UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED September 30, 2008
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OF 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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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
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(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No X
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes No X
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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1
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. /X/
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.
Large accelerated filer Accelerated filer
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Non-accelerated filer (Do not check Smaller reporting company
(if a smaller reporting company) X
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Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). Yes No X
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The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant on March 31, 2008 was $10,532,641, computed
by reference to the $30.86 closing price of such common stock equity on
March 31, 2008.
As of November 3, 2008 there were 570,397 shares of common stock outstanding.
Portions of the following document are incorporated by reference into the
indicated parts of this report: definitive proxy statement for the 2009
annual meeting of stockholders to be filed with the Commission pursuant to
Regulation 14A - Part III.
2
AMCON DISTRIBUTING COMPANY
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Table of Contents
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Page
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PART I
Item 1. Business...................................................... 4
Item 1A. Risk Factors.................................................. 10
Item 1B. Unresolved Staff Comments..................................... 18
Item 2. Properties.................................................... 18
Item 3. Legal Proceedings............................................. 19
Item 4. Submission of Matters to a Vote of Security Holders........... 19
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities............. 20
Item 6. Selected Financial Data....................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 37
Item 8. Financial Statements and Supplementary Data................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 69
Item 9A(T) Controls and Procedures....................................... 69
Item 9B. Other Information............................................. 70
PART III
Item 10. Directors, Executive Officers, and Corporate Governance....... 71
Item 11. Executive Compensation........................................ 71
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters ............... 71
Item 13. Certain Relationships and Related Transactions, and
Director Independence ........................................ 71
Item 14. Principal Accounting Fees and Services........................ 72
PART IV
Item 15. Exhibits, Financial Statement Schedules....................... 72
3
PART I
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 Company's 2008 and 2007 fiscal years ended September 30, are herein
referred to as fiscal 2008 and fiscal 2007, respectively. The fiscal
year-end balance sheet dates of September 30, 2008 and September 30, 2007
are referred to herein as September 2008 and September 2007, respectively.
This report and the documents incorporated by reference herein, if any,
contain forward looking statements, which are inherently subject to risks and
uncertainties. See "Forward Looking Statements" under Item 7 of this report.
ITEM 1. BUSINESS
COMPANY OVERVIEW
AMCON Distributing Company was incorporated in Delaware in 1986 and our
common stock is listed on the American Stock Exchange ("AMEX")under the
symbol "DIT." The Company operates two business segments:
- Wholesale Distribution Segment - The Company is a leading
wholesale distributor of consumer products, including cigarettes and
tobacco products, candy and other confectionery, beverages,
groceries, paper products, and health and beauty care products.
- Retail Health Food Segment - The Company operates thirteen retail
health food stores in Florida and the Midwest.
WHOLESALE DISTRIBUTION SEGMENT
OPERATIONS. ADC serves approximately 4,000 retail outlets in the Great
Plains and Rocky Mountain regions including convenience stores, grocery
stores, liquor stores, drug stores and tobacco shops. In November 2007,
Convenience Store News ranked ADC as the seventh (7th) largest convenience
store distributor based on annual sales. ADC accounted for approximately
95% of the Company's consolidated revenue in fiscal 2008.
ADC distributes 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. In fiscal 2008,
cigarette sales accounted for approximately 74% of ADC's revenue, with
non-cigarette product categories comprising 26% of revenues. ADC's principal
suppliers include Philip Morris USA, RJ Reynolds Tobacco, Proctor & Gamble,
Hershey, Mars, Quaker, and Nabisco. ADC also markets private label lines of
tobacco, snuff, water, candy products, batteries, film, and other products.
4
ADC's main corporate office is in Omaha, Nebraska. Additionally, ADC
operates five distribution centers located in Illinois, Missouri, Nebraska,
North Dakota and South Dakota. These distribution centers, combined with two
cross-dock facilities, contain a total of approximately 487,000 square feet
of floor space and employ modern equipment for the distribution of our large
and diverse product mix. ADC also operates a fleet of approximately 182
delivery vehicles, including straight trucks and over-the-road vehicles with
both refrigerated and non-refrigerated trailers.
COMPETITIVE STRENGTHS. The wholesale distribution business is a mature,
highly competitive industry. To differentiate itself, ADC has employed
a number of strategies focused around providing market leading customer
service, flexible delivery capabilities, and innovative merchandising
programs. These strategies have helped position ADC as a distributor of
choice for both small independent retail outlets and multi-location retail
outlets.
ADC's depth of management experience also provides the Company with
considerable competitive advantages in regards to managing vendor and
customer relationships, as well as overall operational execution. ADC's
senior management team averages over 25 years of industry experience in the
areas of logistics, sales, and marketing.
ADC's customer service programs include providing assistance in tracking and
maximizing vendor promotions, access to private label and custom food
services, store layout and design consultation, and overall profitability
consulting. These programs have proven particularly popular with our
independent retail outlets, many of which have less in-house expertise and
resources than multi-location retailers.
ADC's customer service capabilities include several programs designed to
assist our customers manage inventory and cash flow. These programs include
a next-day delivery policy, acceptance of smaller quantity orders, and access
to a number of information technologies to track inventory, monitor pricing
data, and review new product offerings.
BUSINESS STRATEGY. The wholesale distribution industry (the "Industry")
experienced significant changes driven by high fuel costs, increasing
cigarette and tobacco excise taxes, smoking bans, the popularity of deep-
discount cigarette brands, and consolidation within the Industry's customer
base (principally convenience stores and tobacco shops) during fiscal 2008.
Collectively, these items have pressured profit margins industry-wide.
Cigarette and tobacco sales remain a large percentage of our customers' total
in-store sales volume. Historically, cigarette and tobacco products were
purchased from a variety of sales channels, including grocery stores. In
recent years, however, consumers have increasingly purchased their cigarette
and tobacco products from convenience stores, which is one of ADC's largest
customer segments. ADC remains largely dependent on the pricing and
promotional programs offered by the major tobacco manufacturers, which can
vary from year-to-year.
5
To capitalize on these industry-wide changes, ADC has aggressively managed
its cost structure, heavily leveraged inventory management strategies, and
deployed new technologies and automation tools where possible. These actions
have allowed ADC to maintain competitive pricing and position itself to
capture new business, sell new services to our existing customers, and
further penetrate the convenience store market. Additionally, ADC remains
focused on growing its non-tobacco revenue streams, which offer higher profit
margins.
Slumping economic conditions, higher food costs, and the impact of credit
card fees have negatively impacted profit margins for many of our customers.
Additionally, recent disruptions in the credit markets and unprecedented fuel
prices have created a challenging business environment for our largest
customer segment (convenience stores).
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.
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.
In recent years, the retail health food industry has experienced consistent
growth as the demand for non-processed natural products (pesticide-free,
hormone-free, and non-genetically modified) became popular among health
conscious consumers. Our retail health food segment has benefited from
this trend, recording year-over-year sales growth of approximately 3.5%.
Forward looking, however, rising food commodity prices and slumping economic
conditions will likely decrease near term growth rates industry-wide and
potentially result in further industry consolidation.
ECONOMIC CONDITIONS
Deteriorating economic conditions, the falling value of homes and retirement
portfolios, higher fuel and food commodity prices, and recent disruptions
in the credit markets are collectively impacting consumer confidence
throughout the country as well as the regions in which we operate.
Based on these factors, future sales for both of our business segments may be
negatively impacted in the near term. Many of our wholesale segment
customers are thinly capitalized and their access to credit and reduced cash
flow from operations may impact their ability to operate as a going concern,
presenting additional credit risk for the Company. Further, a general
decrease in consumer discretionary spending will likely pressure retail level
sales for our convenience store customers, which will in turn decrease our
wholesale segment sales volume.
6
Our retail segment will likely face a challenging environment in the near
term as well, as the aforementioned macroeconomic issues push consumers to
purchase cheaper alternatives to natural food products and/or decrease the
average basket size of their purchases. We believe the economic hardships
consumers now face may alter purchasing patterns such as a decrease in
shopping trips and more price sensitive purchasing.
In the long-term, we believe economic conditions will improve and that our
business model positions us well to capitalize on opportunities as they
arise. Accordingly, we continue our conservative strategy of maintaining
financial flexibility and investing prudently in long-term growth
opportunities for the Company.
DISCONTINUED OPERATIONS
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Discontinued operations as reflected in the Consolidated Statement of
Operations included in this Annual Report on Form 10-K ("Annual Report"),
were comprised of Trinity Springs, Inc. ("TSI") in fiscal 2008, and TSI and
Hawaiian Natural Water Company, Inc. ("HNWC") in fiscal 2007. At September
30, 2008, discontinued operations included on the Company's Consolidated
Balance Sheet represented the residual assets and liabilities of TSI.
Both TSI and HNWC operated water bottling facilities and were part of the
Company's former beverage segment prior to their closure.
As discussed further in Note 2 to the Consolidated Financial Statements
included in this Annual Report, in September 2007 TSI entered into an
agreement with Crystal Paradise Holdings, Inc. ("CPH") which provided CPH an
option to purchase TSI's remaining assets through the end of March 2009.
As of September 30 2008, CPH had not yet exercised its asset purchase option.
PRINCIPAL PRODUCTS
Sales of cigarettes represented 70% and 71% of the Company's consolidated
revenue in fiscal 2008 and fiscal 2007, respectively. Sales of candy,
beverages, food service, groceries, health food products, paper products,
health and beauty care products, and tobacco products represented
approximately 30% and 29% of consolidated revenue in fiscal 2008 and
fiscal 2007, respectively.
INFORMATION ON SEGMENTS
Information about our segments is presented in Note 15 to the Consolidated
Financial Statements included in this Annual Report.
COMPETITION - Wholesale Distribution Segment
There are a number of both small and large wholesale distributors operating
in the same geographical regions as ADC, resulting in a highly competitive
marketplace. ADC is one of the largest distribution companies of its kind
in its market area. ADC's principal competitors are national wholesalers
such as McLane Co., Inc. (Temple, Texas) and Core-Mark International
(San Francisco, California), as well as regional wholesalers such as
Eby-Brown LLP (Chicago, Illinois) and Farner-Bocken (Carroll, Iowa),
along with a host of smaller grocery and tobacco wholesalers.
7
Competition within the industry is based primarily on the range and quality
of the services provided, pricing, variety of products offered, and the
reliability of deliveries. Our larger competitors principally compete on
pricing and breadth of product offerings, while our smaller competitors focus
on customer service and the delivery arrangements.
ADC believes its business model is uniquely positioned to compete with a
wide range of competitors including national, regional, and local
wholesalers. As the seventh (7th) largest convenience store distributor in
the United States, ADC has sufficient economies of scale to offer similar
pricing as compared to national wholesalers, while its flexible distribution
and support model allows it to provide superior customer service, and
customized delivery and merchandising solutions, which have proven
particularly attractive to our smaller customers.
COMPETITION - Retail Health Food Segment
The natural food retail industry is highly fragmented, with more than 11,000
stores operating independently or as part of small retail chains. The
leading natural food retail chain, Whole Foods Market, continues to expand
through new store openings and acquisitions, and competes with us in many
markets. Additionally, conventional supermarkets and mass market outlets are
also increasing their emphasis on the sale of natural food products.
SEASONALITY
Sales in the wholesale distribution industry are somewhat seasonal and tend
to be higher in warm weather months as our convenience store customers
experience increased customer traffic. The warm weather months generally
fall within the Company's third and fourth fiscal quarters. Our retail
health food business does not generally experience significant seasonal
fluctuations in its business.
GOVERNMENT REGULATION
The Company is subject to regulation by federal, state and local governmental
agencies, including the U.S. Department of Agriculture, the Food and Drug
Administration, the Occupational Safety and Health Administration, and the
U.S. Department of Transportation. These regulatory agencies generally
impose standards for product quality and sanitation, workplace safety, and
security and distribution policies.
The Company is also subject to state regulations related to the distribution
and sale of cigarettes and tobacco products, generally in the form of
licensing and bonding requirements. Additionally, both federal and state
regulatory agencies have the ability to impose excise taxes on cigarette and
tobacco products. In the past several years, a number of states have
increased excise taxes on cigarettes and tobacco products. Based on recent
legislative activity, we expect this trend to continue in addition to
possible increases in excise taxes by the federal government. The potential
of additional regulation over cigarette and tobacco products may decrease the
Company's future sales and profitability.
8
ENVIRONMENTAL MATTERS
All the facilities and operations of the Company are subject to state and
federal environmental regulations. The Company believes all of its real
property is in substantial compliance with regulations regarding the
discharge of toxic substances into the environment and is not aware of any
conditions at its properties that could have a material adverse effect on its
financial condition or results of operations. Further, the Company has not
been notified by any governmental authority of any potential liability or
other claim in connection with any of its properties. The costs and effect
on the Company to comply with state and federal environmental regulations
were not significant in either fiscal 2008 or fiscal 2007.
EMPLOYEES
At September 2008, the Company had 731 full-time and 114 part-time employees
in the following areas:
Managerial 34
Administrative 86
Delivery 107
Sales & Marketing 307
Warehouse 311
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Total Employees 845
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All of ADC's delivery employees in the Quincy, Illinois distribution center,
representing approximately 4% of employees company-wide, are represented by
the International Association of Machinists and Aerospace Workers. The
current labor agreement with the union is effective through December 2008.
Management believes its relations with its employees are satisfactory.
Corporate and Available Information
The Company's principal executive offices are located at 7405 Irvington Road,
Omaha, Nebraska 68122. The telephone number at that address is 402-331-3727
and our website address is www.amcon.com. We provide free access to the
various reports we file with the United States Securities and Exchange
Commission through our website. These reports include, but are not limited
to, our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.
Please note that any internet addresses provided in this report are for
information purposes only and are not intended to be hyperlinks.
Accordingly, no information found and/or provided at such internet addresses
is intended or deemed to be incorporated by reference herein.
You may also read and copy any materials we file with the Commission at the
SEC's Public Reference Room at 100 F Street NE, Washington, DC 20549 on
official business days during the hours of 10:00 a.m. to 3:00 p.m. You can
get information about the Public Reference Room by calling 1-800-SEC-0330.
The SEC also maintains a website at www.sec.gov which contains reports,
proxies and other company information.
9
ITEM 1A. RISK FACTORS
IN GENERAL
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You should carefully consider the risks described below before making an
investment decision concerning our securities. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial
may also impair our business operations.
