UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 31, 2006
OR
/ / Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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COMMISSION FILE NUMBER 1-15589
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AMCON Distributing Company
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(Exact name of Registrant as specified in its charter)
Delaware 47-0702918
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7405 Irvington Road, Omaha NE 68122
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(Address of principal executive offices)
Registrant's telephone number, including area code: (402) 331-3727
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer X
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The Registrant had 527,062 shares of its $.01 par value common stock
outstanding as of January 22, 2007.
Form 10-Q
1st Quarter
INDEX
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
--------------------------------------------
Condensed consolidated balance sheets at
December 31, 2006 (unaudited) and September 30, 2006 3
Condensed consolidated unaudited statements of operations
for the three months ended December 31, 2006 and
2005 4
Condensed consolidated unaudited statements of cash flows
for three months ended December 31, 2006 and
2005 5
Notes to condensed consolidated unaudited
financial statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits 34
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Balance Sheets
December 31, 2006 and September 30, 2006
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December 2006 September 2006
(Unaudited)
------------ --------------
ASSETS
Current assets:
Cash $ 433,565 $ 481,138
Accounts receivable, less allowance for doubtful
accounts of $0.9 million and $0.9 million, respectively 28,207,328 27,815,751
Inventories, net 26,291,459 24,443,063
Deferred income taxes 1,972,988 1,972,988
Current assets of discontinued operations 13,744 1,172,805
Prepaid and other current assets 5,054,447 5,369,154
------------ ------------
Total current assets 61,973,531 61,254,899
Property and equipment, net 12,248,355 12,528,539
Goodwill 5,848,808 5,848,808
Other intangible assets 3,429,869 3,439,803
Deferred income taxes 5,857,028 6,772,927
Noncurrent assets from discontinued operations 2,382,648 3,774,106
Other assets 1,313,750 1,247,464
------------ ------------
$ 93,053,989 $ 94,866,546
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 13,830,334 $ 14,633,124
Accrued expenses 4,483,797 4,687,789
Accrued wages, salaries and bonuses 1,362,488 1,879,699
Income taxes payable 69,987 168,936
Current liabilities of discontinued operations 5,747,896 7,461,549
Current maturities of credit facility 3,896,000 3,896,000
Current maturities of long-term debt 492,816 524,130
------------ ------------
Total current liabilities 29,883,318 33,251,227
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Credit facility, less current maturities 45,661,073 44,927,429
Long-term debt, less current maturities 6,939,204 7,069,357
Noncurrent liabilities of discontinued operations 4,865,822 5,087,230
Series A cumulative, convertible preferred stock, $.01 par value
100,000 shares authorized and issued, liquidation preference
$25.00 per share 2,438,355 2,438,355
Series B cumulative, convertible preferred stock, $.01 par value
80,000 shares authorized and issued, liquidation preference
$25.00 per share 1,857,645 1,857,645
Series C cumulative, convertible preferred stock, $.01 par value
80,000 shares authorized and issued, liquidation preference
$25.00 per share 1,982,372 1,982,372
Commitments and contingencies (Note 11)
Shareholders' equity (deficiency):
Preferred stock, $0.01 par, 1,000,000 shares authorized,
none outstanding - -
Common stock, $.01 par value, 3,000,000
shares authorized, 527,062 outstanding 5,271 5,271
Additional paid-in capital 6,281,476 6,278,476
Accumulated deficit (6,860,547) (8,030,816)
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Total shareholders' deficiency (573,800) (1,747,069)
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$ 93,053,989 $ 94,866,546
============ ============
The accompanying notes are an integral part of these condensed consolidated unaudited financial
statements.
3
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of Operations
for the three months ended December 31, 2006 and 2005
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2006 2005
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Sales (including excise taxes of
$49.5 million and $48.2 million,
respectively) $ 209,366,149 $ 198,217,081
Cost of sales 194,325,018 184,189,751
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Gross profit 15,041,131 14,027,330
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Selling, general and administrative expenses 12,405,083 12,650,217
Depreciation and amortization 457,843 478,725
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12,862,926 13,128,942
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Operating income 2,178,205 898,388
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Other expense (income):
Interest expense 1,268,662 1,157,466
Other (income), net (31,081) (20,782)
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1,237,581 1,136,684
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Income (loss) from continuing operations
before income taxes 940,624 (238,296)
Income tax expense (benefit) 363,000 (79,000)
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Income (loss) from continuing operations 577,624 (159,296)
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Discontinued operations (Note 2)
Gain on disposal of discontinued operations,
net of income tax expense of $0.7 million 895,588 -
(Loss) from discontinued operations,
net of income tax (benefit) of ($0.1) million
and ($0.6) million, respectively (197,410) (1,027,638)
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Income (loss) on discontinued operations 698,178 (1,027,638)
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Net income (loss) 1,275,802 (1,186,934)
Preferred stock dividend requirements (105,533) (74,867)
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Net income (loss) available to common shareholders $ 1,170,269 $ (1,261,801)
============= =============
Basic earnings (loss) per share
available to common shareholders:
Continuing operations $ 0.90 $ (0.44)
Discontinued operations 1.32 (1.95)
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Net basic earnings (loss) per share
available to common shareholders $ 2.22 $ (2.39)
============= =============
Diluted earnings (loss) per share
available to common shareholders:
Continuing operations $ 0.68 $ (0.44)
Discontinued operations 0.81 (1.95)
------------- -------------
Net diluted earnings (loss) per share
available to common shareholders $ 1.49 $ (2.39)
============= =============
Weighted average shares outstanding:
Basic 527,062 527,062
Diluted 854,427 527,062
The accompanying notes are an integral part of these condensed consolidated unaudited financial
statements.
