revolving Loan Commitment so long as after giving effect to such Revolving Loans, the sum of the aggregate unpaid principal balance of the Revolving Loans and the Letter of Credit Obligations does not exceed an amount up to the sum of the following sublimits (the "Revolving Loan Limit"):
(i) Up to eighty-five percent (85%) of the face amount (less maximum discounts, credits and allowances which may be taken by or granted to Account Debtors in connection therewith in the ordinary course of AMCON's business) of AMCON's Eligible Accounts or Fifty-Five Million and No/100 Dollars ($55,000,000.00), whichever is less; plus
(ii) Up to eighty-five percent (85%) of the lower of cost or market value of Eligible Cigarette Inventory or Twenty Million and No/100 Dollars ($20,000,000.00), whichever is less; plus
(iii) Up to seventy percent (70%) of the lower of cost or market value of AMCON's Eligible Inventory (consisting solely of AMCON's Eligible Inventory other than Eligible Cigarette Inventory set forth in clause (ii) above) or Fifteen Million and No/100 Dollars ($15,000,000.00), whichever is less; plus
(iv) Up to sixty percent (60%) of the lower of cost or market value of the Retail Subsidiaries' Eligible Inventory or the Retail Inventory Sublimit, whichever is less; plus
(v) Up to sixty percent (60%) of the lower of cost or market value of the Beverage Subsidiaries' Eligible Inventory or the Beverage Inventory Sublimit, whichever is less; plus
(vi) Up to eighty percent (80%) of the face amount (less maximum discounts, credits and allowances which may be taken by or granted to Account Debtors in connection therewith in the ordinary course of the Beverage Subsidiaries' business) of the Beverage Subsidiaries' Eligible Accounts or the Beverage Accounts Sublimit, whichever is less; plus
(vii) up to One Million Five Hundred Thousand and No/100 Dollars ($1,500,000.00) as a special accommodation ("Special Accommodation Overadvance") to be made available each Monday of every week and to be reduced to Zero and No/100 Dollars ($0.00) by each Thursday of the same week, provided, however, that Special Accommodation Overadvances shall not be made available after April 30, 2007; minus
(iix) such reserves as Agent elects, in its sole discretion to establish from time to time, including without limitation, a reserve with respect to Rate Hedging Obligations; provided, that the Revolving Loan Limit shall in no event exceed Fifty-Five Million and No/100 Dollars ($55,000,000.00) (the "Maximum Revolving Loan Limit") except as such amount may be increased or, following the occurrence of an Event of Default, decreased by Agent from time to time, in Agent's sole discretion.
(d) The proviso set forth in the first sentence of Subsection 2(d)(iii) of the Agreement is amended and restated in its entirety, to read as follows:
; provided that any remaining outstanding principal balance of Term Loan B shall be repaid on the Term Loan B Maturity Date.
(e) Section 10 of the Agreement is amended and restated in its entirety, to read as follows:
10. TERMINATION; AUTOMATIC RENEWAL.
THIS AGREEMENT SHALL BE IN EFFECT FROM THE DATE HEREOF UNTIL APRIL 30,
2009 (THE "ORIGINAL TERM") AND SHALL AUTOMATICALLY RENEW ITSELF FROM
YEAR TO YEAR THEREAFTER (EACH SUCH ONE-YEAR RENEWAL BEING REFERRED TO
HEREIN AS A "RENEWAL TERM") UNLESS (A) THE DUE DATE OF THE
LIABILITIES IS ACCELERATED PURSUANT TO SECTION 16 HEREOF; OR (B) A
BORROWER OR ANY LENDER ELECTS TO TERMINATE THIS AGREEMENT AT THE END
OF THE ORIGINAL TERM OR AT THE END OF ANY RENEWAL TERM BY GIVING THE
OTHER PARTIES HERETO WRITTEN NOTICE OF SUCH ELECTION AT LEAST NINETY
(90) DAYS PRIOR TO THE END OF THE ORIGINAL TERM OR THE THEN CURRENT
RENEWAL TERM. If one or more of the events specified in clauses (A)
and (B) occurs, then (i) Agent and Lenders shall not make any
additional Loans on or after the date identified as the date on which
the Liabilities are to be repaid; and (ii) this Agreement shall
terminate on the date thereafter that the Liabilities are paid in
full. At such time as Borrowers have repaid all of the Liabilities
and this Agreement has terminated, each Borrower shall deliver to
Agent and Lenders a release, in form and substance satisfactory to
Agent, of all obligations and liabilities of Agent and its Lenders and
their officers, directors, employees, agents, parents, subsidiaries
and affiliates to such Borrower, and if such Borrower is obtaining new
financing from another lender, such Borrower shall deliver such
lender's indemnification of Agent and Lenders, in form and substance
satisfactory to Agent, for checks which Agent has credited to such
Borrower's account, but which subsequently are dishonored for any
reason or for automatic clearinghouse or wire transfers not yet posted
to such Borrower's account. If, during the term of this Agreement,
Borrowers prepay all of the Liabilities and this Agreement is
terminated, Borrowers jointly and severally agree to pay to Agent, for
the benefit of the Lenders, as a prepayment fee, in addition to the
payment of all other Liabilities, an amount equal to (i) two percent
(2%) of the Prepayment Loan Limit if such prepayment occurs on or
before April 30, 2007, and (ii) one percent (1%) of the Prepayment
Loan Limit if such prepayment occurs after April 30, 2007 but on or
before April 30, 2008.
(f) Subsection 14(a) of the Agreement is amended and restated in its entirety, to read as follow:
(a) DEBT SERVICE COVERAGE RATIO.
Borrowers shall not permit the Debt Service Coverage Ratio, as of the last day of each fiscal quarter, beginning with the fiscal quarter ending September 30, 2007, for the twelve-month period then ending, to be less than 1.00 to 1.00.
(g) Subsection 14(d) of the Agreement is amended and restated in its entirety, to read as follows:
(d) EBITDA.
Borrowers shall not permit EBITDA (on a consolidated basis for all
Borrowers, excluding Hawaiian Natural and Trinity) to be less than (i)
One Million and No/100 Dollars ($1,000,000.00) as of each of December
31, 2006, December 31, 2007 and December 31, 2008, in each case for
the three-month period then ending, (ii) Two Million and No/100
Dollars ($2,000,000.00) as of each of March 31, 2007, March 31, 2008
and March 31, 2009, in each case for the six-month period then ending,
(iii) Four Million Five Hundred Thousand and No/100 Dollars
($4,500,000.00) as of each of June 30, 2007 and June 30, 2008, in each
case for the nine-month period then ending, and (iv) Seven Million and
No/100 Dollars ($7,000,000.00) as of each of September 30, 2007 and
September 30, 2008, in each case for the twelve-month period then
ending.
