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 March 31, 2008
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
---- ----
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
Company. See the definitions of "large accelerated filer", "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer Accelerated filer
---- ----
Non-accelerated filer (do not check Smaller reporting company
(if a smaller reporting company) 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 568,564 shares of its $.01 par value common stock
outstanding as of April 14, 2008.
Form 10-Q
2nd Quarter
INDEX
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
--------------------------------------------
Condensed consolidated balance sheets at
March 31, 2008 (unaudited) and September 30, 2007 3
Condensed consolidated unaudited statements of operations
for the three and six months ended March 31, 2008
and 2007 4
Condensed consolidated unaudited statements of cash flows
for the six months ended March 31, 2008 and 2007 5
Notes to condensed consolidated unaudited
financial statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
Item 4. Controls and Procedures 36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 1A. Risk Factors 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 37
Item 4. Submission of Matters to a Vote of Security Holders 37
Item 5. Other Information 37
Item 6. Exhibits 38
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 2008 and September 30, 2007
----------------------------------------------------------------------------------------------------
March 2008 September
(Unaudited) 2007
------------ ------------
ASSETS
Current assets:
Cash $ 503,006 $ 717,554
Accounts receivable, less allowance for doubtful
accounts of $0.5 million and $0.3 million, respectively 21,741,714 27,848,938
Inventories, net 33,119,315 29,738,727
Deferred income taxes 1,478,222 1,446,389
Current assets of discontinued operations 8,639 18,897
Prepaid and other current assets 4,269,603 5,935,208
------------ ------------
Total current assets 61,120,499 65,705,713
Property and equipment, net 11,302,945 11,190,768
Goodwill 5,848,808 5,848,808
Other intangible assets, net 3,380,204 3,400,070
Deferred income taxes 1,489,579 2,768,043
Non-current assets of discontinued operations 2,057,033 2,057,033
Other assets 1,460,690 1,093,150
------------ ------------
$ 86,659,758 $ 92,063,585
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,682,453 $ 15,253,562
Accrued expenses 4,951,361 5,293,923
Accrued wages, salaries and bonuses 1,913,187 2,202,594
Income taxes payable 235,683 367,773
Current liabilities of discontinued operations 4,090,624 4,035,863
Current maturities of credit facility 3,046,000 3,046,000
Current maturities of long-term debt 713,059 568,024
------------ ------------
Total current liabilities 28,632,367 30,767,739
Credit facility, less current maturities 30,483,506 35,808,180
Long-term debt, less current maturities 6,981,633 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, $.01 par value, 3,000,000 shares authorized,
568,564 shares outstanding at March 2008 and 529,436
shares outstanding at September 2007 5,686 5,295
Additional paid-in capital 6,684,826 6,396,131
Retained earnings (deficit) 1,051,058 (857,895)
------------ ------------
Total shareholders' equity 7,741,570 5,543,531
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$ 86,659,758 $ 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 and six months ended March 31, 2008 and 2007
---------------------------------------------------------------------------------------------------------
For the three months For the six months
ended March ended March
----------------------------- -----------------------------
2008 2007 2008 2007
(As Restated (As Restated
-See Note 1) -See Note 1)
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Sales (including excise taxes of $46.3
million and $48.4 million, and $97.9
million and $98.0 million, respectively) $ 190,411,670 $ 201,176,501 $ 401,074,907 $ 410,542,650
Cost of sales 174,669,957 185,928,473 370,137,346 380,200,349
------------- ------------- ------------- -------------
Gross profit 15,741,713 15,248,028 30,937,561 30,342,301
------------- ------------- ------------- -------------
Selling, general and administrative expenses 12,696,507 13,045,926 24,907,082 25,451,009
Depreciation and amortization 339,809 456,204 702,283 914,047
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13,036,316 13,502,130 25,609,365 26,365,056
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Operating income 2,705,397 1,745,898 5,328,196 3,977,245
------------- ------------- ------------- -------------
Other expense (income):
Interest expense 749,558 1,237,976 1,719,360 2,506,638
Other (income), net (39,265) (32,225) (72,476) (63,307)
------------- ------------- ------------- -------------
710,293 1,205,751 1,646,884 2,443,331
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Income from continuing operations
before income tax expense 1,995,104 540,147 3,681,312 1,533,914
Income tax expense 728,000 208,000 1,369,000 591,000
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Income from continuing operations 1,267,104 332,147 2,312,312 942,914
Discontinued operations (Note 2)
(Loss) gain on disposal of discontinued
operations, net of income tax (benefit)
expense of ($0.04) million and $0.6
million, respectively - (66,498) - 829,090
Loss from discontinued operations,
net of income tax (benefit) of ($0.1)
million and ($0.1) million, and ($0.1)
million and ($0.2) million, respectively (97,445) (124,283) (193,440) (382,330)
------------- ------------- ------------- -------------
(Loss) income on discontinued operations (97,445) (190,781) (193,440) 446,760
------------- ------------- ------------- -------------
Net income 1,169,659 141,366 2,118,872 1,389,674
Preferred stock dividend requirements (104,386) (103,239) (209,919) (208,772)
------------- ------------- ------------- -------------
Net income available to common shareholders $ 1,065,273 $ 38,127 $ 1,908,953 $ 1,180,902
============= ============= ============= =============
Basic earnings (loss) per share
available to common shareholders:
Continuing operations $ 2.16 $ 0.43 $ 3.92 $ 1.39
Discontinued operations (0.18) (0.36) (0.36) 0.85
------------- ------------- ------------- -------------
Net basic earnings per share
available to common shareholders $ 1.98 $ 0.07 $ 3.56 $ 2.24
============= ============= ============= =============
Diluted earnings (loss) per share
available to common shareholders:
Continuing operations $ 1.48 $ 0.37 $ 2.72 $ 1.10
Discontinued operations (0.11) (0.27) (0.23) 0.52
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Net diluted earnings per share
available to common shareholders $ 1.37 $ 0.10 $ 2.49 $ 1.62