4
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of Cash Flows
for the three month periods ended December 31, 2006 and 2005
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2006 2005
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,275,802 $ (1,186,934)
Deduct: income (loss) from discontinued operations, net of tax 698,178 (1,027,638)
------------ ------------
Income (loss) from continuing operations 577,624 (159,296)
Adjustments to reconcile net income (loss) from
continuing operations to net cash flows
from operating activities:
Depreciation 447,909 468,792
Amortization 9,934 9,933
(Gain) loss on sale of property and equipment (11,116) 2,035
Stock based compensation 3,000 15,000
Deferred income taxes 915,899 (543,423)
Provision for losses on doubtful accounts (76,196) -
Provision for losses on inventory obsolescence 172,503 88,132
Changes in assets and liabilities:
Accounts receivable (315,381) 1,686,986
Inventories (2,020,899) (4,710,930)
Other current assets 314,707 579,042
Other assets (66,286) (7,836)
Accounts payable (802,790) 1,672,707
Accrued expenses and accrued wages, salaries and bonuses (721,203) (935,357)
Income tax payable and receivable (98,949) (118,798)
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Net cash flows from operating activities - continuing operations (1,671,244) (1,953,013)
Net cash flows from operating activities - discontinued operations (1,844,710) (529,260)
------------ ------------
Net cash flows from operating activities (3,515,954) (2,482,273)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (170,809) (133,871)
Proceeds from sales of property and equipment 14,200 29,599
------------ ------------
Net cash flows from investing activities - continuing operations (156,609) (104,272)
Net cash flows from investing activities - discontinued operations 3,753,394 (17,771)
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Net cash flows from investing activities 3,596,785 (122,043)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on bank credit agreements 733,644 3,194,790
Dividends paid on preferred stock (105,533) (74,867)
Principal payments on long-term debt (161,467) (163,491)
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Net cash flows from financing activities - continuing operations 466,644 2,956,432
Net cash flows from financing activities - discontinued operations (595,048) 633,543
------------ ------------
Net cash flows from financing activities (128,404) 3,589,975
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Net change in cash (47,573) 985,659
Cash, beginning of period 481,138 546,273
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Cash, end of period $ 433,565 $ 1,531,932
============ ============
5
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,262,202 $ 1,162,291
Cash paid (refunded) during the period for income taxes 98,949 (26,890)
Supplemental disclosure of non-cash information:
Buyer's assumption of HNWC lease in connection with
the sale of HNWC's assets - discontinued operations 225,502 -
The accompanying notes are an integral part of these condensed consolidated unaudited financial
statements.
6
AMCON Distributing Company and Subsidiaries
Notes to Condensed Consolidated Unaudited Financial Statements
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION:
AMCON Distributing Company and Subsidiaries ("AMCON" and "the Company") is
primarily engaged in the wholesale distribution of consumer products in the
Great Plains and Rocky Mountain regions. In addition, the Company operates
thirteen retail health food stores in Florida and the Midwest.
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.
Results for the interim period are not necessarily indicative of results to
be expected for the entire year.
The accompanying condensed consolidated unaudited financial statements
include the accounts of AMCON Distributing Company and its subsidiaries.
The Company continues to consolidate all of Trinity Springs, Inc. ("TSI")
losses in discontinued operations even though it owns 85% of the stock of TSI
because the minority shareholders have not guaranteed any of the debt or
committed additional capital to TSI. See Note 11 related to ongoing TSI
litigation.
All significant intercompany transactions and balances have been eliminated
in consolidation. Certain information and footnote disclosures normally
included in our annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
In the opinion of management, the accompanying condensed consolidated
unaudited financial statements contain all adjustments necessary to fairly
present the financial information included therein, such adjustments
consisting of normal recurring items. The Company believes that although the
disclosures are adequate to prevent the information presented from being
misleading, these condensed consolidated unaudited financial statements
should be read in conjunction with the Company's annual audited consolidated
financial statements for the year ended September 30, 2006, as filed with the
Securities and Exchange Commission on Form 10-K ("2006 Annual Report").
For convenience, the first fiscal quarters of 2007 and 2006 have been
referred to throughout this quarterly report as December 2006 and December
2005, respectively.
7
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. The Company adopted SFAS No. 123 (revised 2004) (SFAS 123R), Share
Based Payment, on October 1, 2005 whereby compensation costs associated with
the unvested portion of previously granted employee stock options have been
recognized in the statement of operations since adoption. This expense has
been reflected in the consolidated statement of operations under "selling,
general and administrative expenses." Accordingly, the Company has recorded
compensation expense of $3,000 and $15,000 for three month periods ended
December 2006 and December 2005, respectively.
Recently Issued Accounting Pronouncements
-----------------------------------------
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 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. DISPOSITIONS
Discontinued operations includes the assets and liabilities of TSI and HNWC
at December 31, 2006 and TBG as of December 2005. TBG ceased on-going
operations effective March 31, 2005 at which time it was classified as
discontinued operations. In April 2006, the Company successfully concluded
its wind-down plan of TBG's operations at which time its residual liabilities
were reclassified to continuing operations. This reclassification has been
reflected throughout this Quarterly Report on Form 10-Q.
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."
8
Hawaiian Natural Water Company, Inc. (HNWC)
-------------------------------------------
In September 2006, all of the criteria of SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" were met and the Company
classified HNWC as a component of discontinued operations. On November 20,
2006, all of the operating assets of HNWC were sold 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 pretax gain on disposal of discontinued operations in the first
quarter of fiscal 2007. HNWC, which was headquartered in Pearl City, Hawaii,
was part of the Company's former beverage segment. HNWC bottled, marketed
and distributed Hawaiian natural artesian water, purified water and other
limited production co-packaged products in Hawaii and the mainland.
Trinity Springs, Inc. (TSI)
---------------------------
In March 2006, the Company discontinued the operations of TSI due to
recurring losses and a lack of capital resources to sustain operations.
TSI operated a water bottling facility in Idaho and was a component of the
Company's former beverage segment. TSI has been reflected in the
accompanying condensed consolidated financial statements as a component of
discontinued operations.
The Beverage Group, Inc. (TBG)
--------------------------------
In March 2005, the Company's subsidiary, TBG, which represented the beverage
marketing and distribution component of the Company's former beverage
segment, also ceased on-going operations due to recurring losses and
accordingly was classified as a component of discontinued operations. In
April 2006, the Company successfully concluded its wind-down plan of TBG's
operations at which time its residual liabilities were reclassified to
continuing operations.
