NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Company Operations:
AMCON Distributing Company and Subsidiaries ("AMCON" and "the Company") is
primarily engaged in the wholesale distribution of consumer products in the
Great Plains and Rocky Mountain regions. In addition, the Company operates
thirteen retail health food stores in Florida and the Midwest.
AMCON's wholesale distribution business ("ADC") includes five distribution
centers that sell approximately 14,000 different consumer products, including
cigarettes and tobacco products, candy and other confectionery, beverages,
groceries, paper products, health and beauty care products, frozen and chilled
products and institutional food service products. The Company distributes
products primarily to retailers such as convenience stores, discount and
general merchandise stores, grocery stores and supermarkets, drug stores and
gas stations. In addition, the Company services institutional customers,
including restaurants and bars, schools, sports complexes and vendors, as well
as other wholesalers.
AMCON also operates six retail health food stores in Florida under the name
Chamberlin's Market & Cafe (Chamberlin's) and seven in the Midwest under the
name Akin's Natural Foods Market (Akin's). These stores carry natural
supplements, groceries, health and beauty care products and other food items.
The Company's operations are subject to a number of factors which are beyond
the control of management, such as changes in manufacturers' cigarette
pricing, state excise tax increases or the opening of competing retail stores
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 71% of revenue and 25% of gross profit in fiscal
2007, as compared to 72% and 27% of revenue and gross profit in fiscal 2006,
and 73% and 33% of revenue and gross profit in fiscal 2005.
(b)Change in Accounting Principle:
In the fourth quarter of fiscal 2007, the Company changed its inventory
valuation method from the Last-In First-Out (LIFO) method to the First-In
First-Out (FIFO) method. The change is preferable as it provides a more
meaningful presentation of the Company's financial position as it values
inventory in a manner which more closely approximates current cost; better
represents the underlying commercial substance of selling the oldest products
first; and more accurately reflects the Company's realized periodic income.
As required by U.S. generally accepted accounting principles, this change in
accounting principle has been reflected in the consolidated statements of
financial position, consolidated statements of operations, and consolidated
statements of cash flows through retroactive application of the FIFO method.
Accordingly, inventories from continuing operations as of the beginning of
fiscal 2005 were increased by the LIFO reserve ($4.0 million), net current
deferred tax assets were decreased ($0.7 million), current assets of
discontinued operations were increased for the impact of related LIFO
reserves ($0.1 million), net non-current deferred tax liabilities were
54
increased ($0.9 million), and shareholders' equity was increased by the
after-tax effect ($2.5 million). Previously reported net income (loss)
available to common shareholders' for the fiscal years 2006 and 2005 were also
increased by $0.1 million and $0.5 million after income taxes, respectively.
(c) Accounting Period:
During fiscal 2005, the Company changed its reporting period from a 52-53 week
year to a calendar month reporting period ending on September 30. As a result
of this change, the fiscal year 2005 was comprised of 53 weeks compared to 52
weeks in fiscal 2007 and 2006. The fiscal years 2007, 2006 and 2005 ended on
September 30 and are herein referred to as AMCON's fiscal years.
(d) Principles of Consolidation:
The consolidated financial statements include the accounts of AMCON and its
wholly-owned subsidiaries.
Prior to the settlement of the litigation among and between AMCON, TSI, and
Crystal Paradise Holdings, Inc. ("CPH") in September 2007, as described in
Note 14, the Company had a 85% ownership in TSI, with a 15% non-owned interest
being held by a minority interest (CPH). For the fiscal years 2007, 2006, and
2005, TSI has been accounted for as a consolidated subsidiary of the Company
and has been included as a component of discontinued operations in the
Consolidated Financial Statements. During the first quarter of fiscal 2005,
the Company suspended the allocation of TSI's losses to minority shareholders
as their ownership basis in TSI had been reduced to zero and the minority
shareholders did not guarantee TSI's debt or commit additional capital to TSI.
All significant intercompany accounts and transactions have been eliminated.
(e) Cash and Accounts Payable:
AMCON utilizes a cash management system under which an overdraft is the normal
book balance in the primary disbursing accounts. Overdrafts included in
accounts payable at fiscal 2007 and fiscal 2006 totaled approximately
$3.3 million and $3.2 million, respectively, and 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.
(f) Accounts Receivable:
Accounts receivable consist primarily of amounts due to the Company from its
normal business activities. An allowance for doubtful accounts is maintained
to reflect the expected uncollectibility of accounts receivable based on past
collection history and specific risks identified in the portfolio.
(g) Inventories:
Inventories consisted of the following at September 2007 and 2006 (in
millions):
Restated/1/
September September
2007 2006
--------- ---------
Finished Goods $ 29.7 $ 29.4
========= =========
|
/1/ Restated for the retroactive application of the FIFO inventory
valuation method. See Note 1 to the Consolidated Financial Statements.
55
Inventories are stated at the lower of cost, determined on a FIFO basis, or
market. The wholesale distribution and retail health food segment inventories
consist of finished products purchased in bulk quantities to be redistributed
to the Company's customers or sold at retail.
(h) Prepaid Expenses and Other Current Assets:
A summary of prepaid expenses and other current assets is as follows (in
millions):
September September
2007 2006
--------- ---------
Prepaid expenses $ 0.8 $ 1.2
Prepaid inventory 5.1 4.2
--------- ---------
$ 5.9 $ 5.4
========= =========
|
Prepaid inventory represents inventory in transit that has been paid for but
has not yet been received.
(i) Property and Equipment:
Property and equipment are stated at cost less accumulated depreciation or
amortization. Major renewals and improvements are capitalized and charged to
expense over their useful lives through depreciation or amortization charges.
Repairs and maintenance are charged to expense in the period incurred. The
straight-line method of depreciation is used to depreciate assets over the
estimated useful lives as follows:
Years
-------
Buildings 40
Warehouse equipment 5-7
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.
(j) Long-Lived Assets:
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such asset may
not be recoverable. Long-lived assets are reviewed annually for impairment
and are reported at the lower of the carrying amount or fair value less the
cost to sell. During fiscal 2005, the Company recorded impairment charges of
$2.5 million and $0.4 million related to long-lived assets held by our
Hawaiian Natural Water Company ("HNWC") and TSI subsidiaries, respectively.
The impairments resulted from a shortfall in the projected future cash flows
necessary to support the assets and sustain operations. The Company did not
incur similar impairment charges in fiscal 2007 or fiscal 2006. See further
discussion regarding HNWC and TSI in Note 2.
(k) Goodwill, Intangible and Other Assets:
Goodwill consists of the excess purchase price paid in business acquisitions
over the fair value of assets acquired. At September 2007, intangible assets
consist primarily of tradenames and favorable leases assumed in acquisitions.
56
These assets are initially recorded at an amount equal to the purchase price
paid or allocated to them. Other assets consist primarily of the cash
surrender value of life insurance policies and debt issuance costs.
The Company employs the nonamortization approach to account for purchased
goodwill and intangible assets having indefinite useful lives. Under a
nonamortization approach, goodwill and intangible assets having indefinite
useful lives are not amortized into results of operations, but instead are
reviewed at least annually for impairment. During the fourth quarter of each
fiscal year the Company engages an external consulting firm to assist in
performing this valuation. If the recorded value of goodwill and intangible
assets having indefinite useful lives is determined to exceed their fair
value, the asset is written down to fair value and a charge is taken against
the results of operations in that period. AMCON considers its tradenames to
have indefinite lives.
As discussed in Note 7, during fiscal 2005 the Company determined that certain
goodwill and intangible assets at TSI and HNWC, components of the Company's
former beverage segment reporting unit, were impaired based on a valuation
report provided by an independent valuation specialist. Additionally, the
Company determined that a portion of the tradenames and goodwill carried by
the Company's retail segment were impaired. The total amount of the
impairment of goodwill and identifiable intangible assets before income taxes
was $10.2 million and was included in the results of operations of
discontinued operations. The Company did not incur similar impairment charges
during fiscal 2007 or fiscal 2006. See further discussion of regarding HNWC
and TSI in Note 2.