============= ============= ============= =============
Weighted average shares outstanding:
Basic 537,064 527,062 535,473 527,062
Diluted 851,370 694,431 850,314 856,590
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 six months ended March 31, 2008 and 2007
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2008 2007
(As restated
-see Note 1)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,118,872 $ 1,389,674
Deduct: (Loss) income from discontinued operations, net of tax (193,440) 446,760
------------ ------------
Income from continuing operations 2,312,312 942,914
Adjustments to reconcile net income from
continuing operations to net cash flows
from operating activities:
Depreciation 682,417 894,180
Amortization 19,866 19,867
(Gain) on sale of property and equipment (17,635) (8,129)
Stock based compensation 169,449 6,000
Deferred income taxes 1,246,631 907,289
Provision (benefit) for losses on doubtful accounts 182,909 (50,195)
Provision for losses on inventory obsolescence 13,993 11,650
Changes in assets and liabilities:
Accounts receivable 5,924,315 1,286,473
Inventories (3,394,581) 1,478,717
Prepaid and other current assets 1,665,605 3,730
Other assets (367,540) (34,474)
Accounts payable (1,571,109) (2,950,309)
Accrued expenses and accrued wages, salaries and bonuses (631,969) (71,599)
Income tax payable (132,090) (19,582)
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Net cash flows from operating activities - continuing operations 6,102,573 2,416,532
Net cash flows from operating activities - discontinued operations (128,421) (1,962,255)
------------ ------------
Net cash flows from operating activities 5,974,152 454,277
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (543,156) (211,340)
Proceeds from sales of property and equipment 43,821 17,675
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Net cash flows from investing activities - continuing operations (499,335) (193,665)
Net cash flows from investing activities - discontinued operations - 3,965,394
------------ ------------
Net cash flows from investing activities (499,335) 3,771,729
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on bank credit agreements (5,324,674) (2,858,077)
Dividends paid on preferred stock (209,919) (208,772)
Proceeds from exercise of stock options 119,637 -
Principal payments on long-term debt (274,409) (288,570)
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Net cash flows from financing activities - continuing operations (5,689,365) (3,355,419)
Net cash flows from financing activities - discontinued operations - (789,874)
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Net cash flows from financing activities (5,689,365) (4,145,293)
------------ ------------
Net change in cash (214,548) 80,713
Cash, beginning of period 717,554 481,138
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Cash, end of period $ 503,006 $ 561,851
============ ============
5
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,832,447 $ 2,530,779
Cash paid during the period for income taxes 136,458 99,050
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 277,624 -
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 three month fiscal period ended March 31, 2008 and March 31, 2007 have
been referred to throughout this quarterly report as Q2 2008 and Q2 2007,
respectively. March 31, 2008, March 31, 2007, and September 30, 2007 have
been referred to as March 2008, March 2007, and September 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 and six month periods ended March 31, 2008 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 and six month periods ended March 2007, 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
Trinity Springs, Inc. (TSI)
---------------------------
During fiscal 2006, the Company discontinued the operations of Trinity
Springs, Inc. ("TSI"), which operated a water bottling facility in Idaho,
due to recurring losses, a lack of capital resources to sustain operations,
and the 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
the $5.0 million note payable, plus accrued interest. The option expires in
August 2008 and can be extended for an additional seven months 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.
9
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 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)
-------------------------------------------
Hawaiian Natural Water Company, Inc. ("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 Six months ended
March March
------------------------- ---------------------------
2008 /1/ 2007 /2/ 2008 /1/ 2007 /2/
----------- ----------- ------------ ------------
Sales $ - $ - $ - $ 862,647
Operating loss /3/ (42,695) (112,305) (81,940) (425,677)
(Loss) gain on disposal of discontinued
operations, before income taxes - (107,255) - 1,455,333
Income tax (benefit) expense (59,000) (120,000) (118,000) 396,244
(Loss) income from discontinued operations (97,445) (190,781) (193,440) 446,760
/1/ Includes the results for operations of TSI.
/2/ Includes the results of operations for TSI and HNWC. The residual assets and
liabilities of HNWC were classified as continuing operations in October 2007 (Q1 2008).
/3/ 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):
March September
2008 /1/ 2007 /2/
---------- ----------
Fixed assets - Total noncurrent assets of
discontinued operations $ 2.1 $ 2.1
========== ==========
Accounts payable $ 0.6 $ 0.7
Accrued expenses 0.7 0.5
Current portion of long-term debt due related party /3/ 2.8 2.8
---------- ----------
Total current liabilities of discontinued operations $ 4.1 $ 4.0
========== ==========
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/ Includes the assets and liabilities of TSI.
/2/ Includes the assets and liabilities for TSI and HNWC. HNWC was classified
to continuing operations in October 2007 (Q1 2008).
/3/ TSI's related party debt obligations were in default at March 2008 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
March 2008 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%
11
The Series A Convertible Preferred Stock ("Series A"), Series B Convertible
Preferred Stock ("Series B"), and Series C Convertible Preferred Stock
("Series C"), collectively (the "Preferred Stock"), are convertible at any
time by the holders into a number of shares of AMCON common stock equal to
the number of preferred shares being converted times a fraction equal to
$25.00 divided by the conversion price. The conversion prices for the
Preferred Stock are subject to customary adjustments in the event of stock
splits, stock dividends and certain other distributions on the Common Stock.
Cumulative dividends for the Preferred Stock are payable in arrears, when, as
and if declared by the Board of Directors, on March 31, June 30, September 30
and December 31 of each year.
