UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 31, 2007
OR
/ / Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission File Number 1-15589
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AMCON Distributing Company
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(Exact name of Registrant as specified in its charter)
Delaware 47-0702918
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7405 Irvington Road, Omaha NE 68122
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (402) 331-3727
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer X
---- ---- ----
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act)
Yes No X
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The Registrant had 537,064 shares of its $.01 par value common stock
outstanding as of January 14, 2008.
Form 10-Q
1st Quarter
INDEX
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
--------------------------------------------
Condensed consolidated balance sheets at
December 31, 2007 (unaudited) and September 30, 2007 3
Condensed consolidated unaudited statements of operations
for the three months ended December 31, 2007 and 2006 4
Condensed consolidated unaudited statements of cash flows
for the three months ended December 31, 2007 and 2006 5
Notes to condensed consolidated unaudited
financial statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits 33
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Balance Sheets
December 31, 2007 and September 30, 2007
----------------------------------------------------------------------------------------------------
December 2007 September
(Unaudited) 2007
------------ ------------
ASSETS
Current assets:
Cash $ 300,908 $ 717,554
Accounts receivable, less allowance for doubtful
accounts of $0.3 million and $0.3 million, respectively 24,564,218 27,848,938
Inventories, net 34,057,251 29,738,727
Deferred income taxes 1,290,020 1,446,389
Current assets of discontinued operations 13,743 18,897
Prepaid and other current assets 5,176,195 5,935,208
------------ ------------
Total current assets 65,402,335 65,705,713
Property and equipment, net 11,157,673 11,190,768
Goodwill 5,848,808 5,848,808
Other intangible assets, net 3,390,137 3,400,070
Deferred income taxes 2,270,436 2,768,043
Non-current assets of discontinued operations 2,057,033 2,057,033
Other assets 1,531,789 1,093,150
------------ ------------
$ 91,658,211 $ 92,063,585
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,872,541 $ 15,253,562
Accrued expenses 4,954,751 5,293,923
Accrued wages, salaries and bonuses 1,244,147 2,202,594
Income taxes payable 194,201 367,773
Current liabilities of discontinued operations 4,031,778 4,035,863
Current maturities of credit facility 3,046,000 3,046,000
Current maturities of long-term debt 623,278 568,024
------------ ------------
Total current liabilities 26,966,696 30,767,739
Credit facility, less current maturities 38,331,796 35,808,180
Long-term debt, less current maturities 6,989,239 7,123,453
Noncurrent liabilities of discontinued operations 6,542,310 6,542,310
Series A cumulative, convertible preferred stock, $.01 par value
100,000 shares authorized and issued, liquidation preference
$25.00 per share 2,438,355 2,438,355
Series B cumulative, convertible preferred stock, $.01 par value
80,000 shares authorized and issued, liquidation preference
$25.00 per share 1,857,645 1,857,645
Series C cumulative, convertible preferred stock, $.01 par value
80,000 shares authorized and issued, liquidation preference
$25.00 per share 1,982,372 1,982,372
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred stock, $0.01 par, 1,000,000 shares authorized,
260,000 shares outstanding and issued in Series A, B and C
referred to above - -
Common stock, $.01 par value, 3,000,000 shares authorized,
537,064 shares outstanding for December 2007 and 529,436
shares outstanding for September 2007 5,372 5,295
Additional paid-in capital 6,558,641 6,396,131
Accumulated deficit (14,215) (857,895)
------------ ------------
Total shareholders' equity 6,549,798 5,543,531
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$ 91,658,211 $ 92,063,585
============ ============
The accompanying notes are an integral part of these condensed consolidated unaudited financial
statements.
3
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of Operations
for the three months ended December 31, 2007 and 2006
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2007 2006
(As restated
-see Note 1)
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Sales (including excise taxes of
$51.6 million and $49.5 million,
respectively) $ 210,663,237 $ 209,366,149
Cost of sales 195,467,389 194,271,875
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Gross profit 15,195,848 15,094,274
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Selling, general and administrative expenses 12,210,575 12,405,083
Depreciation and amortization 362,474 457,843
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12,573,049 12,862,926
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Operating income 2,622,799 2,231,348
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Other expense (income):
Interest expense 969,802 1,268,662
Other (income), net (33,211) (31,081)
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936,591 1,237,581
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Income from continuing operations
before income taxes 1,686,208 993,767
Income tax expense 641,000 383,000
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Income from continuing operations 1,045,208 610,767
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Discontinued operations (Note 2)
Gain on disposal of discontinued operations,
net of income tax expense of $0.7 million - 895,588
(Loss) from discontinued operations,
net of income tax (benefit) of ($0.06) million
and ($0.2) million, respectively (95,995) (258,047)
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(Loss) income on discontinued operations (95,995) 637,541
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Net income 949,213 1,248,308
Preferred stock dividend requirements (105,533) (105,533)
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Net income available to common shareholders $ 843,680 $ 1,142,775
============= =============
Basic earnings (loss) per share
available to common shareholders:
Continuing operations $ 1.76 $ 0.96
Discontinued operations (0.18) 1.21
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Net basic earnings per share
available to common shareholders $ 1.58 $ 2.17
============= =============
Diluted earnings (loss) per share
available to common shareholders:
Continuing operations $ 1.23 $ 0.71
Discontinued operations (0.11) 0.75
------------- -------------
Net diluted earnings per share
available to common shareholders $ 1.12 $ 1.46
============= =============
Weighted average shares outstanding:
Basic 533,900 527,062
Diluted 849,187 854,427
The accompanying notes are an integral part of these condensed consolidated unaudited financial
statements.
4
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of Cash Flows
for the three months ended December 31, 2007 and 2006
---------------------------------------------------------------------------------------------------
2007 2006
(As restated
-see Note 1)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 949,213 $ 1,248,308
Deduct: (Loss) income from discontinued operations, net of tax (95,995) 637,541
------------ ------------
Income from continuing operations 1,045,208 610,767
Adjustments to reconcile net income from
continuing operations to net cash flows
from operating activities:
Depreciation 352,541 447,909
Amortization 9,933 9,934
(Gain) on sale of property and equipment (1,625) (11,116)
Stock based compensation 42,950 3,000
Deferred income taxes 653,976 899,251
Provision (benefit) for losses on doubtful accounts 44,000 (76,196)
Provision for losses on inventory obsolescence 160,885 172,503
Changes in assets and liabilities:
Accounts receivable 3,240,720 (315,381)
Inventories (4,479,409) (2,074,042)
Other current assets 759,013 314,707
Other assets (438,639) (66,286)
Accounts payable (2,381,021) (802,790)
Accrued expenses and accrued wages, salaries and bonuses (1,297,619) (721,203)
Income tax payable and receivable (173,572) (98,949)
------------ ------------
Net cash flows from operating activities - continuing operations (2,462,659) (1,707,892)
Net cash flows from operating activities - discontinued operations (94,926) (1,808,062)
------------ ------------
Net cash flows from operating activities (2,557,585) (3,515,954)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (280,619) (170,809)
Proceeds from sales of property and equipment 888 14,200
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Net cash flows from investing activities - continuing operations (279,731) (156,609)
Net cash flows from investing activities - discontinued operations - 3,753,394
------------ ------------
Net cash flows from investing activities (279,731) 3,596,785
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on bank credit agreements 2,523,616 733,644
Dividends paid on preferred stock (105,533) (105,533)
Proceeds from exercise of stock options 119,637 -
Principal payments on long-term debt (117,050) (161,467)
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Net cash flows from financing activities - continuing operations 2,420,670 466,644
Net cash flows from financing activities - discontinued operations - (595,048)
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Net cash flows from financing activities 2,420,670 (128,404)
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Net change in cash (416,646) (47,573)
Cash, beginning of period 717,554 481,138
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Cash, end of period $ 300,908 $ 433,565
============ ============
5
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 992,518 $ 1,262,202
Cash paid during the period for income taxes 101,595 98,949
Supplemental disclosure of non-cash information:
Buyer's assumption of HNWC lease in connection with
the sale of HNWC's assets - discontinued operations - (225,502)
Acquisition of equipment through capital leases 38,090 -
The accompanying notes are an integral part of these condensed consolidated unaudited financial
statements.