The Company's only intangible assets that are considered to have definite
useful lives are favorable leases which continue to be charged to expense
through amortization on the straight-line method over their estimated useful
lives of three to seven years.
The benefit related to increases in the cash surrender value of split dollar
life insurance policies are recorded as a reduction to insurance expense. The
cash surrender value of life insurance policies is limited to the lesser of
the cash value or premiums paid in accordance with regulatory guidance.
(l) Water Royalty in Perpetuity:
Water royalty in perpetuity represents the present value of the future minimum
water royalty payments and related brokers fees to be paid in perpetuity
incurred in connection with assets acquired by TSI in June 2004. As discussed
in Note 2, in September 2007 AMCON and TSI were released of this obligation in
connection with the terms of the litigation settlement.
(m) Debt Issuance Costs:
The costs related to the issuance of debt are capitalized in other assets and
amortized on an effective interest method to interest expense over the terms
of the related debt agreements.
(n) Revenue Recognition:
AMCON recognizes revenue in its wholesale distribution division when products
are delivered to customers (which generally is the same day products are
shipped) and in its retail health food business when products are sold to
consumers. Sales are shown net of returns and discounts.
57
(o) Insurance:
The Company's workers' compensation, general liability and employee-related
health care benefits are provided through high-deductible or self-insurance
programs. As a result, the Company accrues for its workers' compensation and
general liability based upon a claim reserve established with the assistance
of a third-party administrator. The Company has issued a letter of credit in
the amount of $1.0 million to its workers' compensation insurance carrier as
part of its loss control program. The letter of credit was reduced to
approximately $0.9 million subsequent to September 2007. The reserve for
incurred, but not reported, employee health care benefits is based on one
month of claims, calculated using the Company's historical claims experience
rate, plus specific reserves for large claims. The reserves associated with
the exposure to these liabilities are reviewed by management for adequacy at
the end of each reporting period.
(p) Income Taxes:
Deferred income taxes are determined based on temporary differences between
the financial reporting and tax basis of the Company's assets and liabilities,
using enacted tax rates in effect during the years in which the differences
are expected to reverse.
(q) Comprehensive Income (Loss):
Comprehensive income (loss) includes net income or loss, plus changes in the
valuation of interest rate swap contracts, which are treated as hedging
instruments and charged or credited to shareholders' equity.
(r) Stock-Based Compensation:
Prior to its expiration in June 2004, AMCON maintained a stock-based
compensation plan under which the Compensation Committee of the Board of
Directors could grant incentive stock options and non-qualified stock options.
On October 1, 2005, the Company adopted SFAS No. 123 (revised 2004)
(SFAS 123R), Share Based Payment. The Company chose to apply the modified
prospective transition method as permitted by SFAS 123R and therefore has not
restated prior periods. Under the transition method, compensation cost
associated with employee stock options has been recognized in the statement of
operations for fiscal 2007 and fiscal 2006. This expense represents the
amortization of unvested stock option awards granted prior to September 30,
2005, in addition to stock options granted the Company's Chief Executive
Officer in April 2007. This expense has been reflected in the consolidated
statement of operations under "selling, general and administrative expenses."
Prior to the adoption of SFAS 123R, the Company accounted for these plans
under APB Opinion 25, Accounting for Stock Issued to Employees, and related
Interpretations. Under APB Opinion 25, no compensation cost associated with
stock options was reflected in net income (loss) available to common
shareholders, as all options granted under these plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on 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.
58
Restated/1/
2005
------------
Loss available to common shareholders
------------------------------------------------
Net loss available to common
shareholders, as reported $(12,547,776)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (53,108)
------------
Pro forma loss $(12,600,884)
============
Loss per share available to common shareholders
------------------------------------------------
As reported: Basic $ (23.81)
Diluted $ (23.81)
Pro forma: Basic $ (23.91)
Diluted $ (23.91)
/1/ Restated for the retroactive application of the FIFO inventory
valuation method.
|
(s) Per-share results:
Basic earnings or loss per share data are based on the weighted-average number
of common shares outstanding during each period. Diluted earnings or loss per
share data are based on the weighted-average number of common shares
outstanding and the effect of all dilutive potential common shares including
stock options and conversion features of the Company's preferred stock
issuances.
(t) Use of Estimates:
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(u) Recently Issued Accounting Standards:
During fiscal 2007, Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108") became effective for the Company. SAB 108 requires
that registrants quantify errors using both a balance sheet approach and an
income statement approach and then evaluate whether either approach results in
a misstated amount that, when all relevant quantitative and qualitative
factors are considered, is material. The adoption of SAB 108 did not have a
material effect on the Company's financial position or results of operations.
59
The Company is currently evaluating the impact of implementing the following
new accounting standards:
On July 13, 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, and
Related Implementation Issues" ("FIN 48"). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in a Company's financial statements in
accordance with Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" ("SFAS 109"). FIN 48 prescribes a recognition
threshold and measurement attribute for a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006 (the first fiscal quarter of 2008 for the Company).
We do not believe that the cumulative effect of adopting FIN 48 will have a
material impact on the Company's Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 clarifies the principle that fair value should
be based on the assumptions market participants would use when pricing an
asset or liability and establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. Under the standard, fair
value measurements would be separately disclosed by level within the fair
value hierarchy. SFAS 157 is effective in fiscal 2008 for the Company.
In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair value
accounting but does not affect existing standards which require assets and
liabilities to be carried at fair value. Under SFAS 159, a company may elect
to use fair value to measure accounts and loans receivable, available-for-
sale and held-to-maturity securities, equity method investments, accounts
payable, guarantees, issued debt and other eligible financial instruments.
SFAS 159 is effective for fiscal years beginning after November 15, 2007
(fiscal 2009 for the Company).
In March 2007, the FASB issued Emerging Issues Task Force Issue No. 06-10
"Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements"
(EITF 06-10). EITF 06-10 provides guidance for determining a liability for
the postretirement benefit obligation as well as recognition and measurement
of the associated asset on the basis of the terms of the collateral assignment
agreement. EITF 06-10 is effective for fiscal years beginning after December
15, 2007 (fiscal 2009 for the Company).
2. DISPOSITIONS
For the fiscal years 2007, 2006 and 2005, HNWC and TSI have been reflected in
the Company's Consolidated Financial Statements as components of discontinued
operations. The Beverage Group, Inc. ("TBG") is also included in discontinued
operations for the fiscal year 2005 and the first two quarters of fiscal 2006.
TBG was a component of the Company's former beverage segment, which was closed
in March 2005. TBG's final wind-down was completed in April 2006 at which
time its residual liabilities were classified to continuing operations.
60
Trinity Springs, Inc. (TSI)
During fiscal 2006, the Company discontinued the operations of TSI, which
operated a water bottling facility in Idaho, due to recurring losses, a lack
of capital resources to sustain operations, and litigation as discussed in
Note 14.
As described in Note 14, AMCON and TSI were parties to litigation with Crystal
Paradise Holdings, Inc. ("CPH") regarding the April 24, 2004 Asset Purchase
Agreement ("Asset Purchase Agreement"), under which TSI acquired certain
assets from CPH. On September 30, 2007, the Company signed a Mutual Release
and Settlement Agreement (the "Settlement Agreement") with CPH related to this
litigation. The Settlement Agreement calls for the mutual release and
settlement of all outstanding and potential litigation and claims among and
between AMCON, TSI, and CPH with respect to the Asset Purchase Agreement and
the related acquisition.
The Settlement Agreement also restructured the Company's obligations arising
from the Asset Purchase Agreement with CPH totaling approximately $6.5 million
into a new $5.0 million note payable to CPH. The $5.0 million note payable is
due at the end of five years plus accrued interest at 5.0%. Items
restructured into the $5.0 million note payable included CPH's minority
interest in TSI, water royalties payable to CPH, notes payable to CPH, and
accrued interest payable to CPH. Additionally, the agreement provides CPH
with an eleven month option to purchase TSI's assets for a price equivalent to
the amount due CPH under the $5.0 million note payable, plus accrued interest.