In the event of a liquidation of the Company, the holders of the Preferred
Stock, are entitled to receive the liquidation preference plus any accrued
and unpaid dividends prior to the distribution of any amount to the holders
of the Common Stock. The Preferred Stock also contain redemption features
which trigger based on certain circumstances such as a change of control,
bankruptcy, or minimum ownership thresholds in AMCON by Mr. William Wright
("Mr. Wright") and his family. Mr. Wright is AMCON's founder, largest common
shareholder, and a Company director. 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 40% of the outstanding
common stock at March 2008. Mr. Wright beneficially owns 24% 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 Chairman of the 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 March 2008 and September 2007:
March September
2008 2007
------------ ------------
Finished goods $ 33,119,315 $ 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 $0.5 million at
March 2008 and September 2007. These reserves include the Company's
obsolescence allowance, which 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:
March September
2008 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:
March September
2008 2007
------------ ------------
Trademarks and tradenames $ 3,373,269 $ 3,373,269
Favorable leases (less accumulated
amortization of $479,065 and $459,199) 6,935 26,801
------------ ------------
$ 3,380,204 $ 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 approximately $9,900 for three months ended March 2008 and March
2007 and $19,800 for the six months ended March 2008 and March 2007.
Amortization expense related to intangible assets held at March 2008 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 7,000 - - - -
========= ========= ======== ======== ========
/1/ Represents amortization expense of intangible assets with finite lives for the
remaining six 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 March 2008 and
March 2007 that were anti-dilutive were not included in the computations of
diluted earnings per share. Such potential common shares totaled 12,279 for
the three and six months ended March 2008, and 183,862 and 20,245 for the
three and six months ended March 2007, respectively. The average exercise
price of anti-dilutive options and potential common stock was $44.09 for the
three and six months ended March 2008, and $28.74 and $38.74 for the three
and six months ended March 2007, respectively.
14
For the three months ended March
------------------------------------------------------
2008 2007
------------------------- ------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
1. Weighted average common
shares outstanding 537,064 537,064 527,062 527,062
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/ - 314,306 - 167,369
----------- ----------- ----------- -----------
3. Weighted average number of
shares outstanding 537,064 851,370 527,062 694,431
=========== =========== =========== ===========
4. Income from continuing operations $ 1,267,104 $ 1,267,104 $ 332,147 $ 332,147
Deduct: preferred stock
dividend requirements /2/ (104,386) - (103,239) (73,239)
----------- ----------- ----------- -----------
1,162,718 1,267,104 228,908 258,908
=========== =========== =========== ===========
5. Loss from discontinued
operations $ (97,445) $ (97,445) $ (190,781) $ (190,781)
=========== =========== =========== ===========
6. Net income available
to common shareholders $ 1,065,273 $ 1,169,659 $ 38,127 $ 68,127
=========== =========== =========== ===========
7. Income per share from
continuing operations $ 2.16 $ 1.48 $ 0.43 $ 0.37
=========== =========== =========== ===========
8. Loss per share from
discontinued operations $ (0.18) $ (0.11) $ (0.36) $ (0.27)
=========== =========== =========== ===========
9. Net earnings per share
available to common shareholders $ 1.98 $ 1.37 $ 0.07 $ 0.10
=========== =========== =========== ===========
/1/ Diluted earnings per share calculation includes all stock options,
Convertible Preferred Stock, and restricted stock deemed to be dilutive.
/2/ Diluted earnings per share calculation excludes dividend payments for
Convertible Preferred Stock deemed to be dilutive, as those amounts are
assumed to have been converted to common stock of the Company.
15
For the Six months ended March
------------------------------------------------------
2008 2007
------------------------- ------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
1. Weighted average common
shares outstanding 535,473 535,473 527,062 527,062
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/ - 314,841 - 329,528
----------- ----------- ----------- -----------
3. Weighted average number of
shares outstanding 535,473 850,314 527,062 856,590
=========== =========== =========== ===========
4. Income from
continuing operations $ 2,312,312 $ 2,312,312 $ 942,914 $ 942,914
Deduct: preferred stock
dividend requirements /2/ (209,919) - (208,772) -
----------- ----------- ----------- -----------
2,102,393 2,312,312 734,142 942,914
=========== =========== =========== ===========
5. (Loss) income from
discontinued operations $ (193,440) $ (193,440) $ 446,760 $ 446,760
=========== =========== =========== ===========
6. Net income available
to common shareholders $ 1,908,953 $ 2,118,872 $ 1,180,902 $ 1,389,674
=========== =========== =========== ===========
7. Income per share from
continuing operations $ 3.92 $ 2.72 $ 1.39 $ 1.10
=========== =========== =========== ===========
8. (Loss) income per share from
discontinued operations $ (0.36) $ (0.23) $ 0.85 $ 0.52
=========== =========== =========== ===========
9. Net earnings per share
available to common shareholders $ 3.56 $ 2.49 $ 2.24 $ 1.62
=========== =========== =========== ===========
/1/ Diluted earnings per share calculation includes all stock options,
Convertible Preferred Stock, and restricted stock deemed to be dilutive.
/2/ Diluted earnings per share calculation excludes dividend payments for
Convertible Preferred Stock deemed to be dilutive, as those amounts are
assumed to have been converted to common stock of the Company.
16
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 balance
on Term Note A, discussed below, for a total credit facility limit of
$55.5 million at March 2008. As a component of the credit agreement,
the Company has a term note ("Term Note A") with Bank of America
(formerly LaSalle Bank). Term Note A bears interest at the bank's prime
rate and is payable in monthly installments of $16,333. Term Note A had
an outstanding balance of approximately $0.5 million at March 2008.
- Bears interest at the bank's prime interest rate.
- 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, 2008
(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 March 2008.
At March 2008, the available credit on the revolving portion of the Facility,
including accounts receivable and inventory limitations, was $42.0 million
and the outstanding balance was $33.1 million. The Facility bears interest
at the bank's prime rate, which was 5.25% as of March 2008 and is
collateralized by all of the Company's equipment, intangibles, inventories,
and accounts receivable.