If any of the following risks actually materializes, our business, financial
condition or results of operations could be materially adversely affected. In
that case, the trading price of our common stock could decline substantially.
This Annual Report also contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from
those anticipated in the forward-looking statements as a result of a number
of factors, including the risks described below and elsewhere in this Annual
Report. See "Forward Looking Statements" under Item 7 of this report for a
discussion of forward looking statements.
RISK FACTORS RELATED TO THE WHOLESALE BUSINESS
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- The Wholesale Distribution of Cigarettes and Convenience Store Products Is
Significantly Affected by Cigarette Pricing Decisions and Promotional
Programs Offered by Cigarette Manufacturers.
We receive payments from the manufacturers of the products we distribute
including allowances, discounts, volume rebates, and other merchandising
incentives in connection with various incentive programs. In addition, we
receive discounts from states in connection with the purchase of excise
stamps for cigarettes. If the manufacturers or states change or discontinue
these programs or we are unable to maintain the volume of our sales, our
results of operations, business, cash flow, and financial condition could be
negatively affected.
- Increases in Fuel Prices Are Reducing Profit Margins and Adversely
Affecting Our Business.
Increases in fuel prices have had a negative impact on our profits over the
past fiscal year. If fuel prices remain high, and we are not able to pass on
these costs to customers, it will continue to adversely impact our results of
operations, business, cash flow, and financial condition.
- Increases in Wholesale Distribution Business Competition May Have an
Adverse Effect on Our Business.
The wholesale distribution industry is highly competitive. There are many
distribution companies operating in the same geographical regions as ADC.
ADC's principal competitors are national and regional wholesalers, along with
a host of smaller grocery and tobacco wholesalers. Most of these competitors
generally offer a wide range of products at prices comparable to ADC's. Some
of our competitors have substantial financial resources and long-standing
customer relationships. Heightened competition may reduce our margins and
adversely affect our business. If we fail to successfully respond to these
competitive pressures or to implement our strategies effectively, we may lose
market share and our results of operations, business, cash flow, and
financial condition could suffer.
10
- Due to Low Margins on the Products We Distribute, Changes in General
Economic Conditions Can Adversely Affect Our Operating Results.
We derive most of our revenues from the distribution of cigarettes, other
tobacco products, candy, snacks, fast food, grocery products, non-alcoholic
beverages, general merchandise and health and beauty care products. The
wholesale distribution industry is characterized by high sales volumes with
relatively low profit margins. Our non-cigarette sales are at prices that
are based on the cost of the product plus a percentage markup. Gross profit
on cigarette sales are generally fixed on a cents per carton basis. If the
cost of the cigarettes that we purchase increases due to manufacturer price
increases, our inventory costs could rise. To the extent that product cost
increases can not be passed on to our customers, our results from operations,
business, cash flow, and financial condition could be negatively impacted.
- Our Sales Volume Is Largely Dependent upon the Distribution of Cigarette
Products, Which is a Declining Sales Category.
The distribution of cigarettes represents a significant portion of our
business. In fiscal 2008, approximately 70% of our consolidated revenues
came from the distribution of cigarettes and generated approximately 22% of
our consolidated gross profit. Due to increases in the prices of cigarettes,
restrictions on advertising and promotions by cigarette manufacturers,
increases in cigarette regulation and excise taxes, health concerns, smoking
bans, increased pressure from anti-tobacco groups, and other factors, the
U.S. cigarette market has been declining and is expected to continue to
decline based on recent American Wholesale Marketers Association ("AWMA")
studies. If this trend continues, our results from operations, cash flow,
business, and overall financial condition could be negatively impacted.
- In the United States, We Purchase Cigarettes from Manufacturers Covered by
the Industry's Master Settlement Agreement, Which Results in Competition
from Lower Priced Sales of Cigarettes Produced by Manufacturers Who Do Not
Participate in the Master Settlement Agreement.
Increased selling prices and higher cigarette taxes have resulted in the
growth of deep-discount cigarette brands. Deep-discount brands are brands
generally manufactured by companies that are not original participants to the
master settlement agreement, and accordingly, do not have cost structures
burdened with master settlement agreement related payments to the same extent
as the original participating manufacturers. Since the master settlement
agreement was signed in November 1998, the category of deep-discount brands
manufactured by smaller manufacturers or supplied by importers has grown
substantially.
- We Face Competition from Illicit and Other Low Priced Cigarettes.
We face competition from the diversion into the United States market of
cigarettes intended for sale outside the United States, the sale of
counterfeit cigarettes by third parties, the sale of cigarettes in
non-taxable jurisdictions, inter-state and international smuggling of
cigarettes, increased imports of foreign low priced brands, the sale of
cigarettes by third parties over the Internet and by other means designed
11
to avoid collection of applicable taxes. The competitive environment has been
characterized by a continued influx of cheap products that challenge sales
of higher priced and taxed cigarettes manufactured by parties to the master
settlement agreement. Increased sales of counterfeit cigarettes, sales by
third parties over the Internet, or sales by means to avoid the collection
of applicable taxes, could have an adverse effect on our results of
operations, cash flow, business, and overall financial condition.
- If the Tobacco Industry's Master Settlement Agreement Is Invalidated, or
Tobacco Manufacturers Cannot Meet Their Obligations to Indemnify Us, We
Could Be Subject to Substantial Litigation Liability.
In connection with the master settlement agreement, we are indemnified by the
tobacco product manufacturers from which we purchase cigarettes and other
tobacco products for liabilities arising from our sale of the tobacco
products that they supply to us. However, if litigation challenging the
validity of the master settlement agreement were to be successful and the
master settlement agreement is invalidated, we could be subject to
substantial litigation due to our sales of cigarettes and other tobacco
products, and we may not be indemnified for such costs by the tobacco product
manufacturers in the future. In addition, even if we continue to be
indemnified by cigarette manufacturers that are parties to the master
settlement agreement, future litigation awards against such cigarette
manufacturers could be so large as to eliminate the ability of the
manufacturers to satisfy their indemnification obligations. Our results of
operations, business, cash flow, and overall financial condition could be
negatively impacted due to increased litigation costs and potential adverse
rulings against us.
- Cigarettes and Other Tobacco Products Are Subject to Substantial Excise
Taxes and If These Taxes Are Increased, Our Sales of Cigarettes and Other
Tobacco Products Could Decline.
Cigarette and tobacco products are subject to substantial excise taxes in the
United States. Significant increases in cigarette-related taxes and/or fees
have been proposed or enacted and are likely to continue to be proposed or
enacted within the United States. In particular, during the past several
years the United States Congress has proposed legislation to renew and expand
the State Children's Health Insurance Program ("SCHIP"), funded primarily
through increases in federal excise taxes on cigarette and tobacco products.
While this legislation has not been passed, it will likely be reintroduced in
the future and could include substantial increases in the federal excise
taxes on cigarette and tobacco products. If such legislation passes, it
could have an adverse impact on consumption levels and result in lower sales
volumes and/or a sales shift from higher margin premium cigarette and tobacco
products to lower margin deep-discount brands, which could materially impact
the Company's profitability. Historically, increases in cigarette and tobacco
excise taxes have resulted in reduced consumer cigarette demand.
Additionally, higher excise taxes increase the Company's accounts receivable
and inventory carrying cost and could substantially impact our liquidity
position. Accordingly, we may be required to obtain additional debt
financing, which we may not be able to obtain on satisfactory terms or at
all. Our inability to prepay the excise taxes may prevent or delay our
purchase of cigarettes, which could adversely affect our ability to supply
our customers.
12
RISK FACTORS RELATED TO THE RETAIL BUSINESS
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- Increases in Retail Health Food Store Competition May Have an Adverse
Effect on Our Business.
In the retail health food business, our primary competitors currently include
national natural foods supermarkets, such as Whole Foods, specialty
supermarkets, regional natural foods stores, small specialty stores, and
restaurants. In addition, conventional supermarkets and mass market outlets
are increasing their emphasis on the sale of natural products. Some of these
potential competitors may have greater financial or marketing resources than
we do and may be able to devote greater resources to sourcing, promoting, and
selling their products. Increased competition may have an adverse effect on
our results of operations, business, cash flow, and financial condition as
the result of lower sales, lower gross profits and/or greater operating costs
such as marketing.
- Part of Our Strategy Is to Expand Our Retail Health Food Business Through
The Opening of New Stores, If We Are Unsuccessful it May Have an Adverse
Effect on Our Business.
Our expansion strategy is dependent on finding suitable locations, and we
face intense competition from other retailers for such sites. We also need
to be able to open new stores timely and operate them successfully. In
addition, our success is dependant on our ability to hire, train and
integrate new qualified team members. Our success is also dependent on
our ability to adapt our distribution, management information and other
operating systems to adequately supply products to new stores at competitive
prices so that we can operate the stores in a successful and profitable
manner. If we are not able to find and open new store locations and close
poor performing stores, this could have a material adverse impact on our
results of operations, business, cash flow, and overall financial condition.
- Changes in the Availability of Quality Natural and Organic Products Could
Impact Our Business.
There is no assurance that quality natural and organic products including
dietary supplements, fresh and processed foods and vitamins will be available
to meet our future needs. If conventional supermarkets increase their natural
and organic product offerings or if new laws require the reformulation of
certain products to meet tougher standards, the supply of these products may
be constrained. Any significant disruption in the supply of quality natural
and organic products could have a materially adverse impact on our overall
sales and cost of goods.
- Perishable Food Product Losses Could Materially Impact Our Results.
We believe our stores more heavily emphasize perishable products than
conventional supermarket stores. The Company's emphasis on perishable
products may result in significant product inventory losses in the event of
extended power outages, natural disasters or other catastrophic occurrences.
13
RISK FACTORS RELATED TO THE OVERALL BUSINESS
--------------------------------------------
- The Deterioration in Economic Conditions and the Recent Credit Crisis
May Negatively Impact Sales in Both Our Business Segments
Our results of operations and financial condition are particularly sensitive
to changes in overall economic conditions that impact retail level consumer
spending, including discretionary spending. Current economic conditions and
disruptions in the credit markets may reduce retail level demand in both our
business segments.
Many of our wholesale segment customers are thinly capitalized and their
availability to credit may impact their ability to operate as a going
concern, presenting additional credit risk for the Company. Further, a
general decrease in consumer discretionary spending may pressure retail level
sales for our convenience store customers, which could in turn decrease our
wholesale segment sales volume. A decrease in consumer spending may also
decrease sales in our retail segment, as customers purchase cheaper
alternatives to natural food products and/or decrease the average basket
size of their purchases. If such economic issues persist, it may result
in lower sales and profitability.
- Capital Needed for Expansion May Not Be Available.
The acquisition of existing stores, the opening of new retail stores, and the
development of new production and distribution facilities requires
significant amounts of capital. In the past, our growth has been funded
primarily through proceeds from bank debt, private placements of equity and
debt and internally generated cash flow. These and other sources of capital
may not be available to us in the future, which could impair our ability to
further expand our business.
- Restrictive Covenants in Our Revolving Credit Facility May Restrict Our
Ability to React to Changes in Our Business or Industry Because They
Restrict Our Ability to Obtain Additional Financing.
Our revolving credit facility imposes restrictions on us that could increase
our vulnerability to general adverse economic and Industry conditions by
limiting our flexibility in planning for and reacting to changes in our
business and Industry. Specifically, these restrictions limit our ability,
among other things, to: incur additional indebtedness, make distributions and
limits dividends, issue stock of subsidiaries, make investments, repurchase
stock, create liens, enter into transactions with affiliates, merge or
consolidate, or transfer and sell our assets.
- Failure to Meet Restrictive Covenants in Our Revolving Credit Facility
Could Result in Acceleration of the Facility and We May not be Able to
Find Alternative Financing.
Under our credit facility, we are required to meet certain financial ratios
and tests. Our ability to comply with these covenants may be affected by
factors beyond our control. If we breach any of these covenants
or restrictions, it could result in an event of default under our revolving
credit facility, which would permit our lenders to declare all amounts
outstanding thereunder to be immediately due and payable, and our lenders
under our revolving credit facility could terminate their commitments to make
further extensions of credit under our revolving credit facility.
14
- We May Not Be Able to Obtain Capital or Borrow Funds to Provide Us with
Sufficient Liquidity and Capital Resources Necessary to Meet Our Future
Financial Obligations.
We expect that our principal sources of funds will be cash generated from our
operations and financial condition and, if necessary, borrowings under our
revolving credit facility. However, recent disruptions in the credit markets
may impact the availability of capital resources required to meet our future
financial obligations, or to provide funds for our working capital, capital
expenditures and other needs for the foreseeable future. We may require
additional equity or debt financing to meet our working capital requirements
or to fund our capital expenditures. We may not be able to obtain financing
on terms satisfactory to us, or at all.
- We Depend on Relatively Few Suppliers for a Large Portion of Our Products,
and Any Interruptions in the Supply of the Products That We Distribute
Could Adversely Affect Our Results of Operations and Financial Condition.
We do not have any long-term contracts with our suppliers committing them to
provide products to us. Although our purchasing volume can provide leverage
when dealing with suppliers, suppliers may not provide the products we
distribute in the quantities we request or on favorable terms. Because we do
not control the actual production of the products we distribute, we are also
subject to delays caused by interruption in production based on conditions
outside our control. These conditions include job actions or strikes by
employees of suppliers, inclement weather, transportation interruptions, and
natural disasters or other catastrophic events. Our inability to obtain
adequate supplies of the products we distribute as a result of any of the
foregoing factors or otherwise, could cause us to fail to meet our
obligations to our customers.
- We May Be Subject to Product Liability Claims Which Could Adversely Affect
Our Business.
We may face exposure to product liability claims in the event that the use
of products sold by us causes injury or illness. With respect to product
liability claims, we believe that we have sufficient liability insurance
coverage and indemnities from manufacturers. However, product liability
insurance may not continue to be available at a reasonable cost, or, if
available, may not be adequate to cover all of our liabilities. We
generally seek contractual indemnification and insurance coverage from
parties supplying the products we distribute, but this indemnification or
insurance coverage is limited, as a practical matter, to the creditworthiness
of the indemnifying party and the insured limits of any insurance provided by
suppliers. If we do not have adequate insurance or if contractual
indemnification is not available or if the counterparty can not fulfill its
indemnification obligation, product liability relating to defective products
could materially adversely impact our results of operations, business, cash
flow, and overall financial condition.