The TSI asset purchase option can be extended an additional seven months at
CPH's election.
No monetary exchanges between the Company and CPH were required under the
Settlement Agreement. The Company has recorded a $1.5 million pre-tax
deferred gain in connection with the above settlement. This deferred gain
has been classified as component of noncurrent liabilities of discontinued
operations in the Company's Consolidated Balance Sheet. The deferred gain
will be recognized upon the earlier of CPH's election to exercise its TSI
asset purchase option or the expiration of the asset purchase option.
Hawaiian Natural Water Company, Inc. (HNWC)
HNWC, which was headquartered in Pearl City, Hawaii, bottled, marketed and
distributed Hawaiian natural artesian water, purified water and other limited
production co-packaged products, in Hawaii, the mainland and foreign markets.
In November 2006, the Company sold all of the operating assets of HNWC for
approximately $3.8 million in cash plus the buyer's assumption of all
operating and capital leases. The significant operating assets consisted of
accounts receivable, inventory, furniture and fixtures, intellectual property
and all of its bottling equipment. In connection with the sale, the Company
has recorded a $1.6 million pre-tax gain on disposal of discontinued
operations. HNWC remained a fully operational subsidiary of the Company
through November 19, 2006.
61
A summary of discontinued operations is as follows:
Year ended
September
-----------------------------------------
Restated Restated
2007 2006/1/ 2005/1/
----------- ------------ ------------
Sales $ 862,852 $ 8,635,869 $ 13,185,114
Impairment charges - - (8,852,406)
Operating loss (576,101) (3,190,327) (17,101,139)
Gain on disposal of discontinued
operations, before income taxes 1,455,333 - -
Income tax expense (benefit) 269,000 (1,134,000) (5,446,000)
Earnings (loss) from
discontinued operations 234,551 (2,435,766) (11,960,904)
/1/ Restated for the retroactive application of FIFO inventory valuation
method. See Note 1 to the Consolidated Financial Statements.
|
The carrying amounts (net of allowances) of the major classes of assets and
liabilities included in discontinued operations are as follows (in millions):
Restated/1/
September September
2007 2006
---------- ----------
Accounts receivable $ - $ 0.7
Inventories - 0.6
---------- ----------
Total current assets of discontinued operations $ - $ 1.3
========== ==========
Fixed assets - Total noncurrent assets of
discontinued operations $ 2.1 $ 3.8
========== ==========
Accounts payable $ 0.7 $ 2.0
Accrued expenses 0.5 1.0
Accrued wages, salaries and bonuses - 0.3
Current portion of long-term debt - 1.4
Current portion of long-term debt due related party 2.8 2.8
---------- ----------
Total current liabilities of discontinued operations $ 4.0 $ 7.5
========== ==========
Water royalty, in perpetuity /2/ $ - $ 2.8
Deferred gain on CPH settlement 1.5 -
Long-term debt, less current portion 5.0 2.3
---------- ----------
Noncurrent liabilities of discontinued operations $ 6.5 $ 5.1
========== ==========
/1/ Restated for the retroactive application of FIFO inventory valuation method.
See Note 1 to the Consolidated Financial Statements.
/2/ This obligation payable to CPH was released in conjunction with the legal settlement
previously discussed.
|
62
3. CONVERTIBLE PREFERRED STOCK:
The Company has the following Convertible Preferred Stock outstanding as of
September 2007:
Series A Series B Series C
------------- --------------- ---------------
Date of issuance: June 17, 2004 October 8, 2004 March 6, 2006
Optionally redeemable beginning June 18, 2006 October 9, 2006 March 4, 2008
Par value (gross proceeds): $2,500,000 $2,000,000 $2,000,000
Number of shares: 100,000 80,000 80,000
Liquidation preference per share: $25.00 $25.00 $25.00
Conversion price per share: $30.31 $24.65 $13.62
Number of common shares in
which to be converted: 82,481 81,136 146,842
Dividend rate: 6.785% 6.37% 6.00%
|
The Series A Convertible Preferred Stock ("Series A"), Series B Convertible
Preferred Stock ("Series B") and Series C Convertible Preferred Stock ("Series
C"), collectively (the "Preferred Stock"), are convertible at any time by the
holders into a number of shares of AMCON common stock equal to the number of
preferred shares being converted times a fraction equal to $25.00 divided by
the conversion price. The conversion prices for the Preferred Stock are
subject to customary adjustments in the event of stock splits, stock dividends
and certain other distributions on the Common Stock. Cumulative dividends for
the Preferred Stock are payable in arrears, when, as and if declared by the
Board of Directors, on March 31, June 30, September 30 and December 31 of each
year.
In the event of a liquidation of the Company, the holders of the Preferred
Stock, are entitled to receive the liquidation preference plus any accrued and
unpaid dividends prior to the distribution of any amount to the holders of the
Common Stock. The Preferred Stock also contain redemption features which
trigger based on certain circumstances such as a change of control, minimum
thresholds of ownership by the Chairman and his family in AMCON, or
bankruptcy. The Preferred Stock are optionally redeemable by the Company
beginning on various dates, as listed above, at redemption prices equal to
112% of the liquidation preference. The redemption prices decrease 1%
annually thereafter until the redemption price equals the liquidation
preference after which date it remains the liquidation preference. The
Company's credit facility also prohibits the redemption of the Series A
and Series B. Series C is only redeemable so long as no event of default is
in existence at the time of, or would occur after giving effect to, any such
redemption, and the Company has excess availability under the credit facility
of not less than $2.0 million after giving effect to any such redemption.
The Company believes that redemption of these securities by the holders is not
probable based on the following evaluation. Our executive officers and
directors as a group beneficially own approximately 60% of the outstanding
common stock at September 2007. Mr. William Wright, AMCON's Chairman of the
Board, beneficially owns 27% of the outstanding common stock without giving
effect to shares owned by his adult children. There is an identity of
interest among AMCON and its officers and directors for purposes of the
determination of whether the triggering redemption events described above are
63
within the control of AMCON since AMCON can only make 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 seek 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. Hobbs, a director of the Company, is a member.
The Series B Preferred Stock is owned by an institutional investor which has
elected Mr. Chris Atayan, AMCON's Chief Executive Officer and Vice Chairman,
to AMCON's Board of Directors pursuant to voting rights in the Certificate of
Designation creating the Series B Preferred Stock. The Series C is owned by
Draupnir Capital LLC, which is a subsidiary of Draupnir, LLC (the owner of
Series A). Mr. Hobbs is also a Member of Draupnir Capital, LLC.
In view of the foregoing considerations, the Company believes it is
not probable under Rule 5-02.28 of Regulation S-X that the Series A,
Series B or Series C Preferred Stock will become redeemable in the future.
4. EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share available to common shareholders is calculated
by dividing income (loss) from continuing operations less preferred stock
dividend requirements and income (loss) from discontinued operations by the
weighted average common shares outstanding for each period. Diluted earnings
(loss) per share available to common shareholders is calculated by dividing
income (loss) from continuing operations less preferred stock dividend
requirements (when anti-dilutive) and income (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 2007, 2006 and
2005 that were anti-dilutive were not included in the computations of diluted
earnings per share. Such potential common shares totaled 20,245, 128,330 and
198,620 with average exercise prices of $38.74, $30.17 and $29.13,
respectively.