Summary of Financial Information
--------------------------------
Discontinued operations include the results from operations for HNWC and TSI
for the three months ended December 2006 and HNWC, TSI and TBG for the three
months ended December 2005. The effects of the discontinued operations on
net income (loss) available to common shareholders and per share data are
reflected within the consolidated financial statements. Sales from
discontinued operations, which have been excluded from income from continuing
operations in the accompanying condensed consolidated unaudited statements of
operations, are presented as follows.
9
Three months ended Three months ended
December 2006 December 2005
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Sales $ 862,647 $ 2,466,117
Operating loss (215,980) (1,554,157)
Gain on disposal of discontinued operations,
before income taxes 1,562,588 -
Income tax expense (benefit) 553,000 (599,000)
Income (loss) from discontinued operations 698,178 (1,027,638)
The carrying amounts (net of allowances) of the major classes of assets and
liabilities are as follows (in millions):
December September
2006 2006
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Accounts receivable $ - $ 0.7
Inventories - 0.5
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Total current assets of discontinued operations $ - $ 1.2
========== ==========
Fixed assets $ 2.4 $ 3.8
========== ==========
Accounts payable $ 0.9 $ 2.0
Accrued expenses 1.0 1.0
Accrued wages, salaries and bonuses - 0.3
Current portion of long-term debt 1.0 1.4
Current portion of long-term debt due related party 2.8 2.8
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Total current liabilities of discontinued operations $ 5.7 $ 7.5
========== ==========
Water royalty, in perpetuity $ 2.8 $ 2.8
Long-term debt, less current portion 2.1 2.3
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Noncurrent liabilities of discontinued operations $ 4.9 $ 5.1
========== ==========
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.
- 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.
- 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
bears interest of 7.0% per annum.
10
- TSI owes Draupnir, LLC, a private equity firm of which two of the
Company's directors are Members, $750,000 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.
All of the aforementioned notes payable to related parties from TSI are in
default as of December 31, 2006 and are classified in current liabilities of
discontinued operations.
TSI Water Royalty
------------------
As part of June 17, 2004 asset purchase agreement in which the Company
purchased the assets to form TSI, TSI became obligated to pay Crystal
Paradise Holdings, Inc. ("CPH"), in perpetuity, an amount equal to the
greater of $0.03 per liter of water extracted from the source or 4.0% of
water revenues (as defined by the purchase agreement). The agreement is
guaranteed by AMCON up to a maximum of $5.0 million, subject to a floor of
$288,000 annually. Accordingly, the Company has recorded a $2.8 million
liability related to the present value of the future minimum water royalty
payments and related broker fees to be paid in perpetuity. This liability is
classified as noncurrent liability of discontinued operations.
The water royalty is secured by a first priority security and mortgage on the
acquired assets, other than inventory and accounts receivable. CPH retains
the right to receive any water royalty payment for the first five years in
shares of AMCON common stock up to maximum of 41,666 shares. The water
royalty can be cancelled after ten years have elapsed and the business of TSI
is sold to an unaffiliated third party, in which case CPH would be entitled
to receive the appraised fair market value of the water royalty but not less
than $5.0 million. The Company's Chairman has in turn guaranteed AMCON in
connection with AMCON's obligation for these payments. The Company is in
settlement discussions with respect to the TSI litigation discussed in Note
11 to the Condensed Consolidated Unaudited 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. Management believes that the recorded balances
of the subject assets and liabilities have been recognized at their
respective fair values.
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%
11
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 December 31, 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. 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.
12
4. INVENTORIES
Inventories consisted of the following at December 2006 and September 2006:
December September
2006 2006
------------ ------------
Finished goods $ 31,308,878 $ 29,407,201
LIFO reserve (5,017,419) (4,964,138)
------------ ------------
$ 26,291,459 $ 24,443,063
============ ============
The wholesale distribution and retail health food segment inventories consist
of finished products purchased in bulk quantities to be redistributed to the
Company's customers or sold at retail. The wholesale distribution
inventories are stated at the lower of cost (last-in, first-out or "LIFO"
method) or market and consist of the cost of finished goods. The retail
health food operation utilizes the retail inventory method of accounting
stated at the lower of cost (LIFO) or market and consists of the costs of
finished goods. The LIFO reserves at December 2006 and September 2006
represent the amount by which LIFO inventories were less than the amount of
such inventories valued on a first-in, first-out basis, respectively.
Inventory also includes an allowance for obsolescence of $0.4 million at
December 2006 and September 2006. The Company's obsolescence allowance
reflects estimated unsaleable or non-refundable inventory based upon an
evaluation of slow moving and discontinued products.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill by reporting segment for continuing operations of the Company
consisted of the following:
December September
2006 2006
------------ ------------
Wholesale $ 3,935,931 $ 3,935,931
Retail 1,912,877 1,912,877
------------ ------------
$ 5,848,808 $ 5,848,808
============ ============
Other intangible assets for continuing operations of the Company at December
2006 and September 2006 consisted of the following:
December September
2006 2006
------------ ------------
Trademarks and tradenames $ 3,373,269 $ 3,373,269
Favorable leases (less accumulated
amortization of $429,400 and $419,466) 56,600 66,534
------------ ------------
$ 3,429,869 $ 3,439,803
============ ============
13
Goodwill, trademarks and tradenames are considered to have indefinite
useful lives and therefore no amortization has been taken on these assets.
The Company performs an annual impairment testing of goodwill and other
intangible assets after the completion of its third fiscal quarter.
Amortization expense for intangible assets that are considered to have finite
lives was $9,934 and $9,933 for the three months ended December 2006 and
2005, respectively.
Amortization expense related to intangible assets held at December 2006 for
each of the five years subsequent to September 30, 2006 is estimated to be as
follows:
Fiscal Fiscal Fiscal Fiscal Fiscal
2007 /1/ 2008 2009 2010 2011
--------- --------- -------- -------- --------
Favorable leases 30,000 27,000 - - -
========= ========= ======== ======== ========
/1/ Represents amortization expense of finite life intangible assets for the
remaining nine months of Fiscal 2007.
6. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share available to common shareholders is
calculated by dividing income (loss) from continuing operations less
preferred stock dividend requirements and loss from discontinued operations
by the weighted average common shares outstanding for each period. Diluted
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 December 2006 and
December 2005 that were anti-dilutive were not included in the computations
of diluted earnings per share. Such potential common shares totaled 20,245
with an average exercise price of $38.74 for the three months ended December
2006 and 193,742 with an average exercise price of $29.09 for the three
months ended December 2005.
14
For the three months ended December
------------------------------------------------------
2006 2005
------------------------- ------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- ----------
1. Weighted average common
shares outstanding 527,062 527,062 527,062 527,062
2. Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds
used to purchase treasury
stock and conversion of
preferred stock /1/ - 327,365 - -
----------- ----------- ----------- -----------
3. Weighted average number of
shares outstanding 527,062 854,427 527,062 527,062
=========== =========== =========== ===========
4. Income (loss) from continuing
operations $ 577,624 $ 577,624 $ (159,296) $ (159,296)
Deduct: preferred stock
dividend requirements /2/ (105,533) - (74,867) (74,867)
----------- ----------- ----------- -----------
472,091 577,624 (234,163) (234,163)
=========== =========== =========== ===========
5. Income (loss) from discontinued
operations $ 698,178 $ 698,178 $(1,027,638) $(1,027,638)
=========== =========== =========== ===========
6. Net income (loss) available
to common shareholders $ 1,170,269 $ 1,275,802 $(1,261,801) $(1,261,801)
=========== =========== =========== ===========
7. Earnings (loss) per share
from continuing operations $ 0.90 $ 0.68 $ (0.44) $ (0.44)
=========== =========== =========== ===========
8. Earning (loss) per share from
discontinued operations $ 1.32 $ 0.81 $ (1.95) $ (1.95)
=========== =========== =========== ===========
9. Net earnings (loss) per share
available to common shareholders $ 2.22 $ 1.49 $ (2.39) $ (2.39)
=========== =========== =========== ===========
/1/ Dilutive shares includes stock options and Series A, B and C Convertible
Preferred Stock outstanding at December 2006. All stock options and convertible
securities were anti-dilutive and are accordingly not a component of the diluted weighted
average number of shares outstanding at December 2005.
/2/ Series A, B & C Convertible Preferred Stock were dilutive at December 2006. Accordingly,
the December 2006 dilutive earnings calculation includes no convertible securities dividend
payments as all convertible securities were assumed to have been converted to common stock
of the Company. All stock options and convertible securities were anti-dilutive at
December 2005.
7. COMPREHENSIVE INCOME (LOSS)
The following is a reconciliation of net income (loss) per the accompanying
condensed consolidated unaudited statements of operations to comprehensive
income (loss) for first three months of fiscal 2006. There were no such
reconciling items to net income, or accumulated other comprehensive income
(loss) balances, during the first three months of fiscal 2007.
15
December 2005
-------------
Net loss $(1,186,934)
Interest rate swap valuation
adjustment, net of income tax
benefit (expense) of $11,000
for the three months ended
December 31, 2005 (18,129)
-----------
Comprehensive loss $(1,205,063)
===========
8. DEBT
Credit Agreement
----------------
In December 2006, the Company amended its credit agreement with LaSalle Bank
(the "Facility"). The significant terms of the Facility at December 31, 2006
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 $2.0 million at December 31, 2006 for a total credit
facility limit of $57.0 million at December 31, 2006.
- Bears interest at the bank's prime interest rate.
- Maturity and expiration dates for the Facility and Term Note A
of April 2009 and March 2008 for Term Note B.
- 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
and financial covenants.
- Includes a prepayment penalty of two percent (2%) and one percent
(1%) of the prepayment loan limit of $55.0 million if prepayment occurs
on or before April 30, 2007 and April 30, 2008, respectively.
The December 2006 Facility amendment replaced all prior financial covenants
with quarterly cumulative earnings before interest, taxes, depreciation and
amortization ("EBITDA") covenants in addition to a quarterly minimum debt
service ratio financial covenant of 1.0 to 1.0 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 is in compliance with the covenants at
December 31, 2006.
16
Additionally, the Facility 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.
At December 31, 2006, the available credit on the revolving portion of the
Facility, including accounts receivable and inventory limitations, was $50.7
million and the outstanding balance was $47.6 million. The Facility bears
interest at the bank's prime rate, which was 8.25% as of December 31, 2006
and is collateralized by all of the Company's equipment, intangibles,
inventories, and accounts receivable.
As a component of the credit agreement, the Company also has two term notes,
Term Note A and Term Note B, with LaSalle Bank. Term Note A bears interest
at the bank's prime rate (8.25% at December 31, 2006) and is payable in
monthly installments of $16,333. Term Note B bears interest at the bank's
prime rate plus 2% (10.25% at December 31, 2006) and is payable in monthly
installments of $100,000. The outstanding balances on Term Note A and Term
Note B were $0.7 million and $1.3 million, respectively, as of December 31,
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, which resulted in the guaranteed principal outstanding being reduced
to $6.3 million as of December 31, 2006. 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 Natural Foods Inc., Health Food Associates Inc., HNWC and TSI.
Cross Default and Co-Terminus Provisions
-----------------------------------------
The Company's owned real estate in Bismarck, ND, Quincy, IL, and Rapid City,
SD, and certain warehouse equipment in the Rapid City, SD warehouse is
financed through term loans with Marshall and Ilsley Bank ("M&I"), who 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.
17
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.
9. STOCK PLANS
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.
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 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. Options are generally granted at the stock's fair market
value at date of grant. Options issued to shareholders holding 10% or more
of the Company's stock are generally issued at 110% of the stock's fair
market value at date of grant.