2. Agent and Lenders hereby waive any Event of Default existing under Subsection 15(b) of the Agreement as a result of the Borrowers permitting EBITDA (on a consolidated basis for all Borrowers, excluding Hawaiian Natural and Trinity) to be less than One Hundred Thousand and No/100 Dollars ($100,000.00) as of September 30, 2006 for the one-month period then ending, as prohibited under Subsection 14(d) of the Agreement. The waiver set forth in this Section 2 is a waiver of the specific Event of Default enumerated herein and is not, nor should it be construed to be, a waiver of any other existing or future Event of Default, whether or not similar to the Event of Default enumerated herein.
3. 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 $100,000, which fee shall be deemed fully earned by the Lenders as of the date hereof and shall be nonrefundable.
4. 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. Except as expressly set forth in Section 2 of 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.
5. 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.
6. 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.
7. 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.
8. 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 A. Jannaman Title: Vice President By: /s/ William C. Dippel Title: Executive Vice President |
ACKNOWLEDGED AND AGREED TO this 28th day of December 2006:
AMCON DISTRIBUTING COMPANY
By: /s/ Andrew C. Plummer Title: Vice President and Acting CFO HAWAIIAN NATURAL WATER COMPANY, INC. By: /s/ Andrew C. Plummer Title: Assistant Secretary CHAMBERLIN NATURAL FOODS, INC. By: /s/ Clifford W. Ginn Title: Vice President HEALTH FOOD ASSOCIATES, INC. By: /s/ Clifford W. Ginn Title: Vice President TRINITY SPRINGS, INC. By: /s/ Andrew C. Plummer Title: Assistant 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.
/s/ William F. Wright Date: December 28, 2006 |
EXHIBIT 10.26
GUARANTY AND SURETYSHIP AGREEMENT
This Guaranty and Suretyship Agreement (this "Agreement" or the "Guaranty") is made as of the 17th day of June, 2004 by William F. Wright ("Guarantor") in favor of AMCON Distributing Company, Inc., a Delaware corporation ("AMCON"). Capitalized terms not elsewhere defined herein shall have the meanings set forth in that certain Asset Purchase Agreement (the "Asset Purchase Agreement") dated as of April 24, 2004, as amended among AMCON, TSL Acquisition Corp, a Delaware corporation and a wholly-owned subsidiary of AMCON (the "Sub").
RECITALS
A. The Sub has purchased substantially all of the assets of Trinity pursuant to the terms of the Asset Purchase Agreement;
B. In connection with the transactions contemplated by the Asset Purchase Agreement, the Sub has issued to Trinity (a) a Promissory Note in the original principal amount of FIVE HUNDRED THOUSAND DOLLARS ($500,000) (the "Three Year Note"); (b) a Promissory Note in the original principal amount of TWO MILLION EIGHT HUNDRED TWENTY-EIGHT THOUSAND FOUR HUNDRED FORTY AND 00/100 DOLLARS ($2,828,440.00) (the "Ten Year Note"); and (c) pursuant to Section 11.1 of the Asset Purchase Agreement, certain royalty payment obligations with respect to the sale of water after the date hereof (the "Water Royalty");
C. As a condition to Trinity's obligation to enter into the Asset Purchase Agreement and perform its obligations thereunder, AMCON entered into a Guaranty and Suretyship Agreement (the "AMCON Guaranty") to guaranty the Sub's payment obligations under the Three Year Note, the Ten Year Note and the Water Royalty, subject to certain limitations set forth therein;
D. AMCON and LaSalle Bank National Association (in its individual capacity, "LaSalle"), a national banking association for itself, as a Lender, and as Agent ("Agent"), for all lenders that are now or hereafter parties to the Loan Agreement (as defined below) (the "Lenders"), Gold Bank, a Kansas state bank ("Gold Bank"), as a Lender, have entered into that certain Loan and Security Agreement dated June 1, 2001 as amended from time to time (the "Loan Agreement");
E. As partial inducement for the Agent to consent to the transactions contemplated by the Asset Purchase Agreement in order to avoid a default under the Loan Agreement, Guarantor has entered into this Agreement to guaranty any and all indebtedness of AMCON to Trinity under the AMCON Guaranty, subject to certain limitations set forth therein and herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor hereby agrees as follows:
AGREEMENT
1. Definitions. Capitalized terms used in this Agreement, unless otherwise defined in this Agreement, shall have the meanings ascribed to them in the Asset Purchase Agreement.
2. Representations and Warranties. Guarantor hereby represents and warrants to AMCON as follows:
(i) The execution and delivery by Guarantor of this Agreement and the performance by Guarantor of its obligations hereunder do not and will not contravene or conflict with any law, regulation or rule, any license, agreement, or instrument to which Guarantor is a party or by which Guarantor or any of Guarantor's property may be bound or affected, or any judgment, order or decree of any court of any federal, state, or local commission, board, or other administrative agency by which Guarantor or any of Guarantor's property may be bound or affected.
(ii) This Agreement is the legal, valid, and binding obligation of Guarantor, enforceable against Guarantor in accordance with its terms.
3. Guaranty. Guarantor absolutely, irrevocably and unconditionally guaranties the prompt payment when due of (i) all amounts that AMCON is legally required to pay and pays to Trinity under the Three Year Note, the Ten Year Note and the Water Royalty (each in accordance with their respective terms), including, without limitation, costs and expenses of collection, which shall include reasonable attorneys fees and paralegals' fees and all court costs, plus (ii) interest on the amount of any such payment computed at the highest rate provided in the Loan Agreement; provided that, Guarantor's total payment obligations with respect to its guaranty of the Water Royalty shall in no event exceed $5,000,000 in the aggregate (collectively referred to herein as the "Obligations"). Notwithstanding anything to the contrary contained herein, to satisfy the Obligations when due, AMCON shall be entitled to make a claim against all or any portion of the assets of Guarantor. Guarantor further agrees that:
(a) This Guaranty is in all respects continuing, absolute, and unconditional.
(b) This Guaranty is a guaranty of both performance and payment when due, and not of collection.