15
- We Depend on Our Senior Management and Key Personnel.
We substantially depend on the continued services and performance of
our senior management and other key personnel, particularly Christopher H.
Atayan, AMCON's Chief Executive Officer and Chairman of the Board, Kathleen
M. Evans, the Company's President, and Eric J. Hinkefent, the President of
Health Food Associates, Inc. and Chamberlin's Natural Foods, Inc. While we
maintain key person life insurance policies and have employment agreements
with certain key personnel, the loss of service from any of our executive
officers or key employees could harm our business.
- We Operate in a Competitive Labor Market and a Number of Our Employees
Are Covered by Collective Bargaining Agreements.
We compete with other businesses in each of our markets with respect to
attracting and retaining qualified employees. A shortage of qualified
employees could require us to enhance our wage and benefits packages in order
to compete effectively in the hiring and retention of qualified employees or
to hire more expensive temporary employees.
In addition, at September 2008 approximately 4%, or approximately 33, of our
employees are covered by a collective bargaining agreement with a labor
organization, which expires in December 2008. We may not be able to renew
our respective collective bargaining agreement on similar terms. We may not
be able to recover labor cost increases through increased prices charged to
customers or suffer business interruptions as a result of strikes or other
work stoppages.
- We Are Subject to Significant Governmental Regulation and If We Are Unable
to Comply with Regulations That Affect Our Business or If There Are
Substantial Changes in These Regulations, Our Business Could Be Adversely
Affected.
As a distributor of food products, we are subject to the regulation by the
U.S. Food and Drug Administration ("FDA"). Our operations are also subject
to regulation by the Occupational Safety and Health Administration ("OSHA"),
the Department of Transportation and other federal, state and local agencies.
Each of these regulatory authorities have broad administrative powers with
respect to our operations. If we fail to adequately comply with government
regulations or regulations become more stringent, we could experience
increased inspections, regulatory authorities could take remedial action
including imposing fines or shutting down our operations or we could be
subject to increased compliance costs. If any of these events were to occur,
our results of operations, business, cash flow, and financial condition would
be adversely affected.
We cannot predict the impact that future laws, regulations, interpretations
or applications, the effect of additional government regulations or
administrative orders, when and if promulgated, or disparate federal,
state and local regulatory schemes would have on our business in the future.
They could, however, require the reformulation of certain products to meet
new standards, the recall or discontinuance of certain products not able to
16
be reformulated, additional record keeping, expanded documentation of the
properties of certain products, expanded or different labeling and/or
scientific substantiation. While we do not manufacture any products, any of
the aforementioned items could disrupt the supply levels of inventory that we
sell. Any or all of such requirements could have an adverse effect on our
results of operations, business, cash flow, and financial condition.
RISK FACTORS RELATED TO OUR COMMON STOCK
-----------------------------------------
- The Company Has Very Few Shareholders of Record And, If this Number Drops
below 300, the Company Will No Longer Be Obligated to Report under the
Securities Exchange Act of 1934 and in Such Case We May Be Delisted from
the AMEX Reducing the Ability of Investors to Trade in Our Common Stock.
If the number of record owners (including direct participants in the
Depository Trust Company) of our common stock is less than 300, our
obligations to file reports under the Securities Exchange Act of 1934 is
suspended. If we take advantage of this right we will likely reduce
administrative costs of complying with public company rules, but periodic
and current information updates about the Company will not be available to
investors. In addition, the common stock of the Company would be removed
from listing on the AMEX. This would likely impact investors' ability to
trade in our common stock.
- In Relation to the Size of Our Company We Incur Significant Costs as a
Result of Being a Public Company.
As a public company, we incur significant accounting, legal, governance,
compliance and other expenses that private companies do not incur. In
addition, the Sarbanes-Oxley Act of 2002 and the rules subsequently
implemented by the Securities and Exchange Commission and the AMEX, have
required changes in corporate governance practices of public companies. These
rules and regulations increase our legal, audit and financial compliance
costs and make some activities more time-consuming and costly. For example,
as a result of being a public company, we are required to maintain additional
board committees and formalize our internal control over financial reporting
and disclosure controls and procedures. In addition, we incur additional
costs associated with our public company reporting requirements. These rules
and regulations also make it more difficult and more expensive for us to
obtain director and officer liability insurance and we may be required to
accept reduced policy limits and coverage or incur substantially higher costs
to obtain the same or similar coverage. As a result, it may be more difficult
for us to attract and retain qualified persons to serve on our Board of
Directors or as executive officers.
- We Have Various Mechanisms in Place to Discourage Takeover Attempts, Which
May Reduce or Eliminate Our Stockholders' Ability to Sell Their Shares for
a Premium in a Change of Control Transaction.
Various provisions of our bylaws and of corporate law may discourage, delay
or prevent a change in control or takeover attempt of our company by a third
party that is opposed by our management and Board of Directors. These
17
anti-takeover provisions could substantially impede the ability of public
stockholders to benefit from a change of control or change in our management
and Board of Directors. These provisions include:
-classification of our directors into three classes with respect to the
time for which they hold office;
-supermajority voting requirements to amend the provision in our
certificate of incorporation providing for the classification of our
directors into three such classes;
-non-cumulative voting for directors;
-control by our Board of Directors of the size of our Board of
directors;
-limitations on the ability of stockholders to call special meetings of
stockholders; and
-advance notice requirements for nominations of candidates for election
to our Board of Directors or for proposing matters that can be acted
upon by our stockholders at stockholder meetings.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
The location and approximate square footage of the Company's five
distribution centers and thirteen retail stores at September 2008
are set forth below:
Location Square Feet
-------- -----------
Distribution - IL, MO, ND, NE & SD 487,000
Retail - FL, KS, MO, NE & OK 132,600
-------
Total Square Footage 619,600
=======
Our Quincy, Illinois, Bismarck, North Dakota and Rapid City, South Dakota
distribution facilities are owned by ADC. Our Quincy, Bismarck and Rapid
City distribution centers are subject to first mortgages by M&I Bank.
The Company leases its remaining distribution facilities, retail stores,
offices, and certain equipment under noncancellable operating and capital
leases. Management believes that its existing facilities are adequate for
the Company's present level of operations, however, larger facilities and
additional cross-dock facilities and retail stores may be required if the
Company experiences growth in certain market areas.
18
ITEM 3. LEGAL PROCEEDINGS
Information with respect to this item may be found in Note 13 to the
Consolidated Financial Statements in Item 8 and under the caption "Credit
Agreement" (with respect to the TEAM settlement) in Item 7, each of which is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 2008.
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers of our Company are appointed by the Board of Directors and
serve at the discretion of the Board. The following table sets forth certain
information with respect to all executive officers of our Company.
Name Age Position
---- --- --------
Christopher H. Atayan 48 Chairman of the Board,
Chief Executive Officer,
Director
Kathleen M. Evans 61 President, Director
Andrew C. Plummer 34 Vice President, Chief
Financial Officer, and
Secretary
Philip E. Campbell 47 Senior Vice President of
Planning and Compliance
Eric J. Hinkefent 47 President of Chamberlin's Market
and Cafe and Akin's Natural
Foods Market
CHRISTOPHER H. ATAYAN has served as the Company's Chairman of the Board
since January 2008, its Chief Executive Officer since October 2006, and
has been a director of the Company since 2004. From March 2006 to October
2006, Mr. Atayan served the Company in various capacities including Vice
Chairman and Chief Corporate Officer. Mr. Atayan is also a consultant to
Draupnir LLC (the parent of Draupnir Capital, LLC.), a director of AMCON
Corporation, and a director of Hotlink Incorporated. He has also served as
the Senior Managing Director of Slusser Associates, a New York investment
banking firm, since 1988.
KATHLEEN M. EVANS has been President of the Company since 1991. Prior to
that time, Ms. Evans served as Vice President of the AMCON Corporation from
1985 to 1991. From 1978 to 1985, Ms. Evans acted in various capacities with
AMCON Corporation and its operating subsidiaries.
19
ANDREW C. PLUMMER has served as the Company's Chief Financial Officer and
Secretary since January 2007. From 2004 to 2007, Mr. Plummer served the
Company in various roles including Acting Chief Financial Officer, Corporate
Controller, and Manager of SEC Compliance. Prior to joining AMCON in 2004,
Mr. Plummer practiced public accounting, primarily with the accounting firm
Deloitte and Touche, LLP.
PHILIP E. CAMPBELL has served as the Senior Vice President of Planning and
Compliance for the Company since January 2007 and has provided consulting
services for the Company since 2004. Mr. Campbell is also an officer and
a director of Hotlink Incorporated. Prior to that time, Mr. Campbell held
senior management roles in a number of companies, most recently as the Chief
Financial Officer of Franchise Concepts, Inc. from 2001 to 2004.
Although not an executive officer of our Company, Eric. J. Hinkefent is an
executive officer of two of our subsidiaries. His business experience is as
follows:
ERIC J. HINKEFENT has served as President of both Chamberlin's Natural Foods,
Inc. and Health Food Associates, Inc. since October 2001. Prior to that
time, he served as President of Health Food Associates, Inc. beginning in
1993. He has also served on the Board of The Healthy Edge, Inc. from
1999 through 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR COMMON STOCK
The Company's common stock trades on the AMEX under the trading symbol "DIT."
As of October 24, 2008, the closing stock price was $19.85 and there were
570,397 common shares outstanding. As of that date, the Company had
approximately 360 common shareholders of record (including direct
participants in the Depository Trust Company). The following table reflects
the range of the high and low closing prices per share of the Company's
common stock reported by AMEX for fiscal 2008 and 2007.
Fiscal 2008 Fiscal 2007
---------------- ----------------
High Low High Low
------- ------- ------- -------
4th Quarter $ 31.25 $ 24.50 $ 31.77 $ 22.05
3rd Quarter 34.00 27.75 28.85 20.62
2nd Quarter 36.38 29.00 33.75 18.25
1st Quarter 44.00 26.74 19.85 12.25
20
Dividend Policy
On a quarterly basis, the Company's Board of Directors evaluates the
potential declaration of dividend payments on the Company's common stock.
Our dividend policy is intended to return capital to shareholders when it is
most appropriate. The Company's revolving credit facility provides that it
may not pay dividends on its common shares in excess of $0.72 per common
share on an annual basis.
Our Board of Directors could decide to alter our dividend policy or not pay
quarterly dividends at any time in the future. Such an action by the Board of
Directors could result from, among other reasons, changes in the marketplace,
changes in our performance or capital needs, changes in federal income tax
laws, disruptions in the capital markets, or other events affecting our
business, liquidity or financial position.
The Company's Board of Directors declared cash dividends of $0.08 per
common share subsequent to the Company's second and third fiscal quarters.
Cash dividends paid on common stock during fiscal 2008 totaled $90,970.
The Company paid no dividends on its common stock during fiscal 2007.
The Company has issued Series A, B and C Convertible Preferred Stock
("Convertible Preferred Stock"), which are not registered under the
Securities and Exchange Act of 1934. The Company paid cash dividends on
Convertible Preferred Stock totaling $419,839 and $418,692 during fiscal 2008
and fiscal 2007, respectively. See Note 3 to the Consolidated Financial
Statements included in this Annual Report for further information regarding
these securities.
COMPANY REPURCHASE OF SHARES
The Company did not repurchase shares of its common stock during fiscal 2008
or fiscal 2007.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
--------
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes to the Consolidated Financial Statements,
under Item 8, and other information in this report, including Critical
Accounting Policies and Cautionary Information included at the end of this
Item 7. The following discussion and analysis includes the results of
operations for our continuing operations for the twelve month period ended
September 30 in fiscal 2008 and 2007.
A separate discussion of our discontinued operations has been presented
within this Item 7. Accordingly, the sales, gross profit (loss), selling,
general and administrative, depreciation and amortization, direct interest,
other expenses and income tax benefit for discontinued operations have not
been included in our analysis of continuing operations. For more information
regarding our business segments, see Item 1 "Business" of this Annual Report.
21
Strategic Initiatives
---------------------
The Company has set out a number of key initiatives in conjunction with its
long-term strategic plan. The primary elements of this strategic plan
include:
- continuing growth in our two core businesses (wholesale
distribution and retail health food);
- reducing debt and maximizing the Company's liquidity position;
- aggressively managing the Company's cost structure; and
- capitalizing on strategic acquisition opportunities.
While the Company can give no assurances, management believes these
initiatives will strengthen the Company's ability to compete on a
long-term basis and create shareholder value.
Significant Events In Fiscal 2008
----------------------------------
During fiscal 2008, the Company:
- experienced a $0.9 million, or 22.2%, increase in net income available
for shareholders as compared to fiscal 2007.
- recognized income from continuing operations per basic share of $9.65
in fiscal 2008 as compared to $7.19 per basic share in fiscal 2007.
- recognized a loss from discontinued operations per basic share of
($0.49) in fiscal 2008 as compared to income per basic share of
$0.44 in fiscal 2007.
- reduced average borrowings on the revolving portion of our credit
agreement with Bank of America (the "Facility") by $10.6 million
as compared to fiscal 2007.
- amended and executed an early renewal of its $55.0 million Facility
with Bank of America in July 2008. The Facility was originally
scheduled to mature in April 2009 and was extended through June 2011.
- reinstated the payment of dividends on shares of its common stock,
paying dividends of $0.08 per common share subsequent to its second and
third fiscal quarters.
Results of Operations
---------------------
The following table sets forth an analysis of various components of the
Company's Statement of Operations as a percentage of sales for fiscal years
2008 and 2007:
22
Fiscal Years
------------------------
2008 2007
------------------------
Sales............................................ 100.0% 100.0%
Cost of sales.................................... 92.5 92.5
------------------------
Gross profit..................................... 7.5 7.5
Selling, general and
administrative expenses......................... 6.0 6.0
Depreciation and amortization.................... 0.2 0.2
------------------------
Operating income ................................ 1.3 1.3
Interest expense................................. 0.3 0.5
------------------------
Income from continuing operations
before income taxes............................. 1.0 0.8
Income tax expense............................... 0.4 0.3
------------------------
Income from continuing operations ............... 0.6 0.5
(Loss) income on discontinued
operations, net of tax.......................... - -
------------------------
Net income ...................................... 0.6 0.5
Preferred stock dividend
requirements.................................... - -
------------------------
Net income available to
common shareholders............................. 0.6% 0.5%
========================
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 fiscal 2008 and 2007 are follows (dollars in
millions):
Sales
-------------------------
Incr
2008 2007 (Decr)
------- ------- -------
Wholesale distribution segment $ 821.3 $ 815.7 $ 5.6
Retail health food segment 39.2 37.9 1.3
------- ------- -------
$ 860.5 $ 853.6 $ 6.9
======= ======= =======
23
FISCAL YEAR 2008 VERSUS FISCAL YEAR 2007 - Continuing Operations
----------------------------------------------------------------
Sales are reported net of costs associated with sales incentives provided
to retailers, totaling $15.4 million and $15.7 million for fiscal 2008 and
fiscal 2007, respectively.