For Fiscal Years
-----------------------------------------
Restated/1/ Restated/1/
2007 2006 2005
-----------------------------------------
Basic Basic Basic
-----------------------------------------
Weighted average number of shares outstanding 527,062 527,062 527,062
=========================================
Income (loss) from continuing operations $ 4,205,753 $ 1,457,218 $ (292,232)
Deduct: preferred stock dividend requirements (418,692) (366,042) (294,640)
-----------------------------------------
$ 3,787,061 $ 1,091,176 $ (586,872)
=========================================
Income (loss) from discontinued operations $ 234,551 $ (2,435,766) $(11,960,904)
=========================================
Net income (loss) available to common shareholders $ 4,021,612 $ (1,344,590) $(12,547,776)
=========================================
64
Restated/1/ Restated/1/
2007 2006 2005
-----------------------------------------
Basic Basic Basic
-----------------------------------------
Earnings (loss) per share from continuing
operations $ 7.19 $ 2.07 $ (1.11)
Earnings (loss) per share from discontinued
operations 0.44 (4.62) (22.70)
-----------------------------------------
Net earnings (loss) per share available to
common shareholders $ 7.63 $ (2.55) $ (23.81)
=========================================
Diluted Diluted Diluted
-----------------------------------------
Weighted average common shares outstanding 527,062 527,062 527,062
Weighted average of net additional shares
outstanding assuming dilutive options
exercised and proceeds used to purchase
treasury stock /2/ 333,059 181,884 -
-----------------------------------------
Weighted average number of shares outstanding 860,121 708,946 527,062
=========================================
Income (loss) from continuing operations $ 4,205,753 $ 1,457,218 $ (292,232)
Deduct: preferred stock dividend requirements /3/ - (169,641) (294,640)
-----------------------------------------
$ 4,205,753 $ 1,287,577 $ (586,872)
=========================================
Income (loss) from discontinued operations $ 234,551 $ (2,435,766) $(11,960,904)
=========================================
Net income (loss) available to common shareholders $ 4,440,304 $ (1,148,189) $(12,547,776)
=========================================
Earnings (loss) per share from continuing
operations $ 4.89 $ 1.82 $ (1.11)
Earnings (loss) per share from discontinued
operations 0.27 (3.44) (22.70)
-----------------------------------------
Net earnings (loss) per share available to
common shareholders $ 5.16 $ (1.62) $ (23.81)
=========================================
/1/ Restated for the retroactive application of the FIFO inventory valuation method.
See Note 1 to the Consolidated Financial Statements.
/2/ Includes stock options plus Series A, B, and C Convertible Preferred Stock in fiscal 2007
and stock options plus Series B and C Convertible Preferred Stock in fiscal 2006.
/3/ Excludes preferred dividend payments for Series A, B, and C Convertible Preferred Stock
in fiscal 2007 and Series B and C Convertible Preferred Stock in fiscal 2006, as these
issues were dilutive and assumed to have been converted to common stock of the Company.
|
65
5. OTHER COMPREHENSIVE INCOME (LOSS):
The components of other comprehensive income (loss) for fiscal 2006 and 2005
are as follows. There were no such reconciling items to net income or
accumulated other comprehensive income (loss) balances for fiscal 2007.
2006 2005
----------------------
Less reclassification adjustments
for gains which were included in
comprehensive income in prior periods:
Realized net gains $ - $ (2,638)
Interest rate swap valuation adjustment
during the period:
Unrealized gains (losses) (154,002) 71,018
Related tax (expense) benefit 52,708 (26,986)
----------------------
Total other comprehensive income (loss) $ (101,294) $ 41,394
======================
|
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 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 2007 and 2006 consisted of the
following:
2007 2006
---------------------------
Land $ 648,818 $ 648,818
Buildings and improvements 9,048,798 9,048,798
Warehouse equipment 6,341,848 5,358,310
Furniture, fixtures and
leasehold improvements 7,119,859 7,107,293
Vehicles 1,434,548 1,554,553
Capital equipment leases 91,343 1,158,657
---------------------------
24,685,214 24,876,429
Less accumulated depreciation
and amortization:
Owned buildings and equipment (13,461,822) (11,512,799)
Capital equipment leases (32,624) (835,091)
---------------------------
$ 11,190,768 $ 12,528,539
===========================
|
66
7. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill by reporting segment at fiscal year ends 2007 and 2006 was as
follows:
2007 2006
------------ ------------
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 2007 and 2006 consisted of the
following:
2007 2006
------------ ------------
Trademarks and tradenames $ 3,373,269 $ 3,373,269
Favorable leases (less accumulated
amortization of $459,199 and $419,466) 26,801 66,534
------------ ------------
$ 3,400,070 $ 3,439,803
============ ============
|
The Company performs its annual impairment testing of goodwill and other
intangible assets during the fourth fiscal quarter of each year, with the
assistance of an independent valuation specialist. This annual review
identified no impairments in fiscal 2007 or fiscal 2006.
After completing its fiscal 2005 impairment review, however, the Company
concluded that a portion of the tradenames and goodwill at our retail and
former beverage segment were impaired. These impairments were the result of
projected shortfalls in operating cash flows necessary to support the
reporting units carrying value. The fair values of the reporting units were
estimated with the assistance of an independent valuation specialist using the
expected present value of the discounted future cash flows and consideration
of the net recoverable values.
The impairment charges for our Retail segment are recorded in the Company's
statement of operations as a component of income (loss) from continuing
operations. The impairment charges for TSI and HNWC have been included in the
statement of operations as a component of loss from discontinued operations.
67
A summary of the impairment charges for fiscal 2005 by entity are as follows
(in millions):
Continuing Discontinued Total
Operations Operations/1/
---------- ---------------- -----
Retail TSI HNWC Total
Long-lived assets $ - $ 0.4 $ 2.5 $ 2.9
Goodwill 0.3 0.4 0.4 1.1
Water source - 3.7 - 3.7
Customer list - 0.3 0.1 0.4
Tradename 3.9 0.9 0.2 5.0
----- ----- ----- -----
$ 4.2 $ 5.7 $ 3.2 $13.1
===== ===== ===== =====
/1/ See Note 2 to the Consolidated Financial Statements, regarding the
classification of TSI and HNWC at September 2007.
|
The five year estimated amortization expense for intangible assets held at
September 2007 is as follows:
Fiscal Fiscal Fiscal Fiscal Fiscal
2008 2009 2010 2011 2012
--------- --------- -------- -------- --------
Favorable leases $ 27,000 $ - $ - $ - $ -
========= ========= ======== ======== ========
|
8. OTHER ASSETS:
Other assets at fiscal year ends 2007 and 2006 consisted of the following:
2007 2006
-------------------------
Cash surrender value of life
insurance policies $ 806,633 $ 801,238
Debt issuance costs 98,044 97,880
Other 188,473 348,346
-------------------------
$1,093,150 $1,247,464
=========================
|
Debt issuance costs represent fees incurred to obtain the Company's revolving
credit facility and real estate loans, and are being amortized over the terms
of the respective loan agreements. Amortization expense related to these debt
issuance costs were $219,273, $385,487, and $410,764 for the fiscal years
ended 2007, 2006 and 2005, respectively.
68
9. DEBT:
The Company primarily finances it operations through a credit facility
agreement with LaSalle Bank (the "Facility") and long-term debt agreements
with banks.
CREDIT FACILITY
The Facility consisted of the following at fiscal 2007 and 2006:
2007 2006
---------------------------
Revolving portion of the Facility, interest payable
at the bank's prime rate (7.75% at fiscal 2007),
principal due April 2009 $37,936,847 $46,502,896
Term Note A, payable in monthly installments of $16,333
plus interest at the bank's base rate (7.75% at fiscal
2007), remaining principal due April 2009 567,333 770,533
Term Note B, payable in monthly installments of $100,000
plus interest at the bank's base rate plus 2%
(9.75% at fiscal 2007) through March 2008 350,000 1,550,000
---------------------------
38,854,180 48,823,429
Less current maturities 3,046,000 3,896,000
---------------------------
$35,808,180 $44,927,429
===========================
|
The significant terms of the Facility at September 2007 include:
- A $55.0 million revolving credit limit, plus the outstanding balances
on two term notes ("Term Note A" and "Term Note B") which totaled
approximately $0.9 million at September 2007 for a total credit
facility limit of $55.9 million at September 2007.
- Bears interest at the bank's prime interest rate, except for Term Note B
which bears interest at the bank's prime rate plus 2%.
- 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 borrowings.
- Collateral including all of the Company's equipment, intangibles,
inventories, and accounts receivable.
- A prepayment penalty of one percent (1%) of the prepayment loan limit of
$55.0 million if prepayment occurs on or before April 30, 2008.
- Provides that the Company may not pay dividends on its common stock in
excess of $0.72 per share on an annual basis.