(c) AMCON may, from time to time, at AMCON's sole discretion and without notice to Guarantor, take any or all of the following actions:
(i) Accept a security interest in any property to secure payment of any or all of the Obligations;
(ii) Obtain the primary or secondary obligation of any third party in addition to the Guarantor with respect to any or all of the Obligations;
(iii) Release, compromise, extend, alter, or modify any of the Obligations or any obligation of any nature of any other obligor with respect to any of the Obligations;
(iv) Release, compromise, or extend any obligation of Guarantor hereunder;
(v) Release any security interest in, or surrender, release, or permit any substitution or exchange for, all or any part of any property securing any of the Obligations or any obligation hereunder, or release, compromise, extend, alter, or modify any obligation of any nature of any obligor with respect to any such property; and
(vi) resort to or proceed against Guarantor for performance or payment of any of the Obligations whether or not Trinity shall have proceeded against Sub or any other obligor primarily or secondarily obligated with respect to any of the Obligations, shall have resorted to any property securing any of the Obligations or any obligation hereunder, or shall have pursued any other remedy.
(d) As between AMCON and the Guarantor, any amounts received by Trinity from whatever source on account of any Obligation (arising by whatever means) shall be applied by AMCON toward the payment of any Obligation then due and payable, in the following order:
(i) To Obligations that have matured; provided that if the payment is insufficient to pay all Obligations that have matured, pro rata between the matured Obligations according to the relative principal amounts due thereunder; and
(ii) If no Obligations are matured and unpaid, then pro rata between the unmatured Obligations according to the relative principal amounts due thereunder.
Notwithstanding any performance or payments made by or for the account
of Guarantor pursuant to this Guaranty, Guarantor will not be
subrogated to any rights of AMCON until such time as AMCON shall have
received performance and payment in full of all of the Obligations and
performance of all obligations of the Guarantor hereunder. Without
limiting the generality of the foregoing, if Trinity is required at
any time to return all or part of any payment applied by Trinity to
the payment of the Obligations or any costs or expenses covered by
this Guaranty, whether by virtue of the insolvency, bankruptcy, or
reorganization of AMCON or otherwise, the Obligations to which the
returned payment was applied shall be deemed to have continued in
existence and this Guaranty shall continue to be effective or to be
reinstated, as the case may be, as to such Obligations, as though such
payment had not been received and such application by Trinity had not
been made.
(e) Guarantor waives:
(i) Notice of the acceptance by AMCON of this Guaranty;
(ii) Notice of the existence, creation, release, compromise, extension, alteration, modification, non-performance, or non-payment of any or all of the Obligations;
(iii) Presentment, demand, notice of dishonor, protest, and all other notices whatsoever; and
(iv) All diligence in collection of or realization upon any payments on, or assurance of performance of, any of the Obligations or any obligation hereunder, or in collection on, realization upon, or protection of any security for, or guaranty of, any of the Obligations or any obligation hereunder.
(f) As between the Guarantor and AMCON, AMCON may assign or otherwise transfer the right to receive performance of or payment upon any of the Obligations to any third party.
4. Occurrence of Default. Notwithstanding anything in this Agreement
to the contrary, AMCON will not make any demand for payment or
performance hereunder against Guarantor and Guarantor shall not be
obligated to pay or perform any obligation hereunder unless (i) an
"Event of Default" has occurred under the Three Year Note and/or the
Ten Year Note, or (ii) a "Water Royalty Payment Default" has occurred.
For this purpose, a "Water Royalty Payment Default" shall occur if Sub
shall fail to pay any installment when due of the Water Royalty
pursuant to Section 11.1 of the Asset Purchase Agreement, and such
failure shall continue for a period of five (5) days after Trinity
provides written notice of such failure to Sub; provided, however,
that in the event any amount of the Water Royalty is subject to any
bona fide dispute, a Water Royalty Payment Default shall not occur
unless Sub fails to pay the amount of the Water Royalty that is not in
dispute when originally due (and such failure is not cured within five
(5) days after Trinity provides written notice of such failure to Sub)
or fails to pay the disputed amount finally adjudicated to be due by a
court of competent jurisdiction from which no further appeal may be
effected, and such payment is not made within twenty (20) days after
the judgment of such court becomes final and no longer subject to
appeal.
5. Notices. All notices and communications under this Agreement shall be in writing and shall be deemed to have been duly given when delivered by messenger, by overnight delivery service, or by facsimile (receipt confirmed), or mailed by first class certified mail, return receipt requested; if to the Guarantor, at: P.O. Box 9525, Rancho Santa Fe, CA 92067, and if to AMCON, at: Michael D. James, Chief Financial Officer, 7405 Irvington Road, Omaha, NE 68122; or in each case to such other address respectively as the party shall have specified by notice to the other.
6. Integration, Assignment, Modification, Payment of Expenses and Construction. This Guaranty constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes any prior written or oral agreements between the Guarantor and AMCON with respect to the subject matter herein. This Guaranty may not be assigned by Guarantor without the prior written consent of AMCON, which may be withheld for any reason whatsoever. Subject to the foregoing, this Guaranty will inure to the benefit of AMCON, and be binding upon Guarantor, and its successors and assigns. This Guaranty may be amended or modified only by a writing signed by Guarantor and AMCON, which amendment must be consented to by the Agent. The Guarantor shall pay all of AMCON's costs and expenses (including, without limitation, costs and expenses of litigation and reasonable attorneys' fees and paralegals' fees) in enforcing or endeavoring to realize upon this Guaranty which is not paid when due. The unenforceability or invalidity of any provision of this Guaranty shall not affect the validity of the remainder of this Guaranty.
7. Waiver. The failure of AMCON to insist upon strict performance of any of the terms, conditions, agreements, or covenants in this Guaranty in any one or more instances shall not be deemed to be a waiver by AMCON of its rights to enforce thereafter any of such terms, conditions, agreements, or covenants. Any waiver by AMCON of any of the terms, conditions, agreements, or covenants in this Guaranty must be in writing signed by AMCON.
8. Applicable Law. This Guaranty will be governed by, and construed and interpreted in accordance with, the laws of state of Nebraska.
9. Section Headings. The section headings used in this Guaranty are for the convenience of AMCON and the Guarantor only and shall not affect the construction or interpretation of the provisions of this Guaranty.
Guarantor has executed this Guaranty as of the date set forth above.
By: /s/ William F. Wright |
EXHIBIT 10.40
December 29, 2006
Mr. Christopher H. Atayan
Chief Executive Officer
AMCON Distributing Company
515 North State Street, Ste. 2650
Chicago, IL 60610
Dear Chris:
AMCON Distributing Company, and its subsidiaries and affiliates ("AMCON"), recognizes that your contribution to the growth and success of AMCON will continue to be substantial and desires to assure AMCON of your continued employment. In this connection, the Board of Directors of AMCON (the "Board") recognizes that, as is the case with many publicly-held corporations, the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of AMCON and its stockholders.