Sales in our wholesale distribution segment ("wholesale") increased $5.6
million, or 0.7%, in fiscal 2008 as compared to fiscal 2007. This change
included a $3.7 million decrease in cigarette sales and a net $9.3 million
sales increase in our tobacco, beverages, snacks, candy, grocery, health &
beauty products, food service, and store supplies categories ("Other
Products").
Significant items impacting our wholesale segment sales during fiscal 2008
included:
- $14.6 million increase in cigarette sales over fiscal 2007 due to price
increases implemented by major manufacturers. /1/
- $10.0 million increase in cigarette sales over fiscal 2007 due to higher
excise taxes in certain states. /1/
- $28.3 million decrease in cigarette sales over fiscal 2007, primarily due
to a 5.7% decrease in cigarette shipment volumes.
- $9.3 million net increase in our Other Product sales category over
fiscal 2007. This increase was primarily the result of higher tobacco,
confectionary, and food service sales, partially offset by lower sales
in our beverage category.
/1/ As these increases are passed on to our customers, they resulted in a
correlating increase in the cost of sales.
Sales from our retail health food segment increased approximately $1.3
million, or 3.5%, during fiscal 2008 as compared to fiscal 2007. A
significant portion of this sales growth was attributable to higher sales
in our grocery and vitamin supplement categories, driven in part by the
popularity of natural food products and more health conscious consumption
patterns among consumers. On a long-term basis, we believe these trends
will continue and that our retail health food segment is well positioned to
capitalize on such trends. In the near term, however, our sales growth in
this segment may flatten or decrease due to deterorating economic conditions
as previously discussed.
GROSS PROFIT
Our gross profit does not include fulfillment costs and costs related
to the distribution network which are included in selling, general and
administrative costs, and may not be comparable to the gross profit of
other entities which do include such costs. Some entities may classify
such costs as a component of cost of sales. Cost of sales, a component
used in determining gross profit, for our wholesale and retail segments
includes the cost of products purchased from manufacturers, less incentives
that we receive which are netted against such costs.
24
Gross profit by business segment for the fiscal 2008 and September 2007
are as follows (dollars in millions):
Gross Profit
-------------------------
Incr
2008 2007 (Decr)
------- ------- -------
Wholesale distribution segment $ 48.3 $ 48.8 $ (0.5)
Retail health food segment 16.4 15.4 1.0
------- ------- -------
$ 64.7 $ 64.2 $ 0.5
======= ======= =======
Gross profit in our wholesale segment decreased $0.5 million, or 1.0%, in
fiscal 2008 as compared to fiscal 2007. Significant items impacting gross
profit during fiscal 2008 included a $1.7 million reduction in benefits
received from cigarette excise tax increases as compared to fiscal 2007
and a $1.6 million increase in gross profit principally due to higher sales
in Other Products. The remaining change in gross profit is primarily
attributable to lower cigarette shipment volumes, fluctuations in product
mix, and lower promotional spending.
Gross profit in our retail health segment increased $1.0 million, or 5.8%,
in fiscal 2008 as compared to fiscal 2007. Of this increase, approximately
$0.6 million related to higher sales volume and $0.4 million was attributable
to improved sales mix and higher overall gross profit margins.
OPERATING EXPENSE
Operating expense includes selling, general and administrative expenses and
depreciation and amortization. Selling, general, and administrative expenses
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.
Operating expenses for fiscal 2008 increased approximately $0.2 million
as compared to fiscal 2007. Significant items impacting operating expenses
during fiscal 2008 included a $1.0 million increase in fuel costs, a
$0.5 million increase in bad debt expense, and a $0.7 million increase in
compensation and employee related costs. These items were partially offset
by a $1.0 million decrease in professional and legal costs, a $0.4 million
decrease in depreciation expense, and a $0.6 million decrease in other
operating expenses.
25
INTEREST EXPENSE
Fiscal 2008 interest expense decreased approximately $1.8 million as compared
to fiscal 2007. This decrease was 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 2.22% lower and the
average borrowings on variable rate debt were $10.6 million lower in fiscal
2008 as compared to fiscal 2007.
DISCONTINUED OPERATIONS (Fiscal 2008 vs. Fiscal 2007)
Discontinued operations as reflected in the Consolidated Statement of
Operations included in this Annual Report were comprised of Trinity Springs,
Inc. ("TSI") in fiscal 2008, and TSI and Hawaiian Natural Water Company, Inc.
("HNWC") in fiscal 2007.
The Company incurred an after tax loss of ($0.3) million related to
discontinued operations in fiscal 2008 and after tax net income of
$0.2 million in fiscal 2007. Charges incurred during fiscal 2008 were
primarily related to the preservation of TSI's residual assets. Fiscal 2007
results from operations benefited $1.6 million (pre-tax) from the gain
recorded in connection with the November 2006 sale of HNWC's residual assets.
As discussed further in Note 2 to the Consolidated Balance Sheet included
in this Annual Report, in September 2007 the Company settled outstanding
litigation among and between AMCON, TSI and CPH, resulting in a $1.5 million
deferred gain. This gain has been classified as a component of noncurrent
liabilities of discontinued operations in the Company's Consolidated Balance
Sheets and 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
in March 2009. As of September 2008, CPH had not yet exercised its asset
purchase option.
A summary of discontinued operations is as follows:
Year ended
September
-------------------------------
2008 /1/ 2007 /2/
------------ ------------
Sales $ - $ 862,852
Operating loss /3/ (188,904) (576,101)
Gain on disposal of discontinued
operations, before income taxes - 1,455,333
Income tax (benefit) expense (158,000) 269,000
(Loss) income from discontinued operations (260,952) 234,551
/1/ Includes the results of operations for TSI.
/2/ Includes the results of operations for TSI and Hawaiian Natural Water Company, Inc.
("HNWC"). HNWC was classified as continuing operations in October 2007 (Q1 2008).
/3/ Operating loss is before interest expense.
26
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 fiscal 2008, the Company
generated cash of approximately $5.2 million from operating activities.
The cash generated primarily resulted from higher overall earnings and a
reduction in deferred income taxes and prepaid asset balances, partially
offset by higher inventory balances.
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 $0.8 million of cash
during fiscal 2008 for investing activities, primarily related to capital
expenditures for property and equipment.
Financing Activities. The Company used cash of $4.7 million for financing
activities during fiscal 2008. Of this amount, $3.7 million related to net
payments on the Company's credit facility, $0.7 million related to principal
payments on long-term debt, and $0.5 million related dividends on the
Company's common and preferred stock. This was partially offset by $0.2
million in cash received on the exercise of stock options.
Cash on Hand/Working Capital. As of September 2008, the Company had cash
on hand of $0.5 million and working capital (current assets less current
liabilities) of $38.9 million. This compares to cash on hand of $0.7 million
and working capital of $34.9 million as of September 2007.
CREDIT AGREEMENT
----------------
In July 2008, the Company amended and executed an early renewal of its
$55.0 million credit agreement with Bank of America (the "Facility"), which
was originally scheduled to mature in April 2009. The significant terms of
the new Facility agreement include:
- Extended maturity date through June 2011.
- A $55.0 million revolving credit limit, plus the outstanding balance
on Term Note A. Term Note A had an outstanding balance of $0.4 million
at September 30, 2008.
27
CREDIT AGREEMENT (continued)
----------------------------
- The Facility bears interest at either the bank's prime rate or at
a LIBOR based rate based on the election made by the Company.
- The Facility provides for an additional $5.0 million of credit available
for inventory purchases. These advances bear interest at the bank's
prime rate plus one-quarter of one-percent (1/4%) per annum and are
payable within 45 days of each advance.
- Lending limits subject to accounts receivable and inventory
limitations, and an unused commitment fee equal to one-quarter of
one percent (1/4%) 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.
- 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 includes a prepayment penalty equal to a predetermined
percentage of the original maximum loan limit of $60.4 million if the
Company prepays the entire Facility and terminates the credit agreement
before specified dates. The prepayment penalty percentages are as
follows: (1) one percent (1%) if prepayment occurs on or before
June 30, 2009, and (2) one-half of one percent (1/2%) if prepayment
occurs subsequent to June 30, 2009 but on or before June 30, 2010.
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) $7,000,000 for the twelve months ending September 30, 2008 and;
(b) $1,000,000 for the three months ending December 31, 2008 and;
(c) $2,000,000 for the six months ending March 31, 2009
The Company was in compliance with the required debt service and minimum
EBITDA covenants at September 2008.
The Company's maximum available credit limit for the revolving portion of the
Facility was $52.8 million at September 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 September 2008, the outstanding balance on the revolving portion of the
Facility was $34.8 million. The Facility bears interest at a variable rate
equal to the bank's prime rate, which was 5.0% at September 2008. Based on
our collateral and loan limits as defined by the Facility agreement, the
Company's excess availability under the Facility at September 2008 was
approximately $18.0 million.
28
During fiscal 2008, our peak borrowings under the Facility were $42.4 million
and our average borrowings and average availability were $35.5 and $12.6
million, respectively. Our availability to borrow under the Facility
generally decreases as inventory and accounts receivable levels go up because
of the borrowing limitations that are placed on collateralized assets.
In July 2008, the Company refinanced a real estate note payable which was
collateralized by two of the Company's distribution facilities (Bismarck, ND
and Quincy, IL). The note payable was originally due in April 2009. The
terms of the new note payable include a fixed interest rate of 6.75% with
monthly principal and interest installments of $58,303 due through June 2013.
The remaining principal is due at maturity in June 2013.
As part of the July 2007 Television Events & Marketing, Inc. ("TEAM")
litigation settlement, the Company became obligated to pay $46,875 in
quarterly installments through October 2010 and $31,250 in quarterly
installments through October 2011. Mr. Wright has personally guaranteed
these payment obligations, which totaled approximately $0.5 million at
September 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 Company's shares of Chamberlin's, Akin's, HNWC,
and TSI.
TSI Financing
-------------
As previously disclosed, TSI has approximately $2.8 million in related party
debt obligations, which were in default during both fiscal 2008 and fiscal
2007. 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 its future liquidity position.
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.
Dividend Payments
-----------------
The Company's Board of Directors declared cash dividends of $0.08 per
common share subsequent to the Company's second and third fiscal quarters.
Cash dividends paid on common stock during fiscal 2008 totaled $90,970.
The Company paid no dividends on its common stock during fiscal 2007.
The Company has issued Series A, B and C Convertible Preferred Stock
("Convertible Preferred Stock"), which are not registered under the
Securities and Exchange Act of 1934. The Company paid cash dividends on
Convertible Preferred Stock totaling $419,839 and $418,692 during fiscal 2008
and fiscal 2007, respectively. See Note 3 to the Consolidated Financial
Statements included in this Annual Report for further information regarding
these securities.
29
OTHER
-----
The Company has several capital leases for office and warehouse equipment.
At September 2008, the outstanding balances on the capital leases totaled
approximately $0.3 million.
AMCON has issued a letter of credit for $0.8 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.
Liquidity Risk
--------------
The Company's liquidity position is significantly influenced by its ability
to obtain sufficient levels of working capital. For our Company and
industry in general, customer credit risk and continuing access to bank
credit (primarily for the purpose of funding inventory purchases and the lag
period on accounts receivable collections), are important factors impacting
our overall liquidity position.
As previously discussed, the Company recently renewed its credit facility
with Bank of America and believes it has a strong working relationship with
that financial institution. Additionally, the Company was in compliance
with all debt covenants as of September 2008. Our customers, many of whom
are thinly capitalized, do present credit risk. The Company, however,
aggressively monitors its exposure in this area and believes it had adequate
reserves in place at September 2008.
The Company does not currently hedge its exposure to interest rate risk or
fuel costs. Accordingly, significant price movements in these areas can and
do impact the Company's profitability.
Based on these considerations, the Company believes its liquidity position
going forward will be adequate to sustain operations and fund future growth.
However, as recent events in the financial markets have demonstrated,
dramatic shifts in market conditions could materially impact the Company's
ability to collect on customer accounts receivable balances and/or secure
bank credit. While we don't believe the development of such issues in our
business is likely, a continued steep deterioration in market conditions
could materially impact our liquidity position.
Factors That Could Affect Future Results
----------------------------------------
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. In the
past several years, 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"). While such
legislation has not passed, it will likely be reintroduced in the future.
If such legislation eventually passed, it could further accelerate the
30
declining demand for cigarettes and tobacco products. In fiscal 2008, sales
of cigarette and tobacco products accounted for approximately 70% of the
Company's consolidated sales and approximately 22% of its consolidated gross
profit.
Slumping economic conditions, higher food costs, and the impact of credit
card fees have negatively impacted profit margins for many of our customers.
Additionally, recent disruptions in the credit markets and unprecedented fuel
prices have created a challenging business environment for our largest
customer segment (convenience stores).
In the short term, the Company believes the aforementioned items will
pressure future wholesale profits. The Company does not, however, believe
such items will materially impact its liquidity position. While these
market conditions present risks, the Company believes that on a long-term
basis, they provide opportunities to enhance shareholder value as smaller
distributors are forced from the market creating opportunities to win market
share and complete strategic acquisitions at more attractive prices.
Retail Health Food Segment - Our retail segment continues to experience
year-over-year sales growth. While we enjoy a loyal customer following in
this business segment, weak economic conditions combined with higher natural
food costs and increased competition may negatively impact future sales
growth and gross profit margins.
Other Matters - Critical Accounting Estimates
---------------------------------------------
GENERAL
The Consolidated Financial Statements of the Company are prepared in
accordance with U.S. generally accepted accounting principles, which require
the Company to make estimates, judgments and assumptions that affect the
reported amounts of assets, liabilities, net revenue and expenses, and the
disclosure of contingent assets and liabilities. The Company bases its
estimates on historical experience and on various other assumptions that it
believes to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. The Company
believes that the accounting estimates employed and the resulting balances
are reasonable; however, actual results may differ from these estimates under
different assumptions or conditions.