The Facility also includes quarterly debt service and cumulative earnings
before interest, taxes, depreciation and amortization ("EBITDA") financial
covenants. Beginning with the fiscal quarter ended September 2007, the
Company must maintain a minimum debt service ratio of 1.0 to 1.0, as measured
by the twelve month period then ended.
69
The cumulative minimum EBITDA requirements are as follows:
(a) $1,000,000 for the three months ending December 31, 2007 and
December 31, 2008 and;
(b) $2,000,000 for the six months ending March 31, 2008, and
March 31, 2009 and;
(c) $4,500,000 for the nine months ending June 30, 2008 and;
(d) $7,000,000 for the twelve months ending September 30, 2007
and September 30, 2008.
The Company was in compliance with the required debt service and minimum
EBITDA covenants at September 30, 2007.
The Company's Chairman has personally guaranteed repayment of the Facility and
the term loans. However, the amount of his guaranty is capped at $10.0
million and is automatically reduced by the amount of the repayment on Term
Note B, which resulted in the guaranteed principal outstanding being reduced
to approximately $5.4 million as of September 2007. AMCON pays the Company's
Chairman an annual fee equal to 2% of the guaranteed principal in return for
the personal guarantee. This guarantee is secured by a pledge of the shares
of Chamberlin's, Akin's, HNWC and TSI.
The Company's Chairman has also personally guaranteed a note payable issued in
conjunction with the Television Events and Marketing, Inc. ("TEAM") litigation
settlement as discussed in Note 14. The Company pays the Chairman an annual
fee equal to 2% of the guaranteed principal in return for the personal
guarantee. The amount guaranteed in connection with this settlement at
September 2007 was approximately $0.7 million.
LONG-TERM DEBT:
In addition to the Facility, the Company also has the following long-term
obligations at fiscal 2007 and fiscal 2006:
2007 2006
---------------------------
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 $58,303 per month through April 2009 with
remaining principal due April 2009, collateralized
by two owned distribution facilities $5,786,352 $6,005,175
Note payable to a bank, interest payable monthly at a
fixed rate of 6.33% plus monthly principal payments of
$4,100 through December 2009 at which time the remaining
principal is due, collateralized by the Rapid City
building and equipment 869,200 918,400
Note payable to a bank, interest payable monthly at a
fixed rate of 6.33% plus monthly principal payments of
$8,000 through July 2009 collateralized by the Rapid City
building and equipment 167,429 263,429
Obligations under capital leases, payable in monthly
installments with interest rates from 4.91% to 8.25%
through July 2010 108,273 184,811
70
2007 2006
---------------------------
Notes payable, interest payable at a fixed rate between
8.0% - 9.5% with monthly installments of principal and
interest of $2,226 - $2,677 per month through July 2011
collateralized by delivery vehicles 180,805 221,672
Note payable, interest payable discounted at a rate of
8.25% with quarterly installments of principal and
interest of $31,250 - $46,875, beginning January 2008
through October 2011 579,418 -
---------------------------
7,691,477 7,593,487
Less current maturities - continuing operations 568,024 524,130
---------------------------
$7,123,453 $7,069,357
===========================
Discontinued operations
-----------------------
Note payable, fixed rate of 5% compounded annually,
principal and interest due September 2012,
collateralized by substantially all of the assets
of TSI/1/ 5,000,000 -
Revolving credit facility due to a related party, principal
and interest due December 2005, bearing interest at 8%
per annum, collateralized by a second mortgage on an
equal basis with the Company's existing second mortgage
on TSI's real property 1,000,000 1,000,000
Notes due to related parties, principal and interest
due December 2005, interest at 7% 1,000,000 1,000,000
Notes due to related party, principal and interest
due December 2005, bearing interest at 300 basis
points above the yield on 10-year treasury notes
(7.52% at September 2007) 750,000 750,000
Note payable, interest payable at a fixed rate of 5%
with monthly installments of principal and interest of
$30,000 per month. Collateralized by substantially
all of the assets of TSI /2/ - 2,488,700
Note payable, interest payable quarterly at a fixed rate
of 5% with interest due quarterly. Collateralized by
substantially all of the assets of TSI /2/ - 500,000
Note payable, interest payable at a fixed rate of 5% with
annual installments of principal and interest of $49,655.
Collateralized by a warehouse owned by TSI/3/ - 92,328
Note payable, interest payable at a fixed rate of 5%, due
currently with accrued interest - 14,042
Obligations under capital leases, payable in monthly
installments with a fixed rate of 5.55% - 265,287
Note payable, interest payable at a fixed rate of 10.0%
with weekly installments of principal and interest of
$3,000 per week. - 329,763
---------------------------
7,750,000 6,440,120
Less current maturities - discontinued operations 2,750,000 4,159,890
---------------------------
$5,000,000 $2,280,230
===========================
71
/1/ Note payable was issued during fiscal 2007 in conjunction with CPH litigation settlement
as discussed in Note 2.
/2/ The Company was released from this debt obligation in September 2007 in conjunction
with the CPH litigation settlement discussed in Note 14.
/3/ Note was paid off during the year in conjunction with the sale of TSI's warehouse.
|
Long-term obligations, excluding obligations under the Facility and related
party debt, have contractual maturities as follows:
Fiscal Year Ending
------------------
2008 $ 568,024
2009 5,912,836
2010 1,013,947
2011 166,056
2012 5,030,614
Thereafter -
------------
$ 12,691,477
============
|
Market rate risk for fixed rate debt is estimated as the potential increase
in fair value of debt obligations resulting from decreases in interest rates.
Based on discounted cash flows using current market rates for similar
agreements, the fair value of the Company's long-term debt obligations
approximated carrying value at September 2007.
Cross Default and Co-Terminus Provisions
The Company's owned real estate in Bismarck, ND, Quincy, IL, and Rapid City,
SD, and certain warehouse equipment in the Rapid City, SD warehouse is
financed through term loans with Marshall and Ilsley Bank ("M&I"), which is
also a participant lender on the Company's revolving line of credit. The
M&I loans contain cross default provisions which cause all loans with M&I to
be considered in default if any one of the loans where M&I is a lender,
including the revolving credit facility, is in default. 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.
Capital leases
The Company has several capital leases for office and warehouse equipment.
As of September 2007, the outstanding balances on the capital leases totaled
approximately $0.1 million.
OTHER
AMCON has issued a letter of credit in the amount of approximately $1.0
million to its workers' compensation insurance carrier as part of its
self-insured loss control program. The letter of credit was reduced to
approximately $0.9 million subsequent to September 2007.
