AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 2001
REGISTRATION NO. 333-71300
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
AMCON DISTRIBUTING COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------------
DELAWARE 3841 47-0702918
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (IRS EMPLOYER
OF INCORPORATION INDUSTRIAL CLASSIFICATION IDENTIFICATION
OR ORGANIZATION) CODE NUMBER) NO.)
--------------------
10228 "L" STREET
OMAHA, NEBRASKA 68127
(402) 331-3727
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------------
MICHAEL D. JAMES
10228 "L" STREET
OMAHA, NEBRASKA 68127
(402) 331-3727
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
Copies to:
JOHN A. GRANDA, ESQ. RICHARD P. MANSON, ESQ.
STINSON, MAG & FIZZELL, P.C. SQUIRE, SANDERS & DEMPSEY
1201 WALNUT STREET, SUITE 2800 801 S. FIGUEROA STREET, 14TH FLOOR
KANSAS CITY, MISSOURI 64106 LOS ANGELES, CA 90017
(816) 842-8600 (213) 689-5112
FACSIMILE: (816) 691-3495 FACSIMILE: (213) 623-4581
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES
TO THE PUBLIC: As soon as practicable after this registration statement is
declared effective and all other conditions to the merger (as defined herein)
have been satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box.| |
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.| |
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.| |
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
==============================================================================
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
The board of directors of Hawaiian Natural Water Company, Inc. has
agreed to a merger between Hawaiian Natural and AMCON Merger Sub, Inc., a
wholly-owned subsidiary of AMCON Distributing Company, pursuant to an
agreement and plan of merger attached as Annex A. AMCON Merger Sub, Inc.
will be the surviving corporation in this merger. It will change its name to
Hawaiian Natural Water Company, Inc. and continue the business of Hawaiian
Natural following the merger.
For purposes of the merger, the total value of Hawaiian Natural
common stock will be the agreed upon amount of $2,865,348 which will be
allocated among Hawaiian Natural's common stockholder based upon the number
of shares of Hawaiian Natural common stock which they own at the time the
merger is completed. The exchange ratio, which specifies the fractional
share of AMCON to be issued for each share of Hawaiian Natural in the merger,
is determined by dividing this agreed upon value by the average AMCON stock
price described below and then dividing that resulting quotient by the
number of shares of Hawaiian Natural common stock outstanding immediately
prior to the time the merger is completed. For purposes of this calculation,
the average closing price of AMCON common stock will be measured during a 20
trading day period ending three days prior to the date of the Hawaiian
Natural shareholder vote on the merger. However, the common stock of AMCON
will be priced no lower than $6.00 and no greater than $8.00 per share for
this purpose. The exchange ratio will therefore be not less than 0.039 and
not more than 0.052 of a share of AMCON common stock for each share of
Hawaiian Natural common stock. A maximum and a minimum of 477,558 shares and
358,168 shares of AMCON common stock would be therefore issued in the
merger, of which AMCON would receive back 104,000 and 78,000 shares,
respectively, with respect to its ownership of 2,000,000 shares of common
stock of Hawaiian Natural.
HAWAIIAN NATURAL SHAREHOLDERS WILL NOT KNOW THE ACTUAL EXCHANGE
RATIO, OR THE TOTAL NUMBER OF SHARES THEY WILL RECEIVE IN THE MERGER, UNTIL
THREE DAYS BEFORE THE VOTE ON THE MERGER, BUT THEY CAN CALL 800-866-1340,
EXTENSION 2620, TO RECEIVE THAT INFORMATION AT ANY TIME DURING THAT THREE
DAY PERIOD. BASED ON AMCON'S STOCK PRICE AS OF NOVEMBER 12, 2001, THE
EXCHANGE RATIO WOULD BE 0.052 OF A SHARE AND HAWAIIAN NATURAL SHAREHOLDERS
OTHER THAN AMCON WOULD RECEIVE A TOTAL OF 373,558 AMCON SHARES IN THE
MERGER.
Approval of the merger requires the affirmative vote of the holders
of at least a majority of Hawaiian Natural's outstanding common stock. This
approval is assured because AMCON will vote its 21.8%, and Hawaiian
Natural's management and directors and their affiliates will vote their
35.2%, of the outstanding shares in favor of the merger.
We are asking our shareholders to approve the agreement and plan of
merger. A special meeting of the Hawaiian Natural shareholders to vote on
the agreement and plan of merger will be held at 8:00 a.m., Local time, on
Monday, December 17, 2001 at Honolulu Club, 932 Ward Avenue, Honolulu,
Hawaii.
HAWAIIAN NATURAL'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
HAWAIIAN NATURAL SHAREHOLDERS VOTE FOR APPROVAL OF THE AGREEMENT AND PLAN OF
---
MERGER.
___________________________________________
Marcus Bender
Chief Executive Officer and President of
Hawaiian Natural Water Company, Inc.
CONSIDER THE RISKS DESCRIBED ON PAGES 14 THROUGH 20 OF THIS DOCUMENT.
-----------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state
securities regulator has approved the stock to be issued under this document
or determined if this document is accurate or adequate. Any representation
to the contrary is a criminal offense.
-----------------------------------------------------------------------------
This document is dated November 14, 2001 and is first being
mailed to Hawaiian Natural Shareholders on that date.
NOTICE OF SPECIAL MEETING
TO BE HELD ON MONDAY, DECEMBER 17, 2001
AT 8:00 A.M.
To the Shareholders of Hawaiian Natural Water Company, Inc.:
A special meeting of shareholders of Hawaiian Natural will be held
on Monday, December 17, 2001, at 8:00 a.m., local time, at Honolulu Club,
932 Ward Avenue, Honolulu, Hawaii to consider and vote upon:
1. A proposal to approve the fifth amended and restated
agreement and plan of merger, dated as of September 27, 2001, among,
Hawaiian Natural, AMCON Distributing Company, and AMCON Merger Sub, Inc.,
pursuant to which Hawaiian Natural will merge into AMCON Merger Sub, Inc., a
wholly owned subsidiary of AMCON. As a result of the merger, all outstanding
shares of Hawaiian Natural common stock (other than dissenting shares) will
be converted into common stock of AMCON, all as described in the attached
document.
2. Such other business as may properly come before the meeting.
The board of directors has established November 14, 2001
as the record date for the meeting. Only stockholders of record as of such
date will be entitled to notice of or to vote at the meeting or any
adjournment or postponement.
Record and beneficial owners of Hawaiian Natural common stock may
assert dissenters' rights under sections 414-341 through 414-372 of the
Hawaii Revised Business Corporation Act, a copy of which is attached as
Annex B to this document.
Admittance to the special meeting will be granted only to
shareholders as of the record date and guests of management. Please bring
identification and, if you hold your shares in "street name" or otherwise
not in your own name, please bring proof of share ownership, such as an
account statement, for admittance.
THE BOARD OF DIRECTORS OF HAWAIIAN NATURAL HAS DETERMINED THAT THE
ABOVE-REFERENCED AGREEMENT AND PLAN OF MERGER IS FAIR TO AND IN THE BEST
INTERESTS OF HAWAIIAN NATURAL AND ITS SHAREHOLDERS, HAS DECLARED ITS
ADVISABILITY, AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF ITS
APPROVAL.
PLEASE DO NOT SEND ANY CERTIFICATES FOR YOUR STOCK.
/s/ Brian Barbata
---------------------------
Brian Barbata
Secretary
November 14, 2001
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE
SPECIAL SHAREHOLDERS MEETING, PLEASE COMPLETE, DATE AND RETURN YOUR PROXY
CARD IN THE ENCLOSED ENVELOPE PROMPTLY.
IF YOU DO NOT VOTE YOUR SHARES, OR INSTRUCT YOUR STOCKBROKER TO
VOTE FOR YOU, IT WILL HAVE THE SAME EFFECT AS VOTING AGAINST THE
ABOVE-REFERENCED AGREEMENT AND PLAN OF MERGER.
TABLE OF CONTENTS
Page
----
QUESTIONS AND ANSWERS ABOUT THE
MERGER.........................................1
SUMMARY.............................................3
AMCON DISTRIBUTING COMPANY
SELECTED FINANCIAL DATA........................8
HAWAIIAN NATURAL SELECTED
FINANCIAL DATA.................................9
COMPARATIVE PER SHARE DATA.........................10
SUMMARY UNAUDITED COMPARATIVE
HISTORICAL AND PRO FORMA
PER SHARE DATA..............................10
MARKET PRICE DATA...............................11
RISK FACTORS.......................................14
RISKS RELATED TO THE TRANSACTION................14
RISKS RELATED TO THE BUSINESS OF
AMCON.......................................17
RISKS RELATED TO HAWAIIAN NATURAL'S
BUSINESS....................................18
CAUTIONARY STATEMENT CONCERNING FORWARD
LOOKING STATEMENTS............................20
THE MERGER.........................................21
GENERAL.........................................21
BACKGROUND OF THE MERGER........................21
OUR REASONS FOR THE MERGER;
RECOMMENDATIONS OF OUR BOARD OF
DIRECTORS...................................26
MATERIAL UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES
OF THE MERGER...............................29
REGULATORY MATTERS RELATING TO THE
MERGER......................................30
DISSENTERS' RIGHTS..............................31
FEDERAL SECURITIES LAWS CONSEQUENCES............34
ACCOUNTING TREATMENT............................34
STOCK MARKET LISTING............................35
INTERESTS OF OFFICERS AND
DIRECTORS IN THE MERGER.......................35
EXISTING AGREEMENTS AND PLANS
WITH RESPECT TO DIRECTORS
AND OFFICERS................................35
BOARD OF DIRECTORS, MANAGEMENT AND
AGREEMENTS OF THE MERGER SUB................36
OWNERSHIP OF COMMON STOCK;
STOCK OPTIONS...............................36
THE MERGER AGREEMENT...............................36
STRUCTURE OF THE MERGER.........................36
TIMING OF CLOSING...............................36
MERGER CONSIDERATION............................37
TREATMENT OF STOCK OPTIONS......................38
EXCHANGE OF CERTIFICATES........................38
NAME OF SURVIVING CORPORATION...................39
REPRESENTATIONS AND WARRANTIES..................39
COVENANTS.......................................41
MUTUAL COVENANTS................................42
CONDITIONS......................................45
TERMINATION OF THE MERGER AGREEMENT.............46
FEES AND EXPENSES PAYABLE BECAUSE OF A
TERMINATION.................................46
FEES AND EXPENSES GENERALLY.....................46
AMENDMENTS AND WAIVERS..........................47
STOCKHOLDER AGREEMENT..............................47
SELECTED QUARTERLY FINANCIAL
DATA OF AMCON ................................48
INFORMATION ABOUT THE MEETING
AND VOTING....................................50
MATTERS RELATING TO THE MEETING.................50
VOTE NECESSARY TO APPROVE THE
MERGER PROPOSAL.............................50
VOTING BY PROXY.................................50
HOW TO VOTE BY PROXY............................51
OTHER BUSINESS; ADJOURNMENTS....................51
INFORMATION ABOUT AMCON............................52
BUSINESS........................................52
PRINCIPAL PRODUCTS..............................55
COMPETITION.....................................56
GOVERNMENT REGULATION...........................57
EMPLOYEES.......................................57
DIRECTORS AND EXECUTIVE OFFICERS OF
AMCON.......................................57
COMPENSATION OF DIRECTORS.......................59
COMPENSATION OF EXECUTIVE OFFICERS..............59
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR..........61
AGGREGATED OPTION/SAR EXERCISES
IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION/SAR VALUES..................61
LONG-TERM INCENTIVE PLANS AND OTHER
MATTERS.....................................62
EMPLOYMENT AGREEMENTS...........................62
i
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................62
BENEFICIAL OWNERSHIP OF AMCON
COMMON STOCK BY PRINCIPAL
STOCKHOLDERS, DIRECTORS AND
OFFICERS....................................62
CHANGE IN AUDITORS..............................64
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...............................64
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK...............77
INFORMATION ABOUT HAWAIIAN
NATURAL.......................................78
DESCRIPTION OF BUSINESS.........................78
MARKET FOR COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.................84
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT............85
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................87
QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK................93
INFORMATION ABOUT AMCON MERGER
SUB, INC....................................94
CERTAIN LEGAL INFORMATION..........................95
DESCRIPTION OF AMCON STOCK.........................99
GENERAL.........................................99
AMCON COMMON STOCK..............................99
AMCON PREFERRED STOCK..........................100
STATUTORY BUSINESS COMBINATION
PROVISION..................................100
OTHER MATTERS..................................100
SHAREHOLDER PROPOSALS..........................101
LIMITATIONS ON DIRECTOR/OFFICER
LIABILITY..................................101
TRANSFER AGENT AND REGISTRAR...................102
STOCK MARKET LISTING...........................102
LEGAL MATTERS.....................................102
EXPERTS...........................................102
WHERE YOU CAN FIND MORE
INFORMATION..................................103
INDEX TO FINANCIAL STATEMENTS ....................P-i
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS...S-1
ANNEXES
ANNEX A - Agreement and Plan of Merger
ANNEX B - Sections 414-341 through 414-372 of
Hawaii Revised Business Corporation Act
ii
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY ARE WE PROPOSING THE MERGER?
A: We believe that becoming a subsidiary of AMCON will better position us
to obtain the capital resources and management depth needed to grow our
business and increase shareholder value. This should enable us to
increase our efficiency and expand production and distribution of our
Hawaiian Springs water. There can, however, be no assurance that
adequate capital resources will be available. See "Risk Factors."
Q: WHAT WILL HAPPEN IN THE MERGER?
A: Hawaiian Natural will merge into AMCON Merger Sub, Inc., a wholly owned
subsidiary of AMCON, which is a company formed under Delaware law
solely for the purpose of effecting the merger. After the merger, AMCON
Merger Sub's name will be changed to "Hawaiian Natural Water Company,
Inc." Our shareholders will have their shares of common stock converted
into shares of common stock of AMCON.
Q: WILL THE SHARES ISSUED TO HAWAIIAN NATURAL SHAREHOLDERS IN THE MERGER
BE FREELY TRADABLE?
A: Yes, except for certain restrictions on shares held by affiliates of
Hawaiian Natural. The shares will be listed on the American Stock
Exchange and approved for trading upon issuance.
Q: WHEN IS THE HAWAIIAN NATURAL SHAREHOLDERS' MEETING?
A: The meeting will take place on December 17, 2001. The location of the
meeting is specified on the cover page to this document.
Q: WHAT DO I NEED TO DO NOW?
A: You should carefully read and consider the information contained in
this document. Then, please mail your signed proxy card in the enclosed
return envelope, as soon as possible, so that your shares may be
represented at the meeting. In order to assure that we obtain your
vote, please give your proxy as instructed on your proxy card even if
you currently plan to attend your meeting in person.
Q: WHAT SHOULD I DO IF I WANT TO CHANGE MY VOTE?
A: Just send in a later-dated, signed proxy card to our Secretary. Or, you
can attend the meeting in person and vote. You may also revoke your
proxy by sending a notice of revocation to our Secretary at the address
under "Summary -- The Companies" on page 4.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A: If you do not provide your broker with instructions on how to vote your
"street name" shares, your broker will not be permitted to vote them.
You should therefore be sure to provide your broker with instructions
on how to vote your shares. If you do not give voting instructions to
your broker, you will, in effect, be voting against the merger
agreement.
Q: WHAT VOTE IS REQUIRED TO GO FORWARD WITH THE MERGER?
A: Approval of the merger requires the affirmative vote of the holders of
at least a majority of Hawaiian Natural's outstanding common stock.
This approval is assured because AMCON will vote its 21.8%, and
Hawaiian Natural's management and directors and their affiliates will
vote their 35.2%, of the outstanding shares in favor of the merger
pursuant to a stockholders agreement with AMCON to do so. No vote of
the AMCON stockholders is required for approval of the merger.
Q: DO I HAVE DISSENTERS' RIGHTS AND HOW DO I EXERCISE THEM?
A: Hawaiian Natural is incorporated under Hawaii law. Under applicable
Hawaii law, our shareholders have dissenters' rights in connection with
the merger if they do not vote, or vote against the merger agreement,
and comply with procedures required under Hawaii law, including
delivering to Hawaiian Natural before the vote is taken written notice
of the shareholder's intention
1
to demand payment of the fair value for the shareholder's shares if the
merger is completed. See "The Merger-Dissenters' Rights" for further
information on the requirements to be followed to perfect your
dissenters' rights. One of the conditions to the merger is that the
aggregate number of shares that are held by shareholders dissenting to
the merger does not exceed 5.0% of the total number of outstanding
shares of Hawaiian Natural common stock.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. If the merger is completed, we will send our shareholders written
instructions for exchanging their share certificates.
Q: WHAT PLANS ARE THERE FOR FUTURE DIVIDENDS?
A: Hawaiian Natural has not historically paid quarterly dividends to its
shareholders. AMCON paid quarterly cash dividends in its 2000 fiscal
year. AMCON's dividend policy is set by its board of directors. The
amount of any dividends will depend on a number of factors, including
AMCON's financial condition, capital requirements, results of
operations, future business prospects and other factors that AMCON's
board of directors may deem relevant. The payment of dividends by AMCON
in excess of $0.03 per share per quarter also requires the prior
approval of the lender under various borrowing arrangements entered
into by AMCON. We cannot anticipate whether AMCON will continue to pay
dividends to shareholders in the foreseeable future.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are hoping to complete the merger as soon as practicable, and in any
event not later than the next business day following approval of the
merger by the Hawaiian Natural shareholders. We must obtain Hawaiian
Natural shareholder approval, but no approval by AMCON stockholders is
required. We expect to complete the merger during the fourth calendar
quarter of 2001.
Q: WHOM DO I CALL IF I HAVE QUESTIONS ABOUT THE MEETING OR THE MERGER?
A: Hawaiian Natural shareholders may call Marcus Bender at (808) 483-0527.
2
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND
MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO
UNDERSTAND THE MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL
TERMS OF THE MERGER, YOU SHOULD CAREFULLY READ THIS DOCUMENT AND THE
DOCUMENTS WE REFER TO. SEE "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE
103.
WHAT HAWAIIAN NATURAL SHAREHOLDERS WILL RECEIVE IN THE MERGER (SEE PAGE ____)
As a result of the merger, each share of Hawaiian Natural common
stock will be converted into a fractional share of AMCON common stock based
on an exchange ratio that will depend upon the relative value of Hawaiian
Natural and AMCON common stock during a short period of time prior to the
merger described below. For this purpose, the total value of Hawaiian
Natural common stock will be the agreed upon amount of $2,865,348. The
exchange ratio will be determined by dividing this agreed upon value by the
average AMCON stock price described below and then dividing that resulting
quotient by the number of shares of Hawaiian Natural common stock
outstanding immediately prior to the effective time of the merger. For
purposes of this calculation, the average closing price of AMCON common
stock will be measured during a 20 day trading period ending prior to the
third trading day before the date of the shareholder meeting held to approve
the merger agreement. However, the common stock of AMCON will be priced no
lower than $6.00 and no greater than $8.00 per share for this purpose. The
exchange ratio will therefore be not less than 0.039 and not more than 0.052
of a share of AMCON common stock for each share of Hawaiian Natural common
stock. We refer in this document to the fraction of a share of AMCON common
stock that each share of Hawaiian Natural common stock will be converted
into as the "exchange ratio" and the low to high average closing price of
AMCON common stock as the "collar." A maximum and a minimum of 477,558
shares and 358,168 shares of AMCON common stock would be issued in the
merger, of which AMCON would receive back 104,000 and 78,000 shares,
respectively, with respect to its ownership of 2,000,000 shares of common
stock of Hawaiian Natural, representing in either case approximately 21.8%
of the AMCON shares to be issued in the merger. The 9,185,982 outstanding
shares used for this calculation includes 2,000,000 shares owned by AMCON,
but excludes 2,419,354 Hawaiian Natural shares receivable upon conversion of
$750,000 of secured convertible notes issued to AMCON by Hawaiian Natural.
These 2,419,354 shares, which are deemed by SEC Rule 13d-3 to be
beneficially owned by AMCON even though those notes have not yet been
converted and which would increased AMCON's combined beneficial ownership to
approximately 38.0% of Hawaiian Natural's outstanding shares, were excluded
from this calculation because they are prohibited by the merger agreement
from participating in the merger consideration and these notes are not
expected to be converted prior to the merger in any event.
The following table sets forth the per share value of the merger
consideration to be received by the holders of Hawaiian Natural common stock
at various average closing prices of AMCON common stock:
AVERAGE AMCON STOCK PRICE EXCHANGE RATIO PER SHARE CONSIDERATION
------------------------- -------------- -----------------------
4.00 0.052 $0.208
4.50 0.052 $0.234
5.00 0.052 $0.260
5.50 0.052 $0.286
6.00 0.052 $0.312
6.50 0.048 $0.312
7.00 0.045 $0.315
7.50 0.042 $0.315
8.00 0.039 $0.312
8.50 0.039 $0.331
9.00 0.039 $0.351
3
THE COMPANIES
AMCON DISTRIBUTING COMPANY
10228 "L" Street
Omaha, Nebraska 68127
(402) 331-3727
AMCON is a leading wholesale distributor of consumer products
including beverages, candy, tobacco, groceries, food service, frozen and
chilled foods, and health and beauty care products with distribution centers
in Illinois, Missouri (2), Nebraska, North Dakota, South Dakota and Wyoming.
Chamberlin's Natural Foods, Inc. and Health Food Associates, Inc., are both
wholly-owned subsidiaries of AMCON's direct, wholly-owned subsidiary, The
Healthy Edge, Inc. (formerly "Food For Health Co. Inc."). These indirect
subsidiaries operate health and natural product retail stores in central
Florida (8), Kansas, Missouri, Nebraska and Oklahoma (3). The retail stores
operate under the names Chamberlin's Market and Cafe and Akin's Natural
Foods Market.
Based on AMCON's unaudited pro forma combined statement of
operations for the year ended September 30, 2000, the revenues produced by
Hawaiian Natural would represent approximately .04% of AMCON's total
combined pro forma revenues.
HAWAIIAN NATURAL WATER COMPANY, INC.
16-305 Old Volcano Road
Keaau, Hawaii 96749
(808) 966-8888
Hawaiian Natural bottles, markets and distributes the only natural
water from Hawaii. Hawaiian Natural obtains its natural water from a
proprietary source on the Big Island of Hawaii. The natural water is sold
under the brand name "Hawaiian Springs" primarily in Hawaii but also in
selected markets in the U.S. Mainland and in some international markets.
Hawaiian Natural also markets purified water for home and office delivery in
Hawaii under the brand name "Ali'i."
AMCON MERGER SUB, INC.
10228 "L" Street
Omaha, Nebraska 68127
(402) 331-3727
AMCON Merger Sub, Inc., a wholly owned subsidiary of AMCON, is a
newly formed Delaware corporation that has not, to date, conducted any
activities other than those incident to its formation, the execution of the
fifth amended and restated agreement and plan of merger (sometimes referred
to as the "merger agreement") and the preparation of this document. Hawaiian
Natural will merge into AMCON Merger Sub which will continue the business
currently conducted by Hawaiian Natural. AMCON Merger Sub will change its
name to Hawaiian Natural Water Company, Inc. upon completion of the merger.
REASONS FOR THE MERGER (SEE PAGE 26)
Hawaiian Natural has been hampered by the lack of adequate capital
resources to achieve its business objectives. The capital and equipment
already provided by AMCON is expected to enable Hawaiian Natural to expand
its production capacity, distribution capability and sales. With the
additional capital that has been invested by AMCON in Hawaiian Natural, the
approximately $2.0 million of equipment subleased to it by AMCON and AMCON's
additional management support, Hawaiian Natural expects to be better
positioned to obtain additional capital from third parties. There can be no
assurance that additional capital will be obtained in the future to meet
Hawaiian Natural's needs. See "Risk Factors." In the absence of the prior
financial support provided by AMCON, there is a strong likelihood that
Hawaiian Natural could not have continued as a going concern. Hawaiian
Natural's board of directors therefore believes that the merger is the best
alternative available to sustain Hawaiian Natural's operations and to create
an opportunity for enhanced shareholder value.
OUR RECOMMENDATIONS TO SHAREHOLDERS (SEE PAGE 26)
4
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
---
APPROVAL OF THE MERGER AGREEMENT.
THE MERGER
The agreement and plan of merger is sometimes referred to in this
document as the merger agreement. It is attached as Annex A to this document
and we urge you to read it carefully as it is the principal legal document
that governs the merger. This agreement provides for the merger of Hawaiian
Natural into AMCON Merger Sub, a wholly owned subsidiary of AMCON, in a
stock-for-stock merger. Following completion of the merger, AMCON Merger Sub
will change its name to "Hawaiian Natural Water Company, Inc." and will
continue the business currently conducted by Hawaiian Natural.
AMCON will not issue any fractional shares. Accordingly, any
shareholder that does not own enough shares of Hawaiian Natural common stock
to be converted into one or more whole shares of AMCON common stock will
receive cash instead. Similarly, any fractional share that would otherwise
be receivable by any shareholder entitled to receive one or more whole
shares of AMCON common stock in the merger will be converted into cash. The
amount of cash payable in lieu of a fractional share will be equal to the
value of any fractional shares computed based on the mean of the high and
low sales prices of common stock of AMCON as reported on the American Stock
Exchange on the first full day on which it is traded after completion of the
merger. The amount to be paid in cash in lieu of a fractional share uses the
foregoing methodology rather than the type of methodology used to determine
the exchange ratio for administrative convenience and in recognition of the
small total amount of cash involved.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (SEE PAGE 10)
AMCON common stock is listed on the American Stock Exchange
("AMEX") under the symbol "DIT." For the 20 trading days ending on November
7, 2000, the last full trading day before announcement of the merger
agreement, the average closing sale price of AMCON common stock was $4.91.
For the 20 trading days ending on November 12, 2001, the most recent
practicable date prior to the mailing of this document, the average closing
sale price of AMCON common stock was at $4.58.
Hawaiian Natural common stock is traded on the OTC Bulletin Board
under the symbol "HNWC." On November 7, 2000, the last full trading day
before announcement of the merger agreement, the average of the bid and
asked prices of Hawaiian Natural common stock was $0.1875. On November 12,
2001, the most recent practicable date prior to the mailing of this
document, the average of the bid and asked price of our common stock was
$0.155.
LISTING OF AMCON COMMON STOCK
The shares issued to Hawaiian Natural shareholders in the merger
will be listed on the American Stock Exchange.
FOR AMCON SHAREHOLDERS: AMCON shareholder approval is not required
for approval of the merger agreement by either Delaware corporate law or the
requirements of the American Stock Exchange.
OWNERSHIP OF AMCON AFTER THE MERGER
AMCON will issue a minimum of 358,168 and a maximum of 477,558 of
its shares in the merger, of which 104,000 and 78,000 shares, respectively,
will be received by AMCON with respect to its 2,000,000 shares of Hawaiian
Natural common stock. The shares received by AMCON in the merger will be
held in its treasury after the merger. Hawaiian Natural shareholders, other
than AMCON, will own between 12% and 9.3% of AMCON's outstanding shares if
the maximum or minimum number of shares are issued in the merger,
respectively.
INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER (SEE PAGE 35)
When you consider our board of directors' recommendations that you
vote in favor of the merger proposal, you should be
5
aware that our President may enter into an employment agreement with AMCON
Merger Sub which is currently the subject of negotiation and that he is
co-owner of a company that owns land on which the well supplying natural
water to Hawaiian Natural is located. In addition the officers and directors
of Hawaiian Natural will receive replacement options to purchase AMCON
common stock.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (SEE
PAGE 29)
Your receipt of common stock of AMCON in the merger of Hawaiian
Natural into Merger Sub will be tax-free for United States federal income
tax purposes, except for tax resulting from the receipt of cash instead of
any fractional share of common stock of AMCON. AMCON, Hawaiian Natural and
the Merger Sub will not recognize gain or loss for United States federal
income tax purposes as a result of the merger.
ACCOUNTING TREATMENT (SEE PAGE 34)
AMCON will account for the merger under the "purchase" method of
accounting in accordance with accounting principles generally accepted in
the United States. Using the purchase method of accounting, the assets and
liabilities of Hawaiian Natural will be recorded by AMCON at their
respective fair values at the time of the completion of the merger. The
excess of Hawaiian Natural's purchase price over the net fair value of the
assets acquired and liabilities assumed, including identifiable intangible
assets, will be recorded as goodwill and assessed annually to determine if
any impairment of this goodwill has occurred. Under changes recently adopted
by the Financial Accounting Standards Board in Statements of Financial
Accounting Standards Nos. 141 and 142, goodwill no longer is amortized
through the income statement. Under the purchase method of accounting, prior
period financial statements are not restated and the consolidated results of
operations of Hawaiian Natural for the period after the merger will be
included in AMCON's consolidated statement of income after the completion of
the merger.
REGULATORY APPROVALS (SEE PAGE 30)
Except for the registration of the shares of AMCON common stock
issuable in the merger under the Securities Act of 1933, as amended, and the
listing of such shares on the American Stock Exchange, there are no
regulatory approvals that are required to be obtained to complete the
merger.
CONDITIONS TO THE COMPLETION OF THE MERGER (SEE PAGE 45)
Completion of the merger depends upon satisfaction or waiver of a
number of conditions, including the following:
o approval of the merger agreement by the requisite vote of our
shareholders;
o the common stock of AMCON shall be approved for listing on the AMEX;
o absence of any law or order issued by a court or governmental entity
prohibiting the merger;
o absence of any law or order issued by a court or governmental entity
that would reasonably be expected to have a material adverse effect on
AMCON or Merger Sub after the merger;
o material accuracy as of closing of the representations and warranties
made by the parties and material compliance by the parties with their
obligations;
o the aggregate number of shares held by dissenters to the merger shall
not exceed 5.0% of the total number of shares of our common stock
outstanding and entitled to vote;
o absence of a material adverse change in the financial condition,
results of operations, cash flow, assets, liabilities, business or
prospects of AMCON or Hawaiian Natural; and
6
o agreements must be obtained from affiliates of Hawaiian Natural regarding
the resale of shares of AMCON common stock they receive in the merger
to ensure compliance with applicable securities laws.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 46)
Either AMCON or Hawaiian Natural can terminate the merger agreement
if any of the following occurs:
o by mutual written consent of the parties;
o we do not complete the merger by December 31, 2001;
o a law or order is issued that makes consummation of the merger illegal
or that permanently prohibits the merger;
The merger agreement will terminate automatically if the
transactions contemplated by it are enjoined by a court of competent
jurisdiction for a period extending beyond 90 days.
AMCON can terminate the merger agreement if any of the following
occurs:
o there is a breach by us of any representation, warranty, covenant or
agreement that would have a material adverse effect on the financial
condition, business, results of operations or prospects of Hawaiian
Natural;
o we willfully and materially breach our obligations in the merger
agreement with respect to consideration of alternate acquisition
proposals;
o our board of directors does not recommend approval of the merger
agreement;
o our board of directors approves, endorses or recommends any other
acquisition proposal;
o a tender or exchange offer for securities of Hawaiian Natural has
commenced and we have not sent a statement to our security holders
recommending rejection of such tender or exchange offer within the
required time; or
o our board of directors or a committee of the board has resolved to do
or permit any of the foregoing.
We can terminate the merger agreement if there is a breach by AMCON
of any representation, warranty, covenant or agreement set forth in the
merger agreement that would have a material adverse effect on the financial
condition, business, results of operations or prospects of AMCON and its
subsidiaries taken as a whole.
Neither AMCON nor Hawaiian Natural can terminate the merger
agreement based on the reason that the merger is not completed by December
31, 2001, if the reason that the merger has not occurred is because it is in
breach of the merger agreement.
TERMINATION FEES AND EXPENSES (SEE PAGE 46)
All fees and expenses incurred in connection with the merger will
be paid by the party incurring such expenses, whether or not the merger is
completed.
STOCKHOLDER AGREEMENT (SEE PAGE 47)
Some of our principal stockholders, including members of
management, the board of directors, and their affiliates, who collectively
vote 35.2% of the total shares outstanding and entitled to vote at the
meeting have executed a stockholder agreement in which they have agreed to
vote all of their shares in favor of approval of the merger agreement. AMCON
also plans to vote its 2,000,000 shares of Hawaiian Natural common stock
representing approximately 21.8% of the total votes entitled to be cast, in
favor of approval of the merger agreement.
7
AMCON DISTRIBUTING COMPANY SELECTED FINANCIAL DATA
The table below shows selected historical financial information for
AMCON as of and for each of the five years ended September 30, 2000 and has
been derived from the consolidated financial statements of AMCON. The
information as of and for the nine months ended June 30, 2001 and 2000 has
been derived from the consolidated financial statements of AMCON. The balance
sheet data and operating results as of and for the years ended September 30,
1998, 1999 and 2000 and as of and for the nine months ended June 30, 2000
have been restated to reflect the Food For Health distribution business as
discontinued operations. The Food For Health distribution business was sold
during the nine months ended June 30, 2001. See "Information About AMCON"
on page 52.
NINE MONTHS ENDED
JUNE 30, YEAR ENDED SEPTEMBER 30,
----------------- ---------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
OPERATING RESULTS: (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Sales................................... $355,924 $306,123 $ 424,731 $ 342,863 $ 263,083 $ 178,991 $ 176,145
Costs of sales.......................... 323,577 273,225 379,968 311,069 239,180 159,435 155,885
-------- -------- --------- --------- --------- --------- ---------
Gross profit............................ 32,347 32,898 44,763 31,794 23,903 19,556 20,260
Operating expense ...................... 29,997 27,536 37,847 23,938 19,093 16,753 17,504
-------- -------- --------- --------- --------- --------- ---------
Income from operations.................. 2,350 5,361 6,916 7,856 4,810 2,803 2,756
Interest expense........................ 2,113 1,808 2,499 1,282 1,566 867 1,149
Other (income) expense, net ............ (136) (2,091) (2,248) (68) (536) (1,353) (697)
-------- -------- --------- --------- --------- --------- ---------
Income from continuing operations
before income taxes ................. 373 5,645 6,665 6,643 3,780 3,289 2,304
Income taxes ........................... 156 2,037 2,354 2,521 1,496 1,348 968
-------- -------- --------- --------- --------- --------- ---------
Net income from continuing operations... 217 3,608 4,311 4,122 2,284 1,941 1,336
======== ======== ========= ========= ========= ========= =========
Earnings (loss) per share from
continuing operations (1):
Basic: ............................ $0.08 $1.32 $1.58 $1.51 $0.84 $0.72 $0.46
Diluted: .......................... $0.08 $1.26 $1.51 $1.44 $0.82 $0.72 $0.46
Weighted average shares outstanding:
Basic ............................. 2,737,983 2,733,954 2,734,862 2,727,892 2,703,868 2,692,560 2,690,493
Diluted ........................... 2,826,207 2,858,725 2,853,320 2,855,419 2,788,996 2,696,608 2,690,493
BALANCE SHEET DATA:
Working Capital (5)..................... $38,871 $20,514 $22,485 $18,088 $13,292 $11,158 $11,572
Total assets (5)........................ 102,705 54,519 58,828 53,457 29,458 23,497 23,026
Long-term obligations and subordinated
debt (2)(5) ....................... 58,865 26,709 34,383 31,644 15,845 9,123 10,245
Shareholders' equity (4) ............... 15,343 16,626 16,855 13,258 9,605 7,208 (3) 6,621
Cash dividends declared per common
share ............................. 0.09 0.09 0.12 0.08 - - -
(1) Income from continuing operations for the year ended September 30, 1996
has been reduced by the accretion of preferred stock of $83,000 for
purposes of calculating basic and diluted earnings per share from
continuing operations.
(2) Includes current portion of long-term obligations and subordinated debt.
(3) Reflects redemption of preferred stock described in footnote 1 above for
$1,200,000 in December, 1996.
(4) Net of dividends declared of $322,691 and $198,392 in fiscal 2000 and
1999, respectively.
(5) Excludes amounts relating to discontinued operations of Food for Health
Co., Inc.
8
HAWAIIAN NATURAL SELECTED FINANCIAL DATA
The table below shows selected historical financial information for
Hawaiian Natural. The historical financial information as of and for each of
the five years ended December 31, 2000 has been derived from the financial
statements of Hawaiian Natural audited by Arthur Andersen LLP, independent
accountants. The information as of and for the six months ended June 30, 2001
and 2000, has been derived from the unaudited financial statements of
Hawaiian Natural. See "Information About Hawaiian Natural" on page 78.
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
------ ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
OPERATING RESULTS:
Net Sales ................................... $1,599 $ 2,198 $ 3,681 $ 3,050 $ 1,809 $ 1,049 $ 866
Costs of Sales .............................. 1,366 1,756 2,983 2,464 1,680 1,233 907
------ ------- ------- ------- ------- ------- -------
Gross Margin ................................ 233 442 698 586 129 (184) (41)
Expenses:
General and administrative ............. 566 922 1,589 1,436 1,266 1,013 634
Selling and marketing .................. 233 522 900 661 982 801 264
------ ------- ------- ------- ------- ------- -------
Operating Loss .............................. (566) (1,002) (1,791) (1,511) (2,119) (1,998) (939)
Other income (expenses):
Investor relations expense ............. - - - - (1,123) - -
Interest income ........................ - - - 10 72 130 -
Interest expense ....................... (66) (78) (120) (81) (96) (445) (248)
Impairment charge ...................... - (903) (1,026) - - - -
------ ------- ------- ------- ------- ------- -------
Net Loss .................................... $ (632) $(1,983) $(2,937) $(1,582) $(3,266) $(2,313) $(1,187)
------ ------- ------- ------- ------- ------- -------
Preferred Stock Dividend .................... - - (137) (416) - (269) -
------ ------- ------- ------- ------- ------- -------
Net Loss available to common shareholders ... $ (632) $(1,983) $(3,074) $(1,998) $(3,266) $(2,582) $(1,187)
====== ======= ======= ======= ======= ======= =======
Basic and Diluted Loss Per Share ............ $(0.08) $ (0.31) $ (0.45) $ (0.45) $ (0.83) $ (0.76) $ (0.74)
====== ======= ======= ======= ======= ======= =======
Weighted Average Common Shares Outstanding .. 7,807,526 6,339,583 6,844,744 4,476,554 3,949,454 3,038,664 1,599,212
BALANCE SHEET DATA:
Current Assets .............................. $ 964 $ 1,317 $ 939 $ 1,238 $ 1,029 $ 3,043 $ 307
Total assets ................................ $3,260 $ 4,735 $ 3,426 $ 3,992 $ 3,021 $ 4,828 $ 1,192
Total liabilities ........................... $3,267 $ 3,301 $ 3,113 $ 1,897 $ 1,382 $ 1,118 $ 2,610
Stockholders' equity (deficit) .............. $ (7) $ 1,334 $ 313 $ 2,094 $ 1,639 $ 3,710 $(1,418)
9
COMPARATIVE PER SHARE DATA
SUMMARY UNAUDITED COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
The following table sets forth per share data of Hawaiian Natural
on a historical basis:
AS OF AND FOR THE AS OF AND FOR THE
SIX MONTH PERIOD YEAR ENDED
ENDED JUNE 30, 2001 DECEMBER 31, 2000
------------------- -----------------
Basic and diluted loss per share .................................. $(0.08) $(0.45)
Dividends declared per common share ............................... -- --
Book value per common share ....................................... -- 0.04
The following table sets forth per share data of:
o AMCON on a historical basis.
o AMCON and Hawaiian Natural combined on a pro forma basis,
assuming an AMCON price that is a maximum of $8.00 and a
minimum of $6.00 per share.
o AMCON and Hawaiian Natural combined on a pro forma basis,
stated on an equivalent Hawaiian Natural share basis,
assuming an AMCON price that is a maximum of $8.00 and a
minimum of $6.00 per share.
This table should be read in conjunction with the historical
financial statements and notes thereto for AMCON and the historical
financial statements and notes thereto for Hawaiian Natural contained
herein. The Hawaiian Natural equivalent per share pro forma information
shows the effect of the merger from the perspective of an owner of Hawaiian
Natural common stock.
AS OF AND FOR THE AS OF AND FOR THE
NINE MONTH PERIOD YEAR ENDED
ENDED JUNE 30, 2001 SEPTEMBER 30, 2000
------------------- ------------------
AMCON HISTORICAL PER COMMON SHARE DATA:
Basic earnings per share - continuing operations.......... $ 0.08 $1.58
Diluted earnings per share - continuing operations........ 0.08 1.51
Dividends declared per common share....................... 0.09 0.12
Book value per common share............................... 5.60 6.15
UNAUDITED PRO FORMA COMBINED:
Basic earnings per share - continuing operations
Assuming an AMCON price per share of $8.00............ $(0.45) $0.63
Assuming an AMCON price per share of $6.00............ (0.43) 0.61
Diluted earnings per share - continuing operations
Assuming an AMCON price per share of $8.00............ (0.45) 0.61
Assuming an AMCON price per share of $6.00............ (0.43) 0.59
Dividends declared per common share (1)
Assuming an AMCON price per share of $8.00............ 0.08 0.11
Assuming an AMCON price per share of $6.00............ 0.08 0.10
Book value per common share
Assuming an AMCON price per share of $8.00............ 5.08 5.59
Assuming an AMCON price per share of $6.00............ 4.93 5.42
10
AS OF AND FOR THE AS OF AND FOR THE
NINE MONTH PERIOD YEAR ENDED
ENDED JUNE 30, 2001 SEPTEMBER 30, 2000
------------------- ------------------
UNAUDITED PRO FORMA COMBINED PER HAWAIIAN NATURAL
EQUIVALENT SHARE:
Basic earnings per share - continuing operations
Assuming an AMCON price per share of $8.00............ $(0.02) $0.02
Assuming an AMCON price per share of $6.00............ (0.02) 0.03
Diluted earnings per share - continuing operations
Assuming an AMCON price per share of $8.00............ (0.02) 0.02
Assuming an AMCON price per share of $6.00............ (0.02) 0.03
Dividends declared per common share (1)
Assuming an AMCON price per share of $8.00............ -- --
Assuming an AMCON price per share of $6.00............ -- 0.01
Book value per common share
Assuming an AMCON price per share of $8.00............ 0.20 0.22
Assuming an AMCON price per share of $6.00............ 0.26 0.28
(1) For purposes of computing dividends declared per common share, the
calculation assumes that the historical aggregate dollar amount of
dividends declared is constant divided by the number of pro forma shares
outstanding.
MARKET PRICE DATA
On December 31, 1999, AMCON moved from the NASDAQ SmallCap Market
to the American Stock Exchange ("AMEX"). AMCON's trading symbol changed to
"DIT". The following table reflects the range of the high and low prices per
share of AMCON's Common Stock reported by NASDAQ and AMEX during each
quarter for the years ended September 28, 2001, September 29, 2000 and
September 24, 1999. Quotations for fiscal 1999 and for the first quarter of
fiscal 2000 represent inter-dealer quotations, without adjustment for retail
mark-ups, mark-downs or commissions and may not necessarily represent market
transactions. Quotations for the second, third and fourth quarters of fiscal
2000 represent the high and low sales price of AMCON's common stock. All
quotations have been adjusted to reflect the 10% stock dividend paid in
February 2000. As of September 28, 2001, AMCON had approximately 1,000
holders of record of its shares and AMCON believes that approximately 1,600
additional persons hold shares beneficially.
COMMON STOCK
-------------------------------
HIGH LOW
-------- -------
Year ended September 28, 2001
4th Quarter $5.19 $4.30
3rd Quarter 5.36 5.02
2nd Quarter 9.25 3.81
1st Quarter 5.31 3.56
Year ended September 29, 2000:
4th Quarter $6.00 $5.00
3rd Quarter 6.81 5.25
2nd Quarter 7.72 6.13
1st Quarter 9.09 6.42
11
COMMON STOCK
-------------------------------
HIGH LOW
-------- -------
Year ended September 24, 1999:
4th Quarter $9.09 $6.71
3rd Quarter 9.32 5.45
2nd Quarter 7.73 5.17
1st Quarter 7.39 3.86
During the fiscal years ended September 2001 and 2000, the board of
directors declared cash dividends of $0.03 per share per quarter or $0.12
per share for each year. During the fiscal year ended September 1999, the
board of directors declared cash dividends of $0.02 per share per quarter or
$0.08 per share for the year. In December 1999, the board of directors
declared a special 10% stock dividend. The board of directors will evaluate
payment of future dividends at their regular meetings. In addition to
possible dividends in the future, retained earnings will be used to finance
acquisitions of other distributing and retail companies, develop new
products, expand markets and for other corporate purposes. The payment of
dividends in excess of $0.03 per share per quarter requires the prior
approval of the lender under various borrowing arrangements entered into by
AMCON.
The table below presents the closing sales price per share of AMCON
common stock on the American Stock Exchange, and the average of the bid and
asked price for Hawaiian Natural common stock on the OTC Bulletin Board, in
each case, on November 7, 2000, the last full trading day immediately
preceding the public announcement of the proposed merger, and on November 12,
2001, the most recent practicable date prior to the mailing of this
document, as well as the "equivalent stock price" of shares of Hawaiian
Natural common stock on such dates. The "equivalent stock price" of shares
of Hawaiian Natural common stock represents the per share sales price for
AMCON common stock on the American Stock Exchange at such specified date,
multiplied by the applicable exchange ratios described under "Summary
Unaudited Comparative Historical and Pro Forma Per Share Data." The
"equivalent stock price" per share of Hawaiian Natural common stock shows
the effect of the merger from the perspective of an owner of Hawaiian
Natural common stock. Hawaiian Natural shareholders should obtain current
market quotations for shares of AMCON common stock prior to making any
decision with respect to the merger.
HAWAIIAN NATURAL HAWAIIAN NATURAL
AMCON COMMON STOCK PRICE OF EQUIVALENT STOCK PRICE
COMMON STOCK (AVERAGE OF BID AND ASSUMING AN EXCHANGE RATIO
(CLOSING SALE ASKED OF 0.052
PRICE PER SHARE) PRICE PER SHARE) (PRICE PER SHARE)
-------------------------- -------------------------- -----------------------------
November 7, 2000...... $4.88 $0.1875 $0.253
November 12, 2001..... 4.64 0.155 0.241
The table below presents the average closing sales price per share
of AMCON common stock on the American Stock Exchange for the 20 trading day
measurement period ending November 7, 2000 and November 12, 2001, as well as
the "equivalent stock price" of shares of Hawaiian Natural common stock
during such periods.
12
HAWAIIAN NATURAL
AMCON HAWAIIAN NATURAL EQUIVALENT STOCK PRICE
COMMON STOCK COMMON STOCK ASSUMING AN EXCHANGE RATIO
(CLOSING SALE (AVERAGE OF BID AND ASKED OF 0.052
PRICE PER SHARE) PRICE PER SHARE) (PRICE PER SHARE)
------------------------ ---------------------------- -----------------------------
20 trading day average
ending November 7,
2000..................... $4.91 $0.1875 $0.255
20 trading day average
ending November 12, 2001. 4.58 0.155 0.238
Following the consummation of the merger, shares of Hawaiian
Natural common stock will cease to be traded on the OTC Bulletin Board. The
shares of AMCON common stock issued to the Hawaiian Natural stockholders in
the merger will be listed on the American Stock Exchange. The AMCON common
stock currently trades on the American Stock Exchange under the symbol
"DIT."
13
RISK FACTORS
You should consider the following risk factors in determining how
to vote at the meeting.
RISKS RELATED TO THE TRANSACTION
OUR SHAREHOLDERS WILL NOT KNOW THE NUMBER OF SHARES OF AMCON COMMON STOCK
THEY WILL RECEIVE IN THE MERGER UNTIL SHORTLY BEFORE CLOSING
The number of shares of AMCON common stock to be received by our
shareholders will be determined by an exchange ratio which depends upon the
average closing price of AMCON common stock during a 20 trading day period
which ends three days prior to the date of the Hawaiian Natural shareholder
vote on the merger. The exchange ratio is not calculable as of the date of
this document, since the applicable 20 day trading period has not yet ended.
We urge you to obtain current market quotations for AMCON common stock.
Pursuant to the terms of the merger agreement, in no event may the
average closing sale price of AMCON common stock be less than $6.00 or
greater than $8.00 per share for purposes of calculating the exchange ratio.
Therefore, the exchange ratio will be no less than 0.039 and no more than
0.052, assuming no change in the number of shares of Hawaiian Natural common
stock outstanding immediately prior to the effective time of the merger from
the number currently outstanding which is 9,185,982. Our stockholders will
receive in the aggregate a maximum and a minimum of 477,558 and 358,168
shares of AMCON common stock in the merger. If, however, the market value of
the AMCON common stock at the effective time of the merger is less than
$6.00 per share, the aggregate market value of the shares issued in the
merger would be less than $2,865,348. On November 12, 2001, the most recent
practicable date prior to the mailing of this document, the closing sale
price of AMCON common stock was $4.64, and the average closing sale
price for the 20 trading days then ended was $4.58.
The percentage ownership of AMCON to be held by Hawaiian Natural
shareholders is dependent upon the number of shares of AMCON to be issued to
Hawaiian Natural shareholders. This percentage ownership depends on the
exchange ratio and thus the price of AMCON stock during the measurement
period which, in turn, is dependent upon, among other factors:
o changes in the business of AMCON,
o operations or prospects of AMCON,
o the timing of the completion of the merger,
o the prospects of post-merger operations,
o general market and economic conditions and other factors.
AMCON WILL RECEIVE A PORTION OF THE MERGER CONSIDERATION.
AMCON is expected to hold 2,000,000 shares of our common stock
which will be converted into AMCON common stock in the merger and held in
its treasury after the merger. These shares represent approximately 21.8% of
our outstanding shares (assuming there is no change in the outstanding
shares following the date hereof). Therefore, AMCON will receive
approximately 21.8% of the consideration issued in the merger.
CAPITAL RESOURCES AVAILABLE TO HAWAIIAN NATURAL MAY NOT BE SUFFICIENT TO MEET
ITS NEEDS
Hawaiian Natural was hampered by the lack of sufficient capital
resources to achieve its business objectives prior to the investments made
by AMCON in connection with the proposed merger. Since September 2000, AMCON
has provided $1,604,483 in loans (of which $500,000 has been converted into
Common Stock) and an additional $300,000 investment in the form of a common
stock purchase.
14
AMCON's Revolving Credit Facility contains a covenant restricting intercompany
advances from AMCON to Hawaiian Natural to $2,000,000, which leaves remaining
availability of $95,519 for future advances. However, this restriction does
not prevent the sublease by AMCON of new blow molding and water bottling
equipment with a purchase price of approximately $2.0 million.
The capital and equipment already provided by AMCON is expected to
enable Hawaiian Natural to expand its production capacity, distribution
capability and sales. This additional capital and equipment, as well as the
additional management support to be provided by AMCON after the merger is
expected to better position Hawaiian Natural to obtain additional capital
from third parties. In addition, AMCON may seek to amend the restriction in
its Revolving Credit Facility thereby allowing it to increase the amount of
intercompany advances it is permitted to make to Hawaiian Natural. However,
there can be no assurance that additional capital can be obtained by
Hawaiian Natural after the merger or that AMCON will be able to obtain a
relaxation of the restriction in its Revolving Credit Facility in
intercompany advances. Nevertheless, it should be noted that Hawaiian
Natural's sales are expected to represent a small percentage of AMCON's
total sales and the merger will thus enable Hawaiian Natural shareholders to
diversify their investment risk by virtue of AMCON's other businesses and
not be dependent solely on Hawaiian Natural's future ability to obtain
capital to sustain its operations.
OUR DIRECTORS AND OFFICERS MAY HAVE INTERESTS RELATING TO THE MERGER WHICH
ARE DIFFERENT FROM YOUR INTERESTS
The majority of our officers are expected to be retained after the
merger. In addition, Marcus Bender, the Chief Executive Officer and
President of Hawaiian Natural will retain those positions with the surviving
corporation and is currently engaged in negotiations with AMCON on the
possibility of entering into a new employment agreement that would replace
his current employment agreement which will expire in October 2002. Mr.
Bender will be entitled to participate in AMCON's employee benefit plans,
including the possibility of grants of stock options in AMCON's stock option
plan. In addition, Mr. Bender and another director of Hawaiian Natural,
Brian Barbata, each own 50% of the stock of Hawaii Brewery Development
Company, Inc. which is the lessor of the land on which Hawaiian Natural
conducts its operations, including the well from which Hawaiian Natural
extracts the water for its natural water products. This lease is a long-term
agreement that provides for monthly rental payments based upon our sales.
This lease, as revised and described below, will continue in effect
following the merger.
THE MERGER WILL CREATE SIGNIFICANT MERGER-RELATED AND INTEGRATION-RELATED
EXPENSES
Direct incremental merger-related transaction costs will be
recorded by AMCON as a charge to additional paid-in-capital in the quarter
in which the merger is consummated. The direct incremental merger-related
transaction costs consist principally of charges related to professional
services, registration and other regulatory costs of approximately $300,000.
We expect to incur pre-tax charges to operations, currently estimated to be
$100,000, to reflect integration costs resulting from the merger. These
costs will be recorded subsequent to consummation of the merger. These
amounts are preliminary estimates and are therefore subject to change.
Additional unanticipated expenses may be incurred with respect to the
merger.
CONDITIONS TO THE MERGER MAY NOT BE SATISFIED
The merger agreement contains conditions that, if not satisfied,
would result in the merger not occurring, even though our shareholders
approve it. We cannot assure you that all of the closing conditions to the
merger will be satisfied, that any unsatisfied conditions will be waived or
that the merger will occur. AMCON has previously loaned Hawaiian Natural an
aggregate of $1,604,483 to help sustain our operations pending completion of
the merger, of which $500,000 has been converted into common stock of
Hawaiian Natural. Of these total loans, $750,000 is secured by substantially
all of the assets of Hawaiian Natural. All of the notes received for those
loans are due on December 31, 2001. If the merger
15
does not occur, it is currently unlikely that Hawaiian Natural will be able
to pay these notes when due as well as other outstanding payables, including
various expenses of the merger. Therefore, if the merger does not occur, we
will likely not be able to continue as a going concern.
THE PRICE OF AMCON COMMON STOCK MAY BE AFFECTED BY FACTORS DIFFERENT FROM
THOSE AFFECTING THE VALUE OF HAWAIIAN NATURAL STOCK INDIVIDUALLY AND MAY
FLUCTUATE SIGNIFICANTLY REGARDLESS OF THE SURVIVING CORPORATION'S ACTUAL
OPERATING PERFORMANCE
Upon completion of the merger, our common shareholders will become
AMCON common shareholders. AMCON's business will differ from that of
Hawaiian Natural, and AMCON's results of operations, as well as the price of
AMCON's common stock, may be affected by factors different from those
affecting our results of operations and the value of our common stock. Since
our operations will constitute only a fraction of the operations of the
combined company, improvements in our results of operations may not affect
the market price of AMCON's stock after the merger to the same extent as
they would likely have affected our stock price if Hawaiian Natural remained
independent. Conversely, Hawaiian Natural has a history of operating losses
and cash flow deficits since inception. If these losses and cash flow
deficits continue after the merger, they could adversely affect the
financial condition of AMCON, which would likely be reflected in a decline
in the market value of its stock.
The trading price of AMCON's common stock may be volatile. AMCON's
stock price could be subject to wide fluctuations in response to a variety
of factors, including:
o actual or anticipated variations in quarterly operating
results;
o new products or services offered by AMCON or its competitors;
o changes in financial estimates by securities analysts;
o AMCON's announcement of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
o additions or departures of key personnel;
o additional issuances of common stock; and
o other events that may be beyond AMCON's control.
In addition, stocks traded on the American Stock Exchange have
recently experienced significant price and volume fluctuations. These
fluctuations often have been unrelated or disproportionate to the operating
performance of the various listed companies. These broad market and industry
factors may materially adversely affect the market price of AMCON's common
stock, regardless of AMCON's actual operating performance.
AMCON'S STOCK IS THINLY TRADED. THEREFORE, HOLDERS MAY HAVE DIFFICULTY
SELLING ANY SIGNIFICANT PORTION OF THE SHARES RECEIVED IN THE MERGER WITHOUT
DEPRESSING AMCON'S STOCK PRICE
AMCON's stock is thinly traded. The average daily trading volume of
AMCON's stock on the American Stock Exchange during the 3 months prior to
the date of this document has been 1,290. Although the shares issued to
Hawaiian Natural stockholders in the merger will be freely tradable, sales
of substantial amounts of AMCON's common stock in the public market
following consummation of the merger could cause the market price of AMCON's
common stock to fall. These sales might also make it
16
more difficult for AMCON to sell equity or equity related securities at a
time and price that AMCON would deem appropriate.
RISKS RELATED TO THE BUSINESS OF AMCON
AMCON'S SALES ARE CONCENTRATED IN CIGARETTES
Cigarettes accounted for 70% of AMCON's sales and 41% of its gross
margin during its fiscal year ended September 30, 2000. Although AMCON
continues to diversify its business and product lines in an attempt to
lessen its dependence on cigarette sales, increases in the price of
cigarettes compared to other products sold by AMCON makes it difficult to do
so. Limitations imposed by governmental regulation on the sale or promotion
of cigarettes, or a decline in demand for cigarettes by consumers, due to
health or other concerns could have a material adverse effect on AMCON's
business, financial condition and results of operations.
AMCON'S GROWTH STRATEGY IS DEPENDENT IN SIGNIFICANT PART ON ACQUISITIONS
From its inception, AMCON has pursued a strategy of growth through
increased sales and through acquisitions. Since 1981, AMCON has acquired 25
consumer products distributors in the Great Plains, Rocky Mountain and
Southern regions of the United States as well as its natural and health food
businesses. There can be no assurance that AMCON will continue to be able to
grow through acquisitions at prices and other terms favorable to AMCON.
AMCON competes for acquisition candidates with other entities, some of which
have greater financial resources than AMCON, which may lead to fewer
acquisition opportunities and higher acquisition prices. There can also be
no assurance that AMCON will be able to profitably manage acquired
businesses or successfully integrate acquired businesses without substantial
costs, delays or other operational or financial problems. Acquisitions also
involve a number of special risks, including failure of the acquired
business to achieve expected results, diversion of management's attention,
failure to retain key personnel of the acquired business and risks
associated with unanticipated events or liabilities, some or all of which
could have a material adverse effect on AMCON's business, financial
condition and results of operations.
AMCON'S BUSINESSES ARE IN HIGHLY COMPETITIVE AND FRAGMENTED INDUSTRIES
Both the distribution and natural food retail industries are highly
competitive. Most of AMCON's competitors generally offer a wide range of
products at prices comparable to those of AMCON. AMCON therefore seeks to
differentiate itself from its competitors by offering a higher level of
technology and customer service. The natural food retail industry in which
AMCON's subsidiaries compete is highly fragmented, with more than 9,000
stores operating independently or as part of small chains. Expansion of
national health food chains and increased sales of natural products by
conventional food stores have contributed to the saturation of health food
retail stores in some markets and have caused some store sales to generate
minimal increases or experience decreases over the past year. AMCON's
ability to compete successfully is also subject to the following factors:
o the ability to attain estimated expense savings;
o the ability to continue to successfully market existing
products and services, which may be adversely impacted by the
introduction of competing products or services;
o AMCON's ability to successfully develop and market new
products and services;
o AMCON may not be able to increase the efficiency, production
or distribution of Hawaiian Springs water in order to grow
the business conducted by Hawaiian Natural;
17
o the ability to expand the market for existing products;
o the greater financial resources of competitors;
o future changes in laws and regulations, including regulations
affecting cigarettes;
o the ability to successfully negotiate pricing of products and
services with our customers;
o the loss or impairment of sources of capital and the adequacy
of such sources to meet AMCON's and the surviving
corporation's funding needs;
o exposure to product liability 1awsuits;
o general economic and business conditions;
o AMCON's ability to attract and retain management and other
employees; and
o other risk factors detailed in AMCON's Securities and
Exchange Commission filings, including its Annual Report on
Form 10-K and Quarterly Reports on Form 10-Q.
AMCON'S GOVERNING DOCUMENTS AND DELAWARE LAW COULD HAVE ANTITAKEOVER EFFECTS
AMCON's Certificate of Incorporation requires that any action
required or permitted to be taken by shareholders of AMCON must be effected
at a duly called annual or special meeting of shareholders and may not be
effected by any consent in writing, and requires reasonable advance notice
by a shareholder of a proposal or director nomination which that shareholder
desires to present at any annual or special meeting of shareholders. Special
meetings of shareholders may be called only by the Chairman of the Board,
the President or by a majority of the entire board of directors, and members
of the board of directors may be removed only for cause upon the affirmative
vote of holders of at least a majority of the shares of capital stock of
AMCON entitled to vote. In addition, shares of AMCON's preferred stock may
be issued in the future without further shareholder approval and upon such
terms and conditions, and having such rights, privileges and preferences, as
the AMCON board of directors may determine. The rights of the holders of
AMCON common stock will be subject to, and may be adversely affected by, the
rights of any holders of preferred stock that may be issued in the future.
AMCON has no present plans to issue any shares of preferred stock. AMCON is
also subject to provisions of the Delaware corporation law that, in general,
prohibit any business combination with a beneficial owner of 15% or more of
AMCON's common stock for five years unless the holder's acquisition of AMCON
stock was approved in advance by AMCON's board of directors. These
provisions, and other provisions of AMCON's Certificate of Incorporation and
Bylaws, may have the effect of deterring hostile takeovers or delaying or
preventing changes in control or management of AMCON, including transactions
in which shareholders might otherwise receive a premium for their shares
over then current market prices. In addition, these provisions may adversely
affect the price of AMCON's common stock and the voting and other rights of
the holders of AMCON common stock, including limiting the ability of
shareholders to approve transactions that they may deem to be in their best
interests.
RISKS RELATED TO HAWAIIAN NATURAL'S BUSINESS
OPERATIONS HAVE BEEN UNPROFITABLE. Hawaiian Natural has lost money
each year since it began operations. As of June 30, 2001, Hawaiian Natural
had an accumulated deficit of approximately $13,600,000 Hawaiian Natural's
operations may never become profitable.
18
HAWAIIAN NATURAL NEEDS ADDITIONAL FUNDING TO CONTINUE ITS
OPERATIONS. Without additional financing, it is likely that Hawaiian Natural
will not be able to continue its operations. Hawaiian Natural is
substantially dependent on financing from AMCON pending the merger. If the
merger agreement is terminated for any reason, Hawaiian Natural may not be
able to pay the AMCON loans when due, in which event Hawaiian Natural will
likely not be able to continue as a going concern. A default on any of the
secured convertible notes issued in respect of AMCON loans of $750,000
would entitle AMCON to convert any of those notes into Series C Preferred
Stock, and upon such conversion, AMCON would be entitled to elect a majority
of Hawaiian Natural's directors.
HAWAIIAN NATURAL'S BUSINESS IS PRIMARILY IN HAWAII. Although
Hawaiian Natural's objective is to distribute its product internationally, a
substantial majority of Hawaiian Natural's sales still occur in the Hawaiian
market. Hawaiian Natural's principal distributor in Hawaii, Paradise
Beverages, accounted for approximately 49% of Hawaiian Natural's net sales
during its last fiscal year. Hawaiian Natural's distribution agreement with
Paradise Beverages is based upon an oral understanding, which is terminable
at will by either party. If this agreement were terminated, Hawaiian
Natural's business in Hawaii could be materially adversely affected.
CURRENCY FLUCTUATIONS AND ECONOMIC WEAKNESS ABROAD COULD HURT
HAWAIIAN NATURAL'S SALES AND IMPEDE EXPANSION INTO FOREIGN MARKETS,
ESPECIALLY IN ASIA. Hawaiian Natural hopes to grow its business through
international expansion, especially in developed countries in Asia. Several
of these countries have experienced economic downturns and weakening of
their currencies relative to the U.S. dollar. Revenues have not been
directly affected by currency fluctuations in these markets, since Hawaiian
Natural prices all of its product in U.S. dollars. However, currency
fluctuations can lessen demand for Hawaiian Natural's product in foreign
markets by making the product more expensive in local currency.
HAWAIIAN NATURAL LEASES ITS WATER SOURCE AND BOTTLING FACILITY
PURSUANT TO A LONG-TERM LEASE AGREEMENT WITH A PRINCIPAL SHAREHOLDER. This
lease agreement requires Hawaiian Natural to make rental payments on a
monthly basis at a rate equal to base rent of $5,569 per month, subject to
adjustment after October1, 2004 based on the consumer price index, plus
additional rent equal to 2% of Hawaiian Natural's net sales (as defined in
the lease) over the base rent for the same quarterly period. In addition,
the lease contains various restrictions on Hawaiian Natural's operations.
The lessor is entitled to make use of the premises (other than the existing
structures) for the manufacture of other beverages (except natural water)
and is entitled to draw up to 50% of the water flow from the leased well for
such purposes. However, the replacement lease which will become effective at
the time of the merger provides that Hawaiian Natural's use of the well
water will have priority. In addition, the lessor currently conducts no such
activity on the premises.
HAWAIIAN NATURAL IS HIGHLY DEPENDENT UPON THE EFFORTS OF ITS
PRESIDENT. Marcus Bender, Hawaiian Natural's President and Chief Executive
Officer, has designed and managed the implementation of Hawaiian Natural's
business strategy to date. In October 1996, Hawaiian Natural entered into an
employment agreement with Mr. Bender, employing him as President which is
currently renewable annually and which will expire in October 2002 unless it
is further renewed. Mr. Bender and AMCON are currently negotiating a new
employment agreement that would replace his existing employment agreement
but there is no assurance this will be accomplished. Hawaiian Natural has
also obtained $1.0 million in key man life insurance on Mr. Bender's life.
Nevertheless, the loss of Mr. Bender's services may have a material adverse
effect on Hawaiian Natural.
HAWAIIAN NATURAL IS DEPENDENT UPON THE EFFORTS OF INDEPENDENT
DISTRIBUTORS AND BROKERS FOR THE SALE OF ITS PRODUCT. These parties may
de-emphasize or discontinue the sale of Hawaiian Natural's products based
upon their own financial condition, operating strategy or other internal
considerations, which Hawaiian Natural may have no ability to influence or
control. A distributor in
19
Hawaii once stopped representing Hawaiian Natural's product when the
distributor discontinued all sales of bottled water and other non-beer
products. Other distributors have been terminated for failure to meet agreed
performance standards. Such unforeseen changes in Hawaiian Natural's
distribution network have a detrimental effect on the development of
Hawaiian Natural's business.
THE BOTTLED WATER BUSINESS IS HIGHLY COMPETITIVE. There are
numerous products available, which are often perceived as generic by
consumers. Hawaiian Natural competes primarily with large established
foreign and domestic companies. Hawaiian Natural's principal foreign
competitors include Great Brands of Europe, a French company which
distributes under the "Evian," Volvic" and "Dannon Natural Spring Water"
names, and Perrier, S.A., a French company, which distributes through its
U.S. subsidiary, the Perrier Group, under the "Perrier," "Arrowhead" and
"Poland Springs" names, among others. Hawaiian Natural's principal domestic
competitors include Crystal Geyser Water Co., which distributes under the
"Crystal Geyser" name, and Mountain Valley Water Co., which distributes
under the "Mountain Valley" name. All of these companies have large
marketing budgets which enable them to operate in mass consumer markets,
such as supermarket chains. In California, the largest U.S. market,
supermarkets often charge new entrants substantial "slotting fees" for shelf
space. Hawaiian Natural has not had the financial resources to compete in
these markets and has therefore pursued a niche marketing strategy on the
U.S. Mainland. Hawaiian Natural markets its product on the basis of superior
quality and taste and the worldwide reputation of Hawaii.
HAWAIIAN NATURAL MUST MEET STRICT GOVERNMENTAL REGULATIONS
CONCERNING THE BOTTLING AND PACKAGING OF ITS WATER. The bottled water
industry is highly regulated both in the United States and abroad. State and
Federal regulations require Hawaiian Natural to monitor each aspect of its
production process, to ensure the quality of its water and the truthfulness
of its labeling. Governmental regulations in foreign jurisdictions are
generally similar to, and in certain respects more stringent than, U.S.
regulations. Failure to meet applicable regulations in the U.S. or foreign
markets could lead to costly recalls, loss of certification to sell product
or, even in the absence of governmental action, loss of sales due to
negative publicity.
HAWAIIAN NATURAL'S ARTICLES OF INCORPORATION CONTAIN CERTAIN
ANTI-TAKEOVER PROVISIONS. These provisions enable the board of directors to
issue preferred stock in one or more series, with such rights as the board
of directors may determine without any further vote or action by the
shareholders. In addition, section 415-172 of the Hawaii Revised Statutes
requires shareholder approval before the completion of a "control share
acquisition" resulting in beneficial ownership by an acquiring person of in
excess of 10% of the voting power of a public corporation incorporated in
Hawaii with at least 100 shareholders and its principal place of business or
substantial assets located in Hawaii. These provisions could reduce the
probability of any change of control or acquisition of Hawaiian Natural
without Board approval. While such provisions are intended to enable the
board of directors to maximize shareholder value, they may have the effect
of discouraging takeovers which could be in the best interest of
shareholders.
HAWAIIAN NATURAL DOES NOT PAY DIVIDENDS ON ITS COMMON STOCK.
Hawaiian Natural has never paid any dividends on its common stock and does
not expect to pay any such dividends. The SeriesC Preferred Stock issuable
upon conversion of any convertible notes issued to AMCON for loans of
$750,000 has, and any additional preferred stock issued in the future will
likely have, a priority in the payment of dividends.
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS
"Forward-Looking Statements," (as this term is defined in the
Private Securities Litigation Reform Act of 1995) contained in this document
are those statements concerning anticipated financial or business
performance, plans for growth and other factors that could affect future
operations or financial
20
position, and other non-historical facts. These statements often include the
words, "believes," "expects," "anticipates," "intends," "plans,"
"estimates," "may," "will," "should," "could," or similar expressions.
Examples of forward-looking statements include:
o pro forma financial statements and projections relating to
revenues, income from operations, pre-tax income, income or
loss, earnings or loss per share, financial condition,
capital expenditures, the payment or non-payment of
dividends, future share price or value and other financial
items;
o statements of plans and objectives;
o statements of future economic performance; and
o statements of the assumptions underlying these statements.
Forward-looking statements are not guarantees of future performance
or results. They involve risks, uncertainties and assumptions. Future
results of operations, financial condition, business and stock price or
values of AMCON and Hawaiian Natural may be materially different from those
described in these forward-looking statements. Shareholders of Hawaiian
Natural are cautioned not to put undue reliance on any forward-looking
statement.
We have described under "Risk Factors" factors that could cause
actual results to be materially different from those described in the
forward-looking statements. Other factors that we have not identified in
this document could also have this effect.
All forward-looking statements made in this document are made as of
the date of this document. AMCON or Hawaiian Natural may not be required to
publicly update or correct any of these forward-looking statements in the
future.
THE MERGER
GENERAL
Our board of directors is using this document to solicit proxies
from the holders of Hawaiian Natural common stock for use at the special
meeting.
At the Hawaiian Natural shareholders meeting, holders of our common
stock will be asked to vote upon a proposal to approve the agreement and
plan of merger attached hereto as Annex A, sometimes referred to in this
document as the "merger agreement."
BACKGROUND OF THE MERGER
Hawaiian Natural has been hampered by the lack of adequate capital
resources to achieve its business objectives for an extended period of time.
Therefore, for at least two years prior to the commencement of negotiations
concerning the merger, Hawaiian Natural had been continually exploring
alternatives for raising additional capital to expand its production
capacity, distribution capability and sales in order to produce operating
margins that would achieve profitability on a sustained basis. These efforts
led to investments of:
o an aggregate of $1.25 million by Amro International S.A., a
private investment fund, in the first half of 1999,
21
o an aggregate of $1.25 million in Common Stock and Common
Stock warrants in the fourth quarter of 1999 and first
quarter of 2000, of which $1,050,000 was provided by Wilhelm
Kuhlmann, a director, and certain affiliated companies and
$200,000 was provided by Marcus Bender, Hawaiian Natural's
president ($100,000 of which was rescinded in December 2000),
and
o an aggregate of $100,000 in Series B Convertible Preferred
Stock by David Dworsky, a private investor, in the first
quarter of 2000. In addition, between February and August
2000, Mr. Kuhlmann or his affiliated companies exercised an
aggregate of 230,600 Common Stock warrants at an exercise of
$1.00 per share for an aggregate investment of $230,600.
As part of that search for capital, Marcus Bender, Hawaiian
Natural's President, approached William Wright, Chairman of the Board and
Chief Executive Officer of AMCON, in May of 2000. Mr. Bender was aware of
AMCON's sale of bottled waters through its wholesale distribution business
to convenience and other stores as well as through its health and natural
products retail stores. Hawaiian Natural's primary marketing efforts in the
U.S. Mainland have historically been directed toward niche markets, with
specific emphasis on the natural foods markets. Due to their focus on
quality and their willingness to pay a premium for products perceived as
superior, customers who shop at such specialty stores are more likely to
accept the higher price of imported products. Mr. Bender therefore believed
there might be a potential strategic alignment between Hawaiian Natural's
business and AMCON's businesses.
Mr. Bender and Mr. Wright held preliminary discussions on the
possible strategic fit between their companies' business at various times
during the months of May through September 2000. During this period, Mr.
Bender was seeking an investment of capital into Hawaiian Natural by AMCON.
Mr. Wright indicated, however, that AMCON would not be interested in
providing capital unless it was combined with an acquisition of Hawaiian
Natural by AMCON. Mr. Bender was also concurrently exploring the investment
of additional capital into Hawaiian Natural, or alternative acquisition
proposals, from third parties due to the dwindling capital resources
available to Hawaiian Natural. Hawaiian Natural's board of directors was
growing increasingly concerned that Hawaiian Natural would not be able to
continue as a going concern without the infusion of a significant amount of
new capital to satisfy accounts payable and to acquire new equipment to
increase the volume, speed and efficiency of production. Hawaiian Natural
also needed capital to meet its payment obligations on the debts secured by
its blow molding equipment and to repurchase its Series A Preferred Stock,
the conversion of which would have been highly dilutive to common
shareholders. However, despite vigorous efforts to obtain additional capital
investment or alternative acquisition proposals, no acceptable alternatives
became available.
Therefore, in August and September of 2000, Mr. Bender began to
focus primarily on pursuing a transaction with AMCON. A telephone conference
was held on August 24, 2000 among Mr. Bender, Mr. Wright and legal counsel
for Hawaiian Natural and AMCON concerning the possible terms of a proposed
acquisition of Hawaiian Natural by AMCON and financing for Hawaiian Natural
from AMCON to meet its working capital and other needs in the interim prior
to an acquisition.
Based on those discussions, a non-binding term sheet was prepared
by AMCON and its legal counsel and delivered to Hawaiian Natural and its
legal counsel during the last week of August 2000 setting forth the proposed
structure and principal terms of an acquisition of Hawaiian Natural and
interim financing by AMCON. The original proposal contemplated the merger of
Hawaiian Natural into a newly formed subsidiary of AMCON with Hawaiian
Natural's shareholders having an election to sell up to half of their shares
at $0.50 per share in cash or exchange all or the remaining shares for AMCON
common stock based on the average stock price of AMCON during the same
measurement period as in the merger.
22
Hawaiian Natural, however, sought merger consideration consisting entirely
of AMCON common stock because it believed that its shareholders might be
selling for cash at a price below what it perceived to be the higher
potential value of the stock of the combined companies. AMCON agreed in
principle to this revised proposal and in September 2000, a revised term
sheet was distributed, setting forth new terms. These terms called for a
reduction in the acquisition price for the Hawaiian Natural stock to $.45
and imposed a collar of $6.00 to $8.00 per share on the value of the AMCON
stock to be distributed in the merger. The term sheet also contemplated
interim financing of up to $750,000 and a commitment from AMCON for up to $1
million in additional loans, guarantees or lease financing to enable
Hawaiian Natural to purchase new blow molding equipment, which was perceived
as essential to its growth strategy. This revised term sheet was also
non-binding and subject to due diligence by both parties. The term sheet was
also subject to the execution of a stockholder agreement by the principal
shareholders of Hawaiian Natural, containing a commitment to vote their
shares in favor of the proposed merger.
During the month of September 2000, the parties and their legal
counsel continued to negotiate the possible terms of a merger and interim
financing. On September 19, 2000, AMCON delivered an initial draft of a
merger agreement, a stockholder agreement and a convertible, secured
promissory note for the interim financing. The proposed merger agreement was
subject to approval by AMCON's board of directors on or before October 14,
2000. However, it provided that if Hawaiian Natural's board of directors
approved the agreement and the stockholder agreement were executed by
September 30, 2000, AMCON would provide the first installment of interim
financing in the amount of $350,000. Further, if AMCON's board of directors
subsequently approved the agreement, AMCON would be obligated to provide an
additional $400,000 in interim financing promptly thereafter. AMCON began to
conduct a due diligence investigation pursuant to a Confidentiality
Agreement between Hawaiian Natural and AMCON dated September 26, 2000.
As a result of its initial due diligence investigation, and in
light of potential issuances of additional shares of Hawaiian Natural common
stock upon conversion of the outstanding Series A Convertible Preferred
Stock and from other potentially dilutive events, AMCON revised its prior
per share offer into an aggregate offer for the entire net equity of
Hawaiian Natural. The amount offered was $2,865,348, payable in the form of
AMCON common stock based on the average trading price during the same
measurement period as described elsewhere herein. The average trading price
of the AMCON stock issuable in the merger was to be subject to a collar, as
discussed previously, of not less than $6.00 and not more than $8.00 per
share, resulting in an agreed maximum of 477,558 shares and a minimum of
358,168 shares of AMCON common stock as merger consideration for Hawaiian
Natural's common stock. The interest rate on the secured convertible note
for interim financing to be provided by AMCON was reduced from 12% to 10%
per annum as a result of negotiations and allowed conversion of the
principal and unpaid accrued interest on these notes into Hawaiian Natural
common stock at a price per share equal to the quotient of $2,865,348
divided by the number of shares of Hawaiian Natural common stock outstanding
at the date of conversion. Alternatively, this form of secured convertible
note could be converted into a newly created Series C Convertible Preferred
Stock which could be converted before the proposed maturity date of February
28, 2001 but only after the earlier of termination of the merger agreement
or an event of default. Like the final form of Series C Preferred Stock,
this stock would give AMCON the right to elect a majority of Hawaiian
Natural's directors.
On September 28, 2000, Hawaiian Natural's board of directors met to
consider and act upon the proposed merger. All of Hawaiian Natural's
directors were present. Hawaiian Natural's board of directors carefully
considered the terms of the proposed transaction as well as the various
factors described below "Our Reasons for the Merger; Recommendation of Our
board of directors." Hawaiian Natural's board of directors unanimously
approved the merger agreement and related agreements proposed by AMCON
primarily because they believed that it was the only alternative
realistically available to address Hawaiian Natural's production and
distribution problems and liquidity concerns, while providing a reasonable
opportunity for Hawaiian Natural's stockholders to realize value from their
23
investment. On September 29, 2000, an executed copy of the merger agreement
and the stockholder agreement was delivered to AMCON.
AMCON's board of directors met by conference telephone call on
October 13, 2000 to consider the merger agreement and related agreements.
The merger agreement included a provision granting AMCON the right not to
proceed with the merger if the AMCON board of directors did not approve its
execution and performance by 5:00 p.m. on October 14, 2000. AMCON's board of
directors expressed various concerns about the financial and operational
risks associated with the merger and requested Mr. Wright to seek additional
information and an extension of time to act upon the merger. In response to
this request, Hawaiian Natural granted an extension to midnight on October
19, 2000 for AMCON's board of directors to act on the merger. After
receiving further information and analysis, AMCON's board of directors
approved the execution and performance of the merger agreement.
During the period from October 19 through November 7, 2000, the
parties clarified their understanding that the shares underlying the
$750,000 of secured convertible notes would not participate in the merger
consideration and made other technical changes which were reflected in an
amendment and restatement of the merger agreement dated as of November 7,
2000 and other related agreements. A public announcement of this amended and
restated merger agreement, and interim financing was made on November 8,
2000.
In January 2001, Hawaiian Natural requested an additional $300,000
of financing which it proposed be loaned pursuant to a secured convertible
note like the $350,000 and $400,000 secured convertible notes previously
issued to AMCON. AMCON, however, indicated that it was willing to provide
the financing only by means of the purchase of 750,000 shares of Hawaiian
Natural common stock at $0.40 per share, the then estimated value per share
of the merger consideration. In addition, unlike the common stock receivable
upon conversion of the $750,000 of secured convertible notes, AMCON insisted
that these shares would be included among Hawaiian Natural's outstanding
shares for purposes of calculating the exchange ratio and allocating the
merger consideration. Due to the absence of other financing alternatives,
Hawaiian Natural accepted AMCON's proposal and issued 750,000 shares of
Hawaiian Natural common stock for $300,000 in cash in February 2001. A
Second Amended and Restated Merger Agreement was entered into concurrently
with the issuance of those shares primarily in order to permit such shares
to participate in the receipt of merger consideration along with shares
owned by other Hawaiian Natural shareholders.
In February 2001 AMCON also agreed to lease in its name, and
placed orders for, new blow molding and water bottling equipment with a
purchase price of approximately $2.0 million to be used by Hawaiian Natural
in order to increase Hawaiian Natural's capacity and efficiency. Hawaiian
Natural will sublease this equipment from AMCON on similar terms.
Hawaiian Natural subsequently requested $500,000 of additional
financing from AMCON to meet its working capital needs. AMCON agreed to loan
that financing to Hawaiian Natural pursuant to a secured convertible note
bearing interest at the rate of 10% per annum originally due on September
30, 2001 and which is secured by substantially all of Hawaiian Natural's
assets. This $500,000 secured convertible note was issued in June 2001. This
note was subsequently converted pursuant its terms into Hawaiian Natural
common stock at a conversion ratio of $0.40 per share. In connection with
the issuance of the $500,000 secured convertible note, a Third Amended and
Restated Agreement and Plan of Merger was entered into primarily in order
for the shares receivable upon conversion of this Note to participate in the
receipt of merger consideration along with shares owned by other Hawaiian
Natural shareholders. Like the $350,000 secured convertible note and the
$400,000 secured convertible note previously issued to AMCON, the $500,000
secured convertible note was alternatively convertible, prior to its
maturity at a conversion price of $1.00 per share, into Hawaiian Natural's
Series C Convertible Preferred Stock if the
24
Agreement and Plan of Merger was terminated for any reason or Hawaiian
Natural defaulted in its obligations under those notes.
During this period, AMCON was also negotiating with Hawaii Brewery
Development Company, Inc. to seek improvements for the benefit of Hawaiian
Natural in the lease agreement dated October 3, 1994 covering the land upon
which Hawaiian Natural operates, including the well from which Hawaiian
extracts water for its natural water products. Marcus Bender, the President
of Hawaiian Natural, and Mr. Brian Barbata, a director of Hawaiian Natural,
each own 50% of the stock of Hawaii Brewery Development Company, Inc. These
negotiations led to a new lease that would become effective upon the
completion of the merger which, among other things, would give Hawaiian
Natural priority in the use of the well water to meet its needs, facilitate
Hawaiian Natural's acquisition of leasehold title insurance, assure adequacy
of permits and allow for expansion of and improvements to Hawaiian Natural's
operations. In addition, AMCON obtained a right of first offer in favor of
Hawaiian Natural in the event the lessor should desire to sell the land on
which the leased property and contiguous property is located at any time
during the term of the lease. A Fourth Amended and Restated Merger Agreement
was executed in June 2001 to add the new lease as an exhibit to that
agreement and extend the termination date of that agreement to September 30,
2001.
AMCON had also been negotiating for several months the sale of its
health food distribution business conducted by its subsidiary, then named
Food For Health Co., Inc., which is described under "Information About AMCON
- Management's Discussion and Analysis of Financial Condition and Results of
Operations - Acquisitions and Dispositions". During roughly the same time
period, AMCON had also been negotiating the acquisition of substantially all
of the distribution business and net assets of Merchants Wholesale, Inc.
which is described under the same caption referred to above. The probability
of occurrence and significance of these disposition and acquisition
transactions required various financial statements to be included in this
document pursuant to accounting regulations of the Securities and Exchange
Commission. The sale of the health food distribution business conducted by
Food For Health Co., Inc. was completed effective March 23, 2001 and the
acquisition of Merchants Wholesale, Inc. was completed on June 1, 2001. It
was not feasible to prepare the necessary financial statements until those
transactions were completed and the necessary auditing and accounting work
was conducted. As a consequence, the merger had to be delayed for this work
to be performed.
As a result of this delay, AMCON loaned Hawaiian Natural an
additional $354,483 to meet its operating needs pursuant to a promissory
note bearing interest at the rate of 8% per annum. This $354,483 note is not
convertible into any capital stock of Hawaiian Natural but is secured by
substantially all of Hawaiian Natural's assets. A Fifth Amended and Restated
Merger Agreement was entered into as of September 27, 2001 which extended
the termination date of that agreement to December 31, 2001. At the same
time the maturity date of each of the secured convertible notes and the
$354,483 note was extended to December 31, 2001.
FINANCIAL PROJECTIONS
During the course of discussions in connection with the negotiation
of the terms of the merger, Hawaiian Natural provided AMCON with projected
financial information that was not publicly available. This information was
shared in confidence pursuant to the terms of the Confidentiality Agreement
between Hawaiian Natural and AMCON. These projections were prepared
primarily for the purpose of illustrating the projected generation and
consumption of cash based on specified assumptions and therefore should be
viewed in that context. Hawaiian Natural's actual operating performance
produced results of operations which were lower than those projected.
As a matter of policy, neither Hawaiian Natural nor AMCON make
public forecasts or projections as to future performance or earnings. The
inclusion of these forecasts should not be read as an
25
indication that either Hawaiian Natural or AMCON or their boards of
directors considered them to be a determinative factor in connection with
their consideration of the merger. These forecasts were only one of many
factors considered by Hawaiian Natural, AMCON and their boards of directors.
These forecasts were not prepared with a view to public disclosure
or compliance with published guidelines of the Securities and Exchange
Commission or the guidelines established by the American Institute of
Certified Public Accountants regarding projections. These forecasts were
prepared with a limited degree of precision and were not prepared in
accordance with generally accepted accounting principles. This information
is included in this prospectus/proxy statement only because they were
provided by Hawaiian Natural to AMCON.
These forecasts are speculative in nature and are not meant to
portray all of the possible outcomes. While presented with numerical
specificity, these forecasts are based upon a variety of informal estimates
and assumptions (not all of which were stated in the forecasts and not all
of which were provided to AMCON). These assumptions were subject to
significant financial, market, economic, regulatory, and competitive
uncertainties, contingencies, risks and other factors which were difficult
or impossible to predict accurately, all of which were difficult to quantify
and many of which were beyond the control of Hawaiian Natural.
Set forth below is a summary of these forecasts. These forecasts
should be read together with the historical financial statements of Hawaiian
Natural, the Risk Factors set forth in this document, and the cautionary
statement concerning forward-looking statements in this document.
The projections regarding Hawaiian Natural, which were prepared by
Hawaiian Natural's management and provided to AMCON, reflected the following
then anticipated future operating performance for Hawaiian Natural:
For the Eleven For the Nine
Month Period Month Period
Ended August Ended September
31, 2001(1) 30, 2001(2)
-------------- ---------------
Revenues $4,418,935 $3,261,910
Income from Operations 254,087 646,945
Pre-Tax Income 171,587 422,645
-------------------
(1) Provided to AMCON on October 8, 2000.
(2) Provided to AMCON on February 2, 2001.
OUR REASONS FOR THE MERGER; RECOMMENDATIONS OF OUR BOARD OF DIRECTORS
As stated above, Hawaiian Natural has been hampered for some time
by the lack of adequate capital resources to achieve its business
objectives. Hawaiian Natural needed new blow molding equipment to increase
its production capacity, sales and operating profit margins to desired
levels. Its then current equipment also interrupted production due to an
unacceptable level of breakdowns. As a result of these production
constraints, Hawaiian Natural had not been able to fully exploit the demand
for its products in Hawaii and other markets. It also has inadequate capital
to devote to marketing and sales efforts, to expand distribution
capabilities or to attract and retain management depth. As a result of these
limitations, Hawaiian Natural has not been able to become profitable and is
likely not to be able to continue as a going concern without capital
resources continuing to be provided by AMCON or third parties.
AMCON provided $1,604,483 in loans and an additional $300,000
investment in the form of a common stock purchase since September 2000.
Hawaiian Natural has used these funds to reduce outstanding payables, to
redeem Series A Convertible Preferred Stock which would have been highly
26
dilutive to common shareholders if it had been converted into common stock,
to redeem Series B Convertible Preferred Stock, and to meet other working
capital requirements. The purpose of issuing the Series A and Series B
Convertible Preferred Stock was to raise additional capital without which
Hawaiian Natural would probably not have been able to continue as a going
concern. In both cases, the terms of the Preferred, which were highly
negotiated, were in management's judgment the best terms available to
Hawaiian Natural in light of its precarious financial condition. By its
terms, the Series A Convertible Preferred Stock was convertible at the
election of the holder at a 20% discount to the market price (as defined) of
Hawaiian Natural's Common Stock during a specified trading period prior to
conversion. Since the market price of the Common Stock at the time was in
the $.25 - $.30 range, conversion of even a portion of the outstanding
Series A Preferred would have resulted in the issuance of a large number of
additional shares of Common Stock. Moreover, the holder, after converting
the Series A Preferred, would likely have sought to sell the underlying
shares of Common Stock in the market, thus further depressing the market
price and increasing the dilutive effect from any subsequent conversion.
Without these funds being provided by AMCON at the times they were
made available, it is likely that Hawaiian Natural would not have been able
to continue as a going concern. In addition, AMCON has leased in its name
new blow molding and water bottling equipment with a purchase price of
approximately $2.0 million and an estimated commitment of $2.6 million over
eight years which will be subleased to Hawaiian Natural on similar terms.
Hawaiian Natural has explored various alternatives for raising
additional capital and business combinations during the two year period
prior to commencement of negotiations concerning the merger. However, due
to, among other things, its production and distribution problems, history of
operating losses and inadequate capital resources, Hawaiian Natural was
unable to find any alternative suitors that were willing to propose either a
capital investment, other than those described under "Background of the
Merger," or a business combination. Hawaiian Natural and AMCON share the
belief that Hawaiian Natural can achieve profitability through expanded
production capacity, distribution, marketing and management depth which are
expected to be obtained with the capital and management resources provided
by the merger, but there can be no assurance that this will be the case.
Hawaiian Natural and AMCON also believe there is a opportunity for Hawaiian
Natural's products to be distributed much more broadly in the U.S. Mainland
through AMCON's wholesale distribution business and AMCON's health and
natural products retail stores. In the latter regard, Hawaiian Natural's
primary marketing efforts in the U.S. Mainland have historically been
directed toward niche markets, with special emphasis on the specialty and
natural food markets. Due to their focus on quality and their willingness to
pay a premium for products perceived as superior, customers who shop at
these stores are more likely to accept the higher price of imported
products.