Accordingly, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of AMCON's management, including you, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of AMCON.
In order to induce you to remain in the employ of AMCON, AMCON agrees
that you shall receive the severance benefits set forth in this letter
agreement ("Agreement") in the event your employment with AMCON is
terminated subsequent to a "Change in Control of AMCON" (as defined in
Section 2(a) hereof) or under the other circumstances described below.
1. TERM OF AGREEMENT. This Agreement will commence on the date hereof and shall continue in effect until December 31, 2008; provided, however, that commencing on December 31, 2007 and each December 31 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than September 30 of that year, AMCON shall have given notice that it does not wish to extend this Agreement; provided, further that, if a Change in Control of AMCON shall have occurred during the original or extended term of this Agreement, the term of this Agreement shall continue in effect for a period of twenty-four (24) months beyond the month in which such Change in Control of AMCON occurred.
2. CHANGE IN CONTROL OF AMCON.
(a) For purposes of this Agreement, a "Change in Control of AMCON" and "Change in Control" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not AMCON is then subject to such reporting requirement; provided, that, without limitation, such a change in control shall be deemed to have occurred if:
(i) any person (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act) (a "Person") is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of AMCON (not including in the amount of the
securities beneficially owned by such person any such securities
acquired directly from AMCON or its affiliates) representing 50
percent (50%) or more of the combined voting power of AMCON's then
outstanding voting securities; provided, however, that for purposes of
this Agreement the term "Person" shall not include (A) AMCON or any of
its subsidiaries, (B) a trustee or other fiduciary holding securities
under an employee benefit plan of AMCON or any of its subsidiaries,
(C) an underwriter temporarily holding securities pursuant to an
offering of such securities, (D) a corporation, partnership, limited
liability company or other entity owned, directly or indirectly, by
the stockholders of AMCON in substantially the same proportions as
their ownership of stock of AMCON, or (E) any individual, entity or
group involved in the acquisition of AMCON's voting securities in
connection with which, pursuant to Rule 13d-1 promulgated pursuant to
the Exchange Act, such individual, entity or group is permitted to,
and actually does, report its beneficial ownership on Schedule 13G (or
any successor Schedule); provided that, if any such individual, entity
or group subsequently becomes required to or does report its
beneficial ownership on Schedule 13D (or any successor Schedule),
then, for purposes of this paragraph, such individual, entity or group
shall be deemed to have first acquired, on the first date on which
such individual, entity or group becomes required to or does so
report, beneficial ownership of all of AMCON's then outstanding voting
securities beneficially owned by it on such date; and provided,
further, however, that for purposes of this paragraph (i), there shall
be excluded any Person who becomes such a beneficial owner in
connection with an Excluded Transaction (as defined in paragraph (ii)
below); or
(ii) there is consummated a merger or consolidation of AMCON or any direct or indirect subsidiary thereof with any other corporation that is not then a direct or indirect subsidiary of AMCON (a "Business Combination"), other than a merger or consolidation (an "Excluded Transaction") which would result in:
(A) a Business Combination that in substance constitutes a disposition of a division, business unit, or subsidiary; or
(B) a Business Combination that would result in AMCON being no longer required to file reports under the Exchange Act.
(iii) the stockholders of AMCON approve a plan of a complete liquidation or dissolution of AMCON or there is consummation of a sale or other disposition of all or substantially all of the assets of AMCON, other than to a corporation with respect to which, following such sale or other disposition, more than 50% of the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of AMCON's then outstanding voting securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of AMCON's then outstanding voting securities.
(b) Notwithstanding Section 2(a), a Change in Control shall be deemed not to occur solely because there is a transfer of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of AMCON from (i) any one or more of William F. Wright, Aristide Investments, L.P., a California limited partnership, Allen D. Petersen, Draupnir, LLC, a Delaware limited liability company, any member of the family of William F. Wright or any member of the family of Allen D. Petersen, to (ii) any one or more of the Persons listed in clause (i) of this subsection (b).
(c) You agree that, subject to the terms and conditions of this Agreement, in the event of a Change in Control of AMCON, you will remain in the employ of AMCON for a period of six (6) months from and after the occurrence of such Change in Control of AMCON; provided, however, that if during such six-month period (A) your employment is involuntarily terminated by AMCON other than for Cause or (B) you terminate your employment during such six-month period for Good Reason, you shall not be required to remain in AMCON's employ. The foregoing shall in no event limit or otherwise affect your rights under any other provision of this Agreement.
3. TERMINATION FOLLOWING A CHANGE OF CONTROL. If any of the events described in Section 2(a) hereof constituting a Change in Control of AMCON shall have occurred, you shall be entitled to the benefits provided in Section 4(d) hereof upon the termination of your employment upon or following the Change in Control and during the term of this Agreement unless such termination is (i) because of your death or Disability, (ii) by AMCON for Cause, (iii) by you other than for Good Reason or (iv) on or after the date that you attain age sixty-five (65).
(a) Disability. If, as a result of your incapacity due to physical or mental illness which in the opinion of a licensed physician renders you incapable of performing your assigned duties with AMCON, you shall have been absent from the full-time performance of your duties with AMCON for six (6) consecutive months, and within thirty (30) days after written Notice of Termination is given you shall not have returned to the full-time performance of your duties, AMCON may terminate your employment for "Disability."
(b) Cause. Termination by AMCON of your employment for "Cause"
shall mean termination upon (i) the willful and continued failure by
you to substantially perform your duties with AMCON (other than any
such failure resulting from termination by you for Good Reason or any
such failure resulting from your incapacity due to physical or mental
illness), after a demand for substantial performance is delivered to
you that specifically identifies the manner in which AMCON believes
that you have not substantially performed your duties, and you have
failed to resume substantial performance of your duties on a
continuous basis within fourteen (14) days of receiving such demand,
(ii) the willful engaging by you in conduct which is demonstrably and
materially injurious to AMCON, monetarily or otherwise or (iii) your
conviction of a felony or conviction of a misdemeanor which impairs
your ability substantially to perform your duties with AMCON. For
purposes of this Subsection, no act, or failure to act, on your part
shall be deemed "willful" unless done, or omitted to be done, by you
not in good faith and without reasonable belief that your action or
omission was in the best interest of AMCON.