On October 1, 2005, the Company adopted SFAS No. 123R, Shared Based Payment
(SFAS 123R). The Company chose to apply the modified prospective transition
method as permitted by SFAS 123R and therefore has not restated prior
periods. Under this transition method, compensation cost associated with
employee stock options recognized for the three months ended December 31,
2006, includes amortization related to the remaining unvested portion of
stock options granted prior to September 30, 2005. The Company's only stock
option grant since fiscal 2003 was a non-qualified option to purchase 25,000
shares of the Company's common stock awarded to the Company's Chief Executive
Officer. Because the Company's stock option plan terminated in 2004, the
option is subject to approval by the stockholders of the Company at the next
annual meeting. If such stockholder approval is not obtained at the meeting,
the option will be automatically terminated.
As a result of adopting SFAS 123R, net income (loss) before taxes included
share-based compensation expense of $3,000 for the three months ended
December 31, 2006. At December 31, 2006, there were 29,635 options fully
vested and exercisable under the Stock Option Plan and unamortized
compensation expense totaled approximately $10,000. Options issued and
outstanding to management employees pursuant to the Stock Option Plan are
summarized below:
18
Number of Number
Date Exercise Price Options Outstanding Exercisable
------------------------------------------------------------------
Fiscal 1998 $ 15.68 9,171 9,171
Fiscal 1999 $ 36.82 - $ 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 December 31, 2006, there were 8,188 options fully vested and exercisable
issued to outside directors outside the Stock Option Plan as summarized as
follows:
Number of Number
Date Exercise Price Options Outstanding Exercisable
------------------------------------------------------------------
Fiscal 1998 $ 15.68 1,834 1,834
Fiscal 1999 $ 36.82 - $ 49.09 3,852 3,852
Fiscal 2002 $ 26.94 1,668 1,668
Fiscal 2003 $ 28.26 834 834
------ ------
8,188 8,188
====== ======
The stock options have varying vesting schedules ranging up to five years and
expire ten years after the date of grant.
The following is a summary of stock option activity during the three months
ended December 31, 2006.
December 2006
-----------------
Weighted
Number Average
of Exercise
Shares Price
-----------------
Outstanding at beginning of period 31,253 $30.62
Granted - -
Exercised - -
Forfeited/Expired - -
-----------------
Outstanding at end of period 31,253 $30.62
=================
Options exercisable at end of period 29,635
========
19
The following summarizes all stock options outstanding at December 31, 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
====== ====== ====== ======
10. 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
------------- ----------- ---------- -------------
QUARTER ENDED DECEMBER 2006:
External revenue:
Cigarettes $ 150,858,196 $ - $ - $ 150,858,196
Confectionery 13,438,708 - - 13,438,708
Health food - 9,078,710 - 9,078,710
Tobacco, food service & other 35,990,535 - - 35,990,535
------------- ----------- ---------- -------------
Total external revenue 200,287,439 9,078,710 - 209,366,149
Depreciation 306,072 141,837 - 447,909
Amortization - 9,934 - 9,934
Operating income (loss) 2,589,566 501,568 (912,929) 2,178,205
Interest expense 299,080 386,555 583,027 1,268,662
Income (loss) from continuing
operations before taxes 1,925,950 77,237 (1,425,563) 577,624
Total assets 72,061,055 12,093,238 8,899,696 93,053,989
Capital expenditures 90,505 80,304 - 170,809
QUARTER ENDED DECEMBER 2005:
External revenue:
Cigarettes $ 144,438,366 $ - $ - $ 144,438,366
Confectionery 12,205,743 - - 12,205,743
Health food - 9,014,559 - 9,014,559
Tobacco, food service & other 32,558,413 - - 32,558,413
------------- ----------- ---------- -------------
Total external revenue 189,202,522 9,014,559 - 198,217,081
Depreciation 304,536 164,256 - 468,792
Amortization - 9,933 - 9,933
Operating income (loss) 1,213,141 501,311 (816,064) 898,388
Interest expense 374,244 408,687 374,535 1,157,466
1ncome (loss) from continuing
operations before taxes 850,680 101,623 (1,190,599) (238,296)
Total assets 67,678,831 13,721,007 16,744,380 98,144,218
Capital expenditures 102,755 31,116 - 133,871
20
/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.
11. CONTINGENCIES
As described in the Company's 2006 Annual Report on Form 10-K, the Company
is involved in litigation regarding the ownership of the assets of TSI, which
is a discontinued 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 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 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 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 initially resolve the claims of a single minority
shareholder plaintiff, who, at the time, declined 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 which were subsequently
settled.
21
In 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 of 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. Management believes that the recorded balance of
the subject assets and liabilities have been
recognized at their respective fair values.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the Management's Discussion and
Analysis and other sections, contains forward looking statements that are
subject to risks and uncertainties and which reflect management's current
beliefs and estimates of future economic circumstances, industry conditions,
company performance and financial results. Forward looking statements
include information concerning the possible or assumed future results of
operations of the Company and those statements preceded by, followed by or
that include the words "future," "position," "anticipate(s)," "expect,"
"believe(s)," "see," "plan," "further improve," "outlook," "should" or
similar expressions. For these statements, we claim the protection of the
safe harbor for forward looking statements contained in the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are not
guarantees of future performance or results. They involve risks,
uncertainties and assumptions. You should understand that the following
important factors, in addition to those discussed elsewhere in this document,
could affect the future results of the Company and could cause those results
to differ materially from those expressed in our forward looking statements:
22
- 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,
- poor weather conditions,
- increases in fuel prices,
- collection of guaranteed amounts,
- other risks over which the Company has little or no control, and
- any other factors not identified herein could also have such an effect.
Changes in these factors could result in significantly different results.
Consequently, future results may differ from management's expectations.
Moreover, past financial performance should not be considered a reliable
indicator of future performance. Any forward looking statement contained
herein is made as of the date of this document. Except as required by law,
the Company undertakes no obligation to publicly update or correct any of
these forward looking statements in the future to reflect changed
assumptions, the occurrence of material events or changes in future operating
results, financial conditions or business over time.
CRITICAL ACCOUNTING ESTIMATES
Certain accounting estimates used in the preparation of the Company's
financial statements require us to make judgments and estimates and the
financial results we report may vary depending on how we make these
judgments and estimates. Our critical accounting estimates are set forth in
our 2006 Annual Report to Shareholders on Form 10-K for the fiscal year ended
September 30, 2006 filed with the Securities and Exchange Commission. There
have been no significant changes with respect to these policies during the
first three months of fiscal 2007.