Hawaiian Natural's board of directors did not believe it was useful
to engage an investment banking firm to provide an opinion on the fairness
of the merger consideration from a financial point of view. Obtaining such
an opinion would have been expensive and time consuming and would have
produced little, if any, benefit since there were no other alternatives
realistically available to address Hawaiian Natural's exigent financial
circumstances. Hawaiian Natural's board of directors therefore relied on its
good faith evaluation of the value of Hawaiian Natural's common stock and
determined that the merger consideration is fair to all of Hawaiian
Natural's shareholders. In this regard, Hawaiian Natural's directors and
officers then owned approximately 40% of Hawaiian Natural's outstanding
common stock and, at AMCON's request, entered into the Stockholders
Agreement in which they agreed to vote in favor of the merger. These
officers and directors believe that their interests as shareholders are
aligned with the interests of other shareholders of Hawaiian Natural and
they strongly support the merger because it offers the best opportunity to
sustain or enhance the value of their ownership interest in Hawaiian
Natural.
27
Our board of directors, in reaching its decision on the merger,
consulted with its legal advisors and its senior management, reviewed a
significant amount of information and considered a number of factors. This
information included that contained in AMCON's public filings and
information provided orally by AMCON management concerning AMCON's plans for
integration of Hawaiian Natural's operations following the merger. All of
the material factors considered are set forth below:
o the reasons described above under this caption, particularly
the ability to increase our production capacity and scope of
distribution through the use of increased capital and
management resources and higher volume and more efficient
equipment;
o our pressing lack of capital resources and the likelihood of
not being able to continue as a going concern in light of the
absence of alternative financing or acquisition proposals;
o the belief that the continuing equity ownership through the
merger has the potential to enhance shareholder value as a
result of additional opportunities and operating efficiencies;
o the opportunity for the our shareholders to participate in a
larger, more diversified and more competitive company;
o information concerning the financial performance, business
operations and financial condition of AMCON and Hawaiian
Natural and of the two companies on a combined basis;
o the likely impact of the merger on Hawaiian Natural's
employees and customers;
o the expected effect of the merger on our existing strategic
relationships with third parties;
o the qualification of the merger as a tax-free reorganization
for United States federal income tax purposes, except for tax
resulting from any cash received for fractional shares by the
holders of our common stock.
The board of directors also considered the following risk factors
and possible disadvantages relating to the merger:
o the dilution of our shareholders' ownership of Hawaiian Natural
which will result in Hawaiian Natural shareholders, other than
AMCON, owning between 12% and 9.3% of AMCON's outstanding
shares if the maximum or minimum number of shares are issued
in the merger, respectively;
o AMCON's limited analyst coverage and low volume of trading
activity;
o the interests of officers and directors of Hawaiian Natural in
the merger, as described under "Interests of Officers and
Directors in the Merger"; and
o the other possible disadvantages of the merger if the risks
described under "Risk Factors" and factors described under
"Cautionary Statement Concerning Forward-Looking Statements"
were to occur or worsen.
In view of the wide variety of the material factors considered in
connection with our board's evaluations of the merger and the complexity of
these matters, our board of directors did not find it practicable to, and
did not, quantify or otherwise attempt to assign any relative weight to the
various factors considered. In addition, our board of directors did not
undertake to make any specific determination as to whether any particular
factor, or any aspect of any particular factor, was favorable or
28
unfavorable to our board of directors' ultimate determination, but rather
our board of directors conducted an overall analysis of the factors
described above, including discussions with and questioning of our
respective management and legal advisors. In considering the factors
described above, individual members of our board of directors may have given
different weight to different factors.
There can be no assurance that any of the potential efficiencies,
increased production or financial performance will be achieved through the
consummation of the merger.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OUR SHAREHOLDERS
VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
---
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion summarizes the material United States
federal income tax consequences of the merger. This discussion is based on
the Internal Revenue Code of 1986, as amended, applicable Treasury
regulations, administrative interpretations and court decisions as in effect
as of the date of this document, all of which may change, possibly with
retroactive effect.
This discussion does not address all aspects of federal income
taxation that may be important to any particular shareholder in light of
that holder's particular circumstances or to a holder subject to special
rules, such as:
o a shareholder who is not a citizen or resident of the United
States,
o a financial institution or insurance company,
o a tax-exempt organization,
o a dealer or broker in securities,
o a shareholder that holds our stock as part of a hedge,
appreciated financial position, straddle or conversion
transaction, or
o a shareholder who acquired our stock pursuant to the exercise
of options or otherwise as compensation.
TAX OPINION. We expect to receive an opinion of Squire, Sanders &
Dempsey, L.L.P. ("tax counsel"), that the merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code and that AMCON, Merger Sub and Hawaiian Natural
will each be parties to the reorganizations within the meaning of Section
368(b) of the Internal Revenue Code. It is a condition to the obligation of
Hawaiian Natural to complete the merger that the tax counsel provide such an
opinion.
The opinion of tax counsel regarding the merger will rely on:
o representations and covenants made by Hawaiian Natural and
AMCON, including those contained in representation letters of
officers of Hawaiian Natural and AMCON,
o an assumption regarding the completion of the merger in the
manner contemplated by merger agreement,
29
o an assumption that the shares of Hawaiian Natural are held as
capital assets by our shareholders.
In addition, tax counsel's ability to provide the opinion will
depend on, the absence of changes in existing facts or in law between the
date of this document and the closing date of the merger. If any of those
representations, covenants or assumptions are inaccurate, tax counsel may
not be able to provide the closing date opinion and the tax consequences of
the merger could differ from those described in this document. Tax counsel's
opinions does not bind the IRS nor preclude the IRS or the courts from
adopting a contrary position. We do not intend to obtain a ruling from the
IRS on the tax consequences of the merger.
UNITED STATES FEDERAL INCOME TAX TREATMENT OF THE MERGER. The
merger will be treated for United States federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, and AMCON, Merger Sub and Hawaiian Natural will each be parties to the
reorganization within the meaning of Section 368(b) of the Internal Revenue
Code.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO YOU. For United
States federal income tax purposes:
o You will not recognize any gain or loss upon your exchange of
our common stock in the merger for shares of the common stock
of AMCON.
o If you receive cash instead of a fractional share of the
common stock of AMCON, you will be required to recognize gain
or loss, measured by the difference between the amount of cash
received instead of that fractional share and the portion of
the tax basis of your shares of our common stock allocable to
that fractional share. This gain or loss will be capital gain
or loss provided such common stock was held as a capital
asset, and will be long-term capital gain or loss if the share
of our common stock exchanged for that fractional share of the
common stock of AMCON was held for more than one year on the
closing date.
o You will have a tax basis in the common stock of AMCON
received in the merger equal to (1) the tax basis of the your
common stock surrendered in the merger, reduced by (2) any tax
basis of your common stock surrendered that is allocable to
any fractional share of the common stock of AMCON for which
cash is received.
o The holding period for the shares of the common stock of AMCON
you receive in exchange for your shares of our common stock in
the merger will include the holding period for the shares of
common stock surrendered in the merger, provided such common
stock was held as a capital asset.
This discussion of material United States federal income tax
consequences is intended to provide only a summary, and is not a complete
analysis or description of all potential United States federal income tax
consequences of the merger. This discussion does not address tax
consequences that may vary with, or are contingent on, individual
circumstances. In addition, it does not address any non-income tax or any
state, local or non-U.S. income tax consequences of the merger. ACCORDINGLY,
WE STRONGLY URGE YOU TO CONSULT YOUR OWN TAX ADVISOR TO DETERMINE THE
PARTICULAR UNITED STATES FEDERAL, STATE OR LOCAL OR NON-U.S. INCOME OR OTHER
TAX CONSEQUENCES TO YOU OF THE MERGER.
REGULATORY MATTERS RELATING TO THE MERGER
There are no regulatory approvals that are required to be obtained
to complete the merger. The merger will become effective upon the filing of
a certificate of merger in Delaware and the articles of
30
Merger in Hawaii. The parties intend to make these filings as soon as
practicable after the merger is approved by the stockholders and if possible
on the same day.
DISSENTERS' RIGHTS
Shareholders of Hawaiian Natural common stock will have dissenters'
rights under sections 414-341 through 414-372 of the Hawaii Revised Business
Corporation Act (a copy of which is attached as Annex B) in connection with
the merger of Hawaiian Natural. Each shareholder who desires to exercise
dissenters' rights must satisfy the following conditions and otherwise
comply with the provisions of sections 414-341 through 414-372:
o A written notice that the shareholder intends to demand
payment of the fair value for the shareholder's shares must be
delivered to the Corporate Secretary of Hawaiian Natural at
16-305 Old Volcano Road, Keaau, Hawaii 96749, before the
taking of the vote on the approval of the merger agreement at
the Hawaiian Natural shareholders meeting. In addition to
informing Hawaiian Natural of the identity of the record
holder and the notice of intention to demand payment of the
fair value of the shareholder's shares, such notice should
also specify the mailing address of that shareholder and the
number of shares of common stock owned by that shareholder. A
proxy or vote abstaining from voting, or voting against the
approval of the merger agreement, or a failure to vote on the
approval of the merger agreement, does not constitute the
requisite notice within the meaning of sections 414-341
through 414-372.
o A shareholder of record wishing to exercise his or her
appraisal rights under sections 414-341 through 414-372 must
not vote for approval of the merger agreement. If a
shareholder returns a signed proxy failing to specify either
(i) a vote against the approval of the merger agreement or
(ii) a direction to abstain from voting on the approval of the
merger agreement, the proxy will be voted for approval of the
merger agreement, which will have the effect of waiving that
shareholder's dissenters' rights and nullifying any previously
filed written notice of intention to demand payment of the
fair value for the shareholder's shares if the merger is
completed.
A notice of intention to demand payment of the fair value of the
shareholder's shares if the merger is completed must be made by or for and
in the name of the shareholder of record, fully and correctly, as such
shareholder's name appears on the certificates representing the Hawaiian
Natural common stock. A record holder (such as a broker who holds shares as
a nominee for others) may assert dissenters' rights as to less than all of
the shares registered in the record holder's name, only if the record holder
asserts dissenters' rights with respect to all of the shares beneficially
owned by any one person, and discloses the name and address of the person or
persons on whose behalf the record holder asserts dissenters' rights. In
that event, the record holder's dissenters' rights shall be determined as if
the shares as to which the record holder has dissented and the record
holder's other shares were registered in the names of different
shareholders. Persons whose shares are held by brokers or other nominees and
who desire to assert dissenters' rights should consider either (a) arranging
to have their shares transferred into their own names of record and making
the necessary written demand for appraisal or (b) arranging to have their
broker or other nominee, as the case may be, take all of the steps necessary
to comply with sections 414-341 through 414-372.
A beneficial owner of shares who is not the record holder may
assert appraisal rights with respect to shares held on the beneficial
owner's behalf, and shall be treated as a dissenting shareholder under the
terms of sections 414-341 through 414-372, if the beneficial owner submits a
written consent of the record holder to Hawaiian Natural not later than the
time the beneficial owner asserts dissenters' rights.
31
If the merger agreement is approved at the Hawaiian Natural
shareholders meeting, Hawaiian Natural will mail, within 10 days after the
merger is completed, a further notice to all shareholders who gave due
notice of intention to demand payment and who did not vote in favor of the
merger agreement. The notice will state where the payment demand must be
sent and where and when certificates for certificated shares must be
deposited. The notice will be accompanied by a form for demanding payment
that requires that the person asserting dissenters' rights certify whether
or not the person acquired beneficial ownership of the shares before
November 8, 2000, the date of the first announcement to news media of the
terms of the merger. The notice will also set a date by which Hawaiian
Natural must receive the payment demand and will be accompanied by a copy of
sections 414-341 through 414-372 of the Hawaii Revised Business Corporation
Act. The time set for demand for payment and deposit of the shares will not
be fewer than thirty days nor more than sixty days from the date the notice
is delivered.
Any shareholder who fails to demand payment, or fails to deposit
certificates in the time frame set forth in the notice, will forfeit any
right to receive cash payment for the shareholder's shares and will have the
rights of a nondissenting shareholder.
If merger has not been completed within 60 days after the date set
for demanding payment and depositing of share certificates, Hawaiian Natural
will return any certificates that have been deposited.
Except as provided by section 414-358 described below, section
414-356 provides that immediately after the consummation of the merger,
Hawaiian Natural must pay to dissenting shareholders who have made a demand
for payment and deposited their shares in accordance with the notice
provided by Hawaiian Natural, the amount which Hawaiian Natural estimates to
be the fair value of the shares, with interest, if any has accrued. The
payment must be accompanied by:
o Hawaiian Natural's closing balance sheet, statement of income
and statement of changes in shareholders' equity for a fiscal
year ending not more than sixteen months before the date of
the payment, together with the latest available interim
financial statements;
o A statement of Hawaiian Natural's estimate of fair value of
the shares;
o An explanation of how the interest was calculated;
o A statement of the dissenter's right to demand supplemental
payment under section 414-359; and
o A copy of sections 414-341 through 414-372 of the Hawaii
Revised Business Corporation Act.
The term "Fair Value" with respect to dissenters' shares means
their value immediately before the merger to which the dissenter objects,
excluding any appreciation or depreciation in anticipation of the corporate
action unless the exclusion would be inequitable.
The term "Interest" means interest from the effective date of the
merger until the date of payment, at the average rate currently paid by
Hawaiian Natural on its principal bank loans, or, if none, at such rate as
is fair and equitable under all of the circumstances.
Section 414-359 provides that, if (i) the dissenting shareholder
believes the amount paid under section 414-356 is less than the fair value
of the dissenter's shares, or that the interest is not correctly determined;
(ii) Hawaiian Natural fails to make payment under section 414-356 within
sixty days after the date set for demanding payment; or (iii) Hawaiian
Natural does not complete the merger and fails to return any certificates
that have been deposited, then the dissenter may send to Hawaiian Natural
the
32
dissenter's own estimate of the fair value of the shares or of the interest,
and demand payment of the deficiency. If the dissenter does not file such an
estimate and demand payment of the deficiency within 30 days after Hawaiian
Natural's mailing of the payment, the dissenter shall not be entitled to any
additional payments.
Pursuant to section 414-371, Hawaiian Natural may, not more than 60
days after receiving a demand for additional payment pursuant to section
414-359 that remains unsettled, file in an appropriate court, a petition
requesting that the fair market value of the shares and accrued interest
thereon be determined by the court. All dissenters, whose demands for
additional payment have not been settled, will be made parties to the
proceeding as an action against their shares. If the court determines that
the fair value of the shares determined by Hawaiian Natural is insufficient,
all dissenting shareholders, whose demands for additional payment have not
been settled, shall be entitled to receive the amount by which the fair
value of their shares is found to exceed the fair value determined by
Hawaiian Natural, with interest.
In the event that Hawaiian Natural fails to file a petition within
60 days after receiving a demand for additional payment, each dissenter who
made a demand for additional payment and who has not already settled that
demand, will be entitled to receive the amount demanded by such dissenter,
with interest, and may sue in an appropriate court for such additional
payment.
Pursuant to section 414-372, the cost of any appraisal proceeding
may be determined by the court and assessed against the parties as the court
deems equitable under the circumstances, which could potentially result in
all such costs being allocated to Hawaiian Natural, except that any part of
the costs and expenses may be apportioned and assessed as the court may deem
equitable against all or some of the dissenters who are parties and whose
action in demanding supplemental payment the court finds to be arbitrary,
vexatious, or not in good faith. Fees and expenses of counsel and experts
for the respective parties may be assessed as the court may deem equitable
against Hawaiian Natural and in favor of all dissenters if Hawaiian Natural
fails to comply substantially with the requirements of sections 414-351
through 414-359, or may be assessed against either Hawaiian Natural or a
dissenter, in favor of any other party, if the court finds that the party
against whom the fees and expenses are assessed acted arbitrarily,
vexatiously, or not in good faith in respect to the rights provided by
sections 414-341 through 414-372. If the court finds that the services of
counsel for any dissenter were of substantial benefit to other dissenters
similarly situated, and the fees for those services should not be assessed
against Hawaiian Natural, the court may award to these counsel reasonable
fees to be paid out of the amounts awarded the dissenters who were
benefited.
Pursuant to section 414-358, Hawaiian Natural may elect to withhold
the payment required by section 414-356 from a dissenter unless the
dissenter was the beneficial owner of the shares as to which dissenters'
rights are asserted on November 8, 2000, the date of the first announcement
to the news media of the terms of the merger. With respect to such shares,
Hawaiian Natural will upon the consummation of the merger, state to each
dissenter its estimate of the fair value of the shares, state the rate of
interest to be used and offer to pay the resulting amounts on receiving the
dissenter's agreement to accept them in full satisfaction of the dissenters'
demand. Within thirty days after the mailing of any such offer by Hawaiian
Natural, the dissenter may reject Hawaiian Natural's offer and mail to
Hawaiian Natural the dissenter's own estimate of fair value and interest and
demand their payment. If the dissenter fails to do so, they shall be
entitled to no more than Hawaiian Natural's offer. If the dissenter makes a
demand, the provisions of section 414-371 and 414-372 (as discussed above)
will apply to further proceedings on the dissenter's demand.
33
FEDERAL SECURITIES LAWS CONSEQUENCES
This document does not cover any resales of the common stock to be
received by Hawaiian Natural shareholders upon completion of the merger, and
no person is authorized to make any use of this document in connection with
any such resale.
All shares of AMCON common stock that will be distributed to our
shareholders in the merger will be freely transferable, except for the
restrictions on transfer imposed by the federal securities laws on
"affiliates" of Hawaiian Natural. Shares of AMCON common stock received by
persons who are deemed to be affiliates of Hawaiian Natural, but who are not
and will not become affiliates of AMCON as of the time the vote is taken on
the merger, may be resold by them only in transactions permitted by the
resale provisions of Rule 145(d) or as otherwise permitted under the
Securities Act of 1933. Persons who are or will become affiliates of AMCON
as of the time the vote is taken on the merger may be resold by them only in
transactions permitted by the resale provisions of Rule 144 or as otherwise
permitted under the Securities Act of 1933. Persons who may be deemed to be
affiliates of Hawaiian Natural or AMCON generally include persons that
control, are controlled by, or under common control with the respective
entity, such as their respective officers, directors and significant
shareholders.
In general, under Rule 144, an affiliate of AMCON would be entitled
to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the number of shares of such class of stock then
outstanding or the average weekly trading volume of the shares of such class
of stock during the four calendar weeks preceding the filing of a Form 144
with respect to such sale. Sales under Rule 144 are also subject to certain
requirements pertaining to the manner of such sales, notices of such sales
and the availability of current public information concerning the issuer. In
general, Rule 145(d) imposes the same volume and manner of sale limitations
as Rule 144 as to sales made during the one year period following the
merger. During the period between the first and second year following
consummation of the merger, resales made by persons subject to Rule 145(d)
are permitted to be made without any volume or manner of sale of limitations
if AMCON is current in meeting its reporting requirements under the
Securities Exchange Act of 1934. There are no limitations on resales by
persons who are subject to Rule 145(d) after two years have elapsed
following the merger if such persons are not then affiliates of AMCON and
have not been so affiliated during the preceding three months.
ACCOUNTING TREATMENT
AMCON will account for the merger under the "purchase" method of
accounting in accordance with accounting principles generally accepted in
the United States. Using the purchase method of accounting, the assets and
liabilities of Hawaiian Natural will be recorded by AMCON at their
respective fair values at the time of the completion of the merger. The
excess of Hawaiian Natural's purchase price over the net fair value of the
assets acquired and liabilities assumed, including identifiable intangible
assets, will be recorded as goodwill and assessed annually to determine if
any impairment of this goodwill has occurred. Under changes recently adopted
by the Financial Accounting Standards Board in Statements of Financial
Accounting Standards Nos. 141 and 142, goodwill no longer is amortized
through the income statement.
Under the purchase method of accounting, prior period financial
statements are not restated and the consolidated results of operations of
Hawaiian Natural for the period after the merger will be included in AMCON's
consolidated statement of income after the completion of the merger. Based
on AMCON's unaudited pro forma combined statement of operations for the year
ended September 30, 2000, the revenues produced by Hawaiian Natural would
represent approximately .04% of AMCON's total combined pro forma revenues.
A final determination of the intangible asset values and required
purchase accounting adjustments, including the allocation of the purchase
price to the assets acquired and liabilities assumed
34
based on their respective fair values, has not yet been made. AMCON will
determine the fair value of Hawaiian Natural's assets and liabilities and
will make appropriate business combination accounting adjustments. However,
for purposes of disclosing pro forma financial information in this document,
AMCON has made a preliminary determination of the purchase price allocation,
based upon current estimates and assumptions, which is subject to revision
upon consummation of the merger.
STOCK MARKET LISTING
The common stock issued to the Hawaiian Natural shareholders
pursuant to the merger will be listed on the American Stock Exchange under
the symbol "DIT".
INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER
In considering the recommendations of our board of directors with
respect to the merger, you should be aware that the officers and directors
of Hawaiian Natural have interests in the merger that are different from, or
in addition to, their interests as shareholders of Hawaiian Natural
generally. The board of directors were aware of these interests and
considered them, among other matters, in approving the merger agreement and
the transactions contemplated by the merger agreement.
EXISTING AGREEMENTS AND PLANS WITH RESPECT TO DIRECTORS AND OFFICERS
REAL ESTATE LEASE. Marcus Bender, Hawaiian Natural's President,
owns 50% of the stock of Hawaii Brewery Development Company, Inc. which is
the lessor of the land on which Hawaiian Natural conducts its operations,
including the well from which Hawaiian Natural extracts the natural water
for its products. The lease governing that real estate was originally
entered into in 1994 and will be replaced by a new lease upon the
consummation of the merger which contain terms that are more favorable to
Hawaiian Natural. The economic terms of the lease did not change and thus
Hawaii Brewery Development Company, Inc. will continue to receive monthly
base rent of $5,569, subject to adjustment after October 1, 2004 based on
the consumer price index, plus additional rent equal to 2% of Hawaiian
Natural's net sales (as defined in the lease) over the base rent for the
same quarterly period. If the merger is completed, Hawaiian Natural will be
better positioned financially to continue to make these rent payments.
STOCK OPTION PLAN. Hawaiian Natural's 1998 Stock Option Plan
authorizes the grant of options to purchase up to 1,000,000 shares of its
common stock to officers, selected employees, directors and independent
contractors. The vested options granted to Hawaiian Natural's executive
officers and directors are as follows:
NUMBER OF SHARES
NAME POSITION SUBJECT TO VESTED OPTIONS
---- -------- -------------------------
William Irwin Treasurer and Chief Financial Officer 60,000
Raymond Riss Executive Vice President - Sales and Marketing 82,500
Tate Robinson Vice President - Administration 30,000
Brian Barbata Director and Secretary 4,500
Michael Chagami Director 4,500
Wilhelm Kuhlmann Director 1,200
The exercise price of these options is $2.00 per share. In
addition, Mr. Kuhlmann and his affiliated entities own warrants to purchase
an aggregate of 1,188,932 shares of Hawaiian Natural common stock
exercisable at $1.00 or $1.50 per share which expire in September 2004. Mr.
Kuhlmann's affiliated entities, and their respective beneficial ownership of
securities issued by Hawaiian Natural, are
35
described in footnote (3) under the caption "Information About Hawaiian
Natural--Security Ownership of Certain Beneficial Owners and Management."
BOARD OF DIRECTORS, MANAGEMENT AND AGREEMENTS OF THE MERGER SUB
MANAGEMENT OF THE MERGER SUB. Marcus Bender, the president and
chief executive officer of Hawaiian Natural Water Company, will become the
Chief Executive Officer and President of the surviving corporation. None of
our current officers or directors will be directors of AMCON following the
merger.
EMPLOYMENT AGREEMENTS WITH MERGER SUB. AMCON is currently
negotiating with Mr. Bender regarding a new employment agreement with the
surviving corporation that would replace his existing employment agreement
with Hawaiian Natural. His current employment agreement provides, among
other things, that Mr. Bender will serve as president and chief executive
officer of Hawaiian Natural for a term expiring in October 2002, subject to
automatic renewal for successive one year periods unless either party gives
the other party notice that the term will not be extended. Mr. Bender is
paid a regular salary of $150,000 per year. Mr. Bender is also eligible to
participate in the executive bonus plan, and to receive or participate in
any long-term incentive plan or any other additional benefits which may be
made available from time to time.
OWNERSHIP OF COMMON STOCK; STOCK OPTIONS
As of August 31, 2001, directors, executive officers and their
affiliates beneficially owned an aggregate of 4,564,018 shares of Hawaiian
Natural common stock, including shares underlying options and warrants
exercisable by them within 60 days of that date. These shares of common
stock collectively constitute approximately 42% of the outstanding shares of
Hawaiian Natural's common stock, including shares underlying options and
warrants exercisable by them within 60 days of that date.
THE MERGER AGREEMENT
The following discussion summarizes the material provisions of the
merger agreement and is qualified by reference to the complete text of the
fifth amended and restated agreement and plan of merger dated as of September
27, 2001, which is incorporated herein by reference and attached as Annex A
(sometimes referred to herein as the "merger agreement").
STRUCTURE OF THE MERGER
Under the merger agreement, Hawaiian Natural will merge into AMCON
Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of
AMCON. Merger Sub will be the surviving corporation in this merger. The
parties have agreed that Merger Sub will change its name to Hawaiian Natural
Water Company, Inc. after the merger.
TIMING OF CLOSING
The closing of the merger will take place on a date mutually agreed
upon by AMCON and Hawaiian Natural, which will be no later than the third
business day after all closing conditions set forth in the merger agreement
have been satisfied or waived. We expect that immediately upon the closing
of the merger, we will file a certificate of merger with the Secretary of
State of the State of Delaware, and articles of merger with the office of
the department director of the Department of Commerce and Consumer Affairs
of Hawaii. The effective time of the merger will either be the time the
certificate of merger and the articles of merger are filed, or at such later
time as may be specified in the certificate of merger and the articles of
merger. The closing and effective time of the merger are expected to be on
the same date as the date of our shareholders meeting held to approve the
merger.
36
MERGER CONSIDERATION
The merger agreement provides that, at the effective time of the
merger, each share of our common stock outstanding immediately prior to the
effective time of the merger will be converted into a fractional share of
common stock of AMCON equal to the product of one share of Hawaiian Natural
common stock times the exchange ratio, which is determined as follows:
(i) the number determined by
o first dividing $2,865,348 by the average AMCON stock
price, and then
o dividing the resulting number by the number of shares
of our Hawaiian Natural common stock outstanding
immediately prior to the effective time of the merger
(which is expected to be 9,185,982); or
(ii) if the average AMCON stock price is greater than $8.00,
then the average AMCON stock price shall be deemed to be
$8.00 and thus the exchange ratio shall be the number
determined by dividing 358,168 by the number of shares of
Hawaiian Natural common stock outstanding immediately
prior to the effective time; or
(iii) if the average AMCON stock price is less than $6.00, then
the average AMCON stock price shall be deemed to be $6.00
and thus the exchange ratio shall be the number determined
by dividing 477,558 by the number of shares of Hawaiian
Natural common stock outstanding immediately prior to the
effective time. Fractions of a share pursuant to this
methodology shall be rounded to three decimal places.
For purposes of determining the exchange ratio, the following
definitions apply:
o "average AMCON stock price" means the average of the closing
price per share of AMCON common stock during a 20-day
measurement period that ends immediately preceding the third
trading day before the date of our shareholders meeting held
to approve the merger.
o "common stock outstanding immediately prior to the effective
time" shall exclude (i) common stock held by persons who
object to the merger and comply with all provisions of Hawaii
law concerning their right to dissent and demand appraisal,
(ii) common stock held by Hawaiian Natural as treasury stock,
and (iii) common stock owned by AMCON or Merger Sub, except
for the 750,000 shares acquired by AMCON for cash, and
1,250,000 shares received upon the conversion by AMCON of a
$500,000 secured convertible note issued to it by Hawaiian
Natural. Based on 9,185,982 shares outstanding at the
effective time of the merger, AMCON would receive back 21.8%
of the shares issued as merger consideration with respect to
the 2,000,000 shares of Hawaiian Natural common stock held by
AMCON.
The following table sets forth the per share value of the merger
consideration to be received by the holders of Hawaiian Natural common stock
at various average closing prices of AMCON common stock, assuming that the
number of shares of Hawaiian Natural common stock outstanding immediately
prior to the effective time of the merger is 9,185,982:
37
AVERAGE AMCON STOCK PRICE EXCHANGE RATIO PER SHARE CONSIDERATION
------------------------- -------------- -----------------------
4.00 0.052 $0.208
4.50 0.052 $0.234
5.00 0.052 $0.260
5.50 0.052 $0.286
6.00 0.052 $0.312
6.50 0.048 $0.312
7.00 0.045 $0.315
7.50 0.042 $0.315
8.00 0.039 $0.312
8.50 0.039 $0.331
9.00 0.039 $0.351
Shares of common stock of Hawaiian Natural outstanding immediately
prior to the effective time that are held by a holder who has not voted in
favor of the merger, and who has delivered to Hawaiian Natural before the
vote is taken written notice of the shareholder's intention to demand
payment of the fair value of the shareholder's shares if the merger is
completed in accordance with Hawaii law, shall not be converted into the
merger consideration unless the holder of such shares fails to perfect or
withdraws or otherwise loses his dissenters' rights. If after the effective
time the holder of such shares fails to perfect or withdraws or loses his
dissenters' rights, such shares of stock shall be treated as if they were
converted as of the effective time into merger consideration.
AMCON will not issue any fractional shares of AMCON common stock in
connection with the conversion of your common stock in the merger.
Accordingly, any shareholder that does not own enough shares of Hawaiian
Natural common stock to be converted into one or more whole shares of AMCON
common stock will receive cash instead. Similarly, any fractional share that
would otherwise be receivable by any shareholder entitled to receive one or
more whole shares of AMCON common stock in the merger will be converted into
cash. The exchange agent shall pay cash (without interest and subject to the
payment of any applicable withholding taxes), in lieu of a fractional share
otherwise receivable, in an amount equal to the same fraction of the market
value of a full share of AMCON common stock, computed on the basis of the
mean of the high and low sales prices of AMCON common stock as reported on
the American Stock Exchange on the first full day on which AMCON common
stock is traded on the AMEX after the effective time of the merger.
No dividends, distributions or payment of cash in lieu of
fractional shares made with respect to shares of AMCON common stock with a
record date after the effective time shall be paid to the holder of any
unsurrendered stock certificate. Upon surrender of such a certificate, the
holder shall be paid, without interest, any owed dividends, distributions or
payments of cash to which the holder is entitled with a record date after
the effective time but prior to such surrender.
TREATMENT OF STOCK OPTIONS
At the effective time of the merger of Hawaiian Natural into AMCON,
each outstanding option granted by Hawaiian Natural to purchase shares of
Hawaiian Natural common stock will be converted into an option with respect
to common stock of AMCON. The number of shares of common stock of AMCON
receivable upon exercise of each converted option will equal the number of
Hawaiian Natural shares subject to that option multiplied by the exchange
ratio for the merger, and the exercise price of that option will be the
quotient of its current exercise price divided by the exchange ratio.
EXCHANGE OF CERTIFICATES
AMCON has appointed Registrar & Transfer Company exchange agent to
handle the exchange of our stock certificates for stock certificates of
AMCON in the merger. Soon after the effective time of the merger, the
exchange agent will send to each of our former certificate holders a letter
of transmittal to be
38
used to exchange their stock certificates for shares of AMCON and, instead
of the distribution of fractional shares of AMCON common stock, cash. The
letter of transmittal will contain instructions explaining the procedure for
surrendering your stock certificates. YOU SHOULD NOT RETURN ANY STOCK
CERTIFICATES WITH THE ENCLOSED PROXY CARD.
Holders of our stock who surrender their stock certificates to the
exchange agent, together with a properly completed letter of transmittal,
will receive the appropriate merger consideration. Holders of unexchanged
shares of our stock will not be entitled to receive any dividends or other
distributions payable by AMCON after the effective time of the merger until
they surrender their stock certificates in accordance with the exchange
agent's instructions.
If any stock certificate is lost, stolen or destroyed, upon the
showing of an affidavit to that effect by the person claiming such
certificate (and the posting of a bond by that person in a reasonable amount
as determined by AMCON), the exchange agent will deliver in exchange for
such lost, stolen or destroyed certificate a certificate representing the
applicable merger consideration, any cash in lieu of fractional shares of
AMCON common stock, and unpaid dividends and distributions on shares of
AMCON common stock.
HEADQUARTERS OF SURVIVING CORPORATION. The principal corporate offices and
headquarters of the surviving corporation will be located in Omaha, Nebraska
following the merger.
NAME OF SURVIVING CORPORATION
The name of the Surviving Corporation will be changed to Hawaiian
Natural Water Company, Inc. following the merger.
REPRESENTATIONS AND WARRANTIES
In the merger agreement, AMCON and Hawaiian Natural make customary
representations and warranties to each other relating to, among other
things:
o corporate existence and power;
o corporate authority to enter into, and carry out the
obligations under, the merger agreement and enforceability of
the merger agreement;
o government approvals and required consents;
o lack of conflicts with existing agreements;
o capitalization;
o documents and other reports that have been or will be filed
with the Securities and Exchange Commission;
o financial statements;
o absence of undisclosed liabilities;
o reliability of information to be supplied for this document;
o the absence of material changes and events;
39
o the absence of material litigation;
o taxes;
o employee benefit plan matters;
o compliance with laws;
o licenses, permits and registrations;
o title to properties;
o intellectual property;
o environmental matters;
o payment of fees to finders or brokers in connection with the
merger agreement;
o required vote of our shareholders;
o board approval and, in the case of Hawaiian Natural,
recommendations to our shareholders;
o in the case of Hawaiian Natural, exemption of the merger from
state takeover statutes;
o treatment of the merger as a tax-free reorganization;
o restrictions on disposition of stock by affiliates to ensure
compliance with federal securities laws;
o the absence of agreements with employees that would be altered
or result in payment obligations or vesting of benefits as a
result of the merger;
o the absence of agreements restricting the surviving
corporation from competing in any line of business;
o the absence of transactions with directors, officers and
affiliates that would be required to be disclosed under Item
402 or Item 404 of SEC Regulation S-K;
o material contracts;
o in the case of Hawaiian Natural, the absence of business
practices or payments that would be unlawful;
o insurance; and
o in the case of Hawaiian Natural, the use of proceeds of all
notes issued to AMCON by Hawaiian Natural.
The merger agreement also contains representations and warranties
relating to Merger Sub into which Hawaiian Natural will be merged, including
due organization, corporate authorization, lack of conflicts with existing
agreements, no prior business activities and taxes.
40
The representations and warranties contained in the merger
agreement do not survive the effective time of the merger.
COVENANTS
Hawaiian Natural and AMCON have each undertaken to perform certain
covenants in the merger agreement. The principal covenants are as follows:
INTERIM OPERATIONS OF HAWAIIAN NATURAL. From the date of signing
the merger agreement until the effective time of the merger or the
termination of the merger agreement, Hawaiian Natural has agreed to conduct
our business in the ordinary course consistent with past practice, to use
commercially reasonable efforts to preserve our current business
organizations intact, to maintain in effect all licenses, approvals and
other obligations and to preserve our relationships with customers,
suppliers and others with whom we do business with the intention that our
ongoing business shall not be impaired in any material respect. In addition,
we have agreed to restrictions, subject to limited exceptions, that prohibit
us from taking specified actions, including the following:
o amend our articles of incorporation or bylaws or other
governing documents;
o split, combine or reclassify any of our capital stock;
o declare, set aside or pay any dividends or other distribution;
o purchase, redeem or otherwise acquire any shares of our
capital stock;
o issue, deliver or sell any shares of our capital stock or
options, warrants or other rights to acquire our capital stock
other than the options to purchase shares of our common stock
in an amount equal to the number of shares underlying options
forfeited prior to closing by our employees, under our option
plans, and upon exercise of stock options and warrants in
accordance with their present terms;
o amend any term of any of our outstanding securities;
o incur any capital expenditures except for those contemplated
by our capital expenditure budget or those incurred in the
ordinary course of business;
o acquire any assets or equity interests with a fair market
value of more than $25,000, excluding amounts contemplated by
our capital expenditure budget, but in no event may asset or
equity interest acquisitions and budgeted capital expenditures
exceed $50,000 in the aggregate;
o sell, lease, out-license, encumber or otherwise dispose of
assets except in the ordinary course of business, assets no
longer in use, or assets related to discontinued operations;
o incur or generate any debt or issue any debt securities,
warrants or rights to acquire any debt, make any loans,
capital contributions to or investments in any other person,
or, except in the ordinary course of business consistent with
past practices, guarantee any debt securities or indebtedness
of others, in any case, in an amount in excess of $100,000;
o enter into any agreement or arrangement that restricts or
limits us from engaging or competing in any line of business
or in any location;
41
o enter into, amend, modify or terminate any material agreement
except in the ordinary course of business and consistent with
past practice;
o except in the ordinary course of business or as may be
required by law or any existing agreement, increase the amount
of compensation of any director or executive officer or
increase any employee benefits, grant any severance pay to any
director, officer or employee, adopt, amend, make a
contribution to, or accelerate vesting under any benefit plan,
or hire any employee with an annual base salary in excess of
$40,000;
o except as may be required as a result of a change in law or in
generally accepted accounting principles, change any of our
respective accounting methods or our respective fiscal year;
o make any material tax election or settle any material income
tax liability, other than in the ordinary course of business
consistent with past practices;
o settle or commence any litigation or investigation material to
our respective business other than the discharge of various
liabilities in the ordinary course of business;
o enter into any new material line of business;
o use any of the proceeds of the notes issued to AMCON for any
purposes other than providing working capital and other
general corporate purposes, and to redeem our Series A
preferred stock or our Series B convertible preferred stock or
both, in each case, outstanding as of September 29, 2000,
which redemption has been effected; or
o agree, commit or resolve to do any of the foregoing.
NO SOLICITATION. Except as described below, we have agreed that we
will not directly or indirectly, and will not permit our officers,
directors, employees, agents and representatives, to, solicit, initiate, or
knowingly facilitate or encourage the submission of an "acquisition
proposal," as defined below, participate in any discussions or negotiations
or provide any information regarding any acquisition proposal, grant any
waiver or release under any standstill or similar agreement, or enter into
any agreement with respect to an acquisition proposal.
An "acquisition proposal" is any offer or proposal for (i) a
merger, consolidation, share exchange, business combination, reorganization,
recapitalization, issuance of securities, liquidation, dissolution, tender
offer or exchange offer or other similar transaction or series of
transactions, (ii) any purchase of 10% or more of Hawaiian Natural assets,
(iii) any direct or indirect acquisition beneficial ownership of securities
representing, or exchangeable for or convertible into, more than 10% of the
outstanding securities of any class of Hawaiian Natural voting securities,
or (iv) any issuance of Hawaiian Natural securities representing 10% of the
outstanding securities of any class of voting securities of Hawaiian
Natural, other than the transactions contemplated by the merger agreement.
Hawaiian Natural is not prevented from disclosing to our
shareholders our position with respect to an acquisition proposal, or taking
other action required, in order to comply with Rules 14d-9 and 14e-2 under
the Securities Exchange Act of 1934.
MUTUAL COVENANTS
AMCON and Hawaiian Natural have also undertaken to perform other
covenants relating to each of our conduct prior to the effective time,
including those requiring us:
42
o to use our reasonable best efforts to take all actions and do
all things necessary or advisable under applicable law to
complete the merger and the other transactions contemplated by
the merger agreement as soon as practicable;
o to prepare the AMCON registration statement and this document
and to cause AMCON to take any required action under state
securities laws in connection with the issuance of AMCON
common stock in the merger;
o to notify each other of the time the registration statement
has become effective or any supplement or amendment has been
filed, the issuance of any stop order, the suspension of
qualification of the shares in any jurisdiction, or any
request by the SEC for amendment of this document or comments
on this document, responses to such comments or requests from
the SEC for additional information;
o to notify each other if information in this document becomes
or is discovered to be misleading;
o to cooperate to make any required governmental filing and to
obtain all required third-party consents;
o to cooperate to set a mutually acceptable date for our
shareholder meeting;
o to give notice of and convene a meeting of our shareholders to
consider and vote upon adoption and approval of the merger
agreement;
o to permit the other party to review any communication given by
us to any governmental entity or in connection with any
proceeding by a private party and give the other party the
opportunity to attend, and participate in, any such
proceeding;
o subject to our fiduciary duties, declare the advisability of
recommending adoption and approval of this merger agreement
and the merger;
o to use our reasonable best efforts to cause the shares of
AMCON common stock to be issued in the merger to be approved
for listing on the American Stock Exchange; and
o to consult with one another before issuing a press release or
making any public statement regarding the merger agreement,
except as required by applicable law or any listing agreement
with the American Stock Exchange.
ACCESS TO INFORMATION. AMCON and Hawaiian Natural have agreed to
provide each other with access to our offices and information, with such
information to be held subject to our obligations of confidentiality
undertaken in connection with the merger agreement.
NOTIFICATION OF CERTAIN MATTERS. We have agreed to notify each
other of:
o the receipt of any notice or communication from a third party
alleging that their consent is required in connection with the
merger agreement;
o any communication from a governmental entity with respect to
the transactions contemplated by the merger agreement;
43
o obtaining knowledge of any actions, suits or investigations
commenced or threatened against the party; and
o obtaining knowledge of any occurrence causing a representation
or warranty to be untrue or inaccurate in any material respect
or causing the material failure of a party to comply with a
covenant or condition of the merger agreement.
TAX TREATMENT. Each party has agreed that it will use it best
efforts to cause the merger to receive tax-free treatment.
CONFIDENTIALITY. We have each agreed that we will hold, and will
use our reasonable efforts to cause our representatives to hold, in
confidence, all information received in connection with the transactions
contemplated by the merger agreement. We have agreed not to use the
confidential material for any purpose other than the purpose of the
transactions contemplated by the merger agreement. We have also agreed that
the confidential information will only be disclosed to representatives on a
need to know basis and each such representative will be informed of its
obligation to keep the information confidential. If we are required by law
to disclose the confidential information, we have agreed to promptly notify
the party disclosing the information so that they may seek an appropriate
protective order preventing such disclosure. We will not be subject to these
obligations with respect to any information:
o that is or becomes generally available to the public other
than as a result of a disclosure by one of us in connection
with the merger agreement;
o that was previously available to us on a non-confidential
basis; or
o that becomes available to us on a non-confidential basis from
an outside source that is not known to the party receiving the
information to be contractually or legally prohibited from
disclosing the information.
If the merger agreement is terminated, we have agreed that we will
use our best efforts to cause the documents and other materials subject to
such confidentiality obligations to be destroyed or returned.
EXEMPTION FROM LIABILITY UNDER SECTION 16(b). If Hawaiian Natural
delivers to AMCON Section 16 Information with respect to Hawaiian Natural
prior to the effective time of the merger, the board of directors of AMCON,
or a committee of Non-Employee Directors thereof (as such term is defined
for purposes of Rule 16b-3(d) under the Exchange Act), shall adopt a
resolution in advance of the effective time providing that the receipt by
the Hawaiian Natural Insiders of AMCON common stock in exchange for shares
of Hawaiian Natural common stock, and of options to purchase AMCON common
stock upon assumption and conversion by AMCON of options to purchase our
common stock, in each case pursuant to the merger and to the extent such
securities are listed in the Section 16 Information, are intended to be
exempt from liability pursuant to Rule 16b-3 under the Exchange Act of 1934.
o "Section 16 Information" shall mean information accurate in
all respects regarding the Hawaiian Natural Insiders, the
number of shares of our common stock, or other our equity
securities, deemed to be beneficially owned by each such
Hawaiian Natural Insider and expected to be exchanged for
AMCON common stock in connection with the merger.
o "Hawaiian Natural Insiders" shall mean those officers and
directors of Hawaiian Natural who are subject to the reporting
requirements of Section 16(a) of the Securities Exchange Act
of 1934 who are listed in the Section 16 Information.
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CONDITIONS
Each of our respective obligations to complete the merger are
subject to the satisfaction or waiver of various conditions, the most
significant of which are:
o the approval of the merger agreement by our shareholders;
o the registration statement of which this document is a part
shall have become effective without the presence of any stop
orders or initiated or threatened proceedings;
o the approval for listing on the American Stock Exchange of the
common stock of AMCON to be issued in the merger;
o the receipt of all other governmental and regulatory consents,
approvals and authorizations necessary for the merger and the
issuance of common stock in the merger, unless not obtaining
those consents or approvals would not reasonably be expected
to have a material adverse effect on AMCON or Merger Sub,
after the merger;
o the absence of any law, order or injunction prohibiting
completion of the merger or which otherwise would reasonably
be expected to have a material adverse effect on AMCON or the
surviving corporation after the merger;
The obligations of Hawaiian Natural on the one hand, and AMCON on
the other, to consummate the merger of Hawaiian Natural into Merger Sub are
also subject to the fulfillment, on or before the effective time of the
merger, of the following additional conditions, unless waived in writing:
o the performance by AMCON and Hawaiian Natural in all material
respects of all required obligations;
o the representations and warranties of AMCON and Hawaiian
Natural being true in all material respects as if they were
made on the closing date of the merger;
o the receipt of an opinion from tax counsel for Hawaiian
Natural to the effect that the merger will qualify as a tax
free reorganization within the meaning of federal income tax
laws and that each of AMCON and Hawaiian Natural will be a
party to such reorganization;
o in the case of AMCON, receipt of agreements from affiliates of
Hawaiian Natural in order to ensure compliance with federal
securities law requirements described under "The
Merger--Federal Securities Law Consequences";
o the absence of any material adverse change in the financial
condition, results of operations, cash flows, assets,
liabilities, business or prospects of Hawaiian Natural or
AMCON, as the case may be;
o the aggregate number of dissenters' shares shall not exceed 5%
of the total number of shares of our common stock outstanding
and entitled to vote; Termination of the Merger Agreement
TERMINATION OF THE MERGER AGREEMENT
TERMINATION BY AMCON OR HAWAIIAN NATURAL. Either one of us may
terminate the merger agreement and abandon the merger at any time prior to
the effective time of the merger if:
o both of us agree to terminate effective by mutual written
agreement before or after stockholder approval;
45
o the merger have not been completed by December 31, 2001,
provided that the terminating party's breach of or failure to
fulfill any obligation under the merger agreement is not the
cause of the merger not being completed;
o a law or regulation makes consummation of the merger illegal
or otherwise prohibited; or
o a court order or ruling of another governmental entity
permanently prohibiting the completion of the merger becomes
final and non-appealable, provided that the terminating party
shall have used its reasonable best efforts to avoid or remove
such prohibition.
In addition, the merger agreement will automatically terminate if
the transactions contemplated by it are enjoined by a court of competent
jurisdiction for a period extending beyond 90 days.
TERMINATION BY AMCON. AMCON may terminate the merger agreement and
abandon the merger at any time prior to the effective time of the merger if:
o Hawaiian Natural willfully and materially breaches its
obligations with respect to alternate acquisition proposals;
o Any representation or warranty of Hawaiian Natural is
inaccurate in any material respect;
o Any covenant or agreement of Hawaiian Natural is not performed
in all material respects;
o Our board of directors has approved, endorsed or recommended
any alternate acquisition proposal;
o A tender or exchange offer relating to the securities of
Hawaiian Natural has commenced and we have not sent a
statement recommending rejection of such tender or exchange
offer to our security holders within ten business days after
the commencement of such tender or exchange offer; or
o Our board of directors has resolved to do any of the
foregoing.
TERMINATION BY HAWAIIAN NATURAL. Hawaiian Natural may terminate the
merger agreement and abandon the merger at any time prior to the effective
time of the merger if:
o Any representation or warranty of AMCON is inaccurate in any
material respect; or
o Any covenant or agreement of AMCON is not performed in all
material respects.
FEES AND EXPENSES PAYABLE BECAUSE OF A TERMINATION
Neither AMCON nor Hawaiian Natural shall pay a termination fee to
the other party in the event of termination; except that neither AMCON nor
Hawaiian Natural shall be relieved or released from any liabilities or
damages arising out of its willful material breach of the merger agreement.
FEES AND EXPENSES GENERALLY
Each party will pay its own fees and expenses incurred in
connection with the merger agreement.
46
AMENDMENTS AND WAIVERS
Any provision of the merger agreement may be amended or waived by
the parties at any time before our shareholders meeting. However, no
amendment or waiver requiring shareholder approval (generally those
representing material changes) shall be made after our shareholders meeting
without the further approval of our shareholders. If a provision of the
merger agreement is amended or waived prior to our shareholders meeting, we
would anticipate, to the extent required by applicable law, preparing and
mailing to our shareholders an amendment or supplement to this document and
resoliciting proxies for use at the meeting. All amendments to the merger
agreement must be in writing signed by each party. All waivers must be in
writing and signed by the party against whom the waiver is to be effective.
STOCKHOLDER AGREEMENT
The following information relating to the stockholder agreement is
not intended to be a complete description of all of the information relating
to the stockholder agreement, but is intended to include the material terms
of the stockholder agreement.
As a condition to the execution by AMCON of the merger agreement,
some of our stockholders, including members of management and the board of
directors and their affiliates, entered into a stockholder agreement for the
benefit of AMCON.
Pursuant to the stockholder agreement, these stockholders agreed to
vote their shares of our common stock in favor of approval of the merger
agreement and granted irrevocable proxies in support of that voting
agreement. Any transferee of their shares are subject to the voting
agreement and irrevocable proxies. The obligations under the stockholder
agreement terminates automatically upon the termination of the merger
agreement.
The following holders of our securities, representing 3,229,050
shares or approximately 35.2% of our outstanding common stock, are parties
to the stockholder agreement: Marcus Bender, President, CEO and a director;
H.S.C., Inc.; Hawaii Brewery Development Company, Inc.; Mr. Dennis Harris, a
former director; Mr. Wilhelm Kuhlmann, a director; and Keijiro Sorimachi.
[THIS SPACE LEFT INTENTIONALLY BLANK]
47
SELECTED QUARTERLY FINANCIAL DATA OF AMCON
The following table sets forth selected financial information for
each of the eight quarters in the two year period ended September 30, 2000
and the nine month period ended June 30, 2001. This information has been
prepared by AMCON 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 AMCON's consolidated
financial statements and notes thereto included in this proxy statement
prospectus. Quarterly earnings are based on weighted average shares
outstanding for the quarter and therefore the sum of the quarters may not
equal the earnings per share amounts for the full fiscal year.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTH PERIOD ENDED JUNE 30, 2001:
THIRD SECOND FIRST
--------------- --------------- --------------
Sales ....................................................... $153,662 $101,240 $101,023
Gross Profit ................................................ 12,221 9,499 10,627
Income (loss) from continuing operations
before taxes ............................................. 97 (606) 881
Income (loss) from continuing operations .................... 45 (378) 551
Income (loss) from discontinued operations .................. - (506) (388)
Loss on disposal of discontinued operations ................. - (675) -
Net Income .................................................. 45 (1,560) 163
Earnings (loss) per share from continuing
operations:
Basic: ............................................... $0.02 ($0.14) $0.20
Diluted: ............................................. $0.02 ($0.14) $0.20
Earnings (loss) per share from discontinued operations:
Basic: ............................................... - ($0.43) ($0.14)
Diluted: ............................................. - ($0.43) ($0.12)
Net Earnings (loss) per share:
Basic: ............................................... $0.02 ($0.57) $0.06
Diluted: ............................................. $0.02 ($0.57) $0.08
48
FISCAL YEAR ENDED SEPTEMBER 30, 2000:
FOURTH THIRD SECOND FIRST
------------- ------------ ------------ ------------
Sales ............................................. $118,608 $105,951 $99,556 $100,616
Gross Profit ...................................... 11,865 10,507 11,361 11,030
Income from continuing operations before
taxes ........................................ 1,020 2,352 (1) 1,831 1,462
Income from continuing operations ................. 704 1,531 1,166 910
Income (loss) from discontinued operations ........ (398) (151) 40 102
Net Income ........................................ 306 1,380 1,206 1,012
Earnings per share from continuing
operations:
Basic: ................................... $ 0.26 $ 0.56 $ 0.43 $ 0.33
Diluted: ................................. $ 0.25 $ 0.54 $ 0.41 $ 0.31
Earnings (loss) per share from discontinued
operations:
Basic: ................................... $(0.15) $(0.06) $0.01 $0.05
Diluted: ................................. $(0.15) $(0.05) $0.01 $0.05
Net earnings (loss) per share:
Basic: ................................... $(0.11) $0.50 $0.44 $0.38
Diluted: ................................. $(0.11) $0.49 $0.42 $0.36
FISCAL YEAR ENDED SEPTEMBER 30, 1999:
FOURTH THIRD SECOND FIRST
------------- -------------- ------------ ------------
Sales ............................................. $98,845 $92,698 $78,416 $72,904
Gross profit ...................................... 9,120 7,878 6,502 (2) 8,294 (2)
Income from continuing operations
before taxes ................................. 1,273 1,294 1,511 2,565
Income from continuing operations ................. 790 803 938 1,591
Income (loss) from discontinued operations ........ (108) 47 (77) (148)
Net Income ........................................ 682 850 861 1,443
Earnings per common and common
equivalent
Basic: ................................... $0.30 $0.29 $0.34 $0.58
Diluted: ................................. $0.27 $0.28 $0.33 $0.56
Earnings (loss) per share from discontinued
operations:
Basic: .................................. $(0.05) $0.02 $(0.02) $(0.05)
Diluted: ................................. $(0.03) $0.02 $(0.03) $(0.05)
Net earnings (loss) per share:
Basic: .................................. $(0.25) $0.31 $0.32 $0.53
Diluted: ................................. $(0.24) $0.30 $0.30 $0.51
(1) Income before taxes includes gains associated with the sale of real estate and intangible assets.
(2) Gross profit in the first and second quarters include margin from a significant cigarette price
increase which took effect during the first quarter.
49
INFORMATION ABOUT THE MEETING AND VOTING
Hawaiian Natural is using this document to solicit proxies from the
holders of our common stock for use at the special meeting. Hawaiian Natural
is first mailing this document and accompanying forms of proxies to our
shareholders on or about November 14, 2001.
MATTERS RELATING TO THE MEETING
TIME AND PLACE: The shareholder meeting will be held on Monday,
December 17, 2001, 8:00 a.m., Local Time, Honolulu Club, 932 Ward Avenue,
Honolulu, Hawaii.
PURPOSE OF MEETING IS TO VOTE ON THE FOLLOWING ITEMS:
1. A proposal to approve the merger agreement attached as
Annex A.
2. Such other matters as may properly come before the
shareholder meeting, including approval of any adjournment
of the meeting.
RECORD DATE: Holders of record of our common stock at the close of
business on November 14, 2001, will be entitled to vote.
OUTSTANDING SHARES HELD ON RECORD DATE: As of the record date for
the meeting, there were 9,185,982 outstanding shares of our common stock.
SHARES ENTITLED TO VOTE: Each share of common stock that you own as
of the record date entitles you to one vote. Shares held by Hawaiian Natural
in treasury will not be voted.
QUORUM REQUIREMENT: A quorum of shareholders is necessary to hold a
valid meeting. The presence in person or by proxy at the meeting of holders
of a majority of the shares of our common stock entitled to vote at the
meeting is a quorum. Abstentions and broker "non-votes" count as present for
establishing a quorum. Shares held by Hawaiian Natural in its treasury do not
count toward a quorum.
A broker non-vote occurs on a proposal when a broker is not
permitted to vote on that proposal without instruction from the beneficial
owner of the shares and no instruction is given.
SHARES BENEFICIALLY OWNED BY OUR DIRECTORS AND EXECUTIVE OFFICERS
AS OF THE RECORD DATE: Our directors and executive officers beneficially own
2,876,920 shares of our common stock, which does not include 1,687,098
shares subject to exercisable options and warrants held by those persons
because those options and warrants had not been exercised as of the Record
Date for the meeting. These shares represent in total approximately 31.3% of
shares of our common stock outstanding as of the Record Date for the
meeting. These holders have agreed to vote all of the shares entitled to
vote in favor of approval of the merger agreement.
VOTE NECESSARY TO APPROVE THE MERGER PROPOSAL
Approval of the merger agreement requires the affirmative vote of
the holders of a majority of the total votes entitled to be cast by holders
of our common stock. Abstentions and broker non-votes will have the same
effect as votes against the merger agreement.
VOTING BY PROXY
VOTING YOUR PROXY. You may vote in person at your meeting or by
proxy. We recommend you vote by proxy even if you plan to attend your
meeting. You can always change your vote at the meeting.
50
Voting instructions are included on your proxy card. If you
properly give your proxy and submit it to us in time to vote, one of the
individuals named as your proxy will vote your shares as you have directed.
You may vote for or against the proposal submitted at the meeting or abstain
from voting.
HOW TO VOTE BY PROXY
Complete, sign, date and return your proxy card in the enclosed
envelope.
* If you hold shares through a broker or other custodian, please
follow the voting instructions for the voting form used by
that firm.
If you submit your proxy but do not make specific choices, your
proxy will follow your board's recommendations and vote your shares for
their recommendations.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
---
APPROVAL OF THE MERGER AGREEMENT.
REVOKING YOUR PROXY. You may revoke your proxy before it is voted by:
o submitting a new proxy with a later date,
o notifying Hawaiian Natural's Secretary in writing before the
meeting that you have revoked your proxy, or
o voting in person at the meeting.
VOTING IN PERSON. If you plan to attend the meeting and wish to
vote in person, we will give you a ballot at the meeting.
PROXY SOLICITATION. We will pay our own costs of soliciting proxies.
In addition to this mailing, our employees may solicit proxies
personally, electronically or by telephone.
The extent to which these proxy soliciting efforts will be
necessary depends upon how promptly proxies are submitted. You should submit
your proxy by mail without delay. We will also reimburse brokers and other
nominees for their expenses in sending these materials to you and getting
your voting instructions.
DO NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR PROXY CARDS. THE
EXCHANGE AGENT WILL MAIL TRANSMITTAL FORMS WITH INSTRUCTIONS FOR THE
SURRENDER OF STOCK CERTIFICATES FOR OUR COMMON STOCK TO SHAREHOLDERS AS SOON
AS PRACTICABLE AFTER THE COMPLETION OF THE MERGER.
OTHER BUSINESS; ADJOURNMENTS
We are not currently aware of any other business to be acted upon
at the meeting. If, however, other matters are properly brought before the
meeting, or any adjourned or postponed meeting, your proxies will have
discretion to vote or act on those matters according to their best judgment,
including to adjourn the meeting.
Adjournments may be made for the purpose of, among other things,
soliciting additional proxies. Any adjournment may be made from time to time
by approval of the holders of shares representing a majority of the votes
present in person or by proxy at the meeting, whether or not a quorum
exists,
51
without further notice other than by an announcement made at the meeting. We
do not currently intend to seek an adjournment of the special meeting.
INFORMATION ABOUT AMCON
BUSINESS
GENERAL
AMCON Distributing Company, together with its indirectly
wholly-owned subsidiaries Chamberlin's Natural Foods, Inc. and Health Food
Associates, Inc., operate seven distribution centers and fourteen retail
health food stores in the Great Plains, Rocky Mountain, Western and Southern
regions of the United States. The term "AMCON" means AMCON Distributing
Company and its subsidiaries.
AMCON sells approximately 24,000 different consumer products,
including cigarettes and tobacco products, candy and other confectionery,
beverages, groceries, paper products, health and beauty care products,
natural food and related products, frozen and chilled products and
institutional food service products.
AMCON has over 8,500 retail customers, the largest of which
accounted for less than 5.2% of AMCON's total revenues during fiscal 2000.
AMCON 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, AMCON services
institutional customers, including restaurants and bars, schools, sports
complexes and vendors, as well as other wholesalers.
AMCON operates eight retail health food stores in Florida and six
in the Midwest. These stores carry natural supplements, groceries, health
and beauty care products and other food items.
While cigarettes accounted for approximately 70% of AMCON's sales
volume during its fiscal year 2000, AMCON continues to diversify its
businesses and product lines in an attempt to lessen its dependence upon
cigarette sales.
AMCON maintains a 52-53 week fiscal year which ends on the last
Friday in September. For convenience, the fiscal years have been indicated
as September 30, whereas the actual year ends were September 29, 2000,
September 24, 1999 and September 25, 1998. Fiscal 2000 comprised 53 weeks.
Fiscal 1999 and 1998 each comprised 52 weeks.
TRADITIONAL DISTRIBUTION BUSINESS
AMCON serves approximately 8,500 retail outlets in the Great Plains
and Rocky Mountain regions. Food Logistics, a trade periodical, ranked AMCON
as the thirteenth (13th) largest distributor in its industry out of
approximately 1,000 distributors in the United States based upon 1999 sales
volume. AMCON's purchase of Merchants Wholesale, Inc. on June 1, 2001 will
likely rank AMCON in the top 10 in the traditional distribution industry.
From its inception, AMCON has pursued a strategy of growing its distribution
business through increased sales and through acquisitions. Since 1993, AMCON
has focused on increasing operating efficiency in its distribution business
by merging smaller branch distribution facilities into larger ones. In
addition, AMCON has grown its distribution business through expansion of its
market area into contiguous regions and by introduction of new product lines
to customers.
AMCON distributes approximately 9,000 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
principal suppliers
52
to AMCON's distribution business include Philip Morris USA, RJ Reynolds
Tobacco, Brown & Williamson, Proctor & Gamble, Hershey, Mars, William
Wrigley and Nabisco. AMCON also markets private label lines of cigarettes,
tobacco, snuff, water, candy products, batteries and film.
AMCON has sought to increase sales to convenience stores and
petroleum marketers by adopting a number of operating strategies which it
believes gives it a competitive advantage with these types of retailers. One
key operating strategy is a commitment to customer service. In a continuing
effort to provide better service than its competitors, AMCON carries a broad
and diverse product line which allows AMCON to offer "one-stop shopping" to
its customers. AMCON offers self-service health and beauty programs, grocery
products and custom food service programs which have proven to be profitable
to convenience store customers. In addition, AMCON has a policy of next-day
delivery and employs a concept of selling products in cut-case quantities or
"by the each" (i.e., individual units). AMCON also offers planograms to
convenience store customers to assist in the design of their store and
display of products within the store.
AMCON has worked to improve the operating efficiency of its
distribution business by investing in the latest in systems technology,
including computerization of buying and financial control functions and the
introduction in 1999 of internet-based customer maintenance and reporting
options. Inventory management has become even more critical to its
distribution business due to significant increases in the price of
cigarettes over the past three years. AMCON has also sought to reduce
inventory expenses of its distribution business by improving the number of
times its inventory is renewed during a period ("inventory turns") for the
same level of sales. Inventory turns of its distribution business improved
to 25.4 times in its 2000 fiscal year. Inventory turns of its distribution
business for the past five fiscal years are as follows:
FISCAL YEAR TIMES INVENTORY TURNED
----------- ----------------------
2000 25.4
1999 24.5
1998 19.6*
1997 21.8
1996 21.2
*Inventory turns declined slightly in fiscal 1998 as AMCON managed the
inventory levels of its distribution business to take advantage of
anticipated manufacturers' price increases.
By keeping the operating costs of its traditional distribution
business down, AMCON is better able to price its products in such a manner
to achieve an advantage over less efficient distributors in its market
areas.
The main office of AMCON's traditional distribution business is in
Omaha, Nebraska. AMCON has seven distribution centers located in Illinois,
Missouri, Nebraska, North Dakota, South Dakota, and Wyoming with two of
these located in Missouri.
These distribution centers contain a total of approximately 512,200
square feet of floor space and employ state-of-the-art equipment for the
efficient distribution of the large and diverse product mix sold by AMCON's
distribution business. AMCON's distribution business also operates a fleet
of approximately 215 delivery vehicles, ranging from over-the-road vehicles
with refrigerated trailers to half-ton vans.
53
RETAIL HEALTH FOOD STORES
AMCON's retail health food stores are operated by its indirect
subsidiaries as Chamberlin's Market & Cafe ("Chamberlin's") and Akin's
Natural Food Market ("Akin's"). Chamberlin's, which was acquired in March
1999, was first established in 1935, and is an award-winning and
highly-acclaimed chain of eight health and natural product retail stores,
all offering an extensive selection of natural supplements and herbs, baked
goods, dairy products, delicatessen items and organic produce. Chamberlin's
was selected the best health food chain in the United States by Health Foods
Business, a trade publication. Chamberlin's is headquartered in Winter Park,
Florida and operates all of its stores in and around Orlando, Florida.
Akin's Natural Foods Market, also established in 1935 and
headquartered in Tulsa, Oklahoma, is a well-recognized chain of six health
and natural product retail stores, each offering an extensive line of
natural supplements and herbs, dairy products, delicatessen items and
organic produce. Akin's has locations in Tulsa (2 stores) and Oklahoma City,
Oklahoma; Lincoln, Nebraska; Springfield, Missouri; and Topeka, Kansas.
AMCON's retail health food store segment is organized to utilize
the name recognition of the established health food retail chains that were
acquired since both retail chains are unique in their market areas. AMCON
plans to maintain the local identity of each chain while providing a means
to achieve operating synergies leading to cost savings.
ACQUISITIONS
AMCON was incorporated in Delaware in 1986 to carry on the business
of General Tobacco and Candy Company ("General Tobacco"), a Nebraska
corporation which was the predecessor to AMCON's traditional distribution
business. Since 1981, AMCON has acquired 24 consumer product distributors in
the Great Plains, Rocky Mountain and Southern regions of the United States.
In October 1997, AMCON purchased the assets of a traditional candy and
tobacco distribution company in St. Louis, Missouri, thereby expanding it's
market area to include eastern Missouri, Illinois and Indiana. In March
1999, a subsidiary of AMCON purchased all of the outstanding stock of
Chamberlin's Natural Foods, Inc. In September 1999, a subsidiary of AMCON
purchased all of the outstanding stock of Health Food Associates, Inc. In
November 1999, Chamberlin's Natural Foods, Inc. acquired all of the assets
of MDF Health, Inc. In August 2000, Chamberlin's Natural Foods, Inc.
acquired all of the outstanding stock of TINK, Inc. (d/b/a Natural Way
Foods). TINK, Inc. was subsequently merged into Chamberlin's Natural Foods,
Inc.
On June 1, 2001 AMCON completed the acquisition of substantially
all of the distribution business and net assets of Merchants Wholesale, Inc.
located in Quincy, Illinois. In addition, AMCON purchased a 206,000 square
foot building occupied by Merchants and owned by Merchants' sole
stockholder. These acquisitions are described under "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Acquisitions
and Dispositions."
DISCONTINUED OPERATIONS
AMCON purchased all of the outstanding stock of Food For Health
Co., Inc., a distributor of natural foods and related products serving
natural food retailers, in 1997. Effective March 23, 2001 the assets of that
subsidiary were sold for $10.3 million, subject to certain adjustments. That
sale is reflected as discontinued operations in AMCON's audited and
unaudited consolidated financial statements and is described under
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Acquisitions and Dispositions."
54
BUSINESS SEGMENTS
AMCON has two reportable business segments, the wholesale
distribution of consumer products and the retail sale of health and natural
food products. As described above, AMCON disposed of its health food
distribution segment during the second quarter of fiscal 2001. The results
of the acquired Merchants distribution business are included in the
wholesale distribution of consumer products segments due to similar economic
characteristics shared by AMCON's existing distribution business and
Merchants distribution business as well as similar characteristics with
respect to the nature of the products distributed, the type and class of
customers for the distribution products, and the methods used to distribute
the products. The segments are evaluated on revenues, operating income and
income before taxes.
Financial information on these business segments is set forth in
Note 16 of AMCON's consolidated financial statements which is incorporated
herein by reference.
PRINCIPAL PRODUCTS
CIGARETTES
Sales of cigarettes and the gross margin derived therefrom for the
fiscal years ending September 30, 2000, 1999, and 1998 are set forth below:
(DOLLARS IN MILLIONS)
FISCAL YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
2000 1999 1998
---- ---- ----
Sales ..................................................... $ 296.5 $ 251.1 $ 185.5
Sales as a % of Total Sales ............................... 69.8% 73.2% 70.5%
Gross Margin .............................................. $ 18.2 $ 17.0 $ 13.3
Gross Margin as a % of Total Gross Margin ................. 40.7% 53.6% 55.6%
Gross Margin Percentage ................................... 6.2% 6.8% 7.2%
Revenues from the sale of cigarettes during fiscal 2000 increased
by 18.1% as compared to fiscal 1999, while gross profit from the sale of
cigarettes increased by 7.1% during the same period. See "Management's
Discussion and Analysis-Results of Operations-Year Ended September 30, 2000
Versus Year Ended September 30, 1999". Sales of cigarettes represented
approximately 70% of AMCON's sales volume during fiscal 2000. This
represents a 1.8% decline from the prior year and related primarily to
diversification into the retail health food business in fiscal 1999. AMCON's
retail health food segment which was acquired in fiscal 1999, generated
approximately $14.0 million in gross profit in fiscal 2000 compared to $2.9
million in fiscal 1999.
Since 1983, AMCON's traditional distribution business has sought to
position itself to capitalize on consumer demand for discount or
value-priced cigarettes by marketing its own private label cigarettes as a
high-quality, value-priced alternative to premium cigarettes. Substantial
price increases implemented by manufacturers of premium cigarettes during
the late 1980's and early 1990's resulted in a demand for private label
cigarettes, which are sold at lower prices than premium brands. A
significant manufacturers' price decreases in premium brand cigarettes,
aimed at recapturing market share, occurred in 1993 and has caused a steady
decline in the sales of private label cigarettes since that point. Sales of
AMCON's private label cigarettes have declined an average of 31.5% annually
since 1993. Philip Morris USA has manufactured AMCON's private label
cigarettes since 1998 under an exclusive agreement. This agreement was
renewed in October 2001 for a one-year term.
55
NATURAL FOODS AND RELATED PRODUCTS
Natural foods and related products, which are primarily sold by
Chamberlin's Natural Foods and Health Food Associates, Inc., constitute
AMCON's second largest-selling product line, representing approximately 8.0%
of AMCON's total sales volume during fiscal 2000. Sales of natural foods and
related products and the gross margin derived therefrom for the fiscal years
ending September 30, 2000, 1999 and 1998 are set forth below:
(DOLLARS IN MILLIONS)
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
2000 1999 1998
---- ---- ----
Sales .................................................... $ 34.1 $ 7.0 $ --
Gross Margin ............................................. 14.0 2.8 --
Gross Margin Percentage .................................. 41.2% 40.4% --%
CONFECTIONERY
Candy, related confectionery items and snacks, which are primarily
sold by AMCON's traditional distribution business, constitute AMCON's third
largest-selling product line, representing approximately 7.0% of AMCON's
total sales volume during fiscal 2000. Sales of confectionery items and the
gross margin derived therefrom for the fiscal years ending September 30,
2000, 1999, and 1998 are set forth below:
(DOLLARS IN MILLIONS)
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
2000 1999 1998
---- ---- ----
Sales .................................................... $31.1 $30.2 $29.3
Gross Margin ............................................. 3.7 3.8 3.6
Gross Margin Percentage .................................. 11.9% 12.6% 12.3%
AMCON's distribution business supplies customers with over 1,900
different types of candy and related products, including chocolate bars,
cookies, chewing gum, nuts and other snack items. Major brand names include
products manufactured by Hershey (Reese's, Kit Kat, and Hershey), Mars
(Snickers, M&M's, and Milky Way), William Wrigley and Nabisco. AMCON also
markets its own private label candy under a manufacturing agreement with
Palmer Candy Company.
OTHER PRODUCT LINES
Over the past decade, AMCON's distribution business strategy has
been to expand its portfolio of consumer products in order to better serve
its customer base. The other product lines of AMCON's distribution business
include cigars and other tobacco products, water and other beverages,
groceries, paper products, health and beauty care products, frozen and
chilled products and institutional food products. During fiscal 2000,
AMCON's sales of other products increased $8.4 million or 15.4%. During
fiscal 2000 the gross profit margin on these types of products was 13.9%.
COMPETITION
The distribution business is highly competitive. There are many
similar distribution companies operating in the same geographical regions as
AMCON. Management believes that AMCON is one of the largest distribution
companies of its type operating in its market area. AMCON's principal
competitors are national wholesalers such as McLane Co., Inc. (Temple, TX)
and regional wholesalers such as Core-Mark International Inc. (San
Francisco, CA), Farner-Bocken (Carroll, IA), and Fleming Convenience
Marketing and Distribution (Oklahoma City, OK) along with a host of smaller
grocery and
56
tobacco wholesalers. Most of these competitors generally offer a wide range
of products at prices comparable to AMCON's. Therefore, AMCON seeks to
distinguish itself from its competitors by offering a higher level of
technology and customer service.
The natural food retail industry is highly fragmented, with more
than 9,000 stores operating independently or as part of small chains. The
two leading natural food chains, Whole Foods Market and Wild Oats, continue
to expand their geographic markets by opening stores in new markets and
acquiring smaller independent competitors. In addition, conventional
supermarkets and mass market outlets have also begun to increase their
emphasis on the sale of natural products. These strategies have contributed
to the saturation of health food retail stores in some markets and have
caused same store sales to generate minimal increases over the past year.
Management believes AMCON's retail stores separate themselves from other
competitors by offering smaller, more friendly, community-oriented settings
run by people who share a passion for healthy living and natural foods and
that this approach will continue to attract health food consumers.
GOVERNMENT REGULATION
Various state government agencies regulate the distribution of
cigarettes and tobacco products in several ways, including the imposition of
excise taxes, licensing and bonding requirements. Complying with these
regulations is a very time-consuming, expensive and labor-intensive
undertaking. For example, each state (as well as certain cities and
counties) requires AMCON to collect excise taxes ranging from $1.20 to $5.80
per carton on all cigarettes sold by it in the state. Such excise taxes must
be paid in advance and, in most states, is evidenced by a stamp which must
be affixed to each package of cigarettes.
AMCON is also subject to regulation by state and local health
departments, the U.S. Department of Agriculture, the Food and Drug
Administration and the Drug Enforcement Administration. These agencies
generally impose standards for product quality and sanitation, as well as
for security and distribution policies.
EMPLOYEES
As of June 30, 2001, AMCON had 1,214 full-time and part-time
employees in the following areas:
Managerial 17
Administrative 122
Sales & Marketing 508
Warehouse 409
Delivery 158
-----
Total Employees 1,214
=====
None of AMCON's employees are subject to any collective bargaining
agreements with AMCON and management believes its relations with its
employees are good.
DIRECTORS AND EXECUTIVE OFFICERS OF AMCON
AMCON's day-to-day affairs are managed by its executive officers,
who are appointed by the board of directors for terms of one year. AMCON has
entered into employment agreements with Mr. Wright, Ms. Evans and Mr.
Fleming, each with a term expiring on December 31, 2002.
57
The following sets forth relevant information concerning AMCON's
directors and executive officers unless otherwise indicated, each of the
persons listed in the table has held the positions indicated for at least
five years.
NAME AGE POSITION
---- --- --------
William F. Wright 59 Chairman of the Board, CEO
and Director
Kathleen M. Evans 54 President of AMCON, Director
Jerry Fleming 63 Director
William R. Hoppner 51 Director
J. Tony Howard 57 Director
Allen D. Petersen 60 Director
Timothy R. Pestotnik 41 Director
Michael D. James 40 Secretary, Treasurer and
Chief Financial Officer
WILLIAM F. WRIGHT has served as the Chairman and Chief Executive
Officer of AMCON Corporation (the former parent of AMCON) since 1976 and as
Chairman of AMCON since 1981. From 1968 to 1984, Mr. Wright practiced
corporate and securities law in Lincoln, Nebraska. Mr. Wright is a graduate
of the University of Nebraska and Duke University School of Law and is a
certified public accountant. Mr. Wright is also a director of Gold Banc
Corporation, Inc., whose stock is listed on the National Market System of
NASDAQ. His term of office as a director will expire at AMCON's annual
meeting of stockholders in 2004.
KATHLEEN M. EVANS became President of AMCON in February 1991. Prior
to that time she served as Vice President of AMCON Corporation from 1985 to
1991. From 1978 until 1985, Ms. Evans acted in various capacities with AMCON
and its operating subsidiaries. Her term of office as a director of AMCON
will expire at AMCON's annual meeting of stockholders in 2003.
JERRY FLEMING became President of Food for Health Co., Inc. in
1992. Mr. Fleming is a 37 year veteran of the health and natural foods
industry and prior to joining Food For Health Co., Inc., served as President
of Nature's Way (Murdock Health Care), a leading manufacturer of herbal
remedies; Vice President of the Natural Foods Group for Tree of Life, Inc.;
President of the South East division of Tree of Life; President of
Collegedale Distributors; President of Healthway Specialty Foods, Inc.; Vice
President of Landstrom Specialty Foods, Inc. and served eight years on the
board of directors of the National Nutritional Foods Association. His term
of office as a director of AMCON will expire at AMCON's annual meeting of
stockholders in 2004.
WILLIAM R. HOPPNER was appointed of counsel to the law firm of Rehm
and Bennett P.C., in Lincoln, Nebraska in February 1999. Mr. Hoppner acted as
Executive Vice President of International Transportation Specialists, Inc.
from 1985-1995 and has served as Chief of Staff to former U.S. Senator and
Nebraska Governor Robert Kerrey and former U.S. Senator and Nebraska Governor
J. James Exon. Since 1995, Mr. Hoppner has served as a board member for
several not-for-profit organizations. Mr. Hoppner resigned from the board of
directors in October 1997 to pursue political office and was reappointed to
the board of directors in December 1998. His term of office as a director
of AMCON will expire at AMCON's annual meeting of stockholders in 2004.
J. TONY HOWARD became a director of AMCON in 1986. He has been
President of Nebraska Distributing Company since 1978. His term of office
as a director of AMCON expires at AMCON's annual meeting of shareholders
in 2002.
58
ALLEN D. PETERSEN has been a director of AMCON since 1993.
For more than 10 years, he has been the Chairman of the Board and Chief
Executive Officer of American Tool Companies, Inc., located in Hoffman
Estates, Illinois. He is also a director of Gold Banc Corporation, Inc.
His term of office as a director of AMCON expires at AMCON's annual
meeting of stockholders in 2002.
TIMOTHY R. PESTOTNIK has been a director of AMCON since 1998. Since
January 1, 1995, he has been a partner in the law firm of Luce, Forward,
Hamilton & Scripps, LLP, located in San Diego, California. His term of
office as a director of AMCON expires at AMCON's annual meeting of
stockholders in 2003.
MICHAEL D. JAMES became Treasurer and Chief Financial Officer of
AMCON in June 1994. In November 1997, he assumed the responsibilities of
Secretary of AMCON. He is a certified public accountant and is responsible
for all financial and reporting functions within AMCON. Prior to joining
AMCON, Mr. James practiced accounting for ten years with the firm of
PricewaterhouseCoopers LLP, serving as the senior tax manager of the Omaha,
Nebraska office from 1992 until 1994. Mr. James graduated from Kansas State
University in 1983.
COMPENSATION OF DIRECTORS
For fiscal 2001, directors who are not employees of AMCON will be
paid $20,000 plus $500 for each board meeting (including committee meetings)
attended in person or by teleconference, and may receive options to purchase
shares of AMCON's common stock at an exercise price equal to the fair market
value of the stock on the date of grant. The amount of the option grants are
determined on an annual basis. In addition, all directors are reimbursed for
out-of-pocket expenses related to attending board and committee meetings.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information regarding the annual and
long-term compensation awarded to, earned by or paid by AMCON to its
Chairman and the other three highest paid executive officers of AMCON for
services rendered during fiscal 2000, 1999, and 1998. No other executive
officers of AMCON earned salary and bonus in fiscal 2000 in excess of the
disclosure threshold established by the proxy rules of the Securities and
Exchange Commission.
59
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
----------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------- -------------------- -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
(1) (2) (3) (4)
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
-----------------------------------------------------------------------------------------------------------------------------------
William F. Wright, 2000 364,000 - - - - - 12,371
Chairman 1999 350,000 275,000 - - 6,600 - 13,388
1998 346,100 100,000 - - 44,000 - 17,060
Kathleen M. Evans, 2000 286,000 286,000 - - - - 9,941
President 1999 275,000 275,000 - - 5,500 - 9,760
1998 274,000 150,000 - - 33,000 - 11,205
Jerry Fleming, 2000 208,000 - - - - - 396
President of Food 1999 200,000 65,000 - - 4,400 - 396
For Health Co., Inc. 1998 153,100 (5) 65,000 - - 22,000 - -
Michael D. James, 2000 130,000 30,000 - - 4,500 - 6,538
Secretary, Treasurer 1999 115,000 30,000 - - 6,600 - 4,823
and Chief Financial 1998 105,000 10,000 - - 7,700 - 4,538
Officer
---------------------------------
(1) No disclosure is required in this column pursuant to applicable
Securities and Exchange Commission Regulations, as the aggregate
value of items covered by this column does not exceed the lesser of
$50,000 or 10% of the annual salary and bonus shown for each
respective executive officer named.
(2) Option grants for fiscal 1999 and 1998 have been adjusted to reflect
the special 10% stock dividend paid in February 2000.
(3) AMCON does not have a long-term incentive plan as defined in Item 402
of Regulation S-K under the Securities Exchange Act of 1934, as
amended.
(4) The amount for fiscal 2000 consists of contributions to AMCON's
Profit Sharing Plan of $9,195, $8,311 and $6,538 for Mr. Wright, Ms.
Evans and Mr. James, respectively, and the value of life insurance of
$3,176, $1,180 and $396 for Mr. Wright, Ms. Evans and Mr. Fleming,
respectively.
(5) Mr. Fleming's salary amount represents the actual amount paid during
the period from November 10, 1997 (the date Food For Health Co., Inc.
was acquired by AMCON) through September 30, 1998.
60
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Options were granted during fiscal 2000 to the executive officers
listed in the Summary Compensation Table (the "Named Officers") as
summarized below:
PERCENT OF TOTAL
NUMBER OF OPTIONS
SHARES GRANTED TO GRANT DATE
UNDERLYING EMPLOYEES IN EXERCISE EXPIRATION DATE PRESENT VALUE
NAME OPTIONS GRANTED FISCAL YEAR PRICE (1) (2)
------------------ --------------- ---------------- -------- --------------- -------------
Michael D. James 4,500 13.68% $5.75 June 12, 2010 $3.19
---------------------------------
(1) Options awarded to Mr. James are exercisable in 20% increments over a
five-year period and have an exercise price equal to the fair market
value on the date of grant.
(2) In accordance with the Securities and Exchange Commission rules,
grant date present value is determined using the Black-Scholes
option-pricing model. The Black-Scholes model is a complicated
mathematical formula widely used to value exchange-traded options.
However, stock options granted by AMCON are long-term,
non-transferable and subject to vesting restrictions, while
exchange-traded options are short-term and can be exercised or sold
immediately in a liquid market. The Black-Scholes model relies on
several key assumptions to estimate the present value of options,
including the volatility of, and dividend yield on, the security
underlying the option, the risk-free rate of return on the date of
grant and the term of the option. In calculating the grant date
present values set forth in the table, volatility was based on the
daily stock market quotations for the one-year period preceding the
grant date, yield was based on the annual dividend rate of $0.12 per
share (the dividend rate in effect when the options were issued) and
the risk-free rate of return was fixed at the rate for a U.S.
Treasury strip on the date of grant. The following weighted average
assumptions were used: expected volatility of 52.01%; dividend yield
of 2.0%; risk free interest rate of 6.57%; and expected life of 10
years.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
No options were exercised during fiscal 2000 by the Named Officers.
The following table sets forth certain information concerning the number of
unexercised options and the value of unexercised options at the end of
fiscal 2000 for the Named Officers. All options have been adjusted to
reflect the special 10% stock dividend paid in February 2000.
(A) (B) (C) (D) (E)
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR END (#) FISCAL YEAR END ($)
SHARES ACQUIRED ON VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
-------------------- ------------------ -------------- -------------------- -------------------
William F. Wright -0- -0- 41,800/8,800 $88,176/$22,044
Kathleen M. Evans -0- -0- 31,900/6,600 73,032/18,258
Jerry Fleming -0- -0- 13,200/13,200 24,344/35,516
Michael D. James -0- -0- 6,600/14,400 17,106/12,781
61
LONG-TERM INCENTIVE PLANS AND OTHER MATTERS
AMCON does not maintain a long-term incentive plan or pension plan
(as defined in Item 402 of SEC Regulation S-K) for the Named Officers and
has not repriced any options or SARs for any Named Officer during the last
fiscal year.
EMPLOYMENT AGREEMENTS
AMCON has entered into employment agreements with William F.
Wright, the Chairman of the Board and CEO, Kathleen M. Evans, President of
AMCON, and Jerry Fleming, President of The Healthy Edge, Inc. (formerly
"Food For Health Co., Inc."). Each such agreement has a term expiring on
December 31, 2002 and is automatically extended for one additional year each
December 31, unless either AMCON or the executive delivers a notice of
non-extension at least 90 days prior to the scheduled automatic renewal
date. Each agreement provides for the payment of a base salary in each year
during the term thereof and provides that the executive shall be eligible to
receive a bonus based upon performance in an amount determined by the
Compensation Committee of the Board. If the Board elects to terminate the
agreements upon such executive's disability or death, the executive or his
or her personal representative is entitled to receive his or her base salary
for a period of six months following the termination. If the Board elects to
terminate the agreements for a reason other than serious misconduct (as
defined in the agreements), the executive is entitled to receive a severance
package equal to the executive's current base salary plus his or her
previous year's bonus. Each executive is also eligible to participate in
AMCON's 1994 Stock Option Plan and in other employee benefit plans
maintained by AMCON, including health and life insurance plans. Each
agreement contains provisions under which the executive agrees to maintain
the confidentiality of information concerning AMCON and its affairs and a
covenant not to compete with AMCON for a period of one year after the
executive's employment with AMCON terminates.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AMCON Corporation engages in certain transactions with AMCON,
including the provision of offices and administrative services to AMCON.
William F. Wright, Kathleen M. Evans, J. Tony Howard and Allen D. Petersen
are officers, directors or stockholders of AMCON Corporation. The cost of
the shared facilities are apportioned between these entities based upon
their respective usages thereof and on terms no less favorable than would
otherwise be available from unaffiliated parties. AMCON was charged $60,000,
$60,000, and $60,000 by AMCON Corporation during fiscal 2000, 1999, and
1998, respectively, as consideration for these services, which is included
in AMCON's selling, general and administrative expenses for those years.
The remaining interest in a condominium and furnishings and the
related mortgage loan was transferred to AMCON from AMCON Corporation in
1992 as partial settlement of intercompany balances. The condominium was
sold in fiscal 2000. Under a profit sharing agreement with AMCON
Corporation, $1,155,000, representing one-half of the net gain from the sale
of the real estate, was allocated and paid to AMCON Corporation.
BENEFICIAL OWNERSHIP OF AMCON COMMON STOCK BY PRINCIPAL STOCKHOLDERS,
DIRECTORS AND OFFICERS
Only holders of Common Stock of record at the close of business on
February 1, 2001 (the "Record Date") will be entitled to vote at the Annual
Meeting. At the Record Date, there were 2,737,991 shares of Common Stock
which were issued and outstanding. Each share of Common Stock is entitled to
one vote upon each matter to be voted on at the Annual Meeting. Stockholders
do not have the right to cumulate votes in the election of directors.
62
The following table sets forth, as of August 31, 2001, the
beneficial ownership of AMCON's Common Stock by each director and each
nominee for director, by each of the executive officers named in the Summary
Compensation Table, by each person believed by AMCON to beneficially own
more than 5% of AMCON's Common Stock and by all present executive officers
and directors of AMCON as a group:
NUMBER OF
SHARES
BENEFICIALLY PERCENT OF
NAME OWNED CLASS
---- ------------ ----------
William F. Wright, Director, Chairman of the Board and CEO 510,008 (1) 18.11%
Kathleen M. Evans, Director, President 185,036 (2) 6.66
Jerry Fleming, President of a Subsidiary, Director 18,700 (3) *
Michael D. James, Chief Financial Officer, Secretary and Treasurer 11,460 (4) *
J. Tony Howard, Director 177,446 (5) 6.41
Allen D. Petersen, Director 259,238 (6) 9.40
Timothy R. Pestotnik, Director 240,298 (7) 8.75
William R. Hoppner, Director 100,265 (8) 3.65
All executive officers and directors as a group (8 persons) 1,268,133 43.48
Matthew F. Wright (9) 151,650 5.54
Mark A. Wright (10) 209,462 7.65
Wendy M. Wright (11) 328,252 11.99
Ane Patterson (12) 160,784 5.87
------------------------------
* Less than 1% of class.
(1) Includes options to purchase 50,600 shares of Common Stock at an
average exercise price of $3.67 per share which may be exercised
currently.
(2) Includes options to purchase 38,500 shares of Common Stock at an
average exercise price of $3.41 per share which may be exercised
currently.
(3) Includes options to purchase 17,600 shares of Common Stock at an
average exercise price of $4.01 per share which may be exercised
currently. Mr. Fleming also holds unvested options to acquire 8,800
shares of stock at an exercise price of $2.61 per share.
(4) Includes options to purchase 10,360 shares of Common Stock at an
average exercise price of $4.15 per share which may be exercised
currently. Mr. James also holds unvested options to acquire 10,640
shares of common stock at an average exercise price of $5.87 per
share.
(5) Includes options to purchase 29,700 shares of Common Stock at an
average exercise price of $3.68 per share which may be exercised
currently.
(6) Includes 227,098 shares of Common Stock held by the Lifeboat
Foundation, over which Mr. Petersen shares voting power as a
director, 11,440 shares held by the Draupnir Trust, over which Mr.
Petersen has sole voting power as sole trustee, and options to
purchase 18,700 shares of Common Stock at an average exercise price
of $4.30 per share which may be exercised currently.
(7) Includes 227,098 shares of Common Stock held by the Lifeboat
Foundation, over which Mr. Pestotnik shares voting power as a
director, and options to purchase 7,700 shares of Common Stock at an
average exercise price of $6.72 per share which may be exercised
currently.
(8) Includes options to purchase 7,700 shares of Common Stock at an
average exercise price of $6.72 per share which may be exercised
currently.
(9) 1501 Old Farm Road, No. 72, Lincoln, Nebraska 68512. The number of
shares includes 2,970 shares over which Mr. Wright shares voting and
investment power with his minor children.
(10) 11110 E. Beck Lane, Scottsdale, Arizona 85259. The number of shares
includes 650 shares over which Mr. Wright shares voting and
investment power with his spouse and minor children.
63
(11) 3535 Lebon Drive, Apartment 4316, San Diego, California 92122.
(12) 3055 St. Thomas Drive, Missoula, Montana 59803.
CHANGE IN AUDITORS
PricewaterhouseCoopers LLP determined to close its office in Omaha,
Nebraska. On September 4, 2001, AMCON's board of directors, upon
recommendation from AMCON's Audit Committee, approved a change in
independent accountants to Deloitte & Touche LLP ("Deloitte & Touche"), for
the fiscal year ending September 30, 2001 and the dismissal of
PricewaterhouseCoopers LLP. The report of PricewaterhouseCoopers LLP for the
fiscal years ended September 30, 2000 and 1999, contained no adverse
opinion, disclaimer of opinion or qualification or modification as to
uncertainty, audit scope or accounting principles. During the fiscal years
ended September 30, 2000 and 1999, and the interim period from October 1,
2000 through September 4, 2001, there were no disagreements between AMCON
and PricewaterhouseCoopers LLP on any accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers
LLP, would have caused it to make reference to the subject matter of the
disagreement in connection with its reports on the financial statements for
such years. No event as described in paragraph (a)(1)(v) of Item 304 of
Regulation S-K has occurred within AMCON's fiscal years ended September 30,
2000 and 1999, or the period from October 1, 2000 through September 4, 2001.