(c) Good Reason. You shall be entitled to terminate your employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without your express written consent, the occurrence after a Change in Control of AMCON (each an "Applicable Event") of any one or more of the following:
(i) the assignment to you of duties inconsistent with your position immediately prior to the Applicable Event or a reduction or adverse alteration in the nature of your position, duties, status or responsibilities from those in effect immediately prior to the Applicable Event;
(ii) a reduction by AMCON in your annualized and monthly or semi-monthly rate of base salary ("Base Salary") as in effect on the date hereof or as the same shall be increased from time to time;
(iii) AMCON's requiring you to be based at a location in excess of fifty (50) miles from the location where you are based immediately prior to the Applicable Event;
(iv) the failure by AMCON to continue, on no less favorable terms to you as the same are in effect immediately prior to the Applicable Event, all of AMCON's employee benefit, incentive compensation, bonus, stock option and stock award plans, programs, policies, practices or arrangements in which you participate (or substantially equivalent successor plans, programs, policies, practices or arrangements) or the failure by AMCON to continue your participation therein on substantially the same (or more favorable to you) basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed immediately prior to the Applicable Event;
(v) the failure of AMCON to obtain an agreement from any successor to AMCON to assume and agree to perform this Agreement, as contemplated in Section 6 hereof; and
(vi) any purported termination by AMCON of your employment that is not effected pursuant to a Notice of Termination satisfying the requirements of subparagraph (d) below, and for purposes of this Agreement, no such purported termination shall be effective.
Your right to terminate your employment pursuant to this Subsection shall not be affected by your incapacity due to physical or mental illness. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. Your determination of the existence of Good Reason shall be final and conclusive unless such determination is not made in good faith and is made without reasonable belief in the existence of Good Reason.
(d) Notice of Termination. Any termination by AMCON for Cause or for Disability or by you for Good Reason shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. The failure by you to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any of your rights hereunder or preclude you from asserting such fact or circumstance in enforcing your rights hereunder.
(e) Date of Termination. "Date of Termination" shall mean the date specified in the Notice of Termination, when such a notice is required, or in any other case upon ceasing to perform services to AMCON.
4. COMPENSATION UPON TERMINATION OR DURING DISABILITY. After an Applicable Event has occurred, if, during the term of this Agreement, your employment is terminated or you are in a period of Disability the following shall be applicable:
(a) During any period prior to your Date of Termination that you fail to perform your full-time duties with AMCON as a result of Disability, your total compensation, including your Base Salary, bonus and any benefits, will continue unaffected until either you return to the full-time performance of your duties or your employment is terminated pursuant to Section 3(a) hereof.
(b) If your employment shall be terminated by AMCON for Cause or by you other than for Good Reason, AMCON shall pay you your full Base Salary, payable in accordance with AMCON's standard payroll practices, through the Date of Termination at the rate in effect at the time Notice of Termination is given or on the Date of Termination if no Notice of Termination is required hereunder plus all other amounts to which you are entitled under any compensation or benefit plan of AMCON at the time such payments are due in accordance with the applicable plan, and AMCON shall have no further obligations to you under this Agreement.
(c) If your employment terminates by reason of your death, your benefits shall be determined in accordance with AMCON's retirement, survivor's benefits, insurance and other applicable programs and plans then in effect.
(d) If your employment by AMCON is either terminated by AMCON (other than for Cause or Disability) or terminated by you for Good Reason, in either case upon or following a Change in Control, you shall be entitled to the following benefits.
(i) Accrued Compensation and Benefits. The Corporation shall provide you:
(A) the compensation and benefits accrued through the Date of Termination to the extent not theretofore provided;
(B) a lump sum cash amount equal to the value of your unused vacation days accrued through the Date of Termination; and
(C) your normal post-termination compensation and benefits under AMCON's retirement, insurance and other compensation and benefit plans as in effect immediately prior to the Date of Termination, or if more favorable to you, immediately prior to the Applicable Event.
The amounts set forth in (A) and (B) above shall be payable on your next regular payroll date following the Date of Termination. The amounts set forth in (C) above shall be payable in accordance with the terms of the applicable plan, program or arrangement.
(ii) Lump Sum Severance Payment. The Corporation shall provide to you a severance payment in the form of a cash lump sum distribution equal to your Current Annual Compensation (as defined below) multiplied times two (2); provided, however, that if you attain age 65 within three years of the Date of Termination, your benefit will be limited to a pro rata portion of such benefit based on a fraction equal to the number of full and partial months existing between the Date of Termination and your sixty-fifth (65th) birthday divided by 36 months.
For purposes of this paragraph, the term "Current Annual Compensation" shall mean the sum of:
(A) your Base Salary in effect immediately preceding the Date of Termination; and
(B) the average of the actual bonus awarded to you, if any, under any annual bonus plan of AMCON or its predecessor for the three years immediately preceding the Date of Termination.
The severance payment shall be payable upon the first day following the six (6) month anniversary of the Date of Termination.
(iii) Continuation of Welfare Benefits. Subject to the benefits offset described below, AMCON will arrange to make available to you life and health insurance benefits during the Welfare Continuation Period (as defined below) that are substantially similar to those which you were receiving under an AMCON-sponsored welfare benefit plan immediately prior to the Date of Termination or, if more favorable to you, immediately prior to the Applicable Event. These benefits will be provided at a cost to you that is no greater than the amount paid for such benefits by active employees who participate in such Corporation-sponsored welfare benefit plan or, if less, the amount paid for such benefits by you immediately prior to the Applicable Event. The Welfare Continuation Period extends from the Date of Termination for a period of 24 months, or, if earlier, until your 65th birthday.
The benefits otherwise receivable by you pursuant to this paragraph
(iii) shall be reduced to the extent comparable benefits are actually
received by you during the Welfare Continuation Period. For purposes
of complying with the terms of this offset, you are obligated to
report to AMCON the amount of any such benefits actually received.
(e) To the extent that the payment of any salary or benefits under this Agreement would cause any part thereof to be subject to additional taxes and interest under Section 409A of the Code, then the payment of such salary or benefits, as the case may be, shall be (a) deferred to the earliest date upon which such benefits can be paid without being subject to such additional taxes and interest, or (b) if such payment is not capable of being deferred consistent with Section 409A of the Code, modified in amount, structure, timing and/or form of payment so that the maximum portion of such salary or benefits can be paid, as the case may be, without being subject to additional taxes and interest under Section 409A of the Code.
5. SUCCESSORS; BINDING AGREEMENT.
(a) AMCON will request any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of AMCON or of any division or subsidiary thereof employing you to expressly assume and agree to perform this Agreement in the same manner and to the same extent that AMCON would be required to perform it if no such succession had taken place. Failure of AMCON to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from AMCON in the same amount and on the same terms as you would be entitled hereunder if you terminate your employment for Good Reason following an Applicable Event, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination.
(b) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs or assigns. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your heirs, successors, assigns, or other designee or, if there is no such designee, to your estate.