The Company believes the following critical accounting policies reflect the
significant estimates and assumptions used in the preparation of the
Consolidated Financial Statements. Our critical accounting estimates are
set forth below and have not changed during fiscal 2008.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
NATURE OF ESTIMATES REQUIRED. The allowance for doubtful accounts represents
our estimate of uncollectible accounts receivable at the balance sheet date.
We monitor our credit exposure on a weekly basis and assess the adequacy of
our allowance for doubtful accounts on a quarterly basis. Because credit
losses can vary significantly over time, estimating the required allowance
requires a number of assumptions that are uncertain.
31
ASSUMPTIONS AND APPROACH USED. We estimate our required allowance for
doubtful accounts using the following key assumptions.
- Historical collections - Represented as the amount of historical
uncollectible accounts as a percent of total accounts
receivable.
- Specific credit exposure on certain accounts - Identified based
on management's review of the accounts receivable portfolio
and taking into account the financial wherewithal of particular
customers that management deems to have a higher risk of
collection.
- Economic conditions and credit crisis Slumping economic conditions,
higher food costs, and the impact of credit card fees have negatively
impacted profit margins for many of our customers. Additionally, recent
disruptions in the credit markets and unprecedented fuel prices have
created a challenging business environment for our largest customer
segment (convenience stores). The current economic environment has
impacted consumer spending on higher profit, discretionary items at
convenience stores. This has a direct impact on convenience stores
profitability and ultimately impacts their ability to pay their account
timely, or at all.
INVENTORIES
NATURE OF ESTIMATES REQUIRED. In our businesses, we carry large quantities
and dollar amounts of inventory. Inventories primarily consist of finished
products purchased in bulk quantities to be sold to our customers. Given
the large quantities and broad range of products we carry, there is a risk
that inventory may become impaired because it has become unsaleable or
unrefundable, slow moving, obsolete, or because it has been discontinued.
The use of estimates is required in determining the salvage value of this
inventory.
ASSUMPTIONS AND APPROACH USED. We estimate our inventory obsolescence
reserve at each balance sheet date based on the following criteria:
-Slow moving products - Items identified as slow moving are
evaluated on a case-by-case basis for impairment.
-Obsolete/discontinued inventory - Products identified that are
near or beyond their expiration dates. We may also discontinue
carrying certain product lines for our customers. As a result,
we estimate the market value of this inventory as if it were to
be liquidated.
-Estimated salvage value/sales price - The salvage value of the
inventory is estimated using management's evaluation of the
congestion in the distribution channels and experience with
brokers and inventory liquidators to determine the salvage
value of the inventory.
32
DEPRECIATION, AMORTIZATION AND IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets consist primarily of fixed assets and intangible assets
that were acquired in business combinations. Fixed assets and amortizable
identified intangible assets are assigned useful lives ranging from 3 to 40
years. Goodwill is not amortized. Impairment of reporting units, which is
measured in the Company's fourth fiscal quarter in order to coincide with its
budgeting process. The reporting units are valued using after-tax cash flows
from operations (less capital expenditures) discounted to present value.
No impairment charges were recorded by the Company in fiscal 2008 or fiscal
2007.
NATURE OF ESTIMATES REQUIRED. Management has to estimate the useful lives of
the Company's long lived assets. In regard to the Company's impairment
analysis, the most significant assumptions include management's estimate of
the annual growth rate used to project future sales and expenses.
ASSUMPTIONS AND APPROACH USED. For fixed assets, depreciable lives are based
on our accounting policy which is intended to mirror the expected useful life
of the asset. In determining the estimated useful life of amortizable
intangible assets, such as customer lists, we rely on our historical
experience to estimate the useful life of the applicable asset and consider
Industry norms as a benchmark. In evaluating potential impairment of
long-lived assets, we primarily use an income based approach (discounted
cash flow method) in addition to both public and private company information.
A discounted cash flow methodology requires estimation in (i) forecasting
future earnings (ii) determining the discount rate applicable to the earnings
stream being discounted, and (iii) computing a terminal value at some point
in the future.
The forecast of future earnings is an estimate of future financial
performance based on current year results and management's evaluation of the
market potential for growth. The discount rate is a weighted average cost of
capital using a targeted debt-to-equity ratio using the Industry average
under the assumption that it represents our optimal capital structure and can
be achieved in a reasonable time period. The terminal value is determined
using a commonly accepted growth model.
INSURANCE
The Company's insurance for workers' compensation, general liability and
employee-related health care benefits are provided through high-deductible or
self-insured programs. As a result, the Company accrues for its workers'
compensation liability based upon claim reserves established with the
assistance of a third-party administrator, which are then trended and
developed. The reserves are evaluated at the end of each reporting period.
Due to the uncertainty involved with the realization of claims incurred but
unreported, management is required to make estimates of these claims.
ASSUMPTIONS AND APPROACH USED. In order to estimate our reserve for incurred
but unreported claims we consider the following key factors:
33
Employee Health Insurance Claims
- Historical claims experience - We review loss runs for each
month to calculate the average monthly claims experience.
- Lag period for reporting claims - Based on analysis and
consultation with our third party administrator, our experience
is such that we have a minimum of a one month lag period in which
claims are reported.
Workers' Compensation Insurance Claims
- Historical claims experience - We review prior years' loss runs
to estimate the average annual expected claims and review
monthly loss runs to compare our estimates to actual claims.
- Lag period for reporting claims - We utilize the assistance
of our insurance agent to trend and develop reserves on
reported claims in order to estimate the amount of incurred but
unreported claims. Our insurance agent uses standard insurance
industry loss development models.
INCOME TAXES
The Company accounts for its income taxes by recording taxes payable or
refundable for the current year and deferred tax assets and liabilities for
the future tax consequences of events that have been recognized in our
financial statements or tax returns. As required by SFAS No. 109,
"Accounting for Income Taxes", these expected future tax consequences are
measured based on provisions of tax law as currently enacted; the effects of
future changes in tax laws are not anticipated. Future tax law changes, such
as a change in the corporate tax rate, could have a material impact on our
financial condition or results of operations.
In accordance with Financial Accounting Standards Board Interpretation,
"Accounting for Uncertainty in Income Taxes" ("FIN 48"), we must assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and establish a related valuation allowance as appropriate. In
performing our evaluation, we consider all available evidence, both positive
and negative, to determine whether, based on the weight of the evidence, a
valuation allowance is needed. Evidence used includes information about our
current financial position and our results of operations for the current and
preceding years, as well as all currently available information about future
years, including our anticipated future performance, the reversal of deferred
tax liabilities and tax planning strategies. When appropriate, we record a
valuation allowance against deferred tax assets to offset future tax benefits
that may not be realized.
ASSUMPTIONS AND APPROACH USED. In determining whether a valuation allowance
is appropriate, we consider whether it is more likely than not that all or
some portion of our deferred tax assets will not be realized, based in part
upon management's judgments regarding future events.
34
In making that estimate we consider the following key factors:
- our current financial position;
- historical financial information;
- future reversals of existing taxable temporary differences;
- future taxable income exclusive of reversing temporary differences
and carryforwards;
- taxable income in prior carryback years; and
- tax planning strategies.
REVENUE RECOGNITION
We recognize revenue in our wholesale segment when products are delivered to
customers (which generally is the same day products are shipped) and in our
retail health food segment when products are sold to consumers. Sales are
shown net of returns, discounts, and sales incentives to customers.
NATURE OF ESTIMATES REQUIRED. We estimate and reserve for anticipated sales
discounts. We also estimate and provide a reserve for anticipated sales
incentives to customers when earned under established program requirements.
ASSUMPTIONS AND APPROACH USED. We estimate the sales reserves using the
following criteria:
- Sales discounts - We use historical experience to estimate the
amount of accounts receivable that will not be collected due to
customers taking advantage of authorized term discounts.
- Volume sales incentives - We use historical experience in
combination with quarterly reviews of customers' sales progress
in order to estimate the amount of volume incentives due to
the customers on a periodic basis.
Our estimates and assumptions for each of the aforementioned critical
accounting estimates have not changed materially during the periods
presented, nor are we aware of any reasons that they would be reasonably
likely to change in the future.
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 157"). SFAS 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 (fiscal 2009 for the Company). In February
2008, the FASB issued FASB Staff Position ("FSP") 157-1 and FSP 157-2.
FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from
its scope and FSP 157-2 delays the effective date of SFAS 157 for
non-recurring non-financial assets and liabilities and is effective beginning
in fiscal 2010 for the Company. Additionally, in October 2008 FASB issued
FSP 157-3 which provides guidance in determining fair value under SFAS 157
for inactive markets.
35
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 June 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).
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3,
Determination of the Useful Life of Intangible Assets ("FSP No. FAS 142-3").
FSP No. FAS 142-3 requires companies estimating the useful life of a
recognized intangible asset to consider their historical experience in
renewing or extending similar arrangements or, in the absence of historical
experience, to consider assumptions that market participants would use about
renewal or extension as adjusted for SFAS No. 142's, Goodwill and Other
Intangible Assets, entity-specific factors. FSP No. FAS 142-3 is effective
for fiscal years beginning after December 15, 2008 (fiscal 2010 for the
Company).
In May 2008, the FASB issued Statement of Financial Accounting Standards
No. 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS
162"). This Standard identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation
of financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles. SFAS 162 directs
the hierarchy to the entity, rather than the independent auditors, as the
entity is responsible for selecting accounting principles for financial
statements that are presented in conformity with generally accepted
accounting principles. The Standard is effective November 15, 2008.
SFAS 162 is not expected to have an impact on the financial statements.
FORWARD LOOKING STATEMENTS
---------------------------
This Annual Report, including 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,
36
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, including Item 1A - Risk Factors of
this Annual Report on Form 10-K, could adversely affect our results of
operations, business, cash flow, and financial condition and could cause our
results of operations 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
- declining 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,
- recent events in the credit markets may impact the availability
of capital resources,
- the demand for the Company's products,
- new business ventures,
- domestic regulatory and legislative risks,
- competition,
- poor weather conditions,
- increases in fuel prices,
- other risks over which the Company has little or no control, and
- any other factors not identified herein could also have such an effect.
Changes in these factors could result in significantly different results.
Consequently, future results may differ from management's expectations.
Moreover, past financial performance should not be considered a reliable
indicator of future performance. Any forward looking statement contained
herein is made as of the date of this document. 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.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to 2008 Consolidated Financial Statements
Report of Independent Registered Public
Accounting Firm.......................................................39
Consolidated Balance Sheets as of September 2008 and September 2007......40
Consolidated Statement of Operations for the Fiscal Years Ended
September 2008 and September 2007.....................................41
Consolidated Statement of Shareholders' Equity for the Fiscal Years
Ended September 2008 and September 2007...............................42
Consolidated Statement of Cash Flows for the Fiscal Years Ended
September 2008 and September 2007.....................................43
Notes to Consolidated Financial Statements...............................45
38
Report of Independent Registered Public Accounting Firm
To the Board of Directors
AMCON Distributing Company
Omaha, Nebraska
We have audited the consolidated balance sheets of AMCON Distributing
Company and subsidiaries as of September 30, 2008 and 2007, and the related
consolidated statements of operations, shareholders' equity and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of AMCON Distributing Company and subsidiaries as of September 30, 2008 and
2007, and the results of their operations and their cash flows for the years
ended September 30, 2008 and 2007, in conformity with U.S. generally accepted
accounting principles.
We were not engaged to examine management's assessment of the effectiveness
of AMCON Distributing Company's internal control over financial reporting as
of September 30, 2008, included in the accompanying Management's Report on
Internal Control Over Financial Reporting and, accordingly, we do not express
an opinion thereon.
/s/ McGLADREY & PULLEN LLP
Omaha, Nebraska
November 7, 2008
39
CONSOLIDATED BALANCE SHEETS
AMCON Distributing Company and Subsidiaries
--------------------------------------------------------------------------------------------------
September 30, 2008 2007
--------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 457,681 $ 717,554
Accounts receivable, less allowance
for doubtful accounts of $0.8 million
and $0.3 million in 2008 and 2007, respectively 27,198,414 27,848,938
Inventories, net 37,330,969 29,738,727
Deferred income taxes 1,260,609 1,446,389
Current assets of discontinued operations 18,947 18,897
Prepaid and other current assets 3,519,650 5,935,208
------------------------------
Total current assets 69,786,270 65,705,713
Property and equipment, net 10,907,541 11,190,768
Goodwill 5,848,808 5,848,808
Other intangible assets, net 3,373,269 3,400,070
Deferred income taxes 234,171 2,768,043
Non-current assets of discontinued operations 2,032,047 2,057,033
Other assets 1,123,252 1,093,150
------------------------------
$ 93,305,358 $ 92,063,585
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,738,214 $ 15,253,562
Accrued expenses 5,275,697 5,293,923
Accrued wages, salaries and bonuses 2,636,699 2,202,594
Income taxes payable 313,021 367,773
Current liabilities of discontinued operations 4,041,837 4,035,863
Current maturities of credit facility 3,046,000 3,046,000
Current maturities of long-term debt 787,128 568,024
------------------------------
Total current liabilities 30,838,596 30,767,739
Credit facility, less current maturities 32,155,005 35,808,180
Long-term debt, less current maturities 6,525,881 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 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 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 authorized and issued, liquidation preference
$25.00 per share 1,982,372 1,982,372
Commitments and contingencies (Note 13)
Shareholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, 260,000 shares outstanding and issued
in Series A, B, and C referred to above - -
Common stock, $0.01 par value, 3,000,000 shares
authorized, 570,397 shares outstanding at September 2008
and 529,436 shares outstanding at September 2007 5,704 5,295
Additional paid-in capital 6,995,948 6,396,131
Retained earnings (deficit) 3,963,542 (857,895)
------------------------------
Total shareholders' equity 10,965,194 5,543,531
------------------------------
$ 93,305,358 $ 92,063,585
==============================
The accompanying notes are an integral part of these consolidated financial statements.