72
10. OTHER INCOME, NET:
Other income, net consisted of the following for fiscal 2007, 2006 and 2005:
2007 2006 2005
-----------------------------------------
Interest income $ (56,020) $ (51,865) $ (45,831)
Rent income - (3,503) (4,289)
Royalty (66,732) (72,771) (15,211)
Other (71,856) (9,102) (14,774)
-----------------------------------------
$ (194,608) $ (137,241) $ (80,105)
=========================================
|
11. INCOME TAXES:
Components of income tax expense (benefit) from continuing operations for
fiscal 2007, 2006, and 2005 consisted of the following:
Restated/1/ Restated/1/
2007 2006 2005
-----------------------------------------
Current:
Federal $ 170,344 $ - $ 1,443,115
State 171,202 121,792 158,232
-----------------------------------------
341,546 121,792 1,601,347
-----------------------------------------
Deferred:
Federal 2,060,146 708,198 (1,709,836)
State 224,308 (315,990) 202,489
-----------------------------------------
2,284,454 392,208 (1,507,347)
-----------------------------------------
Income tax expense (benefit) $ 2,626,000 $ 514,000 $ 94,000
=========================================
|
73
The difference between the Company's income tax expense (benefit) in the
accompanying financial statements and that which would be calculated using the
statutory income tax rate of 34% on income (loss) before taxes is as follows
for fiscal 2007, 2006 and 2005:
Restated Restated/1/ Restated/1/
2007 2006 2005
-----------------------------------------
Tax at statutory rate $ 2,322,795 $ 670,214 $ (100,413)
Amortization of goodwill and
other intangibles (5,302) (5,302) (4,777)
Nondeductible business expenses 34,286 34,675 12,224
Minority interest in subsidiary - - (53,074)
State income taxes, net of
federal tax benefit 112,993 83,206 398,735
Valuation allowance, state net
operating losses (37,428) - 52,297
State net operating loss - (257,965) -
Other 198,656 (10,828) (210,992)
-----------------------------------------
$ 2,626,000 $ 514,000 $ 94,000
=========================================
|
Temporary differences between the financial statement carrying balances and
tax basis of assets and liabilities giving rise to the net deferred tax asset
at fiscal year ends 2007 and 2006 relate to the following:
Restated/1/
2007 2006
---------------------------
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 207,644 $ 492,796
Accrued expenses 756,854 526,685
Inventory 272,234 383,556
AMT credit carry forwards 405,105 285,333
Other 65,054 75,272
---------------------------
1,706,891 1,763,642
Noncurrent:
Fixed assets $ 766,457 $ 1,842,605
Intangible assets 1,571,628 2,167,630
Net operating loss carry
forwards - federal 1,781,297 3,276,583
Net operating loss carry
forwards - state 944,887 1,147,545
Other 27,173 88,815
---------------------------
5,091,442 8,523,178
---------------------------
Total deferred tax assets 6,798,333 10,286,820
Valuation allowance (1,102,157) (1,139,585)
---------------------------
Net deferred tax assets $ 5,696,176 $ 9,147,235
===========================
|
74
Restated/1/
2007 2006
---------------------------
Deferred tax liabilities:
Current:
Trade discounts $ 260,502 $ 251,992
---------------------------
260,502 251,992
Noncurrent:
Fixed assets 696,522 1,629,454
Goodwill 524,720 430,096
---------------------------
1,221,242 2,059,550
---------------------------
Total deferred tax liabilities $ 1,481,744 $ 2,311,542
===========================
Net deferred tax assets (liabilities):
Current $ 1,446,389 $ 1,511,650
Noncurrent 2,768,043 5,324,043
---------------------------
$ 4,214,432 $ 6,835,693
===========================
|
/1/ Restated for the retroactive application of the FIFO inventory valuation
method. See Note 1 to the Consolidated Financial Statements.
During fiscal 2006, the Company recorded a valuation allowance of
$0.5 million against deferred tax assets, primarily related to state net
operating losses at TSI and HNWC, which more likely than not will not be
realized. No such valuation allowance was recorded in fiscal 2007.
The Company's deferred tax asset at fiscal 2007 related to federal net
operating loss carryforwards was $1.8 million, including the net operating
losses of TSI and HNWC. Of the total net operating loss carryforwards $1.1
million expires in 2026. The remaining $0.7 million was acquired in
connection with the acquisition of HNWC in fiscal 2002. The utilization of
HNWC's deferred tax asset related to the net operating loss of $0.7 million is
limited (by Internal Revenue Code Section 382) to approximately $0.1 million
per year 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 $0.5 million, $0.6 million and $0.6 million (net of
employee forfeitures) to the profit sharing plans in fiscal 2007, 2006, and
2005, respectively.
75
13. RELATED PARTY TRANSACTIONS:
In each of the fiscal years 2007, 2006, and 2005, the Company was charged
$72,000 by AMCON Corporation, the former parent of the Company, as
consideration for office rent and management services. These charges have
been included as a component of selling, general and administrative 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
Note B, which resulted in the guaranteed principal outstanding being reduced
to approximately $5.4 million as of September 2007. AMCON pays the Company's
Chairman an annual fee equal to 2% of the guaranteed principal in return for
the personal guarantee. This guarantee is secured by a pledge of the shares
of Chamberlin's, Akin's, HNWC and TSI.
The Company's Chairman has also personally guaranteed a note payable issued in
conjunction with the Television Events and Marketing, Inc. ("TEAM") litigation
settlement as discussed in Note 14. The Company pays the Chairman an annual
fee equal to 2% of the guaranteed principal in return for the personal
guarantee. The amount guaranteed in connection with this settlement at
September 2007 was approximately $0.7 million.
14. COMMITMENTS AND CONTINGENCIES:
Future Lease Obligations
The Company leases certain office and warehouse equipment under capital
leases. The carrying value of these assets was approximately $0.1 million
and $0.3 million at fiscal 2007 and fiscal 2006, respectively, net of
accumulated amortization of $0.04 million and $0.8 million, respectively.
The Company also leases various office and warehouse facilities and equipment
under noncancellable operating leases. Rents charged to expense under these
operating leases during fiscal 2007, 2006, and 2005 totaled approximately
$4.2 million, $5.0 million and $5.1 million, respectively.
At September 2007 the minimum future lease commitments for continuing and
discontinued operations were as follows:
Capital Operating
Fiscal Year Ending Leases Leases
------------------ --------------------------
2008 $ 46,464 $ 3,349,263
2009 46,464 3,105,844
2010 25,652 2,953,749
2011 - 2,600,211
2012 - 2,099,733
Thereafter - 4,060,656
--------------------------
Total minimum lease payments $ 118,580 $ 18,169,456
============
Less amount representing interest 10,307
-----------
Present value of net minimum
lease payments $ 108,273
===========
|
76
Liability Insurance
The Company carries property, general liability, vehicle liability, directors
and officers liability and workers' compensation, as well as umbrella
liability policies to provide excess coverage over the underlying limits
contained in these primary policies.
The Company's insurance programs for workers' 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 2007 and 2006 was
$1.4 million and $1.1 million, respectively, 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
the Company's opinion, recorded reserves are adequate to cover the future
payment of claims previously incurred. However, it is reasonably possible
that recorded reserves may not be adequate to cover the future payment of
claims.
Adjustments, if any, to claims estimates previously recorded, resulting from
actual claim payments, are reflected in operations in the periods in which
such adjustments are known.
Trinity Springs. Inc. / Crystal Paradise Holdings, Inc. Litigation
The Company and its consolidated subsidiary, TSI, were involved in litigation
regarding shareholder approval of the purchase of substantially all of the
assets of Trinity Springs, Ltd. (which later changed its name to Crystal
Paradise Holdings, Inc. ("CPH")). That litigation has been settled and the
presiding Court has approved the settlement and dismissed the lawsuit with
prejudice.
The settlement resolved all disputes between the minority shareholder
plaintiffs and CPH, AMCON, TSI and the Defendant Directors. The Company faces
no further known liability from that lawsuit or settlement.
CPH filed a separate lawsuit in the Fourth Judicial District of the State of
Idaho (the "Court") against AMCON and TSI and other defendants relating to the
transfer of the assets of CPH to TSI and TSI's operation of the business
thereafter. In this lawsuit, CPH asserted 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.
That litigation has now been settled and the Parties are obligated under the
Mutual Release and Settlement Agreement to file any and all papers with the
Court that are required to dismiss the lawsuit with prejudice.
77
In exchange for (i) a full and complete release from CPH, (ii) cancellation of
the promissory notes issued in connection with the original acquisition, (iii)
termination of the Asset Purchase Agreement and water royalty contained
therein, and (iv) relinquishment of the TSI stock owned by CPH, (a) TSI issued
a promissory note in the amount of $5,000,000 to CPH, with interest accruing
at 5% and secured by the assets currently held by TSI (the "New Note"), (b)
AMCON amended and restated the existing Guaranty and Suretyship Agreement to
substitute the New Note for the cancelled notes, and (c) TSI granted CPH an
eleven-month option to purchase the assets of TSI. If CPH elects to exercise
its purchase option, then CPH will cancel the New Note, including the
obligation to pay any accrued interest. The purchase option may be extended
for an additional seven months upon the discharge of all accrued interest
during the initial option period.
Television Events and Marketing, Inc. vs. AMCON Distributing Company
On July 31, 2007, the Company and its subsidiary, The Beverage Group, Inc.
("TBG") settled its outstanding litigation with Television Events & Marketing,
Inc. ("TEAM"). This action, entitled Television Events & Marketing, Inc. vs.