AMCON did not consult with Deloitte & Touche during the fiscal
years ended September 30, 2000 and 1999, or during the interim period from
October 1, 2000 through September 4, 2001, on any matter which was the
subject of any disagreement or any reportable event as defined in Regulation
S-K Item 304(a)(1)(iv) and Regulations S-K Item 304(a)(1)(v), respectively,
or on the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on AMCON's financial statements, relating to which either a written
report was provided to AMCON or oral advice was provided that Deloitte &
Touche concluded was an important factor considered by AMCON in reaching a
decision as to the accounting, auditing, or financial reporting issue.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
AMCON Distributing Company, together with its indirect wholly-owned
subsidiaries, Chamberlin's Natural Foods, Inc. and Health Food Associates,
Inc., operate seven distribution centers and fourteen retail health food
stores in the Great Plains, Rocky Mountain, Western and Southern regions of
the United States. As used herein, unless the context indicates otherwise,
the term "AMCON" means AMCON Distributing Company and its subsidiaries.
AMCON's fiscal year ends on the last Friday in September. For
convenience, the fiscal years have been indicated as September 30, whereas
the actual year ends were September 29, 2000, September 24, 1999, and
September 25, 1998. Fiscal 2000 comprised 53 weeks. Fiscal 1999 and 1998
each comprised 52 weeks.
RESULTS OF OPERATIONS
As more fully described in the section "Acquisitions and
Dispositions" hereunder, AMCON completed the sale of its health food
distribution business effective March 23, 2001. As a result, AMCON's
September 30, 2000 balance sheet and fiscal 2000 results have been restated
to reflect the health food distribution business as discontinued operations.
The discussions and figures below are based on the restated presentation.
Additionally, as more fully described in the section "Acquisitions and
Dispositions" hereunder, AMCON completed its acquisition of substantially
all of the distribution business and net assets of Merchants Wholesale, Inc.
on June 1, 2001. Accordingly, the results of
64
operations for the Merchants Wholesale, Inc. distribution business are
included in the accompanying condensed consolidated statement of operations
from the acquisition date.
Comparison of the three month and nine month periods ended June 30,
2001 and June 30, 2000 Sales for the three months ended June 30, 2001
increased 45.0% to $153.7 million, compared to $106.0 million for the third
quarter in the prior fiscal year. The sales increase by business segment is
as follows:
Wholesale distribution $ 47.8 million
Retail health food stores (0.1) million
------
$ 47.7 million
======
Sales from the wholesale distribution business increased by $47.8
million during Q3 2001 over Q3 2000. Sales from the new Quincy distribution
business (formerly the Merchants distribution business) accounted for $33.8
million of the increase. The remaining increase of $14.0 million was
attributable primarily to an increase in cigarette sales of approximately
$10.9 million over Q3 2000 as a result of three price increases. Cigarette
carton volume increased by approximately 2.2% as compared to Q3 2000. In
addition, sales of tobacco, confectionery and other products were higher in
Q3 2001 relative to Q3 2000 by $3.1 million or 9.3%. Sales growth during Q3
2001 improved over Q3 2000 as weather conditions improved in the Midwest,
which promoted more outdoor activities and more business for AMCON's
customers.
Sales from the retail health food segment in Q3 2001 decreased by
$105,000 when compared to Q3 2000 primarily due to an overall softening of
the natural food retail market over the past year as few new products have
been developed to promote traffic in the retail stores. Additionally,
increased competition by national chains, who have opened stores in the same
markets as AMCON's stores, have negatively impacted sales. AMCON closed
one retail store in the Florida market during the fourth quarter of the
fiscal year due to poor financial performance.
Sales for the nine months ended June 30, 2001 increased 16.3% to
$355.9 million, compared to $306.1 million for the same period in the prior
fiscal year. The sales increase by business segment is as follows:
Wholesale distribution $ 50.7 million
Retail health food stores (0.9) million
------
$ 49.8 million
======
Sales from the wholesale distribution business increased by $50.7
million for the nine months ended June 30, 2001 as compared to the same
period in the prior year. Sales from the new Quincy distribution business
accounted for $33.8 million of the increase. The remaining increase of $16.9
million was attributable primarily to an increase in cigarette sales of
approximately $13.1 million over the same period of the prior year as a
result of three price increases, which more than offset a 4.5% decline in
carton volume. Sales of tobacco, confectionery and other products accounted
for the remainder of the increase as sales of these products were higher
than the prior year by approximately $3.8 million or 5.3%. Sales growth for
the first six months of the year was negatively impacted by the severe
winter in the Midwest, which inhibited traffic in customers' retail stores;
however, sales improved in Q3 2001 as weather conditions improved. In
addition, pricing strategies implemented by several competitors since the
prior year have also had a negative impact on sales.
Sales from the retail health food segment decreased by $0.9 million
when compared to the prior year due to increased competition by national
chains who have opened stores in the same markets as AMCON's stores.
Additionally, an overall softening of the natural food retail market over
the past year due to few new products being developed has negatively
impacted sales growth in the retail health food segment.
65
Gross profit increased 16.3% to $12.2 million for Q3 2001 from
$10.5 million for Q3 2000. Gross profit as a percentage of sales declined to
8.0% for Q3 2001 compared to 9.9% for Q3 2000. Gross profit by business
segment is as follows (dollars in millions):
QUARTER ENDED JUNE 30,
----------------------------- INCR/
2001 2000 (DECR)
---- ---- ------
Wholesale distribution $ 9.0 $ 7.2 $ 1.8
Retail health food stores 3.2 3.3 (0.1)
----- ----- -----
$12.2 $10.5 $ 1.7
===== ===== =====
The new Quincy distribution business accounted for $1.4 million of
the increase in gross profit dollars in the wholesale distribution segment.
The remaining increase in gross profit dollars in the wholesale distribution
segment was primarily due to the net impact of (1) a marginal increase in
cigarette carton volume accompanied by three price increases subsequent to
Q3 2000 and (2) a favorable margin impact of approximately $0.5 million in
Q3 2001 resulting from inventory levels at the time of the Q3 2000 price
increase turning at a lower cost relative to the new sales price; and (3) a
charge to cost of sales of $0.7 million to account for the increase in the
inventory LIFO reserve due to a significant increase in the Producer Price
index utilized by AMCON to compute its inventory LIFO reserve. The decline
in gross profit percentage is directly attributable to the new Quincy
distribution business and increases in the cost and selling price of
cigarettes. As AMCON's overall percentage of cigarette sales increases in
relation to total sales, the overall gross margin percentage continues to
decline.
The retail health food segment experienced a reduction in gross
margin due to an overall decline in same store sales as compared to Q3 2000.
Management is actively reviewing strategies to improve sales and gross
profit in the retail segment, including evaluation of retail locations and
promotional activities. AMCON plans to close one retail store in the Florida
market before the end of the fiscal year due to poor financial performance.
For the nine months ended June 30, 2001, gross profit decreased
1.7% to $32.3 million from $32.9 million for the same period during the
prior fiscal year. Gross profit as a percentage of sales declined to 9.1%
for the nine month period ended June 30, 2001 compared to 10.7% for the nine
month period ended June 30, 2000. Gross profit by business segment is as
follows (dollars in millions):
NINE MONTHS ENDED JUNE 30,
----------------------------- INCR/
2001 2000 (DECR)
---- ---- ------
Wholesale distribution $22.6 $22.2 $ 0.4
Retail health food stores 9.7 10.7 (1.0)
----- ----- -----
$32.3 $32.9 $ 0.6
===== ===== =====
For the nine months ended June 30, 2001, the new Quincy
distribution business contributed $1.4 million of gross profit. This
increase in gross profit was offset by a decrease in gross profit in the
wholesale distribution segment resulting from (1) a favorable margin impact
of approximately $0.3 million resulting from inventory levels at the time of
price increases turning at a lower cost relative to the new sales price, (2)
a Q2 and Q3 2001 charge to cost of sales of $1.4 million to account for the
increase in the LIFO reserve, which reduced margin by approximately $1.4
million relative to the nine months ended June 30, 2000 and (3) reductions
in incentive allowances from manufacturers due to a decline in cigarette
carton volume over the first nine months of the fiscal year as compared to
the prior fiscal year. The retail
66
health food segment experienced an overall decline in same store sales as
compared to the same period of the prior fiscal year, which negatively
impacted profits.
The reduction in the gross profit percentage was primarily
attributable to the three price increases in cigarettes since Q3 2000
combined with the disproportional increase in the selling prices to our
customers. In addition, the Producer Price index utilized by AMCON to
compute its LIFO reserve increased substantially during Q2 and Q3 2001 as
compared to increases in the index in prior quarters, thus requiring a
charge to cost of sales of $1.4 million to increase the LIFO reserve
accordingly.
Since 1993, sales of AMCON's private label cigarettes have declined
an average of 30% annually. This trend is primarily due to the decreased
price differential between premium and major generic brands, including
AMCON's brands, and to the price of sub-generic brands being substantially
less than AMCON's brand. Sales of AMCON's private label cigarettes were down
by approximately 40% compared to the first nine months of the prior year and
the volume incentive payment related to those sales was $485,000 less than
the first nine months of the prior year. Management anticipates the volume
of AMCON's private label cigarettes will continue to decline over the next
few years. Based on these estimates, gross profit from the sale of private
label cigarettes could decrease as much as an additional $100,000 for the
remainder of fiscal 2001.
Total operating expense, which includes selling, general and
administrative expenses and depreciation and amortization, increased 20.3%
or approximately $1.9 million to $11.4 million for Q3 2001 compared to Q3
2000. The increase was primarily due to expenses associated with the new
Quincy distribution business which accounted for $1.5 million of the
increase. As a percentage of sales, total operating expense decreased to
7.4% from 9.0% during Q3 2000. This decrease is primarily due to the
acquisition of the Quincy distribution business which brought the wholesale
distribution segment's operating costs as a percent of sales down to 5.4%
for Q3 2001 compared to 6.0% for Q3 2000.
For the nine month period ended June 30, 2001, total operating expense
increased 8.9% or approximately $2.5 million to $30.0 million compared to
the same period in the prior fiscal year. The increase was primarily due to
expenses associated with the new Quincy distribution business which
accounted for $1.5 million of the increase. The rest of the wholesale
distribution segment incurred $0.6 million in operating costs above amounts
incurred in the first nine months of fiscal 2000 due to increases in general
labor, delivery and fuel costs, as compared to the prior fiscal year. The
retail health food business accounted for the remaining $0.4 million of the
increase in operating expenses. Operating expenses incurred by this business
segment increased due to the addition of a new store since the same period
in the prior fiscal year and additional administrative costs associated with
the development of new retail business opportunities. As a percentage of
sales, total operating expense decreased to 8.4% from 9.0% during the same
period in the prior fiscal year. This decrease is primarily due to the
acquisition of the Quincy distribution business which brought the wholesale
distribution segment's operating costs as a percentage of sales down to 5.9%
for the nine months ended June 30, 2001 compared to 6.2% for the same period
of the prior year.
As a result of the above, income from operations for Q3 2001
decreased by $217,000 to $776,000. Income from operations for the nine
months ended June 30, 2001 decreased by $3.0 million to $2.4 million.
Interest expense for Q3 2001 increased 31.7% to approximately
$766,000 compared to approximately $582,000 during Q3 2000. The increase was
primarily due to interest expense attributable to the debt incurred to
acquire the Merchants distribution business and net assets and the Quincy
distribution facility on June 1, 2001 and to provide advances to Hawaiian
Natural Water Company ("Hawaiian Natural"). Interest incurred for these
purposes was approximately $259,000. Interest expense for the nine months
ended June 30, 2001 increased 16.9% to $2.1 million compared to $1.8 million
for
67
the same period in the prior fiscal year. The increase was primarily due to
debt incurred to acquire the Merchants Wholesale, Inc. distribution business
and net assets and the Quincy distribution facility and debt incurred to
provide advances to and investments in Hawaiian Natural. These items
accounted for approximately $271,000, or 89%, of the increase in interest
expense.
Other income for the three and nine-month periods ended June 30,
2001 of approximately $125,000 and $173,000, respectively, was generated
primarily by interest income and dividends received on investment
securities. Other income for the three and nine-month periods ended June 30,
2000 of $1.9 million and $2.1 million, respectively, included gains of $1.9
million associated with the sale of AMCON's interest in a condominium
and resolution of an intellectual property matter involving a trademark.
Equity in earnings of unconsolidated affiliates represents AMCON's
ownership interest in the loss of Hawaiian Natural.
As a result of the above factors, income from continuing operations
for the three months ended June 30, 2001 was $44,418 compared to $1,531,501
for the three months ended June 30, 2000. Income from continuing operations
for the nine months ended June 30, 2001 was $216,876, compared to $3,607,710
for the first nine months of the prior year.
The distribution industry is in a state of consolidation.
Competition and pressure on profit margins continue to affect both large and
small distributors and demand that distributors consolidate in order to
become more efficient. The new Quincy, Illinois distribution business
(formerly Merchants) operates out of a state-of-the-art facility that
enables customers in Arkansas, Illinois, Indiana, Iowa, Kansas, Missouri,
Ohio and Wisconsin to be serviced out of one 206,000 square foot facility.
As a result of the acquisition, AMCON's annualized revenues will be
approximately $900 million.
The retail natural foods industry is highly fragmented, with more
than 9,000 stores operated independently or as part of small chains. The two
leading natural food chains continue to expand their geographic markets. In
addition, conventional supermarkets and mass market outlets have also begun
to increase their emphasis on the sale of natural products. This business
climate subjects operating income to a number of factors which are beyond
the control of management, such as competing retail stores opening in close
proximity to AMCON's retail stores and manufacturers changing prices and
promotional programs.
While AMCON sells a diversified product line, it remains dependent
on cigarette sales which represented approximately 71% of its revenue and
44% of its gross margin in the first nine months of the fiscal year. Changes
in manufacturers' cigarette pricing affects the market for generic and
private label cigarettes and net income is heavily dependent upon sales of
AMCON's private label cigarettes and volume discounts received from
manufacturers in connection with such sales. AMCON continuously evaluates
steps it may take to improve net income in future periods, including further
acquisitions of other distributing companies and retail stores in similar
business lines and further sales of assets that are no longer essential to
its primary business activities such as investments in equity securities.
Investments at June 30, 2001 included 70,000 shares of Consolidated
Water Company Limited ("CWC"), a public company which is listed on NASDAQ.
AMCON's basis in the securities is $127,000 and the fair market value
of the securities was $637,000 and $499,000 on June 30, 2001 and September
30, 2000, respectively. The unrealized gain on CWC shares was approximately
$510,000 and $372,000 on June 30, 2001 and September 30, 2000, respectively.
The fair market value of the CWC shares held on July 31, 2001 was $764,000.
68
The impact of the recent accounting pronouncements (SFAS 141 and
SFAS 142) on AMCON's financial statements in future periods is incorporated
by reference from the notes to AMCON's unaudited condensed consolidated
financial statements for the three and nine months ended June 30, 2001.
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). SFAS 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. The liability is discounted and
accretion expense is recognized using the credit-adjusted risk-free interest
rate in effect when the liability was initially recognized. SFAS 143 is
effective for financial statements issued for fiscal years beginning after
June 15, 2002 (for the fiscal year ended September 30, 2003 for AMCON).
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144
addresses financial accounting and reporting for the impairment or disposal
of long-lived assets to be held and used, to be disposed of other than by
sale and to be disposed of by sale. Although the Statement retains certain
of the requirements of SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", it
supersedes SFAS 121 and APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions for the disposal of a segment of a business. SFAS 144 also
amends ARB No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control is likely to
be temporary. The Statement is effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years (fiscal year beginning October 1, 2002 for AMCON), with
early adoption encouraged.
Management is currently assessing what the impact on future periods
will be resulting from the adoption of SFAS 143 and SFAS 144.
Fiscal Year Ends. The following table sets forth an analysis of
various components of the Income Statement as a percentage of sales for the
fiscal years ended September 30, 2000, 1999, and 1998:
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------
2000 1999 1998
---------- ---------- ----------
Sales .............................................. 100.0% 100.0% 100.0%
Cost of sales ...................................... 89.5 90.7 90.9
--------- --------- ---------
Gross Profit ....................................... 10.5 9.3 9.1
Selling, general and administrative expense ........ 8.4 6.6 6.9
Depreciation and amortization ...................... 0.5 0.4 0.4
--------- --------- ---------
Income from operations ............................. 1.6 2.3 1.8
Interest expense ................................... 0.6 0.4 0.6
Other (income) expense, net ........................ (0.6) (0.1) (0.2)
--------- --------- ---------
Income from continuing operations before income
taxes ........................................... 1.6 2.0 1.4
Income tax expense ................................. 0.6 0.8 0.5
--------- --------- ---------
Income from continuing operations .................. 1.0 1.2 0.9
=== === ===
Income (loss) from discontinued operations ......... (0.1) (0.1) 0.0
==== ==== ===
Net income ......................................... 0.9% 1.1% 0.9%
========= ========= =========
69
Year Ended September 30, 2000 Versus Year Ended September
30, 1999. Sales for the year ended September 30, 2000 increased 24% to
$424.7 million, compared to $342.9 million for the year ended September 30,
1999. Sales increase by business segment is as follows:
Wholesale distribution $54.7 million
Retail health food stores 27.1 million
-----
$81.8 million
=====
Sales from the traditional distribution business increased
by $54.7 million for the year ended September 30, 2000 as compared to the
same period in the prior year as follows: Cigarette sales increased
approximately $45.4 million over the prior year, of which approximately
$32.3 million was due to price increases and the balance was due to
increased volume. Sales of non-cigarette products increased by $9.3 million
primarily due to increased volume. The increase in sales of $27.1 million
from the retail health food stores, Chamberlin's Market & Cafe and Akin's
Natural Foods Market, is primarily due to new sales generated since the
retail segment was purchased in the third and fourth quarters of fiscal
1999.
Gross profit increased 40.8% to $44.8 million for the year
ended September 30, 2000 compared to $31.8 million for the prior fiscal
year. Gross profit as a percentage of sales increased to 10.5% for the
period compared to 9.3% for fiscal 1999. Gross profit by business segment
for the year ended September 30, 2000 is as follows (dollars in millions):
INCR/
2000 1999 (DECR)
---- ---- ------
Wholesale distribution (recurring) ................ $30.8 $25.3 $ 5.5
Wholesale distribution (nonrecurring) ............. - 3.7 (3.7)
Retail health food stores ......................... 14.0 2.8 11.2
----- ----- -----
$44.8 $31.8 $13.0
===== ===== =====
The increases in gross profit and gross profit percentage
were primarily attributable to $14.0 million in gross profit generated by
the retail health food stores, which were acquired in the third and fourth
quarters of fiscal 1999. Profit margins generated by the retail food stores
are typically 40-45% compared to profit margins of 9-11% generated by the
distribution segment. Gross profit generated by the recurring distribution
businesses increased by $5.5 million due to additional sales generated by
the traditional distribution business. However, the traditional distribution
business experienced a decrease of $3.7 million in nonrecurring gross profit
in fiscal 2000, as compared to the same period of the prior year, due to the
absence of cigarette price increases of the magnitude of which occurred in
the prior year. A significant cigarette price increase was implemented by
cigarette manufacturers in the first quarter of fiscal 1999 as the result of
a settlement that was reached between the major tobacco manufacturers and
the various states that had filed liability suits against the industry.
Price increases of the magnitude experienced in November 1998 have
historically been rare and the level of profits generated by this event are
not expected to recur on a regular basis. Manufacturers increased the price
of cigarettes on several occasions since November 1998. Management considers
gross profits derived from these increases to occur in the normal course of
business even though their occurrence is irregular and unpredictable.
Sales of AMCON's private label cigarettes declined
significantly from 1993 through 1999 primarily due to the price differential
between premium and major generic brands. The rate of decline in private
label cigarette sales slowed in fiscal 2000 and gross profit derived from
such sales increased slightly in the year ended September 30, 2000 as
compared to the prior year due to enhancements in the
70
manufacturers' promotional program. Management expects the gross profit
derived from the sale of its private label cigarettes to remain at current
levels in fiscal 2001.
For the year ended September 30, 2000, total operating
expense, which includes selling, general and administrative expenses,
depreciation and amortization, increased 58.1% or $13.9 million to $37.8
million compared to fiscal 1999. The increase was primarily due to expenses
associated with the retail health food stores which accounted for $11.4
million of the increase in operating expenses and additional administrative
costs associated with the development of new retail business opportunities.
The retail health food stores were acquired in the third and fourth quarters
of fiscal 1999; therefore, there were no operating expenses associated with
this business segment in the first six months of the prior fiscal year.
Operating expenses incurred by the distribution segment increased by $2.5
million primarily due to increased labor costs in the distribution centers
resulting from tight labor markets and an increase in fuel and other
delivery expenses. As a percentage of sales, total operating expense
increased to 10.4% from 9.0% during the prior year. This increase is
primarily due to operating costs incurred by the retail health food business
during the period. Operating expenses incurred by this business segment were
approximately 37.6% of sales compared to 6.1% incurred by the wholesale
distribution business.
As a result of the above, income from operations for the
year ended September 30, 2000 decreased $940,283 or 12.0% to $6,916,251.
Interest expense for the year ended September 30, 2000
increased 74.1% to $2.5 million compared to $1.5 million during the prior
year. The increase was primarily due to interest expense attributable to the
debt incurred to purchase the retail health food stores in fiscal 1999.
Interest expense associated with this acquisition debt was approximately
$1.6 million for the year ended September 30, 2000, compared to $204,000 in
the prior year. Interest expense associated with AMCON's operating lines of
credit decreased approximately $404,000 for the year ended September 30,
2000, as compared to the prior year. The decrease was primarily attributable
to reductions to the revolving credit balances from the proceeds of the sale
of AMCON's interest in a condominium.
Other income for the year ended September 30, 2000 of $2.2
million was generated primarily by $1.9 million in gains associated with the
sale of AMCON's interest in a condominium and resolution of an intellectual
property matter involving a trademark. Sale of fixed assets and marketable
securities, royalty payments and dividends received on investment securities
were also included in other income. Other income for the year ended
September 30, 1999 of $72,000 was generated from similar activities.
The effective tax rate was 35% in fiscal 2000, compared to
38% in fiscal 1999. The decrease was attributable to release of tax reserves
that were previously recorded and are no longer required due to expiration
of the related statute or favorable tax audit determination.
As a result of the above factors, income from continuing
operations for the year ended September 30, 2000 was $4,310,994 compared to
$4,121,788 for fiscal 1999.
The distribution industry is in a state of consolidation
as intense competition and pressure on profit margins continue to affect
both large and small distributors. The retail natural foods industry is
highly fragmented, with more than 9,000 stores operated independently or as
part of small chains. The two leading natural food chains continue to expand
their geographic markets and acquire smaller independent competitors. In
addition, conventional supermarkets and mass market outlets have also begun
to increase their emphasis on the sale of natural products. This business
climate subjects operating income to a number of factors which are beyond
the control of management, such as competing retail stores opening in close
proximity to AMCON's retail stores and manufacturers' changing prices and
promotional programs.
71
While AMCON sells a diversified product line, it remains
dependent on cigarette sales which represented approximately 70% of its
revenue and 41% of its gross margin in fiscal 2000. Changes in
manufacturers' cigarette pricing affects the market for generic and private
label cigarettes and net income is heavily dependent upon sales of AMCON's
private label cigarettes and volume discounts received from manufacturers in
connection with such sales. AMCON continuously evaluates steps it may take
to improve net income in future periods, including further acquisitions of
other distributing companies and retail stores in similar business lines and
further sales of assets that are no longer essential to its primary business
activities such as investments in equity securities.
Investments in equity securities at September 30, 2000 and
1999 consisted primarily of 70,000 and 83,000 shares, respectively, of
Consolidated Water Company Limited ("CWC,"), a public company which is
listed on NASDAQ. The Company's basis in the securities was $127,000 and
$151,000, and the fair market value of the securities was $499,000 and
$540,000 on September 30, 2000 and September 30, 1999, respectively. The
unrealized gain on CWC shares was approximately $372,000 and $389,000 on
September 30, 2000 and 1999, respectively. The fair market value of the CWC
shares on December 15, 2000 was $485,800.
Year Ended September 30, 1999 Versus Year Ended September
30, 1998. Sales for the year ended September 30, 1999 increased 30% to
$342.9 million, compared to $263.1 million for the year ended September 30,
1998. Sales from the traditional distribution business through September 30,
1999 were $72.8 million over the prior year. Component increases were as
follows. Cigarette sales increased approximately $65.5 million over the
prior year, approximately 61% of which was due to price increases over the
past 12 months and the balance was due to increased volume. Sales of
non-cigarette products increased by $7.3 million primarily due to increased
volume. New sales generated by the retail health food stores acquired during
fiscal 1999 totaled $7.0 million. Chamberlin's Natural Foods, acquired on
March 29, 1999, contributed $6.4 million of new sales and Health Food
Associates, Inc., acquired on September 15, 1999, contributed $569,000 of
new sales.
Gross profit increased 33.0% to $31.8 million for the year
ended September 30, 1999 compared to $23.9 million for the prior fiscal
year. Gross profit as a percent of sales increased to 9.3% for the period
compared to 9.1% for the year ended September 30, 1998. The increases in
gross profit and gross profit percentage were primarily attributable to a
substantial cigarette price increase during the first quarter of the year
which resulted from a settlement that was reached between the major tobacco
manufacturers and the various states that had filed liability suits against
the industry. This nonrecurring price increase accounted for approximately
$4.2 million in gross margin for the year ended September 30, 1999 versus
$1.5 million in the prior year. Gross margin from AMCON's distribution
businesses increased by $4.4 million due to increases in volume. In
addition, gross profit generated by the retail businesses, Chamberlin's
Natural Foods and Health Foods Associates, which were acquired during fiscal
1999, was $2.8 million greater than the prior year. These increases in gross
profit were partially offset by a $2.0 million LIFO inventory adjustment
during the second, third and fourth quarters.
For the year ended September 30, 1999, total operating
expense, which includes selling, general and administrative expenses,
depreciation and amortization, increased 25.4% to $23.9 million compared to
fiscal 1998. The increase was partially due to expenses attributable to
Chamberlin's Natural Foods and Health Food Associates which were acquired
during fiscal 1999. These subsidiaries accounted for $2.7 million of the
increase in operating expenses. The remaining increase in operating expenses
was due to additional expenses incurred by AMCON's distribution business to
support increased volume for the year. As a percentage of sales, total
operating expense decreased to 7.0% from 7.3% during the same period in the
prior year. This decrease was primarily due to increases in cigarette sales
in the traditional distribution business without a corresponding increase in
expenses.
72
As a result of the above, income from operations for the
fiscal year ended September 30, 1999 increased by $3.1 million to $7.9
million.
Interest expense for the fiscal year ended September 30,
1999 decreased 18.1% to $1.28 million compared to $1.57 million during the
prior year. The decrease was primarily due to a 40 to 80 basis point
reduction in the average borrowing rate during the year ended September 30,
1999 combined with a $1.4 million reduction in the average amount borrowed
by AMCON.
Other income for the year ended September 30, 1999 of
$68,000 was generated by gains associated with the sale of fixed assets,
royalty payments, miscellaneous industry promotional income and dividends
received on investment securities. Other income for the year ended September
30, 1998 of $536,000 was generated from similar activities as well as the
gain associated with the sale of marketable securities.
As a result of the above factors, income from continuing
operations for the fiscal year ended September 30, 1999 was $4,121,788
compared to $2,284,485 for fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended June 30, 2001, cash of $14.0 million
was provided by operating activities primarily through reductions in
inventory (excluding the impact of inventory that was purchased from
Merchants Wholesale, Inc.) and due to increases in accounts payable
resulting from AMCON taking advantage of extended payment terms offered by
manufacturers. Cash of $7.0 million was generated from investing activities
during the nine-month period ended June 30, 2001 primarily due to proceeds
received from the sale of the health food distribution business. Cash of
$36.3 million was used in investing activities to acquire the distribution
business net assets of Merchants Wholesale, Inc., including the Quincy,
Illinois distribution facility previously owned by the sole shareholder of
Merchants Wholesale, Inc. In addition, cash was used to make an additional
investment of $900,000 in notes receivable from Hawaiian Natural, a $300,000
equity investment in Hawaiian Natural and for capital expenditures of
approximately $1.2 million. Cash provided by financing activities includes
$36.3 million in proceeds from the new credit facility and the new term debt
to fund the acquisition of the distribution business and net assets of
Merchants Wholesale, Inc. and the Quincy, Illinois distribution facility,
respectively. Cash was used in financing activities for payment of dividends
to stockholders.
During the fiscal year ended September 30, 2000, AMCON utilized
cash flow in operating activities to finance increases in inventory in the
traditional distribution business for operational and tax planning purposes.
Cash was utilized in investing activities during the fiscal year to purchase
the common stock of TINK, Inc. in August 2000 for $905,000 and to invest in
Hawaiian Natural by providing $350,000 of financing in September 2000. Cash
was provided from investing activities through settlement of an intellectual
property matter and the sale of AMCON's condominium in April 2000. Cash was
provided by financing activities through increases in AMCON's revolving
credit facility of $4.2 million to finance the purchase of additional
inventory. In addition, cash was utilized to repay $1.0 million in term debt
related to the acquisition of Food For Health Co., Inc. in fiscal 1998 and
$800,000 of subordinated debt related to the acquisition of Health Food
Associates, Inc. in fiscal 1999. Cash of $372,000 was also used to pay
dividends to common shareholders.
AMCON makes capital expenditures primarily for equipment for its
distribution facilities including computers, delivery vehicles and warehouse
equipment and for remodeling of existing retail health food stores. AMCON
has historically financed its working capital requirements with a
combination of internally generated funds and bank borrowings. Cash used in
operations approximated $4.0 million in fiscal 2000. Cash provided by
operating activities approximated $2.4 million in fiscal 1999. Capital
expenditures during those periods equaled approximately $959,000 and
$508,000, respectively. Any remaining cash provided by operations is applied
to debt service.
73
AMCON had working capital of approximately $38.9 million as of June
30, 2001 compared to $27.0 million as of September 30, 2000. AMCON's debt to
equity ratio was 5.69 at June 30, 2001 compared to 3.33 at September 30,
2000.
On June 1, 2001 AMCON amended its revolving credit facility (the
"Facility") with LaSalle Bank to increase the Facility from $25.0 million
to $55.0 million in order to purchase the distribution business and net
assets of Merchants Wholesale, Inc. Borrowings under the Facility are based
on eligible accounts receivable and inventory requirements. The new Facility
bears interest at the bank's base rate ("Prime") or LIBOR plus 1.75%, as
selected by AMCON. In addition, AMCON is required to pay an unused fee equal
to .25% per annum on the difference between the maximum loan limit and the
average borrowing for the month. The Facility is collateralized by all
equipment, all intangibles, inventories, and accounts receivable. Debt
issuance costs relating to the amendment of the Facility were $300,000.
The Facility contains covenants which, among other things, set
certain financial ratios and net worth requirements. The Facility includes
covenants that (i) restrict the permitted investments, (ii) restrict
intercompany advances to Hawaiian Natural to a maximum of $2.0 million,
(iii) restrict incurrence of additional debt, (iv) restrict mergers and
acquisitions and changes in business or conduct of business and (v) require
the maintenance of certain financial ratios and net worth levels including
an average annual fixed charge ratio of 1.1 to 1.0, and average annual debt
service coverage ratio of 1.5 to 1.0, ratio of average annual senior debt to
earnings before interest, taxes depreciation and amortization of 6.0 to 1.0,
and a minimum tangible net worth of $7,000,000. In addition, AMCON must
maintain a fill rate percentage of not less than 93% calculated on a weekly
basis. The fill rate percentage is determined by dividing the total dollar
amount of inventory delivered to AMCON's customers each week into the total
amount of orders which correspond to such deliveries. The Facility also
provides that AMCON may not pay dividends in excess of $.12 per share on an
annual basis. As of June 30, 2001 the outstanding balance on the Facility
was $39,944,986.
In connection with the purchase of the distribution business and
net assets of Merchants Wholesale, Inc., AMCON assumed Merchants Wholesale,
Inc.'s interest rate swap agreement with a bank. Under the agreement, AMCON
agrees to exchange, at specified intervals, fixed interest amounts for
variable interest amounts calculated by reference to an agreed-upon notional
principal amount of $25,000,000. The interest rate swap effectively converts
$25,000,000 of AMCON's variable-rate senior debt to fixed-rate debt (before
accounting for the impact of the change in market value of the interest rate
swap derivative financial instrument) at a rate of 8.33%, through the
maturity of the swap agreement on May 27, 2003.
AMCON borrowed $6.9 million from a bank to purchase the
distribution facility utilized by Merchants Wholesale, Inc., which was owned
by Merchants sole stockholder (the "Real Estate Loan"). Proceeds from the
Real Estate Loan were also used to retire term debt. The Real Estate Loan
bears interest at a fixed rate of 7.5% with monthly installments of
principal and interest in the amount of $56,531 per month. Debt issuance
costs related to the Real Estate Loan were $37,000. The loan has a term of 5
years, at which time the remaining balance will be due and payable, and is
collateralized by the purchased distribution facility. As of June 30, 2001,
the outstanding balance on the Real Estate Loan was $6,948,417.
The asset purchase agreement with Merchants Wholesale, Inc.
provides for deferred payments to be made to the seller totaling $4,550,000.
The obligations are subordinate to the Facility and the Real Estate Loan.
AMCON paid $1,000,000 on the closing date of the transaction, while the
remaining $3,550,000 is required to be paid on the first, second, third and
fourth anniversaries of the closing date of the transaction in installments
of $900,000 on each of the first three anniversary dates with a final
payment of $850,000 on the fourth anniversary of the closing date. In
addition, AMCON entered into a noncompetition agreement with the seller that
requires AMCON to make payments of $100,000 annually
74
on the first through fourth anniversary dates of the closing of the
transaction. AMCON has recorded the seller obligations at their fair values
utilizing a 6% effective interest rate which was determined based on AMCON's
approximate average borrowing rate. As of June 30, 2001, the outstanding
obligation to the seller was $3,425,495.
AMCON maintained a second revolving credit facility used to provide
capital to the health and natural foods distribution business and a term
loan from a bank used to finance the purchase of a Florida health and
natural foods distributor in November 1998. The revolving credit facility
and the term loan were repaid in full during the third quarter of fiscal
2001 with proceeds received from the sale of the assets of the health and
natural foods distribution business during that quarter.
AMCON had an outstanding term loan from a bank that was used to
finance the purchase of the common stock of Food For Health Co., Inc. (the
"Acquisition Loan") in 1997. The Acquisition Loan was repaid in full during
the third quarter of 2001 with proceeds received from the sale of the assets
of the health and natural foods distribution business during that quarter.
In September 1999, borrowings under an 8% Convertible Subordinated
Note (the "Convertible Note") and a Collateralized Promissory Note (the
"Collateralized Note"), in addition to borrowings under the revolving credit
facility were used to purchase all of the common stock of Health Food
Associates, Inc. Both the Convertible Note and the Collateralized Note have
five-year terms and bear interest at 8% per annum. Principal on the
Convertible Note is due in a single payment at maturity. Principal on the
Collateralized Note is payable in installments of $800,000 per year with the
balance due at maturity. The Collateralized Note is collateralized by a
pledge of the stock of Health Food Associates, Inc. The principal balance of
the Convertible Note may be converted into stock of Food For Health Co.,
Inc. under circumstances set forth in the Convertible Note. As of June 30,
2001, the outstanding balances of the Convertible Note and the
Collateralized Note were $2.0 million and $7.2 million, respectively.
In November 1999, borrowings under a $220,000 subordinated note
(the "MDF Note") were used to purchase the assets of MDF Health, Inc.
("MDF"). The MDF Note has a term of 3 years and bears interest at 8% per
annum. Principal and interest payments are due monthly. As of June 30, 2001,
the outstanding balance of the MDF Note was $75,236.
In August 2000, borrowings of $600,000 under the revolving credit
facility were utilized, in addition to $300,000 under a subordinated note
(the "TINK Note"), to purchase all of the outstanding common stock of TINK,
Inc. The TINK Note has a term of 5 years and bears interest at 7% per annum.
Interest payments are due monthly with annual principal payments ranging
from $40,000 to $80,000. As of June 30, 2001, the outstanding balance of the
TINK Note was $260,000.
In June 2001, AMCON negotiated a $2.0 million credit facility with
a bank to be used to fund the operations, expansion and remodeling of its
retail health food stores (the "Retail Facility"). The Retail Facility bears
interest at the bank's base rate ("Prime") plus 1.0%. The Retail Facility is
secured by all of the inventory of the retail stores and is guaranteed by
AMCON. The outstanding balance of the Retail Facility on June 30, 2001 was
$600,000.
In connection with the purchase of the distribution business and
net assets of Merchants Wholesale, Inc., AMCON assumed several capital
leases for office equipment, automobiles and warehouse equipment. The
interest rates on the capital leases vary from 8% to 16.3%. As of June 30,
2001, the outstanding balances on the capital leases totaled $1,113,657.
AMCON has entered into a new lease for a distribution facility in
Omaha, Nebraska, which will become effective in the 3rd quarter of fiscal
2002 when the lease on its current Omaha, Nebraska distribution facility
expires. Although no commitments have been made as of June 30, 2001, AMCON
75
expects capital expenditures relating to equipment purchases and office build
out to be approximately $1.2 million. It is anticipated that the source of
funds needed to complete these expenditures will be provided by a combination
of leasing and funding through AMCON's revolving line of credit.
AMCON believes that funds generated from operations, supplemented
as necessary with funds available under the Facility, will provide
sufficient liquidity to cover its debt service and any reasonably
foreseeable future working capital and capital expenditure requirements
associated with existing operations.
ACQUISITIONS AND DISPOSITIONS
Health Food Distribution Business. Effective March 23,
2001, AMCON's subsidiary, The Healthy Edge, Inc. (formerly Food For Health
Co., Inc.), completed the sale of the assets of its health food distribution
business for $10.3 million, subject to certain adjustments. The purchase
price was paid in cash and the assumption by the purchaser of approximately
$2.1 million in indebtedness. The sale resulted in a pre-tax loss of
approximately $1.1 million ($675,000 after taxes). This loss includes an
accrual for estimated costs, including rent and related expenses associated
with the remaining lease commitments on the two distribution facilities that
were retained by AMCON of $2.5 million and contractual consulting agreements
of $445,000, which will provide no future economic benefit to AMCON. AMCON
is actively seeking tenants to sublease the facilities for the remainder of
the lease terms. Any differences between these expense estimates and their
actual settlement will change the loss accordingly. In connection with the
sale of the health food distribution business, AMCON also entered into a 5
year supply agreement with the purchaser under which the purchaser will
supply products to AMCON's retail health food stores at market prices.
The sale of AMCON's health food distribution business has
been reflected as discontinued operations in the unaudited condensed
consolidated financial statements in accordance with APB No. 30. Revenues
from the discontinued operations, which have been excluded from income from
continuing operations in the accompanying unaudited condensed consolidated
statements of operations for the three and nine-month periods ended June 30,
2001 and 2000, are presented below. The effects of the discontinued
operations on net income (loss) and per share data are reflected within the
accompanying unaudited condensed consolidated statements of operations.
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenue $ -- $9,933,329 $13,704,844 $33,541,133
Merchants Wholesale, Inc. On June 1, 2001, AMCON completed
the acquisition of substantially all of the distribution business and net
assets of Merchants Wholesale, Inc. ("Merchants") located in Quincy,
Illinois. In addition, AMCON purchased a 206,000 square foot building
occupied by Merchants and owned by Merchants' sole shareholder. The net
purchase price of $36.7 million, net of assumed liabilities of $6.0 million,
was based on assets held at the closing date, including the real estate.
Funding for the acquisition was provided as follows: $27.0 million through
borrowings under AMCON's $55.0 million revolving credit facility with LaSalle
Bank (the "Facility"); $6.3 million through a real estate loan with Gold Bank
(the "Real Estate Loan"); and $3.4 million of deferred payments to the sole
stockholder of Merchants. Costs and expenses associated with the acquisition
were paid from AMCON's Revolving Loan proceeds. The Revolving Loan is
secured by all of AMCON's assets, excluding real estate. The Real Estate
Loan is secured by AMCON's two owned distribution facilities.
The transaction was accounted for using the purchase
method of accounting under which the purchase price was allocated to the
assets acquired and liabilities assumed based on their estimated
76
fair values. The portion of the purchase price in excess of the fair value
of the net assets acquired to be allocated to goodwill and other
identifiable assets is currently estimated to be approximately $4.1 million
and $0.3 million, respectively. The goodwill is currently being amortized
over 25 years, while the identifiable intangible asset, represented by a
noncompete agreement with the sole shareholder of Merchants, is being
amortized over the period covered by the agreement of four years. On October
1, 2001, AMCON intends to early adopt the guidance under the newly issued
Statement of Financial Accounting Standards No. 142 and the remaining
unamortized goodwill asset will no longer be amortized. The carrying value
of the goodwill will then be reviewed for impairment and written down and
charged to the results of operations if and when the impairment recognition
criteria are met and the recorded value of the asset exceeds its measured
fair value. It is AMCON's intention to more fully evaluate the fair value,
classification and useful lives of the acquired net assets, including the
intangible assets, and, as a result, the final allocation of the purchase
price to the intangible assets acquired may ultimately differ from that
recorded as of June 30, 2001. AMCON intends to have the evaluation of fair
value, and therefrom, the purchase price allocation completed by September
30, 2001.
Hawaiian Natural Water Company. The proposed acquisition
of Hawaiian Natural is described above.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In connection with the purchase of the distribution business and
net assets of Merchants Wholesale, Inc., AMCON assumed Merchants' interest
rate swap agreement with a bank. Under the agreement, AMCON agrees to
exchange, at specified intervals, fixed interest amounts for variable
interest amounts calculated by reference to an agreed-upon notional
principal amount of $25,000,000. The interest rate swap effectively converts
$25,000,000 of AMCON's variable-rate senior debt to fixed-rate debt (before
accounting for the impact of the change in market value of the interest rate
swap derivative financial instrument) at a rate of 8.33%, through the
maturity of the swap agreement on May 27, 2003.
Due to the significant decline in variable interest rates from the
date Merchants initially entered into the swap agreement, the negative fair
value of the swap instrument recorded as a liability on Merchant's balance
sheet at the closing date was $931,824. Upon assuming the swap liability,
AMCON did not designate the swap transaction as a hedge and, therefore,
recognized changes in the market value of the instrument in current earnings
(interest expense). At June 30, 2001, the swap instrument had a market value
of $893,834. The change in fair value of the swap instrument from a negative
market value of $931,824 as of the acquisition date to a negative market
value of $893,834 at June 30, 2001 was recorded as a reduction to interest
expense in AMCON's three and nine months ended June 20, 2001.
AMCON does not utilize financial instruments for trading purposes
and holds no derivative financial instruments other than the interest rate
swap which could expose AMCON to significant market risk. AMCON's exposure
to market risk relates primarily to its investment in the common stock of
Consolidated Water Company, a public company traded on the NASDAQ National
Market system, the equity investment in the common stock of Hawaiian
Natural, which is traded over-the-counter, and for changes in interest rates
on the portion of its long-term obligations in excess of the notional amount
of the $25 million swap transaction. At June 30, 2001, AMCON held 70,000
shares of common stock of Consolidated Water Company valued at $637,000.
AMCON values this investment at market and records price fluctuations in
equity as unrealized gain or loss on investments. AMCON also holds 750,000
shares of Hawaiian Natural which is recorded using the equity method of
accounting carried at $262,000 at June 30, 2001. At June 30, 2001, AMCON had
$15.5 million of variable rate debt outstanding, with maturities through May
2004. The interest rates on this debt ranged from 5.75% to 7.75% at June 30,
2001. AMCON has the ability to select the bases on which its variable
interest rates are calculated and may select an interest rate based on its
lender's base interest rate or based on LIBOR. This provides management with
some control of AMCON's variable interest rate risk. AMCON estimates that its
77
annual cash flow exposure relating to interest rate risk based on its
current borrowings is approximately $97,000 for each 1% change in its
lender's prime interest rate or LIBOR, as applicable.
AMCON is also exposed to market risk through its investment in
$750,000 of secured convertible notes, and a $379,000 secured
nonconvertible note, receivable from Hawaiian Natural. The secured
convertible notes are recorded at amortized cost, accrue interest at 10% per
annum and mature on December 31, 2001. The secured nonconvertible note is
recorded at amortized cost, accrues interest at 8% per annum and matures on
December 31, 2001. The secured convertible notes are convertible into
Hawaiian Natural common stock or, in certain circumstances, into Series C
Preferred Stock of Hawaiian Natural. Increases in market interest rates and
in stock price could increase the likelihood that such notes would be
converted into common stock. Alternatively, decreases in market interest
rates and Hawaiian Natural's stock price could decrease the likelihood of
conversion into common stock. Likewise, market changes in Hawaiian Natural's
stock price and interest rates impact the fair value of the secured
convertible note receivable.
INFORMATION ABOUT HAWAIIAN NATURAL
DESCRIPTION OF BUSINESS
GENERAL
Hawaiian Natural Water Company, Inc. produces and sells bottled
water under the "Hawaiian Springs,(TM)" and "Ali'i" names and a line of
herbal beverages under the "East Meets West XEN(TM)" name.
Hawaiian Natural's Hawaiian Springs(TM) brand is the only bottled
"natural" water available from Hawaii. All other bottled waters produced in
Hawaii contain "purified" water, from which chemicals and minerals have been
removed by means of reverse osmosis filtration. Hawaiian Natural draws its
Hawaiian Springs(TM) water from a well located at the base of the Mauna Loa
mountain in Kea'au (near Hilo) on the Big Island of Hawaii. The water is
"bottled at the source" in polyethylene terepthalate ("PET") plastic
bottles, which are manufactured at Hawaiian Natural's bottling facility. PET
products under the Ali'i name are bottled at the same facility, using
purified water.
Hawaiian Natural was incorporated in Hawaii in September 1994, and
began commercial operations in February 1995. From inception until mid-1999,
Hawaiian Natural was involved exclusively in the sale of retail premium PET
products under the Hawaiian Springs(TM) name (bottles of two liters or less
are considered premium). In June 1999, Hawaiian Natural entered the home and
office delivery market through the acquisition of Ali'i Water Bottling Co.,
Inc. ("Ali'i"), a bottler of purified water under the Ali'i name. The
operations of Ali'i consisted of a home and office delivery business on the
Big Island of Hawaii and a line of PET products sold through retail channels
in the Hawaiian Islands. Upon completion of the acquisition, Hawaiian
Natural consolidated Ali'i's PET bottling operations into its bottling
facility in Kea'au. In March 2000, Hawaiian Natural expanded its home and
office delivery business through the acquisition of Aloha Water Company,
Inc. ("Aloha"), a major distributor of purified water under the Aloha name
to the home and office market in the greater Honolulu area. Due to financial
constraints at the time, Hawaiian Natural failed to make required monthly
interest payments aggregating approximately $17,000 to the holders of the
Aloha notes that had been issued in that acquisition. This acquisition was
rescinded in December 2000. See Note 4 to Hawaiian Natural's financial
statements.
In January 2000, Hawaiian Natural expanded its product line beyond
the water category through the introduction of a line of herbal beverages
under the East Meets West XEN(TM) name. This beverage line consisted of six
natural juice flavors containing concentrated herbal extracts. Packaging
featured unique oriental style graphics. The product was manufactured for
Hawaiian Natural pursuant to a co-packing agreement with a Los Angeles area
bottler. Limited initial sales efforts were concentrated on
78
Southern California, Hawaii and Vancouver, Canada. Following the launch of
this product line, it became apparent that Hawaiian Natural's financial
resources were insufficient to support an adequate marketing effort with
respect to major retail channels. In addition, because the sweetener for
this product was determined to contain genetically modified corn fructose,
the beverages were unable to qualify as "all-natural" and therefore were not
accepted for sale through major health food channels. Initial sales were
therefore much lower than originally anticipated. As a result, Hawaiian
Natural ceased manufacturing this product line in the Spring of 2001.
Current marketing activities are limited to the sale of inventory on hand.
Hawaiian Natural is considering a relaunch of the product line after
completion of the merger, depending upon the interest and support of AMCON.
It is expected that revisions to the product line would include
reformulating the sweetener and possible modifications to the existing
labels.
Approximately 76% of Hawaiian Natural's revenues for 2000 were
attributable to the sale of PET products; the remaining revenues were
derived from the sale of home and office delivery products (16%) and the
sale of East Meets West XEN products (8%). Approximately 91% of Hawaiian
Natural's PET sales were generated in Hawaii, approximately 6% on the U.S.
Mainland, and approximately 3% in international markets (principally Guam,
Saipan and Japan).
THE BOTTLED WATER MARKET
Since the mid-1970's the bottled water market has experienced
substantial growth in the United States and most of the industrialized
world. Concerns about municipal water quality combined with increased health
awareness and the availability of light weight convenient packaging, such as
plastic bottles, have fueled bottled water consumption in the United States
and other industrialized nations. The bottled water market in the United
States has grown from approximately 317 million gallons in 1976 to
approximately 4.25 billion gallons in 1999. Currently, bottled water is one
of the fastest growing segments of the beverage industry worldwide.
The bottled water market is generally divided into two principal
segments: (i) retail and (ii) home and office delivery. In the retail
segment, water is bottled at the manufacturer's bottling plant, packed into
cases and sold through a distribution network to retail outlets for resale
to consumers. Retail product is often distinguished by type of water (e.g.,
sparkling versus non-sparkling) and by type of bottle (e.g., PET versus
glass). For several years, the fastest growing market within the retail
segment has been the non-sparkling premium PET market (bottles of two liters
or less are considered premium). This category has grown from approximately
230 million gallons nationwide in 1992 to approximately 1.3 billion gallons
in 1999, with a compound annual growth rate of over 25%. Hawaiian Natural
estimates the total retail market in Hawaii at approximately 5.8 million
gallons (1,600,000 cases) per year and believes that sales of PET products
continue to grow at a rapid pace. The cost of the bottle is typically the
largest cost component in the manufacture of retail product, since a new
bottle must be used for each unit of production. Empty bottles are not
intended to be refilled and are not returned to the manufacturer.
Competition in the retail market is regional, national and international in
scope. Some of the best known brands, such as "Evian" and "Crystal Geyser,"
are shipped from a local bottling source for sale throughout the world.
In the home and office delivery segment, water is bottled at the
manufacturer's bottling plant in large (typically five gallon) bottles and
delivered to the customer. The manufacturer services the customer on a
periodic (typically weekly) basis by picking up empty bottles and replacing
them with full ones. The empty bottles are returned to the bottling facility
for refilling. The bottles are typically made of a hard, durable plastic
designed for reuse at least 20 times. As a result, the cost of the bottle is
a relatively small component in the cost of the finished product.
Competition in the home and office market is inherently local, since the
size and weight of the product and the need to service customers on a
continuing basis require the manufacturer to be located within reasonable
proximity to customers. Office
79
accounts often require servicing large numbers of employees at a single
location, and therefore typically involve larger or more frequent deliveries
than home accounts.
HAWAIIAN NATURAL'S NATURAL WATER SOURCE
Hawaiian Natural draws its natural water from a well at the base of
the Mauna Loa mountain range in Kea'au (near Hilo) on the Big Island of
Hawaii. The southeastern slopes of Mauna Loa, above Kea'au, are among the
wettest places on earth, experiencing up to 225 inches of rainfall annually.
Rainfall filters through the porous lava rock of the mountainside forming
large underground reservoirs and aquifers that flow back into the ocean.
This constant movement maintains the purity of the source and also accounts
for the low mineral content of the water, which gives it its distinctively
light or "young" taste.
Hawaiian Natural's well is drilled to a depth of approximately 250
feet. The source is continuously recharged from rainwater at this level.
Water is pumped from the well at the rate of approximately 250 gallons per
minute. This water flow is more than adequate to satisfy Hawaiian Natural's
maximum production capacity. The flow rate could be expanded, if desired,
through the use of stronger pumping equipment. In 1998, Hawaiian Natural
replaced its pumping equipment and refurbished its well shaft through the
installation of new stainless steel casing.
BOTTLING OPERATIONS
Hawaiian Natural currently has bottling facilities at two
locations, one for retail PET production, located adjacent to its well at
Kea'au, and one for home and office delivery, serving the Big Island.
Hawaiian Natural's East Meets West XEN(TM) line is manufactured by an
independent Los Angeles area bottler pursuant to a co-packing agreement.
PET Operations. All of Hawaiian Natural's retail PET products are
bottled at its facility in Kea'au. These products consist of the Hawaiian
Springs(TM) natural water line, the Ali'i purified water line and various
limited production co-labeled products.
Hawaiian Natural's PET bottling operations consist of three
processes: bottle manufacturing, filling and packing. Hawaiian Natural
currently manufactures all of its own PET bottles, utilizing blow molding
equipment installed at their bottling facility in Kea'au. This equipment has
a normal annual capacity of approximately 18 million bottles. Hawaiian
Natural purchased the equipment in September 1997, for an aggregate of $1.2
million, payable in installments over five years. See Note 6 to Hawaiian
Natural's financial statements. In March 1999, Hawaiian Natural purchased
additional blow molding and bottling equipment for the production of its 5
liter product (see below). This equipment is installed as a separate
bottling line at the Kea'au bottling facility. Hawaiian Natural has recently
ordered new blow molding and related equipment which is expected to be fully
operational by February 2002. This high speed equipment will add up to 2.5
million cases of annual bottling capacity. This equipment has been leased in
AMCON's name. Hawaiian Natural expects to lease this equipment from AMCON on
terms similar to those of AMCON's lease.
Bottles manufactured by Hawaiian Natural can either be fed directly
onto the bottling line or stored for later use. Hawaiian Natural's bottling
line is a fully automated conveyor system which moves the bottles through
continuous stages of production: rinsing, filling, labeling and capping.
Finished bottles are date stamped and conveyed into the packing room, where
they are packed by machine into cardboard cases and placed onto pallets for
immediate shipment or storage.
Most of Hawaiian Natural's PET product is sold in standard sizes of
0.33, 0.5, 1.0 and 1.5 liters. All sizes come with tamper-proof caps. Sports
caps are also available on 1.0 liter bottles. Since the fall of 1999,
Hawaiian Natural has also offered its Hawaiian Springs(TM) brand in a 5
liter PET
80
bottle. Hawaiian Natural believes that it is the only bottler in the United
States offering water in this package. Sales of 5 liter product to date have
been strong, and Hawaiian Natural foresees growing demand for this product
in the future.
Home and Office Delivery. Hawaiian Natural has a home and office
bottling facility in Kailua-Kona, serving customers on the Big Island. This
facility which produces water under the Ali'i name, was acquired in June
1999 in connection with the acquisition of the business and operating assets
of Ali'i. Hawaiian Natural draws its water for this facility from municipal
water sources. The water is then "purified" through reverse osmosis
filtration. Hawaiian Natural's automated bottling lines clean, fill and cap
the bottles. Most of daily production is placed onto delivery vehicles for
immediate delivery. Hawaiian Natural usually keeps only a few days of
finished goods in inventory, which are stored at the bottling facility.
Product is sold in both 3 and 5 gallon sizes. The most common size in the
industry is 5 gallons.
In addition to water, Hawaiian Natural also provides coolers or
other dispensing equipment to its customers. This equipment may either be
purchased or rented for a monthly fee. Hawaiian Natural owns substantially
all of the equipment and delivery vehicles used in its home and office
operations. The facility is occupied pursuant to a lease. See "Description
of Property." All of Hawaiian Natural's deliverymen are Hawaiian Natural
employees.
DISTRIBUTION
PET Products. Hawaiian Natural distributes its PET products
primarily in Hawaii and to a limited extent on the U.S. Mainland and in
certain international markets (principally Guam, Saipan and Japan). A
majority of Hawaiian Natural's product is sold through retail channels such
as convenience stores and supermarkets, although they also sells through
food service outlets such as restaurants, bars, airlines, hotels and country
clubs. Hawaiian Natural's product is currently distributed on Aloha Air
(Continental flights and flights to Micronesia) and Continental Airlines/Air
Micronesia (flights departing Hawaii and flights departing New York, Houston
and Los Angeles for Hawaii). The product is also sold at the Mauna Lani Golf
Course and other prestigious golf courses on the Big Island of Hawaii, as
well as military commissaries in Hawaii.
Paradise Beverages ("Paradise"), one of Hawaii's largest beverage
wholesalers, acts as Hawaiian Natural's retail distributor throughout
Hawaii. Hawaiian Natural has also appointed several other distributors to
cover food service markets in Hawaii not normally covered by Paradise. In
addition, Hawaiian Natural has entered into broker agreements in Hawaii to
support the sales efforts of their distributors. Sales in Hawaii accounted
for approximately 91% of Hawaiian Natural's PET revenue during 2000.
Sales to the U.S. Mainland accounted for approximately 6% of
Hawaiian Natural's PET revenue during 2000. Hawaiian Natural's primary
marketing efforts on the U.S. Mainland are directed toward niche markets,
with special emphasis on the specialty and natural food markets. Hawaiian
Natural believes that demand for its product is enhanced in these markets
due to consumer focus on quality and willingness to pay a premium for
products perceived as superior. An additional niche market being cultivated
by Hawaiian Natural is the health and fitness club market.
Hawaiian Natural's largest international markets are currently
Guam, Saipan, and Japan. In Guam and Saipan, Hawaiian Natural's bottled
water is sold and marketed through Pacific Gift Supply, an established
importer and distributor. In Japan, Hawaiian Natural's products are being
distributed by CFC Japan Corporation. International sales accounted for
approximately 3% of Hawaiian Natural's PET revenue in 2000.
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MARKETING
PET Products. Hawaiian Natural's marketing program for its PET
products concentrates on selling efforts by its distributors and brokers as
well as attendance at trade shows and events. In Hawaii, Hawaiian Natural
has promoted its product through sales to airlines, hotels, country clubs
and other such customers which enhances the visibility of Hawaiian Natural's
product.
On the U.S. Mainland, substantial marketing and promotional
expenditures are typically required in order to obtain widespread
distribution through the largest retail outlets, such as supermarkets.
Supermarkets, especially in California, typically charge entry or "slotting
fees" in exchange for introducing new and untested products. Even after a
successful introduction, continuing expenditures for in-store promotions and
coupon programs are generally required in order to maintain shelf space for
these products. Such promotional programs often need to be supported by
widespread marketing campaigns (e.g. television, radio or print advertising)
which can be very costly. Hawaiian Natural has lacked the financial
resources required to maintain such a mass marketing campaign. Accordingly,
Hawaiian Natural's marketing strategy for the U.S. Mainland has been
directed toward niche markets, with special emphasis on the specialty and
natural foods markets. Hawaiian Natural is the "official water" of
SPINNING(TM), an indoor cycling exercise program featured in health clubs in
60 countries.
Hawaiian Natural has also entered into marketing contracts with
several celebrities to represent Hawaiian Natural's products in television
and radio appearances. The celebrities have agreed to represent Hawaiian
Natural by appearing on its behalf and using its products at public events,
in print and television advertisements and by wearing clothing with its
product logos. These celebrities include Mario Lopez, actor, Dennis Alexio,
kick boxing champion, and Nani Crockett, female basketball star. Hawaiian
Natural has compensated these celebrities for their services through a small
amount of cash, the grant of stock options and/or free merchandise.
Home and Office Delivery. Marketing efforts in this segment rely
primarily upon customer referrals, display of Hawaiian Natural logos on
delivery vehicles and bottles, advertising in certain mass print media, such
as the Yellow Pages and appearances at trade shows and events. Hawaiian
Natural's home and office delivery business is currently limited to the
Kailua-Kona area of the Big Island.
GOVERNMENTAL REGULATION; QUALITY CONTROL
The bottled water industry is highly regulated both in the United
States and abroad. Various state and Federal regulations, designed to ensure
the quality of the product and the truthfulness of its marketing claims,
require Hawaiian Natural to monitor each aspect of its production process,
including its water source, bottling operations and packaging and labeling
practices. The Environmental Protection Agency requires a yearly analysis of
Hawaiian Natural's water source by a certified laboratory with respect to a
comprehensive list of contaminants (including herbicides, pesticides,
volatile chemicals and trace metals). In addition, the Hawaii Department of
Health requires weekly microbiological testing of Hawaiian Natural's well
water and finished product, as well as monthly inspection of its production
line.
Hawaiian Natural's PET bottling facility has an on-site laboratory,
where samples of its finished product are visually and chemically tested
daily. Hawaiian Natural also utilizes an independent state certified
laboratory to test samples from each production run. In addition, Hawaiian
Natural's production line is subject to constant visual inspection. Hawaiian
Natural believes that it meets or exceeds all applicable regulatory
standards concerning the quality of its water.
Hawaiian Natural is also subject to regulation by the Food and Drug
Administration (the "FDA"), which regulates Hawaiian Natural's packaging and
labeling practices. Separate regulations apply to water and nutraceutical
products. Hawaiian Natural has met all FDA requirements for the labeling of
its water as "natural" and "bottled at the source." "Natural" signifies that
the chemical composition and mineral
82
content of the bottled water are the same as those at the source. This
contrasts with "purified" water from which chemicals and minerals have been
removed by means of reverse osmosis filtration. "Bottled at the source"
signifies that the water is pumped directly from the source to the bottling
facility, thereby eliminating handling and transportation procedures which
might lead to contamination. Hawaiian Natural's Hawaiian Springs(TM)
products have also been certified as Kosher by the Union of Orthodox Jewish
Congregations of America.
In addition to U.S. regulations, Hawaiian Natural must meet the
requirements of foreign regulatory agencies in order to import and sell its
product into other countries. These requirements are generally similar to,
and in certain respects more stringent than, U.S. regulations. Hawaiian
Natural believes that it is in compliance with applicable regulations in all
foreign territories where it currently markets its product.
Failure to meet applicable regulations in U.S. or foreign markets
could lead to costly recalls, loss of certification to market product or,
even in the absence of governmental action, to loss of revenue as a result
of adverse market reaction to negative publicity.
COMPETITION
PET Products. The retail PET water market is highly competitive,
with numerous participants selling products often perceived as generic by
consumers. The principal bases of competition in the industry are price,
brand recognition, water source and packaging. Price competition has become
more pronounced as the industry has matured. Hawaiian Natural seeks to
develop recognition for its Hawaiian Springs(TM) brand based upon its unique
water source. Hawaiian Natural generally prices this product at or slightly
below the price for other premium brands. Competition in the market for
Hawaiian Natural's Ali'i brand is largely based upon price.
Hawaiian Natural sells most of its product in Hawaii but also seeks
to compete on the U.S. Mainland and in certain foreign markets. See
"Distribution." Competition in the PET market is international in scope,
even in Hawaii, where Hawaiian Natural competes primarily with large,
established foreign and domestic companies, as well as local competitors.
The most popular brands of natural water sold in Hawaii include "Dasani,"
"Crystal Geyser," "Arrowhead," "Dannon," "Sparkletts," and "Alhambra" (all
bottled on the U.S. Mainland) and "Evian" (bottled in France), as well as
local brands, such as "Menehune," "Hawaiian Isles" and "Hawaii." All local
bottlers, except Hawaiian Natural, sell "purified" municipal water, not
"natural" or "spring" water. Hawaiian Natural is the only producer of
natural water from Hawaii. Hawaiian Natural believes that it is likely to
remain the only such producer, at least for some time, because of zoning,
water use and other restrictions currently in effect which make development
of a competing natural water source difficult.
Home and Office Delivery. Competition in the home and office
delivery market is inherently local. None of the major national or
international competitors in the PET products market offer home and office
delivery in Hawaii. Competition in the market is generally limited by
island. The largest market is Oahu, where the bulk of Hawaii's population
resides. "Menehune" is currently the largest competitor in this market.
Significant markets also exist on the Big Island, Maui and Kauai. Hawaiian
Natural is currently one of two principal competitors on the Big Island.
EMPLOYEES
Hawaiian Natural has four employees at its executive office in
Pearl City, 32 employees at its PET bottling facility in Kea'au, including
three in Hawaiian Natural's accounting and administrative department which
was relocated from Pearl City in December 2000, and seven employees at its
home and office facility in Kailua-Kona. Hawaiian Natural's employees are
not unionized, and Hawaiian Natural
83
has not experienced any work stoppages or strikes as a result of labor
disputes. Hawaiian Natural considers its relations with its employees to be
satisfactory.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Hawaiian Natural's Common Stock was quoted on the National
Association of Securities Dealers Automated Quotation System ("Nasdaq")
SmallCap Market under the symbol HNWC from May 1997, until October 5, 1999.
Hawaiian Natural's Common Stock was delisted from the Nasdaq SmallCap
Market, effective as of the close of business on October 5,1999. Since
October 6, 1999, Hawaiian Natural's Common Stock has been quoted on the OTC
Bulletin Board. The following table sets forth the high and low bid prices
for Hawaiian Natural's Common Stock during the periods indicated as reported
by Nasdaq, and the OTC Bulletin Board. These prices reflect inter-dealer
prices, without retail mark-ups, mark-downs or commissions, and may not
represent actual transactions:
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HIGH LOW
---- ---
2001:
First Quarter $0.260 $0.135
Second Quarter 0.260 0.210
Third Quarter 0.210 0.200
Fourth Quarter (through 0.2000 0.1300
November 12, 2001)
2000:
First Quarter $1.9375 $.32
Second Quarter 0.96875 0.28125
Third Quarter 0.200 0.180
Fourth Quarter 0.250 0.130
1999:
First Quarter $4.125 $2.250
Second Quarter 3.1875 0.3750
Third Quarter 1.250 0.3750
Fourth Quarter 0.96875 0.27
The closing bid price for Hawaiian Natural's Common Stock, on the
OTC Bulletin Board on November 12, 2001, was $0.13.
Hawaiian Natural had 45 shareholders of record as of April 6, 2001
(which number does not include the number of shareholders whose shares are
held of record by a brokerage house or clearing agency, but does include
such brokerage house or clearing agency as one record holder).
Hawaiian Natural has never paid any dividends on its Common Stock
and does not anticipate paying any such dividends in the foreseeable future.
Hawaiian Natural intends to retain any earnings it may generate in the
foreseeable future to finance the development and expansion of its business.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
the beneficial ownership of Hawaiian Natural's common stock, as of August
31, 2001, by (i) each stockholder who is known by Hawaiian Natural to be the
beneficial owner of more than 5% of Hawaiian Natural's common stock, the
only class of Hawaiian Natural's outstanding voting securities, (ii) each
director and executive officer of Hawaiian Natural who owns any shares of
Common Stock, and (iii) all executive officers and directors as a group.
Except as otherwise indicated, Hawaiian Natural believes that the beneficial
owners of the shares listed below have sole investment and voting power with
respect to such shares, subject to community property laws where applicable.
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS (1) BENEFICIAL OWNERSHIP (2) CLASS
-------------------- ------------------------ ----------
Wilhelm Kuhlmann (3).......................................... 2,432,532 23.4
Spetzgarter Weg 1 (Direct and Indirect)
88662 Uberlingen
Germany
AMCON Distributing Company (4)................................ 4,419,354 38.0
(Direct)
85
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS (1) BENEFICIAL OWNERSHIP (2) CLASS
-------------------- ------------------------ ----------
HSC, Inc. (5)................................................. 424,056
345 Kekuanoa Street (Direct)
Hilo, HI 96721
Richard Henderson (5)......................................... 424,056
c/o HSC, Inc. (Indirect)
345 Kekuanoa Street
Hilo, HI 96721
Marcus Bender (6)............................................. 1,131,298 11.7
(Direct)
Brian Barbata (7)............................................. 369,132 4.0
(Direct and Indirect)
Michael Chagami (8)........................................... 428,556 4.7
(Direct and Indirect)
Raymond M. Riss (9)........................................... 92,500 *
(Direct)
Tate Robinson (10)............................................ 40,000 *
(Direct)
Willard D. Irwin (11)......................................... 70,000 *
(Direct)
--------
All directors and executive officers as a group (7 4,564,018
persons) (12)..............................................
---------------------------------------------------------------
* Less than 1%.
(1) Except as otherwise indicated, the address of each stockholder listed
above is c/o Hawaiian Natural Water Company, Inc., 16-305 Old Volcano
Road, Keaau, Hawaii 96749.
(2) A person is deemed to be the beneficial owner of securities that can
be acquired within 60 days from the date set forth above through the
exercise of any option, warrant or right. Shares of Common Stock
subject to options, warrants or rights that are currently exercisable
or exercisable within 60 days are deemed outstanding for purposes of
computing the percentage ownership of the person holding such
options, warrants or rights, but are not deemed outstanding for
purposes of computing the percentage ownership of any other person.
(3) Includes 550,000 shares and currently exercisable warrants to
purchase 701,200 shares owned by Mr. Kuhlmann directly; 43,000 shares
and currently exercisable warrants to purchase 58,333 shares owned by
Collectibles Trading plc; 470,600 shares and currently exercisable
warrants to purchase 262,733 shares owned by Bond Exam & Deposit
Corp., Ltd; and 180,000 shares and currently exercisable warrants to
purchase 166,666 shares owned by Coltrade (Manx) Ltd. Mr. Kuhlmann
has investment and voting power over the shares and warrants held by
Collectibles Trading plc, Bond Exam & Deposit Corp., Ltd. and
Coltrade (Manx) and therefore may be deemed the beneficial owner of
such securities.
(4) AMCON Distributing Company is the beneficial owner of 4,419,354
shares of Hawaiian Natural's common stock which includes 750,000
shares purchased from Hawaiian Natural in February 2001 and 1,250,000
shares received upon conversion of a $500,000 secured convertible
note issued to AMCON by Hawaiian Natural in June 2001. This total
number of shares also includes approximately 2,419,354 shares of
common stock estimated to be receivable upon the conversion of
$750,000 in aggregate principal amount of secured convertible notes
even though these notes are
86
not currently convertible, are not expected to be converted prior to
the merger and will not participate in the merger consideration.
These notes may be alternatively converted into Series C Convertible
Preferred Stock of Hawaiian Natural upon the earlier to occur of an
event of default of these Notes or termination of the Merger
Agreement. Series C Convertible Stock gives the holder the right to
elect a majority of Hawaiian Natural's directors.
(5) HSC, Inc. ("HSC") is majority owned by Richard Henderson. Mr.
Henderson may be deemed the beneficial owner of the shares held by
HSC. Other than through HSC, Mr. Henderson does not own any Common
Stock of Hawaiian Natural.
(6) Includes currently exercisable warrants to purchase 333,333 shares
and currently exercisable options to purchase 150,000 shares of
common stock held directly by Mr. Bender.
(7) Includes currently exercisable options to purchase 4,500 shares of
common stock held directly by Mr. Barbata.
(8) As a director of HSC, Mr. Chagami shares the power to vote and
dispose of the shares of Common Stock of Hawaiian Natural held by HSC.
Therefore, he may be deemed the beneficial owner of the 424,056
shares held by HSC. Mr. Chagami disclaims beneficial ownership of any
shares of common stock of Hawaiian Natural held by HSC. Also includes
currently exercisable options to purchase 4,500 shares of common
stock held directly by Mr. Chagami.
(9) Mr. Riss holds currently exercisable options to purchase 82,500 shares.
(10) Mr. Robinson holds currently exercisable options to purchase 40,000
shares.
(11) Mr. Irwin holds currently exercisable options to purchase 60,000
shares.
(12) Includes currently exercisable options or warrants to purchase an
aggregate of 1,687,098 shares held by four executive officers and
three non-employee directors of Hawaiian Natural.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended June 30, 2001 Compared to Three Months
Ended June 30, 2000. Net Sales decreased 34% to approximately $779,000 for
the three months ended June 30, 2001 (the "2001 Quarter") from approximately
$1,173,000 for the three months ended June 30, 2000 (the "2000 Quarter").
$674,000 (87%) of net sales for the 2001 Quarter were derived from sales of
PET products. The remaining $105,000 in net sales were comprised of $72,000
(9%) in home and office delivery sales and $33,000 (4%) in East Meets West
XEN(TM) ("XEN") herbal beverage sales. Sales in the 2000 Quarter included an
aggregate of $280,000 in home and office delivery sales by Aloha Water
Company, Inc. ("Aloha"), a home and office delivery business acquired in
March 2000. This acquisition was subsequently rescinded in December 2000
(see Note 7 to Hawaiian Natural's Financial Statements). The absence of
Aloha sales in 2001 accounted for approximately 71% of the decrease in total
Hawaiian Natural sales for the 2001 Quarter compared to the 2000 Quarter.
The balance of the decrease in total sales is primarily attributable to a
$50,000 decrease in XEN sales and a $60,000 decrease in PET sales. Case
sales of PET products in the 2001 Quarter were approximately 116,000
compared to approximately 131,000 in the 2000 Quarter, and XEN case sales
were approximately 1,900 in the 2001 Quarter compared to 4,400 in the 2000
Quarter. The decrease in PET case sales is attributable to periodic
production equipment breakdowns during the 2001 Quarter, and its ongoing
working capital constraints on raw materials, which have resulted in a
backlog of unfilled sales orders, and in certain instances, lost sales. Due
to Hawaiian Natural's limited working capital resources, marketing and
promotion of XEN products was significantly curtailed in the 2001 Quarter.
In July 2001, Hawaiian Natural terminated its XEN sales representative.
Geographic sales of PET products remained constant in both the 2001 Quarter
and the 2000 Quarter, with Hawaii sales and International sales accounting
for 99% and 1% of PET sales, respectively, in both quarters. 99% of XEN
sales were made in the U.S. Mainland and 1% were made in Hawaii in the 2001
Quarter, compared to 69% in the U.S. Mainland, 29% in Hawaii, and 2% in Guam
in the 2000 Quarter.
87
Hawaiian Natural's aggregate cost of sales decreased 34%
to approximately $632,000 in the 2001 Quarter from approximately $956,000 in
the 2000 Quarter. Cost of sales in the 2000 Quarter included $83,000 in cost
of sales of Aloha. Due to the rescission of the Aloha acquisition in
December 2000, there were no Aloha cost of sales in the 2001 Quarter. The
absence of Aloha cost of sales in 2001 represented 26% of the decrease in
total cost of sales during the 2001 Quarter. Cost of sales also decreased in
the 2001 Quarter for PET, XEN and home and office delivery product sales as
a result of a reduction in case sales in each of these product lines during
the 2001 Quarter. Also contributing to the decreased PET cost of sales in
the 2001 Quarter was an approximately 15% decrease in PET per case costs in
the 2001 Quarter compared to the 2000 Quarter, primarily attributable to
reduced packaging costs as a result of a switch to a lower cost carton and
reduced inventory variances.
Selling and marketing expenses decreased 62% to $114,000
in the 2001 Quarter from approximately $296,000 in the 2000 Quarter. The
majority of this decrease is attributable to $57,000 of expenses associated
with the 2000 launch of the XEN product line, and $84,000 of Aloha expenses,
which did not recur in the 2001 Quarter. In addition, there was an
approximately $41,000 reduction in PET expenses (primarily in package
development and licensing fees and royalties, resulting from reduced case
sales in the 2001 Quarter compared to the 2000 Quarter), and a $15,000
reduction in corporate salaries, partially offset by a $15,000 increase in
expenses related to home and office delivery sales.
General and administrative expenses decreased 34% to
approximately $285,000 in the 2001 Quarter from approximately $429,000 in
the 2000 Quarter. This decrease resulted from $94,000 of expenses related to
Aloha in the 2000 Quarter, which did not recur in the 2001 Quarter, and a
reduction in corporate overhead expenses of approximately $52,000 (primarily
due to an approximate $93,000 reduction in salaries, office rents, outside
services, and professional fees, partially offset by $24,000 of customs
duties incurred upon receipt of the new production equipment (see Note 13 to
Hawaiian Natural's Financial Statements), and an approximately $15,000
increase in travel expenses primarily related to Hawaiian Natural's
relocation of its accounting and administrative office from Pearl City
(Oahu) to Keaau (Big Island) in January 2001.
Net Other (Expense) was approximately $(32,000) in the
2001 Quarter compared to approximately $(960,000) in the 2000 Quarter. Other
(Expense) in the 2000 Quarter included a $(903,094) provision for impairment
of purchase price in excess of book value due to the foreclosure on the
Aloha note (see Note 7 to Hawaiian Natural's Financial Statements), which
did not recur in the 2001 Quarter, and decreased interest expense in the
2001 Quarter. Coupon interest expenses on the outstanding notes during the
2001 Quarter and the 2000 Quarter were relatively the same, however Hawaiian
Natural incurred approximately $23,000 of imputed interest expense (based
upon the average cost of capital in comparison to the coupon interest rate
of the note)in the 2000 Quarter related to the Aloha note (see Note 7 to
Hawaiian Natural's Financial Statements).
Due to the foregoing, Hawaiian Natural incurred a net loss
of $(284,560), or $(0.04) per share, in the 2001 Quarter compared to a net
loss of $(1,467,413), or $(0.22) per share, in the 2000 Quarter. Weighted
Average Shares Outstanding were 7,935,982 in the 2001 Quarter compared to
6,800,471 in the 2000 Quarter.
Six Months Ended June 30, 2001 Compared to Six Months
Ended June 30, 2000. Net sales decreased 27% to approximately $1,599,000 for
the six months ended June 30, 2001 (the "2001 First Half") from
approximately $2,198,000 for the six months ended June 30, 2000 (the "2000
First Half"). $1,384,000 (87%) of net sales for the 2001 First Half were
derived from sales of PET products compared to $1,526,000 (69%) of net sales
for the 2000 First Half. The remaining $215,000 in net sales in the 2001
First Half were comprised of $150,000 (9%) in home and office delivery sales
and 65,000 (4%) in XEN sales compared to $446,000 (20%) in home and office
delivery sales (of which Aloha accounted for $280,000 (47%) of the decrease
in total sales) and $226,000 (10%) in XEN sales in the 2000 First Half.
88
Sales in Hawaii accounted for 97% of PET sales in the 2001 First Half
compared to 99% of PET sales in the 2000 First Half. International sales in
the 2001 First Half were 2% of PET sales in the 2001 First Half compared to
1% in the 2000 First Half; and Mainland sales were 1% of PET sales in the
2001 First Half, compared to no Mainland PET sales in the 2000 First Half.
XEN sales decreased $162,000 (71%) during the 2001 First Half compared to
the 2000 First Half, while XEN case sales decreased 64%, from 14,000 in the
2000 First Half to 5,000 in the 2001 First Half. PET case sales in the 2001
First Half sales decreased approximately 23,000 (9%) in the 2001 First Half
to 234,000 from 257,000 in the 2000 First Half. Substantially all of the XEN
sales in the 2001 First Half were made in California and Vancouver, B.C.; in
the 2000 First Half 50% of XEN sales were made in Hawaii and 50% were made
in California. Due to capital constraints, Hawaiian Natural allocated limited
resources to the marketing and promotion of XEN products in the 2001 First
Half. As a result, sales in the 2001 First Half were substantially less than
in the 2000 First Half.
Hawaiian Natural's aggregate cost of sales decreased 22% to
approximately $1,366,000 in the 2001 First Half from approximately
$1,756,000 in the 2000 First Half. Cost of sales in the 2000 Quarter
included $83,000 in costs of sales by Aloha. Due to the rescission of the
Aloha acquisition in December 2000, there were no Aloha cost of sales
incurred in the 2001 First Half. Home and office cost of sales in the 2001
First Half decreased an aggregate of $89,000 compared to the 2000 First
Half. XEN cost of sales decreased $112,000 in the 2001 First Half compared
to the 2000 First Half, primarily due to a 9,000 case reduction in sales in
the 2001 First Half compared to the 2000 First Half. PET product cost of
sales decreased $189,000 in the 2001 First Half compared to the 2000 First
Half, primarily due to (i) a 23,000 reduction in case sales in the 2001
First Half compared to the 2000 First Half, and (ii) an overall reduction in
per case costs primarily attributable to reduced packaging costs as a result
of a switch to a lower cost carton, and reduced inventory variances.
Selling and marketing expenses decreased 55% to
approximately $233,000 in the 2001 First Half from approximately $522,000 in
the 2000 First Half. This decrease occurred in all business segments in the
2001 First Half as compared with the 2000 First Half, with PET related
expenses decreasing 43%, XEN related expenses decreasing 67%, home and
office related expenses decreasing 64% (36% of this decrease is related to
Aloha expenses in the 2000 First Half), and corporate expenses decreasing
36%. Significant decreases occurred in salaries, and consulting and travel
related expenses.
General and administrative expenses decreased 38% to
approximately $567,000 in the 2001 First Half from approximately $922,000 in
the 2000 First Half. This decrease occurred predominantly in corporate
related expenses (a $118,000 decrease), in PET related expenses (a $27,000
decrease) and in XEN related expenses (a $29,000 decrease). In the 2000
First Half a $100,000 bonus was paid to Hawaiian Natural's Chief Executive
Officer, which was subsequently rescinded in December, 2000. There was no
bonus paid in the 2001 First Half. Further expense reductions in the 2001
First Half included salaries ($43,000), professional fees ($53,000), and
office rent ($35,000), partially offset by an increase in travel expenses
associated with moving the accounting and administrative office from Pearl
City (on the island of Oahu) to the plant location in Keaau (on the island
of Hawaii), and one time expenses incurred in the 2001 First Half for
brokers fees associated with sub-letting a portion of the Pearl City office,
and customs duties on the new production equipment (see Note 13 to Financial
Statements). The decrease in professional fees in the 2001 First Half
resulted from a decrease in financing and acquisition transactions during
the 2001 First Half.
Other (Expenses) decreased to approximately ($66,000) in
the 2001 First Half from approximately ($981,000) in the 2000 First Half.
This decrease is primarily due to a provision for impairment of purchase
price in excess of book value due to the foreclosure on the Aloha Stock (see
Note 7 to the Financial Statements) which was recorded in the 2000 First
Half, partially offset by an increase in interest expense associated with
the AMCON notes.
89
Due to the foregoing, Hawaiian Natural incurred a net loss
of $(632,163), or $(0.08) per share, in the 2001 First Half compared to a
net loss of $(1,982,958), or $(0.31) per share, in the 2000 First Half.
Weighted Average Shares Outstanding were 7,807,526 in the 2001 First Half
compared to 6,339,583 in the 2000 First Half.
Year Ended December 31, 2000 Compared to Year Ended
December 31, 1999. Net sales increased 21% to approximately $3,681,000 for
the year ended December 31, 2000 ("2000") from approximately $3,050,000 for
the year ended December 31, 1999 ("1999"). $2,795,000 (76%) of net sales in
2000 were derived from sales of PET products; $598,000 (16%) were derived
from home and office delivery sales, and $288,000 (8%) were derived from
sales of East Meets West XEN the ("XEN") products, which were introduced to
the market in January 2000. The increase in net sales in 2000 was due
primarily to a $450,000 increase in sales of home and office delivery
products and $288,000 in first year sales of XEN products, partially offset
by a $108,000 reduction in net sales of PET products. Home and office
delivery sales for 2000 included $280,000 in sales by Aloha Water Company,
Inc. ("Aloha"), a Honolulu based bottler acquired in March 2000. This
acquisition was subsequently rescinded in December 2000 (see Note 4 to
Hawaiian Natural's financial statements). Aloha sales are therefore
non-recurring. The $170,000 balance of the increase in home and office
delivery sales is attributable to a full year of operations of Ali'i Water
Bottling Co., Inc. ("Ali'i"), a home and office delivery business on the Big
Island, which was acquired in June 1999. PET net sales declined $108,000 in
2000, despite an 8% increase in case sales to approximately 520,000 cases in
2000 from approximately 481,000 cases in 1999. Net sales revenue declined
however, due to an increase in discounts and promotional allowances per
case, resulting in a decline in the average net sales price per case of 12%
in 2000 compared to 1999. Case sales in 2000 were also adversely affected by
intermittent manufacturing equipment breakdowns, which periodically shut
down production during the year. Hawaiian Natural hopes to avoid such
breakdowns in the future through the installation of new manufacturing
equipment. See Note 15 to Hawaiian Natural's financial statements.
Sales in the Hawaiian market accounted for approximately
91% of PET sales in 2000, compared to approximately 88% in 1999. Sales to
the U.S. Mainland accounted for approximately 6% of PET sales in 2000,
compared to approximately 3% in 1999. International sales accounted for
approximately 3% of PET sales in 2000, compared to approximately 9% in 1999.
Upon consummation of the Merger, Hawaiian Natural expects to enter into a
distribution agreement with an affiliate of AMCON for the distribution of
Hawaiian Springs(TM) products on the U.S. Mainland. This distribution
agreement is expected to increase Hawaiian Natural's PET sales to the U.S.
Mainland. Hawaiian Natural believes that the outlook for PET sales in Asia
is still promising but that the development of these markets may take
substantially longer than originally anticipated, given Hawaiian Natural's
limited financial resources and economic conditions in Asia which are
somewhat resistive to the sale of an imported premium priced product.
Hawaiian Natural's primary target markets for the launch of its XEN products
in 2000 were California and Hawaii. Hawaiian Natural plans to continue to
focus its XEN sales and marketing efforts in these two markets. To date,
Hawaiian Natural has allocated very limited resources to the marketing of
this product line. As a result, first year orders were substantially lower
than originally anticipated. After giving effect to the rescission of the
Aloha acquisition (see Note 4 to Hawaiian Natural's financial statements),
Hawaiian Natural's home and office delivery business is currently limited to
the Kailua-Kona area of the Big Island of Hawaii. Given the limited size of
this market, significant growth in home and office delivery sales is not
anticipated. Hawaiian Natural has no current plans to acquire or develop a
home and office delivery business in the Honolulu area.
Hawaiian Natural's aggregate cost of sales increased 21%
in 2000 compared to 1999, while aggregate net sales also increased 21%. The
primary component in PET cost of sales is the production cost of finished
bottles. Indirect manufacturing expenses increased approximately $213,000
(10%) in 2000 compared to 1999, primarily attributable to increased labor,
and manufacturing rejects, repairs, and supplies expenses associated with
bottling equipment breakdowns in July 2000 which
90
resulted in a shutdown of production for one week. These increased expenses
were partially offset by increased production during 2000 compared to 1999.
For 2000, Hawaiian Natural's bottling facility operated at 65% of normal
capacity compared to 60% in 1999. Hawaiian Natural has ordered new high
speed blow molding equipment which will substantially increase the
efficiency of its bottle making operations. This equipment, which is
expected to be fully operational by February 2002, will be leased from AMCON
on terms to be agreed upon, but which are expected to result in significant
improvements to Hawaiian Natural's manufacturing costs. The lease of this
equipment is expected to be accounted for as an operating lease.
Selling and marketing expenses increased 36% to
approximately $900,000 in 2000 from approximately $661,000 in 1999,
primarily attributable to $234,000 of expenses associated with the launch of
the XEN product line and a $158,000 increase in expenses associated with the
home and office delivery operations, offset by a $153,000 reduction in
expenses associated with PET product sales. Hawaiian Natural currently has
one full-time marketing consultant devoted to the sale of XEN products in
California. The increase in home and office delivery business expense is
attributable to a full year of Ali'i operations compared to six months in
1999 ($75,000 of the increase), and the expenses of Aloha ($83,000), which
are not recurring in light of the rescission of the Aloha acquisition in
December 2000. The decrease in expenses associated with PET sales is
attributable to decreases in advertising and promotional expenses, event
activities, travel and consulting expenses.
General and administrative expenses increased 11% to
approximately $1,589,000 in 2000 from approximately $1,436,000 in 1999. The
increase was primarily attributable to $58,000 of expenses associated with
the launch of the XEN product line and a $195,000 increase of expenses
associated with the home and office delivery operations, offset by a
$100,000 reduction in expenses associated with PET product sales and
corporate overhead. The increase in home and office delivery expenses is
attributable to a full year of operations for Ali'i ($102,000, of which
$83,000 was related to a provision for uncollectible customer accounts
balances or account balances deemed to be potentially uncollectible), and
the expenses of Aloha ($93,000) which are not recurring in light of the
rescission of the Aloha acquisition. The decrease in expenses associated
with PET sales and corporate overhead are primarily attributable to a
reduction in legal and accounting fees, travel, salaries, and SEC printing
fees, partially offset by an executive bonus, increased corporate office
rent, temporary employee services, and amortization expenses associated with
the XEN co-packing agreement (see Note 10d to Hawaiian Natural's financial
statements). Legal and accounting fees decreased $168,000 in 2000 compared
to 1999. Legal fees were unusually large in 1999 due to the large volume of
financing and acquisition transactions during 1999. Hawaiian Natural expects
significant cost savings in the future as a result of the sub- lease of its
headquarters in Pearl City. See Note 10b to Hawaiian Natural's financial
statements.
Other (expense) increased to approximately $(1,146,000) in
2000 from approximately $(70,000) in 1999. This increase is primarily due to
an approximately $1,026,000 impairment charge to purchase price in excess of
the book value resulting from the rescission of the Aloha acquisition (see
Note 4 to Hawaiian Natural's financial statements). Additionally, interest
expense (net of interest income) increased approximately $50,000 due to
interest on capitalized leases and interest on the AMCON notes (see Note 6
to Hawaiian Natural's financial statements).
Primarily as a result of the amortization of the
beneficial conversion feature and redemption of the Series A preferred
shares, Hawaiian Natural recorded an aggregate preferred stock dividend of
$416,379 during 1999. In 2000, Hawaiian Natural redeemed the remaining
Series A preferred shares and adjusted the previously accrued preferred
stock dividend to the holder, resulting in an aggregate preferred stock
dividend of $86,698 for the Series A preferred shares. The Series B
preferred shares became mandatorily redeemable subsequent to yearend at a
redemption premium of $50,000. This premium is included in the preferred
stock dividend for 2000. Hawaiian Natural classified the original $100,000
purchase price as currently payable at December 31, 2000.
91
Due to the foregoing, Hawaiian Natural incurred a net loss
of $(2,937,658), and a net loss available to common shareholders of
$3,074,356 or $(.45) per share, in 2000 compared to a net loss of
$(1,581,943), and net loss applicable to common shareholders of
$(1,998,322), or $(.45) per share, in 1999. Weighted average shares
outstanding increased to 6,844,744 in 2000 from 4,476,554 in 1999. Hawaiian
Natural expects to continue to generate losses until such time, if any, as
it achieves significantly higher sales levels.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were approximately $6,000 at June 2001,
compared to approximately $15,000 at December 31, 2000. In February 2001,
AMCON invested $300,000 in Hawaiian Natural through the purchase of 750,000
shares of Common Stock at a purchase price of $.40 per share. In June 2001,
AMCON loaned Hawaiian Natural $500,000 in exchange for a secured convertible
note, convertible at any time at the election of AMCON into common stock at
a conversion price of $.40 per share. Offsetting these proceeds were losses
from operating activities of ($688,000), purchase of property and equipment
($7,000), repayment of notes and capital leases ($161,000), and redemption
of Hawaiian Natural's Series B preferred stock ($150,000). Hawaiian Natural
is currently substantially dependent upon funding from AMCON to sustain its
operations. The financial statements have been prepared assuming that
Hawaiian Natural will continue as a going concern. Since its inception,
Hawaiian Natural has suffered recurring losses and negative cash flows from
operations. Additionally, at December 31, 2000, Hawaiian Natural had past
due accounts payable of approximately $944,000 and mandatorily redeemable
preferred stock and notes payable amounts due in the near term of
approximately $1,211,000. These factors raise substantial doubt about
Hawaiian Natural's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty. Hawaiian Natural is currently negotiating for
additional funding from AMCON for working capital and for plant additions,
in amounts yet to be determined, pending completion of the Merger. There can
be no assurance that AMCON will provide this additional funding.