6
AMCON Distributing Company and Subsidiaries
Notes to Condensed Consolidated Unaudited Financial Statements
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
AMCON Distributing Company and Subsidiaries ("AMCON" and "the Company") is
primarily engaged in the wholesale distribution of consumer products in the
Great Plains and Rocky Mountain regions. In addition, the Company operates
thirteen retail health food stores in Florida and the Midwest.
AMCON's wholesale distribution business ("ADC") includes five distribution
centers that sell approximately 14,000 different consumer products, including
cigarettes and tobacco products, candy and other confectionery, beverages,
groceries, paper products, health and beauty care products, frozen and
chilled products and institutional food service products. The Company
distributes products primarily to retailers such as convenience stores,
discount and general merchandise stores, grocery stores and supermarkets,
drug stores and gas stations. In addition, the Company services
institutional customers, including restaurants and bars, schools, sports
complexes and vendors, as well as other wholesalers.
AMCON also operates six retail health food stores in Florida under the name
Chamberlin's Market & Cafe (Chamberlin's) and seven in the Midwest under the
name Akin's Natural Foods Market (Akin's). These stores carry natural
supplements, groceries, health and beauty care products and other food items.
Results for the interim period are not necessarily indicative of results to
be expected for the entire year.
All significant intercompany transactions and balances have been eliminated
in consolidation. Certain information and footnote disclosures normally
included in our annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
In the opinion of management, the accompanying condensed consolidated
unaudited financial statements contain all adjustments necessary to fairly
present the financial information included therein, such adjustments
consisting of normal recurring items. The Company believes that although the
disclosures are adequate to prevent the information presented from being
misleading, these condensed consolidated unaudited financial statements
should be read in conjunction with the Company's annual audited consolidated
financial statements for the fiscal year ended September 30, 2007, as filed
with the Securities and Exchange Commission on Form 10-K.
For purposes of this report, unless the context indicates otherwise, all
references to "we", "us", "our", "Company", and "AMCON" shall mean AMCON
Distributing Company and its subsidiaries. The wholesale distribution
segment of our Company will be separately referred to as "ADC". Additionally,
the fiscal three month period ended December 31, 2007 and December 31, 2006
have been referred to throughout this quarterly report as December 2007
and/or Q1 2008, and December 2006 and/or Q1 2007, respectively.
7
CHANGE IN ACCOUNTING PRINCIPLES
-------------------------------
Income Taxes
------------
On October 1, 2007, the Company adopted the provisions of Financial
Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, and Related Implementation Issues" ("FIN 48").
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
a Company's financial statements in accordance with Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS 109").
FIN 48 prescribes a recognition threshold and measurement attribute for a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition.
The results of implementing FIN 48 identified no unrecognized tax benefits
and did not impact the Company's financial statements. The Company's policy
is to record interest and penalties directly related to income taxes as
income tax expense in the condensed consolidated statements of operations.
There were no material changes to unrecognized tax benefits, interest, or
penalties for the three month period ended December 31, 2007 and the Company
does not anticipate any such material changes during the next twelve months.
The Company files income tax returns in the U.S. and various states. The tax
years 2004 and forward remain open under U.S. and state statutes.
Last-In First-Out (LIFO) Inventory Valuation Method
---------------------------------------------------
As previously disclosed in the Company's Fiscal 2007 Annual Report on Form
10-K, during the fourth quarter of fiscal 2007, the Company changed its
inventory valuation method from the Last-In First-Out (LIFO) method to the
First-In First-Out (FIFO) method. As required by U.S. generally accepted
accounting principles, this change in accounting principle was reflected in
the Company's financials statements through the retroactive application of
the FIFO method and the restatement of prior fiscal periods, including the
three month fiscal period ended December 2006, which is included within this
quarterly report on Form 10-Q.
Recently Issued Accounting Pronouncements
-----------------------------------------
The Company is currently evaluating the impact of implementing the following
new accounting standards:
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 clarifies the principle that fair value
should be based on the assumptions market participants would use when pricing
an asset or liability and establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. Under the standard, fair
value measurements would be separately disclosed by level within the fair
value hierarchy. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 (fiscal 2009 for the Company).
8
In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair value
accounting but does not affect existing standards which require assets and
liabilities to be carried at fair value. Under SFAS 159, a company may elect
to use fair value to measure accounts and loans receivable, available-for-
sale and held-to-maturity securities, equity method investments, accounts
payable, guarantees, issued debt and other eligible financial instruments.
SFAS 159 is effective for fiscal years beginning after November 15, 2007
(fiscal 2009 for the Company).
In March 2007, the FASB issued Emerging Issues Task Force Issue No. 06-10
"Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements"
(EITF 06-10). EITF 06-10 provides guidance for determining a liability for
the postretirement benefit obligation as well as recognition and measurement
of the associated asset on the basis of the terms of the collateral
assignment agreement. EITF 06-10 is effective for fiscal years beginning
after December 15, 2007 (fiscal 2009 for the Company).
2. DISPOSITION
Discontinued operations include the residual assets, liabilities, and results
of operations of Trinity Springs, Inc. ("TSI") for the three months ended
December 2007, and TSI and Hawaiian Natural Water Company, Inc. ("HNWC") for
the three months ended December 2006.
Trinity Springs, Inc. (TSI)
---------------------------
During fiscal 2006, the Company discontinued the operations of TSI, which
operated a water bottling facility in Idaho, due to recurring losses, a lack
of capital resources to sustain operations, and litigation discussed in
Note 10.
As described in Note 10, AMCON and TSI were parties to litigation with
Crystal Paradise Holdings, Inc. ("CPH") regarding an April 24, 2004 Asset
Purchase Agreement ("Asset Purchase Agreement"), under which TSI acquired
certain assets from CPH. On September 30, 2007, the Company signed a Mutual
Release and Settlement Agreement (the "Settlement Agreement") with CPH
related to this litigation. The Settlement Agreement resulted in the mutual
release and settlement of all outstanding and potential litigation and claims
among and between AMCON, TSI, and CPH with respect to the Asset Purchase
Agreement and the related acquisition.
The Settlement Agreement also restructured the Company's obligations arising
from the Asset Purchase Agreement with CPH totaling approximately $6.5
million into a new $5.0 million note payable to CPH. The $5.0 million note
payable, plus accrued interest at 5.0%, is due in September 2012, if the
option discussed below is not exercised by CPH. Items restructured into the
$5.0 million note payable included CPH's minority interest in TSI, water
royalties payable to CPH, notes payable to CPH, and accrued interest payable
to CPH. Additionally, the Settlement Agreement provided CPH with an option
to purchase TSI's assets for a price equivalent to the amount due CPH under
9
the $5.0 million note payable, plus accrued interest. The option expires in
August 2008 and can be extended for an additional seven months from August
2008 at CPH's election. If CPH elects to exercise its purchase option, then
CPH will cancel the $5.0 million note payable, including the obligation to
pay any accrued interest. Further, if CPH elects to exercise the additional
seven month purchase option, CPH must also discharge all interest which
accrued during the initial option period.
No monetary exchanges between the Company and CPH were required under the
Settlement Agreement. The Company has recorded a $1.5 million pre-tax
deferred gain in connection with the above settlement. This deferred gain
has been classified as component of noncurrent liabilities of discontinued
operations in the Company's Condensed Consolidated Balance Sheet. The
deferred gain will be recognized upon the earlier of CPH's election to
exercise its TSI asset purchase option or the expiration of the asset
purchase option.
Hawaiian Natural Water Company, Inc. (HNWC)
-------------------------------------------
HNWC, which was headquartered in Pearl City, Hawaii, bottled, marketed and
distributed Hawaiian natural artesian water, purified water and other limited
production co-packaged products, in Hawaii, the mainland and foreign markets.
In November 2006, the Company sold all of the operating assets of HNWC for
approximately $3.8 million in cash plus the buyer's assumption of all
operating and capital leases. The significant operating assets consisted of
accounts receivable, inventory, furniture and fixtures, intellectual property
and all of its bottling equipment. In connection with the sale, the Company
recorded a $1.6 million pre-tax gain on disposal of discontinued operations.
HNWC remained a fully operational subsidiary of the Company through November
19, 2006.
A summary of discontinued operations is as follows:
Three months ended Three months ended
December 2007 December 2006
------------------ ------------------
Sales $ - $ 862,647
Operating loss /1/ (32,945) (313,373)
Gain on disposal of discontinued operations,
before income taxes - 1,562,588
Income tax (benefit) expense (59,000) 516,000
(Loss) income from discontinued operations (95,995) 637,541
/1/ Operating loss is before interest expense on discontinued operations.