6. NOTICE. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement.
7. MISCELLANEOUS.
(a) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware.
(b) The Corporation's obligation to pay benefits under this Agreement shall be merely an unfunded and unsecured promise of AMCON to pay money in the future. You, your beneficiaries, and your heirs, successors and assigns, shall have no secured interest or right, title or claim in any property or assets of AMCON.
8. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
9. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.
10. CLAIMS AND ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Any such arbitration shall be held in Omaha, Nebraska. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.
11. ENTIRE AGREEMENT. This Agreement supersedes any other agreement or understanding between the parties hereto with respect to the issues that are the subject matter of this Agreement.
12. AMENDMENT. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives, except that AMCON may amend this Agreement from time to time without your consent to the extent deemed necessary or appropriate, in its sole discretion, to effect compliance with section 409A of the Code, including regulations and interpretations thereunder, which amendments may result in a reduction of benefits provided hereunder and/or other unfavorable changes to you. You hereby irrevocably consent to such amendments. This Agreement shall be interpreted and administered in accordance with section 409A of the Code and the regulations and interpretations that may be promulgated thereunder.
13. EFFECTIVE DATE. This Agreement shall become effective as of the date first set forth above.
If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to AMCON the enclosed copy of this letter which will then constitute our agreement on this subject.
Sincerely,
AMCON DISTRIBUTING COMPANY
By: /s/ William F. Wright Title: Chairman |
Agreed to this 29th day of December, 2006
By: /s/ Christopher H. Atayan |
Exhibit 10.41
December 29, 2006
Mrs. Kathleen M. Evans
President
AMCON Distributing Company
7405 Irvington Road
Omaha, NE 68122
Dear Kathy:
AMCON Distributing Company, and its subsidiaries and affiliates ("AMCON"), recognizes that your contribution to the growth and success of AMCON will continue to be substantial and desires to assure AMCON of your continued employment. In this connection, the Board of Directors of AMCON (the "Board") recognizes that, as is the case with many publicly-held corporations, the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of AMCON and its stockholders.
Accordingly, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of AMCON's management, including you, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of AMCON.
In order to induce you to remain in the employ of AMCON, AMCON agrees
that you shall receive the severance benefits set forth in this letter
agreement ("Agreement") in the event your employment with AMCON is
terminated subsequent to a "Change in Control of AMCON" (as defined in
Section 2(a) hereof) or under the other circumstances described below.
1. TERM OF AGREEMENT. This Agreement will commence on the date hereof and shall continue in effect until December 31, 2008; provided, however, that commencing on December 31, 2007 and each December 31 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than September 30 of that year, AMCON shall have given notice that it does not wish to extend this Agreement; provided, further that, if a Change in Control of AMCON shall have occurred during the original or extended term of this Agreement, the term of this Agreement shall continue in effect for a period of twenty-four (24) months beyond the month in which such Change in Control of AMCON occurred.
2. CHANGE IN CONTROL OF AMCON.
(a) For purposes of this Agreement, a "Change in Control of AMCON" and "Change in Control" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not AMCON is then subject to such reporting requirement; provided, that, without limitation, such a change in control shall be deemed to have occurred if:
(i) any person (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act) (a "Person") is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of AMCON (not including in the amount of the
securities beneficially owned by such person any such securities
acquired directly from AMCON or its affiliates) representing 50
percent (50%) or more of the combined voting power of AMCON's then
outstanding voting securities; provided, however, that for purposes of
this Agreement the term "Person" shall not include (A) AMCON or any of
its subsidiaries, (B) a trustee or other fiduciary holding securities
under an employee benefit plan of AMCON or any of its subsidiaries,
(C) an underwriter temporarily holding securities pursuant to an
offering of such securities, (D) a corporation, partnership, limited
liability company or other entity owned, directly or indirectly, by
the stockholders of AMCON in substantially the same proportions as
their ownership of stock of AMCON, or (E) any individual, entity or
group involved in the acquisition of AMCON's voting securities in
connection with which, pursuant to Rule 13d-1 promulgated pursuant to
the Exchange Act, such individual, entity or group is permitted to,
and actually does, report its beneficial ownership on Schedule 13G (or
any successor Schedule); provided that, if any such individual, entity
or group subsequently becomes required to or does report its
beneficial ownership on Schedule 13D (or any successor Schedule),
then, for purposes of this paragraph, such individual, entity or group
shall be deemed to have first acquired, on the first date on which
such individual, entity or group becomes required to or does so
report, beneficial ownership of all of AMCON's then outstanding voting
securities beneficially owned by it on such date; and provided,
further, however, that for purposes of this paragraph (i), there shall
be excluded any Person who becomes such a beneficial owner in
connection with an Excluded Transaction (as defined in paragraph (ii)
below); or
(ii) there is consummated a merger or consolidation of AMCON or any direct or indirect subsidiary thereof with any other corporation that is not then a direct or indirect subsidiary of AMCON (a "Business Combination"), other than a merger or consolidation (an "Excluded Transaction") which would result in:
(A) a Business Combination that in substance constitutes a disposition of a division, business unit, or subsidiary; or
(B) a Business Combination that would result in AMCON being no longer required to file reports under the Exchange Act.
(iii) the stockholders of AMCON approve a plan of a complete liquidation or dissolution of AMCON or there is consummation of a sale or other disposition of all or substantially all of the assets of AMCON, other than to a corporation with respect to which, following such sale or other disposition, more than 50% of the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of AMCON's then outstanding voting securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of AMCON's then outstanding voting securities.
(b) Notwithstanding Section 2(a), a Change in Control shall be deemed not to occur solely because there is a transfer of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of AMCON from (i) any one or more of William F. Wright, Aristide Investments, L.P., a California limited partnership, Allen D. Petersen, Draupnir, LLC, a Delaware limited liability company, any member of the family of William F. Wright or any member of the family of Allen D. Petersen, to (ii) any one or more of the Persons listed in clause (i) of this subsection (b).
(c) You agree that, subject to the terms and conditions of this Agreement, in the event of a Change in Control of AMCON, you will remain in the employ of AMCON for a period of six (6) months from and after the occurrence of such Change in Control of AMCON; provided, however, that if during such six-month period (A) your employment is involuntarily terminated by AMCON other than for Cause or (B) you terminate your employment during such six-month period for Good Reason, you shall not be required to remain in AMCON's employ. The foregoing shall in no event limit or otherwise affect your rights under any other provision of this Agreement.