DISCONTINUED OPERATIONS
Discontinued operations included the disposal groups of HNWC and TSI as of
December 2006 and HNWC, TSI and TBG as of December 2005. TBG ceased on-going
operations effective March 31, 2005 at which time it was classified as
discontinued operations. In April 2006, the Company successfully concluded
its wind-down plan of TBG's operations at which time its residual liabilities
were reclassified to continuing operations. This reclassification has been
reflected throughout this Quarterly Report on Form 10-Q.
COMPANY OVERVIEW - FIRST FISCAL QUARTER 2007
The following discussion and analysis includes the results of operations for
the three months ended December 2006 and December 2005, which is comprised of
our wholesale distribution and retail health food segments. A separate
discussion of our discontinued operations has been presented following our
analysis of continuing operations. Accordingly, the sales, gross profit
(loss), selling, general and administrative, depreciation and amortization,
direct interest, other expenses and income tax benefit from our discontinued
operations have been aggregated and reported as income (loss) from
discontinued operations and are not a component of the aforementioned
continuing operations discussion.
23
AMCON Distributing Company ("AMCON" or the "Company") is primarily engaged in
the wholesale distribution business in the Great Plains and Rocky Mountain
regions of the United States. In addition, AMCON operates thirteen retail
health food stores in Florida and the Midwest. As used herein, unless the
context indicates otherwise, the term "ADC" means the wholesale distribution
segment and "AMCON" or the "Company" means AMCON Distributing Company and its
consolidated subsidiaries. AMCON's fiscal first quarters ended on December
31, 2006 and December 31, 2005. For ease of discussion, these fiscal
quarters are referred to herein as December 2006 and 2005, respectively or
Q1 2007 and Q1 2006, respectively.
During the first quarter of fiscal 2007, the Company:
- amended its credit facility agreement ("Facility"). The amendment was
completed in December 2006 and extended the Facility's maturity date to
April 2009. The amended Facility bears interest at the bank's prime
interest rate and includes a $55.0 million revolving credit limit plus the
outstanding balance on two term notes which totaled approximately $2.0
million for a total credit facility of $57.0 million at December 31, 2006.
See further discussion in Item 7 "Liquidity and Capital Resources."
- sold all the operating assets of HNWC for approximately $3.8 million in
cash plus the buyer's assumption of all operating and capital leases, which
resulted in a gain on sale before income taxes of approximately $1.6
million.
- experienced a 5.6% increase in sales compared to the first quarter of
fiscal 2006.
- recognized income from continuing operations of $0.90 per basic share
for Q1 2007 compared to a loss from continuing operations per basic share
of $(0.44) in Q1 2006.
- recognized income from discontinued operations of $1.32 per basic share
for Q1 2007 compared to a loss from discontinued operations per basic
share of $(1.95) in Q1 2006.
INDUSTRY SEGMENT OVERVIEWS
Wholesale Distribution Segment
-----------------------------
The wholesale distribution business represents approximately 96% of our
consolidated sales. ADC has significant alliances with the major cigarette
manufacturers that comprise over 90% of the cigarette industry volume. While
some of our competitors have focused on the lower priced cigarette brands,
ADC has made a conscious decision to support and grow our national brand
segment and align our business with the major players in the industry. We
believe that it is important not to compete against the major cigarette
manufacturers because of their commitment to growing their market share in a
declining category. Additionally, we believe that the consumer's preference
for premium brands currently drives the category volume.
24
ADC is ranked as a top ten convenience store supplier. We provide our
retailers with a broad selection of merchandise in all product categories.
Non cigarette categories grew by approximately 9% in the first quarter of
fiscal 2007 as compared to fiscal 2006.
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 sells 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 stores and the display of products within the store. In addition,
customers are able to use our web site to order products and promotions,
manage inventory and retail prices, as well as obtain periodic velocity
management reports.
Management has also worked to improve ADC's operating efficiency by investing
in information technology systems to help automate our buying and financial
control functions as well as minimize inventory costs. By offering superior
customer service and aggressively managing operating costs, management
believes ADC is better positioned to compete with both smaller and larger
distributors.
Increases in fuel prices, in addition to increases in other operating costs,
are having a significant impact on all distributors in the United States.
We expect that competition and the pressure on profit margins will continue
to affect both large and small distributors resulting in additional industry
consolidation in order to become more efficient.
Retail Health Food Segment
--------------------------
The retail health food industry is experiencing an increase in sales and
gross profit driven primarily by the demand for natural products and more
health conscious consumers. Our retail health food segment has benefitted
from this trend, experiencing sales growth in many product categories
including grocery and supplements. Management continues to closely review
all store locations for opportunities to close or relocate marginally
performing stores, remodel and expand strong performing stores, and identify
locations for additional stores.
AMCON's retail health food stores are managed collectively through a main
office in Tulsa, Oklahoma. The Company strives to maintain the local
identity of each store while leveraging the operating synergies of
centralized management operations.
25
RESULTS OF OPERATIONS - Continuing Operations
SALES
Changes in sales are driven by two primary components as follows:
(i) changes to selling prices largely controlled by the manufacturers
of the products that we sell, and excise taxes imposed on
cigarettes and tobacco products by various states; and
(ii) changes in the volume of products sold to our customers, either
due to a change in purchasing patterns resulting from consumer
preferences or the fluctuation in the comparable number of
business days in our reporting period.
Sales by business segment for the three month periods ended December 2006 and
December 2005 are as follows (dollars in millions):
Three months
ended December
-----------------------
2006 2005 Incr
------ ------ ------
Wholesale distribution segment $200.3 $189.2 $ 11.1
Retail health food stores segment 9.1 9.0 0.1
------ ------ ------
$209.4 $198.2 $ 11.2
====== ====== ======
Three months ended December 2006 comparison - Continuing Operations
-------------------------------------------------------------------
Sales for Q1 2007 increased 5.6%, or $11.2 million, compared to the same
period in the prior year. Sales are reported net of costs associated with
sales incentives provided to retailers, totaling $3.9 million and $3.6
million, for Q1 2007 and Q1 2006, respectively.