10
The carrying amounts (net of allowances) of the major classes of assets and
liabilities included in discontinued operations are as follows (in millions):
December September
2007 2007
---------- ----------
Fixed assets - Total noncurrent assets of
discontinued operations $ 2.1 $ 2.1
========== ==========
Accounts payable $ 0.6 $ 0.7
Accrued expenses 0.6 0.5
Accrued wages, salaries and bonuses - -
Current portion of long-term debt - -
Current portion of long-term debt due related party /1/ 2.8 2.8
---------- ----------
Total current liabilities of discontinued operations $ 4.0 $ 4.0
========== ==========
Water royalty, in perpetuity $ - $ -
Deferred gain on CPH settlement 1.5 1.5
Long-term debt, less current portion 5.0 5.0
---------- ----------
Noncurrent liabilities of discontinued operations $ 6.5 $ 6.5
========== ==========
/1/ TSI's related party debt obligations are in default at December 2007 and
September 2007. TSI has not obtained associated debt default waivers for
the related party obligations and accordingly has classified these obligations
as current liabilities of discontinued operations.
3. CONVERTIBLE PREFERRED STOCK
The Company had three series of Convertible Preferred Stock outstanding at
December 2007 as identified in the following table:
Series A Series B Series C
------------- --------------- ---------------
Date of issuance: June 17, 2004 October 8, 2004 March 6, 2006
Optionally redeemable beginning June 18, 2006 October 9, 2006 March 4, 2008
Par value (gross proceeds): $2,500,000 $2,000,000 $2,000,000
Number of shares: 100,000 80,000 80,000
Liquidation preference per share: $25.00 $25.00 $25.00
Conversion price per share: $30.31 $24.65 $13.62
Number of common shares in
which to be converted: 82,481 81,136 146,842
Dividend rate: 6.785% 6.37% 6.00%
The Series A Convertible Preferred Stock ("Series A"), Series B Convertible
Preferred Stock ("Series B") and Series C Convertible Preferred Stock
("Series C"), collectively (the "Preferred Stock"), are convertible at any
time by the holders into a number of shares of AMCON common stock equal to
the number of preferred shares being converted times a fraction equal to
$25.00 divided by the conversion price. The conversion prices for the
11
Preferred Stock are subject to customary adjustments in the event of stock
splits, stock dividends and certain other distributions on the Common Stock.
Cumulative dividends for the Preferred Stock are payable in arrears, when, as
and if declared by the Board of Directors, on March 31, June 30, September 30
and December 31 of each year.
In the event of a liquidation of the Company, the holders of the Preferred
Stock, are entitled to receive the liquidation preference plus any accrued
and unpaid dividends prior to the distribution of any amount to the holders
of the Common Stock. The Preferred Stock also contain redemption features
which trigger based on certain circumstances such as a change of control,
bankruptcy, or minimum ownership thresholds in AMCON by Mr. William Wright
("Mr. Wright"), AMCON's Chairman of the Board, and his family. The shares of
Preferred Stock are optionally redeemable by the Company beginning on various
dates, as listed in the above table, at redemption prices equal to 112% of
the liquidation preference. The redemption prices decrease 1% annually
thereafter until the redemption price equals the liquidation preference,
after which date it remains the liquidation preference. The Company's credit
facility prohibits the redemption of the Series A and Series B. Series C is
only redeemable so long as no event of default is in existence at the time
of, or would occur after giving effect to, any such redemption, and the
Company has excess availability under the credit facility of not less than
$2.0 million after giving effect to any such redemption.
The Company believes that redemption of these securities by the holders is
not probable based on the following evaluation. Our executive officers and
directors as a group beneficially own approximately 41% of the outstanding
common stock at December 2007. Mr. Wright beneficially owns 26% of the
outstanding common stock without giving effect to shares owned by his adult
children. There is a substantial identity of interest among AMCON and its
officers and directors for purposes of the determination of whether the
triggering redemption events described above are within the control of AMCON
since AMCON can only make decisions on control or other matters through those
persons. Moreover, the Preferred Stock is in friendly hands with no
expectation that there would be any effort by the holders of such Preferred
Stock to seek optional redemption without the Board being supportive of the
events that may trigger that right. The Series A is owned by Mr. Wright and
a private equity firm (Draupnir, LLC) of which Mr. Hobbs, a director of the
Company, is a member. The Series B Preferred Stock is owned by an
institutional investor which has elected Mr. Chris Atayan, AMCON's Chief
Executive Officer and Vice Chairman to AMCON's Board of Directors pursuant
to voting rights in the Certificate of Designation creating the Series B
Preferred Stock. The Series C is owned by Draupnir Capital LLC, which is a
subsidiary of Draupnir, LLC (the owner of Series A). Mr. Hobbs is also a
Member of Draupnir Capital, LLC.
In view of the foregoing considerations, the Company believes it is
not probable under Rule 5-02.28 of Regulation S-X that the Series A,
Series B or Series C Preferred Stock will become redeemable in the
foreseeable future.
12
4. INVENTORIES
Inventories consisted of the following at December 2007 and September 2007:
December September
2007 2007
------------ ------------
Finished goods $ 34,057,251 $ 29,738,727
============ ============
The wholesale distribution and retail health food segment inventories consist
of finished products purchased in bulk quantities to be redistributed to the
Company's customers or sold at retail. The wholesale distribution
inventories are stated at the lower of cost (first-in, first-out or "FIFO"
method) or market and consist of the cost of finished goods. The retail
health food operation utilizes the retail inventory method of accounting
stated at the lower of cost (FIFO) or market and consists of the costs of
finished goods.
Inventory also included total reserves of approximately $0.7 million and
$0.5 million at December 2007 and September 2007, respectively. The
Company's obsolescence allowance reflects estimated unsaleable or non-
refundable inventory based upon an evaluation of slow moving and discontinued
products.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill by reporting segment of the Company consisted of the following:
December September
2007 2007
------------ ------------
Wholesale $ 3,935,931 $ 3,935,931
Retail 1,912,877 1,912,877
------------ ------------
$ 5,848,808 $ 5,848,808
============ ============
Other intangible assets of the Company consisted of the following:
December September
2007 2007
------------ ------------
Trademarks and tradenames $ 3,373,269 $ 3,373,269
Favorable leases (less accumulated
amortization of $469,132 and $459,199) 16,868 26,801
------------ ------------
$ 3,390,137 $ 3,400,070
============ ============
13
Goodwill, trademarks and tradenames are considered to have indefinite
useful lives and therefore no amortization has been taken on these assets.
The Company performs annual impairment testing of goodwill and other
intangible assets during the fourth fiscal quarter of each year.
Amortization expense for intangible assets that are considered to have finite
lives was $9,933 and $9,934 for the three months ended December 2007 and
December 2006, respectively.
Amortization expense related to intangible assets held at December 2007 for
each of the five years subsequent to September 30, 2007 is estimated as
follows:
Fiscal Fiscal Fiscal Fiscal Fiscal
2008/1/ 2009 2010 2011 2012
--------- --------- -------- -------- --------
Favorable leases 17,000 - - - -
========= ========= ======== ======== ========
/1/ Represents amortization expense of intangible assets with finite lives for the
remaining nine months of Fiscal 2008.
6. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share available to common shareholders is
calculated by dividing income (loss) from continuing operations less
preferred stock dividend requirements and income (loss) from discontinued
operations by the weighted average common shares outstanding for each period.
Diluted earnings (loss) per share available to common shareholders is
calculated by dividing income (loss) from continuing operations less
preferred stock dividend requirements (when anti-dilutive) and income (loss)
from discontinued operations by the sum of the weighted average common shares
outstanding and the weighted average dilutive options, using the treasury
stock method.
Stock options and potential common stock outstanding at December 2007 and
December 2006 that were anti-dilutive were not included in the computations
of diluted earnings per share. Such potential common shares totaled 9,248
and 20,245 for the three months ended December 2007 and December 2006,
respectively. The average exercise price of anti-dilutive options and
potential common stock was $47.39 and $38.74 for the three months ended
December 2007 and December 2006, respectively.