AMCON Distributing Co., The Beverage Group, Inc., The Beverage Group aka AMCON
Beverage Group, AMCON Corporation and William F. Wright, Civil No. CV 05-00259
ACK KSC, was filed in the First Circuit Court of the State of Hawaii in
Honolulu, Hawaii on March 8, 2005 and was moved on April 12, 2005 to the
United States District Court for the District of Hawaii.
This action concerned the alleged breach of two trademark licensing agreements
between TEAM and the Company's subsidiary, TBG and purportedly, the other
named defendants. On December 21, 2005, the Plaintiffs filed a Second Amended
Complaint. This Second Amended Complaint sought (i) an unstated amount of
damages for an alleged breach of those agreements and alleged
misrepresentation; (ii) interest and reasonable attorney's fees and costs; and
(iii) such other relief as the Court deemed just and proper.
The Company, together with its named subsidiary successfully obtained
dismissal of certain legal theories by motions for summary judgment. The
Company and its subsidiary also filed a Counterclaim in the action on July 5,
2006 against TEAM, TEAM's President and Archie Thornton alleging: (1) Thornton
was an undisclosed dual agent and breached his fiduciary duty to TBG; (2) TEAM
tortuously assisted Thornton in breaching his fiduciary duty; (3) unjust
enrichment/restitution; (4) TEAM breached its duty of good faith and fair
dealing; (5) TEAM and Thornton's failure to disclose Thornton's agency
relationship with TEAM constituted fraud and misrepresentation; and (6)
punitive damages.
As part of the settlement, AMCON paid TEAM $187,500 in August 2007 and became
obligated to pay $187,500 in four equal quarterly installments of $46,875
beginning in January 2008 through October 2010 and $125,000 in four equal
quarterly installments of $31,250 beginning in January 2011 through October
2011. The Company's Chairman has personally and unconditionally guaranteed
the payment obligation of $687,500 as of September 30, 2007. AMCON has
received certain promotion sponsorships as part of the settlement.
78
American Stock Exchange Compliance Plan
In fiscal 2007, the Company was notified by the American Stock Exchange (AMEX)
that it was not in compliance with Section 1003(a)(ii) of the AMEX Company
Guide regarding shareholders' equity of less than $4,000,000, and losses from
continuing operations and/or net losses in three of its four most recent
fiscal years. In order to maintain its AMEX listing, the Company submitted a
comprehensive plan outlining steps to regain compliance with the AMEX's
continued listing standards by March 11, 2008. As of September 30, 2007, the
Company's shareholders' equity of $5.5 million exceeded the threshold set
forth by Section 1003(a)(ii) of the AMEX Company Guide. After maintaining the
required shareholders' equity for two successive quarters, the Company will
have completed its comprehensive plan previously submitted to the AMEX.
15. STOCK OPTION PLAN:
Prior to its expiration in June 2004, AMCON maintained a stock-based
compensation plan ("the Stock Option Plan") which provided the Compensation
Committee of the Board of Directors authorization to grant incentive stock
options and non-qualified stock options, pursuant to the Stock Option Plan, of
up to 550,000 shares. No shares have been issued under the Stock Option Plan
since the end of fiscal 2003 and there was no unamortized compensation expense
related to the Plan at September 2007.
On October 1, 2005, the Company adopted SFAS No. 123R, Shared Based Payment
(SFAS 123R). The Company applied the modified prospective transition method
as permitted by SFAS 123R and therefore has not restated prior periods.
Prior to October 1, 2005, the Company accounted for stock option grants in
accordance with Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" using the intrinsic value method
under which compensation cost was measured by the excess, if any, of the fair
market value of its common stock on the date of grant over the exercise price
of the stock option. Accordingly, stock-based compensation costs 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.
On December 11, 2006, prior to the approval of the Omnibus Plan referred to
below, the Compensation Committee of the Board of Directors awarded
Christopher Atayan, Chief Executive Officer ("CEO"), Vice Chairman and a
Director of the Company, a non-qualified option to purchase 25,000 shares of
the Company's common stock, subject to shareholder approval. On April 17,
2007, the Company's shareholders approved the stock option grant, which vests
in three equal installments over a three year period and has an exercise price
of $18.00 per share, the December 11, 2006 closing price of the Company's
common stock on the American Stock Exchange.
The Company has estimated that the fair value of the non-qualified stock
option award to Mr. Atayan was approximately $347,000 using the Black-Scholes
option pricing model. This cost will be amortized to compensation expense
over a three year service period. The following assumptions were used in
connection with the Black-Scholes option pricing calculation:
79
Stock Option Pricing Assumptions
--------------------------------
Fiscal 2007 Awards
------------------
Risk-free interest rate 4.69%
Dividend yield 1.65%
Expected volatility 46%
Expected life in years 7
Forfeiture rate 0%
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On April 17, 2007, the Board of Directors of the Company approved an equity
incentive plan, the 2007 Omnibus Incentive Plan ("the Omnibus Plan"), to
encourage employees of the Company and subsidiaries to acquire a proprietary
and vested interest in the growth and performance of the Company. The Omnibus
Plan permits the issuance of up to 150,000 shares of the Company's common
stock in the form of stock options, restricted stock awards, restricted stock
units, performance share awards as well as awards such as stock appreciation
rights, performance units, performance shares, bonus shares and dividend share
awards payable in the form of common stock or cash. As of September 2007, no
awards have been granted under the Omnibus Plan.
Net income (loss) before incomes taxes for fiscal 2007 and 2006 included
share-based compensation expense of approximately $71,000 and $60,000,
respectively. At September 2007, there were 26,118 stock options fully vested
and exercisable under the Stock Option Plan and no unamortized compensation
expense. Total unamortized compensation expense related to the April 2007
stock option award to the Company's CEO totaled approximately $290,000 at
September 2007.
Options issued and outstanding to management employees pursuant to the Stock
Option Plan and April 2007 stock option award to the Company's CEO are
summarized below:
Number of Number Aggregate
Date Exercise Price Options Exercisable Intrinsic Value
Outstanding September 2007
-------------------------------------------------------------------------------
Fiscal 1998 $ 15.68 7,630 7,630 $ 90,187
Fiscal 1999 $ 45.68 - $ 51.14 6,683 6,683 -
Fiscal 2000 $ 34.50 3,165 3,165 -
Fiscal 2003 $ 28.80 3,212 2,570 -
Fiscal 2007 $ 18.00 25,000 - 237,500
------ ------ --------
45,690 20,048 $327,687
====== ====== ========
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80
At September 2007, there were 8,188 options fully vested and exercisable
issued to outside directors, outside of the Stock Option Plan, as summarized
as follows:
Number of Number Aggregate
Date Exercise Price Options Exercisable Intrinsic Value
Outstanding September 2007
------------------------------------------------------------------------------
Fiscal 1998 $ 15.68 1,834 1,834 $ 21,678
Fiscal 1999 $ 36.82 - $ 49.09 2,568 2,568 -
Fiscal 2002 $ 26.94 834 834 467
Fiscal 2003 $ 28.26 834 834 -
------ ------ --------
6,070 6,070 $ 22,145
====== ====== ========
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The stock options have varying vesting schedules ranging up to five years and
expire ten years after the date of grant.
The following is a summary of stock option activity during fiscal 2007.