40
CONSOLIDATED STATEMENTS OF OPERATIONS
AMCON Distributing Company and Subsidiaries
--------------------------------------------------------------------------------------------------
Fiscal Years Ended September 2008 2007
--------------------------------------------------------------------------------------------------
Sales (including excise taxes of $206.8 million and
$208.2 million, respectively) $ 860,451,122 $ 853,566,512
Cost of sales 795,774,780 789,317,758
------------------------------
Gross profit 64,676,342 64,248,754
------------------------------
Selling, general and administrative expenses 51,631,324 50,963,645
Depreciation and amortization 1,386,218 1,831,640
------------------------------
53,017,542 52,795,285
------------------------------
Operating income 11,658,800 11,453,469
Other expense (income):
Interest expense 2,986,215 4,816,324
Other (income), net (114,613) (194,608)
------------------------------
2,871,602 4,621,716
------------------------------
Income from continuing operations
before income tax expense 8,787,198 6,831,753
Income tax expense 3,194,000 2,626,000
------------------------------
Income from continuing operations 5,593,198 4,205,753
Discontinued operations (Note 2)
Gain on disposal of discontinued
operations, net of income tax expense
of $0.6 million - 829,090
Loss from discontinued operations, net of
income tax benefit of $0.2 million and
$0.3 million, respectively (260,952) (594,539)
------------------------------
(Loss) income on discontinued operations (260,952) 234,551
-----------------------------
Net income 5,332,246 4,440,304
Preferred stock dividend requirements (419,839) (418,692)
-----------------------------
Net income available to common shareholders $ 4,912,407 $ 4,021,612
==============================
Basic earnings (loss) per share
available to common shareholders:
Continuing operations $ 9.65 $ 7.19
Discontinued operations (0.49) 0.44
------------------------------
Net basic earnings per share
available to common shareholders $ 9.16 $ 7.63
==============================
Diluted earnings (loss) per share
available to common shareholders:
Continuing operations $ 6.57 $ 4.89
Discontinued operations (0.31) 0.27
------------------------------
Net diluted earnings per share
available to common shareholders $ 6.26 $ 5.16
==============================
Weighted average shares outstanding:
Basic 536,319 527,062
Diluted 851,298 860,121
The accompanying notes are an integral part of these consolidated financial statements.
41
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AMCON Distributing Company and Subsidiaries
---------------------------------------------------------------------------------------------------------
Common Stock Additional Retained
----------------- Paid in Earnings
Shares Amount Capital (Deficit) Total
---------------------------------------------------------------------------------------------------------
Balance, September 30, 2006 527,062 $ 5,271 $ 6,278,476 $ (4,879,507) $ 1,404,240
Dividends on preferred stock - - - (418,692) (418,692)
Stock option expense - - 70,993 - 70,993
Exercise of stock options 2,374 24 46,662 - 46,686
Net income - - - 4,440,304 4,440,304
-----------------------------------------------------------------------
Balance, September 30, 2007 529,436 5,295 6,396,131 (857,895) 5,543,531
Dividends on common stock,
$0.08 per share - - - (90,970) (90,970)
Dividends on preferred stock - - - (419,839) (419,839)
Stock option expense - - 435,250 - 435,250
Issuance of stock in connection
with stock-based incentive plans 40,961 409 147,975 - 148,384
Stock option tax benefit - - 16,592 - 16,592
Net income - - - 5,332,246 5,332,246
-----------------------------------------------------------------------
Balance, September 30, 2008 570,397 $ 5,704 $ 6,995,948 $ 3,963,542 $10,965,194
=======================================================================
The accompanying notes are an integral part of these consolidated financial statements.
42
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMCON Distributing Company and Subsidiaries
--------------------------------------------------------------------------------------------------
Fiscal Years Ended September 2008 2007
--------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,332,246 $ 4,440,304
Deduct: (Loss) income from discontinued operations,
net of tax (260,952) 234,551
------------------------------
Income from continuing operations 5,593,198 4,205,753
Adjustments to reconcile income from
continuing operations to net cash flows
from operating activities:
Depreciation 1,359,417 1,791,907
Amortization 26,801 39,733
Loss (gain) on sale of property and equipment (39,619) 27,235
Stock based compensation 435,250 70,993
Excess tax benefit on exercise of stock options (16,592) -
Deferred income taxes 2,719,652 2,621,261
Provision for losses on doubtful accounts 505,000 (250,196)
Provision for losses on inventory obsolescence 101,998 52,242
Changes in assets and liabilities,
Accounts receivable 145,524 217,009
Inventories (7,694,240) (383,768)
Prepaid and other current assets 2,415,558 (566,058)
Other assets (30,102) 254,314
Accounts payable (515,348) 739,188
Accrued expenses and accrued wages, salaries and bonuses 415,879 1,574,429
Income taxes payable (38,160) 198,837
------------------------------
Net cash flows from operating activities - continuing operations 5,384,216 10,592,879
Net cash flows from operating activities - discontinued operations (230,042) (1,929,323)
------------------------------
Net cash flows from operating activities 5,154,174 8,663,556
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (845,156) (514,277)
Proceeds from sales of property and equipment 86,209 101,328
------------------------------
Net cash flows from investing activities - continuing operations (758,947) (412,949)
Net cash flows from investing activities - discontinued operations - 3,965,394
------------------------------
Net cash flows from investing activities (758,947) 3,552,445
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on bank credit agreement (3,653,175) (9,969,248)
Principal payments on long-term debt (656,092) (734,416)
Proceeds from exercise of stock options 148,384 46,686
Excess tax benefit on exercise of stock options 16,592 -
Debt issuance costs - (100,000)
Dividends on preferred stock (419,839) (418,692)
Dividends on common stock (90,970) -
------------------------------
Net cash flows from financing activities - continuing operations (4,655,100) (11,175,670)
Net cash flows from financing activities - discontinued operations - (803,915)
------------------------------
Net cash flow from financing activities (4,655,100) (11,979,585)
------------------------------
Net change in cash (259,873) 236,416
Cash, beginning of year 717,554 481,138
------------------------------
Cash, end of year $ 457,681 $ 717,554
==============================
43
-------------------------------------------------------------------------------------------------
Fiscal Years 2008 2007
-------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 3,116,098 $ 4,890,997
Cash paid during the year for income taxes 354,508 94,901
Supplemental disclosure of non-cash information:
Acquisition of equipment through capital leases $ 277,624 68,422
Forgiveness of debt and related interest in
connection with settlement of TSI litigation - $ (3,735,145)
Forgiveness of water royalty in connection
with settlement of TSI litigation - (2,807,000)
Issuance of note payable in connection with TSI litigation - 5,000,000
Issuance of note payable in connection with
settlement of TBG litigation - 763,983
Buyer's assumption of HNWC lease in connection with
the sale of HNWC's assets - discontinued operations - (225,502)
The accompanying notes are an integral part of these consolidated financial statements.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Company Operations:
AMCON Distributing Company and Subsidiaries ("AMCON" and "the Company") is
primarily engaged in the wholesale distribution of consumer products in the
Great Plains and Rocky Mountain regions. In addition, the Company operates
thirteen retail health food stores in Florida and the Midwest.
AMCON's wholesale distribution business ("ADC") includes five distribution
centers that sell approximately 14,000 different consumer products, including
cigarettes and tobacco products, candy and other confectionery, beverages,
groceries, paper products, health and beauty care products, frozen and chilled
products and institutional food service products. The Company distributes
products primarily to retailers such as convenience stores, discount and
general merchandise stores, grocery stores and supermarkets, drug stores and
gas stations. In addition, the Company services institutional customers,
including restaurants and bars, schools, sports complexes and vendors, as well
as other wholesalers.
AMCON also operates six retail health food stores in Florida under the name
Chamberlin's Market & Cafe ("Chamberlin's") and seven in the Midwest under the
name Akin's Natural Foods Market ("Akin's"). These stores carry natural
supplements, groceries, health and beauty care products and other food items.
The Company's operations are subject to a number of factors which are beyond
the control of management, such as changes in manufacturers' cigarette
pricing, state excise tax increases or the opening of competing retail stores
in close proximity to the Company's retail stores. While the Company sells a
diversified product line, it remains dependent upon cigarette sales which
represented approximately 70% of revenue and 22% of gross profit in fiscal
2008, as compared to 71% of revenue and 25% of gross profit in fiscal 2007.
(b) Accounting Period:
The Company's fiscal year ends on September 30. The fiscal years ended
September 30, 2008 and September 30, 2007, are herein referred to as fiscal
2008 and fiscal 2007, respectively.
(c) Principles of Consolidation and Basis of Presentation:
The Consolidated Financial Statements include the accounts of AMCON and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Where appropriate, certain prior-year
amounts have been reclassified to conform to current-year presentation.
(d) Cash and Accounts Payable:
AMCON utilizes a cash management system under which an overdraft is the normal
book balance in the primary disbursing accounts. Overdrafts included in
accounts payable at fiscal 2008 and fiscal 2007 totaled approximately
$1.9 million and $3.3 million, respectively, and reflect checks drawn on the
disbursing accounts that have been issued but have not yet cleared through the
banking system. The Company's policy has been to fund these outstanding
checks as they clear with borrowings under its revolving credit facility (see
Note 5). These outstanding checks (book overdrafts) are classified as cash
flows from operating activities in the Consolidated Statements of Cash Flows.
45
(e) Accounts Receivable:
Accounts receivable consist primarily of amounts due to the Company from its
normal business activities. An allowance for doubtful accounts is maintained
to reflect the expected uncollectibility of accounts receivable based on past
collection history, evaluation of impact of economic conditions on our
customers, and specific risks identified in the portfolio.
(f) Inventories:
Inventories consisted of the following at September 2008 and
2007 (in millions):
September September
2008 2007
--------- ---------
Finished Goods $ 37.3 $ 29.7
========= =========
Inventories are stated at the lower of cost, determined on a FIFO basis,
or market. The wholesale distribution and retail health food segment
inventories consist of finished products purchased in bulk quantities to
be redistributed to the Company's customers or sold at retail. Finished
goods include total reserves of approximately $0.6 million and $0.5 million
at September 2008 and September 2007, respectively. 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.
(g) Prepaid Expenses and Other Current Assets:
A summary of prepaid expenses and other current assets is as follows (in
millions):
September September
2008 2007
--------- ---------
Prepaid expenses $ 1.1 $ 0.8
Prepaid inventory 2.4 5.1
--------- ---------
$ 3.5 $ 5.9
========= =========
Prepaid inventory represents inventory in-transit that has been paid for but
has not yet been received.
(h) Property and Equipment:
Property and equipment are stated at cost less accumulated depreciation or
amortization. Major renewals and improvements are capitalized and charged to
expense over their useful lives through depreciation or amortization charges.
Repairs and maintenance are charged to expense in the period incurred. The
straight-line method of depreciation is used to depreciate assets over the
estimated useful lives as follows:
Years
-------
Buildings 40
Warehouse equipment 5-7
Furniture, fixtures and
leasehold improvements 5-12
Vehicles 5
Costs and accumulated depreciation applicable to assets retired or sold are
eliminated from the accounts, and the resulting gains or losses are reported
as a component of operating income.
46
(i) Long-Lived Assets:
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such asset may
not be recoverable. Long-lived assets are reviewed annually in the fourth
fiscal quarter for impairment and are reported at the lower of the carrying
amount or fair value less the cost to sell. The Company did not record
impairment charges in fiscal 2008 or fiscal 2007.
(j) Goodwill, Intangible and Other Assets:
Goodwill consists of the excess purchase price paid in business acquisitions
over the fair value of assets acquired. At September 2008, intangible assets
primarily consisted of tradenames assumed in acquisitions and other assets
primarily consisted of debt issuance costs and the cash surrender value of
life insurance policies.
The Company employs the non-amortization approach to account for purchased
goodwill and intangible assets having indefinite useful lives. Under a
non-amortization approach, goodwill and intangible assets having indefinite
useful lives are not amortized into results of operations, but instead are
reviewed at least annually for impairment. The Company performs its annual
impairment testing of goodwill and other intangible assets during the fourth
fiscal quarter of each year. If the recorded value of goodwill and intangible
assets having indefinite useful lives is determined to exceed their fair
value, the asset is written down to its fair value and a charge is taken
against the results of operations in that period. AMCON considers its
tradenames to have indefinite lives. The Company did not record impairment
charges related to goodwill or intangible assets during fiscal 2008 or fiscal
2007.
The benefit related to increases in the cash surrender value of split dollar
life insurance policies are recorded as a reduction to insurance expense.
The cash surrender value of life insurance policies is limited to the lesser
of the cash value or premiums paid in accordance with regulatory guidance.
(k) Debt Issuance Costs:
The costs related to the issuance of debt are capitalized in other assets and
amortized on an effective interest method to interest expense over the terms
of the related debt agreements.
(l) Revenue Recognition:
AMCON recognizes revenue when title passes to our customers. In our
wholesale distribution segment, this occurs when products are delivered to
customers (which generally is the same day products are shipped) and in our
retail health food segment when products are sold to consumers. Sales are
shown net of returns and discounts.
(m) Insurance:
The Company's workers' compensation, general liability and employee-related
health care benefits are provided through high-deductible or self-insurance
programs. As a result, the Company accrues for its workers' compensation and
general liability based upon a claim reserve analysis. The Company has issued
a letter of credit in the amount of $0.8 million to its workers' compensation
insurance carrier as part of its loss control program. The reserve for
incurred, but not reported, employee health care benefits is based on
47
approximately one month of claims, calculated using the Company's historical
claims experience rate, plus specific reserves for large claims. The reserves
associated with the exposure to these liabilities are reviewed by management
for adequacy at the end of each reporting period.
(n) Income Taxes:
Deferred income taxes are determined based on temporary differences between
the financial reporting and tax basis of the Company's assets and liabilities,
using enacted tax rates in effect during the years in which the differences
are expected to reverse.
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
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. See Note 10 for a discussion
regarding the impact of applying FIN 48 on the Consolidated Financial
Statements of the Company.
(o) Stock-Based Compensation:
The Company applies the provisions of SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123R). Under SFAS 123R, compensation cost associated with
employee stock options are recognized in the Statement of Operations. This
compensation expense has been reflected in our Consolidated Statement of
Operations under "selling, general and administrative expenses."
(p) Per-share results:
Basic earnings or loss per share data are based on the weighted-average number
of common shares outstanding during each period. Diluted earnings or loss per
share data are based on the weighted-average number of common shares
outstanding and the effect of all dilutive potential common shares including
stock options and conversion features of the Company's preferred stock
issuances.
(q) Use of Estimates:
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(r) Recently Issued Accounting Standards:
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 157"). SFAS 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 (fiscal 2009 for the Company). In February
48
2008, the FASB issued FASB Staff Position ("FSP") 157-1 and FSP 157-2.
FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from
its scope and FSP 157-2 delays the effective date of SFAS 157 for
non-recurring non-financial assets and liabilities and is effective beginning
in fiscal 2010 for the Company. Additionally, in October 2008 FASB issued FSP
157-3 which provides guidance in determining fair value under SFAS 157 for
inactive markets.
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 June 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).
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3,
Determination of the Useful Life of Intangible Assets ("FSP No. FAS 142-3").
FSP No. FAS 142-3 requires companies estimating the useful life of a
recognized intangible asset to consider their historical experience in
renewing or extending similar arrangements or, in the absence of historical
experience, to consider assumptions that market participants would use about
renewal or extension as adjusted for SFAS No. 142's, Goodwill and Other
Intangible Assets, entity-specific factors. FSP No. FAS 142-3 is effective for
fiscal years beginning after December 15, 2008 (fiscal 2010 for the Company).
In May 2008, the FASB issued Statement of Financial Accounting Standards
No. 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS
162"). This Standard identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles. SFAS 162 directs
the hierarchy to the entity, rather than the independent auditors, as the
entity is responsible for selecting accounting principles for financial
statements that are presented in conformity with generally accepted accounting
principles. The Standard is effective November 15, 2008. SFAS 162 is not
expected to have an impact on the financial statements.
2. DISPOSITIONS
Discontinued operations as reflected in the Consolidated Statement of
Operations were comprised of Trinity Springs, Inc. ("TSI") in fiscal 2008,
and TSI and Hawaiian Natural Water Company, Inc. ("HNWC") in fiscal 2007.
At September 30, 2008, discontinued operations included in the Company's
49
Consolidated Balance Sheet represented the residual assets and liabilities
of TSI. Both TSI and HNWC operated water bottling facilities and were part
of the Company's former beverage segment prior to their closure.
In September 2007, the Company signed a Mutual Release and Settlement
Agreement (the "Settlement Agreement") to resolve litigation among and
between AMCON, TSI, and Crystal Paradise Holdings, Inc. ("CPH") related to
a 2004 Asset Purchase Agreement ("Asset Purchase Agreement"), under which TSI
acquired certain assets from CPH.
In conjunction with the Settlement Agreement, AMCON entered into a $5.0
million note payable to CPH. The note is due in September 2012 and accrues
interest at 5.0%. The Settlement Agreement also provides CPH with an option
to purchase TSI's remaining assets for a price equivalent to the amount due
CPH under the $5.0 million note payable, plus accrued interest. This option
expires March 31, 2009. If CPH elects to exercise its asset purchase option,
CPH is required to cancel the $5.0 million note payable, including any accrued
interest. As of September 30, 2008, CPH had not yet exercised its asset
purchase option.
The Company has recorded a $1.5 million pre-tax deferred gain in connection
with the Settlement Agreement. This deferred gain has been classified as a
component of noncurrent liabilities of discontinued operations in the
Company's Consolidated Balance Sheets. The deferred gain will be recognized
upon the earlier of CPH's election to exercise the asset purchase option or
the expiration of the asset purchase option.
A summary of discontinued operations is as follows:
Year ended
September
------------------------------
2008 /1/ 2007 /2/
------------ -----------
Sales $ - $ 862,852
Operating loss /3/ (188,904) (576,101)
Gain on disposal of discontinued
operations, before income taxes - 1,455,333
Income tax (benefit) expense (158,000) 269,000
(Loss) income from discontinued operations (260,952) 234,551
/1/ Includes the results of operations for TSI.
/2/ Includes the results of operations for TSI and Hawaiian Natural Water Company, Inc.
("HNWC"). HNWC was classified as continuing operations in October 2007 (Q1 2008).
/3/ Operating loss is before interest expense.
50
The carrying amounts (net of allowances) of the major classes of assets and
liabilities included in discontinued operations are as follows (in millions):
September September
2008 /1/ 2007 /2/
---------- ----------
Fixed assets - Total noncurrent assets of
discontinued operations $ 2.0 $ 2.1
========== ==========
Accounts payable $ 0.5 $ 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 $ 4.0 $ 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 of TSI and HNWC. The residual assets and
liabilities of HNWC were classified as continuing operations in October 2007 (Q1 2008).
/3/ TSI's related party debt obligations were in default at September 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
September 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%
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
51
$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 44% of the outstanding
common stock at September 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.
52
4. EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share available to common shareholders is calculated
by dividing income (loss) from continuing operations less preferred stock
dividend requirements and income (loss) from discontinued operations by the
weighted average common shares outstanding for each period. Diluted earnings
(loss) per share available to common shareholders is calculated by dividing
income (loss) from continuing operations less preferred stock dividend
requirements (when anti-dilutive) and income (loss) from discontinued
operations by the sum of the weighted average common shares outstanding and
the weighted average dilutive options, using the treasury stock method.
Stock options and potential common stock outstanding at fiscal 2008 and fiscal
2007 that were anti-dilutive were not included in the computations of diluted
earnings per share. Such potential common shares totaled 12,279 and 20,245
in fiscal 2008 and fiscal 2007, respectively. The average exercise price of
anti-dilutive options and potential common stock was $44.09 and $38.74, in
fiscal 2008 and fiscal 2007, respectively.
For Fiscal Years
----------------------------------
2008 2007
----------------------------------
Basic Basic
----------------------------------
Weighted average number of shares outstanding 536,319 527,062
==================================
Income from continuing operations $ 5,593,198 $ 4,205,753
Deduct: preferred stock dividend requirements (419,839) (418,692)
----------------------------------
$ 5,173,359 $ 3,787,061
==================================
(Loss) income from discontinued operations $ (260,952) $ 234,551
==================================
Net income available to common shareholders $ 4,912,407 $ 4,021,612
==================================
Earnings per share from continuing operations $ 9.65 $ 7.19
(Loss) earnings per share from discontinued operations (0.49) 0.44
----------------------------------
Net earnings per share available to common shareholders $ 9.16 $ 7.63
==================================
2008 2007
----------------------------------
Diluted Diluted
----------------------------------
Weighted average common shares outstanding 536,319 527,062
Weighted average of net additional shares
outstanding assuming dilutive options
exercised and proceeds used to purchase
treasury stock /1/ 314,979 333,059
----------------------------------
Weighted average number of shares outstanding 851,298 860,121
==================================
53
2008 2007
----------------------------------
Diluted Diluted
----------------------------------
Income from continuing operations $ 5,593,198 $ 4,205,753
Deduct: preferred stock dividend requirements /2/ - -
----------------------------------
$ 5,593,198 $ 4,205,753
==================================
(Loss) income from discontinued operations $ (260,952) $ 234,551
==================================
Net income available to common shareholders $ 5,332,246 $ 4,440,304
==================================
Earnings per share from continuing operations $ 6.57 $ 4.89
(Loss)earnings per share from discontinued operations (0.31) 0.27
----------------------------------
Net earnings per share available to common shareholders $ 6.26 $ 5.16
==================================
/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.
5. PROPERTY AND EQUIPMENT, NET:
Property and equipment at fiscal year ends 2008 and 2007 consisted of the
following:
2008 2007
---------------------------
Land $ 648,818 $ 648,818
Buildings and improvements 9,082,533 9,048,798
Warehouse equipment 6,665,006 6,341,848
Furniture, fixtures and
leasehold improvements 7,162,158 7,119,859
Vehicles 1,506,747 1,434,548
Capital equipment leases 368,967 91,343
---------------------------
25,434,229 24,685,214
Less accumulated depreciation
and amortization:
Owned buildings and equipment (14,457,774) (13,461,822)
Capital equipment leases (68,914) (32,624)
---------------------------
$ 10,907,541 $ 11,190,768
===========================
54
6. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill by reporting segment at fiscal year ends 2008 and 2007 was as
follows:
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 at fiscal year ends 2008 and 2007 consisted of the
following:
2008 2007
------------ ------------
Trademarks and tradenames $ 3,373,269 $ 3,373,269
Favorable leases (less accumulated
amortization of $486,000 and $459,199
in fiscal 2007) - 26,801
------------ ------------
$ 3,373,269 $ 3,400,070
============ ============
Goodwill, trademarks and tradenames are considered to have indefinite
useful lives and therefore no amortization has been taken on these assets.
The Company performs its annual impairment testing of goodwill and other
intangible assets during the fourth fiscal quarter of each year. This review
identified no impairments in fiscal 2008 or fiscal 2007.
Amortization expense for intangible assets that are considered to have finite
lives was approximately $0.03 million in fiscal 2008 and approximately $0.04
million in fiscal 2007, respectively. All finite intangible assets were fully
amortized at September 2008.
7. OTHER ASSETS:
Other assets at fiscal year ends 2008 and 2007 consisted of the following:
2008 2007
------------ ------------
Cash surrender value of life
insurance policies $ 808,667 $ 806,633
Debt issuance costs - 98,044
Other 314,585 188,473
------------ ------------
$ 1,123,252 $ 1,093,150
============ ============
55
Debt issuance costs represent fees incurred to obtain the Company's revolving
credit facility and real estate loans, and are being amortized over the terms
of the respective loan agreements. Amortization expense related to these debt
issuance costs was approximately $0.1 million in both fiscal 2008 and 2007.
8. DEBT:
The Company primarily finances it operations through a credit facility
agreement with Bank of America (the "Facility") and long-term debt agreements
with banks.
CREDIT FACILITY
---------------
The Facility consisted of the following at fiscal 2008 and 2007:
2008 2007
---------------------------
Revolving portion of the Facility, interest payable
at the bank's prime rate (5.0% at fiscal 2008),
principal due June 2011 $34,836,872 $37,936,847
Term Note A, payable in monthly installments of $16,333
plus interest at the bank's base rate (5.0% at fiscal
2008), remaining principal due April 2009 364,133 567,333
Term Note B, payable in monthly installments of $100,000
plus interest at the bank's base rate plus 2%
- 350,000
---------------------------
35,201,005 38,854,180
Less current maturities 3,046,000 3,046,000
---------------------------
$32,155,005 $35,808,180
===========================
The significant terms of the Facility at September 2008 include:
- A $55.0 million revolving credit limit, plus the outstanding balance
on Term Note A. Term Note A had an outstanding balance of $0.4 million
at September 30, 2008.
- The Facility bears interest at either the bank's prime rate or at
a LIBOR based rate based on the election made by the Company.
- The Facility provides for an additional $5.0 million of credit available
for inventory purchases. These advances bear interest at the bank's
prime rate plus one-quarter of one-percent (1/4%) per annum and are
payable within 45 days of each advance.
- Lending limits subject to accounts receivable and inventory
limitations, and an unused commitment fee equal to one-quarter of
one percent (1/4%) per annum on the difference between the maximum
loan limit and average monthly borrowings.
56
- Collateral including all of the Company's equipment, intangibles,
inventories, and accounts receivable.
- 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 includes a prepayment penalty equal to a predetermined
percentage of the original maximum loan limit of $60.4 million if the
Company prepays the entire Facility and terminates the credit agreement
before specified dates. The prepayment penalty percentages are as
follows: (1) one percent (1%) if prepayment occurs on or before
June 30, 2009, and (2) one-half of one percent (1/2%) if prepayment
occurs subsequent to June 30, 2009 but on or before June 30, 2010.
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) $7,000,000 for the twelve months ending September 30, 2008 and;
(b) $1,000,000 for the three months ending December 31, 2008 and;
(c) $2,000,000 for the six months ending March 31, 2009
The Company was in compliance with the required debt service and minimum
EBITDA covenants at September 2008.
LONG-TERM DEBT:
---------------
In addition to the Facility, the Company also has the following long-term
obligations at fiscal 2008 and fiscal 2007 as follows:
2008 2007
---------------------------
Continuing operations
---------------------
Note payable to a bank ("Real Estate Loan"),
interest payable at a fixed rate of 6.75% with
monthly installments of principal and interest
of $58,303 per month through May 2013 with
remaining principal due June 2013, collateralized
by two owned distribution facilities $5,517,542 $5,786,352
Note payable to a bank, interest payable monthly at a
fixed rate of 6.33% plus monthly principal payments of
$4,100 through December 2009 at which time the remaining
principal is due, collateralized by the Rapid City
building and equipment 820,000 869,200
Note payable to a bank, interest payable monthly at a
fixed rate of 6.33% plus monthly principal payments of
$8,000 through July 2009 collateralized by the Rapid City
building and equipment 71,429 167,429
Obligations under capital leases, payable in monthly
installments with interest rates from 4.91% to 8.25%
through February 2011 288,533 108,273
57
2008 2007
---------------------------
Notes payable, interest payable at a fixed rate between
8.0% - 9.5% with monthly installments of principal and
interest of $2,226 - $2,677 per month through July 2011
collateralized by delivery vehicles 136,205 180,805
Note payable, interest payable discounted at a rate of
8.25% with quarterly installments of principal and
interest of $31,250 - $46,875 through October 2011,
secured by Mr. Wright's personal guaranty (see Note 12) 479,300 579,418
---------------------------
7,313,009 7,691,477
Less current maturities - continuing operations 787,128 568,024
---------------------------
$6,525,881 $7,123,453
===========================
Discontinued operations
-----------------------
Note payable, fixed rate of 5.0% compounded annually,
principal and interest due September 2012,
collateralized by substantially all of the assets
of TSI 5,000,000 5,000,000
Revolving credit facility due to a related party, principal
and interest due December 2005, bearing interest at 8.0%
per annum, collateralized by a second mortgage on an
equal basis with the Company's existing second mortgage
on TSI's real property /1/ 1,000,000 1,000,000
Notes due to related parties, principal and interest
due December 2005, interest at 7.0% /1/ 1,000,000 1,000,000
Notes due to related party, principal and interest
due December 2005, bearing interest at 300 basis
points above the yield on 10-year treasury notes
(6.69% at September 2008) /1/ 750,000 750,000
---------------------------
7,750,000 7,750,000
Less current maturities - discontinued operations 2,750,000 2,750,000
---------------------------
$5,000,000 $5,000,000
===========================
The aggregate minimum principal maturities of the long-term debt for each
of the five fiscal years following September 2008 are as follows:
Fiscal Year Ending
------------------
2009 /2/ $ 3,537,128
2010 1,466,524
2011 580,256
2012 5,437,603
2013 4,041,498
Thereafter -
------------
$ 15,063,009
============
/1/ Represents TSI notes payable to related parties which were in default at September
2008 and September 2007. TSI has not obtained associated waivers and amounts have
been classified as current liabilities discontinued operations.