14
For the three months ended December
------------------------------------------------------
2007 2006
------------------------- ------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
1. Weighted average common
shares outstanding 533,900 533,900 527,062 527,062
2. Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds
used to purchase treasury
stock and conversion of
preferred stock /1/ - 315,287 - 327,365
----------- ----------- ----------- -----------
3. Weighted average number of
shares outstanding 533,900 849,187 527,062 854,427
=========== =========== =========== ===========
4. Income from
continuing operations $ 1,045,208 $ 1,045,208 $ 610,767 $ 610,767
Deduct: preferred stock
dividend requirements /2/ (105,533) - (105,533) -
----------- ----------- ----------- -----------
939,675 1,045,208 505,234 610,767
=========== =========== =========== ===========
5. (Loss) income from
discontinued operations $ (95,995) $ (95,995) $ 637,541 $ 637,541
=========== =========== =========== ===========
6. Net income available
to common shareholders $ 843,680 $ 949,213 $ 1,142,775 $ 1,248,308
=========== =========== =========== ===========
7. Income per share from
continuing operations $ 1.76 $ 1.23 $ 0.96 $ 0.71
=========== =========== =========== ===========
8. (Loss) income per share from
discontinued operations $ (0.18) $ (0.11) $ 1.21 $ 0.75
=========== =========== =========== ===========
9. Net earnings per share
available to common shareholders $ 1.58 $ 1.12 $ 2.17 $ 1.46
=========== =========== =========== ===========
/1/ For Q1 2008 and Q1 2007, all in-the-money stock options and Convertible Preferred Stock
Series were dilutive and have been included as a component of the diluted weighted average
number of shares outstanding calculation. For Q1 2008, restricted stock awards have been
excluded from the diluted earnings per share calculation as they were anti-dilutive.
/2/ For Q1 2008 and Q1 2007, the dilutive earnings per share calculation excludes dividend
payments for Series A, B & C Preferred Stock, as they are assumed to have been converted
to common stock of the Company.
15
7. DEBT
Credit Agreement
----------------
The Company has a credit agreement with Bank of America (formerly LaSalle
Bank)(the "Facility"), which includes the following significant terms:
- A $55.0 million revolving credit limit, plus the outstanding balances
on two term notes ("Term Note A" and "Term Note B") which totaled
approximately $0.6 million at December 2007 for a total credit
facility limit of $55.6 million at December 2007.
- Bears interest at the bank's prime interest rate, except for Term Note B
which bears interest at the bank's prime rate plus 2%.
- Lending limits subject to accounts receivable and inventory limitations,
an unused commitment fee equal to 0.25% per annum on the difference
between the maximum loan limit and average monthly borrowings.
- Collateral including all of the Company's equipment, intangibles,
inventories, and accounts receivable.
- A prepayment penalty of one percent (1%) of the prepayment loan limit of
$55.0 million if prepayment occurs on or before April 30, 2008.
- Provides that the Company may not pay dividends on its common stock in
excess of $0.72 per share on an annual basis.
The Facility also includes quarterly debt service and cumulative earnings
before interest, taxes, depreciation and amortization ("EBITDA") financial
covenants. A minimum debt service ratio of 1.0 to 1.0 must be maintained,
as measured by the twelve month period then ended. The cumulative minimum
EBITDA requirements are as follows:
(a) $1,000,000 for the three months ending December 31, 2007 and
December 31, 2008 and;
(b) $2,000,000 for the six months ending March 31, 2008, and
March 31, 2009 and;
(c) $4,500,000 for the nine months ending June 30, 2008 and;
(d) $7,000,000 for the twelve months ending September 30, 2008
The Company was in compliance with the required debt service and minimum
EBITDA covenants at December 2007.
At December 2007, the available credit on the revolving portion of the
Facility, including accounts receivable and inventory limitations, was $48.7
million and the outstanding balance was $40.8 million. The Facility bears
interest at the bank's prime rate, which was 7.25% as of December 2007 and is
collateralized by all of the Company's equipment, intangibles, inventories,
and accounts receivable.
16
As a component of the credit agreement, the Company has two term notes,
Term Note A and Term Note B, with Bank of America (formerly LaSalle Bank).
Term Note A bears interest at the bank's prime rate (7.25% at December 2007)
and is payable in monthly installments of $16,333. Term Note B bears
interest at the bank's prime rate plus 2% (9.25% at December 2007) and is
payable in monthly installments of $100,000. The outstanding balances on
Term Note A and Term Note B were $0.5 million and $0.05 million,
respectively, as of December 2007.
The Company's Chairman, Mr. William Wright, has personally guaranteed
repayment of the Facility and the term loans. However, the amount of
his guaranty related to the Facility is capped at $10.0 million and is
automatically reduced by the amount of the repayment on Term Note B,
which resulted in the guaranteed principal outstanding being reduced to
approximately $5.1 million as of December 2007. AMCON pays Mr. Wright
an annual fee equal to 2% of the guaranteed principal in return for the
personal guarantee. This guarantee is secured by a pledge of the shares
of Chamberlin's, Akin's, HNWC, and TSI.
Mr. Wright has also personally guaranteed a note payable issued in
conjunction with the July 2007 Television Events and Marketing, Inc. ("TEAM")
litigation settlement. AMCON pays Mr. Wright an annual fee equal to 2% of
the guaranteed principal in return for the personal guarantee. The amount
guaranteed in connection with this settlement at December 2007 was
approximately $0.7 million.
Cross Default and Co-Terminus Provisions
-----------------------------------------
The Company's owned real estate in Bismarck, ND, Quincy, IL, and Rapid City,
SD, and certain warehouse equipment in the Rapid City, SD warehouse is
financed through term loans with Marshall and Ilsley Bank ("M&I"), which is
also a participant lender on the Company's revolving line of credit. The
M&I loans contain cross default provisions which cause all loans with M&I to
be considered in default if any one of the loans where M&I is a lender,
including the revolving credit facility, is in default. In addition, the M&I
loans contain co-terminus provisions which require all loans with M&I to be
paid in full if any of the loans are paid in full prior to the end of their
specified terms.
OTHER
-----
AMCON has issued a letter of credit for $0.9 million to its workers'
compensation insurance carrier as part of its self-insured loss control
program.
Off-Balance Sheet Arrangements
------------------------------
The Company does not have any off-balance sheet arrangements.
17
8. STOCK PLANS
Stock Options
-------------
Prior to its expiration in June 2004, AMCON maintained a stock-based
compensation plan ("the Stock Option Plan") which provided the Compensation
Committee of the Board of Directors authorization to grant incentive stock
options and non-qualified stock options, pursuant to the Stock Option Plan,
of up to 550,000 shares. No shares have been issued under the Stock Option
Plan since the end of fiscal 2003 and there was no unamortized compensation
expense related to the Stock Option Plan at December 2007.
In April 2007, the Company's shareholders approved the award of 25,000
non-qualified stock options to Christopher Atayan, Chief Executive Officer
("CEO"), Vice Chairman, and a Director of the Company. The stock options
vest in equal installments over a three year period, have an exercise price
of $18.00 per share, and had a fair value of approximately $347,000 at the
date of shareholder approval, using the Black-Scholes option pricing model.
At December 2007, 8,333 of the stock options had vested.