Hawaiian Natural has also issued four promissory notes to AMCON
(the "AMCON Notes") in the aggregate principal amount of $1,604,483 with a
maturity date of December 31, 2001, of which $500,000 has been converted by
its terms into Common Stock at $.40 per share. These notes are secured by
substantially all of the assets of Hawaiian Natural. Hawaiian Natural does
not currently have any source of funds to repay the loans evidenced by these
notes prior to completion of the merger. AMCON may also loan additional
funds to Hawaiian Natural prior to the merger to sustain its operations but
AMCON is not obligated to do so. Hawaiian Natural also has outstanding a
promissory note to the vendor of its original blow molding machine. The
aggregate principal amount currently outstanding under the equipment note is
$330,000, due in two equal installments of $165,000 (plus interest) on
September 30, 2001 and 2002.
Hawaiian Natural has ordered new blow molding and related equipment
with an aggregate purchase price of approximately $2,000,000 for
installation at Hawaiian Natural's bottling facility. A substantial portion
of this equipment arrived at the plant in July 2001. This equipment, which
is expected to be operational by February 2002, should enable Hawaiian
Natural to reduce its production costs of finished bottles in an amount
sufficient to enable Hawaiian Natural to reach break-even in its PET
operations. This equipment has been leased by AMCON in its own name. Upon
installation, this equipment will be leased from AMCON on terms similar to
AMCON's lease. This lease will be accounted for as an operating lease.
Hawaiian Natural does not anticipate any significant additional capital
expenditures prior to the anticipated completion date of the Merger.
During 2000, Hawaiian Natural raised an aggregate of approximately
$431,600 in equity financing (net of offering costs), primarily as a result
of the issuance of the Series B convertible preferred stock ($100,000), the
exercise of certain warrants by a private investor ($230,600) and the
issuance of
92
common stock and common stock warrants in a private offering ($100,000). See
Note 2 to Hawaiian Natural's financial statements. As of December 31, 2000,
these proceeds had been substantially consumed as a result of (i)
redemptions of Series A convertible preferred stock ($319,000), and (ii)
losses from operations. The remainder of the cash flow deficit for 2000 was
funded from working capital and from certain interim loans from AMCON as
described above. Overdue accounts payable increased from $493,707 at
December 31, 1999 to $943,672 at December 31, 2000.
There are currently no shares of Series A or Series B convertible
preferred stock outstanding.
Hawaiian Natural had capital expenditures of approximately $101,000
in 2000, and approximately $488,000 in 1999.
SEASONALITY
Hawaiian Natural believes that its business is subject to seasonal
variations. For obvious reasons, demand for bottled water in any given
market tends to be higher during the summer months than during the winter.
However, Hawaiian Natural expects these seasonal effects to be moderated by
concurrent sales into a variety of different markets worldwide, all of which
may not have the same summer season. Moreover, several of Hawaiian Natural's
target markets, such as California and the Middle East, have hot or mild
temperatures throughout the year.
CURRENCY FLUCTUATIONS
Hawaiian Natural is not directly affected by currency fluctuations
in overseas markets, since all of Hawaiian Natural's sales are quoted in
U.S. dollars. However, currency fluctuations can adversely affect the demand
for Hawaiian Natural's product in foreign markets by increasing the price of
the product in local currency.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Hawaiian Natural is exposed to certain market risks associated with
interest rate fluctuations on its borrowing arrangements. All borrowing
arrangements are entered into for purposes other than trading. Hawaiian
Natural is not subject to risks from currency rate fluctuations, except as
described above. See "Management's Discussion and Analysis--Currency
Fluctuations". Hawaiian Natural does not utilize hedging contracts or
similar instruments.
Hawaiian Natural's exposure to interest rate risk arises from
financial instruments entered into in the normal course of business.
Hawaiian Natural's borrowings bear interest at fixed annual rates. Changes
in interest rates generally affect the fair value of such borrowings, but do
not have an impact on earnings or cash flows. Because of the uncertainty
with respect to Hawaiian Natural's ability to continue as a going concern,
the fair value of Hawaiian Natural's financial instruments may be
significantly different than their respective carrying values as of December
31, 2000.
Qualitative Disclosures. Hawaiian Natural's primary exposures
relate to (1) interest rate risk on its borrowings, (2) Hawaiian Natural's
ability to pay or refinance its borrowings at maturity at market rates, and
(3) the impact of interest rate movements on Hawaiian Natural's ability to
obtain adequate financing to fund future cash requirements. Hawaiian Natural
manages interest rate risk on its outstanding borrowings by using fixed rate
debt. While Hawaiian Natural can not predict or manage its ability to
refinance existing borrowings or the impact of interest rate movements will
have on its existing borrowings, management evaluates Hawaiian Natural's
financial position on an ongoing basis. Hawaiian Natural does not use
derivatives in its operations and therefore does not have any risk exposure
to these instruments.
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INFORMATION ABOUT AMCON MERGER SUB, INC.
AMCON Merger Sub, Inc. is a newly formed Delaware corporation that
has not, to date, conducted any activities other than those incident to its
formation, its execution of the merger agreement and related agreements, and
its participation in the preparation of this document. The financial
statements of AMCON Merger Sub, Inc. are omitted because AMCON Merger Sub,
Inc. has nominal assets and no liabilities, as well as no operations to
date. There are also no contingent assets or liabilities. AMCON Merger Sub,
Inc. has 100 shares of its common stock issued and outstanding, all of which
are owned by AMCON.
As a result of the merger of Hawaiian Natural into AMCON Merger
Sub, Inc., the business of AMCON Merger Sub, Inc. will be the businesses
currently conducted by Hawaiian Natural. AMCON Merger Sub's name will be
changed to Hawaiian Natural Water Company, Inc. after consummation of the
merger. The headquarters of AMCON Merger Sub will be in Omaha, Nebraska.
94
CERTAIN LEGAL INFORMATION
Copies of the AMCON Merger Sub certificate of incorporation and
bylaws, our certificate of incorporation and bylaws, and the AMCON articles
of incorporation and bylaws, in each case as in effect on the date of this
proxy statement/prospectus, will be sent to our shareholders upon request.
See "Where You Can Find More Information" on page 103.
SUMMARY OF MATERIAL DIFFERENCES BETWEEN CURRENT RIGHTS OF OUR SHAREHOLDERS
AND RIGHTS THOSE SHAREHOLDERS WILL HAVE AS AMCON SHAREHOLDERS FOLLOWING THE
MERGER
AUTHORIZED CAPITAL STOCK
HAWAIIAN NATURAL AMCON
The authorized capital stock of Hawaiian Natural The authorized capital stock of AMCON consists
consists of 20,000,000 shares of common stock, no of 15,000,000 shares of common stock, par value
par value, and 5,000,000 shares of preferred stock, $.01 per share, and 1,000,000 shares of
par value $1.00 per share. preferred stock, par value $.01 per share.
As of the date of this document, no shares of any As of the date of this document, no shares of
series of Hawaiian Natural preferred stock are any series of AMCON preferred stock are
outstanding. outstanding.
NUMBER OF DIRECTORS
HAWAIIAN NATURAL AMCON
The Hawaiian Natural board of directors currently The AMCON board of directors currently consists
consists of four directors. of seven directors.
CLASSIFICATION OF BOARD OF DIRECTORS
HAWAIIAN NATURAL AMCON
The Hawaiian Natural board of directors is not The AMCON board of directors is divided into
divided into classes. Each director serves a three classes, with each class serving a
one-year term. staggered three-year term. This provision may
not be amended or repealed unless such action
is approved by the affirmative vote of not less
than 75% of the votes then entitled to be cast
in the election of directors.
REMOVAL OF DIRECTORS
HAWAIIAN NATURAL AMCON
Any or all directors may be removed with or without The holders of a majority of the shares entitled
cause by vote of the holders of a majority of the to vote at an election of directors may remove
shares then entitled to vote at an election of any director or the entire board of directors,
directors. but only for cause.
95
SHAREHOLDER ACTION BY WRITTEN CONSENT
HAWAIIAN NATURAL AMCON
Hawaiian Natural shareholders may act by written AMCON shareholders may not act by written
consent in lieu of a meeting of shareholders. Such consent in lieu of a meeting of shareholders.
consent must be signed by all shareholders entitled
to vote at such meeting.
CALLING OF SPECIAL MEETINGS OF SHAREHOLDERS
HAWAIIAN NATURAL AMCON
The Hawaiian Natural bylaws provides that a special AMCON's certificate of incorporation and bylaws
meeting of the shareholders may be called by the provide that a special meeting of shareholders
board of directors and the chairman of the board may be called only by the chairman of the board,
of directors, and the holders of not less than 10% the president or the board of directors pursuant
of all shares entitled to vote at such special to a resolution approved by a majority of the
meeting, or such other persons as may be authorized entire board of directors.
in the articles of incorporation or bylaws.
AMENDMENT OF CHARTER AND BYLAWS
HAWAIIAN NATURAL AMCON
Hawaiian Natural's articles of incorporation may AMCON's certificate of incorporation may be
be amended if the change is approved by the amended if the change is approved by the board
board of directors and by the holders of a of directors and by the holders of a majority
majority of the outstanding stock entitled to vote of the outstanding stock entitled to vote
thereon. thereon. However, the following articles in
AMCON's certificate of incorporation require
the affirmative vote of the holders of at least
75% of the outstanding stock entitled to vote
in the election of directors:
Article V - authorization of rights under
a shareholders rights plan;
Article VI - amendment of bylaws by
directors or holders of 75%
or more of the combined
voting power;
Article VII - number and classification of
board of directors;
Article VIII - elimination of liability of
directors for certain
breaches of fiduciary duty;
Article IX - entitlement to
indemnification by directors
and officers;
Article X - authorization for directors
to take into account
interests of constituencies
other than shareholders in
determining what is in the
best interests of AMCON;
96
Article XII - elimination of cumulative
voting for elections of
directors;
Article XIII - denial of right to take
action by written consent
and specifying who can call
a special meeting of
shareholders;
Article XIV - super-majority voting
requirement for business
combinations with an
interested shareholder not
approved by AMCON's board of
directors; and
Article XV - votes required to amend the
certificate of incorporation.
The bylaws may be amended by the holders of a The bylaws may be amended by the affirmative
majority of the outstanding shares entitled to vote vote of a majority of the board of directors.
thereon. The bylaws may also be amended by the The bylaws also may be amended by the affirmative
board of directors, subject to repeal or change by vote of at least 75% of the shareholders entitled
action of a majority of the outstanding shares to vote generally in the election of directors.
entitled to vote thereon.
CONSIDERATION OF NON-SHAREHOLDER INTERESTS
HAWAIIAN NATURAL AMCON
No comparable provision. Specific authorization to permit directors to
take into account any of the following
interests in determining what he reasonably
believes to be in the best interests of AMCON:
o AMCON's employees;
o economy of the nation;
o community and societal interests; and
o long-term as well as short-term
interests of AMCON and its shareholders,
including the possibility that those
interests may be best served by the
continued independence of AMCON.
97
VOTES REQUIRED FOR CONTROL SHARE ACQUISITIONS
AND BUSINESS COMBINATIONS
HAWAIIAN NATURAL AMCON
Section 415-172 of the Hawaiian Revised Statutes No comparable statutory provision.
requires shareholder approval before the
completion of a "control share acquisition"
resulting in the beneficial ownership by an
acquiring person of an excess of 10% of the
voting power of Hawaiian Natural.
No comparable statutory provision. Section 203 of the Delaware Corporation Law
generally prohibits a business combination with
an interested shareholder (i.e., a beneficial
owner of 15% or more of AMCON's common stock).
This provision is described under "Description
of AMCON Stock - Statutory Business Combination
Provision."
[This space left intentionally blank]
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DESCRIPTION OF AMCON STOCK
GENERAL
The authorized capital stock of AMCON consists of 15,000,000 shares
of AMCON common stock, par value $.01 per share, of which, as of August 31,
2001, there were 2,739,184 shares issued and outstanding and 1,000,000
shares of preferred stock, par value $.01 per share, none of which were
issued and outstanding, as of August 31, 2001. All of the outstanding shares
of the capital stock of AMCON are duly authorized, validly issued, fully
paid and nonassessable, and no class is entitled to preemptive rights. As of
August 31, 2001, there were stock options to purchase an aggregate of
330,520 shares of AMCON common stock. There were no outstanding
subscriptions, warrants, rights, contracts or other arrangements or
commitments obligating AMCON to issue any shares of its capital stock or any
securities convertible into or exchangeable for shares of its capital stock.
If the average of the closing price per share of AMCON common stock
during a 20 trading day measurement period that ends immediately preceding
the third trading day before the vote on the merger is $6.00 or less, then,
based on the number of shares outstanding as August 31, 2001, AMCON is
expected to have outstanding, immediately following completion of the
merger:
o a maximum of 3,112,767 shares of common stock outstanding,
which would not include any of the shares AMCON common stock
would receive back in respect of the 2,000,000 shares of
Hawaiian Natural common stock it owns and which AMCON shares
would be held as treasury stock); and
o 353,315 shares of common stock reserved for issuance upon
exercise of options and warrants.
The number of shares of common stock that AMCON would have
outstanding and reserved for issuance immediately following completion of
the merger would decrease if the average closing price per share of AMCON
common stock during a 20 day measurement period that ends immediately
preceding the third trading day before the vote on the merger is greater
than $6.00, as described under "The Merger Agreement - Merger
Consideration."
AMCON COMMON STOCK
Subject to the rights of holders of any outstanding AMCON preferred
stock, the holders of outstanding shares of AMCON common stock are entitled
to share ratably in dividends declared out of assets legally available
therefor at such time and in such amounts as the AMCON board of directors
may from time to time lawfully determine.
Each holder of AMCON common stock is entitled to one vote for each
share held and, except as otherwise provided by law or by the AMCON board of
directors with respect to any series of AMCON preferred stock, the holders
of AMCON common stock will exclusively possess all voting power. Holders of
AMCON common stock are not entitled to cumulative voting for the election of
directors. The AMCON common stock is not entitled to conversion or
preemptive rights and is not subject to redemption or assessment. Subject to
the rights of holders of any outstanding AMCON preferred stock, upon
liquidation, dissolution or winding up of AMCON, any assets legally
available for distribution to stockowners as such are to be distributed
ratably among the holders of the AMCON common stock at that time
outstanding.
AMCON's common stock is listed on the American Stock Exchange under
the ticker symbol "DIT."
99
AMCON PREFERRED STOCK
The AMCON board of directors has the authority to issue AMCON
preferred stock in one or more series with such distinctive serial
designations, at such price or prices and for such other consideration as
may be fixed by the AMCON board of directors. AMCON preferred stock of all
series shall be in all respects entitled to the same preferences, rights and
privileges and subject to the same qualifications, limitations and
restrictions; provided, however, that different series of AMCON preferred
stock may vary with respect to, among other things, dividend rates,
conversion rights, voting rights, redemption rights, liquidation preferences
and the number of shares constituting each such series as shall be
determined and fixed by resolution or resolutions of the AMCON board of
directors providing for the issuance of such series, without any further
vote or action by the shareholders of AMCON. All the shares of any one
series will be alike in every particular. The ability of the AMCON's board
of directors to issue AMCON preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire, or
of discouraging a third party from acquiring, a majority of the outstanding
voting stock of AMCON. As of the date of this document, no shares of AMCON
preferred stock are issued and outstanding and no shares have been
designated as a series of preferred stock.
STATUTORY BUSINESS COMBINATION PROVISION
AMCON is subject to Section 203 of the Delaware General Corporation
Law, which generally prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested shareholder" for a
period of three years after the time that the person became an interested
shareholder, unless
o prior to such time the board of directors of the corporation
approved either the business combination or the transaction in
which the person became an interested shareholder,
o upon consummation of the transaction that resulted in the
shareholder becoming an interested shareholder, the interested
shareholder owns at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding shares owned by directors who are also officers of
the corporation and by certain employee stock plans, or
o at or after such time the business combination is approved by
the board of directors of the corporation and by the
affirmative vote of at least 66% of the outstanding voting
stock of the corporation that is not owned by the interested
shareholder.
A "business combination" generally includes mergers, asset sales
and similar transactions between the corporation and the interested
shareholder, and other transactions resulting in a financial benefit to the
shareholder. An "interested shareholder" is a person who owns 15% or more of
the corporation's voting stock or who is an affiliate or associate of the
corporation and, together with his or her affiliates and associates, has
owned 15% or more of the corporation's voting stock within three year period
immediately prior to the date on which it is sought to be determined whether
such person is an interested shareholder.
OTHER MATTERS
The certificate of incorporation of AMCON provides that the number
of directors shall be as determined by the board of directors from time to
time, but shall be at least five and not more than fifteen. It also provides
that directors may be removed only for cause, and then only by the
affirmative vote of the holders of at least a majority of all outstanding
voting stock entitled to vote in an election of directors. This provision,
in conjunction with the provision of the bylaws authorizing the board of
directors to fill vacant directorships, will prevent shareholders from
removing incumbent directors without cause and filling the resulting
vacancies with their own nominees.
100
The certification of incorporation of AMCON provides that
shareholders may act only at an annual or special meeting of shareholders
and may not act by written consent. The certificate of incorporation
provides that special meetings of the shareholders can be called only by the
chairman of the board, the president or the board of directors pursuant to a
resolution approved by a majority of the whole board of directors.
The certificate of incorporation of AMCON authorizes the board of
directors to take into account (in addition to any other considerations
which the board of directors may lawfully take into account) in determining
whether to take or to refrain from taking corporate action on any possible
acquisition proposals or other matters, the long-term as well as short-term
interests of AMCON and its shareholders, including the possibility that
these may be best served by the continued independence of AMCON, customers,
employees and other constituencies of AMCON and any subsidiaries, as well as
the effect upon communities in which AMCON and any subsidiaries do business.
In considering the foregoing and other pertinent factors, the board of
directors is not required, in considering the best interests of AMCON, to
regard any particular corporate interest or the interest of any particular
group affected by such action as a controlling interest.
SHAREHOLDER PROPOSALS
The bylaws of AMCON contain provisions (i) requiring that advance
notice be delivered to AMCON of any business to be brought by a shareholder
before any meeting of shareholders and (ii) establishing certain procedures
to be followed by shareholders in nominating persons for election to the
board of directors. Generally, such advance notice provisions provide that
written notice must be given to the Secretary of AMCON by a shareholder,
with respect to director nominations or shareholder proposals, not less than
35 days prior to the meeting (except that if less than 35 days notice or
prior public disclosure of the date of the meeting is given or made to
shareholders, then notice by the shareholder, to be timely, must be received
within 7 days of the date on which notice of the date of the meeting was
mailed or such public disclosure was made, whichever first occurs). Such
notice must set forth specific information regarding such shareholder and
such business or director nominee, as described in the bylaws. The foregoing
summary is qualified in its entirety by reference to the bylaws of AMCON,
which are included as an exhibit to the registration statement of which this
document is a part.
LIMITATIONS ON DIRECTOR/OFFICER LIABILITY
Delaware law authorizes corporations to limit or eliminate the
personal liability of directors to corporations and their shareholders for
monetary damages for breach of a director's fiduciary duty of care. The duty
of care requires that, when acting on behalf of the corporation, directors
must exercise an informed business judgment based on all material
information reasonably available to them. Absent the limitations authorized
by Delaware law, directors are accountable for monetary damages for conduct
constituting gross negligence in the exercise of their duty of care.
Delaware law enables corporations to limit available relief for a breach of
the duty of care to equitable remedies such as injunction or rescission. The
certificate of incorporation of AMCON limits the liability of directors to
AMCON or its shareholders to the fullest extent permitted by Delaware law.
Specifically, directors of AMCON will not be personally liable to AMCON or
its shareholders for monetary damages for breach of a director's fiduciary
duty as a director, except for liability for breach of the duty of loyalty,
for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, for unlawful payments of dividends
or unlawful stock repurchases or redemptions as provided in Section 174 of
the Delaware General Corporation Law or for any transaction in which a
director has derived an improper personal benefit.
The certificate of incorporation requires AMCON to indemnify to the
fullest extent permitted by Delaware law any person who is a party or is
threatened to be made a party to any action, suit or proceeding by reason of
the fact that such person is or was a director or officer of AMCON, or is
serving
101
as a director or officer of another enterprise at AMCON's request. The
indemnification provided by the certificate of incorporation is not
exclusive of any other rights to which those seeking indemnification may be
otherwise entitled.
AMCON has obtained directors and officer's liability insurance,
with coverage limits of $3 million for each loss and $3 million each policy
period, covering past, present and future directors and officers of AMCON
and its subsidiaries.
The foregoing limitations on liability and indemnification
obligations may have the effect of reducing the likelihood of derivative
litigation against directors and may discourage or deter shareholders or
management from bringing a lawsuit against directors for breach of their
fiduciary duties, even though such an action, if successful, might otherwise
have benefited AMCON and its shareholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for AMCON common stock is
Registrar and Transfer Company.
STOCK MARKET LISTING
It is a condition to the consummation of the merger that the shares
of AMCON common stock to be issued in the merger be approved for listing on
the American Stock Exchange, subject to official notice of issuance. AMCON's
stock is currently listed under the ticker symbol "DIT".
LEGAL MATTERS
The validity of the AMCON common stock to be issued to our
shareholders in the merger will be passed upon by Stinson, Mag & Fizzell,
P.C. It is a condition to the completion of the merger that Hawaiian Natural
receive an opinion from our tax counsel that the merger will qualify as a
tax-free reorganization for United States federal income tax purposes.
EXPERTS
The financial statements of AMCON as of September 30, 2000 and
1999, and for each of the three years in the period ended September 30, 2000
included in this proxy statement/prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of Hawaiian Natural Water Company, Inc.
included this proxy statement/prospectus, to the extent and for the periods
indicated in their report, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said report. Reference is made to said report, which
includes an explanatory paragraph with respect to the uncertainty regarding
Hawaiian Natural's ability to continue as a going concern as discussed in Note 1
to the financial statements.
The financial statements of Merchants Wholesale, Inc. included in
this proxy statement/prospectus, to the extent and for the periods indicated
in their report, have been so included in reliance on the report of Clifton
Gunderson L.L.C., independent accountants, given on the authority of said
firm as experts in auditing and accounting.
102
WHERE YOU CAN FIND MORE INFORMATION
AMCON and Hawaiian Natural file annual, quarterly and special
reports, proxy statements and other information with the Securities and
Exchange Commission. You may read and copy any reports, statements or other
information AMCON and Hawaiian Natural file at the SEC's public reference room
at 450 Fifth Street, N.W., Washington, D.C., 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from commercial document retrieval
services and at the web site maintained by the SEC at http://www.sec.gov.
------------------
AMCON filed a registration statement on Form S-4 (333-71300) to
register with the SEC the shares of common stock to be issued to our
shareholders in the merger. This document is a part of that registration
statement and constitutes a prospectus of AMCON in addition to being a proxy
statement of Hawaiian Natural for its shareholder meeting. As allowed by SEC
rules, this document does not contain all the information included in the
registration statement or the exhibits to the registration statement.
The SEC allows us to "incorporate by reference" information into
this document, which means that AMCON and Hawaiian Natural can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed
to be a part of this document and any statement contained in a document
incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this document to the extent that a statement
contained herein, modified or superseded such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this document. This document
incorporates by reference the documents set forth below that AMCON and
Hawaiian Natural have previously filed with the SEC. These documents contain
important information about our companies and their respective finances.
AMCON SEC FILINGS
(FILE NO. 01-15589) PERIOD
------------------- ------
Annual Report on Form 10-K filed on December 28, 2000. Fiscal Year ended September 30, 2000.
Quarterly Reports on Form 10-Q filed on February 12, 2001, Quarters ended December 31, 2000, March 31,
May 14, 2001 and August 13, 2001, (as amended on October 4, 2001 and June 30, 2001, respectively.
2001) respectively.
Current Reports on Form 8-K dated February 8, 2001,
March 23, 2001, June 1, 2001, as amended by Form 8-KA, and
September 4, 2001 and filed on March 6, 2001, April 11, 2001,
June 18, 2001, August 13, 2001, and September 11, 2001,
respectively.
HAWAIIAN NATURAL SEC FILINGS
(FILE NO. 0-22099) PERIOD
------------------ ------
Annual Report on Form 10-KSB filed on April 17, 2001, as Fiscal year ended December 31, 2000.
amended August 6, 2001.
Quarterly Reports on Form 10-QSB filed on May 15, 2001 and Quarters ended March 31, 2001 and June 30,
August 14, 2001, respectively. 2001, respectively.
AMCON and Hawaiian Natural have supplied all information contained
or incorporated by reference in this document relating to our respective
companies.
103
Documents incorporated by reference are available from us without
charge, excluding all exhibits unless they have specifically incorporated by
reference an exhibit in this document. Stockholders may obtain documents
incorporated by reference in this document by requesting them in writing or
by telephone from the Secretary's of the appropriate company at the
following addresses:
AMCON DISTRIBUTING COMPANY
10228 "L" STREET
OMAHA, NEBRASKA 68127
(402) 331-3727
HAWAIIAN NATURAL WATER COMPANY, INC.
16-305 OLD VOLCANO ROAD
KEAAU, HAWAII 96749
(808) 966-8888
If you would like to request documents, please do so by _________,
2001 to receive them before the meeting.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED
BY REFERENCE IN THIS DOCUMENT TO VOTE ON THE MERGER PROPOSAL. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM
WHAT IS CONTAINED IN THIS DOCUMENT. THIS DOCUMENT IS DATED ___________,
2001. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS DOCUMENT
IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, AND NEITHER THE MAILING OF
THIS DOCUMENT TO STOCKHOLDERS NOR THE ISSUANCE OF COMMON STOCK IN THE MERGER
SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
104
INDEX TO PRO FORMA FINANCIAL INFORMATION AND FINANCIAL STATEMENTS
Unaudited Pro Forma Financial Information P-1
Unaudited Pro Forma Combined Balance Sheet at June 30, 2001 P-2
Unaudited Pro Forma Combined Financial Information - Summary of Adjustments - Balance Sheet P-3
Unaudited Pro Form Combined Statements of Operations
For the Nine Months Ended June 30, 2001 P-5
Unaudited Pro Form Combined Statements of Operations
For the Twelve Months Ended September 30, 2000 P-6
Unaudited Pro Forma Combined Financial Information -
Summary of Pro Forma Adjustments - Merchants Wholesale Statements of Operations P-7
Notes to Unaudited Pro Forma Combined Financial Data P-9
AMCON DISTRIBUTING COMPANY
JUNE 30, 2001
Unaudited Condensed Consolidated Balance Sheets F-1
Unaudited Condensed Consolidated Statements of Operations F-2
Unaudited Condensed Consolidated Statements of Cash Flows F-3
Notes to Unaudited Condensed Consolidated Financial Statements F-4
SEPTEMBER 30, 2000
Report of Independent Accountants F-12
Consolidated Balance Sheets F-13
Consolidated Statements of Income F-14
Consolidated Statements of Shareholders' Equity and Comprehensive Income F-15
Consolidated Statements of Cash Flows F-17
Notes to Consolidated Financial Statements F-18
HAWAIIAN NATURAL WATER COMPANY, INC.
JUNE 30, 2001
Unaudited Balance Sheet F-38
Unaudited Statements of Operations F-39
Unaudited Statements of Shareholders' Equity (Deficit) F-40
Unaudited Statements of Cash Flows F-41
Notes to Financial Statements F-42
DECEMBER 31, 2000
Report of Independent Accountants F-50
Balance Sheet F-51
Statements of Operations F-52
Statements of Shareholders' Equity (Deficit) F-53
Statements of Cash Flows F-56
Notes to Financial Statements F-57
P-i
INDEX TO PRO FORMA FINANCIAL INFORMATION AND FINANCIAL STATEMENTS, CONTINUED
MERCHANTS WHOLESALE INC.
MARCH 31, 2001
Unaudited Consolidated Balance Sheets F-72
Unaudited Consolidated Statements of Operations F-74
Unaudited Consolidated Statements of Cash Flows F-75
Notes to Condensed Consolidated Financial Statements F-76
DECEMBER 31, 2000
Independent Auditor's Report F-78
Consolidated Balance Sheet F-79
Consolidated Statement of Operations F-81
Consolidated Statement of Retained Earnings F-82
Consolidated Statement of Cash Flows F-83
Summary of Significant Accounting Policies F-84
Notes to Consolidated Financial Statements F-86
DECEMBER 31, 1999
Independent Auditor's Report F-91
Consolidated Balance Sheet F-92
Consolidated Statement of Operations F-94
Consolidated Statement of Retained Earnings F-95
Consolidated Statement of Cash Flows F-96
Summary of Significant Accounting Policies F-97
Notes to Consolidated Financial Statements F-99
JANUARY 31, 1999
Independent Auditor's Report F-104
Balance Sheets F-105
Statements of Operations F-107
Statement of Retained Earnings F-108
Statements of Cash Flows F-109
Summary of Significant Accounting Policies F-110
Notes to Consolidated Financial Statements F-112
P-ii
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following information has been provided to aid you in your
analysis of the financial aspects of the merger of Hawaiian Natural Water
Company. The financial information of AMCON was derived from its audited
consolidated financial statements for the fiscal year ended September 30,
2000 and its unaudited consolidated financial statements for the nine month
period ended June 30, 2001. The financial information of Hawaiian Natural
was derived from its audited financial statements for the fiscal year ended
December 31, 2000 and its unaudited financial statements for the nine month
period ended June 30, 2001. The information is only a summary and should be
read together with the historical financial statements and related notes
contained in the annual reports and quarterly reports and other information
that AMCON and Hawaiian Natural have filed with the Securities and Exchange
Commission and incorporated by reference and included elsewhere herein.
The unaudited pro forma financial information is presented for
informational purposes only and is not necessarily indicative of the
financial position or results of operations of AMCON that would have occurred
if the merger had been completed on the dates indicated, nor does it purport
to be indicative of future financial positions or results of operations. In
the opinion of AMCON's management, all material adjustments necessary to
reflect the effects of these transactions have been made.
PURCHASE METHOD OF ACCOUNTING
The merger is expected to be accounted for using the purchase method
of accounting. This means that, for accounting and financial reporting
purposes, Hawaiian Natural's assets and liabilities will be recorded at their
respective fair values at the time of completion of the merger. Any excess of
the purchase price over the net fair value of the assets acquired and
liabilities assumed, including identifiable intangible assets, will be
recorded as goodwill and assessed annually to determine if any impairment of
this goodwill has occurred. The allocation of purchase price is subject to
final determination based upon estimates and other evaluations of fair value.
Therefore, the allocations in the following unaudited pro forma financial
information may differ from the amounts ultimately determined.
PERIODS COVERED
The following unaudited pro forma balance sheet as of June 30, 2001
is presented as if the merger had occurred on June 30, 2001. The unaudited
pro forma consolidated statements of operations for the fiscal year ended
September 30, 2000 and for the nine month period ended June 30, 2001 are
presented as if the merger had occurred on October 1, 1999.
The historical balance sheet of AMCON Distributing Company at June
30, 2001 includes the net assets of the Merchants Wholesale Inc. business
which was acquired on June 1, 2001 in a business combination accounted for
as a purchase. Due to the timing of the acquisition of the net assets of
Merchants relative to AMCON's year ended September 30, 2000 and its nine
month interim period ended June 30, 2001, Merchants' historical results for
the period from June 1, 2001 through June 30, 2001 are included in AMCON's
historical results for the nine month period ended June 30, 2001.
Accordingly, in addition to giving effect to the merger of Hawaiian Natural
Water Company, the accompanying unaudited pro forma combined statements of
operations for the year ended September 30, 2000 and the nine month period
ended June 30, 2001 are presented as if the acquisition of the net assets of
Merchants occurred on October 1, 1999. The unaudited pro forma statements of
operations of AMCON and Merchants combined, prior to the inclusion of the
results of Hawaiian Natural Water Company and the pro forma effects of the
merger, are presented for informational purposes only and are not
necessarily indicative of the results of operations of AMCON and Merchants
combined that would have occurred if the acquisition of the net assets of
Merchants had occurred on the dates indicated, nor does it purport to be
indicative of future results of operations. In the opinion of AMCON's
management, all material adjustments necessary to reflect the effects of the
acquisition of the net assets of Merchants have been made.
P-1
AMCON DISTRIBUTING COMPANY
UNAUDITED PRO FORMA COMBINED BALANCE SHEET AT JUNE 30, 2001
HISTORICAL
HISTORICAL HAWAIIAN TOTAL
AMCON NATURAL PRO COMBINED
DISTRIBUTING WATER FORMA PRO
COMPANY COMPANY ADJUSTMENTS(A) FORMA
------------- ------------- --------------- -------------
ASSETS
Current assets:
Cash .............................................. $ 1,051,626 $ 5,650 $ - $ 1,057,276
Accounts receivable ............................... 35,873,042 303,777 - 36,176,819
Inventories ....................................... 29,684,879 524,082 20,563 30,229,524
Deferred income taxes ............................. 1,122,058 - - 1,122,058
Other ............................................. 654,642 130,763 (73,707) 711,698
------------- ------------ ------------- -------------
Total current assets .............................. 68,386,247 964,272 (53,144) 69,297,375
Fixed assets, net .................................. 15,136,561 2,093,462 - 17,230,023
Notes receivable ................................... 1,250,000 - (1,250,000) -
Investments ........................................ 1,068,168 - (206,082) 862,086
Deferred income taxes .............................. 266,728 - 590,907 857,635
Other assets ....................................... 16,597,133 202,588 1,671,490 18,471,211
------------- ------------ ------------- -------------
$ 102,704,837 $ 3,260,322 $ 753,171 $ 106,718,330
============= ============ ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 22,458,882 $ 1,005,955 $ - $ 23,464,837
Accrued expenses .................................. 4,898,500 532,196 - 5,430,696
Current portion of long-term debt ................. 1,289,178 1,410,720 (1,250,000) 1,449,898
Current portion of subordinated debt .............. 868,721 - - 868,721
Due to AMCON Distributing Company ................. - 73,707 (73,707) -
Current portion of capital lease obligation ....... - 18,031 - 18,031
------------- ------------ ------------- -------------
Total current liabilities ..................... 29,515,281 3,040,609 (1,323,707) 31,232,183
Other liabilities .................................. 1,139,412 41,380 - 1,180,792
Long-term debt, less current portion ............... 50,234,612 176,637 300,000 50,711,249
Subordinated debt, less current portion ............ 6,472,792 - - 6,472,792
Capital lease obligation, less current portion ..... - 9,063 - 9,063
Shareholders' equity:
Common stock ...................................... 27,383 9,912,446 (9,908,710) 31,119
Common stock warrants and options ................. - 3,680,765 (3,680,765) -
Additional paid-in capital ........................ 4,123,086 - 1,765,775 5,888,861
Accumulated other comprehensive income, net of tax 315,111 - - 315,111
Retained earnings (accumulated deficit) ........... 10,877,160 (13,600,578) 13,600,578 10,877,160
------------- ------------ ------------- -------------
Total shareholders' equity .................... 15,342,740 (7,367) 1,776,878 17,112,251
------------- ------------ ------------- -------------
$ 102,704,837 $ 3,260,322 $ 753,171 $ 106,718,330
============= ============ ============= =============
(A) See components of the pro forma adjustments in the "Summary of Pro
Forma Adjustments - Balance Sheet."
See notes to unaudited pro forma combined financial information.
P-2
AMCON DISTRIBUTING COMPANY
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
SUMMARY OF PRO FORMA ADJUSTMENTS -- BALANCE SHEET
AS OF
JUNE 30,
BALANCE SHEET COMPONENT NOTE ADJUSTMENT 2001
--------------------------------------- ---- ---------------------------------------------- -----------------
Inventories (1) To step inventory up to its fair value. $ 20,563
-----------------
20,563
-----------------
Other (2) To eliminate amounts due from Hawaiian Natural
Water Company. (73,707)
-----------------
(73,707)
-----------------
Notes receivable (3) Elimination of notes receivable from Hawaiian
Natural Water Company. (750,000)
(3) Conversion of notes receivable from Hawaiian
Natural Water Company to common stock
investment in Hawaiian Natural Water Company. (500,000)
-----------------
(1,250,000)
-----------------
Investments (4) To eliminate carrying value of AMCON Distributing
Company's equity investment in Hawaiian
Natural Water Company. (206,082)
-----------------
(206,082)
-----------------
Deferred income taxes, noncurrent (1) To record the fair value of the Hawaiian Natural
Water Company net operating loss carryforwards
acquired. 1,056,835
(1) Deferred income tax liabilities resulting from
the purchase price allocation for Hawaiian
Natural Water Company. (465,928)
-----------------
590,907
-----------------
Other assets (1) Value of trade name purchased in the
acquisition of Hawaiian Natural Water
Company. 1,008,853
(1) Value of customer list purchase in the
acquisition of Hawaiian Natural Water
Company. 196,709
(1) Goodwill arising from the recording of the
deferred tax liabilities resulting from the
allocation of the purchase price of
Hawaiian Natural Water Company. 465,928
-----------------
1,671,490
-----------------
Current portion of long-term debt (3) Elimination of notes payable to AMCON
Distributing Company. (750,000)
(3) Conversion of notes payable to AMCON
Distributing Company to common stock
investment in Hawaiian Natural Water Company. (500,000)
-----------------
(1,250,000)
-----------------
Due to AMCON Distributing Company (2) To eliminate amount due to AMCON Distributing
Company. (73,707)
-----------------
(73,707)
-----------------
See notes to unaudited pro forma combined financial information.
P-3
AMCON DISTRIBUTING COMPANY
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
SUMMARY OF PRO FORMA ADJUSTMENTS -- BALANCE SHEET
AS OF
JUNE 30,
BALANCE SHEET COMPONENT NOTE ADJUSTMENT 2001
--------------------------------------- ---- ---------------------------------------------- -----------------
Long-term debt, less current portion (5) To record liability for estimated stock issuance
costs. 300,000
-----------------
300,000
-----------------
Common stock (1) Issuance of 373,558 shares of AMCON
Distributing Company common stock for the
remaining outstanding common stock of
Hawaiian Natural Water Company. 3,736
(6) Elimination of Hawaiian Natural Water
Company's common stock. (9,912,446)
-----------------
(9,908,710)
-----------------
Common stock warrants and options (6) Elimination of Hawaiian Natural Water
Company's common stock warrants and
options. (3,680,765)
-----------------
(3,680,765)
-----------------
Additional paid-in capital (1) Issuance of 373,558 shares of AMCON
Distributing Company common stock for the
remaining Hawaiian Natural Water Company
common stock. 2,065,775
(5) To record estimated stock issuance costs. (300,000)
-----------------
1,765,775
-----------------
Retained earnings (6) Elimination of Hawaiian Natural Water Company's
accumulated deficit. 13,600,578
-----------------
13,600,578
-----------------
See notes to unaudited pro forma combined financial information.
P-4
AMCON DISTRIBUTING COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 2001
HAWAIIAN
AMCON MERCHANTS NATURAL
DISTRIBUTING WHOLESALE WATER
COMPANY INC. COMPANY
9 MONTHS 8 MONTHS 9 MONTHS
ENDED ENDED PRO AMCON AND ENDED
JUNE 30, MAY 31, FORMA MERCHANTS JUNE 30,
2001 2001 (A) ADJUSTMENTS (C) COMBINED 2001 (B)
------------ ------------ --------------- ------------- -----------
Sales ............................ $355,924,403 $308,343,996 $ - $664,268,399 $ 2,137,314
Cost of sales .................... 323,577,307 294,418,985 - 617,996,292 1,931,447
------------ ------------ ------------ ------------ -----------
Gross profit ................. 32,347,096 13,925,011 - 46,272,107 205,867
Selling, general and
administrative expenses ......... 28,235,894 12,945,487 (360,640) 40,820,741 1,405,648
Depreciation and amortization .... 1,760,820 416,838 296,578 2,474,236 -
------------ ------------ ------------ ------------ -----------
29,996,714 13,362,325 (64,062) 43,294,977 1,405,648
------------ ------------ ------------ ------------ -----------
Income (loss) from
operations .................. 2,350,382 562,686 64,062 2,977,130 (1,199,781)
Other expense (income):
Interest expense ............... 2,112,936 2,224,378 (353,874) 3,983,440 132,148
Other income, net .............. (173,224) - - (173,224) -
Equity in loss of
unconsolidated affiliate ...... 38,042 - - 38,042 -
------------ ------------ ------------ ------------ -----------
1,977,754 2,224,378 (353,874) 3,848,258 132,148
------------ ------------ ------------ ------------ -----------
Income (loss) from continuing
operations before taxes ......... 372,628 (1,661,692) 417,936 (871,128) (1,331,929)
Income tax expense (benefit) ..... 155,752 - (486,781) (331,029) -
------------ ------------ ------------ ------------ -----------
Income (loss) from
continuing operations ........... 216,876 (1,661,692) 904,717 (540,099) (1,331,929)
Preferred stock dividends ........ - - - - (23,453)
------------ ------------ ------------ ------------ -----------
Income (loss) from continuing
operations available to common
shareholders .................... $ 216,876 $ (1,661,692) $ 904,717 $ (540,099) $(1,355,382)
============ ============ ============ ============ ===========
Earnings (loss) per share from
continuing operations (E):
Basic ........................ $0.08 $(0.20)
Diluted ...................... 0.08 (0.20)
Weighted average shares:
Basic ........................ 2,737,983 2,737,983
Diluted ...................... 2,826,207 2,826,207
PRO COMBINED
FORMA PRO
ADJUSTMENTS(D) FORMA
------------- ------------
Sales ........................... $ - $666,405,713
Cost of sales - 619,927,739
------------ ------------
Gross profit ................ - 46,477,974
Selling, general and
administrative expenses ........ - 42,226,389
Depreciation and amortization ... 67,338 2,541,574
------------ ------------
67,338 44,767,963
------------ ------------
Income (loss) from
operations ................. (67,338) 1,710,011
Other expense (income):
Interest expense .............. (55,876) 4,059,712
Other income, net ............. - (173,224)
Equity in loss of
unconsolidated affiliate ..... (38,042) -
------------ ------------
(93,918) 3,886,488
------------ ------------
Income (loss) from continuing
operations before taxes ........ 26,580 (2,176,477)
Income tax expense (benefit) .... (496,033) (827,061)
------------ ------------
Income (loss) from
continuing operations .......... 522,612 (1,349,416)
Preferred stock dividends ....... 23,453 -
------------ ------------
Income (loss) from continuing
operations available to common
shareholders ................... $ 546,065 $ (1,349,416)
============ ============
Earnings (loss) per share from
continuing operations (E):
Basic ........................ $(0.43)
Diluted ...................... (0.43)
Weighted average shares:
Basic ........................ 373,558 3,111,541
Diluted ...................... 373,558 3,199,765
(A) MWI's historical results for the eight months ended May 31, 2001 include
the operating results for the 12 week period from October 6, 2000 through
December 29, 2000, representing sales and pre-tax loss of $116,565,044
and $626,923, respectively. The activity for this 12-week period is also
included in MWI's historical results for the year ended December 29, 2000.
(B) Hawaiian Natural Water Company's historical results for the nine months
ended June 30, 2001 include the operating results for three months ended
December 31, 2000, representing sales and pre-tax loss of $537,914 and
$699,766, respectively. The activity for this three-month period is also
included in Hawaiian Natural Water Company's historical results for
the year ended December 31, 2000.
(C) See components of the pro forma adjustments in the "Summary of Pro Forma
Adjustments - Merchants Wholesale Statements of Operations".
(D) See components of the pro forma adjustments in the "Summary of Pro Forma
Adjustments - Hawaiian Natural Water Company Statements of Operations".
(E) See "Comparative Per Share Data" at page 10.
See notes to unaudited pro forma combined financial information.
P-5
AMCON DISTRIBUTING COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2000
HAWAIIAN
AMCON MERCHANTS NATURAL
DISTRIBUTING WHOLESALE WATER
COMPANY INC. COMPANY
FISCAL YEAR YEAR YEAR
ENDED ENDED PRO AMCON AND ENDED
SEPTEMBER 30, DECEMBER 29, FORMA MERCHANTS DECEMBER 31,
2000 2000 (A) ADJUSTMENTS (C) COMBINED 2000 (B)
------------ ------------ --------------- ------------- -----------
Sales .......................... $424,731,331 $506,199,544 $ - $930,930,875 $ 3,681,026
Cost of sales .................. 379,968,197 482,205,858 - 862,174,055 2,983,160
------------ ------------ ------------ ------------ -----------
Gross profit ............... 44,763,134 23,993,686 - 68,756,820 697,866
Selling, general and
administrative expenses ....... 35,637,465 21,032,664 (540,960) 56,129,169 2,489,560
Depreciation and amortization .. 2,209,418 778,814 444,867 3,433,099 -
Impairment charge .............. - - - - 1,025,935
------------ ------------ ------------ ------------ -----------
37,846,883 21,811,478 (96,093) 59,562,268 3,515,495
------------ ------------ ------------ ------------ -----------
Income from operations ..... 6,916,251 2,182,208 96,093 9,194,552 (2,817,629)
Other expense (income):
Interest expense ............. 2,498,806 2,590,592 210,940 5,300,338 120,029
Other income, net ............ (2,247,842) 72,581 - (2,175,261) -
------------ ------------ ------------ ------------ -----------
250,964 2,663,173 210,940 3,125,077 120,029
------------ ------------ ------------ ------------ -----------
Income from continuing
operations before taxes ....... 6,665,287 (480,965) (114,847) 6,069,475 (2,937,658)
Income tax expense ............. 2,354,293 - (47,893) 2,306,401 -
------------ ------------ ------------ ------------ -----------
Income from continuing
operations .................... 4,310,994 (480,965) (66,955) 3,763,075 (2,937,658)
Preferred stock dividends ...... - - - - (136,698)
------------ ------------ ------------ ------------ -----------
Income (loss) from continuing
operations available to common
shareholders .................. $ 4,310,994 $ (480,965) $ (66,955) $ 3,763,075 $(3,074,356)
============ ============ ============ ============ ===========
Earnings (loss) per share from
continuing operations (E):
Basic ........................ $1.58 $1.38
Diluted ...................... 1.51 1.32
Weighted average shares:
Basic ........................ 2,734,862 2,734,862
Diluted ...................... 2,853,320 2,853,320
PRO COMBINED
FORMA PRO
ADJUSTMENTS(D) FORMA
-------------- ------------
Sales .......................... $ - $934,611,901
Cost of sales .................. - 865,157,215
------------ ------------
Gross profit ............... - 69,454,686
Selling, general and
administrative expenses ....... - 58,618,729
Depreciation and amortization .. 89,784 3,522,883
Impairment charge .............. - 1,025,935
------------ ------------
89,784 63,167,547
------------ ------------
Income from operations ..... (89,784) 6,287,139
Other expense (income):
Interest expense ............. (15,417) 5,404,950
Other income, net ........... - (2,175,261)
------------ ------------
(15,417) 3,229,689
------------ ------------
Income from continuing
operations before taxes ....... (74,367) 3,057,450
Income tax expense ............. (1,144,570) 1,161,831
------------ ------------
Income from continuing
operations .................... 1,070,202 1,895,619
Preferred stock dividends ...... 136,698 -
------------ ------------
Income (loss) from continuing
operations available to common
shareholders .................. $ 1,206,900 $ 1,895,619
============ ============
Earnings (loss) per share from
continuing operations (E):
Basic ........................ $0.61
Diluted ...................... 0.59
Weighted average shares:
Basic ........................ 373,558 3,108,420
Diluted ...................... 373,558 3,226,878
(A) MWI's historical results for the year ended December 29, 2000 include the
operating results for the 12 week period from October 6, 2000 through December
29, 2000, representing sales and pre-tax loss of $116,565,044 and $626,923,
respectively. The activity for this 12 week period is also included in MWI's
historical results for the eight months ended May 31, 2001.
(B) Hawaiian Natural Water Company's historical results for the year ended
December 31, 2000 include the operating results for three months ended
December 31, 2000, representing sales and pre-tax loss of $537,914 and
$699,766, respectively. The activity for this three-month period is also
included in Hawaiian Natural Water Company's historical results for
the nine months ended June 30, 2001.
(C) See components of the pro forma adjustments in the "Summary of Pro Forma
Adjustments - Merchants Wholesale Statements of Operations".
(D) See components of the pro forma adjustments in the "Summary of Pro Forma
Adjustments - Hawaiian Natural Water Company Statements of Operations".
(E) See "Comparative Per Share Data" at page 10.
See notes to unaudited pro forma combined financial information.
P-6
AMCON DISTRIBUTING COMPANY
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
SUMMARY OF PRO FORMA ADJUSTMENTS - MERCHANTS WHOLESALE STATEMENTS OF OPERATIONS
FOR THE
NINE FOR THE
MONTHS YEAR
ENDED ENDED
JUNE 30, SEPTEMBER 30,
STATEMENT OF OPERATIONS COMPONENT NOTE ADJUSTMENT 2001 2000
--------------------------------------- ---- -------------------------------------------- -------------- --------------
Selling, general and administrative expenses (7) To eliminate operating lease expense on
distribution facility. $ (360,640) $ (540,960)
-------------- --------------
(360,640) (540,960)
-------------- --------------
Depreciation and amortization (8) Depreciation expense on purchased
distribution facility. 130,000 195,000
(9) Amortization of non-compete asset. 57,752 86,628
(10) Amortization of goodwill. 108,826 163,239
-------------- --------------
296,578 444,867
-------------- --------------
Interest expense (11) To eliminate MWI historical interest expense. (2,162,111) (2,501,415)
(12) To record interest expense on the LaSalle
Bank debt incurred to purchase MWI assets.
1,601,829 2,402,743
(13) Amortization of LaSalle Bank debt issuance
costs. 66,667 100,000
(14) Interest expense on the Gold Bank debt
incurred to purchase distribution facility. 345,376 518,064
(15) Interest on debt paid off with portion of
Gold Bank proceeds. (36,000) (54,000)
(16) Amortization of Gold Bank debt issuance
costs. 4,933 7,400
(17) Interest expense on amounts due to MWI sole
stockholder. 137,020 205,530
(18) Impact of interest rate swap financial
instrument. (292,921) (439,382)
(19) Amortization relating to MWI historical
debt issuance costs. (18,667) (28,000)
-------------- --------------
(353,874) 210,940
-------------- --------------
Income tax expense (benefit) (20) To adjust income taxes for the net pro forma
adjustments and the combined pro forma
results. (486,781) (47,893)
-------------- --------------
Net income (loss) impact of pro forma
adjustments $ 904,717 $ (66,955)
============== ==============
See notes to unaudited pro forma combined financial information.
P-7
AMCON DISTRIBUTING COMPANY
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
SUMMARY OF PRO FORMA ADJUSTMENTS - HAWAIIAN NATURAL WATER COMPANY STATEMENTS OF OPERATIONS
FOR THE
NINE FOR THE
MONTHS YEAR
ENDED ENDED
JUNE 30, SEPTEMBER 30,
STATEMENT OF OPERATIONS COMPONENT NOTE ADJUSTMENT 2001 2000
---------------------------------------- ---- --------------------------------------------- -------------- --------------
Depreciation and amortization (21) To record amortization expense for the
trade name intangible asset. $ 37,832 $ 50,443
(22) To record amortization expense for the
customer list intangible asset. 29,506 39,342
-------------- --------------
67,338 89,784
-------------- --------------
Interest expense (23) To eliminate historical interest expense
recorded by Hawaiian Natural Water Company
with respect to the notes payable to AMCON
Distributing Company. (55,876) (15,417)
-------------- --------------
(55,876) (15,417)
-------------- --------------
Equity in loss of unconsolidated affiliates (24) To eliminate historical equity in losses of
Hawaiian Natural Water Company. (38,042) -
-------------- --------------
(38,042) -
-------------- --------------
Income tax expense (25) To record the tax effect of the pro forma
adjustments. (496,033) (1,144,570)
-------------- --------------
(496,033) (1,144,570)
-------------- --------------
Preferred stock dividends (26) To eliminate preferred stock dividends
recorded by Hawaiian Natural Water Company. 23,453 136,698
-------------- --------------
23,453 136,698
-------------- --------------
Net income (loss) available to common
shareholders impact from pro forma
adjustments
$ 546,065 $ 1,206,901
============== ==============
See notes to unaudited pro forma combined financial information.
P-8
AMCON DISTRIBUTING COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(1) The acquisition of Hawaiian Natural Water Company will be accounted
for as a purchase. Under purchase accounting, the total of the
consideration paid and the fair value of liabilities assumed would be
allocated to the assets and liabilities of Hawaiian Natural Water
Company based on their respective fair values. The allocation of the
consideration paid has been made to major categories of assets and
liabilities in the accompanying unaudited pro forma combined balance
sheet as follows:
Original equity investment in Hawaiian Natural Water Co. ......... $ 206,082 (a)
Conversion of note receivable .................................... 500,000 (b)
Issuance of 373,558 shares of AMCON common stock ................. 2,069,511 (c)
-----------
Total acquisition consideration .................................. $ 2,775,593
===========
Net assets acquired .............................................. $ 492,633 (d)
Inventory step-up to fair value .................................. 20,563 (e)
Trade name ....................................................... 1,008,853 (f)
Customer list .................................................... 196,709 (f)
Goodwill ......................................................... 465,928 (g)
Deferred income tax asset ........................................ 1,056,835 (h)
Deferred income tax liability .................................... (465,928) (g)
-----------
Acquisition consideration allocation ............................. $ 2,775,593
===========
(a) AMCON made an initial equity investment in Hawaiian
Natural Water Company in February 2001 of $300,000,
representing the purchase of 750,000 shares. The original
investment of $300,000 was reduced by the recording of
AMCON's equity in the losses of Hawaiian Natural Water
Company of $38,042 and the recording of, as a return of
investment, AMCON's interest income from Hawaiian Natural
Water Company in connection with the notes receivable
totaling $1,250,000 of $55,876.
(b) In June 2001, AMCON provided funding to Hawaiian
Natural Water Company in the form of a note receivable of
$500,000 bearing interest at a rate of 10% per annum. The
$500,000 note receivable is convertible at any time into
Hawaiian Natural Water Company common stock at a conversion
ratio of $0.40 per share, representing 1,250,000 shares.
The pro forma combined balance sheet assumes the conversion
of the $500,000 note receivable into the 1,250,000 common
shares of Hawaiian Natural Water Company.
(c) The merger agreement between AMCON Distributing Company and
Hawaiian Natural Water Company indicates that the purchase
price is subject to a formula whereby AMCON will issue
shares of its common stock ranging between a high of
477,558 and a low of 358,168 such that the resulting
purchase price would be $2,865,344 providing AMCON's
closing stock price at the time of the acquisition were
between $6.00 and $8.00. However, due to the initial equity
investment of $300,000 and the assumed conversion of the
$500,000 note receivable, AMCON owns 2,000,000 shares of
Hawaiian Natural Water Company, representing approximately
22% of Hawaiian. Accordingly, in accordance with the
formula, AMCON will be required to issue 373,558 shares of
its common stock to purchase the remaining 78% of Hawaiian
Natural Water Company. The options expected to be issued as
part of the merger consideration are not expected to be
significant.
In accordance with Emerging Issues Task Force's Abstracts
Issue 99-12, "Determination of the Measurement Date for the
Market Price of Acquirer Securities Issued in a Purchase
Business
P-9
AMCON DISTRIBUTING COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION (CONTINUED)
Combination" (EITF 99-12), because of the fact that (1)
the market value of AMCON's stock on the date the terms of
the merger were agreed to and announced was below the
range of $6.00 to $8.00, (2)
the market value of the stock subsequently went above
$6.00 for a period of time, (3) the market value
subsequently fell back below the range on February 14,
2001 and (4) the market value stayed below the range
through June 30, 2001, the measurement date for the market
price of AMCON's common stock for purposes of recording
the purchase price allocation for the acquisition of
Hawaiian Natural Water Company is February 14, 2001. In
accordance with EITF 99-12, the market value of the common
stock of $5.54 per share used in the purchase price
allocation was based on the average of market prices a few
days before and after the measurement date. The total
value of the common stock issued of $2,069,511 was
determined by multiplying the shares issued of 373,558 by
the market price of $5.54.
Based on a par value of $0.01 per share, the credits to
common stock and additional paid-in capital for the
issuance of the 373,558 shares are $3,736 and $2,065,775,
respectively.
(d) The net assets acquired of $492,633 is represented by the
net liability amount of $7,367 per the June 30, 2001
Hawaiian Natural Water Company historical balance sheet
plus the assumed conversion of the $500,000 note payable to
AMCON Distributing Company to Hawaiian Natural Water
Company common stock.
(e) Represents the estimated write-up in value of the purchase
finished goods inventory. The write-up will not result in a
charge to cost of sales for the purposes of the
accompanying Unaudited Pro Forma Combined Statement of
Operations due to its non-recurring nature.
(f) The excess of the acquisition consideration over the fair
value of the net assets acquired has been allocated to the
other identified intangibles trade name and customer list
in the amounts of $1,008,853 and $196,709, respectively.
The trade name and customer list assets will be amortized
over their estimated useful lives of 20 years and 5 years,
respectively.
Under the current guidance of Statement of Financial
Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," (to be replaced by Statement of
Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" for all
fiscal years beginning after December 15, 2001) and
Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," in the event that
facts and circumstances indicate that the carrying value
of Hawaiian Natural's long-lived assets (including
intangible assets subject to amortization) may be
impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with those
assets would be compared to the carrying amount to
determine if a write-down to fair value is required. Under
Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," goodwill is no
longer amortized, but is assessed at least annually for
impairment using a fair value methodology. The fair value
methodology would be based on the operations of Hawaiian
Natural (assuming Hawaiian Natural is considered to be an
operating segment or one level below after the merger).
Hawaiian Natural has experienced recurring losses and
negative cash flows from operations since its inception in
1994. Accordingly, there can be no assurance that
impairment write-downs of Hawaiian Natural's long-lived
assets (including intangible assets subject to
amortization and goodwill) will not be recorded in the
future under these accounting standards.
P-10
AMCON DISTRIBUTING COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION (CONTINUED)
(g) Represents the establishment of the deferred income taxes
liability resulting from the acquisition of Hawaiian
Natural Water Company, applying an estimated effective
income tax rate of 38% as follows:
Trade name ........................ $1,008,853
Customer list ..................... 196,709
Inventory step-up ................. 20,563
----------
Totals ............................ 1,226,125
Estimated effective tax rate ...... 38%
----------
Net deferred tax liability ........ $ 465,928
==========
The deferred tax liability has been recorded in the Unaudited
Pro Forma Combined Balance Sheet with the establishment of a
goodwill asset. Due to the fact that the purchase of Hawaiian
Natural Water Company will be consummated after June 30, 2001,
in accordance with Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," this goodwill
will not be amortized. Under this nonamortization approach,
the carrying value of the goodwill will be reviewed for
impairment and written down and charged to results of
operations only in the periods in which the impairment
recognition criteria has been met and the recorded value of
goodwill is more than its measured fair value.
(h) To record the fair value of the tax net operating loss
carryforwards acquired in the purchase of the Hawaiian Natural
Water Company common stock. The fair value was based on the
estimated amount of the net operating loss carryforwards AMCON
expects it will be able to utilize, taking into consideration
the limitation on the subsequent utilization under IRC Section
382.
(2) To eliminate amounts due from Hawaiian Natural Water Company to AMCON
Distributing Company for expenses paid by AMCON on Hawaiian's behalf.
(3) To eliminate the notes receivable due from Hawaiian Natural Water Company
and the related notes payable to AMCON Distributing Company totaling
$1,250,000. The $350,000, $400,000 and $500,000 notes bear interest at
10% per annum and have been outstanding since September 2000, October
2000 and June 2001, respectively. The $350,000 and $400,000 notes are
eliminated, as the notes will represent intercompany amounts
subsequent to the consummation of AMCON's acquisition of the stock in
Hawaiian Natural Water Company. The pro forma combined financial data
assumes AMCON's conversion of the $500,000 note into 1,250,000 shares
of Hawaiian Natural Water Company common stock prior to the
consummation of the acquisition.
(4) To eliminate the carrying value of the original $300,000 equity
investment AMCON Distributing Company made in Hawaiian Natural Water
Company in February 2001, representing 750,000 shares of Hawaiian
Natural Water Company's common stock. The original investment of
$300,000 was reduced by the recording of AMCON's equity in the losses
of Hawaiian Natural Water Company of $38,042 and the recording of,
as a return of investment, AMCON's interest income from Hawaiian
Natural Water Company in connection with the notes receivable totaling
$1,250,000 of $55,876.
(5) AMCON Distributing Company estimates the costs to be incurred for
legal, accounting, printing and other in connection with the exchange
of its common stock for the remaining outstanding common stock of
Hawaiian Natural Water Company to be approximately $300,000. As these
costs relate to the issuance of equity, the costs have been reflected
as a charge to additional paid-in capital. As these costs will be
funded by AMCON's revolving credit facility, the Unaudited Pro Forma
Combined Balance Sheet reflects these costs as an increase in
outstanding long-term debt.
(6) To eliminate the equity of Hawaiian Natural Water Company.
P-11
AMCON DISTRIBUTING COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION (CONTINUED)
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS - MERCHANTS WHOLESALE INC.
(7) To eliminate the operating lease expense on the Quincy, Illinois
distribution facility of $360,640 and $540,960 for the eight months
ended May 31, 2001 and the year ended September 30, 2000,
respectively, that was leased from the MWI sole stockholder under a
noncancellable operating lease through June 1, 2001. AMCON purchased
the building on June 1, 2001 for $6,500,000 and recorded it in the
preliminary purchase price allocation at its appraised fair value of
$7,800,000.
(8) To record depreciation expense on the $7,800,000 Quincy, Illinois
distribution facility of $130,000 and $195,000 for the eight months
ended May 31, 2001 and the year ended September 30, 2000,
respectively. The facility is being depreciated over its estimated
useful life of 40 years.
(9) To record the pro forma amortization on the noncompete intangible
asset of $346,510 for the eight months ended May 31, 2001 and the year
ended September 30, 2000 of $57,752 and $86,628, respectively.
(10) To record the pro forma amortization on the goodwill of $4,080,980
for the eight months ended May 31, 2001 and the year ended September
30, 2000 of $108,826 and $163,239, respectively. Upon the adoption of
Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets," the recording of goodwill amortization
relating to the acquisition of MWI and other pre-June 30, 2001
acquisitions will cease. Under this nonamortization approach, the
carrying value of the goodwill will be reviewed for impairment and
written down and charged to results of operations only in the periods
in which the impairment recognition criteria has been met and the
recorded value of goodwill is more than its measured fair value.
(11) To eliminate 100% of MWI's historical interest expense with the
exception of interest incurred on the capital lease obligations, as
the only debt that was assumed in the purchase of MWI's net assets
were certain obligations under capital lease.
(12) To record the incremental debt incurred under the LaSalle Bank
line of credit arrangement to purchase the net assets of MWI, to
finance a portion of the Quincy, IL distribution facility and to pay
the $337,000 in debt issuance costs was $28,844,459. Therefore, the
pro forma interest expense on the incremental debt at 8.33% for the
eight months ended May 31, 2001 and the year ended September 30, 2000
is $1,601,829 and $2,402,743, respectively. The impact on pre-tax
income of a 1/8% variance in the interest rate would be $24,037
and $36,056 for the eight months ended May 31, 2001 and the year
ended September 30, 2000, respectively.
(13) To record the pro forma amortization of the LaSalle Bank debt
issuance costs of $300,000 for the eight months ended May 31, 2001 and
the year ended September 30, 2000 of $66,667 and $100,000,
respectively.
(14) To record the pro forma interest expense on the Gold Bank 7.5%
(fixed rate) term debt of $6,960,000 for the eight months ended
May 31, 2001 and the year ended September 30, 2000 of $345,376 and
$518,064, respectively.
(15) To eliminate the historical interest expense for the eight months
ended May 31, 2001 and the year ended September 30, 2000 of $36,000
and $54,000, respectively, relating to the $720,000 of existing AMCON
debt that was paid off with a portion of the Gold Bank term loan
proceeds.
(16) To record the pro forma amortization on the Gold Bank debt
issuance costs of $37,000 for the eight months ended May 31, 2001 and
the year ended September 30, 2000 of $4,933 and $7,400, respectively.
(17) To record the pro forma interest expense at a fixed rate of 6% on
the amounts due to the MWI sole stockholder relating to the noncompete
and goodwill arrangements for the eight months ended May 31, 2001
and the year ended September 30, 2000 of $137,020 and $205,530,
respectively.
P-12
AMCON DISTRIBUTING COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION (CONTINUED)
(18) To record the estimated pro forma interest expense reduction
impact of marking to market the interest rate swap financial
instrument from a negative fair value (liability) of $951,995 as of
the date of the acquisition to zero as of the contract's maturity
date for the eight months ended May 31, 2001 and the year ended
September 30, 2000 of $292,921 and $439,382, respectively.
(19) To eliminate the historical MWI debt issuance cost amortization
for the eight months ended May 31, 2001 and the year ended September
30, 2000 of approximately $18,667 and $28,000, respectively.
(20) The net impact of the pro forma adjustments have been tax-effected
at AMCON's historical effective tax rate of approximately 38%.
Additionally, due to the fact that MWI was an S-Corporation for tax
purposes, no income tax expense (benefit) was recorded in its
historical results for the eight months ended May 31, 2001 or for its
year ended December 29, 2000. Accordingly, the pro forma tax
adjustments include amounts to tax-effect the combined pro forma
results for the nine months ended June 30, 2001 and the year ended
September 30, 2000 at AMCON's historical effective tax rate of
approximately 38%.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS - HAWAIIAN NATURAL WATER
COMPANY
(21) To record the pro forma amortization on the trade name intangible
asset of $1,008,853 over 20 years for the nine months ended June 30,
2001 and the year ended September 30, 2000 of $37,832 and $50,443,
respectively.
(22) To record the pro forma amortization on the customer list intangible
asset of $196,709 over 5 years for the nine months ended June 30,
2001 and the year ended September 30, 2000 of $29,506 and $39,342,
respectively.
(23) To eliminate the historical interest expense recorded by Hawaiian
Natural Water Company in connection with the notes payable to AMCON
Distributing Company of $350,000, $400,000 and $500,000 bearing
interest at 10% per annum.
(24) Prior to the consummation of the acquisition, AMCON Distributing
Company accounted for its investment in Hawaiian Natural Water Company
under the equity method. Subsequent to the acquisition, AMCON will
consolidate Hawaiian Natural Water Company and, therefore, this pro
forma adjustment is to eliminate the historical AMCON Distributing
Company equity in losses of Hawaiian Natural Water Company.
(25) The net impact of the pro forma adjustments have been tax-effected at
AMCON's historical effective tax rate of approximately 38%.
Additionally, due to the fact that Hawaiian Natural Water Company was
providing a full reserve against the tax net operating loss
carryforward assets it was generating, no income tax benefit was
recorded in its historical results for the nine months ended June 30,
2001 or for its year ended December 31, 2000. Accordingly, the pro
forma tax adjustments include amounts to tax-effect the combined pro
forma results for the nine months ended June 30, 2001 and the year
ended September 30, 2000 at AMCON's historical effective tax rate of
approximately 38%.
(26) To eliminate the preferred stock dividends recorded by Hawaiian
Natural Water Company relating to its preferred stock which has since
been fully redeemed.
P-13
AMCON DISTRIBUTING COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND SEPTEMBER 30, 2000
(UNAUDITED)
JUNE 30, SEPTEMBER 30,
2001 2000
------------- -------------
ASSETS
Current Assets:
Cash ......................................................................... $ 1,051,626 $ 1,148,276
Accounts receivable less allowance for
doubtful accounts of $684,049 and $329,069 ................................. 35,873,042 16,703,983
Inventories .................................................................. 29,684,879 22,122,674
Deferred income taxes ........................................................ 1,122,058 241,709
Current assets of discontinued operations .................................... - 10,265,416
Other ........................................................................ 654,642 447,754
------------- ------------
Total current assets .............................. 68,386,247 50,929,812
Fixed assets net .................................................................. 15,136,561 4,870,093
Notes receivable .................................................................. 1,250,000 350,000
Investments ....................................................................... 1,068,168 509,162
Deferred income taxes ............................................................. 266,728 -
Non-current assets of discontinued operations ..................................... - 4,099,258
Other assets ...................................................................... 16,597,133 12,434,011
------------- ------------
$ 102,704,837 $ 73,192,336
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................................. $ 22,458,882 $ 6,610,358
Accrued expenses ............................................................. 4,898,500 2,600,258
Current liabilities of discontinued operations ............................... - 5,727,463
Current portion of long-term debt ............................................ 1,289,178 8,056,323
Current portion of subordinated debt ......................................... 868,721 912,694
------------- ------------
Total current liabilities ......................... 29,515,281 23,907,096
------------- ------------
Other liabilities ................................................................. 1,139,412 -
Deferred income taxes ............................................................. - 683,233
Non-current liabilities of discontinued operations ................................ - 6,333,219
Long-term debt less current portion ............................................... 50,234,612 16,668,647
Subordinated debt less current portion ............................................ 6,472,792 8,745,236
Commitments .......................................................................
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none
outstanding ................................................................. - -
Common stock, $.01 par value, 15,000,000 shares authorized, 2,738,304
and 2,737,551 issued, respectively ......................................... 27,383 27,376
Additional paid-in capital ................................................... 4,123,086 4,121,981
Unrealized gain on investments available-for-sale,
net of $191,194 and $139,482 tax ........................................... 315,111 228,924
Retained earnings ............................................................ 10,877,160 12,476,624
------------- ------------
Total shareholders' equity ........................ 15,342,740 16,854,905
------------- ------------
$ 102,704,837 $ 73,192,336
============= ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-1
AMCON DISTRIBUTING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 2001 AND 2000
(UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE NINE MONTHS ENDED JUNE 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Sales (including excise taxes
of $26.3 million and $18.8
million, and $59.2 million and
$52.1 million, respectively) ..... $ 153,662,344 $ 105,950,999 $ 355,924,403 $ 306,123,069
Cost of sales ....................... 141,441,141 95,444,465 323,577,307 273,225,403
------------- ------------- ------------- -------------
Gross profit .................... 12,221,203 10,506,534 32,347,096 32,897,666
Selling, general and
administrative expenses ........... 10,800,560 9,055,589 28,235,894 25,902,037
Depreciation and amortization ....... 644,967 457,800 1,760,820 1,634,249
------------- ------------- ------------- -------------
11,445,527 9,513,389 29,996,714 27,536,286
------------- ------------- ------------- -------------
Income from operations .............. 775,676 993,145 2,350,382 5,361,380
Other expense (income):
Interest expense ............... 765,620 581,539 2,112,936 1,808,111
Other income, net .............. (125,000) (1,940,187) (173,224) (2,091,473)
Equity in loss of
unconsolidated affiliate ..... 38,042 - 38,042 -
------------- ------------- ------------- -------------
678,662 (1,358,648) 1,977,754 (283,362)
------------- ------------- ------------- -------------
Income from continuing
operations before income taxes .... 97,014 2,351,793 372,628 5,644,742
Income tax expense .................. 52,396 820,292 155,752 2,037,032
------------- ------------- ------------- -------------
Income from continuing
operations ........................ 44,618 1,531,501 216,876 3,607,710
Loss from discontinued
operations, net of income tax
benefit of $88,630, $551,298,
and $5,357 ........................ - (150,910) (894,435) (9,122)
Loss on disposal of discontinued
operations, net of income tax
benefit of $411,350 ............... - - (675,416) -
------------- ------------- ------------- -------------
Net income (loss) ................... $ 44,618 $ 1,380,591 $ 1,352,975 $ 3,598,588
============= ============= ============= =============
Earnings (loss) per share from
continuing operations:
Basic: ......................... $ 0.02 $ 0.56 $ 0.08 $ 1.32
Diluted: ....................... $ 0.02 $ 0.54 $ 0.08 $ 1.26
Earnings (loss) per share from
discontinued operations:
Basic: ......................... $ - $ (0.06) $ (0.57) $ (0.00)
Diluted: ....................... $ - $ (0.05) $ (0.56) $ (0.00)
Net earnings (loss) per share:
Basic: ......................... $ 0.02 $ 0.50 $ (0.49) $ 1.32
Diluted: ....................... $ 0.02 $ 0.49 $ (0.48) $ 1.26
Weighted average shares
outstanding:
Basic: ......................... 2,738,231 2,737,333 2,737,983 2,733,954
Diluted: ....................... 2,831,433 2,845,101 2,826,207 2,858,725
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-2
AMCON DISTRIBUTING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
2001 2000
------------ -----------
Net cash provided by operating activities ................ $ 13,983,622 $ 3,605,592
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets ........................... (1,220,207) (607,247)
Proceeds from sales of fixed assets ................. 1,350 1,945,413
Advances under notes receivable ..................... (900,000) -
Purchase of common stock in HNWC .................... (300,000) -
Proceeds from sales of available-for-
sale securities ................................... - 92,260
Proceeds from disposal of discontinued
operations net of cash expenditures ............... 8,200,641 -
Acquisitions net of cash acquired ................... (36,344,144) -
------------ -----------
Net cash (used in) investing activities .. (30,562,360) 1,430,426
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ........................ 720,000 -
Proceeds from bank credit agreement
for acquisition ................................... 36,344,144 -
Net (payments) on bank credit agreement ............. (16,141,430) (5,153,192)
Payments on long-term debt and
subordinated debt ................................. (3,354,289) (626,619)
Payment of debt issue costs ......................... (305,846) -
Dividends paid ...................................... (246,429) (208,042)
Proceeds from exercise of stock options ............. 1,141 20,262
Purchase of treasury stock .......................... (85) -
------------ -----------
Net cash (used in) financing activities .... 17,017,206 (5,967,591)
------------ -----------
Net increase (decrease) in cash .......................... 438,468 (931,573)
Cash, beginning of period ................................ 613,158 1,646,133
------------ -----------
Cash, end of period ...................................... $ 1,051,626 $ 714,560
============ ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-3
AMCON DISTRIBUTING COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial
statements include the accounts of AMCON Distributing Company and its
subsidiaries ("AMCON" or the "Company"). All significant intercompany
transactions and balances have been eliminated in consolidation. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to fairly present the
financial information included therein, such adjustments consisting of normal
recurring items. It is suggested that these financial statements be read in
conjunction with the audited financial statements and notes thereto for the
fiscal year ended September 30, 2000, which are included in the Company's
Annual Report to Stockholders filed with Form 10-K. Results for the interim
period are not necessarily indicative of results to be expected for the
entire year. Additionally, the Company completed its purchase of the
distribution business and net assets of Merchants Wholesale, Inc. on June 1,
2001. As more fully described in Note 2 to the unaudited condensed
consolidated financial statements, the Company completed the sale of its
health food distribution business effective March 23, 2001. As a result, the
Company's September 30, 2000 balance sheet and fiscal 2000 results have been
restated to reflect the health food distribution business as discontinued
operations.
AMCON's fiscal third quarters ended on June 29, 2001 and June 23,
2000, respectively. For convenience, the fiscal quarters have been indicated
as June 30. Each three and nine-month period ended comprised 13 weeks and 39
weeks, respectively.
2. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES:
(a) Health Food Distribution Business:
---------------------------------
Effective March 23, 2001, the Company's subsidiary, Food For Health
Co., Inc., completed the sale of the assets of its health food distribution
business for $10.3 million, subject to certain adjustments. The purchase
price was paid in cash and the assumption by the purchaser of approximately
$2.1 million in indebtedness. The sale resulted in a pre-tax loss of
approximately $1.1 million ($675,000 after taxes). This loss includes an
accrual for estimated costs, including rent and related expenses associated
with the remaining lease commitments on the two distribution facilities that
were retained by the Company of $2.5 million and contractual consulting
agreements of $445,000, which will provide no future economic benefit to the
Company. The Company is actively seeking tenants to sublease the facilities
for the remainder of the lease terms. Any differences between these expense
estimates and their actual settlement will change the loss accordingly. In
connection with the sale of the health food distribution business, the
Company also entered into a 5 year supply agreement with the purchaser under
which the purchaser will supply products to the Company's retail health food
stores at market prices.
The sale of the Company's health food distribution business has been
reflected as discontinued operations in the unaudited condensed consolidated
financial statements in accordance with APB No. 30. Revenues from the
discontinued operations, which have been excluded from income from continuing
operations in the accompanying unaudited condensed consolidated statements of
operations for the three and nine-month periods ended June 30, 2001 and 2000,
are presented below. The effects of the discontinued operations on net income
(loss) and per share data are reflected within the accompanying unaudited
condensed consolidated statements of operations.
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenue ... $ - $ 9,933,329 $ 13,704,844 $ 33,541,133
F-4
AMCON DISTRIBUTING COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
(b) Merchants Wholesale, Inc.:
-------------------------
On June 1, 2001, the Company completed the acquisition of
substantially all of the distribution business and net assets of Merchants
Wholesale, Inc. ("Merchants") located in Quincy, IL. In addition, the Company
purchased a 206,000 square foot building occupied by Merchants and owned by
Merchants' sole shareholder. The net purchase price of $36.7 million, net of
assumed liabilities of $6.0 million, was based on assets held at the closing
date, including the real estate. Funding for the acquisition was provided as
follows: $27.0 million through borrowings under a revolving loan agreement
with LaSalle National Bank (the "Revolving Loan"); $6.3 million through a
real estate loan with Gold Bank (the "Real Estate Loan"); and $3.4 million of
deferred payment to the sole stockholder of MWI. Costs and expenses
associated with the acquisition were paid from AMCON's Revolving Loan
proceeds. The Revolving Loan is secured by all of AMCON's assets, excluding
real estate. The Real Estate Loan is secured by AMCON's two owned
distribution facilities.
The transaction was accounted for using the purchase method of
accounting under which the purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair values. The
portion of the purchase price in excess of the fair value of the net assets
acquired to be allocated to goodwill and other identifiable assets is
currently estimated to be approximately $4.1 million and $0.3 million,
respectively. The goodwill is currently being amortized over 25 years, while
the identifiable intangible asset, represented by a noncompete agreement with
the sole shareholder of Merchants, is being amortized over the period covered
by the agreement of four years. On October 1, 2001, the Company intends to
early adopt the guidance under the newly issued Statement of Financial
Accounting Standards No. 142 and the remaining unamortized goodwill asset
will no longer be amortized. The carrying value of the goodwill will then be
reviewed for impairment and written down and charged to the results of
operations if and when the impairment recognition criteria is met and the
recorded value of the asset exceeds its measured fair value. It is the
Company's intention to more fully evaluate the fair value, classification and
useful lives of the acquired net assets, including the intangible assets,
and, as a result, the final allocation of the purchase price to the
intangible assets acquired may ultimately differ from that recorded as of
June 30, 2001. The Company intends to have the evaluation of fair value, and
therefrom, the purchase price allocation completed by September 30, 2001.
Operating results for the Merchants acquisition are included in the
accompanying condensed consolidated statement of operations from the
acquisition date. The following presents pro forma unaudited condensed
consolidated revenues, net income from continuing operations and net income
per share for the nine months ended June 30, 2001 and 2000 as if the
acquisition of the distribution business and the net assets of Merchants
occurred on October 1, 2000 and 1999, respectively.
NINE MONTHS ENDED
------------------------------------
JUNE 30, 2001 JUNE 30, 2000
------------- -------------
Sales ....................................... $664,268,399 $628,276,249
Net income from continuing operations ....... $ (202,414) $ 3,767,199
Net income .................................. $ (1,722,264) $ 3,758,077
Earnings per share:
Basic .................................... $ (0.65) $ 1.38
Diluted .................................. $ (0.65) $ 1.32
The pro forma information provided above is based on assumptions
that management deems appropriate, but does not purport to be indicative of
the results that would have actually occurred had the acquisition taken place
on October 1, 2000 and 1999, respectively.
F-5
AMCON DISTRIBUTING COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
(c) Hawaiian Natural Water Company, Inc.:
------------------------------------
In November 2000, the Company entered into a merger agreement with
Hawaiian Natural Water Company, Inc. (OTC: HNWC), pursuant to which HNWC
would be merged with and into, and thereby become, a wholly-owned subsidiary
of the Company. As a result, the Company will issue between 358,168 and
477,558 shares of its common stock to HNWC shareholders, representing between
11.6% and 14.9% of the Company's outstanding shares after giving effect to
the merger. The ultimate purchase price will be determined based on the
Company's stock price at the closing of the transaction. Based on the
Company's closing stock price on July 31, 2001, the maximum purchase price
would be $2.7 million (excluding the $750,000, but including the $500,000,
advanced to HNWC through June 30, 2001 and recorded as notes receivable and
the $300,000 recorded as an investment in the accompanying unaudited
condensed consolidated balance sheet at June 30, 2001).
The Company has provided HNWC with certain interim debt financing
pending the consummation of the merger. HNWC is currently experiencing
recurring operating losses and negative cash flows from operations;
therefore, the Company loaned HNWC $350,000 in September 2000 and $400,000 in
October 2000 for a total of $750,000 (the "$750,000 Notes") to be used for
working capital and other general corporate purposes, including redemption of
outstanding preferred stock. The loan is evidenced by promissory notes,
bearing interest at the rate of 10% per annum, due on September 30, 2001 (the
original due date was March 31, 2001), which are secured by substantially all
of HNWC's assets.
In February 2001, the Company invested an additional $300,000 in
HNWC in exchange for 750,000 shares of common stock at substantially the same
exchange ratio as provided for in the merger agreement. The investment
represents an ownership interest of approximately 9.5% in HNWC and,
accordingly, was accounted for under the cost method through the end of
Company's quarter ended March 31, 2001.
In February 2001, the Company agreed to obtain, and placed orders
for, certain water bottling equipment to be utilized by HNWC in order to
increase production capacity to achieve its growth targets. The estimated
commitment under this operating lease is approximately $2.6 million over 8
years. The Company will sublease this equipment to HNWC under similar terms.
In June 2001, the Company loaned HNWC an additional $500,000, which
loan is evidenced by a promissory note bearing interest at the rate of 10%
per annum, due on September 30, 2001, and which is also secured by
substantially all of HNWC's assets (the "$500,000 Note"). In the event that
the merger agreement is terminated for any reason or HNWC defaults on its
obligations under the $750,000 Notes or the $500,000 Note, the Company will
be entitled to convert all of those notes into Series C Convertible Preferred
Stock which, among other things, would entitle AMCON to elect a majority of
HNWC's Board of Directors. The $750,000 notes are also convertible upon 61
days' advance notice into HNWC's common stock at the same exchange ratio as
in the merger. The $500,000 Note is convertible at any time at AMCON's
election into HNWC's common stock at a conversion ratio of $0.40 per share
and gives the Company a beneficial ownership interest of approximately 22% in
HNWC.
While there is no commitment to do so, the Company may consider
negotiating future financing needs as they arise. However, given the
continued funding of HNWC in the Company's quarter ended June 30, 2001
through the issuance of the $500,000 Note, AMCON management believes that it
has the ability to exercise significant influence over the operating and
financial policies of HNWC. Accordingly, the Company has adopted the equity
method of accounting for its investment in HNWC in the 3rd quarter ended June
30, 2001. The effect of adopting equity accounting on the carrying value of
the common stock in HNWC and the results of operations as of, and for, the
Company's second quarter ended March 31, 2001, the quarter in which the HNWC
common stock investment was made, is immaterial. The charge to the Company's
third quarter results to record its equity in the losses of HNWC from the
initial common stock investment date is $38,042.
F-6
AMCON DISTRIBUTING COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
The 750,000 shares purchased in February 2001 and the 1,250,000
shares receivable by AMCON upon conversion of the $500,000 Note will
participate in the consideration to be received by HNWC stockholders in the
merger (the "Merger Consideration"). Any shares receivable by AMCON upon
conversion of the $750,000 Notes will not participate in the merger
consideration. Due to the anticipated acquisition of HNWC and management's
belief that the notes will not be paid within the next 12 months, the notes
have been classified as noncurrent as of June 30, 2001.
The merger is expected to qualify as a tax-free reorganization and to be
recorded on the Company's books using the purchase method of accounting. The
merger is subject to various conditions, including the effectiveness of a
registration statement covering the AMCON shares to be issued in the merger,
the listing of such shares on AMEX and the approval of the HNWC stockholders.
It is expected that the merger will be consummated in the fourth quarter of
fiscal 2001.
3. INVENTORIES:
Inventories consist of finished products purchased in bulk
quantities to be redistributed to the Company's customers. Effective in
fiscal 1999, the Company changed the method of accounting for inventory from
the first-in, first-out ("FIFO") method to the last-in, first-out ("LIFO")
method. LIFO inventories at June 30, 2001 were approximately $3.9 million
less than the amount of such inventories valued on a FIFO basis.
4. DIVIDENDS:
The Company paid cash dividends totaling $0.03 per share during the
quarter ended June 30, 2001.
5. EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share is calculated by dividing income
from continuing operations, loss from discontinued operations and net income
(loss) by the weighted average common shares outstanding for each period.
Diluted earnings (loss) per share is calculated by dividing income from
continuing operations, loss from discontinued operations and net income
(loss) by the sum of the weighted average common shares outstanding and the
weighted average dilutive options, using the treasury stock method. Stock
options outstanding at June 30, 2001 and 2000, respectively, which were not
included in the computations of diluted earnings per share because the
option's exercise price was greater than the average market price of the
common shares totaled 172,380 with an average exercise price of $7.25 for the
three and nine months ended June 30, 2001, 168,200 shares with an average
exercise price of $7.39 for the three months ended June 2000 and 129,700
shares with an average exercise price of $7.76 for the nine months ended June
30, 2000.
F-7
AMCON DISTRIBUTING COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
FOR THE THREE-MONTH PERIOD ENDED JUNE 30,
--------------------------------------------------------------
2001 2000
--------------------------- -----------------------------
BASIC DILUTED BASIC DILUTED
----------- ----------- ----------- -----------
1. Weighted average common shares
outstanding ................................ 2,738,242 2,738,242 2,737,337 2,737,337
2. Weighted average treasury shares
outstanding ................................ (11) (11) (4) (4)
3. Weighted average of net additional shares
outstanding assuming dilutive options and
warrants exercised and proceeds used to
purchase treasury stock ................... - 93,202 - 107,768
----------- ----------- ----------- -----------
4. Weighted average number of shares
outstanding ............................... 2,738,231 2,831,433 2,737,333 2,845,101
=========== =========== =========== ===========
5. Income from continuing operations ........... $ 44,618 $ 44,618 $ 1,531,501 $ 1,531,501
=========== =========== =========== ===========
6. Loss from discontinued operations ........... $ - $ - $ (150,910) $ (150,910)
=========== =========== =========== ===========
7. Net income .................................. $ 44,618 $ 44,618 $ 1,380,591 $ 1,380,591
=========== =========== =========== ===========
8. Earnings per share from continuing
operations ................................ $ 0.02 $ 0.02 $ 0.56 $ 0.54
=========== =========== =========== ===========
9. Loss per share from discontinued
operations ................................ $ - $ - $ (0.06) $ (0.05)
=========== =========== =========== ===========
10. Net earnings per share ...................... $ 0.02 $ 0.02 $ 0.50 $ 0.49
=========== =========== =========== ===========
FOR THE NINE-MONTH PERIOD ENDED JUNE 30,
--------------------------------------------------------------
2001 2000
--------------------------- -----------------------------
BASIC DILUTED BASIC DILUTED
----------- ----------- ----------- -----------
1. Weighted average common shares
outstanding ................................. 2,737,988 2,737,988 2,733,955 2,733,955
2. Weighted average treasury shares
outstanding ................................. (5) (5) (1) (1)
3. Weighted average of net additional shares
outstanding assuming dilutive options and
warrants exercised and proceeds used to
purchase treasury stock ..................... - 88,224 - 124,771
----------- ----------- ----------- -----------
4. Weighted average number of
shares outstanding .......................... 2,737,983 2,826,207 2,733,954 2,858,725
=========== =========== =========== ===========
5. Income from continuing operations ............. $ 216,876 $ 216,876 $ 3,607,710 $ 3,607,710
=========== =========== =========== ===========
6. Loss from discontinued operations ............. $ (894,435) $ (894,435) $ (9,122) $ (9,122)
=========== =========== =========== ===========
7. Loss on disposal of discontinued operations ... $ (675,416) $ (675,416) $ - $ -
=========== =========== =========== ===========
8. Net income (loss) ............................. $(1,352,975) $(1,352,975) $ 3,598,588 $ 3,598,588
=========== =========== =========== ===========
9. Earnings per share from
continuing operations ....................... $ 0.08 $ 0.08 $ 1.32 $ 1.26
=========== =========== =========== ===========
10. Loss per share from discontinued
operations .................................. $ (0.57) $ (0.56) $ - $ -
=========== =========== =========== ===========
11. Net earnings (loss) per share ................. $ (0.49) $ (0.48) $ 1.32 $ 1.26
=========== =========== =========== ===========
F-8
AMCON DISTRIBUTING COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
6. COMPREHENSIVE INCOME (LOSS):
The following is a reconciliation of net income (loss) per the
accompanying consolidated statements of operations to comprehensive income
(loss) for the periods indicated:
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------- -------------------------------
2001 2000 2001 2000
----------- ------------- ------------- -------------
Net income (loss) ................................. $ 44,618 $ 1,380,591 $ (1,352,975) $ 3,598,588
Other comprehensive income:
Unrealized holding gain (losses) arising
from investments during the period, net of
income taxes of $(10,499), $17,956, $51,712
and $19,783, respectively .................... (17,501) 29,926 86,188 32,971
Less reclassification adjustments included in
net income ...................................... - (25,533) - (42,904)
----------- ------------- ------------- -------------
Comprehensive income (loss) ....................... $ 27,117 $ 1,384,984 $ (1,266,787) $ 3,588,655
=========== ============= ============= =============
7. DEBT:
In connection with the acquisition of the distribution business and
net assets of Merchants on June 1, 2001, the Company incurred additional debt
as follows:
(a) Revolving Credit Facility:
-------------------------
The Company amended its revolving credit facility (the "Facility")
with a bank to increase the Facility from $25.0 million to $55.0 million.
Borrowings under the Facility are based on eligible accounts receivable and
inventory requirements. The new Facility bears interest at the bank's base
rate ("Prime") or LIBOR plus 1.75%, as selected by the Company. In addition,
the Company is required to pay an unused fee equal to .25% per annum on the
difference between the maximum loan limit and the average borrowing for the
month. The Facility is collateralized by all equipment, all intangibles,
inventories, and accounts receivable. The Facility contains covenants which,
among other things, set certain financial ratios and net worth requirements,
including covenants that (i) restrict the permitted investments, (ii)
restrict intercompany advances to HNWC, (iii) restrict incurrence of
additional debt, (iv) restrict mergers and acquisitions and changes in
business or conduct of business and (v) require the maintenance of certain
financial ratios and net worth levels including an average annual fixed
charge ratio of 1.1 to 1.0, average annual debt service coverage ratio of 1.5
to 1.0, average annual Senior debt to EBITDA ratio of 6.0 to 1.0, and a
minimum tangible net worth of $7,000,000. In addition, the Company must
maintain a fill rate percentage of not less than 93% calculated on a weekly
basis. The fill rate percentage is determined by dividing the total dollar
amount of inventory delivered to the Company's customers each week into the
total amount of orders which correspond to such deliveries. The Facility also
provides that the Company may not pay dividends in excess of $.12 per share
on an annual basis.