The sales of cigarettes in the wholesale distribution segment increased by
$6.4 million and the sales of tobacco, confectionary, food service and other
products in our wholesale distribution segment increased $4.7 million in Q1
2007 compared to Q1 2006. Of the increase in cigarette sales, $0.6 million
related to price increases on certain brands of cigarettes in December 2006
and $5.8 million was attributable to a 2.8% increase in the volume of
cigarette carton sales. The increase in tobacco, confectionary, food service
and other product sales was primarily due to higher sales volumes.
Sales from our retail health food segment increased slightly to $9.1 million
in Q1 2007 compared to $9.0 million in Q1 2006. Sales in this segment
continue to remain strong, benefitting from the overall growth in the natural
foods industry and the Company's continued marketing efforts.
26
GROSS PROFIT
Our gross profit does not include fulfillment costs and costs related to the
distribution network which are included in selling, general and
administrative costs, and may not be comparable to those of other entities.
Some entities may classify such costs as a component of cost of sales. Cost
of sales, a component used in determining gross profit, for wholesale and
retail segments includes the cost of products purchased from manufacturers,
less incentives that we receive which are netted against such costs.
Gross profit by business segment for the three month periods ended December
2006 and December 2005 are as follows (dollars in millions):
Three Months ended
December
-----------------------
2006 2005 Incr
------ ------ ------
Wholesale distribution segment $ 11.5 $ 10.5 $ 1.0
Retail health food stores segment 3.5 3.5 -
------ ------ ------
$ 15.0 $ 14.0 $ 1.0
====== ====== ======
Three months ended December 2006 comparison - Continuing Operations
-------------------------------------------------------------------
During Q1 2007, gross profit increased $1.0 million to $15.0 million compared
to $14.0 million in Q1 2006. This represents a 7.2% increase in gross profit
compared to the same period in the prior year. Gross profit as a percent of
sales increased slightly to 7.2% in Q1 2007 compared to 7.1% in Q1 2006.
Gross profit from our wholesale distribution segment increased $1.0 million
in Q1 2007 as compared to Q1 2006. Of this increase, $0.4 million was
related to additional promotional activity, $0.4 million was due to higher
sales volumes, $0.1 million was attributable to a smaller quarterly LIFO
charge in Q1 2007 as compared to Q1 2006, and $0.1 million was attributable
to the benefit of a cigarette price increase in December 2006.
Gross profit for the retail health food segment remained flat in Q1 2007 at
$3.5 million, or 39.0% of sales as compared to the same period in the prior
year.
OPERATING EXPENSE
Operating expense includes selling, general and administrative expenses and
depreciation and amortization. Selling, general and administrative include
costs related to our sales, warehouse, delivery and administrative
departments for all segments. Specifically, purchasing and receiving costs,
warehousing costs and costs of picking and loading customer orders are all
classified as selling, general and administrative expenses. Our most
significant expenses relate to employee costs, facility and equipment leases,
transportation costs, fuel costs, insurance and professional fees.
27
In Q1 2007, operating expenses decreased 2.0% or approximately $0.3 million,
as compared to Q1 2006. This decrease was primarily related to a reduction
in professional fees, partially offset by higher compensation costs in our
wholesale segment.
INTEREST EXPENSE
Interest expense for the three months ended December 31, 2006 increased 9.6%
or $0.1 million compared to the same period in fiscal 2006. This increase
was primarily related to increases in the prime interest rate, as compared to
Q1 2006, which is the rate at which the Company primarily borrows, and the
expiration of an interest rate swap in fiscal 2006 which had the effect of
converting $10.0 million of Facility borrowings to a fixed interest rate of
4.87%. On average, the Company's borrowing rates on variable rate debt were
1.28% higher and the average borrowings on variable rate debt were $2.3
million lower in Q1 2007 as compared to Q1 2006.
DISCONTINUED OPERATIONS
Discontinued operations consist of our TSI and HNWC subsidiaries for the
three month periods ended December 2006 and December 2005, and TBG for three
months ended December 2005. As previously discussed, TBG's residual balances
were reclassified to continuing operations in April 2006 and the assets of
HNWC were sold in November 2006.
Income from discontinued operations increased approximately $1.7 million
during Q1 2007 as compared to the same period in the prior year. This change
was primarily the result a $1.6 million gain before income taxes recorded on
the sale of HNWC. Additionally, TSI's operations were closed in March 2006
which stemmed further operating losses.
A summary of discontinued operations is as follows:
Three months ended Three months ended
December 2006 December 2005
------------------ ------------------
Sales $ 862,647 $ 2,466,117
Operating loss (215,980) (1,554,157)
Gain on disposal of discontinued operations,
before income taxes 1,562,588 -
Income tax expense (benefit) 553,000 (599,000)
Income (loss) from discontinued operations 698,178 (1,027,638)
28
LIQUIDITY AND CAPITAL RESOURCES
Overview
----------
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 Q1 2007, the Company used approximately $3.5 million of
cash from operating activities, primarily related to inventory purchases by
our wholesale distribution segment and the pay down of accounts payable and
accrued expenses in both our continuing and discontinued 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 peak time
of the year operationally, we generally carry larger inventory back stock to
ensure high fill rates to maintain customer satisfaction.
Investing Activities. The Company generated approximately $3.6 million in
cash from investing activities during the first three months of fiscal 2007.
Of the cash generated, approximately $3.8 million resulted from the sale of
HNWC's assets, which was partially offset by $0.2 million in capital
expenditures for property, plant and equipment.
Financing Activities. The Company used net cash of $0.1 million for
financing activities during the first quarter of fiscal 2007. Of the net
change in cash, the Company used cash of $0.7 million for continuing and
discontinued operations long-term debt payments and $0.1 million for the
payment of preferred stock dividend payments. These uses of cash were offset
by $0.7 million generated from additional borrowings on the Company's credit
facility.