The following assumptions were used in connection with the Black-Scholes
option pricing calculation:
Stock Option Pricing Assumptions
--------------------------------
April 2007 Awards
-----------------
Risk-free interest rate 4.69%
Dividend yield 1.65%
Expected volatility 46%
Expected life in years 7
Forfeiture rate 0%
Options issued and outstanding to management employees pursuant to the Stock
Option Plan and the April 2007 stock option award to the Company's CEO are
summarized as follows:
Number of Number Aggregate
Date Exercise Price Options Exercisable Intrinsic Value
Outstanding December 2007
-----------------------------------------------------------------------------
Fiscal 1999 $ 45.68 - $ 51.14 6,683 6,683 -
Fiscal 2000 $ 34.50 3,165 3,165 -
Fiscal 2003 $ 28.80 3,212 3,212 12,687
Fiscal 2007 $ 18.00 25,000 8,333 368,750
------ ------ --------
38,060 21,393 $381,437
====== ====== ========
18
At December 2007, there were 4,236 options fully vested and exercisable
issued to outside directors, outside of the Stock Option Plan, as summarized
below:
Number of Number Aggregate
Date Exercise Price Options Exercisable Intrinsic Value
Outstanding December 2007
------------------------------------------------------------------------------
Fiscal 1999 $ 36.82 - $ 49.09 2,568 2,568 -
Fiscal 2002 $ 26.94 834 834 4,846
Fiscal 2003 $ 28.26 834 834 3,745
------ ------ --------
4,236 4,236 $ 8,591
====== ====== ========
The following summarizes all stock options outstanding at December 2007:
Exercisable
Remaining ----------------------------
Exercise Number Weighted-Average Weighted-Average Number Weighted-Average
Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------- ----------- ---------------- ---------------- ----------- ----------------
1999 Options $36.82-$51.14 9,251 1.4 years $47.39 9,251 $47.39
2000 Options $34.50 3,165 2.4 years $34.50 3,165 $34.50
2002 Options $26.94 834 4.6 years $26.94 834 $26.94
2003 Options $28.26-$28.80 4,046 5.0 years $28.69 4,046 $28.69
2007 Options $18.00 25,000 9.3 years $18.00 8,333 $18.00
------ ------ ------ ------
42,296 $26.86 25,629 $32.63
====== ====== ====== ======
December 2007
-----------------
Weighted
Number Average
of Exercise
Shares Price
-----------------
Outstanding at beginning of period 51,760 $24.81
Granted - -
Exercised (9,464) $15.68
Forfeited/Expired - -
-----------------
Outstanding at end of period 42,296 $26.86
=================
Options exercisable at end of period 25,629
========
The Company's stock options have varying vesting schedules, ranging up to
five years and expire ten years after the date of grant. Net income before
incomes taxes for Q1 2008 and Q1 2007 included compensation expense related
to stock options of approximately $29,000 and $3,000, respectively. Total
unamortized compensation expense related stock options totaled approximately
$261,000 at December 2007.
19
Omnibus Plan
------------
In April 2007, the stockholders of the Company approved an equity incentive
plan, the 2007 Omnibus Incentive Plan ("the Omnibus Plan"), to encourage
employees of the Company and subsidiaries to acquire a proprietary and vested
interest in the growth and performance of the Company. The Omnibus Plan
permits the issuance of up to 150,000 shares of the Company's common stock in
the form of stock options, restricted stock awards, restricted stock units,
performance share awards as well as awards such as stock appreciation rights,
performance units, performance shares, bonus shares and dividend share awards
payable in the form of common stock or cash. On December 6, 2007, the
Compensation Committee of the Board of Directors authorized and approved the
grant of 24,000 restricted stock awards to four executive officers
("Participants") of the Company, pursuant to the provisions of the Omnibus
Plan. There is no direct cost to the Participants associated with the
restricted stock awards, except for any applicable taxes. The restricted
stock awards have a requisite service of approximately thirty four months and
vest one-third on October 16, 2008, one-third on October 16, 2009, and one-
third on October 16, 2010. The restricted stock held by Participants are
entitled to full voting rights and the customary adjustments in the event of
stock splits, stock dividends, and certain other distributions on the
Company's common stock. All cash dividends and/or distributions payable to
restricted stock Participants will be held in escrow until all the conditions
of vesting have been met.
The estimated fair value of the restricted stock awards was approximately
$963,000, net of estimated forfeitures, based on the closing market price of
the Company's stock on the grant date. The Company recognizes compensation
expense related to restricted stock awards on a straight-line basis over the
requisite service period. Accordingly, Q1 2008 net income before incomes
taxes included compensation expense of $14,000 related to restricted stock
awards and total unamortized compensation expense was approximately $949,000
at December 2007. The total intrinsic value of all restricted stock awards
at December 2007 was approximately $786,000. No restricted stock awards were
vested at December 2007.
The following summarizes restricted stock activity under the Omnibus Plan
for the three months ended December 2007:
December 2007
----------------------------
Number Weighted Average
of Grant Date
Shares Fair Value
----------------------------
Nonvested restricted stock
at beginning of period - -
Granted 24,000 $42.50
Vested/Issued - -
Forfeited/Expired - -
----------------------------
Nonvested restricted stock
at end of period 24,000 $42.50
============================
20
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 retail health food stores' operations are aggregated to comprise the
retail segment because such operations have similar economic characteristics,
as well as similar characteristics with respect to the nature of products
sold, the type and class of customers for the health food products and the
methods used to sell the products. Included in the "Other" column is
interest expense previously allocated to HNWC, intercompany eliminations,
charges incurred by the holding company, and assets of discontinued
operations. The segments are evaluated on revenues, gross margins, operating
income (loss), and income before taxes.
Wholesale
Distribution Retail Other /1/ Consolidated
------------- ----------- ---------- -------------
QUARTER ENDED DECEMBER 2007:
External revenue:
Cigarettes $ 149,611,531 $ - $ - $ 149,611,531
Confectionery 14,107,957 - - 14,107,957
Health food - 9,521,555 - 9,521,555
Tobacco, food service & other 37,422,194 - - 37,422,194
------------- ----------- ---------- -------------
Total external revenue 201,141,682 9,521,555 - 210,663,237
Depreciation 231,766 120,319 456 352,541
Amortization - 9,933 - 9,933
Operating income (loss) 2,812,633 811,374 (1,001,208) 2,622,799
Interest expense 230,235 324,206 415,361 969,802
Income (loss) from continuing
operations before taxes 2,589,985 498,470 (1,402,247) 1,686,208
Total assets 73,379,656 11,302,023 6,976,532 91,658,211
Capital expenditures 269,232 11,387 - 280,619
QUARTER ENDED DECEMBER 2006:
External revenue:
Cigarettes $ 150,858,196 $ - $ - $ 150,858,196
Confectionery 13,438,708 - - 13,438,708
Health food - 9,078,710 - 9,078,710
Tobacco, beverage & other 35,990,535 - - 35,990,535
------------- ----------- ---------- -------------
Total external revenue 200,287,439 9,078,710 - 209,366,149
Depreciation 306,072 141,837 - 447,909
Amortization - 9,934 - 9,934
Operating income (loss) 2,605,994 538,283 (912,929) 2,231,348
Interest expense 299,080 386,555 583,027 1,268,662
Income (loss) from continuing
operations before taxes 988,189 160,952 (155,374) 993,767
Total assets 76,520,116 12,651,596 7,006,122 96,177,834
Capital expenditures 90,505 80,304 - 170,809
/1/ Includes interest expense previously allocated to HNWC, intercompany eliminations,
charges incurred by the holding company, and assets of discontinued operations.
10. CONTINGENCIES
Trinity Springs. Inc. / Crystal Paradise Holdings, Inc. Litigation
-----------------------------------------------------------------
The Company and its consolidated subsidiary, TSI, were involved in litigation
regarding an April 24, 2004 Asset Purchase Agreement ("Asset Purchase
Agreement"), under which TSI acquired certain assets from Trinity Springs,
Ltd. (which later changed its name to Crystal Paradise Holdings, Inc.
("CPH")). In September 2007, the Company signed a Mutual Release and
21
Settlement Agreement (the "Settlement Agreement") with CPH related to this
litigation. The Settlement Agreement resulted in the mutual release and
settlement of all outstanding and potential litigation and claims among and
between minority shareholder plaintiffs, CPH, AMCON, TSI, and Defendant
Directors with respect to the Asset Purchase Agreement and the related
acquisition. The presiding Court approved the settlement and dismissed the
related lawsuit with prejudice. The Company faces no further known liability
from that lawsuit or settlement.