(b) Real Estate Term Loan:
---------------------
The Company borrowed $6.9 million from a bank to purchase the
distribution facility utilized by Merchants, which was owned by Merchants'
sole stockholder (the "Real Estate Loan"). Proceeds from the Real Estate Loan
were also used to retire term debt. The Real Estate Loan bears interest at a
fixed rate of 7.5% with monthly installments of principal and interest in the
amount of $56,531 per month. The loan has a term of 5 years, at which time
the remaining balance will be due and payable, and is collateralized by the
Company's two owned distribution facilities.
F-9
AMCON DISTRIBUTING COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
(c) Subordinated Obligations Due Seller:
-----------------------------------
The asset purchase agreement with Merchants provides for deferred
payments to be made to the seller totaling $4,550,000. The obligations are
subordinate to the Facility and the Real Estate Loan. The company paid
$1,000,000 on the closing date of the transaction, while the remaining
$3,550,000 is required to be paid on the first, second, third and fourth
anniversaries of the closing date of the transaction in installments of
$900,000 on each of the first three anniversary dates with a final payment of
$850,000 on the fourth anniversary of the closing date. In addition, the
Company entered into a noncompetition agreement with the seller that requires
the Company to make payments of $100,000 annually on the first through fourth
anniversary dates of the closing of the transaction. The Company has recorded
the seller obligations at their fair values utilizing a 6% effective interest
rate which was determined based on the Company's approximate average
borrowing rate.
8. ADOPTION OF SFAS NO. 133 AND THE INTEREST RATE SWAP AGREEMENT:
The Company adopted Statement of Financial Standards No. 133 (SFAS
No. 133), "Accounting for Derivative Instruments and Hedging Activities," on
September 30, 2000. Under SFAS No. 133, all derivatives are recognized on the
balance sheet at their fair value, with the impact of the change in the fair
value recorded in current earnings or in other comprehensive income depending
on the type of derivative, the designation of the instrument as a hedge, and
the effectiveness of the hedge. At September 30, 2000, the Company did not
have any derivative financial instruments.
In connection with the purchase of the distribution business and net
assets of Merchants, the Company assumed Merchants's interest rate swap
agreement with a bank. Under the agreement, the Company agrees to exchange,
at specified intervals, fixed interest amounts for variable interest amounts
calculated by reference to an agreed-upon notional principal amount of
$25,000,000. The interest rate swap effectively converts $25,000,000 of the
Company's variable-rate senior debt to fixed-rate debt (before accounting for
the impact of the change in market value of the interest rate swap derivative
financial instrument) at a rate of 8.33%, through the maturity of the swap
agreement on May 27, 2003.
Due to the significant decline in variable interest rates from the
date Merchants initially entered into the swap agreement, the negative fair
value of the swap instrument recorded as a liability on Merchant's balance
sheet at the closing date was $931,824. Upon assuming the swap liability, the
Company did not designate the swap transaction as a hedge and, therefore,
recognized changes in the market value of the instrument in current earnings
(interest expense). At June 30, 2001, the swap instrument had a market value
of $893,834. The change in fair value of the swap instrument from a negative
market value of $931,824 as of the acquisition date to a negative market
value of $893,834 at June 30, 2001 was recorded as a reduction to interest
expense in the Company's three and nine months ended June 20, 2001.
9. 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 Company disposed of its health food distribution segment
during the second quarter of fiscal 2001. Prior period segment data has been
restated to conform to the current presentation. The results of the acquired
Merchants distribution business are included in the wholesale distribution of
consumer products segment due to similar economic characteristics shared by
AMCON's existing distribution business and Merchants distribution business
and due to similar characteristics with respect to the nature of the products
distributed, the type and class of customers for the distribution products,
and the methods used to distribute the products. The segments are evaluated
on revenues, operating income and income before taxes.
F-10
AMCON DISTRIBUTING COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
WHOLESALE
DISTRIBUTION RETAIL OTHER CONSOLIDATED
------------- ------------- -------- -------------
Quarter ended June 30, 2001:
Revenues ........................................ $ 145,391,249 $ 8,271,095 - $ 153,662,344
Operating income (loss) ......................... 1,093,712 (318,036) - 775,676
Income (loss) before taxes ...................... 771,918 (636,862) $(38,042) 97,014
Total assets .................................... 82,181,582 20,523,255 - 102,704,507
Quarter ended June 30, 2000:
Revenues ........................................ $ 97,575,165 $ 8,375,834 - $ 105,950,999
Operating income (loss) ......................... 1,305,203 (312,058) - 993,145
Income before taxes ............................. 3,051,244 (699,451) - 2,351,793
Total assets excluding
discontinued operations ....................... 33,051,902 19,965,774 - 53,017,676
Nine months ended June 30, 2001:
Revenues ........................................ $ 331,610,778 $ 24,313,625 - $ 355,924,403
Operating income (loss) ......................... 3,102,488 (752,106) - 2,350,382
Income (loss) before taxes ...................... 2,321,040 (1,910,370) $(38,042) 372,628
Total assets .................................... 82,181,582 20,523,255 - 102,704,507
Nine months ended June 30, 2000:
Revenues ........................................ $ 280,932,796 $ 25,190,273 - $ 306,123,069
Operating income ................................ 4,772,631 588,749 - 5,361,380
Income before taxes ............................. 6,179,270 (534,528) - 5,644,742
Total assets excluding
discontinued operations ....................... 33,051,902 19,965,774 - 53,017,676
There are no intersegment sales between the two operating segments.
Operating income (loss) and income (loss) before taxes from the retail
segment include general corporate overhead expenses, which were previously
allocated to the discontinued health food distribution operations but were
not eliminated as a result of the sale. Income (loss) before taxes in the
"Other" column represent equity in the loss of unconsolidated affiliates.
10. RECENT ACCOUNTING PRONOUNCEMENTS:
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Standards No. 141 (SFAS No. 141), "Business
Combinations" and SFAS No. 142,"Goodwill and Other Intangible Assets." SFAS
No. 141 requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting, and broadens the
criteria for recording intangible assets separate from goodwill. Recorded
goodwill and intangibles being classified as goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. SFAS No. 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain
intangibles will not be amortized into results of operations, but instead
would be reviewed for impairment and written down and charged to results of
operations only in the periods in which the impairment recognition criteria
had been met and the recorded value of goodwill and certain intangibles is
more than its measured fair value. The provisions of each statement which
apply to goodwill and intangible assets acquired prior to June 30, 2001 must
be adopted by the Company on October 1, 2002. Early application of SFAS 142
is permitted for the Company's fiscal year beginning October 1, 2001. Given
that the Company is still evaluating the fair value classification and useful
lives of the acquired Merchants' net assets, including goodwill and the
identifiable intangible assets, management is still addressing what the
impact on future periods will be resulting from the adoption of SFAS No. 141
and SFAS No. 142.
F-11
AMCON DISTRIBUTING COMPANY
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of AMCON Distributing Company:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income and shareholders' equity and
comprehensive income and of cash flows present fairly, in all material
respects, the consolidated financial position of AMCON DISTRIBUTING COMPANY
and its subsidiaries as of September 30, 2000 and 1999, and the consolidated
results of their operations and their consolidated cash flows for each of
the three years in the period ended September 30, 2000, in conformity with
accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United
States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements,
the Company changed its method of accounting for inventory in fiscal 1999.
PRICEWATERHOUSECOOPERS LLP
Omaha, Nebraska
November 22, 2000, except for paragraph
one of Note 1 and Note 18, for which the
date is March 23, 2001
F-12
AMCON DISTRIBUTING COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
2000 1999
--------------- ---------------
ASSETS
Current Assets:
Cash ................................................................ $ 1,148,276 $ 1,728,042
Accounts receivable less allowance for doubtful
accounts of $329,069 and $315,461 ................................. 16,703,983 15,431,055
Inventories ......................................................... 22,122,674 16,355,863
Deferred income taxes ............................................... 241,709 278,565
Current assets from discontinued operations ......................... 10,265,416 11,152,732
Other ............................................................... 447,754 824,451
--------------- ---------------
Total current assets .................. 50,929,812 45,770,708
--------------- ---------------
Fixed assets, net ..................................................... 4,870,093 6,553,641
Notes receivable ...................................................... 350,000 -
Investments ........................................................... 509,162 561,941
Non-current assets from discontinued operations ....................... 4,099,258 3,979,768
Other assets .......................................................... 12,434,011 11,723,158
--------------- ---------------
$ 73,192,336 $ 68,589,216
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................................... $ 6,610,358 $ 7,983,802
Accrued expenses .................................................... 1,743,087 2,192,297
Accrued wages, salaries and bonuses ................................. 857,171 640,933
Income taxes payable ................................................ - 283,111
Current liabilities of discontinued operations ...................... 5,727,463 10,505,201
Current portion of long-term debt ................................... 8,056,323 4,577,171
Current portion of subordinated debt ................................ 912,694 800,000
Dividends payable ................................................... - 51,297
--------------- ---------------
Total current liabilities ............. 23,907,096 27,033,812
--------------- ---------------
Deferred income taxes ............................................... 683,233 585,757
Non-current liabilities of discontinued operations .................. 6,333,219 1,444,517
Long-term debt, less current portion ................................ 16,668,647 17,067,187
Subordinated debt, less current portion ............................. 8,745,236 9,200,000
Commitments (Note 13)
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none outstanding .................................................. - -
Common stock, $.01 par value, 15,000,000 shares authorized and
2,737,551 and 2,727,656 issued at September 30, 2000 and 1999 ..... 27,376 27,276
Additional paid-in capital .......................................... 4,121,981 4,101,629
Accumulated other comprehensive income net of $139,482 and
$149,664 tax ...................................................... 228,924 234,299
Retained earnings ................................................... 12,476,624 8,895,099
--------------- ---------------
16,854,905 13,258,303
Less treasury stock, 102 shares at cost at September 30, 1999 ......... - (360)
--------------- ---------------
Total shareholders' equity ............. 16,854,905 13,257,943
--------------- ---------------
$ 73,192,336 $ 68,589,216
=============== ===============
The accompanying notes are an integral part of these financial statements.
F-13
AMCON DISTRIBUTING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR ENDED SEPTEMBER 30,
2000 1999 1998
------------- ------------- -------------
Sales (including excise taxes of $72.6 million,
$54.5 million and $52.9 million respectively) .. $ 424,731,331 $ 342,863,572 $ 263,083,330
Cost of sales .................................... 379,968,197 311,069,295 239,179,975
------------- ------------- -------------
Gross profit ..................................... 44,763,134 31,794,277 23,903,355
Selling, general and administrative expenses ..... 35,637,465 22,654,462 18,170,384
Depreciation and amortization .................... 2,209,418 1,283,281 922,901
------------- ------------- -------------
37,846,883 23,937,743 19,093,285
------------- ------------- -------------
Income from operations ........................... 6,916,251 7,856,534 4,810,070
Other expense (income):
Interest expense ............................... 2,498,806 1,281,852 1,565,662
Other (income) expense, net .................... (2,247,842) (68,479) (535,809)
------------- ------------- -------------
250,964 1,213,373 1,029,853
------------- ------------- -------------
Income from continuing operations before
income taxes ................................... 6,665,287 6,643,161 3,780,217
Income tax expense ............................... 2,354,293 2,521,373 1,495,732
------------- ------------- -------------
Income from continuing operations ................ 4,310,994 4,121,788 2,284,485
Income (loss) from discontinued operations,
net of income taxes of $(238,771),
$(175,449) and $47,121, respectively ........... (406,555) (286,259) 73,701
------------- ------------- -------------
Net income ....................................... $ 3,904,439 $ 3,835,529 $ 2,358,186
============= ============= =============
Earnings per share from continuing operations:
Basic ....................................... $1.58 $1.51 $0.84
Diluted ..................................... $1.51 $1.44 $0.82
Earnings (loss) per share from discontinued
operations:
Basic ....................................... $(0.15) $ (0.10) $ 0.03
Diluted ..................................... $(0.14) $ (0.10) $ 0.03
Net earnings per share:
Basic ....................................... $1.43 $1.41 $0.87
Diluted ..................................... $1.37 $1.34 $0.85
Weighted average shares outstanding:
Basic ....................................... 2,734,862 2,727,892 2,703,868
Diluted ..................................... 2,853,320 2,855,419 2,788,996
The accompanying notes are an integral part of these financial statements.
F-14
AMCON DISTRIBUTING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------- ----------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ --------- ----------- -----------
Balance, September 30, 1997 ......... - - 2,450,000 $ 24,500 $ 2,213,828
Issuance and exercise of
warrants .......................... - - 30,000 300 57,450
Net income .......................... - - - - -
Unrealized gain (loss) on
investments available-for-sale,
net of tax ........................ - - - - -
Total comprehensive income .......... - - - - -
------ ------ --------- ----------- -----------
Balance, September 30, 1998 ......... - - 2,480,000 24,800 2,271,278
Purchase of treasury stock .......... - - - - -
Dividends ........................... - - - - -
Net income .......................... - - - - -
Unrealized gain on investments
available-for-sale, net of tax .... - - - - -
Total comprehensive income .......... - - - - -
------ ------ --------- ----------- -----------
Balance September 30, 1999 .......... - - 2,480,000 24,800 2,271,278
Exercise of options ................. - - 9,032 91 20,361
Purchase of treasury stock .......... - - - - -
Dividends ........................... - - - - -
10% stock dividend .................. - - 248,519 2,485 1,830,342
Net income .......................... - - - - -
Unrealized gain (loss) on
investments available-for-sale,
net of tax ........................ - - - - -
Total comprehensive income .......... - - - - -
------ ------ --------- ----------- -----------
Balance, September 30, 2000 ......... - - 2,737,551 $ 27,376 $ 4,121,981
====== ====== ========= =========== ===========
The accompanying notes are an integral part of these financial statements.
F-15
AMCON DISTRIBUTING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (CONTINUED)
ACCUMULATED
OTHER TREASURY STOCK
COMPREHENSIVE RETAINED --------------------------
INCOME EARNINGS SHARES AMOUNT TOTAL
------------- ----------- ------ --------- -------------
Balance, September 30, 1997 ..... $ 237,503 $ 4,732,603 (97) $ (315) $ 7,208,119
Issuance and exercise of
warrants ...................... - - - - 57,750
Net income ...................... - 2,358,186 - - 2,358,186
Unrealized gain (loss) on
investments available-for-
sale, net of tax .............. (19,358) - - - (19,358)
-------------
Total comprehensive income ...... - - - - 2,338,828
--------- ----------- ------- --------- -------------
Balance, September 30, 1998 ..... 218,145 7,090,789 (97) (315) 9,604,697
Purchase of treasury stock ...... - - (5) (45) (45)
Dividends ....................... - (198,392) - - (198,392)
Net income ...................... - 3,835,529 - - 3,835,529
Unrealized gain on
investments available-for sale,
net of tax .................... 16,154 - - - 16,154
-------------
Total comprehensive income ...... - - - - 3,851,683
--------- ----------- ------- --------- -------------
Balance, September 30, 1999 ..... 234,299 10,727,926 (102) (360) 13,257,943
Exercise of options ............. - (223) 108 399 20,628
Purchase of treasury stock ...... - - (6) (39) (39)
Dividends ....................... - (322,691) - - (322,691)
10% stock dividend .............. - (1,832,827) - - -
Net income ...................... - 3,904,439 - - 3,904,439
Unrealized gain (loss) on
investments available-for-
sale, net of tax .............. (5,375) - - - (5,375)
-------------
Total comprehensive income ...... - - - - 3,899,064
--------- ----------- ------- --------- -------------
Balance, September 30, 2000 ..... $ 228,924 $12,476,624 - $ - $ 16,854,905
========= =========== ======= ========= =============
The accompanying notes are an integral part of these financial statements.
F-16
AMCON DISTRIBUTING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED SEPTEMBER 30,
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
Net income ........................................................ $ 4,310,994 $ 4,121,788 $ 2,284,485
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net income (loss) from discontinued operations ................ (406,555) (286,259) 73,701
Depreciation and amortization ................................. 2,211,242 1,287,126 922,901
(Gain) loss on sales of fixed assets, intangibles land
held for sale and securities ............................... (2,102,857) 259 (46,955)
Proceeds from sales of trading securities ..................... - - 157,207
Deferred income taxes ......................................... 134,332 445,955 (215,204)
Provision for losses on doubtful accounts and inventory
obsolescence ................................................ 222,735 162,785 593,825
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable ........................................... (1,225,970) (2,731,682) (2,363,987)
Inventories ................................................... (5,382,676) (291,332) (1,730,140)
Other current assets .......................................... (65,483) (638,357) (94,405)
Other assets .................................................. (51,677) 38,359 (45,366)
Accounts payable .............................................. (1,491,132) 1,284,922 1,163,900
Accrued expenses and accrued wages, salaries and bonuses ...... (404,671) 301,391 (108,932)
Income taxes payable and receivable ........................... (490,931) (781,169) 471,985
Other liabilities ............................................. - - -
Net cash provided by (used in) operating activities - discontinued
operations ....................................................... 1,612,826 (540,717) (374,794)
----------- ----------- -----------
Net cash (used in) provided by operating
activities ....................................... (3,129,823) 2,373,069 688,221
----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed assets ......................................... (516,060) (294,741) (671,592)
Acquisitions, net of cash acquired ................................ (606,183) (5,879,143) (7,119,254)
Proceeds from sales of fixed assets and intangibles ............... 2,887,234 54,880 86,887
Proceeds from sales of available-for-sale securities .............. 92,260 - -
Purchase of debt security ......................................... (350,000) - -
Proceeds from repayment of advance to officer ..................... - - 100,000
Net cash used in investing activities - discontinued
operations ....................................................... (449,958) (466,965) (110,848)
----------- ----------- -----------
Net cash provided by (used in) investing
activities ....................................... 1,057,293 (6,585,969) (7,714,807)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings of long-term debt ........................ - 1,100,000 4,500,000
Net (payments) proceeds on bank credit agreement .................. 4,461,173 6,509,466 2,988,636
Payments on long-term and subordinated debt ....................... (2,332,631) (4,648,363) (766,025)
Debt issue costs .................................................. - - (182,234)
Proceeds from exercise of warrants ................................ - - 3,000
Dividends paid .................................................... (372,289) (148,794) -
Purchase of treasury stock ........................................ (39) (45) -
Proceeds from exercise of stock options ........................... 20,628 - -
Net cash (used in) provided by financing activities - discontinued
operations ...................................................... (284,078) 3,090,309 494,605
----------- ----------- -----------
-
Net cash provided by financing activities ......... 1,492,764 5,902,573 7,037,982
----------- ----------- -----------
Net (decrease) increase in cash ..................................... (579,766) 1,689,673 11,396
Cash, beginning of year ............................................. 1,728,042 38,369 26,973
----------- ----------- -----------
Cash, end of year ................................................... $ 1,148,276 $ 1,728,042 $ 38,369
=========== =========== ===========
Supplemental cash flow information:
Cash paid during the year for interest ............................ $ 3,016,285 $1,675,323 $ 1,745,609
Cash paid during the year for income taxes ........................ 2,899,950 3,166,246 1,145,770
Supplemental noncash information:
Acquisition of equipment through capital leases ................... - 80,676 -
Business combinations:
Fair value of assets acquired ................................. 1,195,995 24,061,292 12,988,719
Subordinated debt assumed ..................................... 520,000 10,000,000 -
Other liabilities assumed ..................................... 995 6,917,274 5,869,053
Warrants issued ............................................... - - 54,750
The accompanying notes are an integral part of these financial statements.
F-17
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) General:
-------
As more fully described in Note 18 to the consolidated financial
statements, the Company completed the sale of its health food distribution
business effective March 23, 2001. As a result, the Company's September 30,
2000 and 1999 balance sheets and fiscal 2000, 1999 and 1998 results have
been restated to reflect the health food distribution business as
discontinued operations.
In February 2000, the Company declared a special 10% stock
dividend. All periods presented in the accompanying consolidated financial
statements have been retroactively restated to reflect the stock dividend.
(b) Company Operations:
------------------
AMCON Distributing Company (together with its wholly-owned
subsidiaries, Chamberlin's Natural Foods, Inc. ("CNF") and Health Food
Associates, Inc. ("HFA")) operates 6 distribution centers and 14 retail
health food stores in the Great Plains, Rocky Mountain, Western and Southern
regions of the United States.
AMCON sells approximately 24,000 different consumer products,
including cigarettes and tobacco products, candy and other confectionery,
beverages, groceries, paper products, health and beauty care products,
natural food and related 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 eight (8) retail health food stores in Florida
under the name Chamberlin's Market & Cafe and six (6) in the Midwest under
the name Akin's Natural Foods Market. These stores, which were acquired
during fiscal 1999, carry natural supplements, groceries, health and beauty
care products and other food items.
The Company's operating income is subject to a number of factors
which are beyond the control of management, such as changes in
manufacturers' cigarette pricing which affects the market for generic and
private label cigarettes and competing retail stores opening in close
proximity to the Company's retail stores. While the Company sells a
diversified product line, it remains dependent upon cigarette sales which
represented approximately 70% of its revenue and 41% of its gross margin in
fiscal 2000. Net income is heavily dependent on sales of the Company's
private label cigarettes and volume discounts received from manufacturers in
connection with such sales.
(c) Accounting Period:
-----------------
AMCON maintains a 52-53 week fiscal year which ends on the last
Friday in September. For convenience, the fiscal years have been indicated
as September 30, whereas the actual year ends were September 29, 2000,
September 24, 1999 and September 25, 1998. Fiscal 2000 comprised 53 weeks.
Fiscal 1999 and 1998 each comprised 52 weeks.
F-18
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) Principles of Consolidation:
---------------------------
The consolidated financial statements include the accounts of AMCON
and its subsidiaries. Intercompany accounts and transactions have been
eliminated.
(e) Cash and Accounts Payable:
-------------------------
AMCON uses a cash management system under which an overdraft is the
normal book balance in the primary disbursing accounts. The overdrafts
included in accounts payable which were $2,366,593 and $3,731,061 at
September 30, 2000 and 1999, respectively, reflect the 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 facilities
(see Note 8).
(f) Debt and Equity Investments:
---------------------------
AMCON classifies marketable securities, debt securities and
investments as held to maturity, available-for-sale or trading securities.
Investments classified as available-for-sale or trading are stated at market
value. Investments classified as held to maturity are stated at amortized
cost. The carrying amounts of the securities used in computing unrealized
and realized gains and losses are determined by specific identification.
Fair values are determined using quoted market prices. For available-for-sale
securities, net unrealized holding gains and losses are reported as a separate
component of shareholders' equity, net of tax. For trading securities, net
unrealized holding gains and losses are included in the determination of net
income.
(g) 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.
(h) Inventories:
-----------
Inventories consist of finished products purchased in bulk
quantities to be sold to the Company's customers. Effective in fiscal 1999,
AMCON changed the method of accounting for inventory from the first-in,
first-out, ("FIFO") method to the last-in, first-out ("LIFO") method. LIFO
inventories at September 30, 2000 and 1999 were approximately $2.3 million
and $2.0 million less than the amount of such inventories valued on a FIFO
basis, respectively. The change in the inventory valuation method was made
to better match current costs with current revenue. The change to LIFO
reduced net income and basic earnings per share for the year ended September
30, 1999 by $1,284,000 and $0.47, respectively. Pro forma effects of
retroactive application of LIFO are not determinable and there is no
cumulative effect on retained earnings at the beginning of the year.
F-19
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(i) Fixed Assets:
------------
Fixed assets are stated at cost. Major renewals and improvements
are capitalized and charged to expense through depreciation charges. Repairs
and maintenance are charged to expense as incurred. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of depreciable assets. Estimated useful lives are as follows:
Years
--------
Buildings .......................................... 7 - 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 in the statement of income.
(j) Revenue Recognition:
-------------------
AMCON recognizes revenue when products are shipped from
distribution centers or sold to consumers in retail stores. Sales are shown
net of returns and discounts.
(k) 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.
(l) Comprehensive Income:
--------------------
Comprehensive income includes all changes in stockholders' equity
with the exception of additional investments by shareholders or
distributions to shareholders. Comprehensive income for the Company includes
net income and the changes in net unrealized holding gains on investments
charged or credited to stockholders' equity.
(m) Long Lived Assets:
-----------------
Management reviews goodwill and other long lived assets whenever
events or changes in circumstances indicate that the carrying amount may not
be recoverable. Impairments would be recognized in operating results if a
permanent reduction in value were to occur based on discounted cash flows.
F-20
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(n) Use of Estimates:
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles 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.
2. ACQUISITIONS OF BUSINESSES:
In August 2000, the Company acquired all of the outstanding shares
of TINK, Inc. (doing business as Natural Way Foods) for $900,000. The
acquisition was financed through borrowings under the Company's revolving
credit facility totaling $600,000 and a subordinated promissory note with
the seller in the amount of $300,000.
In November 1999, the Company acquired all of the outstanding
assets of MDF Health, Inc. for $220,000 financed by a seller-held
subordinated note payable of $220,000.
Both acquisitions were accounted for using the purchase method of
accounting. The purchase price for the above acquisitions was allocated to
assets acquired based on their estimated fair values. The portion of the
purchase prices allocated to goodwill totaled $750,000 and is being
amortized on a straight-line basis over 20 years.
The Company acquired HFA, and CNF in September 1999 and March 1999,
respectively. The St. Louis distribution center was acquired in October
1997. These acquisitions were accounted for using the purchase method of
accounting. Goodwill and other intangibles are described in Note 7.
The results of operations for each of the above are included in the
accompanying financial statements from the date of acquisition.
F-21
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assuming the above acquisitions had occurred on the first day
preceding the year of acquisition, unaudited pro forma consolidated sales,
net income and earnings per share would have been as follows:
2000 1999 1998
------------- ------------- -------------
Sales ............................... $ 425,587,000 $ 378,014,000 $ 263,083,000
Net income from
continuing operations ............. $ 5,048,000 $ 4,637,000 $ 2,284,000
Net income .......................... $ 3,906,000 $ 4,197,000 $ 2,258,000
Earnings per share:
Basic: ........................... $1.43 $1.54 $0.84
Diluted: ......................... $1.37 $1.47 $0.81
The pro forma information provided above is based on assumptions that
management deems appropriate, but does not purport to be indicative of the
results that would have actually occurred had the acquisitions taken place
on the first day of the year preceding the acquisition.
3. EARNINGS PER SHARE:
Basic earnings (loss) per share is calculated by dividing income
from continuing operations, income (loss) from discontinued operations and
net income (loss) by the weighted average common shares outstanding for each
period. Diluted earnings (loss) per share is calculated by dividing income
from continuing operations, income (loss) from discontinued operations and
net income (loss) by the sum of the weighted average common shares
outstanding and the weighted average dilutive options, using the treasury
stock method. Stock options outstanding at September 30, 2000 and 1999,
respectively, which were not included in the computations of diluted
earnings per share because the option's exercise price was greater than the
average market price of the common shares totaled 96,800 with an average
exercise price of $8.44. All per share data has been restated to reflect the
special 10% stock dividend paid in February 2000.
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------
BASIC BASIC BASIC
2000 1999 1998
----------- ----------- -----------
Weighted average common shares
outstanding .................................... 2,734,862 2,727,990 2,703,965
Weighted average treasury shares .................. - (98) (97)
----------- ----------- -----------
Weighted average number of shares
outstanding .................................... 2,734,862 2,727,892 2,703,868
=========== =========== ===========
Income from continuing operations ................. $ 4,310,994 $ 4,121,778 $ 2,284,485
=========== =========== ===========
Income (loss) from discontinued operations ........ $ (406,535) $ (286,259) $ 73,701
=========== =========== ===========
Net income ........................................ $ 3,904,439 $ 3,835,529 $ 2,358,186
=========== =========== ===========
Earnings per share from continuing
operations ..................................... $ 1.58 $ 1.51 $ 0.84
====== ====== ======
Earnings (loss) per share from
discontinued operations: ....................... $(0.15) $(0.10) $ 0.03
====== ====== ======
Net earnings per share ............................ $ 1.43 $ 1.41 $ 0.87
====== ====== ======
F-22
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------
DILUTED DILUTED DILUTED
2000 1999 1998
------------ ----------- -----------
Weighted average common shares
outstanding ................................ 2,734,862 2,727,990 2,703,965
Weighted average treasury shares .............. - (98) (97)
Weighted average of net additional
shares outstanding assuming dilutive
options exercised and proceeds used
to purchase treasury stock ................. 118,458 127,527 85,128
----------- ----------- -----------
Weighted average number of shares
outstanding ................................ 2,853,320 2,855,419 2,788,996
=========== =========== ===========
Income from continuing operations ............. $ 4,310,994 $ 4,121,778 $ 2,284,485
=========== =========== ===========
Income (loss) from discontinued
operations ................................. $ (406,555) $ (286,259) $ 73,701
=========== =========== ===========
Net income .................................... $ 3,904,439 $ 3,835,529 $ 2,358,186
=========== =========== ===========
Earnings per share from continuing
operations .................................... $1.51 $1.44 $0.82
===== ===== =====
Earnings (loss) per share from
discontinued operations ....................... $(0.14) $(0.10) $0.03
====== ====== =====
Earnings per share ............................ $1.37 $1.34 $ 0.85
===== ===== ======
F-23
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. COMPREHENSIVE INCOME (LOSS):
The components of other comprehensive income (loss) were as
follows:
2000 1999 1998
--------- --------- ---------
Unrealized holding gains (losses) during the period:
Unrealized gains (losses) ....................... $ 53,089 $ 28,700 $ (51,875)
Related tax (expense) benefit ................... (34,747) (12,546) 32,517
--------- --------- ---------
Net ........................................... 18,342 16,154 (19,358)
Less reclassification adjustments for
net gains realized on sale of
investments during the period:
Realized net gains .............................. 68,646 - -
Realized tax expense ............................ (44,929) - -
--------- --------- ---------
Net ........................................... 23,717 - -
--------- --------- ---------
Total other comprehensive income
(loss) .......................................... $ (5,375) $ 16,154 $ (19,358)
========= ========= =========
5. FIXED ASSETS, NET:
Fixed assets at September 30, 2000 and 1999 consisted of the
following:
2000 1999
----------- -----------
Land and buildings ..................................... $ 617,228 $ 725,597
Condominium and furnishings ............................ - 1,246,625
Warehouse equipment .................................... 5,165,966 3,744,211
Furniture fixtures and leasehold
improvements ......................................... 2,938,930 3,286,530
Vehicles ............................................... 1,322,712 1,684,654
Capital equipment leases ............................... 248,928 248,928
----------- -----------
10,293,764 10,936,545
Less accumulated depreciation & amortization:
Owned equipment .................................... 5,205,266 4,208,654
Capital equipment leases ........................... 218,405 174,250
----------- -----------
$ 4,870,093 $ 6,553,641
=========== ===========
At September 30, 1999, land and buildings included a warehouse held
for sale which was recorded at its net realizable fair value. The property
was sold in November 1999.
F-24
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEBT AND EQUITY INVESTMENTS:
Investments in equity securities at September 30, 2000 and 1999
consisted of the following:
SEPTEMBER 30, 2000
-----------------------------------------------------------
UNREALIZED MARKET
COST GAIN (LOSS) VALUE
--------- ----------- ---------
Investments (available-for-sale) ......... $ 140,756 $ 368,406 $ 509,162
SEPTEMBER 30, 1999
-----------------------------------------------------------
UNREALIZED MARKET
COST GAIN VALUE
--------- ----------- ---------
Investments (available-for-sale) ......... $ 177,978 $ 383,963 $ 561,941
The Company sold 13,000 shares of its available-for-sale
investments and realized gains on the sale of $68,646 in fiscal 2000. No
shares were sold in 1999 or 1998. The Company recognized gains of $29,400 on
trading securities during fiscal 1998.
At September 30, 2000, the Company held a convertible note
receivable of $350,000 from Hawaiian Natural Water Company, Inc. ("HNWC").
The note accrues interest at 10% and matures on March 31, 2001. The note is
classified as held to maturity and the fair value approximates the carrying
amount. See Note 17.
7. OTHER ASSETS:
Other assets at September 30, 2000 and 1999 consisted of the
following:
2000 1999
------------ ------------
Trademarks and tradenames (less accumulated
Amortization of $477,786 and $13,542) .......................... $ 8,222,214 $ 8,686,458
Goodwill (less accumulated amortization of
$477,963 and $339,329) ......................................... 2,862,125 1,520,827
Covenants not to compete (less accumulated
amortization of $166,271 and $98,819) ........................... 407,444 529,646
Favorable leases (less accumulated
(amortization of $90,671 and $56,375) ........................... 412,946 486,000
Cash surrender value of life insurance policies .................... 430,850 382,044
Debt issue costs (less accumulated
amortization of $102,748 and $66,062) .......................... 79,486 116,172
Other .............................................................. 18,946 2,011
------------ ------------
$ 12,434,011 $ 11,723,158
============ ============
F-25
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Trademarks and tradenames arose from the acquisitions of CNF and
HFA during 1999 and are amortized using the straight-line method over 20
years.
Goodwill arose from the acquisition of certain businesses and is
amortized using the straight-line method over periods ranging from 20 to 25
years. Amortization expense was $138,634, $58,592, and $41,927 for the years
ended September 30, 2000, 1999, and 1998, respectively.
The covenants not to compete are amortized using the straight-line
method over periods ranging from 2 to 5 years. Amortization expense was
$122,202, $71,444, and $29,708 for the years ended September 30, 2000, 1999,
and 1998, respectively.
Favorable leases arose from the acquisitions of HFA during fiscal
1999 and represent lease agreements in which the lease rates were below
market value on the acquisition date. The leases are amortized over periods
ranging from 3 to 11 years.
8. LONG-TERM OBLIGATIONS:
Long-term obligations at September 30, 2000 and 1999 consisted of
the following:
2000 1999
------------ ------------
Revolving credit facility with a bank, interest payable monthly at the
bank's base rate less 0.5% or LIBOR plus 1.75%, as selected by the
Company (ranging from 8.44% to 9.0% at September 30, 2000); principal
due February 2002 ....................................................... $ 22,477,301 $ 18,317,309
Note payable to a bank, interest payable monthly at the bank's base
rate less 0.5% or LIBOR plus 1.75% (ranging from 8.38% to 8.44% at
September 30, 2000); principal payments of $85,096 due monthly through
November 2002 ........................................................... 2,212,500 3,233,653
Obligations under capital leases, payable in monthly installments with
interest of approximately 9.5% through April 2001 (Note 14) ............. 35,169 93,396
------------ ------------
24,724,970 21,644,358
Less current portion .................................................... 8,056,323 4,577,171
------------ ------------
$ 16,668,647 $ 17,067,187
============ ============
F-26
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 1998, ADC entered into a revolving credit facility with a
bank (the "Facility"). The Facility allows ADC to borrow up to $25 million
at any time, subject to eligible accounts receivable and inventory
requirements, and provides for an additional $1.5 million facility to be
used for transportation equipment purchases. The Facility was amended in
November 2000 to increase the borrowing limit to $30 million for a six-month
period. The Facility bears interest at the bank's base rate ("Prime") less
0.5% or LIBOR plus 1.75%, as selected by ADC. The Facility is collateralized
by all equipment, general intangibles, inventories and accounts receivable,
and with a first mortgage on the owned distribution center. As of September
30, 2000 the unused portion of the credit agreement was $2,522,699. The
Facility expires on February 25, 2002.
The Facility contains covenants which, among other things, set
forth certain financial ratios and net worth requirements which adjust
semiannually or annually as specified in the Facility. For fiscal 2001 and
2000, the Facility includes covenants that (i) restrict the incurrence of
additional debt, (ii) restrict payments, prepayments and repurchases of
subordinated debt or capital stock, (iii) restrict mergers and acquisitions
and changes in business or conduct of business and (iv) require the
maintenance of certain financial ratios and net worth levels including an
average annual fixed charge ratio of 1.1 to 1.0, an average annual debt
service coverage ratio of 1.5 to 1.0, a debt to equity ratio of 4.0 to 1.0
(excluding debt associated with the acquisition of FFH) and minimum tangible
net worth of $4,500,000. In addition, AMCON may not pay dividends with
respect to its Common Stock without the consent of the lender of the
Facility. In December 1999, AMCON received consent to pay cash dividends of
up to $0.03 per share per quarter and to pay a special 10% stock dividend in
February 2000.
In November 1997, the Company borrowed $4.5 million from a bank to
finance the purchase of the common stock of FFH (the "Acquisition Loan").
The Acquisition Loan has a term of five years, bears interest at Prime less
0.5% or LIBOR plus 1.75%, as selected by the Company, and requires monthly
payments equal to accrued interest plus principal payments of $85,096, which
began in August 1998. The loan is collateralized by the common stock of FFH.
The above long-term obligations, excluding obligations under the
revolving credit facilities, have contractual maturities as follows:
YEAR ENDING SEPTEMBER 30,
-------------------------
2001 ...................... $ 1,056,321
2002 ...................... 1,021,152
2003 ...................... 170,196
-----------
$ 2,247,669
===========
Borrowings under the revolving credit facility in the amount of
$15,477,300 have been classified as long-term based on expected borrowing
levels. 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 30, 2000.
F-27
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SUBORDINATED DEBT:
Subordinated debt at September 30, 2000 and September 30, 1999
consisted of the following:
2000 1999
----------- -----------
Convertible subordinated note payable, interest payable
quarterly at 8% per annum; principal due at maturity of the
note, September 15, 2004 .............................................. $ 2,000,000 $ 2,000,000
Collateralized subordinated promissory note payable, interest payable
quarterly at 8% annum; annual principal payments of $800,000 due
annually through September 2004 with a balance of $4,000,000 due
September 2004 ........................................................ 7,200,000 8,000,000
Collateralized subordinated promissory note payable bearing interest
at 8% per annum; principal and interest payments due monthly through
October 2002 .......................................................... 157,930 -
Collateralized subordinated promissory note payable, interest payable
monthly at 7.0% per annum; annual interest payments ranging from
$40,000 to $80,000 due annually from August 2001 through August 2005 .. 300,000 -
----------- -----------
9,657,930 10,000,000
Less current portion .................................................. 912,694 800,000
----------- -----------
$ 8,745,236 $ 9,200,000
=========== ===========
In September, 1999, the Company issued subordinated debt of $10.0 million,
in addition to $4.0 million borrowed on the Facility, to purchase all of the
outstanding stock of HFA. The subordinated debt is comprised of the
following: a $2.0 million 8% Convertible Subordinated Note (the "Convertible
Note") from the Company to the sellers; and an $8.0 million Collateralized
Promissory Note (the "Collateralized Note") from the Company to the sellers.
The Collateralized Note is collateralized by a pledge of the stock of HFA.
The principal balance of the Convertible Note may be converted into stock
of FFH if AMCON distributes its interest in FFH to its shareholders (the
"Spin-Off") at which time FFH would become a publicly held corporation.
The Convertible Note must be converted within 60 days of any announcement
regarding a Spin-Off of FFH. The number of shares of FFH stock to be
received upon conversion is determined based upon a formula that takes
into account FFH's consolidated gross sales, the outstanding balance of the
Convertible Note and the number of shares of FFH's common stock outstanding
at the time a Spin-Off is announced.
F-28
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2000, principal payments are due on subordinated debt as
follows:
YEAR ENDING SEPTEMBER 30,
-------------------------
2001 ......................... $ 912,694
2002 ......................... 928,727
2003 ......................... 866,509
2004 ......................... 6,870,000
2005 ......................... 80,000
-----------
$ 9,657,930
===========
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 30, 2000.
10. OTHER (INCOME) EXPENSE:
Other (income) expense consisted of the following for the years
ended September 30, 2000, 1999 and 1998:
2000 1999 1998
------------ ---------- -----------
Interest income ......................... $ (39,079) $ (2,468) $ (30,617)
Dividends ............................... (21,609) (17,850) (14,941)
Rent income ............................. (4,966) (15,034) (24,880)
Royalties ............................... (1,625) (15,924) (41,710)
Gain on marketable securities
and investments ...................... (68,646) - (29,420)
Gain from disposition of fixed
and intangible assets ................ (2,034,211) (22,119) (17,535)
Other ................................... (77,706) 4,916 (376,706)
------------ ---------- -----------
$ (2,247,842) $ (68,479) $ (535,809)
============ ========== ===========
11. INCOME TAXES:
Components of income tax expense (benefit) attributable to
continuing operations for the fiscal years ended September 30, 2000, 1999
and 1998 consisted of the following:
2000 1999 1998
----------- ----------- -----------
Current:
Federal ................................... $ 1,893,627 $ 1,809,764 $ 1,479,960
State ..................................... 326,334 265,653 230,976
----------- ----------- -----------
2,219,961 2,075,418 1,710,936
----------- ----------- -----------
Deferred:
Federal ................................... 114,585 388,873 (187,658)
State ..................................... 19,747 57,082 (27,546)
----------- ----------- -----------
134,332 445,955 (215,204)
----------- ----------- -----------
Income tax expense - continuing operations .. 2,354,293 2,521,373 1,495,732
Income tax expense (benefit) - discontinued
operations ................................ (238,771) (175,449) 47,121
----------- ----------- -----------
Total income tax expense .................... $ 2,115,522 $ 2,345,924 $ 1,542,853
=========== =========== ===========
F-29
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal 2000, the Company recognized income tax benefit of
approximately $187,000 related to tax reserves that were previously recorded
and are no longer required due to expiration of the related statute or
favorable tax audit determination.
The difference between the Company's income tax expense attributable
to continuing operations in the accompanying financial statements and that
which would be calculated using the statutory income tax rate of 34% on
income before taxes is as follows for the fiscal years ended September 30,
2000, 1999 and 1998:
2000 1999 1998
----------- ----------- -----------
Tax at statutory rate ................. $ 2,266,198 $ 2,258,675 $ 1,285,274
Amortization of goodwill .............. 30,850 43,406 24,045
Nondeductible business
expenses ............................ 1,473 5,720 851
State income taxes, net of
federal tax benefit ................. 228,414 213,006 134,264
Release of tax reserves................ (186,737) - -
Other ................................. 14,095 566 51,298
----------- ----------- -----------
$ 2,354,293 $ 2,521,373 $ 1,495,732
=========== =========== ===========
Temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities giving rise to the net
deferred tax asset at September 30, 2000 and 1999 relate to the following:
2000 1999
----------- -----------
Deferred tax assets:
Current:
Allowance for doubtful accounts .... $ 122,974 $ 117,406
Accrued expenses ................... 126,912 107,375
Net operating loss carryforwards ... 37,370 37,217
Inventory .......................... 93,151 86,539
Other .............................. - 5,218
----------- -----------
380,407 353,755
Noncurrent:
Net operating loss carryforwards ... 37,056 211,138
Other liabilities .................. - -
Other .............................. 31,293 24,530
----------- -----------
68,349 235,668
----------- -----------
Total deferred tax assets ...... 448,756 589,423
=========== ===========
F-30
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 1999
-------- --------
Deferred tax liabilities:
Current:
Trade discounts .......................... 128,204 75,190
Other .................................... 10,494 -
--------- ---------
138,698 75,190
--------- ---------
Noncurrent:
Fixed assets ............................. 127,405 157,178
Tradenames ............................... 484,695 514,583
Leases ................................... - -
Unrealized gains on available-
for-sale investments ................... 139,482 149,664
--------- ---------
751,582 821,425
--------- ---------
$ 890,280 $ 896,615
========= =========
Net deferred tax assets (liabilities):
Current .................................... $ 241,709 $ 278,565
Noncurrent ................................. (683,233) (585,757)
--------- ---------
$(441,524) $(307,192)
========= =========
The Company did not record any valuation allowances against
deferred tax assets at September 30, 2000 or 1999 because management
believes future taxable income will more likely than not be sufficient to
realize such amounts. The net operating loss was acquired in connection with
the acquisition of Sheya Brothers in 1993. The utilization of the net
operating loss of approximately $198,000 at September 30, 2000 is limited
(by Internal Revenue Code Section 382) to approximately $100,000 per year
through 2002.
12. PROFIT SHARING PLAN
AMCON maintains profit sharing plans covering substantially all
full-time employees. The plans provide for AMCON to make profit sharing
contributions of up to 1% of qualified employees' gross wages. Employees may
also make additional voluntary contributions which may be matched 50% by the
Company up to the first 6% contributed. The Company contributed $354,494,
$260,215, and $241,009 (net of employee forfeitures) to the profit sharing
plans during the years ended September 30, 2000, 1999 and 1998,
respectively.
13. RELATED PARTY TRANSACTIONS:
The Company was charged $60,000 by AMCON Corporation, the former
parent of the Company for each of the years ended September 30, 2000, 1999
and 1998, as consideration for office rent and management services, which is
included in selling, general and administrative expenses.
The remaining interest in a condominium and furnishings and related
mortgage loan, was transferred from AMCON Corporation to the Company in
1992, as partial settlement of intercompany balances. The condominium was
sold in 2000. Under a profit sharing agreement with AMCON Corporation,
one-half of the net gain from the sale of the real estate was allocated to
AMCON Corporation.
F-31
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. COMMITMENTS:
The Company leases certain office equipment under a capital lease.
The carrying value of these assets was $30,253 and $72,568 as of September
30, 2000 and 1999, respectively, net of accumulated amortization of $218,405
and $136,715.
The Company leases various office and warehouse facilities and
equipment under noncancellable operating leases. Rent charged to expense
during the years ended September 30, 2000, 1999 and 1998 under such lease
agreements was $2,393,274, $1,395,896 and $1,047,023, respectively. As of
September 30, 2000, minimum future lease commitments are as follows:
CAPITAL OPERATING
YEAR ENDING SEPTEMBER 30, LEASES LEASES
------------------------- -------- -----------
2001 ................................... $ 33,406 $ 2,463,853
2002 ................................... - 1,862,474
2003 ................................... - 1,274,865
2004 ................................... - 939,498
2005 ................................... - 662,766
Thereafter ................................ 601,775
-------- -----------
Total minimum lease payments ....................... 33,406 $ 7,805,231
===========
Less amount representing interest .................. 325
--------
Present value of net minimum
lease payments .................................. $ 33,731
========
15. STOCK OPTION PLAN:
In June 1994, the Company adopted the 1994 Stock Option Plan (the
"Stock Option Plan"). In March 2000, the Stock Option Plan was amended to
increase the maximum number of shares of common stock which may be issued
pursuant to the Stock Option Plan from 300,000 to 550,000. A special 10%
stock dividend was paid in February 2000 and all share and price information
has been restated to reflect the dividend. 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 September 27,
1996, options to purchase 24,200 shares of common stock were issued to
management employees at an exercise price of $1.48. On November 10, 1997,
options to purchase 154,000 shares of common stock were issued to management
employees at exercise prices of $2.62 and $2.87. During fiscal 1999, options
to purchase 115,500 shares of common stock were issued to management
employees at exercise prices between $6.14 and $9.00. During fiscal 2000,
options to purchase 32,900 shares of common stock were issued to management
employees at an exercise price of $5.75. At September 30, 2000, 131,076
options were fully vested and exercisable. In addition, options to purchase
33,000 shares of common stock were issued to certain outside directors at an
exercise price of $2.62 in fiscal 1998 and options to purchase 30,800 shares
of common stock were issued to outside directors at exercise prices of $6.14
and $8.18 in fiscal 1999. These options were not issued pursuant to the
Stock Option Plan. At September 30, 2000, 57,200 shares issued to certain
outside directors were fully vested and exercisable. The options have
varying vesting schedules ranging up to five years and expire ten years
after the date of grant.
F-32
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). Accordingly, no compensation cost has been
recognized for the stock option plan. Had compensation cost for the
Company's stock option plan been determined on the fair value at the grant
date for awards issued in or subsequent to 1995 consistent with the
provisions of SFAS 123, the Company's net income and earnings per share on a
pro forma basis would have been as follows:
2000 1999 1998
----------- ----------- -----------
Net income- as reported ........... $ 3,904,439 $ 3,835,529 $ 2,358,187
Net income- pro forma ............. $ 3,823,138 $ 3,657,477 $ 2,293,014
Basic EPS- as reported ............ $ 1.43 $ 1.41 $ 0.87
Basic EPS- pro forma .............. $ 1.40 $ 1.34 $ 0.85
Diluted EPS- as reported .......... $ 1.37 $ 1.34 $ 0.85
Diluted EPS- pro forma ............ $ 1.34 $ 1.28 $ 0.82
The above pro forma results are not likely to be representative of the
effects on reported net income for future years since additional awards are
made periodically.
The fair value of the weighted average of each year's option grants is
estimated as of the date of grant using the Black-Scholes option-pricing
model using the following weighted-average assumptions: dividend yield of
2.0% for 2000, 1.0% for 1999 and 1.8% for 1998; expected volatility of
52.01% for 2000, 58.31% for 1999 and 60.30% for 1998; risk free interest
rate based on U.S. Treasury strip yield at the date of grant of 6.57% for
2000, 5.68% for 1999 and 5.90% for 1998; and expected lives of 5 to 10
years.
F-33
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes information about stock options
outstanding as of the following fiscal year ends (all share and price
information has been restated to reflect the special 10% stock dividend in
February 2000):
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------- ------------------ -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE EXERCISE AVERAGE EXERCISE AVERAGE EXERCISE
------------------- ------------------ -------------------
SHARES PRICE SHARES PRICE SHARES PRICE
------- ----- ------- ----- ------- -----
Outstanding at beginning of
period ............................. 346,500 $4.72 200,200 $2.58 17,600 $1.48
Granted .............................. 32,900 5.75 146,300 7.65 187,000 2.68
Exercised ............................ (9,900) 2.08 - - - -
Forfeited/Expired .................... (9,020) 7.08 - - (4,400) $2.05
------- ----- ------- ----- ------- -----
Outstanding at end of period ......... 360,480 $4.83 346,500 $4.72 200,200 $2.58
======= ===== ======= ===== ======= =====
Shares available for options
that may be granted .................. 239,020 42,900 158,400
======= ======= =======
Weighted-average grant date fair
value of options granted during
the period - exercise price
equals stock market price at grant ... $3.19 $4.73 $1.55
===== ===== =====
Weighted-average grant date fair
value of options granted during
the period - exercise price
exceeds stock market price at grant .. - $4.06 $1.25
===== ===== =====
The following summarizes options outstanding at September 30, 2000:
REMAINING
EXERCISABLE
-------------------------------
EXERCISE NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------- ----------- ---------------- ---------------- ----------- ----------------
1995 Options ... $1.48 10,780 5.2 years $1.48 10,780 $1.48
1997 Options ... $2.62 - $2.87 177,320 5.9 years $2.68 110,760 $2.70
1999 Options ... $5.91 - $6.14 49,500 8.3 years $6.09 27,500 $6.12
1999 Options ... $7.62 - $9.00 89,980 8.4 years $8.43 38,236 $8.41
2000 Options ... $5.75 32,900 9.7 years $5.75 - $5.75
F-34
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. BUSINESS SEGMENTS:
AMCON operates within two reportable business segments; the
wholesale distribution of consumer products by ADC and the wholesale
distribution of natural food products by FFH are aggregated as the
"Wholesale Distribution" segment. The other reportable segment represents
the retail sale of health and natural food products. The business units
within each segment are evaluated on revenues, operating income and income
before taxes and extraordinary items.
WHOLESALE
DISTRIBUTION RETAIL CONSOLIDATED
------------- ------------- -------------
YEAR ENDED SEPTEMBER 30, 2000:
External revenues:
Cigarettes ................................ $ 296,533,411 $ - $ 296,533,411
Health food ............................... - 34,089,817 34,089,817
Confectionery ............................. 31,051,435 - 31,051,435
Tobacco beverage & other .................. 63,056,668 - 63,056,668
------------- ------------- -------------
Total external revenues ..................... 390,641,514 34,089,817 424,731,331
Depreciation and amortization ............... 786,328 1,423,090 2,209,418
Operating income ............................ 6,899,638 16,613 6,916,251
Interest expense ............................ 849,626 1,649,180 2,498,806
Income before taxes ......................... 8,218,046 (1,552,759) 6,665,287
Total assets excluding
discontinued operations ................... 53,651,226 19,541,110 73,192,336
Capital expenditures ........................ 381,646 134,414 516,060
YEAR ENDED SEPTEMBER 30, 1999:
External revenues:
Cigarettes ................................ $ 251,076,045 $ - $ 251,076,045
Health food ............................... - 6,961,743 6,961,743
Confectionery ............................. 30,191,317 - 30,191,317
Tobacco beverage & other .................. 54,634,467 - 54,634,467
------------- ------------- -------------
Total external revenues ................... 335,901,829 6,961,743 342,863,572
Depreciation and amortization ............... 982,139 301,142 1,283,281
Operating income ............................ 7,657,095 199,439 7,856,534
Interest expense ............................ 1,091,111 190,741 1,281,852
Income before taxes ......................... 6,456,113 187,048 6,643,161
Total assets, excluding
discontinued operations ................... 47,965,695 20,623,521 68,589,216
Capital expenditures ........................ 273,954 20,787 294,741
F-35
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WHOLESALE
DISTRIBUTION RETAIL CONSOLIDATED
------------- ------ -------------
YEAR ENDED SEPTEMBER 30, 1998:
External revenues:
Cigarettes .................................. $ 185,524,096 $ - $ 185,524,096
Confectionary ............................... 29,286,831 - 29,286,831
Tobacco, beverages & other .................. 48,272,403 - 48,272,403
------------- ---- -------------
Total external revenues ..................... 263,083,330 - 263,083,330
Intersegment sales .......................... - - -
Depreciation and amortization ............... 922,901 - 922,901
Operating Income ............................ 4,810,069 - 4,810,069
Interest expense ............................ 1,565,662 - 1,565,662
Income before taxes ......................... 3,780,217 - 3,780,217
Total assets, excluding discontinued
operations ................................ 39,643,737 - 39,643,737
Capital expenditures ........................ 671,592 - 671,592
The retail segment was acquired in fiscal 1999, therefore no
segment information is presented for the retail segment in fiscal 1998.
Segment information for the retail segment presented in fiscal 1999
represents approximately six months of operations of CNF and two weeks of
operations of HFA.
17. SUBSEQUENT EVENTS:
In November 2000, the Company entered into a merger agreement with
Hawaiian Natural Water Company, Inc. (OTC: HNWC), pursuant to which HNWC
would be merged with and into, and thereby become, a wholly-owned subsidiary
of AMCON Distributing Company. The merger consideration values the entire
common equity interest in HNWC at $2,865,348, payable in common stock of the
Company, which will be priced no lower than $6.00 and no greater than $8.00
per share based on a 20 trading day measuring period ending three trading
days before the date of the HNWC stockholder vote on the merger. As a
result, the Company will issue an aggregate of not less than 358,168 or more
than 477,558 shares, representing between 11.6% and 14.9% of the Company's
outstanding shares after giving effect to the merger. HNWC optionholders and
warrantholders would also receive comparable options and warrants of The
Company but with the exercise price and number of shares covered thereby
being adjusted to reflect the exchange ratio.
The Company has provided HNWC with certain interim debt financing
pending the consummation of the merger. The Company loaned HNWC $350,000 in
September 2000 and $400,000 in October 2000 for a total of $750,000 to be
used for working capital and other general corporate purposes, including
redemption of outstanding preferred stock. The loan is evidenced by
promissory notes, bearing interest at the rate of 10% per annum, due on
March 31, 2001 which are secured by substantially all of HNWC's assets. In
the event that the merger agreement is terminated for any reason or HNWC
defaults on its obligations under the notes, the Company will be entitled to
convert the notes into Series C Convertible Preferred Stock which, among
other things, would entitle the Company to elect a majority of HNWC's Board
of Directors. The notes are also convertible upon 61 days' advance notice
into HNWC common stock at the same exchange ratio as in the merger.
F-36
AMCON DISTRIBUTING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The merger is expected to qualify as a tax-free reorganization and
to be recorded on the Company's books using the purchase method of
accounting. The merger is subject to various conditions, including the
effectiveness of a registration statement covering the shares to be issued
in the merger, the listing of such shares on AMEX and approval of the
stockholders of HNWC. All of HNWC's officers and directors and any of their
affiliated entities that own shares of HNWC common stock (constituting
approximately 40% of the currently outstanding shares) have agreed to vote
their shares in favor of the merger. It is expected that the merger will be
consummated on or before March 31, 2001.
See Note 18 regarding discontinued operations.
(Unaudited)
On June 1, 2001, the Company completed the acquisition of
substantially all of the distribution business and net assets of
Merchants Wholesale, Inc. ("Merchants") located in Quincy, IL. In
addition, the Company purchased a 206,000 square foot building
occupied by Merchants and owned by Merchants' sole shareholder. The
net purchase price of $36.7 million, net of assumed liabilities of
$6.0 million, was based on assets held at the closing date, including
the real estate. Funding for the acquisition was provided as follows:
$27.0 million through borrowings under a revolving loan agreement with
LaSalle National Bank (the "Revolving Loan"); $6.3 million through a
real estate loan with Gold Bank (the "Real Estate Loan"); and $3.4
million of deferred payment to the sole stockholder of MWI. Costs and
expenses associated with the acquisition were paid from AMCON's
Revolving Loan proceeds. The Revolving Loan is secured by all of
AMCON's assets, excluding real estate. The Real Estate Loan is secured
by AMCON's two owned distribution facilities.
18. DISCONTINUED OPERATIONS
Effective March 23, 2001, the Company's subsidiary, Food For Health
Co., Inc., completed the sale of the assets of its health food distribution
business for $10.3 million, subject to certain adjustments. The sale of the
Company's health food distribution business has been reflected as discontinued
operations in the consolidated financial statements in accordance with APB
No. 30. Revenues from the discontinued operations, which have been excluded
from income from continuing operations in the accompanying consolidated
statements of operations for the years ended September 30, 2000, 1999 and
1998, are presented below. The effects of the discontinued operations on net
income (loss) and per share data are reflected within the accompanying
consolidated statements of income.
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------
2000 1999 1998
------------ ------------ -------------
Revenue ........... $ 41,393,914 $ 43,928,520 $ 31,197,993*
* Represents the period November 10, 1997 through September 30, 1998.
F-37
HAWAIIAN NATURAL WATER COMPANY, INC.
BALANCE SHEET
JUNE 30, 2001
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents ................................................ $ 5,650
Inventories .............................................................. 524,082
Trade accounts receivable, net of allowance for doubtful
accounts of $68,056 .................................................... 303,777
Other current assets ..................................................... 130,763
------------
Total Current Assets .................................................. 964,272
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $1,159,881 ........................................... 2,093,462
CO-PACKING AGREEMENT, net of accumulated amortization of $52,500 ........... 97,500
INTANGIBLE ASSET, net of accumulated amortization of $54,061 ............... 105,088
------------
Total Assets ................................................ $ 3,260,322
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable ................................................... $ 969,751
Operating account overdraft .............................................. 36,204
Accrued professional fees ................................................ 29,928
Insurance installment contracts payable .................................. 59,784
Accrued vacation, payroll and related taxes .............................. 81,126
Accrued commissions and billbacks ........................................ 194,455
Accrued other ............................................................ 166,903
Due to AMCON Distributing Company ........................................ 73,707
Notes payable - Current portion .......................................... 1,410,720
Capital lease obligation - Current portion ............................... 18,031
------------
Total Current Liabilities ............................................. 3,040,609
------------
Non-current Liabilities:
Capital lease obligation - net of current portion ........................ 9,063
Notes payable - net of current portion ................................... 176,637
Other .................................................................... 41,380
------------
Total Non-Current Liabilities ......................................... 227,080
------------
Total Liabilities ........................................... 3,267,689
------------
Stockholders' Equity (Deficit):
Preferred Stock, $1 par value 5,000,000 shares
authorized; no shares issued or outstanding ............................ -
Common stock, no par value 20,000,000 shares
authorized; 7,935,982 shares issued and outstanding .................... 9,912,446
Common stock warrants and options; 5,624,358 issued
and outstanding ........................................................ 3,680,765
Accumulated Deficit ...................................................... (13,600,578)
------------
Total Stockholders' Equity (Deficit) ................... (7,367)
------------
Total Liabilities and Stockholders' Equity (Deficit) ... $ 3,260,322
============
The accompanying notes are an integral part of this financial statement.
F-38
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 2001
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2000 2001 2000 2001
------------- ----------- ------------- -----------
NET SALES .............................. $ 1,173,421 $ 778,681 $ 2,198,113 $ 1,599,400
COST OF SALES .......................... 955,964 632,322 1,755,946 1,365,910
----------- ----------- ----------- -----------
Gross Margin ...................... 217,457 146,359 442,167 233,490
EXPENSES:
Selling and marketing ............. 296,452 113,939 522,199 233,294
General and administrative ........ 428,657 284,775 922,155 566,639
----------- ----------- ----------- -----------
725,109 398,714 1,444,354 799,933
OTHER INCOME (EXPENSE)
Interest expense .................. (56,667) (32,205) (77,677) (65,720)
Impairment charge ................. (903,094) - (903,094) -
----------- ----------- ----------- -----------
(959,761) (32,205) (980,771) (65,720)
----------- ----------- ----------- -----------
NET LOSS ............................... $(1,467,413) $ (284,560) $(1,982,958) $ (632,163)
=========== =========== =========== ===========
BASIC AND DILUTED NET LOSS PER SHARE ... $ (0.22) $ (0.04) $ (0.31) $ (0.08)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING .................... 6,800,471 7,935,982 6,339,583 7,807,526
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-39
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE
SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
COMMON STOCK
------------
COMMON STOCK WARRANTS AND OPTIONS
------------ --------------------
TOTAL
NUMBER NUMBER ACCUMULATED STOCKHOLDERS'
OF SHARES AMOUNT OF SHARES AMOUNT DEFICIT EQUITY (DEFICIT)
--------- ---------- --------- ---------- ------------ ----------------
Balance at December 31, 2000 ...... 7,185,966 $9,612,446 5,595,558 $3,669,035 $(12,968,415) $ 313,066
Sale of common stock to AMCON
Distributing Company
February 1, 2001 ................ 750,000 300,000 - - - 300,000
Issuance of common stock options
to non-employee directors
January 1, 2001 ................. - - 900 - - -
April 1, 2001 ................... - - 900 - - -
Issuance of common stock options
to marketing consultants .......... - - 27,000 11,730 - 11,730
Issuance of common stock
pursuant to Co-Packing Agreement .. 16 - - - - -
Net loss .......................... - - - - (632,163) (632,163)
--------- ---------- --------- ---------- ------------ -----------
Balance at June 30, 2001 .......... 7,935,982 $9,912,446 5,624,358 $3,680,765 $(13,600,578) $ (7,367)
========= ========== ========= ========== ============ ===========
The accompanying notes are an integral part of these financial statements.
F-40
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 2001
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2000 2001
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................................... $(1,982,958) $(632,163)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ................................ 209,556 200,054
Impairment charge ............................................ 903,094 -
Issuance of stock and options to consultants and
distributors ............................................... 26,222 11,730
Amortization of debt discount ................................ 51,183 11,544
Net decrease (increase) in current assets .................... 225,281 (34,258)
Net increase in current liabilities .......................... 363,210 463,349
Net increase in other liabilities ............................ 10,505 -
----------- ---------
Net cash (used in) provided by operating activities ..... (193,907) 20,256
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........................... (43,506) (7,737)
Cash acquired in merger with Aloha ........................... 183,111 -
----------- ---------
Net cash (used in) provided by investing activities ..... 139,605 (7,737)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock and common
stock warrants ............................................. 100,000 -
Net proceeds from private placement of common stock
and common stock warrants .................................. 200,000 300,000
Exercise of common stock options and warrants ................ 165,600 -
Redemption of preferred stock ................................ (179,000) (150,000)
Repayments of notes payable .................................. (6,454) (151,797)
Repayment of principal on capital leases ..................... (24,194) (19,702)
----------- ---------
Net cash (used in) provided by financing activities ..... 255,952 (21,499)
----------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............... $ 201,650 $ (8,980)
CASH AND CASH EQUIVALENTS beginning of period ...................... 8,988 14,630
----------- ---------
CASH AND CASH EQUIVALENTS end of period ............................ $ 210,638 $ 5,650
=========== =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Merger with Aloha Water Company Inc. in exchange for
common stock and promissory note ............................... $ 1,334,769 -
=========== =========
Preferred shareholder dividends .................................. $ 41,351 -
=========== =========
The accompanying notes are an integral part of these financial statements.
F-41
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
1. GENERAL:
The accompanying unaudited financial statements of Hawaiian Natural
Water Company, Inc., (the "Company") should be read in conjunction with the
audited financial statements for the year ended December 31, 2000 of Hawaiian
Natural Water Co., Inc. and notes thereto as filed with the Securities and
Exchange Commission in the Company's Annual Report on Form 10-KSB. The
auditor's report on those financial statements included an explanatory fourth
paragraph indicating that there is substantial doubt about the Company's
ability to continue as a going concern.
In the opinion of management, the accompanying financial statements
reflect all adjustments (which consist primarily of normal recurring
adjustments) considered necessary to fairly present the financial position of
the Company at June 30, 2001, the results of its operations for the three
month and six month periods ended June 30, 2001 and 2000, and the cash flows
for the six month periods ended June 30, 2001 and 2000, in accordance with
accounting principles generally accepted in the United States and the rules
and regulations of the Securities and Exchange Commission. The results of
operations for interim periods are not necessarily indicative of results to
be achieved for full fiscal years. Certain amounts from prior periods have
been reclassified to conform to their current period presentation.
(a) Organization and Going Concern:
------------------------------
Hawaiian Natural Water Company, Inc. (the "Company") was
incorporated in the state of Hawaii on September 13, 1994. The Company was
formed for the purpose of bottling, marketing and distributing Hawaiian
natural water in Hawaii, the United States mainland and foreign markets. The
Company's initial product introduction occurred in the first quarter of 1995.
In June 1999 the Company acquired certain assets of Ali'i Water
Bottling Co., Inc., which extended the Company's product line to include (1)
premium purified bottled water, and (2) the home and office large bottle (3
gallon and 5 gallon) delivery market. This business is concentrated in the
Kailua-Kona area of the Big Island of Hawaii.
In January 2000, the Company introduced a line of herbal beverages
under the East Meets West XEN(TM) ("XEN") name. The beverages are manufactured
for the Company pursuant to a co-packing agreement with a Los Angeles area
bottler (see Note 6). Sales efforts to date have concentrated in Southern
California, Hawaii and the Vancouver, Canada area.
In March 2000, the Company acquired Aloha Water Company Co. Inc., a
distributor of purified water in the home and office market in the Honolulu
area. This acquisition was subsequently rescinded in December, 2000 (see Note
7).
In November 2000, the Company agreed to be acquired by AMCON
Distributing Company, an Omaha, Nebraska based distributor, by means of a
merger of the Company into a wholly owned subsidiary of AMCON (see Note 8).
Since the execution of the merger agreement, the Company has been
substantially dependent upon AMCON for its financing requirements. If the
merger agreement were terminated for any reason, the Company would likely not
be able to continue as a going concern.
F-42
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
As shown in the accompanying financial statements, the Company has
incurred significant losses and negative cash flows from operations since
inception. Management expects that the Company will continue to incur
additional losses and negative cash flows until the Company achieves
significant levels of sales. To date, the Company has been unable to generate
cash flow sufficient to support its operations. Additionally, the Company has
past due accounts payable of approximately $851,000 and notes payable amounts
due in near term of approximately $1,400,000. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
(b) Estimates:
---------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(c) Revenue Recognition:
-------------------
The Company recognizes revenue on the accrual method of accounting
when title transfers: upon shipment, for bottled water products and other
beverages, and upon delivery for home and office delivery products. The
Company grants customers the right to return goods that are defective or
otherwise unsuitable for sale. The Company issues refunds to customers or
replaces goods that are rejected.
The Company's policy is to provide a reserve for estimated
uncollectible trade accounts receivable. The Company also provides a reserve
for estimated sales returns and related disposal costs. Net sales revenue
reflects reductions for the reserve for sales returns, discounts, promotional
allowances and freight-out. The Company also estimates the amount of
billbacks from certain distributors which represents price adjustments for
quantity or other discounts to distributors' customers.
(d) Gross Margin:
------------
The Company's plant currently has a normal production capacity of
approximately 200,000 cases per calendar quarter. The Company is currently
operating its plant at approximately 58 percent of this capacity. Since a
significant portion of the Company's cost of sales includes fixed production
costs, the Company anticipates higher gross margins as production and sales
increase.
(e) Recent Accounting Pronouncements:
--------------------------------
The Company adopted Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") effective January 1, 2001. Under the provisions of SFAS 133, the
Company is required to recognize all derivatives as either assets or
liabilities in the balance sheet and measure these instruments at fair value.
The adoption of SFAS 133 did not have a material effect on the Company's
financial statements.
F-43
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141"). This Statement addresses financial accounting and
reporting for business combinations and supersedes APB Opinion No. 16,
"Business Combinations," and FASB Statement No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises." All business
combinations in the scope of this Statement are to be accounted for using one
method, the purchase method. The Company will adopt SFAS 141 for all business
combinations initiated after June 30, 2001.
Also in June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS
142 addresses financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17, "Intangible
Assets." This pronouncement addresses, among other things, how goodwill and
other intangible assets should be accounted for after they have been
initially recognized in the financial statements. Goodwill would no longer be
amortized but would be assessed at least annually for impairment using a fair
value methodology. The Company will adopt this statement for all goodwill and
other intangible assets acquired after June 30, 2001 and for all existing
goodwill and other intangible assets beginning January 1, 2002. The Company
does not anticipate that the adoption of SFAS 142 will have a significant
effect on the Company's financial position or the results of operations.
2. LOSS PER SHARE:
Basic and Diluted Loss Per Share is computed by dividing the Net
Loss (adjusted for preferred dividends) by the Weighted Average Common Shares
Outstanding during the period.
The Company's Basic and Diluted Loss Per Share is the same for the
first and second quarters of both 2000 and 2001 in that any exercise of stock
options or warrants would have been anti-dilutive.
3. CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include savings accounts and investments
in a money market account with original maturities less than 90 days.
4. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out
method) or market. As of June 30, 2001, inventories were comprised of the
following:
Raw Material ............... $383,242
Finished Goods ............. 140,840
--------
$524,082
========
Raw materials inventory consists of PET "pre-forms", caps, labels
and various packaging and shipping materials. Finished goods inventory
includes materials, labor and manufacturing overhead costs.
F-44
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
5. ACQUISITION OF INTANGIBLE ASSET:
In June 1999, the Company purchased for $150,000 the beverage
products, trademarks and all other rights related to its XEN line of herbal
beverages. The acquisition cost and related trademark registration expenses
have been capitalized and are being amortized over a five-year period.
6. CO-PACKING AGREEMENT:
In June 1999, the Company entered into a five-year agreement with an
independent bottler in Los Angeles, California (the "Bottler") for the
production, warehousing, and shipment of herbal beverages. On September 13,
1999, the Company has issued an aggregate of 850,000 shares of common stock
to the principals of the Bottler in partial consideration for these services
which were recorded as an asset on the Company's accounting records in the
amount of $150,000, based on the fair value of the securities issued, which
is being amortized over a five year period.
7. ACQUISITION OF ALOHA WATER COMPANY, INC. AND IMPAIRMENT CHARGE:
On March 17, 2000, the Company acquired Aloha Water Company, Inc.,
("Aloha"), a distributor of purified water to the home and office delivery
market in the Honolulu area. The acquisition was accomplished through a
merger of Aloha into a wholly owned subsidiary of the Company formed for this
purpose. The purchase price for Aloha consisted of an aggregate of (i)
750,000 shares of common stock of the Company and (ii) a promissory note of
the Company in the amount of $500,000 (the "Aloha note") to the stockholders
of Aloha. Interest on the note was payable monthly at the annual rate of 10%.
The entire principal amount was due on April 1, 2000. The Aloha note was
secured by a first priority security interest on all of the capital stock of
Aloha.
In August 2000, the holders of the Aloha note declared a default for
failure to make certain interest payments, and foreclosed on their
collateral, which was all of the stock of Aloha. As a result, the Company
wrote off its investment in Aloha, the related goodwill and the Aloha note.
In December 2000, the parties agreed to rescind the acquisition, as
a result of which Aloha returned the Aloha note and the 750,000 shares of the
Company's common stock. The fair value of the Company's shares returned was
not material.
8. AMCON MERGER:
In November 2000, the Company entered into a merger agreement with
AMCON Distributing Company ("AMCON"), pursuant to which the Company has
agreed to merge with and into, and thereby become, a wholly owned subsidiary
of AMCON. The merger consideration values the entire common equity interest
in the Company at $2,865,348, payable in common stock of AMCON, which will be
priced at not less than $6.00 or more than $8.00 per share, based on a 20
trading day measuring period ending three trading days before the date of the
Company's stockholder vote on the merger. As a result, AMCON will issue an
aggregate of not less than 358,168 or more than 477,558 shares. Holders of
outstanding options and warrants of the Company would receive comparable
options and warrants of AMCON with the exercise price and number of shares
covered adjusted based upon the exchange ratio.
F-45
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
The merger is expected to qualify as a tax-free reorganization. It
is subject to various conditions, including the effectiveness of a
registration statement covering the shares to be issued in the merger, the
listing of such shares on the American Stock Exchange, and the approval of
the Company's stockholders. All of the Company's officers and directors and
any of their affiliated entities that own shares of the Company's common
stock have agreed to vote their shares in favor of the merger.
The Company does not currently anticipate completion of the Merger
before December 31, 2001. However, the Merger Agreement is terminable under
certain circumstances, and there can be no assurance that the Merger will be
completed. Pending completion of the Merger, AMCON has made certain interim
financing available to the Company. If the Merger Agreement is terminated for
any reason, it is likely that the Company will not be able to continue as a
going concern.
9. NOTES PAYABLE:
In anticipation of acquiring the Company, AMCON has provided certain
debt financing to the Company for working capital and other general corporate
purposes. AMCON advanced $350,000 in September 2000, $400,000 in October
2000, and an additional $500,000 in June 2001. These loans are evidenced by
secured promissory notes (the "AMCON notes") bearing interest at a rate of
10% per annum, payable quarterly. The AMCON notes are convertible at the
election of AMCON, under certain circumstances, into Series C convertible
preferred stock bearing dividends, payable quarterly, of 10% per annum and
giving effective control of the Board of Directors to AMCON. The AMCON notes
are also convertible into common stock of the Company at AMCON's election at
a conversion price of $.40 per share. The AMCON notes are secured by a lien
on all of the Company's assets. The due date of the AMCON notes, originally
February 28, 2001, has been extended to September 30, 2001. The Company
anticipates a further extension of the due date of the AMCON notes to the
expected completion date of the Merger.
In September 1997, the Company acquired certain bottle making
equipment used in its bottling operations. The consideration for the
equipment was an aggregate of $1.2 million, a portion of which was paid
through the issuance of a promissory note in the original principal amount of
$825,000, payable in installments, as defined. The Company discounted this
equipment note payable using an estimated weighted average cost of capital of
12%, and amortized the resulting discount to interest expense using the
effective interest method over the term of the loan. In October 2000, the
Company negotiated a restructuring of the $189,000 installment due on
September 30, 2000, so as to extend the payment over six months. This
installment was paid in full as of May 11, 2001. There are currently two
equal installments of $165,000 (plus interest) due on this promissory note on
September 30, 2001 and 2002.
In September 1999, the Company acquired a prefabricated warehouse,
which it assembled and installed on its property in Kea'au. The warehouse was
purchased for $24,995 with a down payment of $2,000 and a 5-year note, with
monthly payments aggregating $22,995, including interest.
F-46
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
The following summarizes the Company's notes payable as of June 30, 2001:
First AMCON note ................... $ 350,000
Second AMCON note .................. 400,000
Third AMCON note ................... 500,000
Equipment note payable ............. 330,000
Less: Amortized discount ........... (7,564)
-----------
Net notes payable .................. 1,572,436
Vehicle installment note payable ... 517
Warehouse note payable ............. 14,404
-----------
Subtotal--notes payable ............ 1,587,357
Less: Current portion .............. (1,410,720)
-----------
Non-current portion ................ $ 176,637
===========
10. STOCK OPTIONS:
The total number of Common Stock warrants and options shown at June
30, 2001 excludes an aggregate of 438,367 options outstanding at such date
held by officers and employees of the Company. Stock options granted to
employees are accounted for under APB Opinion No. 25, under which
compensation expense is recognized only if the exercise price is less than
the market price at the date of grant. All employee stock options outstanding
at June 30, 2001 had an original exercise price of $4.00 per share. In
February 2000, the Company reduced the exercise price of the options held by
all active employees to $2.00 per share, which has not resulted in any
further compensation charges to income through June 30, 2001.
Stock options granted to non-employees are accounted for in
accordance with Statement of Financial Accounting Standards No. 123 (SFAS
123) "Accounting for Stock-Based Compensation," which requires that these
transactions be accounted for based upon the fair value of consideration
received or the fair value of the equity instruments issued, whichever is
more reliably determinable.
11. PRODUCT LINE SALES INFORMATION:
For the three-month periods ended June 30, 2000 and 2001, the
Company had the following sales by product line:
2000 % 2001 %
---------- --- --------- ---
PET products ................... $ 733,757 63 $ 673,651 87
Home & office delivery ......... 361,063 30 71,722 9
XEN herbal beverage products ... 78,601 7 33,308 4
---------- --- --------- ---
$1,173,421 100 $ 778,681 100
========== =========
F-47
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
For the six-month periods ended June 30, 2000 and 2001, the Company
had the following sales by product line:
2000 % 2001 %
---------- --- ---------- ---
PET products ................... $1,526,531 69 $1,383,794 87
Home & office Delivery ......... 444,033 20 150,543 9
XEN herbal beverage products ... 227,549 11 65,063 4
---------- --- ---------- ---
$2,198,113 100 $1,599,400 100
========== === ========== ===
In the six-month period ended June 30, 2001, 97% of Pet products
sales were made in Hawaii, and 99% of XEN sales were made in the U.S.
Mainland. In the three-month period ended June 30, 2000, 99% of Pet product
sales were made in Hawaii, and 69% of XEN sales were made in Mainland, 19%
were made in Hawaii, and 2% were made in Guam. All home and office delivery
sales are made in Hawaii.
12. EQUITY TRANSACTIONS:
(a) Series A Convertible Preferred Stock
------------------------------------
In 1999, the Company issued an aggregate of 1,250 shares ($1.25
million in aggregate liquidation preference amount) of Series A convertible
preferred stock to an institutional investor. The Company also issued to this
investor for no additional consideration warrants to purchase 100,000 shares
of common stock at an original exercise price of $3.625 per share.
Each share of Series A preferred stock had a liquidation preference
of $1,000, and was entitled to cumulative dividends at an annual rate of 4%,
payable quarterly commencing May 31,1999, in cash or common stock at the
election of the Company. The Series A preferred stock was convertible into
common stock, in whole or in part at the election of the holder, at a
variable conversion price based upon a discount to the market price (as
defined) of the common stock as of each conversion date (the "beneficial
conversion feature").
In August 1999, the investor converted six shares of Series A
preferred into an aggregate of 11,429 shares of common stock. In September
1999, the Company entered into a standstill agreement with the investor,
pursuant to which the investor agreed not to convert any additional shares of
Series A preferred and granted the Company an option to redeem the
outstanding shares. This standstill agreement was extended continuously until
November 2, 2000. Pursuant to this standstill arrangement, the Company
redeemed an aggregate of (i) 925 shares of Series A preferred stock for an
aggregate of $808,750 in 1999, (ii) 100 shares for an aggregate of $100,000
during the first quarter of 2000, (iii) 79 shares for an aggregate of $79,000
during the second quarter of 2000, and (iv) the remaining 140 shares for an
aggregate of $140,000 in October 2000. There are currently no Series A
preferred shares outstanding.
As partial consideration for the extension of the standstill
agreement, the Company reduced the exercise price of the warrants held by the
investor in several increments to $.01 per share. The investor exercised
these warrants in full in March 2000.
Primarily as a result of the amortization of the beneficial
conversion feature and redemption of the Series A preferred shares, the
Company recorded an aggregate preferred stock dividend of $416,379 during
1999. In 2000, the Company redeemed the remaining Series A preferred shares
and adjusted the previously accrued preferred stock dividend to the holder,
resulting in an aggregate preferred stock dividend of $86,698 for the Series A
preferred shares.
F-48
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
(b) Series B Convertible Mandatorily Redeemable Preferred Stock:
-----------------------------------------------------------
In March 2000, the Company issued 100 shares ($100,000 aggregate
liquidation preference amount) of Series B convertible preferred stock to a
private investor. Each share of Series B preferred stock has a liquidation
preference of $1,000. The Series B preferred stock is mandatorily redeemable,
at the election of the holder, at any time within 90 days following the first
anniversary date of the date of issuance in the event that the market price
(as defined) of the common stock is less than $1.50 per share on the first
anniversary date. The redemption price in such event is $1,500 per share
($150,000 in the aggregate).
The market price of the common stock was less than $1.50 on the
first anniversary date, and the investor delivered to the Company a notice of
redemption with respect to all of the outstanding Series B preferred stock.
The Company recorded the $50,000 redemption premium as a preferred stock
dividend. The stock was redeemed in full during the quarter ended June 30,
2001.
(c) Issuance of Stock to AMCON:
--------------------------
In February 2001, the Company issued 750,000 shares of common stock
to AMCON at a purchase price of $.40 per share for an aggregate purchase
price of $300,000. These shares will participate in the Merger consideration
(see Note 8). In June 2001, the Company issued to AMCON a $500,000
convertible promissory note, convertible at any time at AMCON's election,
into an aggregate of 1,250,000 shares of common stock at a conversion price
of $.40 per share. If this note is converted prior to the Merger, the shares
issued upon conversion will participate in the Merger consideration.
13. SUBSEQUENT EVENTS:
In July and August 2001, the Company took delivery of a new blow
molding machine and certain related equipment for installation at the
Company's bottling facility. The total value of this new equipment is
estimated at $2,000,000. The Company expects this new equipment to
significantly enhance the efficiency of its bottling operations. The
equipment was acquired by AMCON in its own name. Upon installation, the
Company expects to lease this equipment from AMCON, on terms to be agreed
upon. This lease is expected to be accounted for as an operating lease.
In August 2001, the Company commenced construction of an addition to
its existing bottling facility to house this new equipment. The Company
anticipates this addition to be completed in October 2001, at an estimated
cost of $150,000, and the equipment to be fully operational by November 2001.
The Company anticipates AMCON will lend the Company the funds needed for the
facility addition, as well as certain additional working capital, in an
amount yet to be agreed upon.
F-49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Hawaiian Natural Water Company, Inc.:
We have audited the accompanying balance sheet of HAWAIIAN NATURAL
WATER COMPANY, INC., (a Hawaii corporation) as of December 31, 2000 and the
related statements of operations, stockholders' equity (deficit) and cash
flows for the two years in the period then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hawaiian Natural
Water Company, Inc. as of December 31, 2000 and the results of its
operations and its cash flows for the two years in the period then ended, in
conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company has suffered recurring losses and
negative cash flows from operations. Additionally, the Company has past due
accounts payable of approximately $944,000 and mandatorily redeemable
preferred stock and notes payable amounts due in the near term of
approximately $1,211,000. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with
respect to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ ARTHUR ANDERSEN LLP
Honolulu, Hawaii
April 13, 2001
F-50
HAWAIIAN NATURAL WATER COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 2000
ASSETS
Current Assets:
Cash and cash equivalents .......................................................................... $ 14,630
Trade accounts receivable, net of allowance for doubtful accounts of $39,062 ....................... 275,428
Inventories ........................................................................................ 571,164
Due from officers .................................................................................. 21,672
Other current assets ............................................................................... 56,100
-------------
Total current assets ......................................................... 938,994
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $989,490 .................... 2,256,116
-------------
CO-PACKING AGREEMENT, net of accumulated amortization of $37,500 ........................................ 112,500
INTANGIBLE ASSET, net of accumulated amortization of $40,575 ............................................ 118,574
-------------
Total assets ................................................................. $ 3,426,184
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................................................................... $ 1,062,487
Book overdraft ..................................................................................... 59,466
Accrued professional fees .......................................................................... 99,001
Accrued vacation ................................................................................... 21,363
Accrued commissions and billbacks .................................................................. 195,241
Accrued payroll and related taxes .................................................................. 42,957
Accrued other ...................................................................................... 155,273
Amount due for mandatorily-redeemable preferred stock .............................................. 150,000
Notes payable ...................................................................................... 1,061,437
Capital lease obligation ........................................................................... 30,375
-------------
Total current liabilities .................................................... 2,877,600
Non-current Liabilities:
Notes payable--net of current portion .............................................................. 177,717
Capital lease obligation--net of current portion ................................................... 16,421
Other .............................................................................................. 41,380
-------------
Total non-current liabilities ................................................ 235,518
-------------
Total liabilities ............................................................ 3,113,118
-------------
Stockholders' Equity:
Preferred stock, $1 par value:
Authorized - 5,000,000 shares ..................................................................
No shares outstanding ..........................................................................
Common Stock, no par value:
Authorized - 20,000,000 shares .................................................................
Issued and outstanding - 7,185,966 shares ...................................................... 9,612,446
Common stock warrants and options:
Issued and outstanding - 5,595,558 shares ...................................................... 3,669,035
Accumulated deficit ................................................................................ (12,968,415)
-------------
Total stockholders' equity ................................................... 313,066
-------------
Total liabilities and stockholders' equity ................................... $ 3,426,184
-------------
The accompanying notes are an integral part of this financial statement.
F-51
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
------------- -------------
NET SALES ................................................................... $ 3,681,026 $ 3,050,383
COST OF SALES ............................................................... 2,983,160 2,464,403
------------- -------------
Gross margin ........................................................... 697,866 585,980
EXPENSES:
General and administrative ............................................. 1,589,275 1,436,214
Selling and marketing .................................................. 900,285 661,289
------------- -------------
2,489,560 2,097,503
------------- -------------
(1,791,694) (1,511,523)
------------- -------------
OTHER INCOME (EXPENSE):
Impairment charge ...................................................... (1,025,935) -
Interest income ........................................................ - 10,515
Interest expense ....................................................... (120,029) (80,935)
------------- -------------
NET LOSS .................................................................... (2,937,658) (1,581,943)
Preferred Stock Dividend ............................................... (136,698) (416,379)
------------- -------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS .................................. $ (3,074,356) $ (1,998,322)
------------- -------------
BASIC AND DILUTED NET LOSS PER SHARE ........................................ $ (0.45) $ (0.45)
------------- -------------
The accompanying notes are an integral part of these financial statements.
F-52
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Common Stock Warrants
Common Stock and Options Preferred Stock
--------------------- ----------------------- ----------------------
Total
Number of Number Stockholders'
Number of Underlying of Accumulated Equity
Shares Amount Shares Amount Shares Amount Deficit (Deficit)
---------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998 ..... 4,024,563 $6,693,062 3,757,959 $2,841,329 -- $ -- $ (7,895,737) $ 1,638,654
Issuance of common stock and
warrants in private offering
September 28, 1999 .... 850,000 440,646 1,416,666 389,354 -- -- -- 830,000
December 6, 1999 ...... 100,000 53,097 166,667 46,903 -- -- -- 100,000
December 10, 1999 ..... 100,000 53,098 166,666 46,902 -- -- -- 100,000
Issuance of common stock for
purchase of Net Assets of
Ali'i Water Bottling, Inc.
June 30, 1999 ......... 263,040 312,359 -- -- -- -- -- 312,359
Issuance of common stock for
Co-Packing Agreement
September 13, 1999 .... 100,000 43,750 -- 106,250 -- -- -- 150,000
Issuance of common stock and
common stock options to
professional advisor for
services rendered
April 1, 1999 ......... -- -- 12,500 16,226 -- -- -- 16,226
July 1, 1999 .......... -- -- 12,500 16,226 -- -- -- 16,226
July 14, 1999 ......... 2,695 2,695 -- -- -- -- -- 2,695
September 28, 1999 .... 30,000 15,929 50,000 14,071 -- -- -- 30,000
October 1, 1999 ....... -- -- 12,500 3,000 -- -- -- 3,000
Issuance of common stock options
to non-employee directors .... -- -- 9,000 8,395 -- -- -- 8,395
Issuance of common stock options
to marketing consultant
May 20, 1999 .......... -- -- 10,000 4,370 -- -- -- 4,370
May 24, 1999 .......... -- -- 30,000 13,110 -- -- -- 13,110
Exercise of common stock options
by financial public relations
advisor
January 11, 1999 ...... 50,000 125,000 (50,000) -- -- -- -- 125,000
Issuance of preferred stock and
common stock warrants to
institutional investor, net
of offering costs
March 3, 1999 ......... -- -- 100,000 97,422 750 488,397 -- 585,819
Issuance of common stock and
common stock warrants to
broker for services rendered
March 3, 1999 ......... 5,000 18,750 15,000 41,670 -- -- -- 60,420
Issuance of preferred stock to
institutional investor
August 10, 1999 ....... -- 312,500 -- -- 500 500,000 (312,500) 500,000
Repricing of warrants
associated with the
outstanding preferred
stock
August 10, 1999 ....... -- -- -- 27,003 -- (20,252) -- 6,751
September 23, 1999 .... -- -- -- 19,069 -- (14,302) -- 4,767
November 5, 1999 ...... -- -- -- 14,229 -- (10,672) -- 3,557
The accompanying notes are an integral part of these financial statements.
F-53
HAWAIIAN NATURAL WATER COMPANY, INC.