17
As discussed further in Item 2 - "Liquidity and Capital Resources",
Mr. William Wright, the Company's founder, largest common shareholder, and
a Company director has 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 his personal guarantee. The amount
guaranteed in connection with this settlement at March 2008 was approximately
$0.6 million. This guarantee is secured by a pledge of the shares of
Chamberlin's, Akin's, HNWC, and TSI.
Mr. Wright also formerly guaranteed the repayment of the Facility and
Term Note A, up to a maximum of $10.0 million, in exchange for a 2% annual
fee of the guaranteed principal. In March 2008, this personal guarantee was
cancelled as it was no longer required by the Facility's lender, Bank of
America. The Company paid Mr. Wright approximately $0.1 million related to
this personal guarantee for the fiscal year 2007.
Cross Default and Co-Terminus Provisions
-----------------------------------------
The Company's owned real estate in Bismarck, ND, Quincy, IL, and Rapid City,
SD, and certain warehouse equipment in the Rapid City, SD warehouse is
financed through term loans with Marshall and Ilsley Bank ("M&I"), which is
also a participant lender on the Company's revolving line of credit. The
M&I loans contain cross default provisions which cause all loans with M&I to
be considered in default if any one of the loans where M&I is a lender,
including the revolving credit facility, is in default. In addition, the M&I
loans contain co-terminus provisions which require all loans with M&I to be
paid in full if any of the loans are paid in full prior to the end of their
specified terms.
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.
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 all associated compensation expense has
been fully amortized.
18
In April 2007, the Company's shareholders approved the award of 25,000
non-qualified stock options to Christopher Atayan, Chief Executive Officer
("CEO"), 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 March 2008, 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 March 2008
-----------------------------------------------------------------------------
Fiscal 1999 $ 45.68 - $ 51.14 6,591 6,591 -
Fiscal 2000 $ 34.50 3,123 3,123 -
Fiscal 2003 $ 28.80 3,212 3,212 6,617
Fiscal 2007 $ 18.00 25,000 8,333 321,500
------ ------ --------
37,926 21,259 $328,117
====== ====== ========
At March 2008, there were 4,236 fully vested and exercisable options 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 March 2008
-----------------------------------------------------------------------------------
Fiscal 1999 $ 36.82 - $ 49.09 2,568 2,568 -
Fiscal 2002 $ 26.94 834 834 3,269
Fiscal 2003 $ 28.26 834 834 2,168
------ ------ --------
4,236 4,236 $ 5,437
====== ====== ========
19
The following summarizes stock options outstanding at March 2008:
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 9,159 1.13 years $47.35 9,159 $47.35
2000 Options $34.50 3,123 2.15 years $34.50 3,123 $34.50
2002 Options $26.94 834 4.37 years $26.94 834 $26.94
2003 Options $28.26-$28.80 4,046 4.74 years $28.69 4,046 $28.69
2007 Options $18.00 25,000 9.05 years $18.00 8,333 $18.00
------ ------ ------ ------
42,162 $26.80 25,495 $32.56
====== ====== ====== ======
The following is a summary of the activity of the stock plans during the
quarter ended March 2008.
March 2008
-----------------
Weighted
Number Average
of Exercise
Shares Price
-----------------
Outstanding at beginning of period 42,296 $26.86
Granted - -
Exercised - -
Forfeited/Expired (134) 45.92
-----------------
Outstanding at end of period 42,162 $26.80
=================
Options exercisable at end of period 25,495
========
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 included stock option compensation expense of approximately
$29,000 and $58,000 for the three and six months ended March 2008, and $3,000
and $6,000 for three and six months ended March 2007. Total unamortized
compensation expense related stock to options totaled approximately $232,000
at March 2008.
Omnibus Plan
------------
The Company's 2007 Omnibus Incentive Plan ("the Omnibus Plan") provides for
equity incentives that are intended to encourage employees of the Company
to acquire a 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.
20
Pursuant to the Omnibus Plan, the Compensation Committee of the Board of
Directors has authorized and approved the restricted stock awards summarized
below:
Restricted Stock /1/ Restricted Stock /2/
-------------------- --------------------
Date of award: December 6, 2007 January 29, 2008
Number of shares: 24,000 7,500
Service period: 34 months 36 months
Estimated fair value of
award at grade date/3/: $963,000 $229,000
Intrinsic value at March 2008: $740,640 $231,450
/1/ Award vests one-third on October 16, 2008, one-third on October 16, 2009,
and one-third on October 16, 2010.
/2/ Award vests one-third on January 29, 2009, one-third on January 29, 2010,
and one-third on January 29, 2011.
/3/ Amount is net of estimated forfeitures.
There is no direct cost to the recipients of the restricted stock awards,
except for any applicable taxes. The restricted stock held by recipients 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 recipients will be held in escrow until all the conditions
of vesting have been met.
The Company recognizes compensation expense related to restricted
stock awards on a straight-line basis over the requisite service period.
Accordingly, net income before incomes taxes included compensation expense
of $98,000 and $112,000 for the three and six months ended March 2008.
Total unamortized compensation expense related to restricted stock awards
at March 2008 was approximately $1,080,000.