In exchange for (i) a full and complete release from CPH, (ii) cancellation
of the promissory notes issued in connection with the original acquisition,
(iii) termination of the Asset Purchase Agreement and water royalty contained
therein, and (iv) relinquishment of the TSI stock owned by CPH, (a) TSI
issued a promissory note in the amount of $5.0 million to CPH, with interest
accruing at 5% and secured by the assets currently held by TSI (the "New
Note"), (b) AMCON amended and restated the existing Guaranty and Suretyship
Agreement to substitute the New Note for the cancelled notes, and (c) TSI
granted CPH an eleven-month option to purchase the assets of TSI. If CPH
elects to exercise its purchase option, then CPH will cancel the New Note,
including the obligation to pay any accrued interest. The purchase option
may be extended for an additional seven months upon the discharge of all
accrued interest during the initial option period.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the Management's Discussion and
Analysis and other sections, contains forward looking statements that are
subject to risks and uncertainties and which reflect management's current
beliefs and estimates of future economic circumstances, industry conditions,
company performance and financial results. Forward looking statements
include information concerning the possible or assumed future results of
operations of the Company and those statements preceded by, followed by or
that include the words "future," "position," "anticipate(s)," "expect,"
"believe(s)," "see," "plan," "further improve," "outlook," "should" or
similar expressions. For these statements, we claim the protection of the
safe harbor for forward looking statements contained in the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are not
guarantees of future performance or results. They involve risks,
uncertainties and assumptions. You should understand that the following
important factors, in addition to those discussed elsewhere in this document,
could affect the future results of the Company and could cause those results
to differ materially from those expressed in our forward looking statements:
- increases in state and federal excise taxes on cigarette and tobacco
products, including proposed legislation to renew and expand the
State Children's Health Insurance Program ("SCHIP"), which would be
largely funded through significant increases to federal excise taxes
on cigarette and tobacco products
- changing market conditions with regard to cigarettes,
- changes in promotional and incentive programs offered by manufacturers,
- the demand for the Company's products,
- new business ventures,
22
- domestic regulatory risks,
- competition,
- poor weather conditions,
- increases in fuel prices,
- collection of guaranteed amounts,
- other risks over which the Company has little or no control, and
- any other factors not identified herein could also have such an effect.
Changes in these factors could result in significantly different results.
Consequently, future results may differ from management's expectations.
Moreover, past financial performance should not be considered a reliable
indicator of future performance. Any forward looking statement contained
herein is made as of the date of this document. Except as required by law,
the Company undertakes no obligation to publicly update or correct any of
these forward looking statements in the future to reflect changed
assumptions, the occurrence of material events or changes in future operating
results, financial conditions or business over time.
CRITICAL ACCOUNTING ESTIMATES
Certain accounting estimates used in the preparation of the Company's
financial statements require us to make judgments and estimates and the
financial results we report may vary depending on how we make these
judgments and estimates. Our critical accounting estimates are set forth in
our Form 10-K for the fiscal year ended September 30, 2007, as filed with the
Securities and Exchange Commission. There have been no significant changes
with respect to these policies during the first three months of fiscal 2008.
COMPANY OVERVIEW - FIRST FISCAL QUARTER 2008 (Q1 2008)
The following discussion and analysis includes the Company's results of
operations from continuing operations for the three months ended December
2007 and 2006. Continuing operations are comprised of our wholesale
distribution and retail health food segments. A separate discussion of our
discontinued operations has been presented following our analysis of
continuing operations. Accordingly, the sales, gross profit (loss), selling,
general and administrative, depreciation and amortization, direct interest,
other expenses and income tax benefit from our discontinued operations have
been aggregated and reported as income (loss) from discontinued operations
and are not a component of the aforementioned continuing operations
discussion.
During Q1 2008, the Company:
- experienced a $0.7 million increase in income from continuing operations
before income taxes as compared to Q1 2007.
- reduced losses from discontinued operations, net of income taxes and
excluding gains from asset disposals, by $0.2 million as compared to
Q1 2007.
- recognized income from continuing operations per basic share of
$1.76 and $0.96 for Q1 2008 and Q1 2007, respectively.
- recognized (loss) income from discontinued operations per basic share
of ($0.18) and $1.21 for Q1 2008 and Q1 2007, respectively.
23
Wholesale Distribution Segment (ADC)
------------------------------------
Our wholesale distribution segment represents approximately 95% of the
Company's consolidated sales. ADC serves approximately 4,000 retail outlets
in the Great Plains and Rocky Mountain regions and is ranked as a top ten
convenience store supplier according to Convenience Store News. While we
provide our retailers with a broad selection of merchandise in all product
categories, we remain largely dependent on cigarette sales, which account for
approximately 74% of ADC total sales. ADC is also focused on growing its
sales of non-tobacco products, which offer higher profit margins and greater
revenue stream diversity.
The wholesale distribution industry (the "Industry") is mature and highly
competitive. To differentiate itself, ADC leverages a number of strategies
focused around providing market leading customer service programs and
offering flexible delivery capabilities. These strategies have helped
position ADC as a distributor of choice for both small independent retail
outlets and multi-location retail outlets.
ADC has significant alliances with the major cigarette manufacturers which we
believe control over 90% of the cigarette industry volume. While some of our
competitors have focused on the lower priced cigarette brands, ADC has made a
conscious decision to support and grow our national brand segment and align
our business with the major players in the industry. We believe that it is
important not to compete against the major cigarette manufacturers because of
their commitment to growing and maintaining their market share in a declining
category. Additionally, we believe that consumers' preference for premium
brands currently drives the category volume.
The Industry continues to experience significant changes driven by high fuel
costs, increasing cigarette and tobacco excise taxes, the popularity of deep-
discount cigarette brands, and consolidation within the Industry's customer
base (particularly convenience stores and tobacco shops). Collectively, we
expect these items will continue to pressure profit margins industry-wide and
potentially diminish the Company's profits.
To capitalize on the industry-wide changes mentioned above, ADC has
aggressively managed its cost structure, heavily leveraged inventory
management strategies, and deployed new technologies and automation tools
where possible. These actions have allowed ADC to maintain competitive
pricing and position itself to capture new business, sell new services to
our existing customers, explore acquisition opportunities, and further
penetrate the convenience store market.
Retail Health Food Segment
--------------------------
AMCON's retail health food stores, which are operated as Chamberlin's Market
& Cafe ("Chamberlin's" or "CNF") and Akin's Natural Foods Market ("Akin's" or
"ANF"), offer thousands of different product selections to their customers.
Chamberlin's, which was first established in 1935, is an award-winning and
highly-acclaimed chain of six health and natural product retail stores, all
offering an extensive selection of natural supplements and herbs, baked
goods, dairy products, and organic produce. Chamberlin's operates all of its
stores in and around Orlando, Florida.
24
Akin's, established in 1935, is also an award winning chain of seven health
and natural product retail stores, each offering an extensive line of natural
supplements and herbs, dairy products, and organic produce. Akin's has
locations in Tulsa and Oklahoma City, Oklahoma; Lincoln, Nebraska;
Springfield, Missouri; and Topeka, Kansas.
The retail health food industry has experienced strong growth in recent years
driven primarily by the demand for natural products and more health conscious
consumers. Our retail health food segment has benefited from this trend,
experiencing sales growth in many key product categories. Our management
team continues to evaluate locations for new stores.
RESULTS OF OPERATIONS - Continuing Operations
SALES:
------
Changes in sales are driven by two primary components:
(i) changes to selling prices, which are largely controlled by
our product suppliers, and excise taxes imposed on
cigarettes and tobacco products by various states; and
(ii) changes in the volume of products sold to our customers, either
due to a change in purchasing patterns resulting from consumer
preferences or the fluctuation in the comparable number of
business days in our reporting period.
Sales by business segment for the three month period ended December 2007
and December 2006 are as follows (dollars in millions):
Three months
ended December
------------------------
Incr
2007 2006 (Decr)
------ ------- -------
Wholesale distribution segment $ 201.2 $ 200.3 $ 0.9
Retail health food segment 9.5 9.1 0.4
------- ------- ------
$ 210.7 $ 209.4 $ 1.3
======= ======= ======
Sales - Q1 2008 vs. Q1 2007 (continuing operations)
---------------------------------------------------
Sales for Q1 2008 increased $1.3 million, or 0.6% as compared to Q1 2007.
Sales are reported net of costs associated with sales incentives provided to
retailers, totaling $3.6 million and $3.9 million, for Q1 2008 and Q1 2007,
respectively.
Sales from our wholesale distribution segment increased $0.9 million for the
three months ended December 2007 as compared to the same period in the prior
year. Growth in our tobacco, confectionary, food service, and other product
sales accounted for a $2.1 million increase in sales during Q1 2008. This
growth was partially offset by a $1.2 million decrease in cigarette sales.
25
Significant items impacting Q1 2008 sales included the following items.
Subsequent to the end of Q1 2007, several states imposed sizable increases in
the excise taxes levied against cigarettes. Because excise taxes are passed
on to our customers, the associated increase in our prices had the impact of
increasing our Q1 2008 sales by approximately $6.3 million as compared to
Q1 2007. Additionally, major cigarette manufacturers increased prices on a
number of their brands subsequent to Q1 2007. The impact of these
manufacturer price increases had the impact of increasing our Q1 2008 sales
by approximately $4.8 million as compared to Q1 2007.