Common Stock Warrants
Common Stock and Options Preferred Stock
--------------------- ----------------------- --------------------
Total
Number of Number Stockholders'
Number of Underlying of Accumulated Equity
Shares Amount Shares Amount Shares Amount Deficit (Deficit)
---------------------------------------------------------------------------------------------------
Conversion of preferred stock
to common stock
August 24, 1999 ....... 11,429 6,000 -- -- (6) (6,000) -- --
Redemption of preferred stock
September 23, 1999 ........ -- -- -- -- (250) (197,680) (52,320) (250,000)
October 1, 1999 ........... -- -- -- -- (375) (296,520) (3,480) (300,000)
October 8, 1999 ........... -- -- -- -- (250) (197,680) (11,070) (208,750)
November 5, 1999 .......... -- -- -- -- (50) (39,536) (10,464) (50,000)
Accrued dividends to preferred
Shareholder .................. -- -- -- -- -- -- (26,545) (26,545)
Net loss ....................... -- -- -- -- -- -- (1,581,943) (1,581,943)
--------- ---------- --------- ---------- ------ ------------ ------------ -----------
BALANCE at December 31, 1999 ... 5,536,727 $8,076,886 5,709,458 $3,705,529 319 $ 205,755 (9,894,059) 2,094,111
--------- ---------- --------- ---------- ------ ------------ ------------ -----------
Issuance of common stock bonus
to executive officer
December 15, 2000 ..... 350,000 84,370 -- -- -- -- -- 84,370
Issuance of common stock and
common stock warrants in
private offering
February 1, 2000 ...... 50,000 26,548 83,333 23,452 -- -- -- 50,000
February 20, 2000 ..... 50,000 26,548 83,333 23,452 -- -- -- 50,000
Exercise of common stock
warrants by private investor
March 3, 2000 ......... 50,000 50,000 (50,000) -- -- -- -- 50,000
May 25, 2000 .......... 35,000 35,000 (35,000) -- -- -- -- 35,000
June 1, 2000 .......... 15,000 15,000 (15,000) -- -- -- -- 15,000
June 16, 2000 ......... 14,600 14,600 (14,600) -- -- -- -- 14,600
June 16, 2000 ......... 35,000 35,000 (35,000) -- -- -- -- 35,000
June 29, 2000 ......... 15,000 15,000 (15,000) -- -- -- -- 15,000
July 21, 2000 ......... 26,000 26,000 (26,000) -- -- -- -- 26,000
August 25, 2000 ....... 40,000 40,000 (40,000) -- -- -- -- 40,000
Issuance of common stock to
non-employee directors
February 16, 2000 ..... -- -- 900 486 -- -- -- 486
May 11, 2000 .......... -- -- 900 486 -- -- -- 486
June 13, 2000 ......... -- -- 600 -- -- -- -- --
August 8, 2000 ........ -- -- 900 -- -- -- -- --
September 28, 2000 .... -- -- 900 -- -- -- -- --
Redemption of preferred stock
February 7, 2000 ...... -- -- -- -- (50) (32,250) (17,750) (50,000)
March 6, 2000 ......... -- -- -- -- (50) (32,250) (17,750) (50,000)
May 1, 2000 ........... -- -- -- -- (35) (22,575) (12,425) (35,000)
May 26, 2000 .......... -- -- -- -- (15) (9,675) (5,325) (15,000)
June 29, 2000 ......... -- -- -- -- (29) (18,705) (10,295) (29,000)
October 2, 2000 ....... -- -- -- -- (40) (25,800) (14,200) (40,000)
October 23, 2000 ...... -- -- -- -- (100) (64,500) (35,500) (100,000)
Issuance of common stock and
common stock warrants to
professional advisor
February 1, 2000 ...... 10,000 5,310 16,667 4,690 -- -- -- 10,000
February 15, 2000 ..... 10,000 5,310 16,667 4,690 -- -- -- 10,000
March 17, 2000 ........ 50,000 50,000 -- -- -- -- -- 50,000
Issuance of common stock to
professional advisor
March 31, 2000 ........ -- -- 12,500 12,500 -- -- -- 12,500
The accompanying notes are an integral part of these financial statements.
F-54
HAWAIIAN NATURAL WATER COMPANY, INC.
Common Stock Warrants
Common Stock and Options Preferred Stock
--------------------- ----------------------- --------------------
Total
Number of Number Stockholders'
Number of Underlying of Accumulated Equity
Shares Amount Shares Amount Shares Amount Deficit (Deficit)
---------------------------------------------------------------------------------------------------
Issuance of common stock in
merger with Aloha Water Co.
March 17, 2000 ........ 750,000 937,500 -- -- -- -- -- 937,500
Return of common stock in
conjunction with rescission
of agreement to merge with
Aloha Water Co.
December 27, 2000 ..... (750,000) -- -- -- -- -- -- --
Exercise of stock option by
institutional investor
March 3, 2000 ......... 100,000 1,000 (100,000) -- -- -- -- 1,000
Issuance of common stock to
marketing consultant
March 31, 2000 ........ 20,000 20,000 -- -- -- -- -- 20,000
April 12, 2000 ........ 3,000 3,000 -- -- -- -- -- 3,000
June 30, 2000 ......... 2,250 2,250 -- -- -- -- -- 2,250
September 30, 2000 .... 10,000 10,000 -- -- -- -- -- 10,000
September 30, 2000 .... 6,750 6,750 -- -- -- -- -- 6,750
December 31, 2000 ..... 4,500 4,500 -- -- -- -- -- 4,500
Issuance of common stock
pursuant to Co-Packing
Agreement
May 5, 2000 ........... 3,490 3,490 -- -- -- -- -- 3,490
June 30, 2000 ......... 2,618 2,618 -- -- -- -- -- 2,618
July 31, 2000 ......... 2,643 512 -- -- -- -- -- 512
September 13, 2000 .... 700,000 106,250 -- (106,250) -- -- -- --
September 30, 2000 .... 4,483 869 -- -- -- -- -- 869
December 31, 2000 ..... 1,905 310 -- -- -- -- -- 310
Issuance of common stock for
U.S. Mainland office rental
June 5, 2000 .......... 1,000 406 -- -- -- -- -- 406
June 30, 2000 ......... 1,000 438 -- -- -- -- -- 438
July 3, 2000 .......... 1,000 406 -- -- -- -- -- 406
September 1, 2000 ..... 1,000 188 -- -- -- -- -- 188
October 31, 2000 ...... 1,000 200 -- -- -- -- -- 200
December 31, 2000 ..... 2,000 562 -- -- -- -- -- 562
Issuance of common stock to
key management executives
as incentive compensation
August 31, 2000 ....... 30,000 5,625 -- -- -- -- -- 5,625
Accrued dividend to Series B
preferred holder
December 31, 2000 ..... -- -- -- -- -- -- (50,000) (50,000)
Adjustment of previously accrued
dividend to Series A
preferred holder ............. -- -- -- -- -- -- 26,547 26,547
Net loss ....................... -- -- -- -- -- -- (2,937,658) (2,937,658)
--------- ---------- --------- ----------- ------ ------------ ------------ -----------
BALANCE at December 31, 2000 ... 7,185,966 $9,612,446 5,595,558 $3,669,035 -- -- $(12,968,415) 313,066
--------- ---------- --------- ---------- ------ ------------ ------------ -----------
The accompanying notes are an integral part of these financial statements.
F-55
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................................ $(2,937,658) $(1,581,943)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ....................................................... 384,880 288,759
Amortization of debt discount ....................................................... 35,574 59,398
Impairment charge ................................................................... 1,025,935 -
Net income from subsidiary .......................................................... (18,435) -
Issuance of common stock to Co-Packer, landlord and consultants ..................... 56,499 -
Issuance of common stock bonuses to executive officer ............................... 84,370 -
Issuance of common stock compensation to executives ................................. 5,625 -
Issuance of common stock options to consultants and distributors .................... 12,500 85,627
Issuance of common stock options to non-employee directors .......................... 972 8,395
Warrants granted for preferred standstill agreement ................................. - 15,075
Loss on sale of equipment ........................................................... - 3,282
Net decrease (increase) in current assets ........................................... 304,751 (520,343)
Increase in other noncurrent liabilities ............................................ - 41,380
Net increase in current liabilities .................................................. 436,474 484,915
----------- -----------
Net cash used in operating activities ............................. (608,513) (1,115,455)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ..................................................... (100,877) (328,902)
Acquisition of intangible asset ......................................................... - (159,149)
Proceeds from sale of equipment ......................................................... - 1,080
----------- -----------
Net cash used in investing activities ............................. (100,877) (486,971)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable ................................................. 796,903 -
Repayments of principal on notes payable ................................................ (62,669) (131,956)
Repayment of principal on capital leases ................................................ (31,802) (69,408)
Net proceeds from sale of preferred stock and common stock warrants ..................... - 1,146,239
Net proceeds from sale of common stock and common stock warrants ........................ 100,000 1,030,000
Redemption of preferred stock ........................................................... (319,000) (808,750)
Proceeds from exercise of common stock warrants and options ............................. 231,600 125,000
----------- -----------
Net cash provided by financing activities ......................... 715,032 1,291,125
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................................... $ 5,642 $ (311,301)
CASH AND CASH EQUIVALENTS, beginning of period ............................................... 8,988 320,289
----------- -----------
CASH AND CASH EQUIVALENTS, end of period ..................................................... $ 14,630 $ 8,988
----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
ACQUISITION OF NET OPERATING ASSETS OF ALII WATER BOTTLING, INC.
WITH COMMON STOCK ....................................................................... $ - $ 312,359
----------- -----------
CO-PACKING AGREEMENT - PAID WITH COMMON STOCK ................................................ $ - $ 150,000
----------- -----------
ADDITION OF CAPITALIZED EQUIPMENT LEASES ..................................................... $ 17,243 $ 82,176
----------- -----------
CAPITAL ADDITION - ACQUIRED WITH NOTE PAYABLE ................................................ $ - $ 22,195
----------- -----------
ACQUISITION AND RESCISSION OF NET OPERATING ASSETS OF ALOHA WATER CO.:
Issuance of common stock and common stock warrants to professional advisor .............. $ 70,000 -
Issuance of common stock in merger ...................................................... 937,500 -
Issuance of note payable ................................................................ 500,000 -
Cancellation of note payable ............................................................ (500,000) -
----------- -----------
$ 1,007,500 $ -
----------- -----------
The accompanying notes are an integral part of these financial statements.
F-56
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS
(a) Organization and Going Concern
------------------------------
Hawaiian Natural Water Company, Inc. (the "Company") was
incorporated in the State of Hawaii on September 13, 1994. The Company was
formed for the purpose of bottling, marketing and distributing Hawaiian
natural water in Hawaii, the United States mainland and foreign markets. The
Company's initial product introduction occurred in the first quarter of
1995.
In June 1999 the Company acquired certain assets of Ali'i Water
Bottling Co., Inc. (see Note 3), which extended the Company's product line
to include (1) premium purified bottled water, and (2) the home and office
large bottle (3 gallon and 5 gallon) delivery market. This business is
concentrated in the Kailua-Kona area of the Big Island of Hawaii.
In January 2000, the Company introduced a line of herbal beverages
under the "East Meets West XEN(TM)" name. The beverages are manufactured for
the Company pursuant to a co-packing agreement with a Los Angeles area
bottler (see Note 10d to the financial statements). Sales efforts in 2000
were concentrated in Southern California, Hawaii and the Vancouver, Canada
area.
In March 2000, the Company acquired Aloha Water Company Co. Inc., a
distributor of purified water in the home and office market in the Honolulu
area. This acquisition was subsequently rescinded in December, 2000 (see
Note 4).
In November 2000, the Company agreed to be acquired by AMCON
Distributing Company, an Omaha, Nebraska based distributor, by means of a
merger of the Company into a wholly owned subsidiary of AMCON (see Note 5).
Since the execution of the merger agreement, the Company has been
substantially dependent upon AMCON for its financing requirements. If the
merger agreement were terminated for any reason, the Company would likely
not be able to continue as a going concern.
As shown in the accompanying financial statements, the Company has
incurred significant losses and negative cash flows from operations since
inception. Management expects that the Company will continue to incur
additional losses and negative cash flows until the Company achieves
significant levels of sales. To date, the Company has been unable to
generate cash flow sufficient to support its operations. Additionally, the
Company has past due accounts payable of approximately $944,000 and
mandatorily redeemable preferred stock and notes payable amounts due in near
term of approximately $1,211,000. The accompanying financial statements do
not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
(b) Basis of Accounting
-------------------
The Company's accounting policies are in accordance with generally
accepted accounting principles in the United States.
F-57
HAWAIIAN NATURAL WATER COMPANY, INC.
(c) Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include savings accounts and investments
in a money market account with original maturities less than 90 days.
(d) Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out)
or market. As of December 31, 2000, inventories were comprised of the
following:
Raw materials ........... $315,873
Finished goods .......... 255,291
--------
$571,164
========
Raw materials inventory consists of PET "pre-forms", caps, labels
and various packaging and shipping materials. Finished goods inventory
includes materials, labor and manufacturing overhead costs.
(e) Property and Equipment
----------------------
Property and equipment are stated at cost, which includes the
cost of labor used to install equipment and construct major leasehold
improvements. Maintenance and repairs are expensed as incurred. Depreciation
and amortization are provided on the straight-line method over the following
estimated useful lives:
Leasehold improvements The shorter of the
useful life or the
lease term
Machinery, equipment and assets under capital lease ...... 7-15 years
Property and equipment is summarized as follows:
Machinery and equipment ................ $2,610,658
Leasehold improvements ................. 529,960
Assets under capital lease ............. 104,988
----------
3,245,606
Less--Accumulated depreciation and
amortization ......................... (989,490)
----------
$2,256,116
----------
(f) Revenue Recognition
-------------------
The Company recognizes revenue on the accrual method of accounting
when title transfers: upon shipment, for bottled water products and other
beverages, and upon delivery for home and office delivery products. The
Company grants customers the right to return goods which are defective or
otherwise unsuitable for sale. The Company issues refunds to customers or
replaces goods which are rejected.
The Company's policy is to provide a reserve for estimated
uncollectible trade accounts receivable. The Company also provides a reserve
for estimated sales returns and related disposal costs. Net sales revenue
reflects reductions for the reserve for sales returns, discounts,
promotional allowances and freight-out. The Company also estimates the
amount of billbacks from certain distributors which represents price
adjustments for quantity or other discounts to distributors' customers.
F-58
HAWAIIAN NATURAL WATER COMPANY, INC.
(g) Advertising
-----------
The Company charges the cost of advertising to expense as incurred.
The Company incurred approximately $85,000 and $113,000 of advertising
expense during the years ended December 31, 2000 and 1999, respectively.
(h) Stock-Based Compensation
------------------------
The Company accounts for transactions in which its equity
instruments are issued to acquire goods or services from non-employees.
Those transactions must be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably determinable. The Company has elected to account
for the issuance of equity instruments to employees, using this intrinsic
value method under APB Opinion No. 25. (See Note 8).
(i) Basic and Diluted Loss Per Share
--------------------------------
Basic and diluted loss per share is calculated using net loss
adjusted for dividends to preferred shareholders. The Company's basic and
diluted loss per share are the same for both 2000 and 1999 in that any
conversion of stock options and warrants would have been anti-dilutive.
Basic and diluted loss per share is based on the weighted average number of
common shares issued and outstanding during the period of 6,844,744 and
4,476,554 for 2000 and 1999, respectively.
(j) Fair Value of Financial Instruments
-----------------------------------
The carrying amounts for trade receivables and payables are
considered to be their fair values. The fair value of the Company's notes
payable at December 31, 2000 may be significantly different from their
carrying value as a result of the matters discussed in Note 1a. above and as
a result of fluctuations in market interest rates.
(k) Income Taxes
------------
Income tax liabilities and assets are recognized at enacted tax
rates for the expected future tax consequences of temporary differences
between carrying amounts and the tax basis of assets and liabilities. A
reserve is provided to reduce deferred tax assets to estimated realizable
value (See Note 9).
(l) Estimates
---------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of 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.
(m) New Accounting Pronouncement
----------------------------
In June 1998, the FASB issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities", which is effective for
fiscal years beginning after June 15, 2000 as amended by SFAS No. 137 and
SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments. The statement requires that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value, and that changes in the derivative's fair value
be recognized currently in the earnings unless specific hedge accounting
criteria are met. The Company
F-59
HAWAIIAN NATURAL WATER COMPANY, INC.
did not have any derivative instruments as of December 31, 2000 and believes
that the adoption of SFAS No. 133 will not have a material impact on its
financial statements.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, disclosure and
presentation of revenue in financial statements. SAB 101, as amended by
SAB 101A and SAB 101B, is required to be implemented no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. The
adoption of SAB 101 did not have a material impact on its financial position
or the results of operations.
In March 2000, the FASB issued interpretation No. 44, "Accounting
For Certain Transactions Involving Stock Compensation--an Interpretation of
APB Opinion No. 25." The Interpretation clarifies the application of APB
Opinion No. 25 in certain situations, as defined. The Interpretation is
effective July 1, 2000, but covers certain events occurring during the
period after December 15, 1998, but before the effective date. To the extent
that events covered by the effective date, the effects of applying this
Interpretation would be recognized on a prospective basis from the effective
date. Accordingly, upon initial application of the final Interpretation,
(a) no adjustments would be made to the financial statements for periods before
the effective date and (b) no expense would be recognized for any additional
compensation cost measured that is attributable to periods before the
effective date. The adoption of this new Interpretation had no impact on the
Company's financial statements, based on its current structure and
operations.
(n) Long-Lived Assets
-----------------
Whenever there are recognized events or changes in circumstances
that could affect the carrying amount of long-lived assets, management
reviews these assets for possible impairment. Management uses estimated
expected future net cash flows (undiscounted and excluding interest costs)
to measure the recoverability of these assets. The estimation of expected
future net cash flows is inherently uncertain and, relies to a considerable
extent on the availability of capital. If in future periods, there are
changes in the estimates or assumptions incorporated into the impairment
review analysis, the changes could impact the carrying amount of these
assets.
(o) Reclassifications
-----------------
Certain 1999 amounts have been reclassified to conform to their
2000 presentation.
2. EQUITY TRANSACTIONS
(a) Investor Relations
------------------
On July 31, 1998, the Company engaged a financial public relations
advisor for a two-year term. As compensation for its services, the Company
issued to this advisor 100,000 shares of Common Stock, plus options to
purchase an aggregate of 565,000 additional shares at exercise prices
ranging from $2.50 to $6.00 per share. On January 11, 1999 the advisor
exercised 50,000 of these options, at an exercise price of $2.50 per share,
which resulted in cash proceeds to the Company of $125,000. All of the
remaining options have expired unexercised.
F-60
HAWAIIAN NATURAL WATER COMPANY, INC.
(b) Series A Convertible Preferred Stock
------------------------------------
In 1999, the Company issued an aggregate of 1,250 shares ($1.25
million in aggregate liquidation preference amount) of Series A convertible
preferred stock to an institutional investor. The Company also issued to
this investor for no additional consideration warrants to purchase 100,000
shares of common stock at an original exercise price of $3.625 per share.
Each share of Series A preferred stock had a liquidation preference
of $1,000, and was entitled to cumulative dividends at an annual rate of 4%,
payable quarterly commencing May 31, 1999, in cash or common stock at the
election of the Company. The Series A preferred stock was convertible into
common stock, in whole or in part at the election of the holder, at a
variable conversion price based upon a discount to the market price (as
defined) of the common stock as of each conversion date (the "beneficial
conversion feature").
In August 1999, the investor converted six shares of Series A
preferred into an aggregate of 11,429 shares of common stock. In September
1999, the Company entered into a standstill agreement with the investor,
pursuant to which the investor agreed not to convert any additional shares
of Series A preferred and granted the Company an option to redeem the
outstanding shares. This standstill agreement was extended continuously
until November 2, 2000. Pursuant to this standstill arrangement, the Company
redeemed an aggregate of (i) 925 shares of Series A preferred stock for an
aggregate of $808,750 in 1999, (ii) 100 shares for an aggregate of $100,000
during the first quarter of 2000, (iii) 79 shares for an aggregate of
$79,000 during the second quarter of 2000, and (iv) the remaining 140 shares
for an aggregate of $140,000 in October 2000. As a result of these
redemptions, there were no shares of Series A preferred outstanding at
December 31, 2000.
As partial consideration for the extension of the standstill
agreement, the Company reduced the exercise price of the warrants held by
the investor in several increments to $.01 per share. The investor exercised
these warrants in full in March 2000.
Primarily as a result of the amortization of the beneficial
conversion feature and redemption of the Series A preferred shares, the
Company recorded an aggregate preferred stock dividend of $416,379 during
1999. In 2000, the Company redeemed the remaining Series A preferred shares
and adjusted the previously accrued preferred stock dividend to the holder,
resulting in an aggregate preferred stock dividend of $86,698 for the Series
A preferred shares.
(c) Series B Convertible Mandatorily Redeemable Preferred Stock
-----------------------------------------------------------
In March 2000, the Company issued 100 shares ($100,000 aggregate
liquidation preference amount) of Series B convertible preferred stock to a
private investor. Each share of Series B preferred stock has a liquidation
preference of $1,000. The Series B preferred stock is mandatorily
redeemable, at the election of the holder, at any time within 90 days
following the first anniversary date of the date of issuance in the event
that the market price (as defined) of the common stock is less than $1.50
per share on the first anniversary date. The redemption price in such event
is $1,500 per share ($150,000 in the aggregate).
The market price of the common stock was less than $1.50 on the
first anniversary date, and the investor has delivered to the Company a
notice of redemption with respect to all of the outstanding Series B
preferred stock. The Company recorded the $50,000 redemption premium as a
preferred stock dividend
F-61
HAWAIIAN NATURAL WATER COMPANY, INC.
and classified the original $100,000 of mandatorily redeemable preferred stock
as currently payable as of December 31, 2000 in the accompanying Financial
Statements.
(d) Private Offering of Common Stock and Warrants
---------------------------------------------
In September 1999, the Company raised $850,000 ($830,000 net of
offering expenses) through a private offering of 850,000 Units at a purchase
price of $1.00 per Unit. Each Unit consisted of (i) one share of common
stock, (ii) one five year warrant to purchase one share of common stock at
an exercise price of $1.00 per share (a $1.00 warrant), and (iii) one five
year warrant to purchase 2/3 of one share of common stock at an exercise
price of $1.50 per share. An investment of $750,000 was received from two
unaffiliated private investors (and certain of their affiliated entities),
and an additional investment of $100,000 was received from the Company's
Chief Executive Officer. The unaffiliated investors purchased an additional
200,000 Units in December 1999 and 100,000 Units in February 2000 for an
aggregate additional investment of $300,000. The unaffiliated investors
exercised (i) 50,000 $1.00 warrants for an aggregate of $50,000 in the first
quarter of 2000, (ii) 114,600 $1.00 warrants for an aggregate of $114,600 in
the second quarter of 2000, and (iii) 66,000 $1.00 warrants for an aggregate
of $66,000 in the third quarter of 2000.
Approximately $530,000 of the net proceeds of the initial offering
was allocated to the warrants granted to the investors, based upon the
trading price of the common stock on the date of grant and the Black-Scholes
option pricing model.
(e) Stock Bonus
-----------
In December 2000, the Company awarded its Chief Executive Officer
bonus compensation for 2000, payable in 350,000 shares of common stock. In
connection with this award, the $100,000 bonus awarded the Company's Chief
Executive Officer for 1999 (issued in January 2000) was rescinded. This
earlier award had been granted subject to a commitment by the Chief
Executive Officer to purchase an additional 100,000 Units at $1.00 per Unit.
See Note 2b. The purchase of these Units was also rescinded in December
2000. The effect of these transactions was in substance a repricing of the
January 2000 stock award in December 2000. The compensation expense related
to these transactions was $84,370 in accordance with FIN 44. The withholding
tax related to the December 2000 award was advanced to the Chief Executive
Officer and included in the amount due from officers.
3. ACQUISITION OF ALI'I WATER BOTTLING, INC.
Effective June 30, 1999, the Company purchased all of the operating
assets, net of certain liabilities, of Ali'i Water Bottling, Inc. ("Ali'i").
Ali'i bottles and distributes purified water to the home and office market
on the Big Island of Hawaii and also sells purified water in PET plastic
bottles through retail channels throughout the Hawaiian Islands. The
consideration for the net assets purchased was 263,040 shares of common
stock of the Company. The Company assumed Ali'i's trade payables and
contractual obligations related to continuing operations but did not assume
any note(s) payable, line of credit or liabilities for federal, state, or
local taxes incurred by Ali'i. The net assets acquired were recorded in the
accounting records of the Company on June 30, 1999 in the amount of
$312,359, which was the fair value of the 263,040 issued shares. No
significant goodwill resulted from this acquisition. Acquisition costs were
not material. The shares issued are "restricted securities" as defined in
Rule 144 under the Securities Act of 1933, and may not be sold except in
compliance with such Rule or other exemption from registration under the
Securities Act. Had the acquisition occurred at January 1, 1999, the
unaudited and pro forma net sales, net loss, diluted net loss per share and
diluted weighted average common shares outstanding for 1999 would be as
follows:
F-62
HAWAIIAN NATURAL WATER COMPANY, INC.
Twelve Months Ended
-------------------
1999
-------------------
Net sales ........................................................ $ 3,303,984
Net loss ........................................................ $(1,913,388)
Diluted net loss per share ........................................ $ (0.43)
Diluted weighted average common shares outstanding ................ 4,476,554
4. ACQUISITION OF ALOHA WATER COMPANY, INC. AND IMPAIRMENT CHARGE
On March 17, 2000, the Company acquired Aloha Water Company, Inc.,
("Aloha"), a distributor of purified water to the home and office delivery
market in the Honolulu area. The acquisition was accomplished through a
merger of Aloha into a wholly owned subsidiary of the Company formed for
this purpose. The purchase price for Aloha consisted of an aggregate of (i)
750,000 shares of common stock of the Company and (ii) a promissory note of
the Company in the amount of $500,000 (the "Aloha note") to the shareholders
of Aloha. Interest on the note was payable monthly at the annual rate of
10%. The entire principal amount was due on April 1, 2000. The Aloha note
was secured by a first priority security interest on all of the capital
stock of Aloha.
In August, 2000 the holders of the Aloha note declared a default
for failure to make certain interest payments, and foreclosed on their
collateral, which was all of the stock of Aloha. As a result, the Company
has written off its investment in Aloha, the related goodwill and the Aloha
note. This write-off is reflected as a total impairment charge in 2000 of
$1,025,935, which represented the Company's entire investment in Aloha.
In December 2000, the parties agreed to rescind the acquisition, as
a result of which Aloha returned the Aloha note and the 750,000 shares of
the Company's common stock. The fair value of the Company's shares returned
was not material.
5. AMCON MERGER
In November 2000, the Company entered into a merger agreement with
AMCON Distributing Company ("AMCON"), pursuant to which the Company has
agreed to merge with and into, and thereby become, a wholly-owned subsidiary
of AMCON. The merger consideration values the entire common equity interest
in the Company at $2,865,348, payable in common stock of AMCON, which will
be priced at not less than $6.00 or more than $8.00 per share, based on a 20
trading day measuring period ending three trading days before the date of
the Company's shareholder vote on the merger. As a result, AMCON will issue
an aggregate of not less than 358,168 or more than 477,558 shares. Holders
of outstanding options and warrants of the Company would receive comparable
options and warrants of AMCON with the exercise price and number of shares
covered adjusted based upon the exchange ratio.
The merger is expected to qualify as a tax-free reorganization. It
is subject to various conditions, including the effectiveness of a
registration statement covering the shares to be issued in the merger, the
listing of such shares on the American Stock Exchange, and the approval of
the Company's shareholders. All of the Company's officers and directors and
any of their affiliated entities that own shares of the Company's common
stock have agreed to vote their shares in favor of the merger.
If the Merger Agreement is terminated for any reason, it is likely
that the Company will not be able to continue as a going concern.
F-63
HAWAIIAN NATURAL WATER COMPANY, INC.
6. NOTES PAYABLE
In anticipation of acquiring the Company, AMCON has provided
certain debt financing to the Company for working capital and other general
corporate purposes. AMCON advanced $350,000 in September 2000, and an
additional $400,000 in October 2000. These loans are evidenced by secured
promissory notes (the "AMCON notes") bearing interest at a rate of 10% per
annum, payable quarterly. The AMCON notes are convertible at the election of
AMCON, under certain circumstances, into Series C convertible preferred
stock bearing dividends, payable quarterly, of 10% per annum and giving
effective control of the Board of Directors to AMCON. The AMCON notes are
secured by a lien on all of the Company's assets. The due date of the AMCON
notes, originally February 28, 2001, has been extended to May 31, 2001.
In September 1997, the Company acquired certain bottle making
equipment used in its bottling operations. The consideration for the
equipment was an aggregate of $1.2 million, a portion of which was paid
through the issuance of a promissory note in the original principal amount
of $825,000, payable in installments, as defined. The Company discounted
this equipment note payable using an estimated weighted average cost of
capital of 12%, and amortized the resulting discount to interest expense
using the effective interest method over the term of the loan. In October
2000, the Company renegotiated the payment terms for this promissory note.
In September 1999, the Company acquired a prefabricated warehouse,
which it assembled and installed on its property in Kea'au. The warehouse
was purchased for $24,995 with a down payment of $2,000 and a 5 year note,
with monthly payments aggregating $22,995, including interest.
The following summarizes the Company's notes payable as of December
31, 2000:
Equipment note payable ................... $ 466,457
Less: Unamortized discount ............... (19,108)
-----------
Net equipment note payable ............... 447,349
First AMCON note ......................... 350,000
Second AMCON note ........................ 400,000
Note payable to service provider ......... 22,135
Vehicle installment note payable ......... 3,490
Warehouse note payable ................... 16,180
-----------
Subtotal - notes payable ................. 1,239,154
Less: Current portion .................... (1,061,437)
-----------
Non-current portion ...................... $ 177,717
-----------
Maturities of notes payable, net of discount at December 31, 2000
are as follows:
2001 ......................... $1,061,437
2002 ......................... 169,025
2003, and thereafter ......... 8,692
----------
$1,239,154
----------
7. CONSULTING ARRANGEMENTS
During 2000 and 1999, the Company hired various consultants to
perform sales, marketing and other functions. The Company recognized
consulting expenses of approximately $111,000 and $88,000 for 2000 and 1999,
respectively.
F-64
HAWAIIAN NATURAL WATER COMPANY, INC.
8. STOCK OPTIONS
The Board of Directors has authorized an aggregate of 1,000,000
shares of common stock for issuance upon the exercise of stock options which
may be granted from time to time to directors, officers, employees and
consultants of the Company under the Company's stock option plan. Under this
plan, the Company granted to certain consultants and distributors options to
purchase an aggregate of 12,500 shares of common stock options in 2000, and
136,500 shares of common stock options in 1999. These options are
exercisable for five years at exercise prices ranging from $1.00 to $4.00
per share. Certain of these options were valued based upon the value of
services provided and others were valued using the Black-Scholes option
pricing model, at $12,500 in 2000, and $75,398 in 1999, which amounts were
charged to expense as incurred. These options vested upon grant.
Using the Black-Scholes option valuation model (and the following
assumptions), the estimated fair values of options granted ranged from $.13
to $2.21 in 1999. Management believes that the fair value results from using
the Black-Scholes calculation may not be indicative of the Company's
economic cost of issuing stock options. Principle weighted-average
assumptions used in applying the Black-Scholes model were as follow:
1999
--------------
Expected volatility ............... 60.00%
Expected dividend yield ........... 0.00%
Expected term ..................... 5 years
Risk-free interest rate ........... 5.63% to 5.78%
In addition, as further described below, at December 31, 2000,
outstanding options to purchase an aggregate of 438,367 shares of common
stock were held by employees and former employees of the Company. These
options are not reflected on the balance sheet as "Common Stock warrants and
options, issued and outstanding."
The following summarizes information about stock options granted to
employees and former employees during the years ended December 31, 2000 and
1999:
Weighted-Average
Shares Exercise Price
--------- ----------------
Balance at December 31, 1998 ....... 487,000 $ 4.00
Granted ....................... 70,000 $ 4.00
Forfeited ..................... (109,833) $ 4.00
--------- --------
Balance at December 31, 1999 447,167 $ 4.00
Granted ....................... --
Forfeited ..................... (8,800) $ 4.00
---------
Balance at December 31, 2000 ....... 438,367 $ 2.25
---------
In February 2000, the Company reduced the exercise price of all
stock options held by the current employees from $4.00 to $2.00 per share.
This had no impact on compensation expense during 2000.
At December 31, 2000 and 1999, respectively, the Company had
337,825 and 265,925 vested employee options outstanding, exercisable at a
weighted-average exercise price of $2.25 and $4.00, respectively.
F-65
HAWAIIAN NATURAL WATER COMPANY, INC.
The Company accounts for stock options granted to employees under
APB No. 25, under which expense is recognized if the exercise price of
options granted is less than the market price on the date of grant. If
compensation expense for stock options granted to employees had been
accounted for under SFAS. 123, the Company's net loss per share for 2000 and
1999 would have been $(.47) and $(.51), respectively.
9. INCOME TAXES
Certain items of expense are recognized in different periods for
income tax purposes than for financial reporting purposes. As of December 31,
2000, the Company had approximately $7.5 million of net operating loss
(NO) carryforwards available to reduce future taxable income. These NOL
carryforwards expire on various dates beginning in 2012 through 2021. The
deferred tax asset as of December 31, 2000 consisted primarily of net
operating loss carryforwards. A valuation allowance has been provided for
the entire deferred tax asset due to the uncertainty of its realization.
The Company is subject to Internal Revenue Code Section 382 which
limits the Company's ability to utilize net operating losses generated prior
to the closing of its initial public offering (of approximately $2.3
million). The annual net operating loss limitation under Section 382 is
approximately $361,000. The current limitation is subject to change as a
result of recent equity transactions.
The Company paid no income taxes and had no net deferred or current
tax provision/benefit for the years ended December 31, 2000 and 1999.
10. COMMITMENTS AND CONTINGENCIES
(a) Capital Lease Obligations
-------------------------
The Company leases machinery and equipment under capital leases
which expire on various dates through August 2005.
As of December 31, 2000, future minimum lease payments were as
follows:
2001 ...................................... 36,174
2002 ...................................... 8,801
2003 ...................................... 5,596
2004 ...................................... 5,596
2005 ...................................... 2,798
---------
Total future minimum payments ............. 58,965
Less - Amount representing interest ....... (12,169)
---------
Total Capital lease obligations ........... 46,796
Less - Current portion .................... (30,375)
---------
Noncurrent portion ........................ $ 16,421
---------
The capital leases bear interest ranging from 12.5% to 27%, per
year.
(b) Operating Lease Obligations
---------------------------
(i) Plant Lease
-----------
F-66
HAWAIIAN NATURAL WATER COMPANY, INC.
The Company leases its bottling facility and surrounding
property, including the water source and pumping equipment from an
affiliate, under a 50 year lease. The lease can be renewed at the Company's
option for an additional 50 years. The lease includes the following
provisions:
Rent is the greater of $5,335 per month (Base Rent),
adjusted every five years based upon changes in the consumer price index in
Hawaii, as defined, or 2% of the Company's net revenue, as defined.
The lease entitles the Company to exclusive use of the
water source, except that the lessor may draw up to 50% of the water flow
for use in beverage production other than the sale of natural water. The
Company believes the remaining 50% is adequate for the current and projected
future needs of the Company's business.
During 2000, the Company incurred approximately $4,000 for
leasehold improvements to this property.
(ii) Warehouse Lease
---------------
On February 1999, the Company entered into a one-year
lease for warehouse space located near its bottling plant with lease
payments of $2,560 per month. In January 2000, this lease was terminated and
the warehouse space was replaced with a prefabricated warehouse erected on
the Company's leased bottling facility property.
(iii) Office Lease
------------
In October 1996, the Company entered into a three-year
office and warehouse lease in Honolulu, with a renewal option. Monthly
rental payments were $3,000 through November 1997. Thereafter, monthly
rental payments were $4,000. Commencing October 1, 1999 the Company entered
into a 45 month lease of office and warehouse space in Pearl City,
containing approximately 13,500 square feet of warehouse and 1,500 square
feet of office space. Terms of the lease provided for no rental fee for the
first month. Thereafter, monthly payments are $6,800 through May 2001,
$7,800 through May 2002, and $8,800 through May 2003.
On December 2000, the Company relocated its accounting and
administrative operations to its bottling plant in Keaau on the Big Island.
In January 2001, the Company entered into an agreement to sublease 11,770
square feet of its Pearl City office space. The sublease is for a 29 month
period, ending on May 31, 2003, and the monthly sublease income is $7,062.
On July 1, 1999 the Company entered in to a month-to-month
rental agreement for 5,043 square feet of manufacturing and office space for
its Ali'i home and office delivery business in Kailua-Kona, Hawaii. The
lease is terminable on a 14 day advance notice. Monthly payments are $2,747.
The Company incurred approximately $203,000 and $184,000
in lease expense under all existing facility lease agreements in 2000 and
1999, respectively.
The future minimum lease payments for the plant, warehouse
and office leases as of December 31, 2000 were as follow:
2001 ....................... $ 167,428
2002 ....................... 172,428
2003 ....................... 110,828
2004 ....................... 66,828
2005 ....................... 66,828
Thereafter ................. 2,522,757
----------
$3,107,097
F-67
HAWAIIAN NATURAL WATER COMPANY, INC.
The future sublease income for the Pearl City office and
warehouse space are as follow:
2001 ...................... $ 84,744
2002 ...................... 84,744
2003 ...................... 35,310
-----------
$ 204,798
(c) Sponsorship and Sales Agreement
-------------------------------
In June 1999, the Company entered into a five year sponsorship and
beverage sales agreement with the USS Missouri Memorial Association, Inc., a
nonprofit corporation which operates the Battleship Missouri Memorial (the
"Missouri") as a visitor attraction at Pearl Harbor, Hawaii. Under the terms
of this agreement, the Company became an official sponsor of the Missouri,
and agreed to supply bottled water and vending machines to the Missouri, in
exchange for a license to certain of Missouri's trademarks for use in
various marketing and promotional activities, and a lease of space for the
operation of vending machines at the Missouri. The aggregate sponsorship fee
is $100,000, payable $20,000 annually in monthly installments of $1,667.
Additionally, the Company is obligated to provide cash and in-kind support
for events promoting the Missouri in an aggregate amount of $432,500 (none
of which had been provided as of December 31, 2000). In July 2001, the
Company has the option to re-negotiate or terminate the agreement if the
prior 12 month sales of the Company's bottled water to the Missouri are less
than $144,000. In February 2001, based on sales to date, the Company advised
the Missouri that it intends to exercise its right to re-negotiate or
terminate this agreement. As of December 31, 2000, the Company has accrued
approximately $12,000 for unpaid sponsorship fees. In the opinion of
management, the outcome of the re-negotiation or termination will not have a
material adverse effect on the financial statements.
(d) Co-Packing Agreement
--------------------
In June 1999, the Company entered into a five year agreement with
an independent bottler in Los Angeles, California (the "Bottler") for the
production, warehousing, and shipment of herbal beverages. On September 13,
1999, the Company issued 100,000 shares of common stock to the principals of
the Bottler in partial consideration for these services. The agreement was
recorded as an asset on the Company's accounting records in the amount of
$150,000. Initially, $43,750 was allocated to the common stock account
(based on the aggregate market value of the 100,000 common shares issued)
and the balance ($106,250) was allocated to common stock options. The
agreement provided that in the event the market price (as defined) of the
Company's common stock on the first anniversary of the date of issuance was
less than $1.50 per share, the Company would issue, for no additional
consideration, sufficient additional shares of common stock to bring the
then market value of all shares issued (including the initial 100,000
shares) up to $150,000. Pursuant to this provision, on September 13, 2000,
the Company issued an additional 700,000 shares of common stock to the
principals of the Bottler. Upon issuance of these additional 700,000 shares,
the $106,250 initially allocated to common stock options was reclassified to
the common stock account.
F-68
HAWAIIAN NATURAL WATER COMPANY, INC.
11. ACQUISITION OF INTANGIBLE ASSET
In June 1999, the Company purchased for $150,000 the beverage
products, trademarks and all other rights related to a line of herbal
beverages. The acquisition cost and related trademark registration expenses
have been capitalized and are being amortized over a five year period.
12. SIGNIFICANT CUSTOMER
For the years ended December 31, 2000 and 1999 approximately 49%
and 47%, respectively, of the Company's sales were made through one Hawaii
distributor. No other single customer accounted for greater than 10% of
sales.
13. SEGMENT INFORMATION
The Company has three segments: PET, home and office delivery, and
XEN. The Company's reportable segments are business units defined by product
line, the results of which are reported directly to the Company's chief
operating decision maker. The accounting policies of the segments are the
same as those described in the "Summary of Significant Accounting Policies".
The Company manages cash flows and assets on a consolidated basis, and not
by segment, and does not allocate or report assets and capital expenditures
by segment. Information for the year ended December 31, 1999 has been
recast, as required by SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information."
The following tables summarize the operating results by segment for
the years ended December 31, 1999 and 2000.
YEAR ENDED DECEMBER 31, 1999:
Home and Company
PET Office XEN Corporate Total
---------- --------- --------- ----------- -----------
Revenue from external customers $2,902,949 $ 147,434 $ -- $ -- $ 3,050,383
Depreciation and amortization expense 167,413 26,025 20,698 74,623 288,759
Total operating costs 2,899,211 236,724 20,698 1,405,273 4,561,906
Operating income (loss) 3,738 (89,290) (20,698) (1,405,273) (1,511,523)
Net interest expense -- 10,630 -- 59,790 70,420
Net income (loss) $ 3,738 $ (99,920) $ (20,698) $(1,465,063) $(1,581,943)
YEAR ENDED DECEMBER 31, 2000:
Home and Company
PET Office XEN Corporate Total
---------- --------- --------- ----------- -----------
Revenue from external customers $2,794,919 $ 598,001 $ 288,106 $ -- $ 3,681,026
Depreciation and amortization expense 167,288 82,062 60,907 74,623 384,880
Total operating costs 2,729,618 777,166 572,828 1,393,108 5,472,720
Operating income (loss) 65,301 (179,165) (284,722) (1,393,108) (1,791,694)
Net interest expense -- 8,411 -- 111,618 120,029
Impairment charge -- 1,025,935 -- -- 1,025,935
Net income (loss) $ 65,301 $(1,213,511) $(284,722) $(1,504,726) $(2,937,658)
14. 401(k) PLAN
In 1999, the Company established a defined contribution retirement
plan (the Plan) governed under Section 401(k) of the Internal Revenue Code.
In 2000, prior to implementation of the Plan, the Company determined that
based on the Company's current financial condition, it would not be prudent
to proceed with the Plan. In December 2000 the Plan was terminated.
F-69
HAWAIIAN NATURAL WATER COMPANY, INC.
15. SUBSEQUENT EVENTS
(a) Issuance of Stock to AMCON
--------------------------
In February 2001, the Company issued 750,000 shares of common stock
to AMCON at $.40 per share for an aggregate equity investment of $300,000.
These shares will participate in the Merger consideration (see Note 5).
AMCON now owns approximately 9.5% of the Company's common stock.
(b) Equipment Lease
---------------
The Company has ordered new blow molding and related equipment for
installation at the Company's bottling facility. The Company expects this
equipment, which will be fully operational by August 2001, to significantly
enhance the efficiency of its bottling operations. The equipment was
acquired by AMCON in its own name. Upon installation, the Company expects to
lease this equipment from AMCON, on terms to be agreed upon. This lease is
expected to be accounted for as an operating lease.
16. QUARTERLY DATA (UNAUDITED)
In the opinion of management, the following unaudited, quarterly
data reflects all adjustments (consisting primarily of normal recurring
adjustments) considered necessary to fairly present the Company's results of
operations in accordance with generally accepted accounting principles and
the rules and regulations of the Securities and Exchange Commission.
1999 Quarter Ended*
-----------------------------------------------------------------
September 30
March 31 June 30 (As Restated) December 31
-------- ------- ------------- -----------
(Unaudited)
Net Sales ..................................... $ 485,805 $ 742,739 $ 929,880 $ 891,959
Cost of Sales ................................. 448,645 516,946 709,988 788,824
----------- ----------- ----------- -----------
Gross Margin .................................. 37,160 225,793 219,892 103,135
Expenses
General and Administrative ............... 284,911 343,472 423,584 384,247
Selling and Marketing .................... 149,055 175,311 169,342 167,581
----------- ----------- ----------- -----------
433,966 518,783 592,926 551,828
Other Income (Expenses)
Interest Income .......................... 3,391 1,166 3,933 2,025
Interest Expense ......................... (23,133) (16,967) (18,223) (22,612)
----------- ----------- ----------- -----------
(19,742) (15,801) (14,290) (20,587)
----------- ----------- ----------- -----------
Net Loss ...................................... $ (416,548) $ (308,791) $ (387,324) $ (469,280)
----------- ----------- ----------- -----------
Preferred Stock Dividend (**) ............ -- -- (312,500) (103,879)
Net Loss Applicable to Common Shareholders $ (416,548) $ (308,791) $ (699,824) $ (573,159)
----------- ----------- ----------- -----------
Basic and Diluted Net Loss Per Share ..... $ (0.10) $ (0.08) $ (0.16) $ (0.11)
----------- ----------- ----------- -----------
Weighted Average Shares Outstanding ........... 4,070,619 4,079,563 4,395,155 5,357,053
----------- ----------- ----------- -----------
F-70
HAWAIIAN NATURAL WATER COMPANY, INC.
2000 Quarter Ended*
-----------------------------------------------------------------
September 30
March 31 June 30 (As Restated) December 31
-------- ------- ------------- -----------
(Unaudited)
Net Sales ..................................... $ 1,024,692 $ 1,173,421 $ 944,999 $ 537,914
Cost of Sales ................................. 799,982 955,964 661,677 565,537
----------- ----------- ----------- -----------
Gross Margin .................................. 224,710 217,457 283,322 (27,623)
Expenses
General and Administrative (***).......... 434,118 408,657 281,420 465,080
Selling and Marketing .................... 225,747 316,452 217,451 140,635
----------- ----------- ----------- -----------
659,865 725,109 498,871 605,715
Other Income (Expenses)
Impairment Charge ........................ -- (903,094) (122,841) --
Interest Expense ......................... (21,010) (56,667) 24,076 (66,428)
----------- ----------- ----------- -----------
Net Loss ...................................... $ (456,165) $(1,467,413) $ (314,314) (699,766)
----------- ----------- ----------- -----------
Preferred Stock Dividend ................. (35,500) (28,045) (49,700) (23,453)
Net Loss Applicable to Common Shareholders $ (491,665) $(1,495,458) $ (364,014) $ (723,219)
----------- ----------- ----------- -----------
Basic and Diluted Net Loss Per Share ..... $ (0.08) $ (0.22) $ (0.05) $ (0.09)
----------- ----------- ----------- -----------
Weighted Average Shares Outstanding ........... 5,883,760 6,759,582 7,041,501 7,682,761
----------- ----------- ----------- -----------
* Results of operations for interim periods are not necessarily
indicative of results to be achieved for full fiscal years.
** Restatement of Quarter Ended September 30, 1999: The preferred stock
-----------------------------------------------
dividend of $312,500 represents the amortization of preferred stock
discount resulting from a beneficial conversion feature related to the
Company's Series A convertible preferred stock. The beneficial
conversion feature should have been recognized when the preferred
shares were issued and the resulting discount to preferred stock
should have been amortized to the date the securities first became
convertible. The beneficial conversion feature issue was identified
during the third quarter but was not resolved until the fourth
quarter. All of the shares became convertible on September 3, 1999. As
such, the results for the third quarter were restated to give effect
to the amortization of the beneficial conversion feature discount.
*** Restatement of Quarter Ended March 31, 2000: In January 2000, the
-------------------------------------------
Company granted its Chief Executive Officer a cash bonus of $100,000,
subject to a commitment by the Chief Executive Officer to purchase an
additional 100,000 Units at $1 per Unit (each Unit consisting of one
share of common stock of the company and one warrant to purchase one
share of the Company at a strike price of $1). This bonus arrangement
was incorrectly treated like a cash bonus and the amount charged to
expense was $100,000. During the fourth quarter of 2000, the Company
concluded that this was in substance an equity compensation
arrangement. As such, the intrinsic value of the equity compensation
at the date of grant was $40,620, thereby resulting in a restatement
of general and administrative expense of $59,380 in the quarter ended
March 31, 2000.
F-71
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 23, 2001 and October 6, 2000
(Unaudited)
ASSETS
3/23/2001 10/6/2000
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ - $ -
Accounts receivable, less allowance for doubtful
accounts of $583,350 and $78,650 18,980,008 24,175,496
Inventories 11,325,670 12,878,768
Prepaid expenses 593,111 2,517,587
Note receivable from affiliate 719,788 434,930
----------- -----------
Total current assets 31,618,577 40,006,781
----------- -----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Leasehold improvements 152,697 6,223
Equipment 6,376,628 6,003,231
----------- -----------
Total, at cost 6,529,325 6,009,454
Less accumulated depreciation (4,474,177) (4,265,616)
----------- -----------
Total equipment and leasehold improvements 2,055,148 1,743,838
----------- -----------
OTHER ASSETS
Unamortized loan fees 170,192 56,562
Advance to affiliate - 1,080,291
Other assets 80,291 100
----------- -----------
TOTAL ASSETS $33,924,208 $42,887,572
=========== ===========
F-72
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Bank overdraft $ 3,676,761 $ 4,987,566
Accounts payable 3,987,645 5,149,060
Current maturities of long-term debt 21,115,965 26,004,695
Current maturities of obligations
under capital lease 68,604 77,604
Current income taxes payable 310,958 346,205
Accrued expenses 1,702,866 1,045,641
----------- -----------
Total current liabilities 30,862,799 37,610,771
----------- -----------
LONG-TERM LIABILITIES
Other liabilities 951,995 -
Notes payable to stockholder 1,174,117 2,313,413
Long-term debt, less current maturities above - 519,883
Obligations under capital lease, less
current maturities above 865,401 67,527
----------- -----------
Total long-term liabilities 2,039,518 2,900,823
----------- -----------
Total liabilities 33,854,312 40,511,594
----------- -----------
STOCKHOLDER'S EQUITY
Common stock, $50 par value; 100,000 shares
authorized, 3,000 shares issued and 88 shares
outstanding 150,000 151,000
Additional paid-in capital 398,237 398,237
Retained earnings 2,072,369 4,377,451
----------- -----------
2,620,606 4,926,688
Treasury stock, 2,912 shares at cost (2,550,710) (2,550,710)
----------- -----------
Total stockholder's equity 69,896 2,375,978
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $33,924,208 $42,887,572
=========== ===========
F-73
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
Six Months Ended March 23, 2001 and March 24, 2000
(Unaudited)
2001 2000
------------- -------------
NET SALES $ 225,640,942 $ 205,418,489
COST OF SALES 215,750,750 195,253,322
------------- -------------
Gross profit 9,890,192 10,165,167
OPERATING EXPENSES
Selling, general, and administrative expenses 9,907,388 8,218,263
------------- -------------
Income (loss) from operations (17,196) 1,946,904
------------- -------------
OTHER EXPENSE
Interest expense (1,648,637) (796,689)
------------- -------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (1,665,833) 1,150,215
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (639,243) -
------------- -------------
NET INCOME (LOSS) $ (2,305,076) $ 1,150,215
============= =============
F-74
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 23, 2001 and March 24, 2000
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES 2001 2000
----------- -----------
Net income (loss) $(2,305,076) $ 1,150,215
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Bad debt expense 504,700 3,000
Depreciation 291,527 383,070
Gain on sale of equipment (39,304) -
Effects of changes in operating assets
and liabilities:
Accounts receivable 4,690,788 (6,255,260)
Inventory 1,553,098 (3,716,064)
Prepaid expenses 1,924,476 109,341
Other assets (193,821) -
Accounts payable (1,161,415) 673,046
Accrued expenses 657,225 (786,212)
Income taxes payable (35,247) (130,497)
Other liabilities 951,995 -
----------- -----------
Net cash provided by (used in)
operating activities 6,838,946 (8,569,361)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment and leasehold
improvements - (779,179)
Proceeds from sale of equipment 264,143 -
Amounts due from affiliate 795,433 -
----------- -----------
Net cash provided by (used in)
investing activities 1,059,576 (779,179)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft (1,310,804) (1,904,442)
Payment of loan fees payable - (132)
Payments from affiliate - -
Payments on stockholder's notes (1,139,296) -
Proceeds on long-term debt - 3,007
Payments on long-term debt - (187,605)
Net proceeds (payments) on line of credit (5,408,614) 11,634,860
Principal payments on capital lease obligation (39,808) -
----------- -----------
Net cash (used in) provided by
financing activities (7,898,522) 9,545,688
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS - 197,148
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR - -
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ - $ 197,148
=========== ===========
F-75
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 23, 2001
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Merchants Wholesale, Inc. and its wholly-owned
subsidiary ("MWI" or the "Company"). All significant intercompany
transactions and balances have been eliminated in consolidation. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to fairly present the
financial information included therein, such adjustments consisting of normal
recurring items. It is suggested that these financial statements be read in
conjunction with the audited financial statements and notes thereto for the
fiscal year ended December 29, 2000. Results for the interim period are not
necessarily indicative of results to be expected for the entire year.
The Company has established its fiscal year using the 52-53 week year
method. MWI's interim period ended March 23, 2001 includes 24 weeks. The
first 12 weeks of the period are also included in the audited financial
statements for the year ended December 29, 2000.
2. INVENTORIES
Inventories consist of finished product purchased in bulk quantities to be
redistributed to the Company's customers. Inventories are stated at lower of
cost or market. The Company uses the last-in, first-out (LIFO) method to
determine the cost of its cigarette inventory. The Company uses the
first-in, first-out (FIFO) method to determine the cost of the remainder of
its inventory. If the FIFO method of inventory accounting had been used by
the Company to determine the cost of its cigarette inventory, inventories
would have been $2,034,688 higher than reported at March 23, 2001.
3. ADOPTION OF SFAS NO. 133
The Company adopted Statement of Financial Accounting Standards No. 133
(SFAS No 133), "Accounting for Derivative Instruments and Hedging
Activities" on December 30, 2000. In accordance with the transition
provisions of SFAS No. 133, the Company recorded a cumulative effect of
change in accounting principle-type adjustment of $639,243 in earnings to
reflect the negative fair value at December 30, 2000 of an interest rate
swap derivative that did not meet the criteria for hedge accounting under
FAS 133. The fair value of the interest rate swap derivative further
decreased to a negative fair value of $951,995 as of March 23, 2001, with
the impact of the adjustment to fair value recorded in earnings (interest
expense). The interest rate swap derivative is recognized on the balance
sheet (other liabilities) at its fair value.
Under the swap agreement, the Company agrees to exchange, at specified
intervals, the difference between fixed and variable interest amounts
F-76
calculated by reference to an agreed-upon notional principal amount of
$25,000,000. The interest rate swap converts the Company's variable-rate
senior debt to fixed-rate debt.
4. SUBSEQUENT EVENTS
Subsequent to March 23, 2001, the assets and liabilities of the Company's
subsidiary were transferred at fair market value, which approximates book
value, to the Parent and the distribution facility in Davenport, IA was
closed.
On February 8, 2001, MWI entered into an Asset Purchase Agreement with AMCON
Distributing Company ("AMCON"). On June 1, 2001, pursuant to the Asset
Purchase Agreement, the Company sold substantially all of its operating
assets and liabilities to AMCON for $36.7 million, net of liabilities
assumed by AMCON of $6.0 million. The Company's senior debt facility was
retired with the proceeds from the sale.
5. RECENT ACCOUNTING CHANGES
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Standards No. 141 (SFAS No. 141), "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting, and broadens the
criteria for recording intangible assets separate from goodwill. Recorded
goodwill and intangibles being classified as goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. SFAS No. 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain
intangibles will not be amortized into results of operations, but instead
would be reviewed for impairment and written down and charged to results of
operations only in the periods in which the impairment recognition criteria
had been met and the recorded value of goodwill and certain intangibles is
more than its measured fair value. The provisions of each statement, which
apply to goodwill and intangible assets acquired prior to June 30, 2001,
must be adopted by the Company on January 1, 2002.
F-77
MERCHANTS WHOLESALE INC.
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Merchants Wholesale, Inc.
Quincy, Illinois
We have audited the accompanying consolidated balance sheet of Merchants
Wholesale, Inc. and its subsidiary as of December 29, 2000, and the related
consolidated statements of operations, retained earnings, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Merchants
Wholesale, Inc. and its subsidiary as of December 29, 2000, and the results
of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
As explained in Note 12 to the consolidated financial statements, the
stockholder of Merchants Wholesale, Inc. has entered into an agreement to
sell substantially all operating assets and related liabilities of the
Company.
CLIFTON GUNDERSON L.L.C.
Peoria, Illinois
February 23, 2001 (except for Note 2 and Note 12,
as to which the date is June 1, 2001)
F-78
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 29, 2000
ASSETS
Current Assets:
Cash and cash equivalents ................................. $ 4,587
Accounts receivable, less allowance for doubtful
accounts of $326,387 ................................... 22,631,778
Inventories ............................................... 13,575,731
Prepaid expenses .......................................... 262,944
Note receivable from affiliate ............................ 578,445
------------
Total current assets ......................... 37,053,485
------------
Equipment and Leasehold Improvements:
Leasehold improvements .................................... 142,697
Equipment ................................................. 6,368,323
------------
Total, at cost ............................... 6,511,020
Less accumulated depreciation ............................. (4,397,341)
------------
Total equipment and leasehold improvements ... 2,113,679
------------
Other Assets:
Unamortized loan fees ..................................... 177,404
------------
Total Assets ................................................... $ 39,344,568
============
F-79
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 29, 2000
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Bank overdraft ................................................... $ 5,090,059
Accounts payable ................................................. 5,243,582
Current maturities of long-term debt ............................. 88,588
Current maturities of loan fees payable .......................... 43,750
Current maturities of obligations under capital lease ............ 68,604
Current maturities of income taxes payable ....................... 179,613
Accrued expenses ................................................. 1,659,968
Obligation under purchase agreement .............................. 310,000
------------
Total current liabilities ........................... 12,684,164
------------
Long-term Liabilities:
Notes payable to stockholder ..................................... 411,124
Senior debt ...................................................... 23,365,155
Long-term debt, less current maturities above .................... 830,343
Loan fees payable, less current maturities above ................. 43,750
Obligations under capital lease, less current maturities above ... 130,638
Income taxes payable, less current maturities above .............. 131,345
------------
Total long-term liabilities ......................... 24,912,355
------------
Total liabilities ................................... 37,596,519
------------
Stockholders' Equity:
Common stock, $50 par value; 100,000 shares authorized,
3,000 shares issued and 88 shares outstanding ................. 150,000
Additional paid-in capital ....................................... 398,237
Retained earnings ................................................ 3,750,522
------------
4,298,759
Treasury stock, 2,912 shares at cost ............................. (2,550,710)
------------
Total stockholder's equity .......................... 1,748,049
------------
Total Liabilities and Stockholder's Equity ............................ $ 39,344,568
============
F-80
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 29, 2000
NET SALES ................................................. $ 506,199,544
COST OF SALES ............................................. 482,205,858
-------------
Gross profit ............................ 23,993,686
OPERATING EXPENSES:
Selling, general, and administrative expenses ........ 21,811,478
-------------
Income from operations .................. 2,182,208
-------------
OTHER EXPENSE, NET:
Interest expense ..................................... (2,594,815)
Other expense, net ................................... (68,358)
-------------
Other expense, net ...................... (2,663,173)
-------------
NET LOSS .................................................. $ (480,965)
=============
F-81
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
YEAR ENDED DECEMBER 29, 2000
BALANCE, BEGINNING OF YEAR ................................ $ 6,424,837
Net loss ............................................. (480,965)
Dividends paid ....................................... (2,193,350)
-------------
BALANCE, END OF YEAR ...................................... $ 3,750,522
=============
F-82
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 29, 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................... $ (480,965)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Bad debt expense ............................................ 456,000
Depreciation ................................................ 742,885
Gain on sale of equipment ................................... (39,304)
Amortization of loan fees ................................... 35,929
Effects of changes in operating assets and liabilities:
Accounts receivable .................................... (5,325,340)
Inventory .............................................. 3,265,046
Prepaid expenses ....................................... 340,932
Accounts payable ....................................... 652,478
Accrued expenses ....................................... 533,503
Income taxes payable ................................... (151,485)
-----------
Net cash provided by operating activities .......... 29,679
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements .............. (383,369)
Proceeds from sale of equipment ................................ 264,143
-----------
Net cash used in investing activities .............. (119,226)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft ................................................. 1,213,356
Payment of loan fees payable ................................... (93,750)
Payments to affiliate .......................................... (578,445)
Payments on stockholder's notes ................................ (435,310)
Proceeds on long-term debt ..................................... 918,931
Payments on long-term debt ..................................... (746,092)
Net proceeds on line of credit ................................. 2,304,082
Principal payments on capital lease obligation ................. (145,588)
Payments on purchase agreement ................................. (150,000)
Dividends paid ................................................. (2,193,350)
-----------
Net cash provided by financing activities .......... 93,834
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 4,287
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ........................ 300
-----------
CASH AND CASH EQUIVALENTS, END OF YEAR .............................. $ 4,587
===========
F-83
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 29, 2000
Merchants Wholesale, Inc. was incorporated on July 9, 1954 in the state of
Illinois. The Company's principal business activity is the distribution of
tobacco, candy, and various sundry products throughout Missouri, Illinois,
and other adjacent states. The Company's 100 percent owned subsidiary,
Merchants Wholesale of Iowa, Inc., principal business activity is also the
distribution of tobacco, candy, and various sundry products throughout Iowa,
Illinois, and other adjacent states. Significant accounting policies followed
by the Company are presented below. The Company has established its fiscal
year using the 52-53 week tax year method. A 52-53 week tax year varies from
52 to 53 weeks and always ends the year on the same day of the week.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its 100 percent owned subsidiary. Intercompany transactions
and balances have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at lower of cost or market. The Company uses the
last-in, first-out (LIFO) method to determine the cost of its cigarette
inventory. The Company uses the first-in, first-out (FIFO) method to
determine the cost of the remainder of its inventory. If the FIFO method of
inventory accounting had been used by the Company to determine the cost of
its cigarette inventory, inventories would have been $2,217,049 higher than
reported at December 29, 2000.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Equipment and
leasehold improvements are depreciated using straight-line and accelerated
methods over the estimated lives of the assets which range from three to
fifteen years.
F-84
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 29, 2000
UNAMORTIZED LOAN FEES
The Company amortizes its loan fees on a straight-line basis over the
respective lives of the loans.
ADVERTISING
The Company expenses advertising costs as incurred.
INCOME TAXES
Effective January 30, 1999, the Company, with the consent of its stockholder,
has elected to be taxed under sections of federal and state income tax law as
an S corporation. Under such election, the stockholder separately pays income
tax on his pro rata shares of the Company's income, deductions, losses, and
credits. As such, no provision for federal income taxes has been calculated
for the Company. The Company is subject to state replacement taxes; however,
a provision is not made as the amount has been deemed insignificant to the
financial statements.
F-85
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2000
1. NOTES RECEIVABLE FROM AFFILIATE:
At December 29, 2000, the Company had notes receivable from
Lansing's Novelty, Inc. totaling $578,445. Lansing's Novelty, Inc. is 100
percent owned by the shareholder of the Company.
2. SENIOR DEBT (Dated June 1, 2001):
The Company has a loan agreement with a bank for a $30,000,000 total
commitment of which $23,365,155 is utilized. The commitment is a revolving
credit arrangement whereby the Company may periodically borrow and repay
funds as needed. The total balance is due on the termination date of the loan
agreement, December 2003.
The loan agreement provides for interest on outstanding borrowings
at the prime rate (9.50 percent at December 29, 2000) paid monthly. The line
of credit is collateralized by substantially all of the Company's assets and
contains restrictive covenants relating to the Company's financial position
and operations. At December 29, 2000, the Company was not in compliance with
certain covenants. The line of credit has subsequently been assumed in
conjunction with an asset purchase agreement (see Note 12).
3. DEBT:
(a) Notes Payable to Stockholder (Related Party Transactions):
---------------------------------------------------------
The notes payable to stockholder, totaling $411,124, are unsecured
and bear interest at 7.50 percent, requiring monthly interest payments, with
various maturity dates.
(b) Long-term Debt:
--------------
Long-term debt consists of the following:
Equipment loan requiring monthly installments of
$14,268 including interest at 9.40 percent. The
final payment is due December 2006 and the loan is
secured by equipment ................................ $ 918,931
Less current portion ................................ 88,588
------------
Long-term portion ................................... $ 830,343
============
Future maturities of long-term debt and note payable to stockholder
are as follows:
2001 ................................................ $ 88,588
2002 ................................................ 97,284
2003 ................................................ 106,833
2004 ................................................ 189,529
2005 ................................................ 208,133
Later years ......................................... 639,688
------------
Total ............................................... $ 1,330,055
============
F-86
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2000
4. SWAP AGREEMENT:
The Company entered into an interest rate swap agreement during the
year ended December 29, 2000 to reduce the impact of changes in interest
rates on its floating rate senior debt. The swap agreement resulted in a gain
of $4,488 which was recognized in interest expense for the year ended
December 29, 2000. At December 29, 2000, the Company had an outstanding
interest rate swap agreement with a bank having a total principal amount of
$25,000,000. The agreement effectively changed the Company's interest rate
exposure on $25,000,000 of a floating rate note to a fixed 6.48 percent. The
$25,000,000 interest rate swap agreement matures on May 27, 2003. At December
29, 2000, the interest rate swap derivative had a negative fair value of
$639,243.
5. LOAN FEES PAYABLE:
In connection with the revolving line of credit loan agreement, the
Company incurred $181,250 of loan fees. The Company paid $93,750 during 2000.
The remaining balance is due in two installments of $43,750 in December 2001
and December 2002.
6. INCOME TAXES:
The Company elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code for both federal and state income tax reporting
effective January 30, 1999. After that date, the Company's earnings and
losses will be included in the stockholder's personal income tax return. The
election required that the Company include the $1,545,255 excess of the cost
of its inventory calculated using the first-in, first-out method of
accounting over the amount reported under the last-in, first-out method of
accounting in its year ended January 29, 1999 taxable income. That amount
also was added to the tax basis of the inventory and increased year ended
January 29, 1999 taxes by $525,386. The increase is payable in four equal
installments beginning with the filing of the year ended January 29, 1999 tax
return. Since the resulting excess of the inventory's tax basis over its
financial basis will be deductible when the Company is a nontaxable entity,
no deferred tax benefit is recognized for it.
Schedule of required income tax payments (payments are due by due
dates of the returns):
2001 ................................................ $ 179,613
2002 ................................................ 131,345
------------
Total ............................................... $ 310,958
============
F-87
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2000
7. LEASE COMMITMENTS:
(a) Obligations Under Capital Lease:
-------------------------------
The Company leases equipment under capitalized leases expiring in
years ranging from 2001 through 2004. Accumulated depreciation on the
equipment was $160,884 as of December 29, 2000.
Future minimum lease payments under the leases are as follows:
2001 ................................................ $ 85,141
2002 ................................................ 66,720
2003 ................................................ 66,720
2004 ................................................ 13,200
------------
Total ............................................... 231,781
Less amount representing interest ................... 32,539
------------
Present value of minimum lease payments ............. $ 199,242
============
(b) Operating Lease With Stockholder - Related Party Transaction:
------------------------------------------------------------
The Company leases its Quincy, Illinois facility from its sole
stockholder, under a noncancelable operating lease expiring in January 2008.
Future minimum lease payments under this lease are as follows:
2001 ................................................ $ 540,960
2002 ................................................ 540,960
2003 ................................................ 540,960
2004 ................................................ 540,960
2005 ................................................ 540,960
Thereafter .......................................... 1,127,000
------------
Total ............................................... $ 3,831,800
============
Total lease expense paid to the Company's sole stockholder for the
year ended December 29, 2000 was $540,960.
(c) Other Operating Leases:
----------------------
The Company has various other noncancelable operating leases
expiring in various years through 2007. Future minimum payments under these
leases are as follows:
2001 ................................................ $ 1,199,717
2002 ................................................ 899,717
2003 ................................................ 834,019
2004 ................................................ 835,929
2005 ................................................ 835,929
Thereafter .......................................... 840,429
-------------
Total ............................................... $ 5,445,740
=============
F-88
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2000
7. LEASE COMMITMENTS (CONTINUED):
(c) Other Operating Leases (Continued):
----------------------------------
The Company has various operating leases for delivery equipment
which are cancelable with 60 days written notice.
Total rent expense for the year ended December 29, 2000 under all
operating leases was $2,448,683.
8. PROFIT SHARING PLAN:
The Company has established defined contribution profit sharing
plans covering employees who have completed one year of service.
Contributions are made at the discretion of the Company. The Company
contributed $207,015 for the year ended December 29, 2000.
9. CONCENTRATION OF CREDIT RISK:
The Company's major customers include companies in the convenience
store industry. Sales to one customer were approximately $60,700,000 for the
year ended December 29, 2000 and accounts receivable from two customers were
approximately $2,538,000 at December 29, 2000. The Company performs periodic
credit evaluations of its customers' financial condition and generally does
not require collateral. Tobacco products sold to this industry account for
approximately 86 percent of the Company's sales in 2000.
10. CASH FLOW DISCLOSURES:
Cash paid for interest and income taxes was as follows:
Interest ............................................ $ 2,475,814
Income taxes ........................................ 151,485
The Company had the following noncash investing and financing
transactions:
Equipment costing $460,000 was obtained through a purchase
agreement. At December 29, 2000, $150,000 was paid on this purchase
agreement. The remaining $310,000 is reflected as a current liability at
December 29, 2000.
F-89
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2000
10. CASH FLOW DISCLOSURES (CONTINUED):
Loan fees of $131,250 were incurred for which long-term financing
was provided by the lender. A payment of $43,750 was made by December 29,
2000.
Leasehold improvements of $90,000 were purchased in 2000 and
included in accounts payable at December 29, 2000.
11. SELF INSURANCE:
The Parent and Subsidiary have partial self-insurance programs for
employees' health benefits. The maximum potential self-insurance cost to each
of the Companies for the year ended December 29, 2000, as determined by the
insurance provider, is approximately $1,265,051 and $308,000, respectively.
The Companies also pay premiums for specific and aggregate excess coverage
for claims in excess of the maximum claims to be paid by the Companies.
During the year ended December 29, 2000, the Companies incurred $710,232 and
$238,078, respectively, of their maximum potential cost.
12. SUBSEQUENT EVENTS (Dated June 1, 2001):
Subsequent to year end, assets and liabilities of the Subsidiary
were transferred at book value, which approximates book value, to the Parent.
On February 8, 2001, the Parent Company (seller) entered into an
Asset Purchase Agreement (Agreement) with AMCON Distributing Company (buyer).
Pursuant to the Agreement, it is the intent of the seller to sell
substantially all operating assets and related liabilities to the buyer for
fair market value plus an additional amount to be paid by the buyer over 5
years. The closing date of the Agreement is June 1, 2001.
F-90
MERCHANTS WHOLESALE INC.
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Merchants Wholesale, Inc.
Quincy, Illinois
We have audited the accompanying consolidated balance sheet of Merchants
Wholesale, Inc. and its subsidiary as of December 31, 1999, and the related
consolidated statements of operations, retained earnings, and cash flows for
the eleven month period then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Merchants Wholesale, Inc. and its subsidiary as of December 31, 1999, and
the results of their operations and their cash flows for the eleven month
period then ended in conformity with generally accepted accounting
principles.
CLIFTON GUNDERSON L.L.C.
Peoria, Illinois
February 24, 2000
F-91
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
Current Assets:
Cash and cash equivalents .................................... $ 300
Accounts receivable, less allowance for doubtful
accounts of $126,250 ..................................... 17,751,985
Inventories .................................................. 16,840,777
Prepaid expenses ............................................. 603,876
------------
Total current assets ............................ 35,196,938
------------
Equipment and Leasehold Improvements:
Leasehold improvements ....................................... 6,223
Equipment .................................................... 5,797,079
Equipment under capital lease ................................ 387,720
------------
Total, at cost .................................. 6,191,022
Less accumulated depreciation ................................ (4,042,988)
------------
Total equipment and leasehold improvements ...... 2,148,034
------------
Other Assets:
Unamortized loan fees ........................................ 32,083
------------
Total Assets ...................................................... $ 37,377,055
============
F-92
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Bank overdraft ...................................................... $ 3,876,703
Accounts payable .................................................... 4,490,651
Current maturities of note payable to stockholder ................... 160,000
Current maturities of long-term debt ................................ 133,753
Current maturities of obligations under capital lease ............... 145,597
Current maturities of income taxes payable .......................... 199,749
Accrued expenses .................................................... 1,126,465
------------
Total Current Liabilities .............................. 10,132,918
------------
Long-term Liabilities:
Notes payable to stockholder, less current maturities above ......... 686,434
Senior debt ......................................................... 21,061,073
Long-term debt, less current maturities above ....................... 612,339
Obligations under capital lease, less current maturities above ...... 199,233
Income taxes payable, less current maturities above ................. 262,694
------------
Total Long-term Liabilities ............................ 22,821,773
------------
Total Liabilities ...................................... 32,954,691
------------
Stockholder's Equity:
Common stock, $50 par value; 100,000 shares authorized,
3,000 shares issued and 88 shares outstanding ................... 150,000
Additional paid-in capital .......................................... 398,237
Retained earnings ................................................... 6,424,837
------------
6,973,074
Treasury stock, 2,912 shares at cost ................................ (2,550,710)
------------
Total Stockholder's Equity ............................. 4,422,364
------------
Total Liabilities and Stockholder's Equity ............................... $ 37,377,055
============
F-93
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
ELEVEN MONTHS ENDED DECEMBER 31, 1999
NET SALES ............................................... $ 342,993,776
COST OF SALES ........................................... 325,811,641
-------------
Gross profit .......................... 17,182,135
OPERATING EXPENSES
Selling, general, and administrative expenses ...... 13,691,611
-------------
Income from operations ................ 3,490,524
-------------
OTHER EXPENSE, NET:
Interest expense ................................... (1,063,302)
Other income, net .................................. 3,668
-------------
Other expense, net .................... (1,059,634)
-------------
NET INCOME .............................................. $ 2,430,890
=============
F-94
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
ELEVEN MONTHS ENDED DECEMBER 31, 1999
BALANCE, BEGINNING OF PERIOD ................ $ 3,993,947
Net income ............................. 2,430,890
-----------
BALANCE, END OF PERIOD ...................... $ 6,424,837
===========
F-95
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
ELEVEN MONTHS ENDED DECEMBER 31, 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ 2,430,890
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation ................................................. 753,686
Loss on sale of equipment .................................... 14,557
Amortization of loan fees .................................... 14,576
Effects of changes in operating assets and liabilities:
Accounts receivable ..................................... (5,870,772)
Inventory ............................................... 751,904
Prepaid expenses ........................................ (496,404)
Accounts payable ........................................ 1,977,960
Accrued expenses ........................................ (23,337)
Income taxes payable .................................... (546,815)
-----------
Net cash used in operating activities ............... (993,755)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements ................ (940,516)
Proceeds from sale of equipment .................................. 16,583
-----------
Net cash used in investing activities ............... (923,933)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft ................................................... (948,884)
Payment of costs to maintain debt financing ...................... (35,000)
Proceeds from stockholder's loans payable ........................ 600,000
Principal payments on stockholder's loans payable ................ (379,961)
Principal payments on notes payable .............................. (115,838)
Net proceeds on line of credit ................................... 2,844,318
Principal payments on capital lease obligation ................... (46,947)
-----------
Net cash provided by financing activities ........... 1,917,688
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................. --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................ 300
-----------
CASH AND CASH EQUIVALENTS, END OF PERIOD .............................. $ 300
===========
F-96
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1999
Merchants Wholesale, Inc. was incorporated on July 9, 1954 in the state of
Illinois. The Company's principal business activity is the distribution of
tobacco, candy, and various sundry products throughout Missouri, Illinois,
and other adjacent states. The Company's 100 percent owned subsidiary,
Merchants Wholesale of Iowa, Inc., principal business activity is also the
distribution of tobacco, candy, and various sundry products throughout Iowa,
Illinois, and other adjacent states. Significant accounting policies
followed by the Company are presented below. The Company has established its
fiscal year using the 52-53 week tax year method. A 52-53 week tax year
varies from 52 to 53 weeks and always ends the year on the same day of the
week.
Effective January 30, 1999, the Company elected S corporation status
pursuant to IRS regulations. The Company also changed its year end to a
calendar year end resulting in a period covering January 30, 1999 to
December 31, 1999.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its 100 percent owned subsidiary. Intercompany transactions
and balances have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at lower of cost or market. The Company uses the
last-in, first-out (LIFO) method to determine the cost of its cigarette
inventory. The Company uses the first-in, first-out (FIFO) method to
determine the cost of the remainder of its inventory. If the FIFO method of
inventory accounting had been used by the Company to determine the cost of
its cigarette inventory, inventories would have been $2,048,925 higher than
reported at December 31, 1999.
F-97
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1999
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Equipment and
leasehold improvements are depreciated using an accelerated method over the
estimated lives of the assets which range from three to fifteen years.
UNAMORTIZED LOAN FEES
The Company amortizes its loan fees on a straight-line basis over the
respective lives of the loans.
ADVERTISING
The Company expenses advertising costs as incurred.
This information is an integral part of the accompanying
consolidated financial statements.
F-98
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ACQUISITION:
At the close of business on December 3, 1999, the Subsidiary
acquired certain assets of a company that distributes tobacco, candy, and
various sundry products. The purchase price was $4,850,157, consisting of a
cash payment of $4,765,476 and the issuance of a capital lease obligation
for $84,681.
A summary of the net assets acquired is as follows:
Inventory ........................................ $ 4,765,476
Equipment ........................................ 84,681
-----------
Net assets acquired .............................. $ 4,850,157
===========
The acquisition was accounted for using the purchase method of
accounting and, accordingly, the assets assumed were recorded at their fair
values. The results of the Company's operations subsequent to the
acquisition have been included in the results of operations of the Company.
2. SENIOR DEBT:
The Company has a loan agreement with a bank for a $32,500,000
total commitment of which $21,061,073 is utilized. The commitment is a
revolving credit agreement whereby the Company may periodically borrow and
repay funds as needed. The balance of the loan is due on the termination
date of the loan agreement, July 30, 2001.
The loan agreement provides for interest on outstanding borrowings
at 1.75 percent over the LIBOR index rate (5.82 percent at December 31,
1999) paid monthly for $12,000,000 of the revolving credit agreement. The
borrowings in excess of $12,000,000 require interest to be paid monthly at
the bank's prime index rate (8.50 percent at December 31, 1999). The line of
credit is collateralized by substantially all of the Company's assets and
contains restrictive covenants relating to the Company's financial position
and operations.
3. DEBT:
(a) Notes Payable to Stockholder (Related Party Transactions):
---------------------------------------------------------
The notes payable to stockholder, totaling $846,434, are unsecured
and bear interest at 7.50 percent, requiring monthly interest payments, with
maturity dates ranging from 2003 to 2005. A balance of $160,000 is
classified as current as the Company is making semiannual principal payments
of $80,000 on February 1 and August 1.
F-99
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
3. DEBT (CONTINUED):
Long-term debt consists of the following:
Equipment loan requiring monthly installments of $14,650 including
interest at variable rate of 71 percent of the published prime
rate. The interest rate at the period ended December 31, 1999 was
6.035 percent. The final payment is due December 2004 and the loan
is secured by equipment. The loan agreement contains restrictive
covenants relating to the Company's financial position and
operations ........................................... $ 746,092
Less current portion ................................. 133,753
---------
Long-term portion .................................... $ 612,339
=========
Future maturities of senior debt, long-term debt, and note payable
to stockholder are as follows:
2000 ............................................... $ 293,753
2001 ............................................... 21,363,372
2002 ............................................... 311,256
2003 ............................................... 320,775
2004 ............................................... 318,009
Later years ........................................ 46,434
-----------
Total .............................................. $22,653,599
===========
4. LEASE COMMITMENTS:
(a) Obligations Under Capital Lease:
-------------------------------
The Company leases equipment under capitalized leases expiring in
years ranging from 2000 through 2004. Accumulated depreciation on the
equipment was $94,653 as of December 31, 1999.
Future minimum lease payments under the leases are as follows:
2000 .................................................... $ 170,865
2001 .................................................... 85,141
2002 .................................................... 66,720
2003 .................................................... 66,720
2004 .................................................... 13,200
---------
Total ................................................... 402,646
Less amount representing interest ....................... 57,816
---------
Present value of minimum lease payments ................. $ 344,830
=========
F-100
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
4. LEASE COMMITMENTS (CONTINUED):
(b) Operating Lease With Stockholder - Related Party Transaction:
------------------------------------------------------------
The Company leases its facility from its sole stockholder, under a
noncancelable operating lease expiring in January 2008. Future minimum lease
payments under this lease are as follows:
2000 ............................................... $ 345,960
2001 ............................................... 336,960
2002 ............................................... 336,960
2003 ............................................... 336,960
2004 ............................................... 336,960
Later years ........................................ 1,038,960
-----------
Total $ 2,732,760
===========
Total lease expense paid to the Company's sole stockholder for
the eleven month period ended December 31, 1999 was $345,960.
(c) Other Operating Leases:
----------------------
The Company has various other noncancelable operating leases
expiring in various years through 2004. Future minimum payments under these
leases are as follows:
2000 ................................................... $ 607,625
2001 ................................................... 77,546
2002 ................................................... 66,722
2003 ................................................... 66,722
2004 ................................................... 13,200
---------
Total .................................................. $ 831,815
=========
The Company has various operating leases for delivery equipment
which are cancelable with 60 days written notice.
Total rent expense for the eleven month period ended December 31,
1999 under all operating leases was $1,196,887.
5. PROFIT SHARING PLAN:
The Company has established a profit sharing plan covering all of
the Parent Company employees who have completed one year of service. A
profit sharing plan covering all employees of the subsidiary was being
negotiated at December 31, 1999. Contributions are made at the discretion of
the Company. The Company contributed $283,502 for the eleven month period
ended December 31, 1999.
F-101
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
6. CONCENTRATION OF CREDIT RISK:
The Company's major customers include companies in the convenience
store industry. Sales to one customer were approximately $53,800,000 for the
eleven month period ended December 31, 1999 and accounts receivable from
three customers exceeded ten percent of the Company's total stockholder's
equity at December 31, 1999. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not
require collateral. Tobacco products sold to this industry account for
approximately 83 percent of the Company's sales in 1999.
The Company purchased approximately 79 percent of their tobacco
products from three major suppliers for the eleven month period ended
December 31, 1999.
7. INCOME TAXES:
The Company elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code for both federal and state income tax reporting
effective January 30, 1999. After that date, the Company's earnings and losses
will be included in the stockholder's personal income tax return. The election
required that the Company include the $1,545,255 excess of the cost of its
inventory calculated using the first-in, first-out method of accounting over
the amount reported under the last-in, first-out method of accounting in its
year ended January 29, 1999 taxable income. That amount also was added to the
tax basis of the inventory and increased year ended January 29, 1999 taxes by
$525,386. The increase is payable in four equal installments beginning with the
filing of the year ended January 29, 1999 tax return. Since the resulting
excess of the inventory's tax basis over its financial basis will be deductible
when the Company is a nontaxable entity, no deferred tax benefit is recognized
for it.
Schedule of required income tax payments (payments are due by due
dates of the returns):
2000 .................................................. $ 199,749
2001 .................................................. 131,347
2002 .................................................. 131,347
---------
Total ................................................. $ 462,443
=========
8. SELF INSURANCE:
The Company has a modified self insurance program for its employee
health insurance, effective February 1, 1993. Actual amounts paid by the
Company totaled $422,906, which included health claims paid by the Company
and administration fees. The Company's maximum exposure for the plan year
beginning January 1, 2000 has been estimated to be $512,000 based on actual
participation levels at December 31, 1999.
F-102
MERCHANTS WHOLESALE, INC. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
9. CASH FLOW DISCLOSURES:
Cash paid for interest and income taxes was as follows:
Interest ............................................. $ 1,033,885
Income taxes ......................................... 555,879
The Company had the following noncash financing transactions:
During the eleven months ended December 31, 1999, the Company
purchased equipment for $141,806 for which long-term financing was provided
by the seller.
This information is an integral part of the accompanying
consolidated financial statements.
F-103
MERCHANTS WHOLESALE INC.
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Merchants Wholesale, Inc.
Quincy, Illinois
We have audited the accompanying balance sheets of Merchants Wholesale, Inc.
as of January 29, 1999 and January 30, 1998, and the related statements of
operations, retained earnings, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Merchants Wholesale, Inc. as
of January 29, 1999 and January 30, 1998, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
CLIFTON GUNDERSON L.L.C.
Peoria, Illinois
March 19, 1999
F-104
MERCHANTS WHOLESALE, INC.
BALANCE SHEETS
JANUARY 29, 1999 AND JANUARY 30, 1998
ASSETS
1999 1998
------------ ------------
Current Assets:
Cash and cash equivalents ................................ $ 300 $ 300
Accounts receivable, less allowance for doubtful
accounts of $70,250 in 1999 and 1998 .................. 11,891,666 7,934,783
Inventories .............................................. 2,827,205 6,654,546
Prepaid expenses ......................................... 107,472 506,635
Deferred income tax ...................................... - 120,000
------------ ------------
Total Current Assets ........................ 24,826,643 15,216,264
------------ ------------
Equipment and Leasehold Improvements:
Leasehold improvements ................................... 6,223 -
Equipment ................................................ 5,080,514 3,803,430
Equipment under capital lease ............................ 204,441 53,441
------------ ------------
Total, at cost .............................. 5,291,178 3,856,871
Less accumulated depreciation ............................ (3,525,320) (3,210,283)
------------ ------------
Total Equipment and Leasehold Improvements .. 1,765,858 646,588
------------ ------------
Other Assets:
Unamortized loan fees .................................... 11,659 33,398
------------ ------------
Total Assets .................................................. $ 26,604,160 $ 15,896,250
============ ============
F-105
MERCHANTS WHOLESALE, INC.
BALANCE SHEETS
JANUARY 29, 1999 AND JANUARY 30, 1998
LIABILITIES AND STOCKHOLDER'S EQUITY
1999 1998
------------ ------------
Current Liabilities:
Bank overdraft ........................................... $ 4,825,587 $ 2,169,903
Accounts payable ......................................... 2,523,144 1,647,740
Note payable to bank ..................................... - 8,252,178
Current maturities of note payable to stockholder ........ 160,000 160,000
Current maturities of long-term debt ..................... 126,610 119,114
Current maturities of obligations under capital lease .... 39,814 12,552
Income taxes payable ..................................... 615,219 8,337
Accrued expenses ......................................... 1,149,802 371,792
------------ ------------
Total Current Liabilities ................... 9,440,176 12,741,616
------------ ------------
Long-term Liabilities:
Notes payable to stockholder, less current
maturities above ...................................... 466,396 417,236
Long-term debt, less current maturities above ............ 735,320 861,931
Obligations under capital lease, less current
maturities above ...................................... 125,476 13,245
Senior debt .............................................. 13,451,279 -
Income taxes payable, less current maturities
above ................................................. 394,039 -
------------ ------------
Total Long-term Liabilities ................. 15,172,510 1,292,412
------------ ------------
Total Liabilities ........................... 24,612,686 14,034,028
------------ ------------
Stockholders' Equity:
Common stock, $50 par value; 100,000 shares
authorized, 3,000 shares issued ....................... 150,000 150,000
Additional paid-in capital ............................... 398,237 398,237
Retained earnings ........................................ 3,993,947 3,864,695
------------ ------------
4,542,184 4,412,932
Treasury stock, 2,912 shares at cost ..................... (2,550,710) (2,550,710)
------------ ------------
Total Stockholder's Equity .................. 1,991,474 1,862,222
------------ ------------
Total Liabilities and Stockholder's Equity .................... $ 26,604,160 $ 15,896,250
============ ============
F-106
MERCHANTS WHOLESALE, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 29, 1999 AND JANUARY 30, 1998
1999 1998
------------- -------------
NET SALES ................................................. $ 257,166,591 $ 167,454,387
COST OF SALES ............................................. 241,080,476 157,425,760
------------- -------------
Gross profit ............................ 16,086,115 10,028,627
OPERATING EXPENSES:
Selling, general, and administrative expenses ........ 13,369,693 8,677,705
------------- -------------
Income from operations .................. 2,716,422 1,350,922
OTHER EXPENSE, NET:
Interest expense ..................................... (1,136,368) (824,642)
Other Expense, net ................................... (295,802) (23,928)
------------- -------------
Income before income taxes and
cumulative effect of a change
in accounting principle .............. 1,284,252 502,352
PROVISION FOR INCOME TAXES ................................ 1,155,000 222,000
------------- -------------
Income before cumulative effect of
a change in accounting principle ..... 129,252 280,352
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, net of related
income tax of $182,000 in 1998 ......................... - (275,452)
------------- -------------
NET INCOME ................................................ $ 129,252 $ 4,900
============= =============
F-107
MERCHANTS WHOLESALE, INC.
STATEMENTS OF RETAINED EARNINGS
YEARS ENDED JANUARY 29, 1999 AND JANUARY 30, 1998
1999 1998
-------------- ---------------
BALANCE, BEGINNING OF YEAR ..................... $ 3,864,695 $ 3,859,795
Net income ................................ 129,252 4,900
-------------- ---------------
BALANCE, END OF YEAR ........................... $ 3,993,947 $ 3,864,695
============== ===============
F-108
MERCHANTS WHOLESALE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 29, 1999 AND JANUARY 30, 1998
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 129,252 $ 4,900
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation ............................................. 570,749 358,176
Loss on sale of equipment ................................ 7,703 35,156
Amortization of loan fees ................................ 36,739 58,434
Deferred income tax assets ............................... 120,000 (39,000)
Effects of changes in operating assets and liabilities:
Accounts receivable ................................. (3,956,883) (1,343,964)
Inventory ........................................... (6,172,659) (2,890,406)
Prepaid expenses .................................... 399,163 (386,899)
Accounts payable .................................... 875,404 94,610
Accrued expenses .................................... 778,010 101,529
Income taxes payable ................................ 1,000,921 (22,476)
----------- -----------
Net cash used in operating activities ........... (6,211,601) (4,029,940)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from redemption of cash value of life insurance ..... - 6,555
Purchases of equipment and leasehold improvements ............ (1,547,992) (110,771)
Proceeds from sale of equipment .............................. 1,270 19,108
----------- -----------
Net cash used in investing activities ........... (1,546,722) (85,108)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft ............................................... 2,655,684 812,687
Payment of costs to maintain debt financing .................. (15,000) (36,699)
Proceeds from stockholder's loans payable .................... 998,280 554,180
Principal payments on stockholder's loans payable ............ (949,121) (616,794)
Proceeds from notes payable .................................. - 1,000,000
Principal payments on notes payable .......................... (119,114) (574,274)
Net proceeds on line of credit ............................... 5,199,101 2,986,744
Principal payments on capital lease obligation ............... (11,507) (11,131)
----------- -----------
Net cash provided by financing activities ....... 7,758,323 4,114,713
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ......................... - (335)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...................... 300 635
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................ $ 300 $ 300
=========== ===========
F-109
MERCHANTS WHOLESALE, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
JANUARY 29, 1999 AND JANUARY 30, 1998
Merchants Wholesale, Inc. was incorporated on July 9, 1954 in the state of
Illinois. The Company's principal business activity is the distribution of
tobacco, candy, and various sundry products throughout Missouri, Illinois,
and other adjacent states. Significant accounting policies followed by the
Company are presented below. The Company has established its fiscal year
using the 52-53 week tax year method. A 52-53 week tax year varies from 52 to
53 weeks and always ends the year on the same day of the week.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
CASH EQUIVALENTS
The Company considers all liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at lower of cost or market. Prior to 1998, cost was
determined using the first-in, first-out (FIFO) method. However, as described
in Note 1, effective February 1, 1997, the Company adopted the last-in,
first-out (LIFO) method to determine the cost of its cigarette inventory. The
Company still uses the FIFO method to determine the cost of the remainder of
its inventory.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Equipment and
leasehold improvements are depreciated using an accelerated method over the
estimated lives of the assets which range from five to fifteen years.
UNAMORTIZED LOAN FEES
The Company amortizes its loan fees on a straight-line basis over the
respective lives of the loans.
F-110
MERCHANTS WHOLESALE, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
JANUARY 29, 1999 AND JANUARY 30, 1998
INCOME TAXES
Deferred income taxes are provided on temporary differences between financial
statement and income tax reporting. Temporary differences are differences
between the amounts of assets and liabilities reported for financial
statement purposes and their tax bases. Deferred tax liabilities are
recognized for temporary differences that will be taxable in future years'
tax returns. Deferred tax assets are recognized for temporary differences
that will be deductible in future years' tax returns and for operating loss
and tax credit carryforwards. Deferred tax assets are reduced by a valuation
allowance if it is deemed more likely than not that some or all of the
deferred tax assets will not be realized. At January 29, 1999, deferred
income taxes are not recorded due to the Company's election of S corporation
status pursuant to IRS regulations effective January 30, 1999.