The following summarizes restricted stock activity under the Omnibus Plan
for the three months ended March 2008:
March 2008
----------------------------
Number Weighted Average
of Grant Date
Shares Fair Value
----------------------------
Nonvested restricted stock
at beginning of period 24,000 $42.50
Granted 7,500 $32.67
Vested/Issued - -
Forfeited/Expired - -
----------------------------
Nonvested restricted stock
at end of period 31,500 $40.14
============================
21
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
------------- ----------- ---------- -------------
THREE MONTHS ENDED MARCH 2008:
External revenue:
Cigarettes $ 132,066,675 $ - $ - $ 132,066,675
Confectionery 13,513,561 - - 13,513,561
Health food - 10,529,463 - 10,529,463
Tobacco, food service & other 34,301,971 - - 34,301,971
------------- ----------- ---------- -------------
Total external revenue 179,882,207 10,529,463 - 190,411,670
Depreciation 242,555 86,824 497 329,876
Amortization - 9,933 - 9,933
Operating income (loss) 2,321,460 1,377,648 (993,711) 2,705,397
Interest expense 181,730 258,320 309,508 749,558
Income (loss) from continuing
operations before taxes 2,152,385 1,131,587 (1,288,868) 1,995,104
Total assets 68,732,684 11,680,923 6,246,151 86,659,758
Capital expenditures 138,238 124,299 - 262,537
THREE MONTHS ENDED MARCH 2007:
External revenue:
Cigarettes $ 143,291,673 $ - $ - $ 143,291,673
Confectionery 13,485,184 - - 13,485,184
Health food - 9,812,607 - 9,812,607
Tobacco, food service & other 34,587,037 - - 34,587,037
------------- ----------- ---------- -------------
Total external revenue 191,363,894 9,812,607 - 201,176,501
Depreciation 307,568 138,703 - 446,271
Amortization - 9,933 - 9,933
Operating income (loss) 2,226,141 994,113 (1,474,356) 1,745,898
Interest expense 282,711 373,975 581,290 1,237,976
Income (loss) from continuing
operations before taxes 1,953,878 630,800 (2,044,531) 540,147
Total assets 70,416,127 12,295,312 8,095,107 90,806,546
Capital expenditures 33,251 7,280 - 40,531
/1/ Includes intercompany eliminations, charges incurred by the holding company,
and assets of discontinued operations.
22
Wholesale
Distribution Retail Other /1/ Consolidated
------------- ----------- ---------- -------------
SIX MONTHS ENDED MARCH 2008:
External revenue:
Cigarettes $ 281,678,206 $ - $ - $ 281,678,206
Confectionery 27,621,518 - - 27,621,518
Health food - 20,051,018 - 20,051,018
Tobacco, food service & other 71,724,165 - - 71,724,165
------------- ----------- ---------- -------------
Total external revenue 381,023,889 20,051,018 - 401,074,907
Depreciation 474,320 207,143 954 682,417
Amortization - 19,866 - 19,866
Operating income (loss) 5,134,092 2,189,022 (1,994,918) 5,328,196
Interest expense 411,965 582,526 724,869 1,719,360
Income (loss) from continuing
operations before taxes 4,742,370 1,630,057 (2,691,115) 3,681,312
Total assets 68,732,684 11,680,923 6,246,151 86,659,758
Capital expenditures 407,470 135,686 - 543,156
SIX MONTHS ENDED MARCH 2007:
External revenue:
Cigarettes $ 294,149,869 $ - $ - $ 294,149,869
Confectionery 26,923,892 - - 26,923,892
Health food - 18,891,317 - 18,891,317
Tobacco, food service & other 70,577,572 - - 70,577,572
------------- ----------- ---------- -------------
Total external revenue 391,651,333 18,891,317 - 410,542,650
Depreciation 613,640 280,540 - 894,180
Amortization - 19,867 - 19,867
Operating income (loss) 4,832,135 1,532,396 (2,387,286) 3,977,245
Interest expense 581,791 760,530 1,164,317 2,506,638
Income (loss) from continuing
operations before taxes 4,265,256 791,752 (3,523,094) 1,533,914
Total assets 70,416,127 12,295,312 8,095,107 90,806,546
Capital expenditures 123,756 87,584 - 211,340
/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
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.
23
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,
- credit risk associated with the Company's wholesale segment customers,
- future availability of capital,
- the demand for the Company's products,
- new business ventures,
- domestic regulatory and legislative 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.
24
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 six months ended March 2008.
COMPANY OVERVIEW - SECOND FISCAL QUARTER 2008 (Q2 2008)
The following discussion and analysis includes the Company's results of
operations from continuing operations for the three and six months ended
March 2008 and March 2007. 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 Q2 2008, the Company:
- experienced a $1.5 million increase in income from continuing operations
before income taxes as compared to Q2 2007.
- recognized income from continuing operations per basic share of
$2.16 and $0.43 for the three months ended March 2008 and March
2007, respectively, and $3.92 and $1.39 for the six months ended
March 2008 and March 2007, respectively.
- recognized (loss) income from discontinued operations per basic share
of ($0.18) and ($0.36) for the three months ended March 2008 and
March 2007, respectively, and ($0.36) and $0.85 for the six months
ended March 2008 and March 2007, respectively.
25
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, higher 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
aggressively manages its cost structure, heavily leverages inventory
management strategies, and deploys 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.
26
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 and six month periods ended
March 2008 and March 2007 are as follows (dollars in millions):
Three months Six months
ended March ended March
----------------------- ------------------------
Incr. Incr.
2008 2007 (Decr) 2008 2007 (Decr)
------ ------ ------ ------ ------ ------
Wholesale distribution segment $179.9 $191.4 $(11.5) $381.1 $391.6 $(10.5)
Retail health food segment 10.5 9.8 0.7 20.0 18.9 1.1
------ ------ ------ ------ ------ ------
$190.4 $201.2 $(10.8) $401.1 $410.5 $ (9.4)
====== ====== ====== ====== ====== ======
SALES - Q2 2008 vs. Q2 2007 (continuing operations)
---------------------------------------------------
Sales for Q2 2008 decreased $10.8 million, or 5.4%, as compared to Q2 2007.
Sales are reported net of costs associated with sales incentives provided to
retailers, totaling $3.8 million and $4.0 million, for Q2 2008 and Q2 2007,
respectively.
Sales in our wholesale distribution segment ("wholesale") decreased
$11.5 million, or 6.0%, in Q2 2008 as compared to Q2 2007. This change
included a $11.2 million decrease in sales, primarily due to lower cigarette
sales, and a $0.3 million net decrease in our other product categories sales
(tobacco, beverages, candy, grocery, health & beauty products, and food
service).
27
Significant items impacting our Q2 2008 wholesale segment sales included:
- $3.3 million increase in cigarette sales due to higher excise taxes.
- $1.8 million increase in cigarette sales due to prices increases
implemented by major manufacturers.