3. TERMINATION FOLLOWING A CHANGE IN CONTROL. If any of the events described in Section 2(a) hereof constituting a Change in Control of AMCON shall have occurred, you shall be entitled to the benefits provided in Section 4(d) hereof upon the termination of your employment upon or following the Change in Control and during the term of this Agreement unless such termination is (i) because of your death or Disability, (ii) by AMCON for Cause, (iii) by you other than for Good Reason or (iv) on or after the date that you attain age sixty-five (65).
(a) Disability. If, as a result of your incapacity due to physical or mental illness which in the opinion of a licensed physician renders you incapable of performing your assigned duties with AMCON, you shall have been absent from the full-time performance of your duties with AMCON for six (6) consecutive months, and within thirty (30) days after written Notice of Termination is given you shall not have returned to the full-time performance of your duties, AMCON may terminate your employment for "Disability."
(b) Cause. Termination by AMCON of your employment for "Cause"
shall mean termination upon (i) the willful and continued failure by
you to substantially perform your duties with AMCON (other than any
such failure resulting from termination by you for Good Reason or any
such failure resulting from your incapacity due to physical or mental
illness), after a demand for substantial performance is delivered to
you that specifically identifies the manner in which AMCON believes
that you have not substantially performed your duties, and you have
failed to resume substantial performance of your duties on a
continuous basis within fourteen (14) days of receiving such demand,
(ii) the willful engaging by you in conduct which is demonstrably and
materially injurious to AMCON, monetarily or otherwise or (iii) your
conviction of a felony or conviction of a misdemeanor which impairs
your ability substantially to perform your duties with AMCON. For
purposes of this Subsection, no act, or failure to act, on your part
shall be deemed "willful" unless done, or omitted to be done, by you
not in good faith and without reasonable belief that your action or
omission was in the best interest of AMCON.
(c) Good Reason. You shall be entitled to terminate your employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without your express written consent, the occurrence after a Change in Control of AMCON (each an "Applicable Event") of any one or more of the following:
(i) the assignment to you of duties inconsistent with your position immediately prior to the Applicable Event or a reduction or adverse alteration in the nature of your position, duties, status or responsibilities from those in effect immediately prior to the Applicable Event;
(ii) a reduction by AMCON in your annualized and monthly or semi-monthly rate of base salary ("Base Salary") as in effect on the date hereof or as the same shall be increased from time to time;
(iii) AMCON's requiring you to be based at a location in excess of fifty (50) miles from the location where you are based immediately prior to the Applicable Event;
(iv) the failure by AMCON to continue, on no less favorable terms to you as the same are in effect immediately prior to the Applicable Event, all of AMCON's employee benefit, incentive compensation, bonus, stock option and stock award plans, programs, policies, practices or arrangements in which you participate (or substantially equivalent successor plans, programs, policies, practices or arrangements) or the failure by AMCON to continue your participation therein on substantially the same (or more favorable to you) basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed immediately prior to the Applicable Event;
(v) the failure of AMCON to obtain an agreement from any successor to AMCON to assume and agree to perform this Agreement, as contemplated in Section 6 hereof; and
(vi) any purported termination by AMCON of your employment that is not effected pursuant to a Notice of Termination satisfying the requirements of subparagraph (d) below, and for purposes of this Agreement, no such purported termination shall be effective.
Your right to terminate your employment pursuant to this Subsection shall not be affected by your incapacity due to physical or mental illness. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. Your determination of the existence of Good Reason shall be final and conclusive unless such determination is not made in good faith and is made without reasonable belief in the existence of Good Reason.
(d) Notice of Termination. Any termination by AMCON for Cause or for Disability or by you for Good Reason shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. The failure by you to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any of your rights hereunder or preclude you from asserting such fact or circumstance in enforcing your rights hereunder.
(e) Date of Termination. "Date of Termination" shall mean the date specified in the Notice of Termination, when such a notice is required, or in any other case upon ceasing to perform services to AMCON.
4. COMPENSATION UPON TERMINATION OR DURING DISABILITY. After an Applicable Event has occurred, if, during the term of this Agreement, your employment is terminated or you are in a period of Disability the following shall be applicable:
(a) During any period prior to your Date of Termination that you fail to perform your full-time duties with AMCON as a result of Disability, your total compensation, including your Base Salary, bonus and any benefits, will continue unaffected until either you return to the full-time performance of your duties or your employment is terminated pursuant to Section 3(a) hereof.
(b) If your employment shall be terminated by AMCON for Cause or by you other than for Good Reason, AMCON shall pay you your full Base Salary, payable in accordance with AMCON's standard payroll practices, through the Date of Termination at the rate in effect at the time Notice of Termination is given or on the Date of Termination if no Notice of Termination is required hereunder plus all other amounts to which you are entitled under any compensation or benefit plan of AMCON at the time such payments are due in accordance with the applicable plan, and AMCON shall have no further obligations to you under this Agreement.
(c) If your employment terminates by reason of your death, your benefits shall be determined in accordance with AMCON's retirement, survivor's benefits, insurance and other applicable programs and plans then in effect.
(d) If your employment by AMCON is either terminated by AMCON (other than for Cause or Disability) or terminated by you for Good Reason, in either case upon or following a Change in Control, you shall be entitled to the following benefits.
(i) Accrued Compensation and Benefits. The Corporation shall provide you:
(A) the compensation and benefits accrued through the Date of Termination to the extent not theretofore provided;
(B) a lump sum cash amount equal to the value of your unused vacation days accrued through the Date of Termination; and
(C) your normal post-termination compensation and benefits under AMCON's retirement, insurance and other compensation and benefit plans as in effect immediately prior to the Date of Termination, or if more favorable to you, immediately prior to the Applicable Event.
The amounts set forth in (A) and (B) above shall be payable on your next regular payroll date following the Date of Termination. The amounts set forth in (C) above shall be payable in accordance with the terms of the applicable plan, program or arrangement.
(ii) Lump Sum Severance Payment. The Corporation shall provide to you a severance payment in the form of a cash lump sum distribution equal to your Current Annual Compensation (as defined below) multiplied times two (2); provided, however, that if you attain age 65 within three years of the Date of Termination, your benefit will be limited to a pro rata portion of such benefit based on a fraction equal to the number of full and partial months existing between the Date of Termination and your sixty-fifth (65th) birthday divided by 36 months.
For purposes of this paragraph, the term "Current Annual Compensation" shall mean the sum of:
(A) your Base Salary in effect immediately preceding the Date of Termination; and
(B) the average of the actual bonus awarded to you, if any, under any annual bonus plan of AMCON or its predecessor for the three years immediately preceding the Date of Termination.
The severance payment shall be payable upon the first day following the six (6) month anniversary of the Date of Termination.