Cash on Hand/Working Capital. As of December 31, 2006, the Company had cash
on hand of $0.4 million and working capital (current assets less current
liabilities) of $32.1 million. This compares to cash on hand of $0.5 million
and a working capital of $28.0 million as of September 30, 2006.
Contractual Obligations
-----------------------
There have been no significant changes to the Company's contractual
obligations as set forth in the Company's Annual Report on Form 10-K for
the fiscal period ended September 30, 2006.
CREDIT AGREEMENT
----------------
The Company's primary source of borrowing for liquidity purposes is its
revolving credit facility. In December 2006, the Company amended its
credit agreement (the "Facility") with LaSalle Bank. The significant terms
of the Facility at December 31, 2006 include:
29
- 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 $2.0 million, for a total credit facility limit of $57.0
million as of December 31, 2006.
- Extension of credit to the Company at the bank's prime interest rate.
- Maturity and expiration dates for the Facility and Term Note A
of April 2009 and March 2008 for Term Note B.
- 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
for the month and financial covenants.
- Includes a prepayment penalty of two percent (2%) and one percent
(1%) of the prepayment loan limit of $55.0 million if prepayment occurs
on or before April 30, 2007 and April 30, 2008, respectively.
The December 2006 Facility amendment replaced all prior financial covenants
with quarterly cumulative earnings before interest, taxes, depreciation and
amortization ("EBITDA") covenants in addition to 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 is in compliance with the covenants at
December 31, 2006.
The Company's maximum available credit limit under the Facility was $50.7
million at December 31, 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 December 31,
2006, the outstanding balance on the revolving portion of the Facility was
$47.6 million. The Facility bears interest at a variable rate equal to the
bank's prime rate, which was 8.25% at December 31, 2006. Based on our
collateral and loan limits, the Company's excess availability under the
Facility at December 31, 2006 was approximately $3.1 million.
During Q1 2007, our peak borrowings under the Facility were $52.4 million and
our average borrowings and average availability were $47.7 and $2.6 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.
As a component of the credit agreement, the Company also has two term notes,
Term Note A and Term Note B, with LaSalle Bank. Term Note A bears interest
at the bank's prime rate (8.25% at December 31, 2006) and is payable in
monthly installments of $16,333. Term Note B bears interest at the bank's
prime rate plus 2% (10.25% at December 31, 2006) and is payable in monthly
installments of $100,000. The outstanding balances on Term Note A and Term
Note B were $0.7 million and $1.3 million, respectively, as of December 31,
2006.
30
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, which resulted in the guaranteed principal outstanding being
reduced to $6.3 million as of December 31, 2006. 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 Natural Foods Inc., Health Food Associates Inc., HNWC and
TSI.
Cross Default and Co-Terminus Provisions
-----------------------------------------
The Company's owned real estate in Bismarck, ND, Quincy, IL, and Rapid City,
SD, and certain warehouse equipment in the Rapid City, SD warehouse is
financed through term loans with 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.
OTHER
-----
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.
Off-Balance Sheet Arrangements
------------------------------
The Company does not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to interest rate risk on its variable rate debt.
At December 31, 2006, the Company had $49.6 million of variable rate debt
outstanding with maturities through April 2009. The interest rate on this
debt ranged from 8.25% to 10.25% at December 2006. We estimate that our
annual cash flow exposure relating to interest rate risk based on our current
borrowings is approximately $0.3 million for each 1% change in our lender's
prime interest rate.
We do not utilize financial instruments for trading purposes and hold no
derivative financial instruments which could expose us to significant market
risk.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules
13a-15(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.
31
Such information is accumulated and communicated to the Company's management,
including its Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), as appropriate, to allow timely decisions regarding required
disclosures. Any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance of achieving
the desired control objectives.
The Company carried out the evaluation required by paragraph (b) of the
Exchange Act Rules 13a-15 and 15d-15, under the supervision and with the
participation of our management, including the CEO and CFO, of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report on Form 10-Q, the
Company's disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed by the Company
in the reports the Company files or submits under the Securities Exchange Act
of 1934 is (1) accumulated and communicated to management, including the
Company's Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosures and (2) recorded, processed,
summarized and reported, within the time periods specified in the
Commission's rules and forms. There have been no changes in the Company's
internal controls over financial reporting during the quarter covered by this
report that have materially affected, or are reasonably likely to materially
affect, such internal controls.
PART II - OTHER INFORMATION
Item 1. 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.
32
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 initially resolve the claims of a single minority
shareholder plaintiff, who, at the time, declined 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 which were subsequently
settled.
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 merit; 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 of AMCON and TSI constituted
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.
33
Item 1A. Risk Factors
There have been no material changes to the Company's risk factors as
previously disclosed in Item 1A "Risk Factors" in our 2006 Annual Report to
Shareholders on Form 10-K for the fiscal year ended September 30, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The LaSalle Bank credit facility provides that the Company may not pay
dividends on its common stock in excess of $0.72 per share on an annual
basis.
Item 3. Defaults Upon Senior Securities
There have been no defaults in the payment of principal and interest with
respect to any indebtedness of the Company or any of it subsidiaries
exceeding five percent of total asset of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no submissions of matters to a vote of security holders to be
reported during the three month fiscal period ended December 31, 2006.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
(a) Exhibits
10.42 Asset Purchase Agreement - Hawaiian Natural Water Company, Inc.
dated November 20, 2006.
31.1 Certification by Christopher H. Atayan, Chief Executive Officer and
Vice Chairman, furnished pursuant to section 302 of the Sarbanes-Oxley
Act
31.2 Certification by Andrew C. Plummer, Vice President and 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 Chief
Financial Officer, furnished pursuant to section 906 of the Sarbanes-
Oxley Act
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
AMCON DISTRIBUTING COMPANY
(registrant)
Date: January 23, 2007 /s/ Christopher H. Atayan
------------------ -----------------------------
Christopher H. Atayan,
Chief Executive Officer and
Vice Chairman
Date: January 23, 2007 /s/ Andrew C. Plummer
------------------ -----------------------------
Andrew C. Plummer,
Chief Financial Officer and Principal
Financial and Accounting Officer
35