September 2007
-----------------
Weighted
Number Average
of Exercise
Shares Price
-----------------
Outstanding at beginning of period 31,253 $30.62
Granted 25,000 $18.00
Exercised (2,375) $19.66
Forfeited/Expired (2,118) $35.79
-----------------
Outstanding at end of period 51,760 $24.81
=================
Options exercisable at end of period 26,118
========
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The following summarizes all stock options outstanding at September 2007:
Exercisable
Remaining ----------------------------
Exercise Number Weighted-Average Weighted-Average Number Weighted-Average
Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------- ----------- ---------------- ---------------- ----------- ----------------
1998 Options $15.68 9,464 0.1 years $15.68 9,464 $15.68
1999 Options $36.82-$51.14 9,251 1.6 years $47.39 9,251 $47.39
2000 Options $34.50 3,165 2.7 years $34.50 3,165 $34.50
2002 Options $26.94 834 4.9 years $26.94 834 $26.94
2003 Options $28.26-$28.80 4,046 5.2 years $28.69 3,404 $28.67
2007 Options $18.00 25,000 9.5 years $18.00 - -
------ ------ ------ ------
51,760 $24.81 26,118 $31.25
====== ====== ====== ======
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81
16. DERIVATIVE INSTRUMENTS:
The Company borrows money at variable interest rates which exposes it to risk
that interest expense will increase if the benchmark interest rate used to set
the variable rates increases. In order to reduce its exposure to this risk,
the Company may use derivative instruments (i.e. interest rate swaps
agreements) pursuant to established Company policies. At September 2005, the
Company had an interest rate swap agreement outstanding with a notional amount
of $10.0 million, with related borrowings on the Facility. The Company had no
derivative instruments outstanding at September 2007 or 2006.
The interest rate swap was used to effectively convert portions of the
Company's floating rate debt to fixed rate debt. The interest rate swap
agreement outstanding at September 2005 was accounted for as cash flow hedge,
with the associated gain deferred in accumulated other comprehensive income,
as the hedge was considered to be effective. Any ineffectiveness associated
with the Company's 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. The segments are evaluated on revenues,
gross margins, operating income (loss), and income before taxes. The table
below has been restated to reflect the change in accounting principle as
discussed in Note 1.
Wholesale
Distribution Retail Other/1/ Consolidated
---------------------------------------------------------------------
FISCAL YEAR ENDED 2007:
External revenues:
Cigarettes $ 607,831,882 $ - $ - $ 607,831,882
Health food - 37,880,246 - 37,880,246
Confectionery 57,515,227 - - 57,515,227
Tobacco, beverage & other 150,339,157 - - 150,339,157
---------------------------------------------------------------------
Total external revenues 815,686,266 37,880,246 - 853,566,512
Depreciation 1,256,223 535,265 419 1,791,907
Amortization - 39,733 - 39,733
Operating income (loss) 12,864,294 3,130,394 (4,541,219) 11,453,469
Interest expense 1,017,846 1,506,402 2,292,076 4,816,324
Income (loss) from continuing
operations before taxes 11,886,864 1,671,275 (6,726,386) 6,831,753
Total assets 73,617,793 11,857,395 6,588,397 92,063,585
Capital expenditures 300,897 213,380 - 514,277
82
Wholesale
Distribution Retail Other/1/ Consolidated
---------------------------------------------------------------------
FISCAL YEAR ENDED 2006:
External revenues:
Cigarettes $ 605,798,030 $ - $ - $ 605,798,030
Health food - 36,848,392 - 36,848,392
Confectionery 55,427,905 - - 55,427,905
Tobacco, beverage & other 141,465,453 - - 141,465,453
---------------------------------------------------------------------
Total external revenues 802,691,388 36,848,392 - 839,539,780
Depreciation 1,287,994 609,172 - 1,897,166
Amortization - 39,731 - 39,731
Operating income (loss) 8,208,936 2,378,155 (3,895,102) 6,691,989
Interest expense 1,700,935 1,611,619 1,545,458 4,858,012
Income (loss) from continuing
operations before taxes 6,607,833 803,920 (5,440,535) 1,971,218
Total assets 70,976,007 12,661,013 14,380,835 98,017,855
Capital expenditures 803,179 177,331 - 980,510
FISCAL YEAR ENDED 2005 (53 weeks):
External revenues:
Cigarettes $ 607,263,715 $ - $ - $ 607,263,715
Health food - 34,617,325 - 34,617,325
Confectionery 56,057,063 - - 56,057,063
Tobacco, beverage & other 136,725,439 - (112,094) 136,613,345
---------------------------------------------------------------------
Total external revenues 800,046,217 34,617,325 (112,094) 834,551,448
Depreciation 1,255,200 784,353 - 2,039,553
Amortization 57,752 58,678 - 116,430
Operating income (loss) 10,337,861 (3,389,055) (3,112,558) 3,836,248
Interest expense 1,042,685 1,580,033 1,588,967 4,211,685
Income (loss) from continuing
operations before taxes 9,336,613 (4,930,418) (4,701,527) (295,332)
Total assets 71,821,207 13,524,609 12,981,533 98,327,349
Capital expenditures 2,349,690 115,004 - 2,464,694
/1/ Includes interest expense previously allocated to HNWC and TSI, intercompany eliminations,
charges incurred by the holding company, and assets of discontinued operations.
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18. 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, 2007 and September
30, 2006. 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.
83
(Dollars in thousands, except per share data)
------------------------------------------------------------------------------------------
Fiscal Year 2007 First/1/ Second/1/ Third/1/ Fourth
------------------------------------------------------------------------------------------
Sales...................................... $ 209,366 $ 201,177 $ 220,072 $ 222,952
Gross profit .............................. 15,094 15,248 17,045 16,862
Income from continuing operations ---------------------------------------------
before income taxes ..................... 994 540 2,548 2,750
Income from continuing operations.......... 611 332 1,553 1,710
Gain (loss) on disposal of discontinued
operations, net of income tax expense
(benefit) 895 (67) - -
Loss from discontinued operations.......... (258) (124) (132) (80)
---------------------------------------------
Net income................................. 1,248 141 1,421 1,630
Preferred stock dividend requirements...... (105) (103) (104) (106)
Net income available to common ---------------------------------------------
shareholders ............................. $ 1,143 $ 38 $ 1,317 $ 1,524
=============================================
Basic earnings (loss) per share available
to common shareholders:
Continuing operations ................... $ 0.96 $ 0.43 $ 2.75 $ 3.04
Discontinued operations ................. 1.21 (0.36) (0.25) (0.15)
---------------------------------------------
Net basic earnings per share available
to common shareholders ................. $ 2.17 $ 0.07 $ 2.50 $ 2.89
=============================================
Diluted earnings (loss) per share available
to common shareholders:
Continuing operations ................... $ 0.71 $ 0.37 $ 1.80 $ 1.99
Discontinued operations ................. 0.75 (0.27) (0.15) (0.09)
---------------------------------------------
Net diluted earnings (loss) per share
available to common shareholders $ 1.46 $ 0.10 $ 1.65 $ 1.90
=============================================
/1/ Restated for the retroactive application of the FIFO inventory valuation method.
See Note 1 to the Consolidated Financial Statements.
|
84
(Dollars in thousands, except per share data)
------------------------------------------------------------------------------------------
Fiscal Year 2006 (As Restated - see Note 1) First Second Third Fourth
------------------------------------------------------------------------------------------
Sales...................................... $ 198,217 $ 195,804 $ 222,190 $ 223,329
Gross profit .............................. 14,109 14,655 15,616 15,970
---------------------------------------------
(Loss) income from continuing operations
before income taxes ..................... (157) 510 1,120 498
(Loss) income from continuing operations... (109) 299 681 586
Loss from discontinued operations.......... (1,003) (827) (344) (262)
---------------------------------------------
Net (loss) income.......................... (1,112) (528) 337 324
Preferred stock dividend requirements...... (75) (81) (104) (106)
Net (loss) income available to common ---------------------------------------------
shareholders.............................. $ (1,187) $ (609) $ 233 $ 218
=============================================
Basic (loss) earnings per share available
to common shareholders:
Continuing operations ................... $ (0.35) $ 0.41 $ 1.09 $ 0.91
Discontinued operations ................. (1.90) (1.57) (0.65) (0.50)
---------------------------------------------
Net basic (loss) earnings per share
available to common shareholders......... $ (2.25) $ (1.16) $ 0.44 $ 0.41
=============================================
Diluted (loss) earnings per share available
to common shareholders:
Continuing operations ................... $ (0.35) $ 0.39 $ 0.80 $ 0.69
Discontinued operations ................. (1.90) (1.42) (0.41) (0.31)
---------------------------------------------
Net diluted (loss) earnings per share
available to common shareholders........ $ (2.25) $ (1.03) $ 0.39 $ 0.38
=============================================
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