(iii) Continuation of Welfare Benefits. Subject to the benefits offset described below, AMCON will arrange to make available to you life and health insurance benefits during the Welfare Continuation Period (as defined below) that are substantially similar to those which you were receiving under an AMCON-sponsored welfare benefit plan immediately prior to the Date of Termination or, if more favorable to you, immediately prior to the Applicable Event. These benefits will be provided at a cost to you that is no greater than the amount paid for such benefits by active employees who participate in such Corporation-sponsored welfare benefit plan or, if less, the amount paid for such benefits by you immediately prior to the Applicable Event. The Welfare Continuation Period extends from the Date of Termination for a period of 24 months, or, if earlier, until your 65th birthday.
The benefits otherwise receivable by you pursuant to this paragraph
(iii) shall be reduced to the extent comparable benefits are actually
received by you during the Welfare Continuation Period. For purposes
of complying with the terms of this offset, you are obligated to
report to AMCON the amount of any such benefits actually received.
(e) To the extent that the payment of any salary or benefits under this Agreement would cause any part thereof to be subject to additional taxes and interest under Section 409A of the Code, then the payment of such salary or benefits, as the case may be, shall be (a) deferred to the earliest date upon which such benefits can be paid without being subject to such additional taxes and interest, or (b) if such payment is not capable of being deferred consistent with Section 409A of the Code, modified in amount, structure, timing and/or form of payment so that the maximum portion of such salary or benefits can be paid, as the case may be, without being subject to additional taxes and interest under Section 409A of the Code.
5. SUCCESSORS; BINDING AGREEMENT.
(a) AMCON will request any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of AMCON or of any division or subsidiary thereof employing you to expressly assume and agree to perform this Agreement in the same manner and to the same extent that AMCON would be required to perform it if no such succession had taken place. Failure of AMCON to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from AMCON in the same amount and on the same terms as you would be entitled hereunder if you terminate your employment for Good Reason following an Applicable Event, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination.
(b) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs or assigns. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your heirs, successors, assigns, or other designee or, if there is no such designee, to your estate.
6. NOTICE. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement.
7. MISCELLANEOUS.
(a) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware.
(b) The Corporation's obligation to pay benefits under this Agreement shall be merely an unfunded and unsecured promise of AMCON to pay money in the future. You, your beneficiaries, and your heirs, successors and assigns, shall have no secured interest or right, title or claim in any property or assets of AMCON.
8. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
9. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.
10. CLAIMS AND ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Any such arbitration shall be held in Omaha, Nebraska. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.
11. ENTIRE AGREEMENT. This Agreement supersedes any other agreement or understanding between the parties hereto with respect to the issues that are the subject matter of this Agreement.
12. AMENDMENT. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives, except that AMCON may amend this Agreement from time to time without your consent to the extent deemed necessary or appropriate, in its sole discretion, to effect compliance with section 409A of the Code, including regulations and interpretations thereunder, which amendments may result in a reduction of benefits provided hereunder and/or other unfavorable changes to you. You hereby irrevocably consent to such amendments. This Agreement shall be interpreted and administered in accordance with section 409A of the Code and the regulations and interpretations that may be promulgated thereunder.
13. EFFECTIVE DATE. This Agreement shall become effective as of the date first set forth above.
If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to AMCON the enclosed copy of this letter which will then constitute our agreement on this subject.
Sincerely,
AMCON DISTRIBUTING COMPANY
By: /s/ William F. Wright Title: Chairman |
Agreed to this 29th day of December, 2006
/s/ Kathleen M. Evans |
Exhibit-21.1
Subsidiaries of the Company
State of
Names Incorporation D/B/A (if applicable)
----------------------------- ------------- --------------------------
The Healthy Edge, Inc. Arizona
Chamberlin Natural Foods, Inc. Florida Chamberlin's Market & Cafe
Health Food Associates, Inc. Oklahoma Akin's Natural Foods Market
Hawaiian Natural Water Co., Inc. Delaware
The Beverage Group, Inc. Delaware
Trinity Springs, Inc. Delaware
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Exhibit-23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-45338 on Form S-8 of our report on the consolidated financial statements dated December 28, 2006, which report expresses an unqualified opinion, and our report on the 2006 information in the consolidated financial statement schedule, which expresses an unqualified opinion of AMCON Distributing Company and subsidiaries, appearing in this Annual Report on Form 10-K of AMCON Distributing Company and subsidiaries for the fiscal year ended September 30, 2006.
McGLADREY & PULLEN
Omaha, Nebraska
December 28, 2006
Exhibit-23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-45338 on Form S-8 of our report on the consolidated financial statements and financial statement schedule dated August 21, 2006 (December 28, 2006 as to Notes 2 and 17), which report expresses an unqualified opinion and includes an explanatory paragraph discussing the uncertainty surrounding the TSI litigation, of AMCON Distributing Company and subsidiaries as of September 30, 2005 and for each of the fiscal years ended September 30, 2005 and September 24, 2004, appearing in this Annual Report on Form 10-K of AMCON Distributing Company and subsidiaries for the fiscal year ended September 30, 2006.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
December 28, 2006
I, Christopher H. Atayan, certify that:
1. I have reviewed this annual report on Form 10-K of AMCON Distributing Company;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and we have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrants' fiscal fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: December 28, 2006 /s/ Christopher H. Atayan
-----------------------------
Christopher H. Atayan,
Chief Executive Officer
and Vice Chairman
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I, Andrew C. Plummer, certify that:
1. I have reviewed this annual report on Form 10-K of AMCON Distributing Company;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and we have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrants' fiscal fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: December 28, 2006 /s/ Andrew C. Plummer
---------------------------------
Andrew C. Plummer, Vice President
and Acting Chief Financial Officer
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CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Annual Report on Form 10-K (the "Report") of AMCON Distributing Company (the "Company") for the fiscal year ended September 30, 2006, I, Christopher H. Atayan, Chief Executive Officer and Principal Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: December 28, 2006 /s/ Christopher H. Atayan
------------------------------
Title: Chief Executive Officer
and Vice Chairman
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A signed original of this written statement required by Section 906 has been provided to AMCON Distributing Company and will be retained by AMCON Distributing Company and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Annual Report on Form 10-K (the
"Report") of AMCON Distributing Company (the "Company") for the fiscal year
ended September 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: December 28, 2006 /s/ Andrew C. Plummer
-------------------------
Title: Vice President and
Acting Chief Financial Officer
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A signed original of this written statement required by Section 906 has been provided to AMCON Distributing Company and will be retained by AMCON Distributing Company and furnished to the Securities and Exchange Commission or its staff upon request.