- $16.3 million decrease in sales, primarily the result of a
11.1% decrease in cigarette shipment volumes.
- $0.3 million net decrease in our other product category sales, primarily
the result of lower sales volumes.
Rising fuel prices and weakening economic conditions have generally impacted
discretionary spending, which has had the impact of reducing sales. In
addition, recent legislative actions, including smoking bans and higher
cigarette excise taxes, and a general decline in the number of cigarette
consumers, has negatively impacted our sales of cigarettes.
Sales from our retail health food segment increased approximately $0.7
million, or 7.1%, in Q2 2008 as compared to Q2 2007. Sales growth has been
achieved in most product categories. We believe this growth is largely
attributable to the continuing popularity of vitamin supplements and natural
food products among more health conscious consumers. We continue to
capitalize on this trend with more targeted promotional insert programs
and recent online efforts.
SALES - Six Months Ended March 2008 (continuing operations)
-----------------------------------------------------------
Sales for the six month period ended March 2008 decreased $9.4 million, or
2.3%, as compared to the same prior year period. Sales for the six months
ended March 2008 and 2007, were net of costs associated with sales incentives
provided to retailers, totaling $7.3 million and $7.9 million, respectively.
Sales from our wholesale segment decreased $10.5 million for the six months
ended March 2008 as compared to the same prior year period. This change
included a $12.3 million decrease in sales primarily related to lower
cigarette sales, partially offset by a $1.8 million net increase in our
other product categories sales (tobacco, beverages, candy, grocery,
health & beauty products, and food service).
Significant items impacting wholesale segment sales for the six months
ended March 2008 included:
- $9.6 million increase in cigarette sales due to higher excise taxes.
- $6.5 million increase in cigarette sales due to prices increases
implemented by major manufacturers.
- $28.4 million decrease in sales, primarily the result of a
9.9% decrease in cigarette shipment volumes.
- $1.8 million net increase in our other product category sales, primarily
the result of higher tobacco and food service sales, partially offset by
lower sales in our beverage category.
28
Rising fuel prices and weakening economic conditions have generally impacted
discretionary spending, which has had the impact of reducing sales. In
addition, recent legislative actions, including smoking bans and higher
cigarette excise taxes, and a general decline in the number of cigarette
consumers, has negatively impacted our sales of cigarettes.
Sales from our retail health food segment increased approximately $1.1
million, or 5.8%, for the six month period ended March 2008, as compared to
the same prior year period. Sales growth has been achieved in most product
categories. We believe this growth is largely attributable to the continuing
popularity of vitamin supplements and natural food products among more health
conscious consumers. We continue to capitalize on this trend with more
targeted promotional insert programs and recent online efforts.
GROSS PROFIT - Q2 2008 vs. Q2 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 and six month periods ended
March 2008 and March 2007 are as follows (dollars in millions):
Three Months Six Months
ended March ended March
----------------------- -----------------------
Incr Incr
2008 2007 (Decr) 2008 2007 (Decr)
------ ------ ------ ------ ------- ------
Wholesale distribution segment $ 11.2 $ 11.1 $ 0.1 $22.5 $ 22.7 $ (0.2)
Retail health food segment 4.5 4.1 0.4 8.4 7.6 0.8
------ ------ ------ ------ ------- ------
$ 15.7 $ 15.2 $ 0.5 $ 30.9 $ 30.3 $ 0.6
====== ====== ====== ====== ======= ======
GROSS PROFIT - Q2 2008 vs. Q2 2007 (continuing operations)
----------------------------------------------------------
Overall gross profit for Q2 2008 increased $0.5 million, or 3.3%, as compared
to Q2 2007.
Gross profit in our wholesale segment increased $0.1 million, or 1.0%, as
compared to the same prior year period. During Q2 2008, our wholesale gross
profit benefited by approximately $0.9 million as a result of price increases
and higher manufacturer promotional allowances. These items were partially
offset by a $0.6 million reduction in benefits received from cigarette excise
tax increases, as compared to Q2 2007. The remaining change in gross profit
is primarily attributable to lower cigarette shipment volumes, offset by
fluctuations in our product mix sold.
29
Gross profit for the retail health segment increased $0.4 million in Q2 2008
as compared to Q2 2007. Of this increase, approximately $0.3 million related
to higher sales volume and improved sales mix, with the remaining change
primarily attributable to higher vendor allowances.
GROSS PROFIT - Six months ended March 2008 (continuing operations)
------------------------------------------------------------------
Overall gross profit for the six months ended March 2008 increased
$0.6 million, or 2.0%, as compared to the same prior year period.
Gross profit in our wholesale segment decreased $0.2 million, or 1.0%,
for the six month period ended March 2008, as compared to the same period in
the prior year. During Q2 2008, our wholesale gross profit benefited by
approximately $0.7 million as a result of price increases and lower product
promotional spending, as compared to the same prior year period. These items
were partially offset by a $0.6 million reduction in benefits received from
cigarette excise tax increases, as compared to the same prior year period.
The remaining change in gross profit is primarily attributable to lower
cigarette shipment volumes, partially offset by fluctuations in our product
mix sold.
Gross profit for the retail health segment increased $0.8 million for
the six month period ended March 2008. Of this increase, approximately
$0.5 million related to higher sales volume and improved sales mix, with
the remaining change primarily attributable to higher vendor allowances.
OPERATING EXPENSE - three and six months ended March 2008 comparison
--------------------------------------------------------------------
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.
Q2 2008 operating expenses decreased approximately $0.5 million as compared
to Q2 2007. This decrease was primarily related to $0.6 million reduction
in professional and legal costs, a $0.2 million reduction in compensation
expense, and a $0.1 million reduction in depreciation charges. These
decreases were partially offset by higher fuel cost and bad debt expenses.
Operating expenses for the six month period ended March 2008 decreased
approximately $0.8 million as compared to the same period in the prior year.