F-111
MERCHANTS WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 29, 1999 AND JANUARY 30, 1998
1. CHANGE IN ACCOUNTING PRINCIPLE:
In 1998, the Company adopted the last-in, first-out (LIFO) method of
costing its cigarette inventory. Previously, the first-in, first-out (FIFO)
method was used. Management believes that the LIFO method minimizes the
effect of price level changes on cigarette inventory valuations and generally
matches current costs against current revenues in the statement of
operations. The change decreased the 1998 net income by $275,452, net of
related tax of $182,000. There is no cumulative effect on beginning retained
earnings since the ending cigarette inventory as previously reported at
January 31, 1997 is considered to be the beginning inventory for LIFO
purposes. Pro forma results of operations for the prior year, as if LIFO had
been followed, are not determinable.
2. SENIOR DEBT:
The Company at January 29, 1999 has a loan agreement with a bank for
a $20,000,000 total commitment of which $13,451,279 is utilized. The
commitment is a revolving credit arrangement whereby the Company may
periodically borrow and repay funds as needed. The termination date of the
loan agreement is July 30, 2001. The loan agreement provides for interest on
outstanding borrowings at 1.75 percent over the LIBOR index rate paid
monthly. The line of credit is collateralized by substantially all of the
Company's assets and contains restrictive covenants relating to the Company's
financial position and operations.
The Company also has locked in part of its borrowings at 1.75
percent over the LIBOR index rate with the principal amount due September 25,
2001. The LIBOR interest is paid monthly. At January 29, 1999, the Company
had $12,000,000 borrowed at 7.02 percent (1.75 percent over LIBOR index rate
of 5.27 percent). The $12,000,000 that the Company locked into is included in
the above $13,451,279.
3. DEBT:
(a) Note Payable to Bank:
--------------------
The note payable to bank at January 30, 1998 is a $12,000,000
revolving line of credit. During 1998, the balance of the $12,000,000
revolving line of credit was paid off with the proceeds received with the
senior debt agreement. At January 30, 1998, $8,252,178 of the line of credit
was used. Amounts drawn against the line of credit are payable on demand and
bear interest at the local prime lending rate at January 30, 1998 (8.50
percent at January 30, 1998). The line of credit is collateralized by
substantially all of the Company's assets and contains restrictive covenants
relating to the Company's financial position and operations.
F-112
MERCHANTS WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 29, 1999 AND JANUARY 30, 1998
3. DEBT (CONTINUED):
(b) Notes Payable to Stockholder (Related Party Transactions):
---------------------------------------------------------
The notes payable to stockholder, totaling $626,396, are unsecured
and bear interest ranging from 7.0 to 8.5 percent, requiring monthly interest
payments, with maturity dates ranging from 2001 to 2003. A balance of
$160,000 is classified as current as the Company is making semiannual
principal payments of $80,000 on February 1 and August 1.
Long-term debt consists of the following:
1999 1998
--------- ---------
Equipment loan requiring monthly installments
of $14,650 including interest at variable rate
of 71 percent of the published prime rate. The
interest rate at the year ended January 29,
1999 was 5.503 percent. The final payment is
due December 2004 and the loan is secured by
equipment .................................... $ 861,930 $ 981,045
Less current portion ......................... 126,610 119,114
--------- ---------
Long-term portion ............................ $ 735,320 $ 861,931
========= =========
Future maturities of senior debt, long-term debt, and note payable
to stockholder are as follows:
2000 ................................................. $ 286,610
2001 ................................................. 294,448
2002 ................................................. 13,754,318
2003 ................................................. 298,438
2004 ................................................. 161,610
Later years .......................................... 144,181
------------
Total ................................................ $ 14,939,605
============
4. LEASE COMMITMENTS:
(a) Obligations Under Capital Lease:
-------------------------------
The Company leases equipment under capitalized leases expiring in
years ranging from 2000 through 2004. Accumulated depreciation on the
equipment was $80,563 and $44,206 as of January 29, 1999 and January 30,
1998, respectively.
F-113
MERCHANTS WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 29, 1999 AND JANUARY 30, 1998
4. LEASE COMMITMENTS (CONTINUED):
(a) Obligations Under Capital Lease (Continued):
-------------------------------------------
Future minimum lease payments under the leases are as follows:
2000 .................................................... $ 58,550
2001 .................................................... 40,320
2002 .................................................... 40,320
2003 .................................................... 40,320
2004 .................................................... 36,960
---------
Total ................................................... 216,470
Less amount representing interest ....................... 51,180
---------
Present value of minimum lease payments ................. $ 165,290
=========
(b) Operating Lease With Stockholder - Related Party Transaction:
------------------------------------------------------------
The Company leases its facility from its sole stockholder, under a
noncancelable operating lease expiring in January 2008. Future minimum lease
payments under this lease are as follows:
2000 .................................................. $ 336,960
2001 .................................................. 336,960
2002 .................................................. 336,960
2003 .................................................. 336,960
2004 .................................................. 336,960
Later years ........................................... 1,375,920
-----------
Total ................................................. $ 3,060,720
===========
Total lease expense paid to the Company's sole stockholder for the
year ended January 29, 1999 was $336,960.
(c) Other Operating Leases:
----------------------
The Company has various operating leases for delivery equipment
which are cancelable with 60 days written notice.
Total rent expense for the years ended January 29, 1999 and January
30, 1998 was $1,151,616 and $870,394, respectively.
F-114
MERCHANTS WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 29, 1999 AND JANUARY 30, 1998
5. CONSULTING FEES - RELATED PARTY TRANSACTION:
The Company paid approximately $246,000 to related parties during
the year ended January 29, 1999 for consulting services provided.
6. PROFIT SHARING PLAN:
The Company has established a profit sharing plan covering all
employees who have completed one year of service. Contributions are made at
the discretion of the Company. The Company contributed $157,302 and $50,000
for the years ended January 29, 1999 and January 30, 1998, respectively.
7. CONCENTRATION OF CREDIT RISK:
The Company's major customers include companies in the convenience
store industry. Sales to one customer were approximately $33,100,000 for the
year ended January 29, 1999 and accounts receivable from 13 customers
exceeded ten percent of the Company's total stockholder's equity at January
29, 1999. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Tobacco
products sold to this industry account for approximately 79 percent of the
Company's sales in 1999 and 75 percent in 1998.
The Company purchased approximately 81 percent of their tobacco products from
3 major suppliers for the years ended January 29, 1999 and January 30, 1998.
8. INCOME TAXES:
The Company has elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code for both federal and state income
tax reporting effective January 30, 1999. After that date, the Company's
earnings and losses will be included in the stockholder's personal income tax
return. The election requires that the Company include the $1,545,255 excess
of the cost of its inventory calculated using the first-in, first-out method
of accounting over the amount reported under the last-in, first-out method of
accounting in its 1999 taxable income. That amount also is added to the tax
basis of the inventory and increases 1999 taxes by $525,386. The increase is
payable in four equal installments beginning with the filing of the 1999 tax
return. Since the resulting excess of the inventory's tax basis over its
financial basis will be deductible when the Company is a nontaxable entity,
no deferred tax benefit is recognized for it. Consequently, the tax provision
is $525,386 more than the amount that would be obtained by applying statutory
rates to pretax income.
F-115
MERCHANTS WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 29, 1999 AND JANUARY 30, 1998
8. INCOME TAXES (CONTINUED):
Schedule of required income tax payments (payments are due by due
dates of the returns):
2000 ($509,612 + 25 percent of $525,386) .............. $ 640,959
2001 .................................................. 131,347
2002 .................................................. 131,347
2003 .................................................. 131,347
-----------
Total ................................................. $ 1,035,000
===========
The sources of deferred tax assets and liabilities and the tax
effect of each are as follows:
1999 1998
--------- -----------
Deferred tax assets:
Allowance for doubtful accounts ............... $ - $ 28,000
Capitalized inventory costs ................... - 92,000
--------- -----------
- 120,000
Valuation allowance for deferred tax assets ... - -
--------- -----------
Total deferred tax assets .............................. $ - $ 120,000
========= ===========
The entire deferred tax asset is classified in the accompanying
balance sheets as current.
The Company's provision for income taxes differs from the tax that
would result from applying statutory federal tax rates to income before
income taxes primarily because of State income taxes and nondeductible
expenses.
The provision for income taxes before the cumulative effect of change in
accounting principle consists of the following components:
1999 1998
----------- ---------
Current ................................... $ 1,035,000 $ 261,000
Deferred .................................. 120,000 (39,000)
----------- ---------
Total provision for income taxes .......... $ 1,155,000 $ 222,000
=========== =========
9. SELF INSURANCE:
The Company has a modified self insurance program for its employee
health insurance, effective February 1, 1993. Actual amounts paid by the
Company totaled $433,712, which included health claims paid by the Company
and administration fees. The Company's maximum exposure for the plan year
beginning February 1, 1999 has been estimated to be $512,000 based on actual
participation levels at January 29, 1999.
F-116
MERCHANTS WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 29, 1999 AND JANUARY 30, 1998
10. CASH FLOW DISCLOSURES:
Cash paid for interest and income taxes was as follows:
1999 1998
----------- ---------
Interest ................................... $ 1,106,268 $ 878,342
Income taxes ............................... 34,079 101,712
The Company had the following noncash financing transactions:
During 1999, the Company purchased equipment for $151,000 for which
long-term financing was provided by the seller.
11. YEAR 2000 UNCERTAINTIES:
Like most entities, the Company may be exposed to risks associated
with Year 2000 dating problems. This problem affects computer software and
hardware; transactions with customers, vendors, and other entities; and
equipment dependent on microchips. The Company has begun but not yet
completed the process of identifying and remediating potential Year 2000
problems. It is not possible for any entity to guarantee the results of its
own remediation efforts or to accurately predict the impact of Year 2000
dating problems on third parties with which the Company does business. If
remediation efforts of the Company or third parties with which it does
business are not successful, it is possible the Year 2000 dating problem
could negatively impact the Company's financial condition and results of
operations.
F-117
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of AMCON Distributing Company:
Our report on the consolidated financial statements of AMCON Distributing
Company is included in this Form S-4. In connection with our audit of such
financial statements, we have also audited the related financial statement
schedule on page S-2 for the years ended September 30, 2000, 1999 and 1998.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
PRICEWATERHOUSECOOPERS LLP
Omaha, Nebraska
November 22, 2000
S-1
AMCON Distributing Company
Financial Statement Schedule
(Restated)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
Net
Amounts
Balance at Provision (Written Off) Balance at
Description Beginning of Period (Benefit) Recovered End of Period
------------------ --------------------- --------- ------------- -----------------------
Allowance for
doubtful accounts Oct 1, 1997 206,249 339,961 (296,895) Sep 30, 1998 249,315
Oct 1, 1998 249,315 156,770 (90,624) Sep 30, 1999 315,461
Oct 1, 1999 315,461 164,000 (150,392) Sep 30, 2000 329,069
Allowance for
inventory
obsolescence Oct 1, 1997 30,000 253,864 (30,000) Sep 30, 1998 253,864
Oct 1, 1998 253,864 - (253,864) Sep 30, 1999 -
Oct 1, 1999 - - - Sep 30, 2000 -
S-2
ANNEX A
FIFTH AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
DATED AS OF
SEPTEMBER 27, 2001
AMONG
AMCON DISTRIBUTING COMPANY
AMCON MERGER SUB, INC.
AND
HAWAIIAN NATURAL WATER COMPANY, INC.
Table of Contents
-----------------
Page
----
ARTICLE I DEFINITIONS ......................................................................................1
ARTICLE II THE MERGER .......................................................................................2
SECTION 2.1. EFFECTS OF THE MERGER ......................................................................2
SECTION 2.2. EFFECT OF THE MERGER ON HNWC CAPITAL STOCK..................................................3
SECTION 2.3. MERGER SUB COMMON STOCK.....................................................................4
SECTION 2.4. FRACTIONAL SHARES...........................................................................4
SECTION 2.5. STOCK OPTIONS, WARRANTS AND OTHER STOCK
RELATED RIGHTS..............................................................................4
SECTION 2.6. APPRAISAL RIGHTS............................................................................5
SECTION 2.7. AFFILIATES..................................................................................6
SECTION 2.8. EXCHANGE FUND...............................................................................6
SECTION 2.9. EXCHANGE PROCEDURES.........................................................................6
SECTION 2.10. DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED COMMON CERTIFICATES...............................7
SECTION 2.11. NO FURTHER OWNERSHIP RIGHTS IN HNWC COMMON STOCK............................................7
SECTION 2.12. TERMINATION OF EXCHANGE FUND................................................................7
SECTION 2.13. NO LIABILITY................................................................................7
SECTION 2.14. INVESTMENT OF THE EXCHANGE FUND.............................................................8
SECTION 2.15. LOST COMMON CERTIFICATES....................................................................8
SECTION 2.16. WITHHOLDING RIGHTS..........................................................................8
SECTION 2.17. FURTHER ASSURANCES..........................................................................8
SECTION 2.18. STOCK TRANSFER BOOKS........................................................................8
ARTICLE III REPRESENTATIONS AND WARRANTIES OF AMCON ..........................................................9
SECTION 3.1. CORPORATE EXISTENCE AND POWER...............................................................9
SECTION 3.2. CORPORATE AUTHORIZATION.....................................................................9
SECTION 3.3. GOVERNMENTAL AUTHORIZATION..................................................................9
SECTION 3.4. NON-CONTRAVENTION..........................................................................10
SECTION 3.5. CAPITALIZATION.............................................................................10
SECTION 3.6. SUBSIDIARIES...............................................................................11
SECTION 3.7. AMCON SEC DOCUMENTS........................................................................11
SECTION 3.8. FINANCIAL STATEMENTS; NO MATERIAL UNDISCLOSED LIABILITIES..................................12
SECTION 3.9. INFORMATION TO BE SUPPLIED.................................................................12
SECTION 3.10. ABSENCE OF CERTAIN CHANGES.................................................................13
SECTION 3.11. LITIGATION.................................................................................13
SECTION 3.12. TAXES......................................................................................13
SECTION 3.13. EMPLOYEE BENEFITS..........................................................................14
SECTION 3.14. COMPLIANCE WITH LAWS; LICENSES, PERMITS AND REGISTRATIONS..................................16
i
Table of Contents
-----------------
(continued)
Page
----
SECTION 3.15. TITLE TO PROPERTIES........................................................................16
SECTION 3.16. INTELLECTUAL PROPERTY......................................................................16
SECTION 3.17. ENVIRONMENTAL MATTERS......................................................................17
SECTION 3.18. FINDERS' FEES; OPINIONS OF FINANCIAL ADVISOR...............................................18
SECTION 3.19. BOARD APPROVAL; REQUIRED VOTE..............................................................18
SECTION 3.20. TAX TREATMENT..............................................................................18
SECTION 3.21. CERTAIN AGREEMENTS.........................................................................18
SECTION 3.22. EMPLOYMENT AGREEMENTS......................................................................18
SECTION 3.23. TRANSACTIONS WITH DIRECTORS, OFFICERS AND AFFILIATES.......................................19
SECTION 3.24. MATERIAL CONTRACTS.........................................................................19
SECTION 3.25. INSURANCE..................................................................................20
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF HNWC ..........................................................20
SECTION 4.1. CORPORATE EXISTENCE AND POWER..............................................................20
SECTION 4.2. CORPORATE AUTHORIZATION....................................................................21
SECTION 4.3. GOVERNMENTAL AUTHORIZATION.................................................................21
SECTION 4.4. NON-CONTRAVENTION..........................................................................21
SECTION 4.5. CAPITALIZATION.............................................................................22
SECTION 4.6. SUBSIDIARIES...............................................................................22
SECTION 4.7. HNWC SEC DOCUMENTS.........................................................................23
SECTION 4.8. FINANCIAL STATEMENTS; NO MATERIAL UNDISCLOSED LIABILITIES..................................23
SECTION 4.9. INFORMATION TO BE SUPPLIED.................................................................24
SECTION 4.10. ABSENCE OF CERTAIN CHANGES.................................................................24
SECTION 4.11. LITIGATION.................................................................................24
SECTION 4.12. TAXES......................................................................................25
SECTION 4.13. EMPLOYEE BENEFITS..........................................................................25
SECTION 4.14. COMPLIANCE WITH LAWS; LICENSES, PERMITS AND REGISTRATIONS..................................27
SECTION 4.15. TITLE TO PROPERTIES........................................................................27
SECTION 4.16. INTELLECTUAL PROPERTY......................................................................28
SECTION 4.17. ENVIRONMENTAL MATTERS......................................................................28
SECTION 4.18. FINDERS' FEES..............................................................................29
SECTION 4.19. REQUIRED VOTE AND WAIVER; BOARD APPROVAL...................................................29
SECTION 4.20. STATE TAKEOVER STATUTES....................................................................29
SECTION 4.21. TAX TREATMENT..............................................................................29
SECTION 4.22. CERTAIN AGREEMENTS.........................................................................29
SECTION 4.23. EMPLOYMENT AGREEMENTS......................................................................30
SECTION 4.24. TRANSACTIONS WITH DIRECTORS, OFFICERS AND AFFILIATES.......................................30
SECTION 4.25. MATERIAL CONTRACTS.........................................................................30
SECTION 4.26. CERTAIN BUSINESS PRACTICES.................................................................31
ii
Table of Contents
-----------------
(continued)
Page
----
SECTION 4.27. INSURANCE..................................................................................31
SECTION 4.28. NO ACTIONS INCONSISTENT WITH ARTICLE VI....................................................32
SECTION 4.29. USE OF PROCEEDS OF CONVERTIBLE NOTES.......................................................32
ARTICLE V REPRESENTATIONS AND WARRANTIES OF MERGER SUB ....................................................32
SECTION 5.1. ORGANIZATION...............................................................................32
SECTION 5.2. CORPORATE AUTHORIZATION....................................................................32
SECTION 5.3. NON-CONTRAVENTION..........................................................................32
SECTION 5.4. NO BUSINESS ACTIVITIES.....................................................................32
SECTION 5.5. TAXES......................................................................................32
ARTICLE VI COVENANTS OF HNWC ...............................................................................33
SECTION 6.1. HNWC INTERIM OPERATIONS....................................................................33
SECTION 6.2. ACQUISITION PROPOSALS; BOARD RECOMMENDATION................................................35
ARTICLE VII COVENANTS OF HNWC AND AMCON .....................................................................36
SECTION 7.1. REASONABLE BEST EFFORTS....................................................................36
SECTION 7.2. CERTAIN FILINGS; COOPERATION IN RECEIPT OF
CONSENTS; LISTING..........................................................................36
SECTION 7.3. HEADQUARTERS...............................................................................37
SECTION 7.4. PUBLIC ANNOUNCEMENTS.......................................................................37
SECTION 7.5. ACCESS TO INFORMATION; NOTIFICATION OF
CERTAIN MATTERS............................................................................38
SECTION 7.6. FURTHER ASSURANCES.........................................................................39
SECTION 7.7. TAX TREATMENT..............................................................................39
SECTION 7.8. AFFILIATES.................................................................................39
SECTION 7.9. CONFIDENTIALITY............................................................................39
SECTION 7.10. BENEFIT MATTERS............................................................................41
SECTION 7.11. EXEMPTION FROM LIABILITY UNDER SECTION 16(B)...............................................41
SECTION 7.12. LEASE AGREEMENT............................................................................42
ARTICLE VIII CONDITIONS TO THE MERGER ........................................................................42
SECTION 8.1. CONDITIONS TO THE OBLIGATIONS OF EACH PARTY................................................42
SECTION 8.2. CONDITIONS TO THE OBLIGATIONS OF AMCON AND MERGER SUB......................................43
SECTION 8.3. CONDITIONS TO THE OBLIGATIONS OF HNWC......................................................44
ARTICLE IX TERMINATION .....................................................................................45
SECTION 9.1. TERMINATION................................................................................45
SECTION 9.2. EFFECT OF TERMINATION......................................................................46
SECTION 9.3. FEES AND EXPENSES..........................................................................46
ARTICLE X MISCELLANEOUS ...................................................................................46
SECTION 10.1. NOTICES....................................................................................46
iii
Table of Contents
-----------------
(continued)
Page
----
SECTION 10.2. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
AFTER THE EFFECTIVE TIME...................................................................47
SECTION 10.3. AMENDMENTS; NO WAIVERS.....................................................................47
SECTION 10.4. ASSIGNMENT.................................................................................48
SECTION 10.5. GOVERNING LAW..............................................................................47
SECTION 10.3. AMENDMENTS; NO WAIVERS.....................................................................47
SECTION 10.4. ASSIGNMENT.................................................................................48
SECTION 10.5. GOVERNING LAW..............................................................................48
SECTION 10.6. COUNTERPARTS; EFFECTIVENESS................................................................48
SECTION 10.7. NO THIRD PARTY BENEFICIARIES...............................................................48
SECTION 10.8. INTERPRETATION.............................................................................48
SECTION 10.9. ENFORCEMENT................................................................................48
SECTION 10.10.ENTIRE AGREEMENT...........................................................................48
SECTION 10.11.SEVERABILITY...............................................................................49
iv
FIFTH AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
FIFTH AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of
September 27, 2001 (the "Agreement"), by and among AMCON Distributing
Company, a Delaware corporation ("AMCON"), AMCON Merger Sub, Inc., a Delaware
corporation and a wholly-owned subsidiary of AMCON ("Merger Sub"), and
Hawaiian Natural Water Company, Inc., a Hawaii corporation ("HNWC").
RECITALS:
WHEREAS, the Boards of Directors of AMCON and HNWC deem it advisable
and in the best interests of each corporation and its respective stockholders
that AMCON and HNWC engage in a business combination which shall be effected
by the terms of this Agreement through the merger as outlined below;
WHEREAS, the respective Boards of Directors of HNWC, Merger Sub and
AMCON have each (i) determined that the merger of HNWC with and into Merger
Sub (the "Merger") is fair to, and in the best interests of, their respective
companies and stockholders, (ii) have approved and declared the advisability
of this Agreement and (ii) have approved the Merger, and (iii) in the case of
HNWC, has recommended the approval and adoption of this Agreement, this
Merger and the transactions contemplated hereby by its stockholders;
WHEREAS, for Federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (a "368 Reorganization"),
and the regulations promulgated thereunder;
WHEREAS, simultaneously with the execution and delivery of this
Agreement, AMCON has entered into an agreement (the "Stockholders Agreement"
in the form attached as Exhibit A hereto) with certain stockholders of HNWC
pursuant to which such HNWC stockholders have agreed to vote the shares of
HNWC Common Stock owned by them in favor of the Merger under certain
circumstances, which agreement is accompanied by irrevocable proxies to vote
such shares in accordance therewith.
NOW, THEREFORE, in consideration of the premises, which are
incorporated into and made part of this Agreement, and of the mutual
representations, warranties, covenants, agreements and conditions set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the capitalized terms used in this
Agreement shall have the meanings specified or referred to in Appendix I
hereto which is incorporated herein by reference.
A-1
ARTICLE II
THE MERGER
Section 2.1. Effects of the Merger.
----------------------
(a) The Surviving Corporation. Upon the terms and subject
-------------------------
to the conditions of this Agreement and in accordance with the
Hawaii Business Corporation Act (the "Hawaii Law"), and the Delaware
General Corporation Law of the State of Delaware (the "Delaware
Law"), at the Effective Time (as defined below), HNWC shall be
merged with and into Merger Sub. As a result of the Merger, the
separate corporate existence of HNWC shall cease and Merger Sub
shall continue as the surviving corporation in the Merger (the
"Surviving Corporation").
(b) Effective Time. As soon as practicable after the
--------------
Closing of the Merger, the Articles of Merger for the Merger in
substantially the form attached hereto as Exhibit B, prepared and
executed in accordance with the relevant provisions of the Hawaii
Law, shall be filed with the Secretary of State of Hawaii, and the
Certificate of Merger for the Merger, in substantially the form
attached hereto as Exhibit C, prepared and executed in accordance
with the relevant provisions of the Delaware Law, shall be filed
with the Secretary of State of Delaware. The parties hereto agree to
take all such further actions as may be required by law to make the
Merger effective. The Merger shall become effective in accordance
with the terms of this Agreement, the Articles of Merger and the
Certificate of Merger at the time and date contemplated therein
(such time and date being referred to herein as the "Effective
Time").
(c) The Closing. The Closing of the Merger and
-----------
transactions contemplated by this Agreement will take place at 10:00
a.m., west coast time, on a date mutually agreed upon by the parties
hereto, which shall be no later than the third Business Day
following the date on which all of the conditions to the obligations
of the parties hereunder set forth in Article VIII hereof have been
satisfied or waived. The place of Closing shall be at such place as
may be mutually agreed upon by the parties hereto.
(d) Effects of the Merger. At and after the Effective
--------------------
Time, the Merger will have the effects set forth in the Delaware Law
and Hawaii Law. Without limiting the generality of the foregoing,
and subject thereto, at the Effective Time all the property, rights,
privileges, powers and franchises of Merger Sub and HNWC shall be
vested in the Surviving Corporation, and all debts, liabilities and
duties of Merger Sub and HNWC shall become the debts, liabilities
and duties of the Surviving Corporation. In addition, the Merger
shall have the following effects:
(i) Articles of Incorporation. The Certificate
-------------------------
of Incorporation of Merger Sub as in effect immediately prior
to the Effective Time (as set forth in Exhibit D hereto)
shall be the Certificate of Incorporation of the Surviving
Corporation.
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(ii) Bylaws. The Bylaws of Merger Sub as in
------
effect immediately prior to the Effective Time (as set forth
in Exhibit E hereto) shall be the Bylaws of the Surviving
Corporation.
(iii) Board of Directors. At the Effective Time,
------------------
the Board of Directors of the Surviving Corporation shall be
as listed on Exhibit F hereto.
(iv) Management. At the Effective Time, the
----------
principal officers of the Surviving Corporation at the
Effective Time shall be as listed on Exhibit G.
Section 2.2. Effect of the Merger on HNWC Capital Stock. Subject
------------------------------------------
to the provisions of this Article II, at the Effective Time, by virtue of the
Merger and without any action on the part of the parties hereto or their
respective stockholders:
(a) Common Merger Consideration. Each share of HNWC
---------------------------
Common Stock outstanding immediately prior to the Effective Time
shall be converted into and become a right to receive a fractional
share of AMCON Common Stock equal to the product of the Common
Exchange Ratio times one share of HNWC Common Stock, which stock,
together with any cash in lieu of fractional shares of AMCON Common
Stock to be paid pursuant to Section 2.4 of this Agreement, are
referred to herein as (the "Common Merger Consideration"), (i)
except for shares of HNWC Common Stock held by persons who object to
the Merger and comply with all provisions of the Hawaii Law
concerning the right of such holders to dissent from the Merger and
demand appraisal for their shares ("Common Dissenters' Shares")
which shall be cancelled and shall cease to exist and as to which
consideration shall be paid solely in accordance with Section 2.6 of
this Agreement, (ii) except for shares of HNWC Common Stock held by
HNWC as treasury stock which shall be cancelled without payment of
any consideration therefor and shall cease to exist, and (iii)
except for shares of HNWC Common Stock owned by AMCON or Merger Sub
immediately prior to the Effective Time, other than the 2,000,000
shares of HNWC Common Stock acquired from HNWC by AMCON and issued
on or after February 1, 2001 (the "Non-Excluded Shares", which
2,000,000 Non-Excluded Shares include 1,250,000 shares of HNWC
Common Stock which will be received by AMCON upon the conversion of
the Amended and Restated 10% Secured Convertible Note dated
September 27, 2001 in the principal amount of $500,000 issued by
HNWC to AMCON (the "$500,000 Convertible Note")), all of which
shares, other than the Non-Excluded Shares, shall be cancelled
without payment of any consideration therefor and shall cease to
exist and the Non-Excluded Shares shall be converted into the Common
Merger Consideration. The shares of HNWC Common Stock referred to in
clauses in (i), (ii) and (iii) of this Section 2.2(a) as being
excluded from the conversion into Common Merger Consideration (which
does not encompass the Non-Excluded Shares) are sometimes referred
to collectively in this Agreement as the "Excluded Shares".
Fractions of a share determined pursuant to this Section 2.2(a)
shall be rounded to three decimal places.
(b) Common Exchange Ratio. The Common Exchange Ratio
---------------------
shall be equal to the quotient of (i) the quotient of (x)
$2,865,348, divided by (y) the Average AMCON Stock Price, divided by
(ii) the number of shares of HNWC Common Stock outstanding
immediately prior to the Effective Time (excluding the Excluded
Shares).
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Notwithstanding the foregoing, (i) if the Average AMCON Stock Price
is greater than $8.00, then the Average AMCON Stock Price shall be
deemed to be $8.00 and thus the Common Exchange Ratio shall be the
quotient of (A) 358,168, divided by (B) the number of shares of HNWC
Common Stock outstanding immediately prior to the Effective Time
(excluding the Excluded Shares), or (ii) if the Average AMCON Stock
Price is less than $6.00, then the Average AMCON Stock Price shall
be deemed to be $6.00 and thus the Common Exchange Ratio shall be
the quotient of (C) 477,558, divided by (D) the number of shares of
HNWC Common Stock outstanding immediately prior to the Effective
Time (excluding the Excluded Shares). The Common Exchange Ratio
determined pursuant to this Section 2.2(b) shall be rounded to three
decimal places.
(c) Certificates. At the Effective Time, each
------------
certificate theretofore representing shares of HNWC Common Stock
("Common Certificates"), except for the Excluded Shares, shall,
without any action on the part of AMCON, HNWC, Merger Sub or the
holder thereof, represent, and shall be deemed to represent from and
after the Effective Time, the number of shares of AMCON Common Stock
as determined in accordance with Sections 2.2(a) and (b) above and
shall cease to represent any rights in any shares of capital stock
of HNWC. At the Effective Time, each holder of a Common Certificate
which, prior to the Effective Time, represented shares of HNWC
Common Stock (except for Common Dissenters' Shares), shall cease to
have any rights with respect to any shares of HNWC capital stock. In
accordance herewith, former holders of HNWC Common Stock (except for
the Excluded Shares) shall, from and after the Effective Time, be
deemed from and after the Effective Time to be holders of the shares
of AMCON Common Stock into which such shares of HNWC Common Stock
have been converted in accordance with Section 2.2(a) and (b)
hereof.
Section 2.3. Merger Sub Common Stock. Each share of common stock
-----------------------
of Merger Sub outstanding and each share held in treasury immediately prior
to the Effective Time shall be converted into and become one share of common
stock of the Surviving Corporation.
Section 2.4. Fractional Shares. No fraction of a share of AMCON
-----------------
Common Stock shall be issued in connection with the conversion of HNWC Common
Stock in the Merger and the distribution of AMCON Common Stock in respect
thereof, but in lieu of such fraction, the Exchange Agent shall make a cash
payment (without interest and subject to the payment of any applicable
withholding Taxes) equal to the same fraction of the market value of a full
share of AMCON Common Stock, computed on the basis of the mean of the high
and low sales prices of AMCON Common Stock as reported on the American Stock
Exchange ("AMEX") on the first full day on which AMCON Common Stock is traded
on the AMEX after the Effective Time (all such fractions of share of AMCON
Common Stock are referred to herein as "Fractional Shares").
Section 2.5. Stock Options, Warrants and Other Stock Related Rights.
------------------------------------------------------
(a) On or prior to the Effective Time, HNWC will take
all action necessary such that each stock option, warrant or other
stock related right prior to the Effective Time and which remains
outstanding immediately prior to the Effective Time shall cease to
represent a right with respect to shares of HNWC Common Stock and
shall be converted, at the Effective Time, into a right, on the same
terms and conditions as were
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applicable under such stock option, warrant or other stock related
right (but taking into account any changes thereto), with respect to
that number of shares of AMCON Common Stock determined by
multiplying the number of shares of HNWC Common Stock subject to
such stock option, warrant or other stock related right, as
applicable, by the Common Exchange Ratio, rounded, if necessary, to
the nearest whole share of AMCON Common Stock, at a price per share
(rounded to the nearest one-hundredth of a cent) equal to the
per-share exercise price specified in such stock option, warrant or
stock related right, as applicable, divided by the Common Exchange
Ratio; provided, however, that in the case of any stock option to
which Section 421 of the Code applies by reason of its qualification
under Section 422 of the Code, the option price, the number of
shares subject to such option and the terms and conditions of
exercise of such option shall be determined in a manner consistent
with the requirements of Section 424(a) of the Code.
(b) As soon as practicable after the Effective Time,
AMCON shall deliver to the holders of stock options, warrants or
other stock related rights appropriate notices setting forth such
holders' rights pursuant to the applicable documents and instruments
(except that there shall be no acceleration in the vesting or
exercisability of such option, warrants or stock related rights by
reason of this Agreement, the Merger or the other matters
contemplated by this Agreement) and the agreements evidencing the
grants of such stock options, warrants or other stock related rights
shall continue in effect on the same terms and conditions (subject
to the adjustments required by this Section 2.5 after giving effect
to the Merger). To the extent permitted by law, AMCON shall comply
with the terms of the HNWC Employee Plans and shall take such
reasonable steps as are necessary or required by, and subject to the
provisions of, such HNWC Employee Plans, to have the stock options
which qualified as incentive stock options prior to the Effective
Time continue to qualify as incentive stock options of AMCON after
the Effective Time.
(c) AMCON shall take all corporate action necessary to
reserve for issuance a sufficient number of shares of AMCON Common
Stock for delivery upon exercise of stock options, warrants or other
stock related rights in accordance with this Section 2.5.
Section 2.6. Appraisal Rights. Notwithstanding Section 2.2,
----------------
shares of HNWC Common Stock outstanding immediately prior to the Effective
Time and held by a holder other than AMCON or Merger Sub who has not voted in
favor of the Merger or consented thereto in writing and who has demanded
appraisal for such shares of HNWC Common Stock in accordance with the Hawaii
Law shall not be converted into the Merger Consideration unless such holder
fails to perfect or withdraws or otherwise loses his right to appraisal. If
after the Effective Time such holder fails to perfect or withdraws or loses
his right to appraisal, such shares of HNWC Common Stock shall be treated as
if they had been converted as of the Effective Time into the Merger
Consideration. HNWC shall give the Surviving Corporation and AMCON prompt
notice of any demands received by HNWC for appraisal of shares of HNWC Common
Stock, and the Surviving Corporation and AMCON shall have the right to
participate in all negotiations and proceedings with respect to such demands.
HNWC shall not, except with the prior written consent of the Surviving
Corporation and AMCON, make any payment with respect to, or settle or offer
to settle, any such demands.
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Section 2.7. Affiliates. Notwithstanding anything to the contrary
----------
herein, to the fullest extent permitted by law, no certificates representing
shares of AMCON Common Stock or cash shall be delivered to a Person who may
be deemed an "affiliate" of HNWC in accordance with Section 7.8 hereof for
purposes of Rule 145 under the Securities Act, until such Person has executed
and delivered a HNWC Affiliate Agreement (as defined in Section 7.8) pursuant
to Section 7.8.
Section 2.8. Exchange Fund. Prior to the Effective Time, AMCON
-------------
shall appoint a commercial bank or trust company reasonably acceptable to
HNWC having net capital of not less than $50,000,000, or a subsidiary
thereof, to act as exchange agent hereunder for the purpose of exchanging
Common Certificates representing the Merger Consideration (the "Exchange
Agent"). At or prior to the Effective Time, AMCON shall deposit with the
Exchange Agent, in trust for the benefit of holders of Common Certificates
which immediately prior to the Effective Time represented outstanding shares
of HNWC Common Stock whose shares will be converted into shares of AMCON
Common Stock at the Effective Time, certificates representing the AMCON
Common Stock issued pursuant to Section 2.2 upon conversion of outstanding
shares of HNWC Common Stock. AMCON agrees to make available to the Exchange
Agent from time to time as needed, cash sufficient to pay cash in lieu of
fractional shares pursuant to Section 2.4 and any dividends and other
distributions pursuant to Section 2.10. Any cash and certificates
representing AMCON Common Stock deposited with the Exchange Agent shall
hereinafter be referred to as the "Exchange Fund."
Section 2.9. Exchange Procedures. As soon as reasonably
-------------------
practicable after the Effective Time, AMCON shall cause the Exchange Agent to
mail to each holder of a Common Certificate (i) a letter of transmittal which
shall specify that delivery shall be effected, and risk of loss and title to
the Common Certificates shall pass, only upon delivery of the Common
Certificates to the Exchange Agent, and which letter shall be in customary
form and have such other provisions as AMCON may reasonably specify and (ii)
instructions for effecting the surrender of such Common Certificates in
exchange for the certificates representing the applicable Merger
Consideration. Upon surrender of a Common Certificate to the Exchange Agent
together with such letter of transmittal, duly executed and completed in
accordance with the instructions thereto, and such other documents as may
reasonably be required by the Exchange Agent, the holder of such Common
Certificate shall be entitled to receive in exchange therefor (A)
certificates representing one or more shares of AMCON Common Stock
representing, in the aggregate, the whole number of shares into which such
holder's shares of HNWC Common Stock have been converted pursuant to Section
2.2 (after taking into account all shares of HNWC Common Stock then held by
such holder), and (B) a check in the amount equal to the cash that such
holder has the right to receive in lieu of any fractional shares of AMCON
Common Stock pursuant to Section 2.4 and dividends and other distributions
pursuant to Section 2.10. No interest will be paid or will accrue on any cash
payable pursuant to Section 2.4 or Section 2.10. In the event of a transfer
of ownership of HNWC Common Stock which is not registered in the transfer
records of HNWC, certificates representing one or more shares of AMCON Common
Stock representing, in the aggregate, the proper number of shares of AMCON
Common Stock, a check in the proper amount of cash in lieu of any fractional
shares of AMCON Common Stock pursuant to Section 2.4 and any dividends or
other distributions to which such holder is entitled pursuant to Section
2.10, may be issued with respect to such HNWC Common Stock to such a
transferee if the Common Certificate which formerly
A-6
represented such shares is presented to the Exchange Agent, accompanied by
all documents required to evidence and effect such transfer and to evidence
that any applicable stock transfer taxes have been paid.
Section 2.10. Distributions with Respect to Unexchanged Common
------------------------------------------------
Certificates. No dividends or other distributions declared or made with
------------
respect to shares of AMCON Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Common
Certificate with respect to the certificate representing shares of AMCON
Common Stock that such holder would be entitled to receive upon surrender of
such Common Certificate and no cash payment in lieu of fractional shares of
AMCON Common Stock shall be paid to any such holder pursuant to Section 2.4
until such holder shall surrender such Common Certificate in accordance with
Section 2.9. Subject to the effect of applicable laws, following surrender of
any such Common Certificate, there shall be paid to such holder of shares of
AMCON Common Stock issuable in exchange therefor, without interest, (a)
promptly after the time of such surrender, the amount of any cash payable in
lieu of fractional shares of AMCON Common Stock to which such holder is
entitled pursuant to Section 2.4 and the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid
with respect to such whole shares of AMCON Common Stock and (b) at the
appropriate payment date, the amount of dividends or other distributions with
a record date after the Effective Time but prior to such surrender and a
payment date subsequent to such surrender payable with respect to such shares
of AMCON Common Stock.
Section 2.11. No Further Ownership Rights in HNWC Common Stock.
------------------------------------------------
All shares of AMCON Common Stock and cash paid upon conversion of shares of
HNWC Common Stock in accordance with the terms of Article II (including any
cash paid pursuant to Section 2.4 or Section 2.10) shall be deemed to have
been issued or paid in full satisfaction of all rights pertaining to the
shares of HNWC Common Stock.
Section 2.12. Termination of Exchange Fund. Any portion of the
----------------------------
Exchange Fund which remains undistributed to the holders of Common
Certificates for six months after the Effective Time shall be delivered to
AMCON or otherwise on the instruction of AMCON, and any holders of the Common
Certificates who have not theretofore complied with this Article II shall
thereafter look only to AMCON for the certificates representing the Merger
Consideration with respect to the shares of HNWC Common Stock formerly
represented thereby to which such holders are entitled pursuant to Section
2.2, any cash in lieu of fractional shares of AMCON Common Stock to which
such holders are entitled pursuant to Section 2.4 and any dividends or
distributions with respect to shares of AMCON Common Stock to which such
holders are entitled pursuant to Section 2.10. Any such portion of the
Exchange Fund remaining unclaimed by holders of Common Certificates which,
prior to the Effective Time, represented shares of HNWC Common Stock five
years after the Effective Time (or such earlier date immediately prior to
such time as such amounts would otherwise escheat to or become property of
any Governmental Entity) shall, to the extent permitted by law, become the
property of AMCON free and clear of any claims or interest of any Person
previously entitled thereto.
Section 2.13. No Liability. None of AMCON, the Surviving
------------
Corporation or the Exchange Agent shall be liable to any Person in respect of
any Merger Consideration from the
A-7
Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
Section 2.14. Investment of the Exchange Fund. The Exchange
-------------------------------
Agent shall invest any cash included in the Exchange Fund as directed by
AMCON on a daily basis. Any interest and other income resulting from such
investments shall promptly be paid to AMCON.
Section 2.15. Lost Common Certificates. If any Common Certificate
------------------------
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the Person claiming such Common Certificate to be lost, stolen
or destroyed and, if required by AMCON, the posting by such Person of a bond
in such reasonable amount as AMCON may direct as indemnity against any claim
that may be made against it with respect to such Common Certificate, the
Exchange Agent will deliver in exchange for such lost, stolen or destroyed
Common Certificate a certificate representing the applicable Merger
Consideration with respect to the shares of HNWC Common Stock, any cash in
lieu of fractional shares of AMCON Common Stock, and unpaid dividends and
distributions on shares of AMCON Common Stock issued in respect thereof,
pursuant to this Agreement.
Section 2.16. Withholding Rights. Each of the Surviving
------------------
Corporation and AMCON shall be entitled to deduct and withhold from the
consideration otherwise payable pursuant to this Agreement to any holder of
Common Certificates which, prior to the Effective Time, represented shares of
HNWC Common Stock, such amounts as it is required to deduct and withhold with
respect to the making of such payment under the Code and the rules and
regulations promulgated thereunder, or any provision of state, local or
foreign tax law. To the extent that amounts are so withheld by the Surviving
Corporation or AMCON, as the case may be, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the holder
of the shares of HNWC Common Stock in respect of which such deduction and
withholding was made by the Surviving Corporation or AMCON, as the case may
be.
Section 2.17. Further Assurances. At and after the Effective
------------------
Time, the officers and directors of the Surviving Corporation will be
authorized to execute and deliver, in the name and on behalf of HNWC or
Merger Sub, any deeds, bills of sale, assignments or assurances and to take
and do, in the name and on behalf of HNWC or Merger Sub, any other actions
and things to vest, perfect or confirm of record or otherwise in the
Surviving Corporation any and all right, title and interest in, to and under
any of the rights, properties or assets acquired or to be acquired by the
Surviving Corporation as a result of, or in connection with, the Merger.
Section 2.18. Stock Transfer Books. The stock transfer books of
--------------------
HNWC shall be closed immediately upon the Effective Time and there shall be
no further registration of transfers of shares of HNWC Common Stock
thereafter on the records of HNWC. On or after the Effective Time, any Common
Certificates presented to the Exchange Agent or AMCON for any reason shall be
exchanged for certificates representing the Merger Consideration with respect
to the shares of HNWC Common Stock formerly represented thereby, any cash in
lieu of fractional shares of AMCON Common Stock to which the holders thereof
are entitled pursuant to Section 2.4 and any dividends or other distributions
to which the holders thereof are entitled pursuant to Section 2.10.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF AMCON
Except as disclosed in (i) the AMCON Disclosure Schedule dated the
date hereof (each section or subsection of which Disclosure Schedule
qualifies the correspondingly numbered representation, warranty or covenant
to the extent specified therein) or (ii) the AMCON SEC Documents filed prior
to the date hereof, AMCON represents and warrants to HNWC that, as of the
date hereof (except for representations and warranties that address matters
only as of a specific date, in which case such representations are true and
correct on and as of such specific date):
Section 3.1. Corporate Existence and Power. AMCON is a
-----------------------------
corporation duly incorporated, validly existing and in good standing under
the laws of the State of Delaware, and has all corporate powers required to
carry on its business as now conducted. AMCON is duly qualified to do
business as a foreign corporation and is in good standing in each
jurisdiction where the character of the property owned or leased by it or the
nature of its activities makes such qualification necessary, except where the
failure to be so qualified, individually or in the aggregate, would not be
reasonably likely to have an AMCON Material Adverse Effect. AMCON has
heretofore made available to HNWC true and complete copies of AMCON's
certificate of incorporation and bylaws as currently in effect.
Section 3.2. Corporate Authorization. The execution, delivery
-----------------------
and performance by AMCON of this Agreement and the consummation by AMCON of
the transactions contemplated hereby are within AMCON's corporate powers and,
as of the date hereof, have been duly authorized by all necessary corporate
action. Assuming that this Agreement constitutes the valid and binding
obligation of HNWC, this Agreement constitutes, as of the date hereof, a
valid and binding agreement of AMCON, enforceable in accordance with its
terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and similar laws, now or hereafter in
effect, relating to or affecting creditors' rights and remedies generally and
to general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
Section 3.3. Governmental Authorization. The execution,
--------------------------
delivery and performance by AMCON of this Agreement and the consummation by
AMCON of the transactions contemplated hereby require no action by or in
respect of, or filing with, any Governmental Entity other than (a) the filing
of (i) Articles of Merger in accordance with the Hawaii Law, (ii) a
Certificate of Merger in accordance with the Delaware Law, and (iii)
appropriate documents with the relevant authorities of other states or
jurisdictions in which AMCON or any AMCON Subsidiary is qualified to do
business; (b) compliance with any applicable requirements of the Securities
Act and the Exchange Act; (c) such as may be required under any applicable
state securities or blue sky laws; and (d) such other consents, approvals,
actions, orders, authorizations, registrations, declarations and filings
that, if not obtained or made, would not, individually or in the aggregate,
(x) be reasonably likely to have an AMCON Material Adverse Effect or
(assuming for this purpose that the Effective Time had occurred) a Surviving
Corporation Material Adverse Effect, or (y) prevent or materially impair the
ability of AMCON to consummate the transactions contemplated by this
Agreement.
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Section 3.4. Non-Contravention. The execution, delivery and
-----------------
performance by AMCON of this Agreement and the consummation by AMCON of the
transactions contemplated hereby do not and will not (a) contravene or
conflict with AMCON's certificate of incorporation or bylaws, (b) assuming
compliance with the matters referred to in Section 3.3, contravene or
conflict with or constitute a violation of any provision of any law,
regulation, judgment, injunction, order or decree binding upon or applicable
to AMCON or any AMCON Subsidiary, (c) constitute a default under or give rise
to a right of termination, cancellation or acceleration of any right or
obligation of AMCON or any AMCON Subsidiary or to a loss of any benefit or
status to which AMCON or any AMCON Subsidiary is entitled under any provision
of any agreement, contract or other instrument binding upon AMCON or any
AMCON Subsidiary or any license, franchise, permit or other similar
authorization held by AMCON or any AMCON Subsidiary, or (d) result in the
creation or imposition of any Lien on any asset of AMCON or any AMCON
Subsidiary other than, in the case of each of (b), (c) and (d), any such
items that would not, individually or in the aggregate (x) be reasonably
likely to have an AMCON Material Adverse Effect or (y) prevent or materially
impair the ability of AMCON to consummate the transactions contemplated by
this Agreement.
Section 3.5. Capitalization.
--------------
(a) The authorized capital stock of AMCON consists of
15,000,000 shares of AMCON Common Stock, $0.01 per value per share,
and 1,000,000 shares of preferred stock, $0.01 par value per share,
of AMCON ("AMCON Preferred Stock"). At the close of business on
September 30, 2000, (i) 2,737,551 shares of AMCON Common Stock were
issued and outstanding, (ii) stock options ("AMCON Stock Options")
to purchase an aggregate of 389,620 shares of AMCON Common Stock
were issued and outstanding (of which options to purchase an
aggregate of 188,166 shares of AMCON Common Stock were exercisable),
(iii) no shares of AMCON Common Stock were held in its treasury and
(iii) no shares of AMCON Preferred Stock were issued and
outstanding. All outstanding shares of capital stock of AMCON have
been duly authorized and validly issued and are fully paid and
nonassessable.
(b) As of the date hereof, except (i) as set forth in
this Section 3.5, and (ii) for changes since June 30, 2001,
resulting from the exercise of stock options outstanding on such
date, there are no outstanding (x) shares of capital stock or other
voting securities of AMCON, (y) securities of AMCON convertible into
or exchangeable for shares of capital stock or voting securities of
AMCON, or (z) options or other rights to acquire from AMCON, and no
obligation of AMCON to issue, any capital stock, voting securities
or securities convertible into or exchangeable for capital stock or
voting securities of AMCON (the items in clauses (x), (y) and (z)
being referred to collectively as the "AMCON Securities"). There are
no outstanding obligations of AMCON or any AMCON Subsidiary to
repurchase, redeem or otherwise acquire any AMCON Securities. There
are no outstanding contractual obligations of AMCON to provide funds
to, or make any investment (in the form of a loan, capital
contribution or otherwise) in, any other Person other than in the
ordinary course of business consistent with past practice. There are
no stockholder agreements, voting trusts or other agreements or
understandings to which AMCON is a party, or of which AMCON is
aware, relating to voting, registration or disposition of any shares
of capital stock of AMCON or granting to any person or
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group of persons the right to elect, or to designate or nominate for
election, a director to the board of directors of AMCON.
Section 3.6. Subsidiaries.
------------
(a) Each Significant Subsidiary of AMCON is a
corporation duly incorporated or an entity duly organized, and is
validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization, has all powers and
authority and all material governmental licenses, authorizations,
consents and approvals required to carry on its business as now
conducted and is duly qualified to do business as a foreign entity
and is in good standing in each jurisdiction where the character of
the property owned or leased by it or the nature of its activities
makes such qualification necessary, in each case with such
exceptions as, individually or in the aggregate, would not be
reasonably likely to have, an AMCON Material Adverse Effect.
(b) All of the outstanding shares of capital stock of,
or other ownership interest in, each AMCON Subsidiary has been
validly issued and is fully paid and nonassessable. All of the
outstanding capital stock of, or other ownership interest in, each
of AMCON's Subsidiaries, is owned, directly or indirectly, by AMCON,
is owned free and clear of any Lien and free of any other limitation
or restriction (including any limitation or restriction on the right
to vote, sell or otherwise dispose of such capital stock or other
ownership interests) with such exceptions as, individually or in the
aggregate, would not be reasonably likely to have, an AMCON Material
Adverse Effect. There are no outstanding (i) securities of AMCON or
any of the AMCON Subsidiaries convertible into or exchangeable or
exercisable for shares of capital stock or other voting securities
or ownership interests in any of the AMCON Subsidiaries, (ii)
options, warrants or other rights to acquire from AMCON or any of
the AMCON Subsidiaries, and no other obligation of AMCON or any of
the AMCON Subsidiaries to issue, any capital stock, voting
securities or other ownership interests in, or any securities
convertible into or exchangeable or exercisable for any capital
stock, voting securities or ownership interests in, any of the AMCON
Subsidiaries or (iii) obligations of AMCON or any of the AMCON
Subsidiaries to repurchase, redeem or otherwise acquire any
outstanding securities of any of the AMCON Subsidiaries or any
capital stock of, or other ownership interests in, any of the AMCON
Subsidiaries.
Section 3.7. AMCON SEC Documents.
-------------------
(a) AMCON has made available to HNWC the AMCON SEC
Documents. AMCON has filed all reports, filings, registration
statements and other documents required to be filed by it with the
SEC since September 30, 1997. No AMCON Subsidiary is required to
file any form, report, registration statement or prospectus or other
document with the SEC.
(b) As of its filing date, each AMCON SEC Document
complied as to form in all material respects with the applicable
requirements of the Securities Act and/or the Exchange Act, as the
case may be.
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(c) No AMCON SEC Document filed pursuant to the
Exchange Act contained, as of its filing date, any untrue statement
of a material fact or omitted to state any material fact necessary
in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. No AMCON
SEC Document, as amended or supplemented, if applicable, filed
pursuant to the Securities Act contained, as of the date such
document or amendment became effective, any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading.
Section 3.8. Financial Statements; No Material Undisclosed
---------------------------------------------
Liabilities.
-----------
(a) The audited consolidated financial statements of
AMCON included in the AMCON 10-K fairly present in all material
respects, in conformity with GAAP consistently applied (except as
may be indicated in the notes thereto), the consolidated financial
position of AMCON and its consolidated Subsidiaries as of the dates
thereof and their consolidated results of operations, consolidated
cash flows and changes in stockholders' equity for the periods then
ended (subject to normal year-end adjustments in the case of any
unaudited interim financial statements).
(b) There are no liabilities of AMCON or any AMCON
Subsidiary of any kind whatsoever, whether accrued, contingent,
absolute, determined, determinable or otherwise, in each case, that
are required by GAAP to be set forth on a consolidated balance sheet
of AMCON, other than:
(i) liabilities or obligations disclosed or
provided for in the AMCON Balance Sheet or disclosed in the
notes thereto;
(ii) liabilities or obligations under this
Agreement or incurred in connection with the transactions
contemplated hereby;
(iii) current liabilities incurred in the ordinary
course of business since September 30, 2000; and
(iv) other liabilities or obligations that
individually or in the aggregate, would not be reasonably
likely to have an AMCON Material Adverse Effect.
(c) AMCON and the AMCON Subsidiaries keep proper
accounting records in which all material assets and liabilities, and
all material transactions, of AMCON and the AMCON Subsidiaries are
recorded in conformity with GAAP. No part of AMCON's or any AMCON
Subsidiary's accounting system or records, or access thereto, is
under the control of a Person who is not an employee of AMCON or
such Subsidiary.
Section 3.9. Information to be Supplied.
--------------------------
(a) The information to be supplied by AMCON expressly
for inclusion or incorporation by reference in the Proxy
Statement/Prospectus will (i) in the case of the Registration
Statement, at the time it becomes effective, not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or
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necessary in order to make the statements therein not misleading and
(ii) in the case of the remainder of the Proxy Statement/Prospectus,
at the time of the mailing thereof, and at the time of the Special
Meeting, not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Proxy
Statement/Prospectus will comply (with respect to information
relating to AMCON) as to form in all material respects with the
provisions of the Securities Act and the Exchange Act.
(b) Notwithstanding the foregoing, AMCON makes no
representation or warranty with respect to any statements made or
incorporated by reference in the Proxy Statement/Prospectus based on
information supplied by HNWC.
Section 3.10. Absence of Certain Changes. Since September 30,
--------------------------
2000, except as otherwise expressly contemplated by this Agreement, AMCON and
the AMCON Subsidiaries have conducted their business in the ordinary course
consistent with past practice and there has not been (a) any damage,
destruction or other casualty loss (whether or not covered by insurance)
affecting the business or assets of AMCON or any AMCON Subsidiary that,
individually or in the aggregate, has had or would be reasonably likely to
have an AMCON Material Adverse Effect, (b) any action, event, occurrence,
development or state of circumstances or facts that, individually or in the
aggregate, has had or would be reasonably likely to have an AMCON Material
Adverse Effect or (c) any incurrence, assumption or guarantee by AMCON of any
material indebtedness for borrowed money other than in the ordinary course
and in amounts and on terms consistent with past practices.
Section 3.11. Litigation. Section 3.11 of the AMCON Disclosure
----------
Schedule contains a list and description of each action, suit, investigation,
arbitration or proceeding pending against, or to the Knowledge of AMCON
threatened against, AMCON or any AMCON Subsidiary or any of their respective
assets or properties before any arbitrator or Governmental Entity. None of
such actions, suits, investigations, arbitrations or proceedings,
individually or in the aggregate, would be reasonably likely to have, an
AMCON Material Adverse Effect. There are no outstanding judgments, decrees,
injunctions, awards or orders against AMCON that would be reasonably likely
to have, individually or in the aggregate, an AMCON Material Adverse Effect.
Section 3.12. Taxes.
-----
(a) All Tax returns, statements, reports and forms
(collectively, the "AMCON Returns") required to be filed with any
taxing authority by, or with respect to, AMCON and the AMCON
Subsidiaries have been filed in substantial compliance with all
applicable laws.
(b) AMCON and the AMCON Subsidiaries have timely paid
all Taxes shown as due and payable on the AMCON Returns that have
been so filed, and all other Taxes not subject to reporting
obligations, and, as of the time of filing, the AMCON Returns
correctly reflected the facts regarding the income, business,
assets, operations, activities and the status of AMCON and the AMCON
Subsidiaries (other than Taxes that are being
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contested in good faith and for which adequate reserves are
reflected on the AMCON Balance Sheet).
(c) AMCON and the AMCON Subsidiaries have made provision
for all Taxes payable by them for which no AMCON Return has yet been
filed.
(d) The charges, accruals and reserves for Taxes with
respect to AMCON and the AMCON Subsidiaries reflected on the AMCON
Balance Sheet are adequate under GAAP to cover the tax liabilities
accruing through the date thereof.
(e) There is no action, suit, proceeding, audit or claim
now proposed or pending against or with respect to AMCON or any of
the AMCON Subsidiaries in respect of any Tax that would be
reasonably likely to have an AMCON Material Adverse Effect.
(f) Neither AMCON nor any of the AMCON Subsidiaries has
been a member of an affiliated, consolidated, combined or unitary
group other than one of which AMCON was the common parent.
(g) Neither AMCON nor any of the AMCON Subsidiaries
holds any asset subject to a consent under Section 341(f) of the
Code.
Section 3.13. Employee Benefits.
-----------------
(a) Section 3.13(a) of the AMCON Disclosure Schedule
contains a correct and complete list identifying each material
"employee benefit plan", as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974 ("ERISA"), each employment,
severance or similar contract, plan, arrangement or policy and each
other plan or arrangement (written or oral) providing for
compensation, bonuses, profit-sharing, stock option or other stock
related rights or other forms of incentive or deferred compensation,
vacation benefits, insurance coverage (including any self-insured
arrangements), health or medical benefits, disability benefits,
workers' compensation, supplemental unemployment benefits, severance
benefits and post-employment or retirement benefits (including
compensation, pension, health, medical or life insurance benefits)
that is maintained, administered or contributed to by AMCON or any
ERISA Affiliate (as defined below) of AMCON and covers any employee
or former employee of AMCON or any AMCON Subsidiary. Copies of such
plans (and, if applicable, related trust agreements) and all
amendments thereto and written interpretations thereof have been
furnished, or will be made available upon request, to HNWC together
with the most recent annual report (Form 5500 including, if
applicable, Schedule B thereto) and summary plan description
prepared in connection with any such plan. Such plans are referred
to collectively herein as the "AMCON Employee Plans". For purposes
of this Section 3.13, "ERISA Affiliate" of any Person means any
other Person which, together with such Person, would be treated as a
single employer under Section 414 of the Code.
(b) No AMCON Employee Plan is now or at any time has
been subject to Part 3, Subtitle B of Title I or ERISA or Title IV
of ERISA. At no time has AMCON or any of its ERISA Affiliates
contributed to, or been required to contribute to, any
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"multiemployer plan," as defined in Section 3(37) or ERISA (a
"Multiemployer Plan"), and neither AMCON nor any of its ERISA
Affiliates has, or ever has had, any liability (contingent or
otherwise) relating to the withdrawal or partial withdrawal from a
multiemployer Plan. To the Knowledge of AMCON, nothing has been done
or omitted to be done and no transaction or holding of any asset
under or in connection with any AMCON Employee Plan has occurred
that will make AMCON or any AMCON Subsidiary, or any officer or
director of AMCON or any AMCON Subsidiary, subject to any liability
under Title I of ERISA or liable for any tax pursuant to Section
4975 of the Code (assuming the taxable period of any such
transaction expired as of the date hereof) that would be reasonably
likely to have an AMCON Material Adverse Effect.
(c) Each AMCON Employee Plan that is intended to be
qualified under Section 401(a) of the Code now meets, and at all
time since its inception have met, the requirements for such
qualification, and each trust forming a part thereof is now, and at
all times since its inception has been, exempt from tax pursuant to
Section 501(a) of the Code. Each such plan has received a
determination letter from the Internal Revenue Service to the effect
that such plan is qualified and its related trust is exempt from
federal income taxes. AMCON has furnished, or will make available
upon request, to HNWC copies of the most recent Internal Revenue
Service determination letters with respect to each such AMCON
Employee Plan. Each AMCON Employee Plan has been maintained and
administered in substantial compliance with its terms (except that
in any case in which any AMCON Employee Plan is currently required
to comply with a provision of ERISA or of the Code, but is not yet
required to be amended to reflect such provision, such plan has been
maintained and administered in accordance with the provision) and
with the requirements prescribed by any and all statutes, orders,
rules and regulations, including but not limited to ERISA and the
Code, which are applicable to such AMCON Employee Plan. All material
reports, returns and similar documents with respect to each AMCON
Employee Plan required to be filed with any government agency or
distributed to any AMCON Employee Plan participant have been duly
timely filed and distributed.
(d) There is no contract, agreement, plan or arrangement
that, as a result of the Merger, would be reasonably likely to
obligate AMCON to make any payment of any amount that would not be
deductible pursuant to the terms of Section 162(m) or Section 280G
of the Code.
(e) Except as disclosed in writing to HNWC prior to the
date hereof, there has been no amendment to, written interpretation
or announcement (whether or not written) relating to, or change in
employee participation or coverage under, any AMCON Employee Plan
that would increase materially the expense of maintaining such AMCON
Employee Plan above the level of the expense incurred in respect
thereof for the fiscal year ended September 30, 2000.
(f) No AMCON Employee Plan promises or provides post-
retirement medical, life insurance or other benefits due now or in
the future to current, former or retired employees of AMCON or any
Subsidiary.
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Section 3.14. Compliance with Laws; Licenses, Permits and
-------------------------------------------
Registrations.
-------------
(a) Neither AMCON nor any AMCON Subsidiary is in
violation of, or has violated, any applicable provisions of any
laws, statutes, ordinances, regulations, judgments, injunctions,
orders or consent decrees, except for any such violations that,
individually or in the aggregate, would not be reasonably likely to
have an AMCON Material Adverse Effect.
(b) Each of AMCON and the AMCON Subsidiaries has all
permits, licenses, approvals, authorizations of and registrations
with and under all federal, state, local and foreign laws, and from
all Governmental Entities required by AMCON and the AMCON
Subsidiaries to carry on their respective businesses as currently
conducted, except where the failure to have any such permits,
licenses, approvals, authorizations or registrations, individually
or in the aggregate, would not be reasonably likely to have an AMCON
Material Adverse Effect.
Section 3.15. Title to Properties.
-------------------
(a) AMCON and each AMCON Subsidiary have good and
marketable title to, or valid leasehold interests in, all their
properties and assets except for such as are no longer used or
useful in the conduct of their businesses or as have been disposed
of in the ordinary course of business and except for defects in
title, easements, restrictive covenants and similar Liens,
encumbrances or impediments that do not materially interfere with
the ability of AMCON and its Subsidiaries to use their respective
assets and conduct their businesses, as currently used or conducted.
All such assets and properties, other than assets and properties in
which AMCON or any AMCON Subsidiary has leasehold interests, are
free and clear of all Liens, except for Liens that, in the
aggregate, do not and will not materially interfere with the ability
of AMCON and the AMCON Subsidiaries to use their respective assets
and conduct their businesses, as currently conducted.
(b) AMCON and each AMCON Subsidiary (i) are in
substantial compliance with the terms of all leases to which they
are a party and under which they are in occupancy, and all such
leases are in full force and effect and (ii) enjoy peaceful and
undisturbed possession under all such leases.
Section 3.16. Intellectual Property.
---------------------
(a) AMCON and the AMCON Subsidiaries own or have a
valid license to use (i) all fictional business names, trading
names, registered and unregistered trademarks, service marks, domain
names and applications (collectively, "Marks"); (ii) all patents,
patent applications, and inventions and discoveries that may be
patentable (collectively, "Patents"); (iii) all copyrights in both
published works and unpublished works (collectively, "Copyrights");
(iv) all rights in mask works (collectively, "Rights in Mask
Works"); and (v) all know-how, trade secrets, confidential
information, customer lists, software, technical information, data,
process technology, plans, drawings, and blue prints (collectively,
"Trade Secrets"); necessary to (x) carry on the business of AMCON
A-16
as currently conducted or as proposed to be conducted by the
Surviving Corporation, to (y) make, have made, use, distribute and
sell all products currently sold by AMCON and all products in
development.
(b) There are no outstanding and, to AMCON's Knowledge,
no Threatened disputes or disagreements with respect to any
agreement to which AMCON or an AMCON subsidiary is a party, relating
to any of AMCON's Marks, Patents, Copyrights, Rights in Mask Works,
or Trade Secrets (collectively, "AMCON Intellectual Property").
(c) AMCON is the owner of all right, title, and interest
in and to the AMCON Intellectual Property, free and clear of all
liens, security interests, charges, encumbrances, equities, and
other adverse claims.
(d) All former and current employees of AMCON have
executed written contracts with AMCON that assign to AMCON all
rights to any inventions, improvements, discoveries, or information
relating to the business of AMCON. To AMCON's knowledge, no employee
of AMCON has entered into any contract that restricts or limits in
any way the scope or type of work in which the employee may be
engaged or requires the employee to transfer, assign, or disclose
information concerning his work to anyone other than AMCON.
(e) All of the Patents are currently in compliance in
all material respects with formal legal requirements (including
payment of filing, examination, and maintenance fees and proofs of
working or use), are valid and enforceable, and are not subject to
any maintenance fees or taxes or actions.
(f) No Patent has been or is now involved in any
interference, reissue, reexamination, or opposition proceeding. To
AMCON's Knowledge, there is no potentially interfering patent or
patent application of any third party.
(g) No Patent is infringed or, to AMCON's Knowledge,
has been challenged or threatened in any way. To AMCON's Knowledge,
none of the products manufactured and sold or proposed to be sold,
nor any process or know-how used, by AMCON infringes or is alleged
to infringe any Patent or other proprietary right of any other
Person.
(h) AMCON is not required to make any payments to any
third parties in connection with its use of AMCON Intellectual
Property.
(i) All products made, used, or sold under the
Patents have been marked with the proper patent notice.
Section 3.17. Environmental Matters.
---------------------
(a) With such exceptions as, individually or in the
aggregate, would not be reasonably likely to have an AMCON Material
Adverse Effect, (i) no written notice, notification, demand, request
for information, citation, summons, complaint or order has been
received by, and no investigation, action, claim, suit, proceeding
or review is
A-17
pending or threatened by any Person against AMCON or any AMCON
Subsidiary with respect to any applicable Environmental Law and (ii)
AMCON and the AMCON Subsidiaries are and have been in compliance
with all applicable Environmental Laws.
(b) For purposes of this Section 3.17 and Section 4.16,
the term "Environmental Laws" means any federal, state, local and
foreign statutes, laws (including, without limitation, common law),
judicial decisions, regulations, ordinances, rules, judgments,
orders, codes, injunctions, permits or governmental agreements
relating to human health and safety, the environment or to
pollutants, contaminants, wastes, or chemicals, hazardous
substances, hazardous materials or hazardous wastes as any of those
terms is regulated or defined by Environmental Laws.
Section 3.18. Finders' Fees; Opinions of Financial Advisor. There
--------------------------------------------
is no investment banker, broker, finder or other intermediary that has been
retained by, or is authorized to act on behalf of, AMCON or any AMCON
Subsidiary who might be entitled to any fee or commission from HNWC or any of
its Affiliates upon consummation of the transactions contemplated by this
Agreement.
Section 3.19. Board Approval; Required Vote.
-----------------------------
(a) As of the date hereof, this Agreement and the
transactions contemplated hereby have been approved by AMCON's Board
of Directors.
(b) No votes of the holders of any class or series of
capital stock of AMCON is required by law, rule, regulation or rule
of the American Stock Exchange to approve and adopt this Agreement
and/or any of the other transactions contemplated hereby, including
the Merger.
Section 3.20. Tax Treatment. Neither AMCON nor any of its
-------------
Affiliates has taken or agreed to take, or will take, any action or is aware
of any fact or circumstance that would prevent or impede the Merger from
qualifying as a 368 Reorganization.
Section 3.21. Certain Agreements. None of AMCON, any AMCON
------------------
Subsidiary or any of their respective Affiliates (i) are parties to or
otherwise bound by any agreement or arrangement that limits or otherwise
restricts AMCON, any AMCON Subsidiary, the Surviving Corporation or any of
their respective Affiliates from engaging or competing in any line of
business or in any locations, which agreement or arrangement is material to
the business of AMCON and the AMCON Subsidiaries or would be material to the
business of the Surviving Corporation (assuming the Merger has taken place),
in either case taken as a whole and (ii) except in the ordinary course of
business, have amended, modified or terminated any material contract,
agreement or arrangement of AMCON or any AMCON Subsidiary or otherwise
waived, released or assigned any material rights, claims or benefits of AMCON
or any AMCON Subsidiary thereunder.
Section 3.22. Employment Agreements. There exists (i) no union,
---------------------
guild or collective bargaining agreement to which AMCON or any AMCON
Subsidiary is a party, (ii) no employment, consulting or severance agreement
between AMCON or any Subsidiary of AMCON and any Person (except for
consulting agreements that individually, and in the
A-18
aggregate, are not material to AMCON), and (iii) no employment, consulting,
severance or indemnification agreement or other agreement or plan to which
AMCON or any AMCON Subsidiary is a party that would be altered or result in
any bonus, golden parachute, severance or other payment or obligation to any
Person, or result in any acceleration of the time of payment or in the
provision or vesting of any benefits, as a result of the execution or
performance of this Agreement or as a result of the Merger or the other
transactions contemplated hereby.
Section 3.23. Transactions With Directors, Officers and
-----------------------------------------
Affiliates. Except for any of the following matters which would not be
----------
required to be disclosed pursuant to Item 402 or Item 404 of Regulation S-K
of the U.S. Securities and Exchange Commission (the "Commission"), since
September 30, 2000, there have been no transactions between AMCON or any of
its Subsidiaries and any director, officer, employee, stockholder or
Affiliate of AMCON or any of its Subsidiaries, including, without limitation,
loans, guarantees or pledges to, by or for AMCON or any of AMCON's
Subsidiaries from, to, by or for any of such Persons. Since September 30,
2000, none of the officers or directors of AMCON or any of its Subsidiaries,
and no spouse or relative of any of such Persons, has been a director or
officer of, or has had any material direct or indirect interest in, any
Person which during such period has been a supplier, customer or sales agent
of AMCON or any of its Subsidiaries or has competed with or been engaged in
any business of the kind being conducted by AMCON or any of its Subsidiaries.
Section 3.24. Material Contracts. Schedule 3.24 delivered to HNWC
------------------
by AMCON prior to the execution of this Agreement lists all material
contracts and agreements to which, as of the date hereof, AMCON or any AMCON
Subsidiary is a party or by which AMCON or any AMCON Subsidiary is bound or
under which AMCON or any AMCON Subsidiary has or may acquire any rights,
which were not filed prior to the date hereof as exhibits to AMCON SEC
Documents, which involve or relate to (i) obligations of AMCON or any AMCON
Subsidiary for borrowed money or other indebtedness where the amount of such
obligations exceeds $6,000,000 individually, (ii) the lease by AMCON or any
AMCON Subsidiary, as lessee or lessor, of real property for rent of more than
$6,000,000 per annum, (iii) the purchase or sale of goods (other than raw
material to be purchased by AMCON on terms that are customary and consistent
with the past practice of AMCON and in amounts and at prices substantially
consistent with past practices of AMCON) or services with an aggregate
minimum purchase price of more than $6,000,000 per annum, (iv) rights to
manufacture and/or distribute any product which accounted for more than
$45,000,000 of the consolidated revenues of AMCON and its Subsidiaries during
the fiscal year ended September 30, 2000 or under which AMCON or any AMCON
Subsidiary received or paid license or other fees in excess of $1,000,000
during any year, (v) the purchase or sale of assets or properties not in the
ordinary course of business having a purchase price in excess of $6,000,000,
(vi) the right (whether or not currently exercisable) to use, license
(including any "in-license" or "outlicense"), sublicense or otherwise exploit
any intellectual property right or other proprietary asset of AMCON or of any
of Subsidiary of AMCON or any other Person which, is material to AMCON; (vii)
any material collaboration or joint venture or similar arrangement; (viii)
the restriction on the right or ability of AMCON or any Subsidiary of AMCON
(A) to compete with any other Person, (B) to acquire any product or other
asset or any services from any other Person, (C) to solicit, hire or retain
any Person as an employee, consultant or independent contractor, (D) to
develop, sell, supply, distribute, offer, support or service any product or
any technology or other asset to or for any other Person, (E) to perform
services for any other Person, or (F) to transact business or deal in
A-19
any other manner with any other Person; (ix) any currency hedging; or (x)
individual capital expenditures or commitments in excess of $6,000,000. All
such contracts and agreements are duly and validly executed by AMCON or such
AMCON Subsidiary, and are in full force and effect in all material respects.
Neither AMCON nor any of its Subsidiaries has violated or breached, or
committed any default under, any contract or agreement, and, to the knowledge
of AMCON, no other Person has violated or breached, or committed any default
under, any contract or agreement, which violation, breach or default (alone
or in combination with other violations, breaches or defaults under such
contract or agreement or under other contracts or agreements) has had or may
reasonably be expected to have an AMCON Material Adverse Effect. No event has
occurred which, after notice or the passage of time or both, would constitute
a default by AMCON or any Subsidiary of AMCON under any contract or agreement
or give any Person the right to (A) declare a default or exercise any remedy
under any contract or agreement, (B) receive or require a rebate, chargeback,
penalty or change in delivery schedule under any contract or agreement, (C)
accelerate the maturity or performance of any contract or agreement, or (D)
cancel, terminate or modify any contract or agreement, in each case which,
together with all other events of the types referred to in clauses (A), (B),
(C) and (D) of this sentence has had or may reasonably be expected to have an
AMCON Material Adverse Effect. All such contracts and agreements will
continue, after the Effective Time, to be binding in all material respects in
accordance with their respective terms until their respective expiration
dates.
Section 3.25. Insurance. AMCON has made available to HNWC a
---------
summary of all material insurance policies and all material self insurance
programs and arrangements relating to the business, assets and operations of
AMCON and its Subsidiaries. Each of such insurance policies is in full force
and effect. Since September 30, 2000, neither AMCON nor any of its
Subsidiaries has received any notice or other communication regarding any
actual or possible (i) cancellation or invalidation of any material insurance
policy, (ii) refusal of any coverage or rejection of any material claim under
any insurance policy, or (iii) material adjustment in the amount of the
premiums payable with respect to any insurance policy. There is no pending
workers' compensation or other claim under or based upon any insurance policy
of AMCON or any of its Subsidiaries other than claims incurred in the
ordinary course of business.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF HNWC
Except as disclosed in the (i) HNWC Disclosure Schedule delivered to
AMCON dated the date hereof (each section or subsection of which Disclosure
Schedule qualifies the correspondingly numbered representation, warranty or
covenant to the extent specified therein), or (ii) the HNWC SEC Documents
filed prior to the date hereof, HNWC represents and warrants to AMCON that,
as of the date hereof (except for representations and warranties that address
matters only as of a specific date, in which case such representations are
true and correct on and as of such specific date):
Section 4.1. Corporate Existence and Power. HNWC is a corporation
-----------------------------
duly incorporated, validly existing and in good standing under the laws of
the State of Hawaii, and has all corporate powers required to carry on its
business as now conducted. HNWC is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction
A-20
where the character of the property owned or leased by it or the nature of
its activities makes such qualification necessary, except where the failure
to be so qualified, individually or in the aggregate, would not be reasonably
likely to have a HNWC Material Adverse Effect. HNWC has heretofore made
available to AMCON true and complete copies of HNWC's articles of
incorporation and bylaws as currently in effect.
Section 4.2. Corporate Authorization. The execution, delivery
-----------------------
and performance by HNWC of this Agreement and the consummation by HNWC of the
transactions contemplated hereby are within HNWC's corporate powers and,
except for the HNWC Stockholder Approval (as defined herein), have been duly
authorized by all necessary corporate action. Assuming that this Agreement
constitutes the valid and binding obligation of AMCON, this Agreement
constitutes a valid and binding agreement of HNWC, enforceable in accordance
with its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and similar laws, now or hereafter in
effect, relating to or affecting creditors' rights and remedies generally and
to general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
Section 4.3. Governmental Authorization. The execution, delivery
--------------------------
and performance by HNWC of this Agreement and the consummation by HNWC of the
transactions contemplated hereby require no action by or in respect of, or
filing with, any Governmental Entity other than (a) the filing of (i) the
Articles of Merger in accordance with the Hawaii Law, (ii) the Certificate of
Merger in accordance with the Delaware Law, and (iii) appropriate documents
with the relevant authorities of other states or jurisdictions in which HNWC
or any HNWC Subsidiary is qualified to do business; (b) compliance with any
applicable requirements of the Securities Act and the Exchange Act; (c) such
as may be required under any applicable state securities or blue sky laws;
and (d) such other consents, approvals, actions, orders, authorizations,
registrations, declarations and filings that, if not obtained or made, would
not, individually or in the aggregate, (x) be reasonably likely to have a
HNWC Material Adverse Effect or (assuming for this purpose that the Effective
Time had occurred) a Surviving Corporation Material Adverse Effect, or (y)
prevent or materially impair the ability of HNWC to consummate the
transactions contemplated by this Agreement.
Section 4.4. Non-Contravention. The execution, delivery and
-----------------
performance by HNWC of this Agreement and the consummation by HNWC of the
transactions contemplated hereby do not and will not (a) contravene or
conflict with HNWC's articles of incorporation or bylaws, (b) assuming
compliance with the matters referred to in Section 4.3, contravene or
conflict with or constitute a violation of any provision of any law,
regulation, judgment, injunction, order or decree binding upon or applicable
to HNWC, (c) constitute a default under or give rise to a right of
termination, cancellation or acceleration of any right or obligation of HNWC
or any HNWC Subsidiary or to a loss of any benefit or status to which HNWC is
entitled under any provision of any agreement, contract or other instrument
binding upon HNWC or any HNWC Subsidiary or any license, franchise, permit or
other similar authorization held by HNWC, or (d) result in the creation or
imposition of any Lien on any asset of HNWC other than, in the case of each
of (b), (c) and (d), any such items that would not, individually or in the
aggregate (x) be reasonably likely to have a HNWC Material Adverse Effect or
(y) prevent or materially impair the ability of HNWC to consummate the
transactions contemplated by this Agreement.
A-21
Section 4.5. Capitalization.
--------------
(a) The authorized capital stock of HNWC consists of
20,000,000 shares of HNWC Common Stock and 5,000,000 shares of HNWC
Preferred Stock (of which 1,250 shares of HNWC Series A Convertible
Preferred Stock were authorized and 250 shares of HNWC Series B
Convertible Preferred Stock were authorized and 750,000 shares of
HNWC Series C Preferred Stock were authorized). At the close of
business on the date hereof, (i) 7,935,982 shares of HNWC Common
Stock were issued and outstanding, (ii) stock options ("HNWC Stock
Options") to purchase an aggregate of 683,926 shares of HNWC Common
Stock were issued and outstanding (of which options to purchase an
aggregate of 624,226 shares of HNWC Common Stock were exercisable),
(iii) warrants ("HNWC Warrants") to purchase an aggregate of
4,862,899 shares of HNWC Common Stock were issued and outstanding
(of which warrants to purchase an aggregate of 4,862,899 shares of
HNWC Common Stock were exercisable), (iv) no shares of HNWC
Preferred Stock were issued and outstanding, (v) there were no stock
options or warrants to purchase shares of HNWC Preferred Stock
issued and outstanding, and (v) there were no other rights to
acquire from HNWC, and no obligation of HNWC to issue, any capital
stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of HNWC, except
for the $500,000 Convertible Note, the secured convertible note
issued by HNWC to AMCON in the principal amount of $350,000 (the
"$350,000 Convertible Note"), and the secured convertible note
issued by HNWC to AMCON in the principal amount of $400,000 (the
"$400,000 Convertible Note") (the $350,000 Convertible Note and the
$400,000 Convertible Note are sometimes collectively referred to as
the "Other Convertible Notes"). All outstanding shares of capital
stock of HNWC have been duly authorized and validly issued and are
fully paid and nonassessable.
(b) As of the date hereof, except (i) as set forth in
this Section 4.5, and (ii) for changes since June 30, 2001,
resulting from the exercise of stock options outstanding on such
date, there are no outstanding (x) shares of capital stock or other
voting securities of HNWC, (y) securities of HNWC convertible into
or exchangeable for shares of capital stock or voting securities of
HNWC, or (z) options or other rights to acquire from HNWC, and no
obligation of HNWC to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or
voting securities of HNWC (the items in clauses (x), (y) and (z)
being referred to collectively as the "HNWC Securities"). There are
no outstanding contractual obligations of HNWC to provide funds to,
or make any investment (in the form of a loan, capital contribution
or otherwise) in, any other Person. There are no stockholder
agreements, voting trusts or other agreements or understandings to
which HNWC is a party, or of which HNWC is aware, relating to
voting, registration or disposition of any shares of capital stock
of HNWC or granting to any person or group of persons the right to
elect, or to designate or nominate for election, a director to the
board of directors of HNWC, except for the Stockholders Agreement
attached hereto as Exhibit A.
Section 4.6. Subsidiaries. HNWC does not have any subsidiaries and
------------
does not own or control, directly or indirectly, any stock or equity interest
in any corporation or other Person.
A-22
Section 4.7. HNWC SEC Documents.
------------------
(a) HNWC has made available to AMCON the HNWC SEC
Documents. HNWC has filed all reports, filings, registration
statements and other documents required to be filed by it with the
SEC since December 31, 1997.
(b) As of its filing date, each HNWC SEC Document
complied as to form in all material respects with the applicable
requirements of the Securities Act and/or the Exchange Act, as the
case may be.
(c) No HNWC SEC Document filed pursuant to the Exchange
Act contained, as of its filing date, any untrue statement of a
material fact or omitted to state any material fact necessary in
order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. No HNWC
SEC Document, as amended or supplemented, if applicable, filed
pursuant to the Securities Act contained, as of the date such
document or amendment became effective, any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading.
Section 4.8. Financial Statements; No Material Undisclosed
---------------------------------------------
Liabilities.
-----------
(a) The audited HNWC financial statements and unaudited
consolidated interim financial statements of HNWC included in the
HNWC 10-KSB and each HNWC 10-QSB fairly present in all material
respects, in conformity with GAAP consistently applied (except as
may be indicated in the notes thereto and except that financial
statements in each Form 10-QSB do not contain all GAAP notes to such
financial statements), the financial position of HNWC as of the
dates thereof and its results of operations, stockholders' equity
and consolidated cash flows for the periods then ended (subject to
normal year-end adjustments in the case of any unaudited interim
financial statements).
(b) There are no liabilities of HNWC of any kind
whatsoever, whether accrued, contingent, absolute, determined,
determinable or otherwise, in each case, that are required by GAAP
to be set forth on a balance sheet of HNWC, other than:
(i) liabilities or obligations disclosed or
provided for in the HNWC Balance Sheet or disclosed in the
notes there;
(ii) liabilities or obligations under this
Agreement or incurred in connection with the transactions
contemplated hereby;
(iii) current liabilities incurred in the ordinary
course of business since December 31, 2000; and
(iv) other liabilities or obligations that
individually or in the aggregate, would not be reasonably
likely to have a HNWC Material Adverse Effect.
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(c) HNWC keeps proper accounting records in which all
material assets and liabilities, and all material transactions, of
HNWC are recorded in conformity with GAAP. No part of HNWC's
accounting system or records, or access thereto, is under the
control of a Person who is not an employee of HNWC.
Section 4.9. Information to be Supplied.
--------------------------
(a) The information to be supplied by HNWC expressly
for inclusion or incorporation by reference in the Proxy
Statement/Prospectus will (i) in the case of the Registration
Statement, at the time it becomes effective, not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading and (ii) in the case of the
remainder of the Proxy Statement/Prospectus, at the time of the
mailing thereof, and at the time of the Special Meeting, not contain
any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under
which they are made, not misleading. The Proxy Statement/Prospectus
will comply (with respect to information relating to HNWC) as to
form in all material respects with the provisions of the Securities
Act and the Exchange Act.
(b) Notwithstanding the foregoing, HNWC makes no
representation or warranty with respect to any statements made or
incorporated by reference in the Proxy Statement/Prospectus based on
information supplied by AMCON.
Section 4.10. Absence of Certain Changes. Since December 31, 1999,
--------------------------
except as otherwise expressly contemplated by this Agreement, HNWC has
conducted its business in the ordinary course consistent with past practice
and there has not been (a) any damage, destruction or other casualty loss
(whether or not covered by insurance) affecting the business or assets of
HNWC that, individually or in the aggregate, has had or would be reasonably
likely to have a HNWC Material Adverse Effect, (b) any action, event,
occurrence, development or state of circumstances or facts that, individually
or in the aggregate, has had or would be reasonably likely to have a HNWC
Material Adverse Effect or (c) any incurrence, assumption or guarantee by
HNWC of any material indebtedness for borrowed money other than in the
ordinary course and in amounts and on terms consistent with past practices.
Section 4.11. Litigation. Section 4.11 of the HNWC Disclosure
----------
Schedule contains a list of each action, suit, investigation, arbitration or
proceeding pending against, or to the Knowledge of HNWC threatened against,
HNWC or any of its respective assets or properties before any arbitrator or
Governmental Entity. None of such actions, suits, investigations,
arbitrations or proceedings, individually or in the aggregate, would be
reasonably likely to have a HNWC Material Adverse Effect. There are no
outstanding judgments, decrees, injunctions, awards or orders against HNWC
that would be reasonably likely to have, individually or in the aggregate, a
HNWC Material Adverse Effect.
A-24
Section 4.12. Taxes.
-----
(a) All Tax returns, statements, reports and forms
(collectively, the "HNWC Returns") required to be filed with any
taxing authority by, or with respect to, HNWC and the HNWC
Subsidiaries have been filed in substantial compliance with all
applicable laws.
(b) HNWC has timely paid all Taxes shown as due and
payable on the HNWC Returns that have been so filed, and all other
Taxes not subject to reporting obligations, and as of the time of
filing, the HNWC Returns correctly reflected the facts regarding the
income, business, assets, operations, activities and the status of
HNWC and the HNWC Subsidiaries (other than Taxes that are being
contested in good faith and for which adequate reserves are
reflected on the HNWC Balance Sheet).
(c) HNWC has made provision for all Taxes payable by
them for which no HNWC Return has yet been filed.
(d) The charges, accruals and reserves for Taxes with
respect to HNWC reflected on the HNWC Balance Sheet are adequate
under GAAP to cover the Tax liabilities accruing through the date
thereof.
(e) There is no action, suit, proceeding, audit or claim
now proposed or pending against or with respect to HNWC in respect
of any Tax that would be reasonably likely to have a HNWC Material
Adverse Effect.
(f) HNWC has not been a member of an affiliated,
consolidated, combined or unitary group other than one of which HNWC
was the common parent.
(g) HNWC does not hold any asset subject to a consent
under Section 341(f) of the Code.
Section 4.13. Employee Benefits.
-----------------
(a) Section 4.13(a) of the HNWC Disclosure Schedule
contains a correct and complete list identifying each material
"employee benefit plan", as defined in Section 3(3) of ERISA, each
employment, severance or similar contract, plan, arrangement or
policy and each other plan or arrangement (written or oral)
providing for compensation, bonuses, profit-sharing, stock option or
other stock related rights or other forms of incentive or deferred
compensation, vacation benefits, insurance coverage (including any
self-insured arrangements), health or medical benefits, disability
benefits, workers' compensation, supplemental unemployment benefits,
severance benefits and post-employment or retirement benefits
(including compensation, pension, health, medical or life insurance
benefits) that is maintained, administered or contributed to by HNWC
or any of its ERISA Affiliates and covers any employee or former
employee of HNWC or any HNWC Subsidiary. Copies of such plans (and,
if applicable, related trust agreements) and all amendments thereto
and written interpretations thereof have been furnished, or will be
made available upon request, to AMCON together with the most recent
annual report (Form 5500 including, if applicable, Schedule B
thereto)
A-25
and summary plan description prepared in connection with any such
plan. Such plans are referred to collectively herein as the "HNWC
Employee Plans". For purposes of this Section 4.13, "ERISA
Affiliate" of any Person means any other Person which, together with
such Person, would be treated as a single employer under Section 414
of the Code.
(b) No HNWC Employee Plan is now or at any time has been
subject to Part 3, Subtitle B of Title I or ERISA or Title IV of
ERISA. At no time has HNWC or any of its ERISA Affiliates
contributed to, or been required to contribute to, any
"multiemployer plan," as defined in Section 3(37) of ERISA (a
"Multiemployer Plan"), and neither HNWC nor any of its ERISA
Affiliates has, or ever has had, any liability (contingent or
otherwise) relating to the withdrawal or partial withdrawal from a
Multiemployer Plan. To the Knowledge of HNWC, no condition exists
and no event has occurred that would be reasonably likely to
constitute grounds for termination of any HNWC Employee Plan that is
a Retirement Plan or, with respect to any HNWC Employee Plan that is
a Multiemployer Plan, presents a material risk of a complete or
partial withdrawal under Title IV of ERISA and neither HNWC nor any
of its ERISA Affiliates has incurred any liability under Title IV of
ERISA arising in connection with the termination of, or complete or
partial withdrawal from, any plan covered or previously covered by
Title IV of ERISA that would be reasonably likely to have a HNWC
Material Adverse Effect. To the Knowledge of HNWC, nothing has been
done or omitted to be done and no transaction or holding of any
asset under or in connection with any HNWC Employee Plan has
occurred that will make HNWC or any HNWC Subsidiary, or any officer
or director of HNWC or any HNWC Subsidiary, subject to any liability
under Title I of ERISA or liable for any tax pursuant to Section
4975 of the Code (assuming the taxable period of any such
transaction expired as of the date hereof) that would be reasonably
likely to have a HNWC Material Adverse Effect.
(c) Each HNWC Employee Plan that is intended to be
qualified under Section 401(a) of the Code now meets, and at all
times since its inception have met, the requirements for such
qualification, and each trust forming a part thereof is now, and at
all times since its inception has been, exempt from tax pursuant to
Section 501(a) of the Code. Each such plan has received a
determination letter from the Internal Revenue Service to the effect
that such plan is qualified and its related trust is exempt from
federal income taxes. HNWC has furnished, or will make available
upon request, to AMCON copies of the most recent Internal Revenue
Service determination letters with respect to each such HNWC
Employee Plan. Each HNWC Employee Plan has been maintained and
administered in substantial compliance with its terms (except that
in any case in which any HNWC Employee Plan is currently required to
comply with a provision of ERISA or of the Code, but is not yet to
be amended to reflect such provision, such plan has been maintained
and administered in accordance with the provision) and with the
requirements prescribed by any and all statutes, orders, rules and
regulations, including but not limited to ERISA and the Code, which
are applicable to such HNWC Employee Plan. All material reports,
returns and similar documents with respect to each HNWC Employee
Plan required to be filed with any governmental agency or
distributed to any HNWC Employee Plan participant have been duly
timely filed and distributed.