Offsetting these increases, was a decrease of approximately $12.3 million
in sales primarily attributable to lower cigarette shipment volumes.
A significant portion of the decrease in cigarette volumes occurred in
states in which excise taxes increases were imposed and consumption has
decreased. The $2.1 million increase in tobacco, confectionary, food service
and other product sales was primarily the result of price increases and
changes in sales volumes.
Sales from our retail health food segment increased approximately $0.4
million, or 4.4%, in Q1 2008 as compared to Q1 2007. This increase was
attributable to an increase in same store sales, primarily in our vitamin
and supplement product categories.
Gross Profit - Q1 2008 vs. Q1 2007 (continuing operations)
----------------------------------------------------------
Our gross profit does not include fulfillment costs and costs related to the
distribution network which are included in selling, general and
administrative costs, and may not be comparable to those of other entities.
Some entities may classify such costs as a component of cost of sales.
Cost of sales, a component used in determining gross profit, for the
wholesale and retail segments includes the cost of products purchased from
manufacturers, less incentives we receive which are netted against such
costs.
Gross profit by business segment for the three month period ended
December 2007 and December 2006 is as follows (dollars in millions):
Three months
ended December
----------------------
Incr
2007 2006 (Decr)
------ ------- ------
Wholesale distribution segment $ 11.3 $ 11.5 $ (0.2)
Retail health food segment 3.9 3.6 0.3
------ ------ ------
$ 15.2 $ 15.1 $ 0.1
====== ====== ======
26
Gross profit - Q1 2008 vs. Q1 2007 (continuing operations)
----------------------------------------------------------
Overall gross profit for Q1 2008 increased $0.1 million, or 0.7% as compared
to Q1 2007.
During Q1 2008, gross profit in our wholesale distribution segment decreased
$0.2 million or 1.7% as compared to Q1 2007, primarily due to fluctuations in
our product mix sold, promotional allowances received from manufacturers, and
changes in unit volumes sold.
Gross profit for the retail health segment increased $0.3 million in Q1 2008
as compared to Q1 2007. Of this increase, approximately $0.2 million related
to higher sales volume, with the remaining change resulting primarily from
improved sales mix and lower throw out costs.
OPERATING EXPENSE - Q1 2008 vs. Q1 2007 (continuing operations)
---------------------------------------------------------------
Operating expense includes selling, general and administrative expenses and
depreciation and amortization. Selling, general and administrative include
costs related to our sales, warehouse, delivery and administrative
departments for all segments. Specifically, purchasing and receiving costs,
warehousing costs and costs of picking and loading customer orders are all
classified as selling, general and administrative expenses. Our most
significant expenses relate to employee costs, facility and equipment leases,
transportation costs, fuel costs, insurance and professional fees.
Q1 2008 operating expenses decreased approximately $0.3 million as compared
to Q1 2007. This decrease was primarily related to lower compensation,
insurance, and equipment costs, partially offset by higher fuel costs.
INTEREST EXPENSE - Q1 2008 vs. Q1 2007 (continuing operations)
--------------------------------------------------------------
Interest expense for Q1 2008 decreased approximately $0.3 million as compared
to Q1 2007. The decrease in interest expense in Q1 2008 was principally
related to lower average prime interest rates and lower average borrowings as
compared to the same period in the prior year.
The Company primarily borrows at the prime interest rate. On average, the
Company's borrowing rates on variable rate debt were 0.73% lower and the
average borrowings on variable rate debt were $8.8 million lower in Q1 2008
as compared to Q1 2007.
DISCONTINUED OPERATIONS - Q1 2008 vs. Q1 2007
---------------------------------------------
Discontinued operations include the residual assets, liabilities, and results
of operations of TSI for the three months end December 2007, and TSI and HNWC
for the three months ended December 2006. In October 2007, the Company
successfully concluded its wind-down of HNWC at which time it classified
HNWC's residual liabilities to continuing operations.
Income (loss) from discontinued operations totaled ($0.1) million in Q1 2008
as compared to $0.6 million in Q1 2007. The change in income (loss) from
Q1 2008 to Q1 2007 is primarily attributable to a $1.6 million pre-tax gain
realized in Q1 2007 in connection with the sale of HNWC's assets.
27
A summary of discontinued operations is as follows:
Three months ended Three months ended
December 2007 December 2006
------------------ ------------------
Sales $ - $ 862,647
Operating loss (39,245) (313,373)
Gain on disposal of discontinued operations,
before income taxes /1/ - 1,562,588
Income tax (benefit) expense (59,000) 516,000
(Loss) income from discontinued operations (95,995) 637,541
LIQUIDITY AND CAPITAL RESOURCES
Overview
----------
Operating Activities. The Company requires cash to pay operating expenses,
purchase inventory, and make capital investments. In general, the Company
finances its cash flow requirements with cash generated from operating
activities and credit facility borrowings. In Q1 2008, the Company used
cash of approximately $2.6 million for operating activities. Cash used
during Q1 2008 was primarily related to inventory purchases and the pay down
of accounts payable and accrued expenses, partially offset by changes in
accounts receivable and deferred income tax balances, and adjustments for
depreciation.
Our variability in cash flows from operating activities is dependent on
the timing of inventory purchases and seasonal fluctuations. For example,
periodically we have inventory "buy-in" opportunities which offer more
favorable pricing terms. As a result, we may have to hold inventory for a
period longer than the payment terms. This generates a cash outflow from
operating activities which we expect to reverse in later periods.
Additionally, during the warm weather months, which is our peak time of
operations, we generally carry higher amounts of inventory to ensure high
fill rates and maintain customer satisfaction.
Investing Activities. The Company used cash of approximately $0.3 million in
Q1 2008 for investing activities, primarily related to capital expenditures
for property, plant and equipment.
Financing Activities. The Company generated net cash proceeds of $2.4
million from financing activities during Q1 2008. Of this net change in
cash, $2.5 million related to borrowings on the Company's credit facility
and $0.1 million related to cash received on the exercise of stock options.
These cash proceeds were offset by preferred stock dividend payments of
$0.1 million and $0.1 million for principal payments on long-term debt.
Cash on Hand/Working Capital. At December 2007, the Company had cash on hand
of $0.3 million and working capital (current assets less current liabilities)
of $38.4 million. This compares to cash on hand of $0.7 million and working
capital of $34.9 million as of September 2007.
28
TSI Financing
-------------
As previously disclosed, TSI has approximately $2.8 million in related party
debt obligations, which are in default at December 2007. TSI has not obtained
associated debt default waivers for the related party obligations.
In September 2007 AMCON and TSI settled all litigation with Crystal Paradise
Holdings, Inc. ("CPH") regarding an April 24, 2004 Asset Purchase Agreement
under which TSI acquired certain assets from CPH. No monetary exchanges
between the Company and CPH were required under the settlement agreement.
The Company has recorded a $1.5 million pre-tax deferred gain in connection
with the above settlement. This deferred gain has been classified as a
component of noncurrent liabilities of discontinued operations in the
Company's December 2007 condensed consolidated balance sheet. The deferred
gain will be recognized upon the earlier of CPH's election to exercise its
TSI asset purchase option or the expiration of the asset purchase option.
With this final settlement, the Company does not expect its future cash flows
to be significantly impacted by future litigation related to the April 24,
2004 Asset Purchase Agreement.
Contractual Obligations
-----------------------
There have been no significant changes to the Company's contractual
obligations as set forth in the Company's Form 10-K for the fiscal period
ended September 30, 2007.
CREDIT AGREEMENT
----------------
The Company's primary source of borrowing for liquidity purposes is its
revolving credit facility with Bank of America (formerly LaSalle Bank)(the
"Facility"). The significant terms of the Facility at December 2007 include:
- A $55.0 million revolving credit limit, plus the outstanding balances
on two term notes ("Term Note A" and "Term Note B") which totaled
approximately $0.6 million at December 2007 for a total credit
facility limit of $55.6 million at December 2007.
- Bears interest at the bank's prime interest rate, except for Term Note B
which bears interest at the bank's prime rate plus 2%.
- Maturity and expiration dates for the Facility and Term Note A of
April 2009.