This decrease was primarily related to $0.7 million reduction in professional
and legal costs, a $0.4 million reduction in compensation expense, and a
$0.2 million reduction in depreciation charges. These decreases were
partially offset by higher fuel costs and bad debt expenses.
30
INTEREST EXPENSE - three and six months ended March 2008 comparison
-------------------------------------------------------------------
Q2 2008 interest expense decreased approximately $0.5 million as compared
to Q2 2007, and interest expense for the six months ended March 2008
decreased approximately $0.8 million as comparable to the prior year
period. These decreases in interest expense were principally related
to lower prime interest rates and lower average borrowings.
The Company primarily borrows at the prime interest rate. On average, the
Company's borrowing rates on variable rate debt were 2.03% lower and the
average borrowings on variable rate debt were $13.9 million lower in Q2 2008
as compared to Q2 2007. For the six months ended March 2008, variable
interest rates were on average 1.41% lower and average borrowings on variable
rate debt were $11.4 million lower as compared to the same prior year period.
DISCONTINUED OPERATIONS - three and six months ended March 2008 comparison
--------------------------------------------------------------------------
(Loss) income from discontinued operations totaled ($0.1) million and
($0.2) million for the three and six months ended March 2008 as compared to
a loss of ($0.2) million and a gain of $0.4 million for the three and six
month periods ended March 2007.
A summary of discontinued operations is as follows:
Three months ended Six months ended
March March
------------------------- ---------------------------
2008 /1/ 2007 /2/ 2008 /1/ 2007 /2/
----------- ----------- ------------ ------------
Sales $ - $ - $ - $ 862,647
Operating loss /3/ (42,695) (112,305) (81,940) (425,677)
(Loss) gain on disposal of discontinued
operations, before income taxes - (107,255) - 1,455,333
Income tax (benefit) expense (59,000) (120,000) (118,000) 396,244
(Loss) income from discontinued operations (97,445) (190,781) (193,440) 446,760
/1/ Includes the results for operations of TSI.
/2/ Includes the results of operations for TSI and HNWC. The residual assets and
liabilities of HNWC were classified as continuing operations in October 2007 (Q1 2008).
The six month period ended March 2007 also included a pre-tax gain of approximately
$1.6 million related to the November 2006 of HNWC's assets.
/3/ Operating loss is before interest expense on discontinued operations.
31
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. During the six months ended
March 2008, the Company generated cash of approximately $6.0 million from
operating activities. The cash generated primarily resulted from higher
overall earnings, and a reduction in accounts receivable and deferred income
tax balances. These items were partially offset by higher inventory
purchases and a reduction in accounts payable.
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 approximately $0.5 million of cash
during the six month period ended March 2008 for investing activities,
primarily related to capital expenditures for property and equipment.
Financing Activities. The Company used net cash of $5.7 million from
financing activities during the six month period ended March 2008.
Of this net change in cash, $5.3 million related to payments on the
Company's credit facility, $0.2 million related to preferred stock
dividend payments, $0.1 million related to cash received on the
exercise of stock options, and $0.3 million related to principal
payments on long-term debt.
Cash on Hand/Working Capital. At March 2008, the Company had cash on hand
of $0.5 million and working capital (current assets less current liabilities)
of $32.5 million. This compares to cash on hand of $0.7 million and working
capital of $34.9 million as of September 2007.
TSI Financing
-------------
As previously disclosed, TSI has approximately $2.8 million in related party
debt obligations, which are in default at March 2008. TSI has not obtained
associated debt default waivers for these related party obligations.
At this time, the Company does not anticipate the defaults will materially
impact the Company's future liquidity position.
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
32
Company's March 2008 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 March 2008 include:
- A $55.0 million revolving credit limit, plus the outstanding balance
on Term Note A, discussed below, for a total credit facility limit of
$55.5 million at March 2008. As a component of the credit agreement,
the Company has a term note ("Term Note A") with Bank of America
(formerly LaSalle Bank). Term Note A bears interest at the bank's prime
rate and is payable in monthly installments of $16,333. Term Note A had
an outstanding balance of approximately $0.5 million at March 2008.
- Bears interest at the bank's prime interest rate.
- 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, 2008
(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 March 2008.
33
The Company's maximum available credit limit for the revolving portion of the
Facility was $42.0 million at March 2008, however, the amount available for
use at any given time is subject to many factors including eligible accounts
receivable and inventory balances which are evaluated on a daily basis.
At March 2008, the outstanding balance on the revolving portion of the
Facility was $33.1 million. The Facility bears interest at a variable rate
equal to the bank's prime rate, which was 5.25% at March 2008. Based on our
collateral and loan limits as defined by the Facility agreement, the
Company's excess availability under the Facility at March 2008 was
approximately $8.9 million.
For the six months ended March 2008, our peak borrowings under the Facility
were $42.4 million and our average borrowings and average availability were
$36.3 and $9.7 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 part of the July 2007 Television Events & Marketing, Inc. ("TEAM")
litigation settlement, the Company became obligated to pay $187,500 in four
equal quarterly installments of $46,875 for the period January 2008 through
October 2010, and $125,000 in four equal quarterly installments of $31,250
for the period January 2011 through October 2011. Mr. Wright has personally
guaranteed these payment obligations, which totaled approximately $0.6
million at March 2008. AMCON pays Mr. Wright an annual fee equal to 2% of
the guaranteed principal in return for his personal guarantee. This
guarantee is secured by a pledge of the shares of Chamberlin's, Akin's,
HNWC, and TSI.
Mr. Wright also formerly guaranteed the repayment of the Facility and
Term Note A, up to a maximum of $10.0 million, in exchange for a 2% annual
fee of the guaranteed principal. In March 2008, this personal guarantee was
cancelled as it was no longer required by the Facility's lender, Bank of
America. The Company paid Mr. Wright approximately $0.1 million related to
this personal guarantee for the fiscal year 2007.