A-26
(d) There is no contract, agreement, plan or arrangement
that, as a result of the Merger, would be reasonably likely to
obligate HNWC to make any payment of any amount that would not be
deductible pursuant to the terms of Section 162(m) or Section 280G
of the Code.
(e) Except as disclosed in writing to AMCON prior to the
date hereof, there has been no amendment to, written interpretation
or announcement (whether or not written) relating to, or change in
employee participation or coverage under, any HNWC Employee Plan
that would increase materially the expense of maintaining such HNWC
Employee Plan above the level of the expense incurred in respect
thereof for the fiscal year ended December 31, 1999.
(f) No HNWC Employee Plan promises or provides post-
retirement medical, life insurance or other benefits due now or in
the future to current, former or retired employees of HNWC or any
Subsidiary.
Section 4.14. Compliance with Laws; Licenses, Permits and
-------------------------------------------
Registrations.
-------------
(a) HNWC is not in violation of, nor has HNWC violated,
any applicable provisions of any laws, statutes, ordinances,
regulations, judgments, injunctions, orders or consent decrees,
except for any such violations that, individually or in the
aggregate, would not be reasonably likely to have a HNWC Material
Adverse Effect.
(b) HNWC has all permits, licenses, approvals,
authorizations of and registrations with and under all federal,
state, local and foreign laws, and from all Governmental Entities
required by HNWC to carry on its business as currently conducted,
except where the failure to have any such permits, licenses,
approvals, authorizations or registrations, individually or in the
aggregate, would not be reasonably likely to have a HNWC Material
Adverse Effect.
Section 4.15. Title to Properties.
-------------------
(a) HNWC has good and marketable title to, or valid
leasehold interests in, and all necessary use permits with respect
to, all its properties and assets, except for such as are no longer
used or useful in the conduct of its business or as have been
disposed of in the ordinary course of business and except for
defects in title, easements, restrictive covenants and similar
Liens, encumbrances or impediments that do not materially interfere
with the ability of HNWC to conduct its business as currently
conducted. All such assets and properties, other than assets and
properties in which HNWC has leasehold interests, are free and clear
of all Liens, except for Liens that do not and will not materially
interfere with the ability of HNWC to conduct its business as
currently conducted.
(b) HNWC (i) is in substantial compliance with the
terms of all leases and use permits to which it is a party or a
beneficiary and under which it is in occupancy, and all such leases
and use permits are in full force and effect and (ii) enjoys
peaceful and undisturbed possession under all such leases and use
permits.
A-27
Section 4.16. Intellectual Property.
---------------------
(a) HNWC owns or has a valid license to use (i) all
Marks; (ii) all Patents; (iii) all Copyrights; (iv) all Rights in
Mask Works' and (v) all Trade Secrets; necessary to (x) carry on the
business of HNWC as currently conducted or as proposed to be
conducted by the Surviving Corporation, to (y) make, have made, use,
distribute and sell all products currently sold by HNWC and all
products in development.
(b) There are no outstanding and, to HNWC's Knowledge,
no threatened disputes or disagreements with respect to any
agreement to which HNWC is a party, relating to any of HNWC's Marks,
Patents, Copyrights, Rights in Mask Works, or Trade Secrets
(collectively, "HNWC Intellectual Property").
(c) HNWC is the owner of all right, title, and interest
in and to the HNWC Intellectual Property, free and clear of all
liens, security interests, charges, encumbrances, equities, and
other adverse claims.
(d) All former and current employees of HNWC have
executed written contracts with HNWC that assign to HNWC all rights
to any inventions, improvements, discoveries, or information
relating to the business of HNWC. To HNWC's knowledge, no employee
of HNWC has entered into any contract that restricts or limits in
any way the scope or type of work in which the employee may be
engaged or requires the employee to transfer, assign, or disclose
information concerning his work to anyone other than HNWC.
(e) All of the Patents are currently in compliance
with formal legal requirements (including payment of filing,
examination, and maintenance fees and proofs of working or use), are
valid and enforceable, and are not subject to any maintenance fees
or taxes or actions.
(f) No Patent has been or is now involved in any
interference, reissue, reexamination, or opposition proceeding. To
HNWC's Knowledge, there is no potentially interfering patent or
patent application of any third party.
(g) No Patent is infringed or, to HNWC's Knowledge, has
been challenged or threatened in any way. To HNWC's knowledge, none
of the products manufactured and sold or proposed to be sold, nor
any process or know-how used, by HNWC infringes or is alleged to
infringe any Patent or other proprietary right of any other Person.
(h) HNWC is not required to make any payments to any
third parties in connection with its use of the HNWC Intellectual
Property.
(i) All products made, used, or sold under the Patents
have been marked with the proper patent notice.
Section 4.17. Environmental Matters. With such exceptions as,
---------------------
individually or in the aggregate, would not be reasonably likely to have a
HNWC Material Adverse Effect, (i) no written notice, notification, demand,
request for information, citation, summons, complaint or
A-28
order has been received by, and no investigation, action, claim, suit,
proceeding or review is pending or threatened by any Person against, HNWC
with respect to any applicable Environmental Law and (ii) HNWC is and has
been in compliance with all applicable Environmental Laws.
Section 4.18. Finders' Fees. There is no investment banker,
-------------
broker, finder or other intermediary that has been retained by, or is
authorized to act on behalf of, HNWC or who might be entitled to any fee or
commission from AMCON or any of its Affiliates upon consummation of the
transactions contemplated by this Agreement.
Section 4.19. Required Vote and Waiver; Board Approval.
----------------------------------------
(a) The only vote or waiver of rights of the holders of
any class or series of capital stock of HNWC required by law, rule
or regulation to approve and adopt this Agreement and/or any of the
other transactions contemplated hereby, including the Merger
(collectively, the "HNWC Stockholder Approval") is the affirmative
vote of the holders of more than fifty percent of the outstanding
shares of HNWC Common Stock in favor of the approval and adoption of
this Agreement and approval of the Merger.
(b) HNWC's Board of Directors has unanimously (i)
determined and declared that this Agreement and the transactions
contemplated hereby, including the Merger, are advisable and in the
best interests of HNWC and its stockholders, (ii) approved and
adopted this Agreement, the Merger and the other transactions
contemplated hereby and (iii) resolved to recommend to such
stockholders that they vote in favor of adopting and approving this
Agreement and the Merger in accordance with the terms hereof at a
special meeting of the stockholders of HNWC duly held for such
purpose (the "HNWC Stockholders Meeting").
Section 4.20. State Takeover Statutes. HNWC has taken all actions
-----------------------
required to be taken by it in order to exempt this Agreement and the
transactions contemplated hereby from the provisions of all "control share
acquisition," "business combination," "fair price" or other anti-takeover
laws or regulations enacted under state or federal laws in the United States
that might apply to this Agreement or any of the transactions contemplated
hereby.
Section 4.21. Tax Treatment. Neither HNWC nor any of its
-------------
Affiliates has taken or agreed to take, or will take, any action or is aware
of any fact or circumstance that would prevent or impede the Merger from
qualifying as a 368 Reorganization.
Section 4.22. Certain Agreements. Neither HNWC nor any of its
------------------
Affiliates (i) are parties to or otherwise bound by any agreement or
arrangement that limits or otherwise restricts HNWC, the Surviving
Corporation or any of their respective Affiliates from engaging or competing
in any line of business or in any locations, which agreement or arrangement
is material to the business of HNWC or would be material to the business of
the Surviving Corporation (assuming the Merger has taken place), in either
case taken as a whole and (ii) except in the ordinary course of business,
have amended, modified or terminated any material contract, agreement or
arrangement of HNWC or any HNWC Subsidiary or otherwise waived,
A-29
released or assigned any material rights, claims or benefits of HNWC or any
HNWC Subsidiary thereunder.
Section 4.23. Employment Agreements. There exists (i) no union,
---------------------
guild or collective bargaining agreement to which HNWC is a party, (ii) no
employment, consulting or severance agreement between HNWC and any Person
(except for consulting agreements that individually, and in the aggregate,
are not material to HNWC), and (iii) no employment, consulting, severance or
indemnification agreement or other agreement or plan to which HNWC is a party
that would be altered or result in any bonus, golden parachute, severance or
other payment or obligation to any Person, or result in any acceleration of
the time of payment or in the provision or vesting of any benefits, as a
result of the execution or performance of this Agreement or as a result of
the Merger or the other transactions contemplated hereby.
Section 4.24. Transactions With Directors, Officers and Affiliates.
----------------------------------------------------
Except for any of the following matters which would not be required to be
disclosed pursuant to Item 402 or Item 404 of Regulation S-K of the
Commission (assuming HNWC was subject to such Items), since December 31,
1999, there have been no transactions between HNWC or any of its Subsidiaries
and any director, officer, employee, stockholder or "Affiliate" (as
identified pursuant to Section 7.8 hereof) of HNWC, including, without
limitation, loans, guarantees or pledges to, by or for HNWC, from, to, by or
for any of such Persons. Except for any of the following matters which would
not be required to be disclosed pursuant to Item 402 or Item 404 of
Regulation S-K of the Commission (assuming that HNWC was subject to such
Items), since December 31, 1999, none of the officers or directors of HNWC,
and no spouse or relative of any of such Persons, has been a director or
officer of, or has had any material direct or indirect interest in, any
Person which during such period has been a supplier, customer or sales agent
of HNWC or has competed with or been engaged in any business of the kind
being conducted by HNWC.
Section 4.25. Material Contracts. Schedule 4.25 delivered to AMCON
------------------ -------------
by HNWC prior to the execution of this Agreement lists all material contracts
and agreements and use permits to which, as of the date hereof, HNWC is a
party or by which is bound or under which HNWC has or may acquire any rights,
which involve or relate to (i) obligations of HNWC for borrowed money or
other indebtedness where the amount of such obligations exceeds $50,000
individually, (ii) the lease by HNWC, as lessee or lessor, of real property
for rent of more than $25,000 per annum, (iii) the purchase or sale of goods
(other than raw material to be purchased by HNWC on terms that are customary
and consistent with the past practice of HNWC and in amounts and at prices
substantially consistent with past practices of HNWC) or services with an
aggregate minimum purchase price of more than $25,000 per annum, (iv) rights
to manufacture and/or distribute any product which accounted for more than
$25,000 of the consolidated revenues of HNWC during the fiscal year ended
December 31, 1999 or under which HNWC received or paid license or other fees
in excess of $25,000 during any year, (v) the purchase or sale of assets or
properties not in the ordinary course of business having a purchase price in
excess of $25,000, (vi) the right (whether or not currently exercisable) to
use, license (including any "in-license" or "outlicense"), sublicense or
otherwise exploit any intellectual property right or other proprietary asset
of HNWC or any other Person which, when considered together with all such
other rights, is material to HNWC; (vii) any material collaboration or joint
venture or similar arrangement; (viii) the restriction on the right or
ability of HNWC (A) to compete with any other Person, (B) to acquire any
product or other asset or any services from any other
A-30
Person, (C) to solicit, hire or retain any Person as an employee, consultant
or independent contractor, (D) to develop, sell, supply, distribute, offer,
support or service any product or any technology or other asset to or for any
other Person, (E) to perform services for any other Person, or (F) to
transact business or deal in any other manner with any other Person; (ix) any
currency hedging; (x) individual capital expenditures or commitments in
excess of $25,000; or (xi) any license, lease, permit or other right to use
any water used by HNWC in its bottling operations. All such contracts and
agreements and permits are duly and validly executed by HNWC, the other party
thereto and all Governmental Entities, as the case may be, and are in full
force and effect in all material respects. HNWC has not violated or breached,
or committed any default under, any contract or agreement or permit, and, to
the knowledge of HNWC, neither HNWC or other Person has violated or breached,
or committed any default under, any contract or agreement or permit, which
violation, breach or default (alone or in combination with other violations,
breaches or defaults under such contract or agreement or permit or under
other contracts or agreements or permits) has had or may reasonably be
expected to have a HNWC Material Adverse Effect. No event has occurred which,
after notice or the passage of time or both, would constitute a default by
HNWC under any contract or agreement or permit or give any Person the right
to (A) declare a default or exercise any remedy under any contract or
agreement or permit, (B) receive or require a rebate, chargeback, penalty or
change in delivery schedule under any contract or agreement or permit, (C)
accelerate the maturity or performance of any contract or agreement or
permit, or (D) cancel, terminate or modify any contract or agreement or
permit, in each case which, together with all other events of the types
referred to in clauses (A), (B), (C) and (D) of this sentence has had or may
reasonably be expected to have a HNWC Material Adverse Effect. All such
contracts and agreements and permits will continue, after the Effective Time,
to be binding in all material respects in accordance with their respective
terms until their respective expiration dates.
Section 4.26. Certain Business Practices. Neither HNWC nor to
--------------------------
the knowledge of HNWC any director, officer, agent or employee of HNWC has
(i) used any funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity, (ii) made any unlawful
payment to foreign or domestic government officials or employees or to
foreign or domestic political parties or campaigns or violated any provision
of the Foreign Corrupt Practices Act of 1977, as amended, (assuming for
purposes of this Section 4.26 that HNWC is subject to Section 30A of the
Exchange Act) or (iii) made any other unlawful payment.
Section 4.27. Insurance. HNWC has made available to AMCON a
---------
summary of all material insurance policies and all material self insurance
programs and arrangements relating to the business, assets and operations of
HNWC . Each of such insurance policies is in full force and effect. Since
December 31, 1999, HNWC has not received any notice or other communication
regarding any actual or possible (i) cancellation or invalidation of any
material insurance policy, (ii) refusal of any coverage or rejection of any
material claim under any insurance policy, or (iii) material adjustment in
the amount of the premiums payable with respect to any insurance policy.
There is no pending workers' compensation or other claim under or based upon
any insurance policy of HNWC other than claims incurred in the ordinary
course of business.
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Section 4.28. No Actions Inconsistent with Article VI. HNWC has
---------------------------------------
not taken any of the actions contemplated by Article VI of this Agreement during
the period from and including September 29, 2000 through and including the date
of this Agreement, except for the issuance of the Convertible Notes and the
Non-Excluded Shares.
Section 4.29. Use of Proceeds of Notes and Advances. None of the
-------------------------------------
proceeds of the $500,000 Convertible Note or the Other Convertible Notes, or any
other loans or advances made by AMCON or its subsidiaries to HNWC have been or
will be used for any purposes other than (a) providing working capital and other
general corporate purposes of HNWC, and (b) to redeem the HNWC Series A
Convertible Preferred Stock or Series B Convertible Preferred Stock or both, in
each case, outstanding as of September 29, 2000.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF MERGER SUB
Merger Sub represents and warrants to HNWC as follows:
Section 5.1. Organization. Merger Sub is a corporation duly
------------
incorporated, validly existing and in good standing under the laws of
Delaware. Merger Sub is a direct wholly-owned subsidiary of AMCON.
Section 5.2. Corporate Authorization. Merger Sub has all
-----------------------
requisite corporate power and authority to enter into this agreement and to
consummate the transaction contemplated by this Agreement. The execution,
delivery and performance by each of Merger Sub of this Agreement and the
consummation of the transactions contemplated by this Agreement have been
duly authorized by all necessary corporate action on the part of Merger Sub.
This Agreement has been duly executed and delivered by Merger Sub and
constitutes a valid and binding agreement of Merger Sub, enforceable against
it in accordance with its terms, except as such enforceability may be limited
by bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors generally or by general equity principles.
Section 5.3. Non-Contravention. The execution, delivery and
-----------------
performance by Merger Sub of this Agreement and the consummation by Merger
Sub of the transactions contemplated by this Agreement do not and will not
contravene or conflict with its certificate of incorporation or bylaws.
Section 5.4. No Business Activities. Merger Sub has not conducted
----------------------
any activities other than in connection with the organization of Merger Sub,
the negotiation and execution of this Agreement and the consummation of the
transactions contemplated by this Agreement. Merger Sub has no subsidiaries.
Section 5.5. Taxes. Merger Sub has not taken or agreed to take,
-----
will not take, and is not aware of any fact or circumstance that would
prevent or impede the Merger from qualifying as 368 Reorganizations.
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ARTICLE VI
COVENANTS OF HNWC
HNWC agrees as follows:
Section 6.1. HNWC Interim Operations. Except as set forth in
-----------------------
the HNWC Disclosure Schedule or as otherwise expressly contemplated or
permitted hereby, or as required by any Governmental Entity of competent
jurisdiction, without the prior consent of AMCON (which consent shall not be
unreasonably withheld or delayed), from the date hereof until the Effective
Time, HNWC shall conduct its business in all material respects in the
ordinary course consistent with past practice and shall use commercially
reasonable efforts to (i) preserve intact its present business organization,
(ii) maintain in effect all material foreign, federal, state and local
licenses, approvals and authorizations, including, without limitation, all
material licenses and permits that are required for HNWC to carry on its
business and (iii) preserve existing relationships with its material
customers, lenders, suppliers and others having material business
relationships with it. Without limiting the generality of the foregoing,
except as otherwise expressly contemplated or permitted by this Agreement, or
as required by a Governmental Entity of competent jurisdiction, from the date
hereof until the Effective Time, without the prior consent of AMCON (which
consent shall not be unreasonably withheld or delayed), HNWC shall not:
(a) amend its certificate of incorporation or by-laws;
(b) split, combine or reclassify any shares of capital
stock of HNWC or declare, set aside or pay any dividend in respect
of its capital stock or redeem, repurchase or otherwise acquire or
offer to redeem, repurchase, or otherwise acquire any of its
securities;
(c) (i) issue, deliver or sell, or authorize the
issuance, delivery or sale of, any shares of its capital stock of
any class or any securities convertible into or exercisable for, or
any rights, warrants or options to acquire, any such capital stock
or any such convertible securities, other than (A) a number of
shares of capital stock equal to that number of shares underlying
options forfeited prior to the Closing by former HNWC employees,
pursuant to the HNWC Employee Plans, (B) HNWC Common Stock upon the
exercise of stock options or warrants in accordance with their
present terms or upon exercise of options issued pursuant to clause
(A) of this Section 6.1(c)(i), (C) HNWC Common Stock upon the
conversion of the $500,000 Convertible Note or the Other Convertible
Notes, or (D) other existing contractual arrangements, or (ii) amend
in any respect any term of any outstanding security of HNWC;
(d) other than in connection with transactions not
prohibited by Section 6.1(e), incur any capital expenditures or any
obligations or liabilities in respect thereof, except for those (i)
contemplated by the capital expenditure budgets for HNWC previously
made available to AMCON, or (ii) incurred in the ordinary course of
business of HNWC and consistent with past practice;
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(e) acquire (whether pursuant to cash merger, stock or
asset purchase or otherwise) in one transaction or series of related
transactions (i) any assets (including any equity interests) having
a fair market value in excess of $25,000, or (ii) all or
substantially all of the equity interests of any Person or any
business or division of any Person having a fair market value in
excess of $25,000, but in no event shall the expenditures,
commitments, obligations or liabilities made, incurred or assumed,
as the case may be, by HNWC pursuant to Sections 6.1(d) and 6.1(e)
exceed $50,000 in the aggregate;
(f) sell, lease, out-license, encumber or otherwise
dispose of any assets, other than (i) sales of finished goods in the
ordinary course of business consistent with past practice, (ii)
equipment and property no longer used in the operation of HNWC's
business and (iii) assets related to discontinued operations of
HNWC;
(g) (i) incur any indebtedness for borrowed money or
guarantee any such indebtedness, (ii) issue or sell any debt
securities or warrants or rights to acquire any debt securities of
HNWC, (iii) make any loans, advances or capital contributions to or
investments in, any other Person, or (iv) guarantee any debt
securities or indebtedness of others in any case in an amount in
excess of $100,000, except in the ordinary course of business
consistent with past practice (which exception shall include,
without limitation, borrowings under HNWC's existing credit
agreements and overnight borrowings);
(h) (i) enter into any agreement or arrangement that
limits or otherwise restricts HNWC or any of its Affiliates or any
successor thereto or that would, after the Effective Time, limit or
restrict HNWC or the Surviving Corporation, or any of their
respective Affiliates, from engaging or competing in any line of
business or in any location, or (ii) enter into, amend, modify or
terminate any material contract, agreement or arrangement of HNWC or
otherwise waive, release or assign any material rights, claims or
benefits of HNWC thereunder; provided, however, that this Section
6.1(h) shall not prevent HNWC from entering into material contracts
with customers, suppliers or distributors, so long as such contracts
are entered into in the ordinary course and consistent with HNWC's
prior practice;
(i) (i) except as required by law or a written
agreement existing on or prior to the date hereof, increase the
amount of compensation of any director or executive officer or make
any increase in or commitment to increase any employee benefits,
(ii) except as required by law, a written agreement existing on or
prior to the date hereof, or a HNWC severance policy existing as of
the date hereof, grant any severance or termination pay to any
director, officer or employee of HNWC or, (iii) adopt any additional
employee benefit plan or, except in the ordinary course of business
consistent with past practice and containing only normal and
customary terms, make any contribution to any existing such plan or
(iv) except as may be required by law or a written agreement or
employee benefit plan existing on or prior to the date hereof, or as
contemplated by this Agreement, enter into, amend in any respect, or
accelerate the vesting under any HNWC Employee Plan, employment
agreement, option, license agreement or retirement agreements, or
(v) hire any employee with an annual base salary in excess of
$40,000;
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(j) change (x) HNWC's methods of accounting in effect
at December 31, 1999 except as required by changes in GAAP, as
concurred with by its independent public accountants, (y) HNWC's
fiscal year, or (z) make any material Tax election, other than in
the ordinary course of business consistent with past practice and
containing only normal and customary terms;
(k) (i) settle, propose to settle or commence, any
litigation, investigation, arbitration, proceeding or other claim
that is material to the business of HNWC, other than the payment,
discharge or satisfaction, in the ordinary course of business
consistent with past practice of liabilities (x) recognized or
disclosed in the HNWC Financial Statements (or the notes thereto) or
(y) incurred since the date of such Financial Statements in the
ordinary course of business consistent with past practice, or (ii)
make any tax election or enter into any settlement or compromise of
any tax liability;
(l) enter into any new material line of business;
(m) except to the extent required to comply with its
obligations hereunder or required by law, HNWC shall not amend or
propose to so amend its Certificate of Incorporation, Bylaws or
other governing documents;
(n) use any of the proceeds of the $500,000 Convertible
Note or the Other Convertible Notes for any purposes other than (i)
providing working capital and other general corporate purposes, and
(ii) to redeem the HNWC Series A Convertible Preferred Stock or the
Series B Convertible Preferred Stock or both, in each case,
outstanding as of September 29, 2000; or
(o) agree, resolve or commit to do any of the foregoing.
Section 6.2. Acquisition Proposals; Board Recommendation. HNWC
-------------------------------------------
agrees that it shall not, nor shall it authorize or knowingly permit any
officer, director, employee, investment banker, attorney, accountant, agent
or other advisor or representative of HNWC, directly or indirectly, to (i)
solicit, initiate or knowingly facilitate or encourage the submission of any
Acquisition Proposal for HNWC, (ii) participate in any discussions or
negotiations regarding, or furnish to any Person any information with respect
to, or take any other action knowingly to facilitate any inquiries or the
making of any proposal that constitutes an Acquisition Proposal for HNWC,
(iii) grant any waiver or release under any standstill or similar agreement
with respect to any class of HNWC equity securities or (iv) enter into any
agreement with respect to any Acquisition Proposal for HNWC. Notwithstanding
anything in this Agreement to the contrary, HNWC or its Board of Directors
shall be permitted to (A) to the extent applicable, comply with Rule 14d-9
and Rule 14e-2 promulgated under the Exchange Act with regard to an
Acquisition Proposal for HNWC.
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ARTICLE VII
COVENANTS OF HNWC AND AMCON
The parties hereto agree that:
Section 7.1. Reasonable Best Efforts. Subject to the terms and
-----------------------
conditions hereof, each party will use reasonable best efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement as promptly as
practicable.
Section 7.2. Certain Filings; Cooperation in Receipt of
------------------------------------------
Consents; Listing. As promptly as reasonably practicable after the date
-----------------
hereof, HNWC and AMCON shall prepare and AMCON shall file with the SEC the
Registration Statement, in which a Proxy Statement/Prospectus will be
included as AMCON's prospectus. Each of HNWC and AMCON shall use all
reasonable efforts to have the Registration Statement declared effective
under the Securities Act as promptly as reasonably practicable after such
filing and to keep the Registration Statement effective as long as is
necessary to consummate the Merger and the transactions contemplated thereby.
HNWC shall mail the Proxy Statement/Prospectus to its stockholders as
promptly as reasonably practicable after the Registration Statement is
declared effective under the Securities Act and, if necessary, after the
Proxy Statement/Prospectus shall have been so mailed, promptly circulate
amended, supplemental or supplemented proxy material, and, if required in
connection therewith, resolicit proxies. AMCON and HNWC shall take any action
(other than qualifying to do business in any jurisdiction in which it is not
now so qualified or to file a general consent to service of process) required
to be taken under any applicable state securities or blue sky laws in
connection with the issuance of shares of Surviving Corporation Common Stock
in the Merger.
(a) No amendment or supplement to the Proxy Statement/
Prospectus will be made by HNWC or AMCON without the approval of the
other party, which will not be unreasonably withheld or delayed.
Each party will advise the other party, promptly after it receives
notice thereof, of (i) the time when the Registration Statement has
become effective or any supplement or amendment has been filed, (ii)
the issuance of any stop order, (iii) the suspension of the
qualification of the shares of AMCON Common Stock issuable in
connection with the Merger for offering or sale in any jurisdiction,
or (iv) any request by the SEC for amendment of the Proxy
Statement/Prospectus or comments thereon and responses thereto or
requests by the SEC for additional information, in each case,
whether orally or in writing. If at any time prior to the Effective
Time, HNWC or AMCON discovers any information relating to either
party, or any of their respective Affiliates, officers or directors,
that should be set forth in an amendment or supplement to the Proxy
Statement/Prospectus, so that such document would not include any
misstatement of a material fact or omit to state any material fact
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, the party
that discovers such information shall promptly notify the other
party hereto and an appropriate amendment or supplement describing
such information shall be promptly filed with respect thereto, and
with respect to the Registration Statement, as the case may be, with
the SEC and, to the extent required by law or regulation,
disseminated to the stockholders of HNWC.
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(b) HNWC and AMCON shall cooperate with one another in
(i) determining whether any other action by or in respect of, or
filing with, any Governmental Entity is required, or any actions,
consents, approvals or waivers are required to be obtained from
parties to any material contracts, in connection with the
consummation of the transactions contemplated hereby, (ii) seeking
any such other actions, consents, approvals or waivers or making any
such filings, furnishing information required in connection
therewith and seeking promptly to obtain any such actions, consents,
approvals or waivers, (iii) setting a mutually acceptable date for
the HNWC Special Meeting, and (iv) taking all lawful action to call,
give notice of, convene and hold a meeting of HNWC stockholders for
the purpose of obtaining the requisite vote to approve and adopt
this Agreement, the Merger and the other matters contemplated by
this Agreement. The Board of Directors of HNWC shall, subject to its
fiduciary duties under applicable law, declare the advisability of
and recommend adoption and approval of this Agreement, the Merger
and the other matters contemplated by this Agreement by the
stockholders of HNWC, and shall not, subject to its fiduciary duties
under applicable law, withdraw, modify or materially qualify in any
manner adverse to AMCON to such recommendation or take any action or
make any statement in connection with the HNWC Stockholders Meeting
materially inconsistent with such recommendation (any such
withdrawal, modification, qualification or statement (whether or not
required), an "Adverse Change in the HNWC Recommendation").
(c) Each party shall permit the other party to review
any communication given by it to, and consult with each other in
advance of any meeting or conference with, any Governmental Entity
or, in connection with any proceeding by a private party, with any
other Person, and to the extent permitted by the applicable
Governmental Entity or other Person, give the other party the
opportunity to attend and participate in such meetings and
conferences, in each case in connection with the transactions
contemplated hereby.
(d) AMCON and HNWC agree to use their respective
reasonable best efforts to cause the shares of AMCON Common Stock to
be issued upon conversion of shares of HNWC Common Stock in
accordance with this Agreement, the Articles of Merger and the
Certificate of Merger to be approved for listing upon issuance on
the American Stock Exchange.
Section 7.3. Headquarters. The parties intend that, by the end
------------
of one year after the AMCON Effective Time, the Surviving Corporation shall
maintain its principal corporate offices and headquarters in Omaha, Nebraska.
Section 7.4. Public Announcements. AMCON and HNWC shall use
--------------------
reasonable best efforts to develop a joint communications plan and each party
shall use reasonable best efforts (i) to ensure that all press releases and
other public statements with respect to the transactions contemplated hereby
shall be consistent with such joint communications plan, and (ii) unless
otherwise required by applicable law or by obligations pursuant to any rules
of the American Stock Exchange, to consult with each other before issuing any
press release or, to the extent practical, otherwise making any public
statement with respect to this Agreement or the transactions contemplated
hereby.
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Section 7.5. Access to Information; Notification of Certain Matters.
------------------------------------------------------
(a) From the date hereof until the Effective Time and
subject to applicable law, HNWC and AMCON shall (i) give to the
other party, its counsel, financial advisors, auditors and other
authorized representatives reasonable access during normal business
hours to the offices, properties, books, records, contracts,
commitments, officers and employees and all other information
concerning it and its business, properties, assets, condition
(financial or otherwise) or prospects of such party, (ii) consistent
with its legal obligations, furnish or make available to the other
party, its counsel, financial advisors, auditors and other
authorized representatives such financial and operating data and
other information as such Persons may reasonably request and (iii)
instruct its employees, counsel, financial advisors, auditors and
other authorized representatives to cooperate with the reasonable
requests of the other party in its investigation. Any investigation
pursuant to this Section 6.5 shall be conducted in such manner as
not to interfere unreasonably with the conduct of the business of
the other party. Unless otherwise required by law, each of AMCON and
HNWC will hold, and will cause its respective officers, employees,
counsel, financial advisors, auditors and other authorized
representatives to hold, any nonpublic information obtained in any
such investigation in confidence in accordance with Section 7.9. No
information or knowledge obtained in any investigation pursuant to
this Section 7.5 shall affect or be deemed to modify any
representation or warranty made by any party hereunder.
(b) Each party hereto shall give prompt notice to each
other party hereto of:
(i) the receipt by such party or any of such
party's Subsidiaries of any notice or other communication
from any Person alleging that the consent of such Person is
or may be required in connection with the transactions
contemplated by this Agreement.
(ii) the receipt by such party or any of such
party's Subsidiaries of any notice or other communication
from any Governmental Entity in connection with any of the
transactions contemplated by this Agreement; and
(iii) such party's obtaining Knowledge of any
actions, suits, claims, investigations or proceedings
commenced, threatened against, relating to or involving or
otherwise affecting any of HNWC or AMCON, as the case may be,
or any AMCON Subsidiary which relate to the consummation of
the transactions contemplated by this Agreement; and
(iv) such party's obtaining Knowledge of the
occurrence, or failure to occur, of any event which
occurrence or failure to occur will be likely to cause (A)
any representation or warranty contained in this Agreement to
be untrue or inaccurate in any material respect, or (B) any
material failure of any party to comply with or satisfy any
covenant, condition or agreement o be complied with or
satisfied by it under this Agreement; provided, however, that
no such notification shall limit or otherwise affect the
representations, warranties,
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obligations or remedies of the parties to the conditions to
the obligations of the parties hereunder.
Section 7.6. Further Assurances. At and after the
------------------
Effective Time, the officers and directors of the Surviving Corporation will
be authorized to execute and deliver, in the name and on behalf of AMCON,
HNWC or Merger Sub, any deeds, bills of sale, assignments or assurances and
to take and do, in the name and on behalf of AMCON, HNWC or Merger Sub, any
other actions and things to vest, perfect or confirm of record or otherwise
in the Surviving Corporation any and all right, title and interest in, to and
under any of the rights, properties or assets of HNWC, AMCON or Merger Sub
acquired or to be acquired by the Surviving Corporation as a result of, or in
connection with the Merger.
Section 7.7. Tax Treatment.
-------------
(a) Prior to the Effective Time, each party shall
cooperate with the other party and shall use its reasonable best
efforts to cause the Merger to qualify as a 368 Reorganization, and
will not take any action reasonably likely to cause the Merger not
so to qualify. The Surviving Corporation shall not take any action
after the Effective Time that would cause the Merger not to qualify
as a 368 Reorganization.
(b) Each party shall cooperate with the other party and
shall use its reasonable best efforts to obtain the opinion referred
to in Section 8.3(b) and in connection therewith, HNWC shall deliver
to such counsel a customary representation letter substantially in
the forms attached hereto as Exhibit H (the "HNWC Representation
Letter") or otherwise in form and substance reasonably satisfactory
to such counsel.
Section 7.8. Affiliates. Not less than 45 days prior to
----------
the Effective Time, HNWC shall deliver to AMCON a letter identifying all
persons who, in the reasonable judgment of HNWC, may be deemed at the time
this Agreement is submitted for adoption by the stockholders of HNWC,
"affiliates" of HNWC for purposes of Rule 145 under the Securities Act, and
such list shall be updated as necessary to reflect changes from the date
hereof. HNWC shall use reasonable best efforts to cause each Person
identified on such list to deliver to AMCON not less than 30 days prior to
the Effective Time, a written agreement substantially in the form attached as
Exhibit I hereto (a "HNWC Affiliate Agreement").
Section 7.9. Confidentiality.
---------------
(a) Prior to the Effective Time and after any
termination of this Agreement each party hereto will hold, and will
use its reasonable best efforts to cause its officers, directors,
employees, accountants, counsel, consultants, advisors, affiliates
(as such term is used in Rule 12b-2 under the Exchange Act) and
representatives (collectively, the "Representatives"), to hold, in
confidence all confidential documents and information concerning the
other parties hereto and its Subsidiaries furnished to such party in
connection with the transactions contemplated by this Agreement,
including, without limitation, all analyses, compilations, studies
or records prepared by the party receiving the information or by
such party's Representatives, that contain or otherwise reflect or
are generated from such information (collectively, the "Confidential
Material"). The party
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furnishing any Confidential Material is herein referred to as the
"Delivering Company" and the party receiving any Confidential
Material is herein referred to as the "Receiving Company."
(b) The Receiving Company agrees that the Confidential
Material will not be used other than for the purpose of the
transactions contemplated by this Agreement, and that such
information will be kept confidential by the Receiving Company and
its Representatives; provided, however, that (i) any of such
-----------------
information may be disclosed to the Representatives who need to know
such information for the purpose described above (it being
understood that (a) each such Representative shall be informed by
the Receiving Company of the confidential nature of such
information, shall be directed by the Receiving Company to treat
such information confidentially and not to use it other than for the
purpose described above and shall agree to be bound by the terms of
this Section 7.9, and (b) in any event, the Receiving Company shall
be responsible for any breach of this Agreement by any of its
Representatives), and (ii) any other disclosure of such information
may be made if the Delivering Company has, in advance, consented to
such disclosure in writing. The Receiving Company will make all
reasonable, necessary and appropriate efforts to safeguard the
Confidential Material from disclosure to anyone other than as
permitted hereby.
(c) Notwithstanding the foregoing, if the Receiving
Company or any of its Representatives is requested or required (by
oral question or request for information or documents in legal
proceedings, interrogatories, subpoena, civil investigative demand
or similar process) to disclose any Confidential Material, the
Receiving Company will promptly notify the Delivering Company of
such request or requirement so that the Delivering Company may seek
an appropriate protective order and/or waive the Receiving Company's
compliance with the provisions of this Agreement. If, in the absence
of a protective order or the receipt of a waiver hereunder, the
Receiving Company or any of its Representatives is nonetheless, in
the reasonable written opinion of the Receiving Company's counsel,
compelled to disclose Confidential Material to any tribunal, the
Receiving Company or such Representative, after notice to the
Delivering Company, may disclose such information to such tribunal.
The Receiving Party shall exercise reasonable efforts to obtain
reliable assurance that confidential treatment will be accorded the
Confidential Material so disclosed. The Receiving Company or such
Representative shall not be liable for the disclosure of
Confidential Material hereunder to a tribunal compelling such
disclosure unless such disclosure to such tribunal was caused by or
resulted from a previous disclosure by the Receiving Company or any
of its Representatives not permitted by this Agreement.
(d) This Section 7.9 shall be inoperative as to
particular portions of the Confidential Material if such information
(i) is or becomes generally available to the public other than as a
result of a disclosure by the Receiving Company or its
Representatives, (ii) was available to the Receiving Company on a
non-confidential basis prior to its disclosure to the Receiving
Company by the Delivering Company or the Delivering Company's
Representatives, or (iii) becomes available to the Receiving Company
on a non-confidential basis from a source other than the Delivering
Company or the Delivering Company's Representatives, provided that
such source is not known by
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the Receiving Company, after reasonable inquiry, to be bound by a
confidentiality agreement with the Delivering Company or the
Delivering Company's Representatives and is not otherwise prohibited
from transmitting the information to the Receiving Company by a
contractual, legal or fiduciary obligation. The fact that
information included in the Confidential Material is or becomes
otherwise available to the Receiving Company or its Representatives
under clauses (i) through (iii) above shall not relieve the
Receiving Company or its Representatives of the prohibitions of the
confidentiality provisions of this Section 7.9 with respect to the
balance of the Confidential Material.
(e) If this Agreement is terminated, each party hereto
will, and will use its reasonable best efforts to cause its
officers, directors, employees, accountants, counsel, consultants,
advisors and agents to, destroy or deliver to the party from whom
such Confidential Material was obtained, upon request, all documents
and other materials, and all copies thereof, obtained by such party
or on its behalf from any such other parties in connection with this
Agreement that are subject to such confidence.
Section 7.10. Benefit Matters. AMCON and HNWC will work together
---------------
to design benefit plans to be adopted by the Surviving Corporation for the
benefit of its employees as soon as practicable following the Merger. Until
such adoption, the Surviving Corporation shall cause all AMCON Employee Plans
and all HNWC Employee Plans to be maintained in full force and effect.
Section 7.11. Exemption From Liability Under Section 16(b).
--------------------------------------------
(a) Provided that HNWC delivers to AMCON the Section
16 Information with respect to HNWC prior to the Effective Time, the
Board of Directors of AMCON, or a committee of Non-Employee
Directors thereof (as such term is defined for purposes of Rule
16b-3(d) under the Exchange Act), shall adopt a resolution in
advance of the Effective Time providing that the receipt by the HNWC
Insiders of AMCON Common Stock in exchange for shares of HNWC Common
Stock, and of options to purchase AMCON Common Stock upon assumption
and conversion by the Surviving Corporation of options to purchase
HNWC Common Stock, in each case pursuant to the transactions
contemplated hereby and to the extent such securities are listed in
the Section 16 Information, are intended to be exempt from liability
pursuant to Rule 16b-3 under the Exchange Act.
(b) "Section 16 Information" shall mean information
accurate in all respects regarding the HNWC Insiders, the number of
shares of HNWC Common Stock, or other HNWC equity securities, deemed
to be beneficially owned by each such HNWC Insider and expected to
be exchanged for Surviving Corporation Common Stock in connection
with the Merger.
(c) "HNWC Insiders" shall mean those officers and
directors of HNWC who are subject to the reporting requirements of
Section 16(a) of the Exchange Act who are listed in the Section 16
Information.
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Section 7.12. Lease Agreement and Right of First Offer. AMCON and
----------------------------------------
HNWC agree that the Lease Agreement between HNWC and Hawaii Brewery
Development Co., Inc. ("Hawaii Brewery"), regarding real property situated in
Keaau, Puna, Hawaii, together with all buildings and other improvements
located thereon, the water well located thereon and the appurtenant pumping
equipment (which are described in Exhibits A and B to that Lease), which
Lease has been duly and validly executed and delivered by HNWC and Hawaii
Brewery and is attached hereto as Exhibit K, shall become effective on the
Closing Date and shall thereupon become legally binding and enforceable in
accordance with its terms. In addition, the letter agreement, dated as of the
date hereof, together with any documentation necessary to make such agreement
legally recordable on applicable records, shall grant to the Surviving
Corporation a right of first offer to purchase the Premises (as defined in
the Lease attached hereto as Exhibit K) or any part thereof upon the same
terms and conditions as which lessor proposes to sell such Premises or any
part thereof to a third party or parties.
ARTICLE VIII
CONDITIONS TO THE MERGER
Section 8.1. Conditions to the Obligations of Each Party. The
-------------------------------------------
respective obligations of HNWC, AMCON and Merger Sub to consummate the Merger
are subject to the satisfaction or waiver on or prior to the Closing Date of
the following conditions:
(a) Stockholder Approval. The HNWC Stockholder Approval
--------------------
shall have been obtained;
(b) Securities Laws. (i) The Registration Statement
---------------
shall have become effective in accordance with the provisions of the
Securities Act, no stop order suspending the effectiveness of the
Registration Statement shall have been issued by the SEC and no
proceedings for that purpose shall have been initiated or threatened
by the SEC and not concluded or withdrawn and (ii) all state
securities or blue sky authorizations necessary to carry out the
transactions contemplated hereby shall have been obtained and be in
effect;
(c) AMEX Listing. The shares of AMCON Common Stock to
------------
be issued in the Merger shall have been approved for listing upon
issuance on the AMEX, subject to official notice of issuance;
(d) Regulatory Approvals. Other than the filings
--------------------
provided for by Article II, all authorizations, consents, orders or
approvals of, or declarations or filings with, or expirations of
waiting periods imposed by, any Governmental Entity the failure of
which to obtain would have a HNWC Material Adverse Effect, an AMCON
Material Adverse Effect or a Surviving Corporation Material Adverse
Effect, shall have been filed, occurred or been obtained; and
(e) No Injunctions or Restraints; Illegality. No Laws
----------------------------------------
shall have been adopted or promulgated, and no temporary restraining
order, preliminary or permanent injunction or other order issued by
a court or other Governmental Entity of competent jurisdiction
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shall be in effect, (i) having the effect of making the Merger
illegal or otherwise prohibiting, enjoining or restraining
consummation of the Merger or (ii) which otherwise would reasonably
be expected to have a Surviving Corporation Material Adverse Effect
after giving effect to the Merger; provided, however, that the
provisions of this Section 8.1(e) shall not be available to any
party whose failure to fulfill its obligations pursuant to Sections
7.1 and 7.2 shall have been the cause of, or shall have resulted in,
such order or injunction.
Section 8.2. Conditions to the Obligations of AMCON and Merger
-------------------------------------------------
Sub. The obligations of AMCON and Merger Sub to consummate the Merger are
---
subject to the satisfaction, or waiver by AMCON and Merger Sub, on or prior
to the Closing Date, of the following further conditions:
(a) Representations and Covenants. (i) HNWC shall have
-----------------------------
performed in all material respects all of its obligations hereunder
required to be performed by it at or prior to the time of the filing
of the Articles of Merger and the Certificates of Merger; (ii) the
representations and warranties of HNWC in this Agreement that are
qualified as to materiality, HNWC Material Adverse Effect or
Surviving Corporation Material Adverse Effect shall be accurate, and
any such representations and warranties that are not so qualified
shall be accurate, in all material respects, as of the date of this
Agreement and as of the Effective Time (except for representations
and warranties that address matters only as of a specific date, in
which case such representations and warranties qualified as to
materiality, HNWC Material Adverse Effect or Surviving Corporation
Material Adverse Effect shall be true and correct, and those not so
qualified shall be true and correct in all material respects, on and
as of such earlier date); and (iii) AMCON shall have received a
certificate signed by the Chief Executive Officer or Chief Financial
Officer of HNWC to the foregoing effect;
(b) Affiliate Agreements. AMCON shall have received
--------------------
from each Person named in the letter referred to in Section 7.8 an
executed copy of a HNWC Affiliate Agreement substantially in the
form of Exhibit I to this Agreement;
(c) Employment Agreements. The Chief Executive Officer
---------------------
of HNWC shall have executed and delivered to the Surviving
Corporation an employment agreement in the form attached hereto as
Exhibit J;
(d) No Material Adverse Change. There shall have been
--------------------------
no material adverse change in the financial condition, results of
operations or cash flows or assets, liabilities, business or
prospects of HNWC from September 29, 2000 through the Closing Date,
except as disclosed in (i) the HNWC Disclosure Schedule dated the
date hereof, or (ii) HNWC SEC Documents filed prior to the date
hereof;
(e) Dissenters. The aggregate number of Dissenters'
----------
Shares shall not exceed 5.0% of the total number of shares of HNWC
Common Stock outstanding and entitled to vote;
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(f) Consents. Consents shall have been obtained from
--------
all parties to HNWC Material Contracts (as defined in Section 4.25)
that are needed because of the Merger or the transactions
contemplated hereby in order to permit the Surviving Corporation to
enjoy all rights and benefits thereunder (the "Material Consent
Condition"); and
(g) All of the shares of HNWC's Series B Convertible
Preferred Stock shall have been repurchased.
Section 8.3. Conditions to the Obligations of HNWC. The
-------------------------------------
obligations of HNWC to consummate the Merger are subject to the satisfaction,
or waiver by HNWC, on or prior to the Closing Date, of the following further
conditions:
(a) Representations and Covenants. (i) AMCON shall have
-----------------------------
performed in all material respects all of its obligations hereunder
required to be performed by it at or prior to the time of the filing
of the Articles of Merger and the Certificates of Merger; (ii) the
representations and warranties of AMCON and Merger Sub in this
Agreement that are qualified as to materiality, AMCON Material
Adverse Effect or Surviving Corporation Material Adverse Effect
shall be accurate, and any such representations and warranties that
are not so qualified shall be accurate, in all material respects, as
of the date of this Agreement and as of the Effective Time (except
for representations and warranties which address matters only as of
a specific date, in which case such representations and warranties
qualified as to materiality, AMCON Material Adverse Effect or
Surviving Corporation Material Adverse Effect shall be true and
correct, and those not so qualified shall be true and correct in all
material respects, on and as of such earlier date); and (iii) HNWC
shall have received a certificate signed by the Chief Executive
Officer or Chief Financial Officer of AMCON and Merger Sub to the
foregoing effect;
(b) Tax Opinion. HNWC shall have received an opinion
-----------
of Squire, Sanders & Dempsey L.L.P. in form and substance reasonably
satisfactory to HNWC, on the basis of certain facts, representations
and assumptions set forth in such opinion, dated as of the date of
the filing of the Articles of Merger and the Certificates of Merger,
to the effect that the Merger will qualify for federal income tax
purposes as a 368 Reorganization and that each of AMCON and HNWC
will be a party to the reorganizations within the meaning of Section
368(b) of the Code. In rendering such opinion, such counsel shall be
entitled to rely upon representations of officers of AMCON and HNWC;
(c) Employment Agreements. The Chief Executive Officer
---------------------
of HNWC shall have executed and delivered to the Surviving
Corporation an employment agreement in the form attached hereto as
Exhibit J; and
(d) No Material Adverse Change. There shall have been
--------------------------
no material adverse change in the financial condition, results of
operations or cash flows or assets, liabilities, business or
prospects of AMCON from September 30, 2000 through the Closing Date,
except as disclosed in (i) the AMCON Disclosure Schedule dated the
date hereof, or (ii) AMCON SEC Documents filed prior to the date
hereof.
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ARTICLE IX
TERMINATION
Section 9.1. Termination. This Agreement may be terminated at any
-----------
time prior to the Effective Time by written notice by the terminating party
to the other party (except if such termination is pursuant to Section
9.1(a)), notwithstanding approval thereof by the stockholders of HNWC:
(a) by mutual written agreement of AMCON and HNWC;
(b) by either HNWC or AMCON, if
(i) the Merger shall not have been consummated
by December 31, 2001 (the "Expiration Date"); provided,
--------
however, that the right to terminate this Agreement under
-------
this Section 9.1(b)(i) shall not be available to any party
whose breach of any provision of this Agreement has resulted
in the failure of the Merger to occur on or before the
Expiration Date; or
(ii) there shall be any Law that makes
consummation of the Merger illegal or otherwise prohibited or
any judgment, injunction, order or decree of any Governmental
Entity having competent jurisdiction enjoining AMCON, HNWC or
the Merger Sub from consummating the Merger is entered and
such judgment, injunction, judgment or order shall have
become final and nonappealable and, prior to such
termination, the parties shall have used reasonable best
efforts to resist, resolve or lift, as applicable, such law,
regulation, judgment, injunction, order or decree.
(c) by AMCON, (i) if there shall have occurred a willful
and material breach of Section 6.2 by HNWC or any of its officers,
directors, employees, advisors or agents; (ii) if a breach of any
representation, warranty, covenant or agreement on the part of HNWC
set forth in this Agreement shall have occurred that would cause the
condition set forth in Section 8.2(a) not to be satisfied, and such
condition shall be incapable of being satisfied by the Expiration
Date; (iii) HNWC shall have failed to include in the Proxy
Statement/Prospectus the recommendation of the Board of Directors of
HNWC in favor of the adoption and approval of this Agreement and the
approval of the Merger; (v) the Board of Directors of HNWC shall
have approved, endorsed or recommended any Acquisition Proposal;
(vi) a tender or exchange offer relating to securities of HNWC shall
have been commenced and HNWC shall not have sent to its security
holders, within ten business days after the commencement of such
tender or exchange offer, a statement disclosing that HNWC
recommends rejection of such tender or exchange offer; or (vii) HNWC
or HNWC's Board of Directors or any committee thereof shall have
resolved to do or permit any of the foregoing;
(d) by HNWC, if a breach of any representation,
warranty, covenant or agreement on the part of AMCON set forth in
this Agreement shall have occurred that
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would cause the condition set forth in Section 8.3(a) not to be
satisfied, and such condition is incapable of being satisfied by the
Expiration Date; or
(e) automatically if the transactions contemplated
herein are enjoined by a court of competent jurisdiction for a
period extending beyond 90 days.
Section 9.2. Effect of Termination. If this Agreement is
---------------------
terminated pursuant to Section 9.1, this Agreement shall forthwith become
void and there shall be no liability or obligation on the part of AMCON or
HNWC or their respective officers or directors (i) except with respect to the
provisions of Sections 7.9, 9.2, 10.1, 10.4, 10.5, 10.10 and 10.11 of this
Agreement which provisions shall remain in full force and effect and survive
any termination of this Agreement, and (ii) except that, notwithstanding
anything to the contrary contained in this Agreement, neither AMCON nor HNWC
shall be relieved or released from any liabilities or damages arising out of
its willful material breach of this Agreement.
Section 9.3. Fees and Expenses. All fees and expenses incurred
-----------------
in connection herewith and the transactions contemplated hereby shall be paid
by the party incurring such expenses, whether or not the Merger is
consummated. As used in this Agreement, "Expenses" includes all out-of-pocket
expenses (including, without limitation, all fees and expenses of counsel,
accountants, investment bankers, experts and consultants to a party hereto
and its affiliates) incurred by a party or on its behalf in connection with
or related to the authorization, preparation, negotiation, execution and
performance of this Agreement and the transactions contemplated hereby,
including the preparation, printing, filing and mailing of the Proxy
Statement/Prospectus and the solicitation of stockholder approvals and all
other matters related to the transactions contemplated hereby.
ARTICLE X
MISCELLANEOUS
Section 10.1. Notices. All notices and other communications
-------
hereunder shall be in writing and shall be deemed duly given (a) on the date
of delivery if delivered personally, or by telecopy or telefacsimile, upon
confirmation of receipt, in each case, if on a Business Day, and otherwise on
the next Business Day, (b) on the first service, or (c) on the fifth Business
Day following the date of mailing if delivered by registered or certified
mail, return receipt requested, postage prepaid. All notices hereunder shall
be delivered as set forth below, or pursuant to such other instructions as
may be designated in writing by the party to receive such notice:
if to the Surviving Corporation, to the address set forth
below for AMCON and HNWC, including copies;
A-46
if to AMCON, to:
William F. Wright
Chairman of the Board
AMCON Distributing Company
P.O. Box 1010
Del Mar, California 92014
Facsimile: (858) 793-1994
with a copy to:
John A. Granda
Stinson, Mag & Fizzell, P.C.
1201 Walnut Street, Suite 2800
Kansas City, Missouri 64106
Facsimile: (816) 691-3495
if to HNWC to:
Marcus Bender
President
Hawaiian Natural Water Company, Inc.
98-746 Kuahao Place
Pearl City, Hawaii 96814
Facsimile: (808) 483-0536
with a copy to:
Richard P. Manson
Squire, Sanders & Dempsey L.L.P.
801 S. Figueroa Street
14th Floor
Los Angeles, California 90017
Facsimile: (213) 623-4581
Section 10.2. Survival of Representations, Warranties and
-------------------------------------------
Covenants After the Effective Time. The representations, warranties,
----------------------------------
covenants and other agreements contained herein and in any certificate or
other instrument delivered pursuant hereto, including any rights arising out
of any breach of such representations, warranties, covenants and other
agreements, shall not survive the Effective Time.
Section 10.3. Amendments; No Waivers.
----------------------
(a) Any provision of this Agreement may be amended or
waived prior to the Effective Time if, and only if, such amendment
or waiver is in writing and signed, in the case of an amendment, by
AMCON and HNWC or in the case of a waiver, by the party against whom
the waiver is to be effective; provided that after the HNWC
Stockholder
A-47
Approval, no such amendment or waiver shall, without the further
approval of such stockholders, be made that would require such
approval under any applicable law, rule or regulation.
(b) No failure or delay by any party in exercising any
right, power or privilege hereunder shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude
any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided
shall be cumulative and not exclusive of any rights or remedies
provided by law.
Section 10.4. Assignment. Neither this Agreement nor any of the
----------
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto, in whole or in part (whether by operation of law or
otherwise), without the prior written consent of the other party, and any
attempt to make any such assignment without such consent shall be null and
void. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their
respective successors and assigns.
Section 10.5. Governing Law. This Agreement shall be construed in
-------------
accordance with and governed by the internal laws of the State of Delaware
without regard to any principles of Hawaii conflicts or choice of law.
Section 10.6. Counterparts; Effectiveness. This Agreement may be
---------------------------
executed in one or more counterparts, all of which shall be considered one
and the same agreement and shall become effective when one or more
counterparts have been signed by each of the parties and delivered to the
other party (including by facsimile transmission), it being understood that
both parties need not sign the same counterpart. This Agreement shall become
effective when each party hereto shall have received counterparts hereof
signed by all of the other parties hereto.
Section 10.7. No Third Party Beneficiaries. This Agreement shall
----------------------------
be binding upon and inure solely to the benefit of each party hereto, and
nothing in this Agreement, express or implied, is intended to or shall confer
upon any other Person any right, benefit or remedy of any nature whatsoever
under or by reason of this Agreement.
Section 10.8. Interpretation. When a reference is made in this
--------------
Agreement to Sections, Exhibits or Schedules, such reference shall be to a
Section of or Exhibit or Schedule to this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed
by the words "without limitation."
Section 10.9. Enforcement. The parties agree that irreparable
-----------
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms. It is accordingly
agreed that the parties shall be entitled to specific performance of the
terms hereof, this being in addition to any other remedy to which they are
entitled at law or in equity.
Section 10.10. Entire Agreement. This Agreement (together with
----------------
the exhibits and schedules hereto) constitutes the entire agreement between
the parties with respect to the subject
A-48
matter hereof and supersedes all prior agreements and understandings, both
oral and written, between the parties with respect to the subject matter
hereof.
Section 10.11. Severability. If any term, provision, covenant or
------------
restriction set forth in this Agreement is held by a court of competent
jurisdiction to be invalid, illegal, void or unenforceable, the remainder of
the terms, provisions, covenants and restrictions set forth in this Agreement
shall remain in full force and effect and shall in no way be affected,
impaired or invalidated so long as the economic or legal substance of the
transactions contemplated hereby is not deemed by a party (acting reasonably
and in good faith) to be materially adverse to that party. Upon such a
determination, the parties shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in order that the transactions contemplated hereby may be
consummated as originally contemplated to the fullest extent possible.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and
year first above written.
AMCON DISTRIBUTING COMPANY
By: /s/ William F. Wright
-----------------------------------------
Name: William F. Wright
Title: Chairman of the Board
HAWAIIAN NATURAL WATER COMPANY, INC.
By: /s/ Marcus Bender
-----------------------------------------
Name: Marcus Bender
Title: President
AMCON MERGER SUB, INC.
By: /s/ William F. Wright
-----------------------------------------
Name: William F. Wright
Title: Chairman of the Board
A-49
APPENDIX I
DEFINITIONS
"Acquisition Proposal for HNWC" means any offer or proposal for (i)
a merger, consolidation, share exchange, business combination,
reorganization, recapitalization, issuance of securities, liquidation,
dissolution, tender offer or exchange offer or other similar transaction or
series of transactions, (ii) any purchase of 10% or more of HNWC assets,
(iii) any direct or indirect acquisition of beneficial ownership of
securities representing, or exchangeable for or convertible into, more than
10% of the outstanding securities of any class of voting securities of HNWC,
or (iv) any issuance of HNWC securities representing 10% of the outstanding
securities of any class of voting securities of HNWC, other than the
transactions contemplated by this Agreement.
"Action" means any action, suit, proceeding or investigation by or
before any Governmental Entity or arbitrator.
"Affiliate" means, with respect to any Person, any other Person,
directly or indirectly, controlling, controlled by, or under common control
with, such Person. For purposes of this definition, the term "control"
(including the correlative terms "controlling", "controlled by" and "under
common control with") means the possession, direct or indirect, of the power
to direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, or partnership or other
ownership interests, by contract, or otherwise.
"AMCON Disclosure Schedule" means the schedule delivered to HNWC by
AMCON pursuant to Article I hereof containing exceptions to the
representations and warranties of AMCON set forth in such Article III.
"AMCON SEC Documents" means (i) AMCON's annual report on Form 10-K
for its fiscal year ended September 30, 2000 (the "AMCON 10-K"), (ii) AMCON's
quarterly reports on Form 10-Q for its fiscal quarters ended December 31,
2000, March 31, 2001 and June 30, 2001, and (iii) all other reports, filings,
registration statements and other documents filed by it with the SEC since
September 30, 2000.
"Articles of Merger" means the Articles of Merger of HNWC with and
into Merger Sub, in substantially the form attached hereto as Exhibit B.
"Average AMCON Stock Price" means the average of the closing sales
price per share of AMCON Common Stock as reported by AMEX on each of the 20
consecutive trading days immediately preceding the third trading day prior to
the Determination Date.
"Business Day" means any day other than a Saturday, Sunday or one on
which banks are authorized by law to close in the City of New York.
"Certificate of Merger" means the Certificate of Merger of HNWC with
and into Merger Sub, in substantially the form attached hereto as Exhibit C.
"Closing" means the closing of the Merger contemplated in this
Agreement.
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"Closing Date" means the date on which the Closing occurs.
"Code" means the Internal Revenue Code of 1986, as amended.
"Determination Date" means the date on which the last of the
following occurs: (i) the effective date (including the expiration of any
applicable waiting period by law) of the last required consent or order of
any Governmental Entity having authority over and approving or exempting the
Merger, and (ii) the date on which the stockholders of HNWC have approved the
Merger.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Exchange Agent" means the agent to be agreed upon by AMCON and HNWC
and engaged by the Surviving Corporation to effect the exchange of the Common
Certificates pursuant to Section 2.9 of this Agreement.
"Governmental Entity" means any federal, state or local governmental
authority, any transgovernmental authority or any court, tribunal,
administrative or regulatory agency or commission or other governmental
authority or agency, domestic or foreign.
"HNWC Common Stock" means the common stock of HNWC, no par value per
share.
"HNWC Disclosure Schedule" means the schedule delivered to AMCON by
HNWC pursuant to Article IV hereof containing exceptions to the
representations and warranties of HNWC set forth in such Article V.
"HNWC SEC Documents" means (i) HNWC annual report on Form 10-KSB for
its fiscal year ended December 31, 2000 (the "HNWC 10-KSB"), (ii) HNWC
quarterly reports on Form 10-QSB for its fiscal quarters ended March 31, 2001
and June 30, 2001 (each a "HNWC 10-QSB"), (iii) HNWC proxy or information
statements relating to meetings of, or actions taken without a meeting by,
HNWC stockholders held since December 31, 1999, and (iv) all other reports,
filings, registration statements and other documents filed by it with the SEC
since December 31, 2000.
"HNWC Series A Convertible Preferred Stock" means the 1,250 shares
of Series A Convertible Preferred Stock of HNWC, par value $1.00 per share,
authorized by unanimous written consent of the HNWC board of directors dated
March 1, 1999.
"HNWC Series B Convertible Preferred Stock" means the 250 shares of
Series B Convertible Preferred Stock of HNWC, par value $1.00 per share,
authorized by unanimous consent of the HNWC board of directors dated March 3,
2000.
"HNWC Series C Convertible Preferred Stock" means the 750,000 shares
of Series C Convertible Preferred Stock of HNWC, par value of $1.00 per
share, authorized by unanimous consent of the HNWC board of directors dated
as of October __, 2000.
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"Knowledge" means, with respect to the matter in question, if any of
(i) in the case of AMCON or Merger Sub, William Wright, Chairman of the
Board, Kathleen Evans, President, and Mike James, Chief Financial Officer,
and (ii) in the case of HNWC, Marcus Bender, President and Chief Executive
Officer, and Willard Irwin, Treasurer and Chief Financial Officer, has actual
knowledge of such matter.
"Law" means any federal, state, local, municipal, foreign,
international, multinational, or other judicial or administrative order,
judgment, decree, constitution, statute, rule, regulation, treaty, ordinance
or principle of common law.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such
asset.
"Material Adverse Effect" means a material adverse effect on the
financial condition, business, results of operations or prospects of a Person
and its Subsidiaries, taken as a whole, but shall exclude any material
adverse effect arising out of any change or development relating to (i) U.S.
or global economic or industry conditions, (ii) changes in U.S. or global
financial markets or conditions, and/or (iii) any generally applicable change
in Law or GAAP or interpretation of any thereof. "AMCON Material Adverse
Effect" means a Material Adverse Effect in respect of AMCON, "HNWC Material
Adverse Effect" means a Material Adverse Effect in respect of HNWC and
"Surviving Corporation Material Adverse Effect" means a Material Adverse
Effect in respect of the Surviving Corporation.
"Merger" has the meaning specified in the Recitals to this
Agreement.
"Person" means an individual, a corporation, a limited liability
company, a partnership, an association, a trust or any other entity or
organization, including any Governmental Entity.
"Proxy Statement/Prospectus" means the proxy statement of HNWC and
the prospectus of AMCON included in the Registration Statement of AMCON
relating to the HNWC Special Meeting, together with any amendments or
supplements thereto.
"Registration Statement" means the Registration Statement on Form
S-4 registering under the Securities Act the AMCON Common Stock issuable in
connection with the Merger.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
"Subsidiary" means, with respect to any Person, any corporation or
other entity of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other Persons
performing similar functions are directly or indirectly owned by such Person.
"AMCON Subsidiary" means a Subsidiary of AMCON.
"Surviving Corporation Common Stock" means the common stock of
Merger Sub.
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"Tax" or "Taxes" means any federal, state, county, local or foreign
taxes, charges, levies, imposts, duties, other assessments or similar charges
of any kind whatsoever, including any interest, penalties and addition
imposed thereon or with respect thereto.
In addition to the definitions set forth above, each of the
following terms is defined in the Section set forth opposite such term:
TERMS Section
----- -------
368 Reorganization Recitals
Adverse Change in the HNWC Recommendation 7.2(b)
AMCON Preamble
AMCON Employee Plans 3.13(a)
AMCON Intellectual Property 3.16(b)
AMCON Preferred Stock 3.5
AMCON Representation Letter 8.7(b)
AMCON Returns 3.12(a)
AMCON Securities 4.5(b)
AMCON Stock Options 3.5(a)
AMCON Warrants 3.5(a)
Common Certificates 2.9
Confidential Material 7.9(a)
Confidentiality Agreement 5.2(a)
Delaware Law 3.1(a)
Delivering Company 8.9(a)
Effective Time 2.1(b)
Environmental Laws 3.17(b)
ERISA 3.13(a)
ERISA Affiliate 3.13(a)
Expenses 10.3
Expiration Date 10.1(b)(i)
Hawaii Law 2.1(a)
HNWC Preamble
HNWC Affiliate Agreement 7.8
HNWC Employee Plans 4.13(a)
HNWC Financial Statements 4.8(a)
HNWC Insider 8.11(c)
HNWC Intellectual Property 4.16(b)
HNWC Representation Letter 7.7(b)
HNWC Returns 4.12(a)
HNWC Securities 4.5(b)
HNWC Stock Options 4.5(a)
HNWC Stockholder Approval 4.19(a)
HNWC Stockholders Meeting 4.19(b)
HNWC Warrants 4.5(a)
Merger Recitals
Merger Consideration 2.2(a)
Multiemployer Plan 3.13(b)
Receiving Company 7.9(a)
Representatives 7.9(a)
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TERMS Section
----- -------
Retirement Plan 3.13(b)
Section 16 Information 7.11(b)
Stockholder Agreements Recitals
Surviving Corporation 2.1(a)
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APPENDICES
Appendix I - Definitions
EXHIBITS
Exhibit A - Stockholders' Agreement
Exhibit B - Articles of Merger
Exhibit C - Certificate of Merger
Exhibit D - Certificate of Incorporation of Merger Sub
Exhibit E - Bylaws of Merger Sub
Exhibit F - List of Surviving Corporations' Directors
Exhibit G - Principal Officers of Surviving Corporation
Exhibit H - HNWC Representation Letter
Exhibit I - Form of HNWC Affiliate Agreement
Exhibit J - Form of Employment Agreement
Exhibit K - Form of Lease Agreement
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ANNEX B
HAWAII REVISED BUSINESS CORPORATION ACT
PART XIV. DISSENTERS' RIGHTS
A. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
414-341 DEFINITIONS.-As used in this part:
"Beneficial shareholder" means the person who is a beneficial owner
of shares held in a voting trust or by a nominee as the record shareholder.
"Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
"Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 414-342 and who exercises that right when and
in the manner required by sections 414-351 to 414-359.
"Fair value", with respect to a dissenter's shares, means the value
of the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
"Interest" means interest from the effective date of the corporation
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair
and equitable under all the circumstances.
"Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares
to the extent of the rights granted by a nominee certificate on file with a
corporation.
"Shareholder" means the record shareholder or the beneficial
shareholder.
414-342 RIGHT TO DISSENT.-(a) A shareholder is entitled to dissent
from, and obtain payment of the fair value of the shareholder's shares in the
event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation is
a party:
(A) If shareholder approval is required for the merger by section
414-313 or the articles of incorporation and the shareholder is entitled to
vote on the merger; or
(B) If the corporation is a subsidiary that is merged with its
parent under section 414-314;
(2) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be acquired, if
the shareholder is entitled to vote on the plan;
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(3) Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not including a sale pursuant
to court order or a sale for cash pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed to the
shareholders within one year after the date of sale;
(4) An amendment of the articles of incorporation that materially
and adversely affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the shares;
(B) Creates, alters, or abolishes a right in respect of
redemption, including a provision respecting a sinking fund for the
redemption or repurchase, of the shares;
(C) Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities;
(D) Excludes or limits the right of the shares to vote on any
matter, or to cumulate votes, other than a limitation by dilution through
issuance of shares or other securities with similar voting rights; or
(E) Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be acquired for
cash under section 414-74;
(5) Any corporate action taken pursuant to a shareholder vote to
the extent the articles of incorporation, bylaws, or a resolution of the
board of directors provides that voting or nonvoting shareholders are
entitled to dissent and obtain payment for their shares; or
(6) Consummation of a plan of conversion to which the corporation
is the converting entity, if the shareholder is entitled to vote on the plan.
(b) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this part may not challenge the corporate action
crating the shareholder's entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
414-343 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.-(a) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in the shareholder's name only if the shareholder dissents with
respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf
the record shareholder asserts dissenters' rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to which
the partial dissenter dissents and the partial dissenter's other shares were
registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as
to shares held on the beneficial shareholders' behalf only if:
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(1) The beneficial shareholder submits to the corporation the
record shareholder's written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights; and
(2) The beneficial shareholder does so with respect to all shares
of which the beneficial shareholder is the beneficial shareholder or over
which the beneficial shareholder has power to direct the vote.
B. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
414-351 NOTICE OF DISSENTERS' RIGHTS.-(a) If proposed corporate
action creating dissenters' rights under section 414-342 is submitted to a
vote at a shareholders' meeting, the meeting notice must state that
shareholders are or may be entitled to assert dissenters' rights under this
part and be accompanied by a copy of this part.
(b) If corporate action creating dissenters' rights under section
414-342 is taken without a vote of shareholders, the corporation shall notify
in writing all shareholders entitled to assert dissenters' rights that the
action was taken and send them the dissenters' notice described in section
414-353.
414-352 NOTICE OF INTENT TO DEMAND PAYMENT.-(a) If proposed corporate
action creating dissenters' rights under section 414-342 is submitted to a
vote at a shareholders' meeting, a shareholder who wishes to assert
dissenters' rights:
(1) Must deliver to the corporation before the vote is taken
written notice of the shareholder's intent to demand payment for the
shareholder's shares if the proposed action is effectuated; and
(2) Must not vote the shareholder's shares in favor of the
proposed action.
(b) A shareholder who does not satisfy the requirements of
subsection (a) is not entitled to payment for the shareholder's shares under
this part.
414-353 DISSENTERS' NOTICE.-(a) If proposed corporation action
creating dissenters' rights under section 414-342 is authorized at a
shareholders' meeting, the corporation shall deliver a written dissenters'
notice to all shareholders who satisfied the requirements of section 414-352.
(b) The dissenters' notice must be sent no later than ten days
after the corporate action was taken, and must:
(1) State where the payment demand must be sent and where and
when certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is
received;
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(3) Supply a form for demanding payment that includes the date
of the first announcement to news media or to shareholders of the terms of
the proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not the person acquired beneficial
ownership of the shares before that date;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty nor more than sixty days
after the date the subsection (a) notice is delivered; and
(5) Be accompanied by a copy of this part.
414-354 DUTY TO DEMAND PAYMENT.-(a) A shareholder sent a dissenters'
notice described in section 414-353 must demand payment, certify whether the
shareholder acquired beneficial ownership of the shares before the date
required to be set forth in the dissenter's notice pursuant to section
414-353(b)(3), and deposit the shareholder's certificates in accordance with
the terms of the notice.
(b) The shareholder who demands payment and deposits the
shareholder's share certificates under subsection (a) retains all other
rights of a shareholder until these rights are canceled or modified by the
taking of the proposed corporate action.
(c) A shareholder who does not demand payment or deposit the
shareholder's share certificates where required, each by the date set in the
dissenters' notice, is not entitled to payment for the shareholder's shares
under this part.
414-355 SHARE RESTRICTIONS.-(a) The corporation may restrict the
transfer of uncertificated shares from the date the demand for their payment
is received until the proposed corporate action is taken or the restrictions
released under section 414-357.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights re canceled or modified by the taking of the proposed corporate
action.
414-356 PAYMENT.-(a) Except as provided in section 414-358, as soon
as the proposed corporate action is taken, or upon receipt of a payment
demand, the corporation shall pay each dissenter who complied with section
414-354 the amount the corporation estimates to be the fair value of the
dissenter's shares, plus accrued interest.
(b) The payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal
year ending not more than sixteen months before the date of payment, an
income statement for that year, a statement of changes in shareholders'
equity for that year, and the latest available interim financial statements,
if any;
(2) A statement of the corporation's estimate of the fair value
of the shares;
(3) An explanation of how the interest was calculated;
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(4) A statement of the dissenter's right to demand payment
under section 414-359; and
(5) A copy of this part.
414-357 FAILURE TO TAKE ACTION.-(a) If the corporation does
not take the proposed action within sixty days after the date set for
demanding payment and depositing share certificates, the corporation shall
return the deposited certificates and release the transfer restrictions
imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing
transfer restrictions, the corporation takes the proposed action, it must
send a new dissenters' notice under section 414-353 and repeat the payment
demand procedure.
414-358 AFTER-ACQUIRED SHARES.-(a) A corporation may election to
withhold payment required by section 414-356 from a dissenter unless the
dissenter was the beneficial owner of the shares before the date set forth in
the dissenters' notice as the date of the first announcement to news media or
to shareholders of the terms of the proposed corporate action.
(b) To the extent the corporation elects to withhold payment
under subsection (a), after taking the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall pay
this amount to each dissenter who agrees to accept it in full satisfaction of
the dissenter's demand. The corporation shall send with its offer a statement
of its estimate of the fair value of the shares, an explanation of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under section 414-359.
414-359 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR
OFFER.-(a) A dissenter may notify the corporation in writing of the
dissenter's own estimate of the fair value of the dissenter's shares and
amount of interest due, and demand payment of the dissenter's estimate (less
any payment under section 414-356), or reject the corporation's offer under
section 414-358 and demand payment of the fair value of the dissenter's shares
and interest due, if:
(1) The dissenter believes that the amount paid under section
414-356 or offered under section 414-358 is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated;
(2) The corporation fails to make payment under section 414-356
within sixty days after the date set for demanding payment; or
(3) The corporation, having failed to take the proposed action,
does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within sixty days after the
date set for demanding payment.
(b) A dissenter waives the dissenter's right to demand payment
under this section unless the dissenter notifies the corporation of the
dissenter's demand in writing under subsection (a) within thirty days after
the corporation made or offered payment for the dissenter's shares.
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C. JUDICIAL APPRAISAL OF SHARES
414-371 COURT ACTION.-(a) If a demand for payment under section
414-359 remains unsettled, the corporation shall commence a proceeding within
sixty days after receiving the payment demand and petition the court to
determine the fair value of the shares and accrued interest. If the
corporation does not commence the proceeding within the sixty-day period, it
shall pay each dissenter whose demand remains unsettled the amount demand.
(b) The corporation shall commence the proceeding in the circuit
court. If the corporation is a foreign corporation without a registered
office in this State, it shall commence the proceeding in the county in this
State where the registered office of the domestic corporation merged with or
whose shares were acquired by the foreign corporation was located.
(c) The corporation shall make all dissenters (whether or not
residents of this State) whose demands remain unsettled parties to the
proceeding as in an action against their shares and all parties must be
served with a copy of the petition. Nonresidents may be served by registered
or certified mail or by publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is
commenced under subsection (b) is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers
described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in other
civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to
judgment:
(1) For the amount, if any, by which the court finds the fair
value of the dissenter's shares, plus interest, exceeds the amount paid by
the corporation; or
(2) For the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under section 414-358.
414-372 COURT COSTS AND COUNSEL FEES.-(a) The court in an appraisal
proceeding commenced under section 414-371 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of
the dissenters, in amounts the court finds equitable, to the extent the court
finds the dissenters acted arbitrarily, vexatiously, or not in good faith in
demanding payment under section 414.359.
(b) The court may also assess the fees and expenses of counsel
and experts for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters
if the court finds the corporation did not substantially comply with the
requirements of sections 414-351 to 414-359; or
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(2) Against either the corporation or a dissenter, in favor of
any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by this part.
(c) If the court finds that the services of counsel for any
dissenter were of substantial benefit to other dissenters similarly situated,
and that the fees for those services should not be assessed against the
corporation, the court may award to these counsel reasonable fees to be paid
out of the amounts awarded the dissenters who were benefited.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware General Corporation Law
Section 145(a) of the General Corporation Law of the State of
Delaware (the "DGCL") provides that a corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that the person is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by the person in
connection with such action, suit or proceeding if the person acted in good
faith and in a manner the person reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe the person's conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to
be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had reasonable cause to believe
that the person's conduct was unlawful.
Section 145(b) of the DGCL states that a corporation may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys'
fees) actually and reasonably incurred by the person in connection with the
defense or settlement of such action or suit if the person acted in good
faith and in a manner the person reasonably believed to be in or not opposed
to the best interests of the corporation and except that no indemnification
shall be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a
present or former director or officer of a corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred
to in subsections (a) and (b) of Section 145, or in defense of any claim,
issue or matter therein, the person shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by the person in
connection therewith.
Section 145(d) of the DGCL states that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be
made by the corporation only as authorized in the specific case upon a
determination that indemnification of the present or former director,
officer, employee or agent is proper in the circumstances because the person
has met the applicable standard of conduct set forth in subsections (a) and
(b) of Section 145. Such determination shall be made, with respect to a
person who is a director or officer at the time of such determination, (1) by
a majority vote of the
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directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (2) by a committee of such directors
designated by majority vote of such directors, even though less than a, or
(3) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (4) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including
attorneys' fees) incurred by an officer or director in defending any civil,
criminal, administrative or investigative action, suit or proceeding may be
paid by the corporation in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on behalf of such
director or officer to repay such amount if it shall ultimately be determined
that the person is not entitled to be indemnified by the corporation as
authorized in Section 145. Such expenses (including attorneys' fees) incurred
by former directors and officers or other employees and agents may be so paid
upon such terms and conditions, if any, as the corporation deems appropriate.
Section 145(f) of the DGCL states that the indemnification and
advancement of expenses provided by, or granted pursuant to, the other
subsections of Section 145 shall not be deemed exclusive of any other rights
to which those seeking indemnification or advancement of expenses may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in the person's official capacity
and as to action in another capacity while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have
the power to purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against the person and
incurred by the person in any such capacity, or arising out of the person's
status as such, whether or not the corporation would have the power to
indemnify the person against such liability under the provisions of Section
145.
Section 145(j) of the DGCL states that the indemnification and
advancement of expenses provided by, or granted pursuant to, Section 145
shall, unless otherwise provided when authorized or ratified, continue as to
a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of such
a person.
Section 102(b)(7) of the DGCL provides that a certificate of
incorporation may contain a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director provided that shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv)
for any transaction from which the director derived an improper personal
benefit.
Certificate of Incorporation and Bylaws, and Indemnification Agreements
The Certificate of Incorporation limits the liability of directors
of the Registrant to the Registrant or its stockholders to the fullest extent
permitted by Delaware law. Specifically, directors of the Registrant will not
be personally liable to the Registrant or its stockholders for monetary
damages for breach of a director's fiduciary duty as a director, except for
liability for breach of the duty of loyalty, for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of
law, for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL or for any transaction in
which a director has derived an improper personal benefit.
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The Registrant's Certificate of Incorporation requires the
Registrant to indemnify any person who is a party or is threatened to be
made a party to any action, suit or proceeding by reason of the fact that
such person is or was a director, officer, employee or agent of the
Registrant, or is serving as a director, officer, employee or agent of
another enterprise at the Registrant's request. Indemnification is not,
however, permitted under the Certificate of Incorporation unless the person
acted in good faith and in a manner such person reasonably believed to be in
or not opposed to the Registrant's best interests and, with respect to any
criminal action or proceeding, that such person had no reasonable cause to
believe such person's conduct was unlawful. The Registrant's Certificate of
Incorporation further provides that the Registrant shall not indemnify any
person for any liabilities or expenses incurred by such person in connection
with an action, suit or proceeding by or in the right of the Registrant in
respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Registrant, unless and only to the extent
that the court in which the action, suit or proceeding is brought determines
that the person is entitled to indemnity for such expenses. The
indemnification provided by the Certificate of Incorporation is not
exclusive of any other rights to which those seeking indemnification may be
otherwise entitled.
Insurance
AMCON has obtained directors and officer's liability insurance, with
coverage limits of $3 million for each loss and $3 million each policy
period, covering past, present and future directors and officers of AMCON and
its subsidiaries.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed herewith or incorporated herein
by reference.
Exhibit
Number
------
2.1 Fifth Amended and Restated Agreement and Plan of Merger, dated
as of September 27, 2001, by and among the Registrant, AMCON
Merger Sub, Inc., and Hawaiian Natural Water Company, Inc.
("Merger Agreement") (attached as Annex A to the Proxy
Statement/Prospectus and incorporated herein by reference)
2.1.1 Letter Agreement including technical changes to the Fifth
Amended and Restated Agreement and Plan of Merger, between
AMCON Distributing Company and Hawaiian Natural Water Company,
Inc.
2.2 Assets Purchase and Sale Agreement by and between Food For
Health Co., Inc., the Registrant and Tree of Life, Inc.,
dated March 8, 2001, (incorporated by reference to Exhibit
2.1 of the Registrant's Current Report on Form 8-K filed on
April 10, 2001)
2.3 Amendment to Assets Purchase and Sale Agreement by and
between Food For Health Co., Inc., the Registrant and Tree of
Life, Inc., effective March 23, 2001, (incorporated by
reference to Exhibit 2.2 of the Registrant's Current Report
on Form 8-K filed on April 10, 2001)
2.4 Asset Purchase Agreement, dated February 8, 2001, between the
Registrant, Merchants Wholesale, Inc. and Robert and Marcia
Lansing (incorporated by reference to Exhibit 2.1 of the
Registrant's Current Report on Form 8-K filed on June 18,
2001)
2.5 Addendum to Asset Purchase Agreement, dated May 30, 2001,
between the Registrant, Merchants Wholesale, Inc. and Robert
and Marcia Lansing (incorporated by reference to Exhibit 2.2
of the Registrant's Current Report on Form 8-K filed on June
18, 2001)
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Exhibit
Number
------
2.6 Real Estate Purchase Agreement, dated February 8, 2001,
between the Registrant and Robert and Marcia Lansing
(incorporated by reference to Exhibit 2.3 of the Registrant's
Current Report on Form 8-K filed on June 18, 2001)
2.7 Addendum to Real Estate Purchase Agreement, dated May 30,
2001, between the Registrant and Robert and Marcia Lansing
(incorporated by reference to Exhibit 2.4 of the Registrant's
Current Report on Form 8-K filed on June 18, 2001)
2.8 Noncompete, Nonsolicitation and Nondisclosure Agreement,
dated February 8, 2001, between the Registrant, Merchants
Wholesale Inc. and Robert and Marcia Lansing (incorporated by
reference to Exhibit 2.5 of the Registrant's Current Report
on Form 8-K filed on June 18, 2001)
2.9 Addendum to Noncompete, Nonsolicitation and Nondisclosure
Agreement, dated May 30, 2001, between the Registrant,
Merchants Wholesale Inc. and Robert and Marcia Lansing
(incorporated by reference to Exhibit 2.6 of the Registrant's
Current Report on Form 8-K filed on June 18, 2001)
3.1 Restated Certificate of Incorporation of the Registrant, as
amended March 19, 1998 (incorporated by reference to Exhibit
3.1 of the Registrant's Quarterly Report on Form 10-Q filed
on May 11, 1998)
3.3 Bylaws of the Registrant (incorporated by reference to Exhibit
3.2 of the Registrant's Registration Statement on Form S-1
(Registration No. 33-82848) filed on August 15, 1994)
4.1 Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 of the Registrant's Registration Statement on
Form S-1 (Registration No. 33-82848) filed on August 15,
1994)
5.1 Opinion of Stinson, Mag & Fizzell, P.C. as to legality of
shares to be issued in the merger**
8.1 Opinion of Squire, Sanders & Dempsey as to tax matters
10.1 Grant of Exclusive Manufacturing Rights, dated October 1,
1993, between the Registrant and Famous Value Brands, a
division of Philip Morris Incorporated, including Private
Label Manufacturing Agreement and Amended and Restated
Trademark License Agreement (incorporated by reference to
Exhibit 10.1 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-82848) filed on November 8, 1994)
10.2 Amendment No. 1 to Grant of Exclusive Manufacturing Rights,
dated October 1, 1998, between the Registrant and Famous
Value Brands, a division of Philip Morris Incorporated,
including Amendment No. 1 to Private Label Manufacturing
Agreement and Amendment No. 1 to Amended and Restated
Trademark License Agreement (incorporated by reference to
Exhibit 10.2 of the Registrant's Annual Report on Form 10-K
filed on December 24, 1998)
10.3 Loan and Security Agreement, dated June 1, 2001, between the
Registrant and LaSalle National Bank (incorporated by
reference to Exhibit 10.3 of the Registrant's Quarterly
Report on Form 10-Q filed on August 13, 2001).
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Exhibit
Number
------
10.4 ISDA Master Agreement, dated as of December 22, 2000, between
LaSalle Bank National Association and Merchants Wholesale
Inc., as assumed by the Registrant on June 1, 2001 (incorporated
by reference to Exhibit 10.4 of Amendment No. 1 filed on
October 4, 2001 to Registrant's Form 10-Q filed on August 13, 2001)
10.5 Secured Promissory Note, dated as of May 30, 2001, between the
Registrant and Gold Bank (incorporated by reference to Exhibit 10.4
of Amendment No. 1 filed on October 4, 2001 to Registrant's Form 10-Q
filed on August 13, 2001)
10.6 8% Convertible Subordinated Note, dated September 15, 1999,
by and between Food For Health Co., Inc. and Eric Hinkefent,
Mary Ann O'Dell, Sally Sobol, and Amy Laminsky (incorporated
by reference to Exhibit 10.1 of the Registrant's Current
Report on Form 8-K filed on September 30, 1999)
10.7 Secured Promissory Note, dated September 15, 1999, by and
between Food For Health Co., Inc. and James C. Hinkefent and
Marilyn M. Hinkefent, as trustees of the James C. Hinkefent
Trust dated July 11, 1994, as amended, Eric Hinkefent, Mary
Ann O'Dell, Sally Sobol, and Amy Laminsky (incorporated by
reference to Exhibit 10.2 of the Registrant's Current Report
on Form 8-K filed on September 30, 1999)
10.8 Pledge Agreement, dated September 15, 1999, by and between
Food For Health Co., Inc. and James C. Hinkefent and Marilyn
M. Hinkefent, as trustees of the James C. Hinkefent Trust
dated July 11, 1994, as amended, Eric Hinkefent, Mary Ann
O'Dell, Sally Sobol, and Amy Laminsky (incorporated by
reference to Exhibit 10.3 of the Registrant's Current Report
on Form 8-K filed on September 30, 1999)
10.9 First Amended and Restated AMCON Distributing Company 1994
Stock Option Plan (incorporated by reference to Exhibit 10.17
of the Registrant's Current Report on Form 10-Q filed on
August 4, 2000)
10.10 AMCON Distributing Company Profit Sharing Plan (incorporated
by reference to Exhibit 10.8 of Amendment No. 1 to the
Registrant's Registration Statement on Form S-1 (Registration
No. 33-82848) filed on November 8, 1994)
10.11 Employment Agreement, dated May 22, 1998, between the
Registrant and William F. Wright (incorporated by reference
to Exhibit 10.14 of the Registrant's Quarterly Report on
Form 10-Q filed on August 6, 1998)
10.12 Employment Agreement, dated May 22, 1998, between the
Registrant and Kathleen M. Evans (incorporated by reference
to Exhibit 10.15 of the Registrant's Quarterly Report on
Form 10-Q filed on August 6, 1998)
10.13 Employment Agreement, dated May 22, 1998, between Food For
Health Co., Inc. and Jerry Fleming (incorporated by reference
to Exhibit 10.16 of the Registrant's Quarterly Report on Form
10-Q filed on August 6, 1998)
10.14 Second Amended and Restated Shareholders Agreement, dated
as of November 7, 2000, among the Registrant, AMCON Merger
Sub, Inc. and the shareholders of Hawaiian Natural Water
Company, Inc. named on Schedule I thereto**
10.15 Fourth Amended and Restated Secured Convertible Note, dated
as of September 27, 2001, from Hawaiian Natural Water Company,
Inc. in the principal amount of $350,000**
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Exhibit
Number
------
10.16 Fourth Amended and Restated Secured Convertible Note, dated
as of September 27, 2001, from Hawaiian Natural Water Company,
Inc. in the principal amount of $400,000**
10.17 Amended and Restated Secured Convertible Note, dated as of
September 27, 2001, from Hawaiian Natural Water Company, Inc.
in the principal amount of $500,000**
10.18 Amended and Restated Secured Note, dated as of September 27,
2001, from Hawaiian Natural Water Company, Inc. in the
principal amount of $354,483**
10.19 Amended and Restated Certificate of Designation for Series C
Convertible Preferred Stock issuable upon conversion of
Secured convertible notes of Hawaiian Natural Water
Company, Inc.
10.20 Form of Lease Agreement between Hawaiian Natural Water
Company, Inc., a Delaware corporation, and Hawaii Brewery
Development Co., Inc., as Lessor, to be entered into upon
consummation of the merger described in this registration
statement**
10.21 Right of First Offer, dated as of June 1, 2001**
11.1 Statement re: computation of per share earnings (incorporated
by reference to footnote 5 to the financial statements
included in Item 1 of Part I herein)
21.0 Subsidiaries of the Registrant**
23.1 Consent of PriceWaterhouseCoopers LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Clifton Gunderson L.L.C.
23.4 Consent of Stinson, Mag & Fizzell, P.C. (included in
Exhibit 5.1)
23.5 Consent of Squire, Sanders & Dempsey (included in
Exhibit 8.1)
24.1 Powers of Attorney (included on signature page to the
registration statement)
99.1 Form of Proxy**
** Previously filed
(b) Financial statement schedules have been omitted because they
either are not required or are not applicable or because equivalent
information has been included in the financial statements, the notes thereto
or elsewhere herein.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is
II-6
incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(2) That, prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part of
this registration statement, by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other Items of the
applicable form.
(3) That, every prospectus (i) that is filed pursuant to
paragraph (2) immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection
with an offering of securities subject to Rule 415 (section 230.415 of
this chapter), will be filed as part of an amendment of the
registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(4) To respond to requests for information that is
incorporated by reference into the prospectus pursuant to Items 4,
10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
(5) To supply by means of a post-effective amendment all
information concerning a transaction, and Hawaiian Natural being
acquired involved therein, that was not the subject of and included
in the registration statement when it became effective.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment to the registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Omaha, State of Nebraska, on November 13, 2001.
AMCON DISTRIBUTING COMPANY
By: /s/ William F. Wright
-------------------------------------
William F. Wright
Chairman of the Board and Chief
Executive Officer
Know all men by these presents, that we, the undersigned directors
of AMCON Distributing Company, hereby severally constitute William F. Wright
and Michael D. James, and each of them singly, our true and lawful attorneys
with full power to them, and each of them singly, to sign for us and in our
names in the capacities indicated below, the registration statement filed
herewith and any and all amendments to said registration statement, and
generally to do all such things in our names and in our capacities as
directors to enable AMCON Distributing Company to comply with the provisions
of the Securities Act of 1933, and all requirements of the Securities and
Exchange Commission, hereby ratifying and confirming our signature as they
may be signed by our said attorneys, or any of them, to said registration
statement and any and all amendments thereto.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ William F. Wright Chairman of the Board, Chief Executive November 13, 2001
--------------------------------------- Officer and Director (Principal
William F. Wright Executive Officer)
* President, Director November 13, 2001
---------------------------------------
Kathleen M. Evans
* Chief Financial Officer, Secretary and November 13, 2001
--------------------------------------- Treasurer (Principal Financial Officer
Michael D. James and Principal Accounting Officer)
* Director November 13, 2001
---------------------------------------
Jerry Fleming
* Director November 13, 2001
---------------------------------------
J. Tony Howard
* Director November 13, 2001
---------------------------------------
Allen D. Petersen
* Director November 13, 2001
---------------------------------------
Timothy R. Pestotnik
* Director November 13, 2001
---------------------------------------
William R. Hoppner
---------------------------------------
* Signed by William F. Wright,
Attorney-in-fact
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