- Lending limits subject to accounts receivable and inventory limitations,
an unused commitment fee equal to 0.25% per annum on the difference
between the maximum loan limit and average monthly borrowings.
- A prepayment penalty of one percent (1%) of the prepayment loan limit of
$55.0 million if prepayment occurs on or before April 30, 2008.
- Provides that the Company may not pay dividends on its common stock in
excess of $0.72 per share on an annual basis.
29
The Facility also includes quarterly debt service and cumulative earnings
before interest, taxes, depreciation and amortization ("EBITDA") financial
covenants. A minimum debt service ratio of 1.0 to 1.0 must be maintained,
as measured by the twelve month period then ended. The cumulative minimum
EBITDA requirements are as follows:
(a) $1,000,000 for the three months ending December 31, 2007 and
December 31, 2008 and;
(b) $2,000,000 for the six months ending March 31, 2008, and
March 31, 2009 and;
(c) $4,500,000 for the nine months ending June 30, 2008 and;
(d) $7,000,000 for the twelve months ending September 30, 2008
The Company was in compliance with the required debt service and minimum
EBITDA covenants at December 2007.
The Company's maximum available credit limit of the revolving portion of the
Facility was $48.7 million at December 2007, however, the amount available
for use at any given time is subject to many factors including eligible
accounts receivable and inventory balances that are evaluated on a daily
basis. At December 2007, the outstanding balance on the revolving portion of
the Facility was $40.8 million. The Facility bears interest at a variable
rate equal to the bank's prime rate, which was 7.25% at December 2007.
Based on our collateral and loan limits as defined by the Facility agreement,
the Company's excess availability under the Facility at December 2007 was
approximately $7.9 million.
During Q1 2008, our peak borrowings under the Facility were $42.4 million and
our average borrowings and average availability were $38.9 and $8.8 million,
respectively. Our availability to borrow under the Facility generally
decreases as inventory and accounts receivable levels go up because of the
borrowing limitations that are placed on collateralized assets.
As a component of the credit agreement, the Company has two term notes,
Term Note A and Term Note B, with Bank of America (formerly LaSalle Bank).
Term Note A bears interest at the bank's prime rate (7.25% at December 2007)
and is payable in monthly installments of $16,333. Term Note B bears
interest at the bank's prime rate plus 2% (9.25% at December 2007) and is
payable in monthly installments of $100,000. The outstanding balances on Term
Note A and Term Note B were $0.5 million and $0.05 million, respectively, as
of December 2007.
The Company's Chairman, Mr. William Wright, has personally guaranteed
repayment of the Facility and the term loans. However, the amount of
his guaranty related to the Facility is capped at $10.0 million and is
automatically reduced by the amount of the repayment on Term Note B,
which resulted in the guaranteed principal outstanding being reduced to
approximately $5.1 million as of December 2007. AMCON pays Mr. Wright
an annual fee equal to 2% of the guaranteed principal in return for the
personal guarantee. This guarantee is secured by a pledge of the shares
of Chamberlin's, Akin's, HNWC, and TSI.
30
In July 2007, the Company and its subsidiary, The Beverage Group, Inc.
("TBG") entered into an agreement which settled outstanding litigation with
Television Events and Marketing, Inc. ("TEAM"). As part of the settlement,
AMCON became obligated to pay $187,500 in four equal quarterly installments
of $46,875 beginning in January 2008 through October 2010, and $125,000 in
four equal quarterly installments of $31,250 beginning in January 2011
through October 2011. The Company's Chairman, Mr. Wright, has personally
guaranteed the payment obligation, which totaled approximately $0.7 million
at December 2007. AMCON pays Mr. Wright an annual fee equal to 2% of the
guaranteed principal in return for the personal guarantee.
Cross Default and Co-Terminus Provisions
-----------------------------------------
The Company's owned real estate in Bismarck, ND, Quincy, IL, and Rapid City,
SD, and certain warehouse equipment in the Rapid City, SD warehouse is
financed through term loans with Marshall and Ilsley Bank ("M&I"), which is
also a participant lender on the Company's revolving line of credit. The
M&I loans contain cross default provisions which cause all loans with M&I to
be considered in default if any one of the loans where M&I is a lender,
including the revolving credit facility, is in default. In addition, the M&I
loans contain co-terminus provisions which require all loans with M&I to be
paid in full if any of the loans are paid in full prior to the end of their
specified terms.
OTHER
-----
AMCON has issued a letter of credit for $0.9 million to its workers'
compensation insurance carrier as part of its self-insured loss control
program.
Off-Balance Sheet Arrangements
------------------------------
The Company does not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to interest rate risk on its variable rate debt.
At December 2007, the Company had $41.4 million of variable rate debt
outstanding with maturities through April 2009. The interest rate on this
debt ranged from 7.25% to 9.25% at December 2007. We estimate that our
annual cash flow exposure relating to interest rate risk based on our current
borrowings is approximately $0.3 million for each 1% change in our lender's
prime interest rate.
We do not utilize financial instruments for trading purposes and hold no
derivative financial instruments which could expose us to significant market
risk.
31
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules
13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), that are designed to ensure that information required
to be disclosed in the Company's reports filed or furnished under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the applicable Exchange Act rules and forms of the SEC.
Such information is accumulated and communicated to the Company's management,
including its Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), as appropriate, to allow timely decisions regarding required
disclosures. Any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance of achieving
the desired control objectives.
The Company carried out the evaluation required by paragraph (b) of the
Exchange Act Rules 13a-15 or 15d-15, under the supervision and with the
participation of our management, including the CEO and CFO, of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, the CEO and CFO concluded that, as of the end of the period
covered by this report, the Company's disclosure controls and procedures are
effective to provide reasonable assurance that information required to be
disclosed by the Company in the reports the Company files or submits under
the Exchange Act is (1) accumulated and communicated to management, including
the Company's CEO and CFO, to allow timely decisions regarding required
disclosures and (2) recorded, processed, summarized and reported, within the
time periods specified in the Commission's rules and forms.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to this item may be found in Note 10 to the
condensed consolidated unaudited financial statements in Item 1, which is
incorporated herein by reference.
Item 1A. Risk Factors
There have been no material changes to the Company's risk factors as
previously disclosed in Item 1A "Risk Factors" on Form 10-K for the fiscal
year ended September 30, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not applicable.
32
Item 6. Exhibits
(a) Exhibits
10.1 Restricted Stock Award Agreement, dated December 6, 2007, between AMCON
Distributing Company and Christopher H. Atayan (filed on December 12,
2007 as Exhibit 10.2 to our Company's current report on Form 8-K and
incorporated herein by reference).
10.2 Restricted Stock Award Agreement, dated December 6, 2007, between AMCON
Distributing Company and Eric J. Hinkefent (filed on December 12, 2007
as Exhibit 10.3 to our Company's current report on Form 8-K and
incorporated herein by reference).
10.3 Restricted Stock Award Agreement, dated December 6, 2007, between AMCON
Distributing Company and Andrew C. Plummer (filed on December 12, 2007
as Exhibit 10.4 to our Company's current report on Form 8-K and
incorporated herein by reference).
10.4 Restricted Stock Award Agreement, dated December 6, 2007, between AMCON
Distributing Company and Philip E. Campbell (filed on December 12, 2007
as Exhibit 10.5 to our Company's current report on Form 8-K and
incorporated herein by reference).
31.1 Certification by Christopher H. Atayan, Chief Executive Officer
and Vice Chairman, furnished pursuant to section 302 of the
Sarbanes-Oxley Act
31.2 Certification by Andrew C. Plummer, Vice President and
Chief Financial Officer, furnished pursuant to section 302
of the Sarbanes-Oxley Act
32.1 Certification by Christopher H. Atayan, Chief Executive Officer
and Vice Chairman, furnished pursuant to section 906 of the
Sarbanes-Oxley Act
32.2 Certification by Andrew C. Plummer, Vice President and
Chief Financial Officer, furnished pursuant to section 906 of
the Sarbanes-Oxley Act
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
AMCON DISTRIBUTING COMPANY
(registrant)
Date: January 16, 2008 /s/ Christopher H. Atayan
---------------- -----------------------------
Christopher H. Atayan,
Chief Executive Officer and
Vice Chairman
Date: January 16, 2008 /s/ Andrew C. Plummer
---------------- -----------------------------
Andrew C. Plummer,
Chief Financial Officer and Principal
Financial and Accounting Officer
34