Cross Default and Co-Terminus Provisions
-----------------------------------------
The Company's owned real estate in Bismarck, ND, Quincy, IL, and Rapid City,
SD, and certain warehouse equipment in the Rapid City, SD warehouse is
financed through term loans with Marshall and Ilsley Bank ("M&I"), which is
also a participant lender on the Company's revolving line of credit. The
M&I loans contain cross default provisions which cause all loans with M&I to
be considered in default if any one of the loans where M&I is a lender,
including the revolving credit facility, is in default. In addition, the M&I
loans contain co-terminus provisions which require all loans with M&I to be
paid in full if any of the loans are paid in full prior to the end of their
specified terms.
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.
34
Off-Balance Sheet Arrangements
------------------------------
The Company does not have any off-balance sheet arrangements.
Market Conditions and Future Outlook
------------------------------------
Wholesale Segment - The wholesale distribution industry continues to
experience a decline in the demand for cigarettes, resulting in part from
legislative actions such as higher excise taxes and smoking bans, as well
as a general decline in the number of smokers in the United States.
Most recently, legislation has been proposed to significantly increase the
federal excise taxes imposed on cigarette and tobacco products to fund the
State Children's Health Insurance Program ("SCHIP"). If such legislation
passed, it could further accelerate the declining demand for cigarettes and
tobacco products. For the six months ended March 2008, sales of cigarette
and tobacco products accounted for approximately 70% of the Company's
consolidated sales and approximately 20% of its consolidated
gross profit.
A weakening economy, higher food commodity and fuel costs, and the impact
of higher credit card fees have negatively impacted the profit margins and
purchasing patterns for our largest customer segment, convenience stores.
These factors may decrease future sales and expose the Company to higher bad
debt expense. While the Company believes its current accounts receivable
reserve levels are adequate, management can give no assurances that a further
deterioration in economic conditions will not result in higher bad debt
costs.
In the short term, the Company believes the aforementioned market conditions
will pressure wholesale profits, partially offset by lower operating
expenses. The Company does not, however, believe such items will materially
impact its liquidity position.
While these market conditions present risks, in the longer term the Company
believes they create opportunities to enhance shareholder value, as smaller
distributors are forced from the market, presenting opportunities to win
market share and make strategic acquisitions at more attractive prices.
The Company is also focused on diversifying its revenue streams through the
growth of higher margin non-cigarette and non-tobacco product categories.
Retail Health Food Segment - Our retail segment continues to experience
healthy sales growth. While we've enjoyed a loyal customer following in this
business segment, weakening economic conditions, higher natural food costs,
and increased competition from national retailers and mass merchandisers,
may negatively impact future sales growth.
35
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to interest rate risk on its variable rate debt.
At March 2008, the Company had $33.5 million of variable rate debt
outstanding with maturities through April 2009. The interest rate on this
debt was 5.25% at March 2008. We estimate that our annual cash flow exposure
relating to interest rate risk based on our current borrowings is
approximately $0.2 million for each 1% change in our lender's prime interest
rate.
We do not utilize financial instruments for trading purposes and hold no
derivative financial instruments which could expose us to significant market
risk.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules
13a-15(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.
36
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
The Company held its Annual Meeting of Stockholders on January 29, 2008
for the purpose of electing two Class II directors, and ratifying of the
appointment of its independent registered public accounting firm. The
election and ratification results are as follows:
Class II Director Election
---------------------------
NAME OF NOMINEE FOR WITHHELD
--------------- --- --------
Raymond F. Bentele 297,486 1,944
In addition to the above election, the holder of the Company's Series B
Convertible Preferred Stock was entitled to elect one member of the board of
directors, and as such designated Christopher H. Atayan as the individual it
elected as a Class II director by casting all 80,000 of its votes for such
election.
There was no solicitation in opposition to the nominee proposed to be elected
by the Stockholders in the Proxy Statement. In addition to the directors
elected at the Annual Meeting, the following directors continued their term
of office: Jeremy W. Hobbs, Stanley Mayer, William F. Wright, Kathleen M.
Evans, John R. Loyack, and Timothy R. Pestotnik.
Ratification of Independent Auditors
------------------------------------
The ratification of the appointment of McGladrey and Pullen LLP as its
independent registered public accounting firm for the Company for the fiscal
year ending September 30, 2008 was approved by the Stockholders with 297,811
votes FOR, 1,510 votes AGAINST, 26 WITHHELD, and 83 votes ABSTAINED.
There were no broker non-votes.
Further information regarding these matters is contained in the Company's
Proxy Statement dated January 8, 2008.
Item 5. Other Information
Not applicable.
37
Item 6. Exhibits
(a) Exhibits
3.1 Amended and Restated Bylaws of the Company dated January 29, 2008
(incorporated by reference to Exhibit 3.2 of AMCON's Current Report
on Form 8-K filed on February 4, 2008).
10.1 Restricted Stock Award Agreement, dated March 31, 2008, between AMCON
Distributing Company and Raymond F. Bentele.
10.2 Restricted Stock Award Agreement, dated March 31, 2008, between AMCON
Distributing Company and Jeremy W. Hobbs.
10.3 Restricted Stock Award Agreement, dated March 31, 2008, between AMCON
Distributing Company and Stanley Mayer.
10.4 Restricted Stock Award Agreement, dated March 31, 2008, between AMCON
Distributing Company and John R. Loyack.
10.5 Restricted Stock Award Agreement, dated March 31, 2008, between AMCON
Distributing Company and Timothy R. Pestotnik.
31.1 Certification by Christopher H. Atayan, Chief Executive Officer
and 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 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
38
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: April 16, 2008 /s/ Christopher H. Atayan
---------------- -----------------------------
Christopher H. Atayan,
Chief Executive Officer and Chairman
Date: April 16, 2008 /s/ Andrew C. Plummer
---------------- -----------------------------
Andrew C. Plummer,
Chief Financial Officer and Principal
Financial and Accounting Officer
39