/2/ Includes $2.8 million in TSI notes payable to related parties which were in default
at September 2008 and September 2007.
58
Market rate risk for fixed rate debt is estimated as the potential increase
in fair value of debt obligations resulting from decreases in interest rates.
Based on discounted cash flows using current market rates for similar
agreements, the fair value of the Company's long-term debt obligations
approximated carrying value at September 2008.
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 Facility. The M&I loans contain
cross default provisions which cause all loans with M&I to be considered in
default if any one of the loans where M&I is a lender, including the revolving
credit facility, is in default. In addition, the M&I loans contain co-terminus
provisions which require all loans with M&I to be paid in full if any of the
loans are paid in full prior to the end of their specified terms.
Capital leases
--------------
The Company has several capital leases for office and warehouse equipment.
As of September 2008, the outstanding balances on the capital leases totaled
approximately $0.3 million.
OTHER
-----
AMCON has issued a letter of credit in the amount of approximately
$0.8 million to its workers' compensation insurance carrier as part of
its self-insured loss control program.
9. OTHER INCOME, NET:
Other income, net consisted of the following for fiscal 2008 and 2007:
2008 2007
--------------------------------
Interest income $ (54,047) $ (56,020)
Royalty (31,041) (66,732)
Other (29,525) (71,856)
--------------------------------
$ (114,613) $ (194,608)
================================
10. INCOME TAXES:
The components of income tax expense from continuing operations for fiscal
2008 and fiscal 2007 consisted of the following:
2008 2007
--------------------------------
Current: Federal $ 346,453 $ 170,344
Current: State 127,895 171,202
--------------------------------
474,348 341,546
--------------------------------
59
2008 2007
--------------------------------
Deferred: Federal 2,489,052 2,060,146
Deferred: State 230,600 224,308
--------------------------------
2,719,652 2,284,454
--------------------------------
Income tax expense $ 3,194,000 $ 2,626,000
================================
The difference between the Company's income tax expense in the accompanying
financial statements and that which would be calculated using the statutory
income tax rate of 34% on income before income taxes is as follows for fiscal
2008 and fiscal 2007:
2008 2007
--------------------------------
Tax at statutory rate $ 2,987,648 $ 2,322,795
Amortization of goodwill and
other intangibles (5,207) (5,302)
Nondeductible business expenses 34,554 34,286
State income taxes, net of
federal tax benefit 236,607 112,993
Valuation allowance, state net
operating losses 43,822 (37,428)
Other (103,424) 198,656
--------------------------------
$ 3,194,000 $ 2,626,000
================================
Temporary differences between the financial statement carrying balances and
tax basis of assets and liabilities giving rise to the net deferred tax asset
at fiscal year ends 2008 and 2007 relate to the following:
2008 2007
--------------------------------
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 290,435 $ 207,644
Accrued expenses 834,611 756,854
Inventory 332,528 272,234
AMT credit carry forwards 58,352 405,105
Other 61,597 65,054
--------------------------------
1,577,523 1,706,891
Noncurrent:
Fixed assets $ 788,159 $ 766,457
Intangible assets 1,174,815 1,571,628
Net operating loss carry
forwards - federal 610,051 2,867,960
Net operating loss carry
forwards - state 910,289 944,887
Other - 27,173
--------------------------------
3,483,314 6,178,105
--------------------------------
60
2008 2007
--------------------------------
Total deferred tax assets 5,060,837 7,884,996
Valuation allowance (1,145,979) (1,102,157)
--------------------------------
Net deferred tax assets $ 3,914,858 $ 6,782,839
================================
Deferred tax liabilities:
Current:
Trade discounts $ 316,914 $ 260,502
--------------------------------
316,914 260,502
Noncurrent:
Fixed assets 783,590 696,522
Goodwill 608,185 524,720
Section 481 deferral 711,389 1,086,663
--------------------------------
2,103,164 2,307,905
--------------------------------
Total deferred tax liabilities $ 2,420,078 $ 2,568,407
================================
Net deferred tax assets (liabilities):
Current $ 1,260,609 $ 1,446,389
Noncurrent 234,171 2,768,043
--------------------------------
$ 1,494,780 $ 4,214,432
================================
The Company's deferred tax asset at September 2008 related to federal net
operating loss carryforwards was approximately $0.6 million and relates to
the purchase of HNWC in fiscal 2002. The utilization of HNWC's net operating
loss of $1.8 million at September 2008 is limited by Internal Revenue Code
Section 382 to approximately $0.1 million per year through 2022. As of
September 30, 2008, the Company had a valuation allowance of approximately
$1.1 million against certain state and federal net operating losses, which
more likely than not will not be utilized.
The Company adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes," on October 1, 2007. 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 Consolidated Statements of Operations. There were no
material changes to unrecognized tax benefits, interest, or penalties during
fiscal 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 2005 and forward remain open
under U.S. and state statutes.
61
11. PROFIT SHARING PLAN:
AMCON maintains a profit sharing plan (i.e. a section 401(k) plan) covering
substantially all employees. The plan allows employees to make voluntary
contributions up to 100% of their compensation, subject to Internal Revenue
Service limits. The Company matches 50% of the first 4% contributed and
100% of the next 2% contributed for a maximum match of 4% of employee
compensation. The Company made matching contributions to the profit sharing
plan of approximately $0.6 million and $0.5 million (net of employee
forfeitures) in fiscal 2008 and 2007, respectively.
12. RELATED PARTY TRANSACTIONS:
The Company was charged fees of $72,000 in both fiscal 2008 and fiscal 2007
by the AMCON Corporation, the former parent of the Company, as consideration
for office rent and management services. Mr. Wright (the Company's founder,
largest common shareholder, and director), owns a controlling interest in the
AMCON Corporation. These fees have been included as a component of selling,
general and administrative expense.
Mr. Wright personally guarantees a note payable issued in conjunction with
the Television Events and Marketing, Inc. ("TEAM") litigation settlement as
discussed in Note 8. The Company pays the Chairman an annual fee equal to 2%
of the guaranteed principal in return for his personal guarantee. The amount
guaranteed in connection with this settlement was approximately $0.5 million
at September 2008. The Company paid Mr. Wright approximately $12,000 and
$3,000 during fiscal 2008 and fiscal 2007, respectively, related to this
guarantee. This guarantee is secured by a pledge of the Company's shares in
Chamberlin's, Akin's, HNWC, and TSI.
Through March 2008, Mr. Wright personally guaranteed the repayment of the
Facility and certain term loans. In return for this guarantee, the Company
paid Mr. Wright a fee equal to 2% of the guaranteed principal, which was
capped at $10.0 million. The Company paid Mr. Wright approximately $25,000
and $116,000 during fiscal 2008 and fiscal 2007, respectively, related to this
guarantee.
13. COMMITMENTS AND CONTINGENCIES:
Future Lease Obligations
------------------------
The Company leases certain office and warehouse equipment under capital
leases. The carrying value of these assets was approximately $0.3 million
and $0.1 million at fiscal 2008 and fiscal 2007, respectively, net of
accumulated amortization of approximately $0.1 million in both periods.
The Company also leases various office and warehouse facilities and equipment
under noncancellable operating leases. Rents charged to expense under these
operating leases during fiscal 2008 and 2007 totaled approximately
$3.8 million and $4.2 million, respectively.
At September 2008 the minimum future lease commitments for continuing and
discontinued operations were as follows:
62
Capital Operating
Fiscal Year Ending Leases Leases
------------------ --------------------------
2009 $ 148,940 $ 3,752,209
2010 128,128 3,570,629
2011 33,743 2,882,732
2012 - 2,337,257
2013 - 1,723,763
Thereafter - 1,974,864
--------------------------
Total minimum lease payments $ 310,811 $ 16,241,454
============
Less amount representing interest 22,278
-----------
Present value of net minimum
lease payments $ 288,533
===========
Liability Insurance
-------------------
The Company carries property, general liability, vehicle liability, directors
and officers liability and workers' compensation insurance. Additionally, the
Company carries an umbrella liability policy to provide excess coverage over
the underlying limits of the aforementioned primary policies.
The Company's insurance programs for workers' compensation, general liability,
and employee related health care benefits are provided through high deductible
or self-insured programs. Claims in excess of self-insurance levels are fully
insured. Accruals are based on claims filed and estimates of claims incurred
but not reported.
The Company's liabilities for unpaid and incurred, but not reported claims,
for workers' compensation and health insurance at fiscal 2008 and 2007 was
$1.3 million and $1.4 million, respectively. These amounts are included in
accrued expenses in the accompanying Consolidated Balance Sheets. While the
ultimate amount of claims incurred are dependent on future developments, in
the Company's opinion, recorded reserves are adequate to cover the future
payment of claims previously incurred. However, it is reasonably possible
that recorded reserves may not be adequate to cover the future payment of
claims.
Adjustments, if any, to claims estimates previously recorded, resulting from
actual claim payments, are reflected in operations in the periods in which
such adjustments are known.
Trinity Springs. Inc. / Crystal Paradise Holdings, Inc. Litigation
------------------------------------------------------------------
In September 2007, the Company signed a Mutual Release and Settlement
Agreement (the "Settlement Agreement") to resolve litigation among and
between AMCON, TSI, and Crystal Paradise Holdings, Inc. ("CPH") related to
a 2004 Asset Purchase Agreement ("Asset Purchase Agreement"), under which TSI
acquired certain assets from CPH.
63
In conjunction with the Settlement Agreement, AMCON entered into a $5.0
million note payable to CPH. The note is due in September 2012 and accrues
interest at 5.0%. The Settlement Agreement also provides CPH with an option
to purchase TSI's remaining assets for a price equivalent to the amount due
CPH under the $5.0 million note payable, plus accrued interest. This option
expires March 31, 2009. If CPH elects to exercise its asset purchase option,
CPH is required to cancel the $5.0 million note payable, including any accrued
interest. As of September 30, 2008, CPH had not yet exercised its asset
purchase option.
The Company has recorded a $1.5 million pre-tax deferred gain in connection
with the Settlement Agreement. This deferred gain has been classified as a
component of noncurrent liabilities of discontinued operations in the
Company's Consolidated Balance Sheets. The deferred gain will be recognized
upon the earlier of CPH's election to exercise the asset purchase option or
the expiration of the asset purchase option.
14. EQUITY-BASED INCENTIVE AWARDS:
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. No shares have been issued under the
Stock Option Plan since fiscal 2003 and all associated compensation expense
has been fully amortized.
In April 2007, the Company's shareholders approved the award of 25,000
non-qualified stock options to Christopher Atayan, the Company's Chief
Executive Officer ("CEO"), Chairman, and a Company director. 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 September 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%
64
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
Date Exercise Price Options Exercisable
Outstanding
-------------------------------------------------------------
Fiscal 1999 $ 45.68 - $ 51.14 6,591 6,591
Fiscal 2000 $ 34.50 3,123 3,123
Fiscal 2003 $ 28.80 3,170 3,170
Fiscal 2007 $ 18.00 25,000 8,333
------ ------
37,884 21,217
====== ======
At September 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
Date Exercise Price Options Exercisable
Outstanding
------------------------------------------------------------------
Fiscal 1999 $ 36.82 - $ 49.09 2,568 2,568
Fiscal 2002 $ 26.94 834 834
Fiscal 2003 $ 28.26 834 834
------ ------
4,236 4,236
====== ======
The following summarizes stock options outstanding at September 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 0.63 years $47.35 9,159 $47.35
2000 Options $34.50 3,123 1.70 years $34.50 3,123 $34.50
2002 Options $26.94 834 3.87 years $26.94 834 $26.94
2003 Options $28.26-$28.80 4,004 4.24 years $28.69 4,004 $28.69
2007 Options $18.00 25,000 8.25 years $18.00 8,333 $18.00
------ ------ ------ ------
42,120 $26.80 25,453 $32.56
====== ====== ====== ======
65
The following is a summary of the activity of the stock plans during
fiscal 2008.
September 2008
-----------------
Weighted
Number Average
of Exercise
Shares Price
-----------------
Outstanding at September 2007 51,760 $24.81
Granted - -
Exercised (9,461) 15.68
Forfeited/Expired (179) 41.84
-----------------
Outstanding at September 2008 42,120 $26.80
=================
Options exercisable at end of period 25,453
========
The Company's stock options have varying vesting schedules, ranging up
to five years and expiring ten years subsequent to the grant date.
Net income before incomes taxes included stock option compensation
expense of approximately $0.1 million in both fiscal 2008 and fiscal 2007.
Total unamortized compensation expense related to stock options at September
2008 totaled approximately $0.2 million. This unamortized compensation
expense is expected to be amortized over approximately the next fiscal year
(the expected weighted-average period).
The aggregate intrinsic value of stock options outstanding at September 2008
and September 2007 was approximately $0.2 million and $0.4 million,
respectively. The aggregate intrinsic value of stock options exercisable was
approximately $0.1 million at both September 2008 and September 2007.
The total intrinsic value of stock options exercised during fiscal 2008 and
fiscal 2007 was approximately $0.1 million and $0.02 million, respectively.
The total fair value of stock options vested in fiscal 2008 and 2007 was
approximately $0.2 million and $0.01 million, respectively.
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.
66
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 grant date/3/: $963,000 $229,000
Intrinsic value of awards outstanding:
at September 2008 $588,000 $183,750
/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 $0.3 million in fiscal 2008. Total unamortized compensation expense
related to restricted stock awards at September 2008 was approximately
$0.9 million. This unamortized compensation expense is expected to be
amortized over approximately the next two fiscal years (the expected weighted-
average period).
The following summarizes restricted stock activity under the Omnibus Plan
during fiscal 2008:
September 2008
----------------------------
Number Weighted Average
of Grant Date
Shares Fair Value
----------------------------
Nonvested restricted stock
at September 2007 - $ -
Granted 31,500 40.16
Vested/Issued - -
Forfeited/Expired - -
----------------------------
Nonvested restricted stock
at September 2008 31,500 $40.16
============================
67
15. 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
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
---------------------------------------------------------------------
FISCAL YEAR ENDED 2008:
External revenues:
Cigarettes $ 604,064,437 $ - $ - $ 604,064,437
Confectionery 61,831,556 - - 61,831,556
Health food - 39,218,465 - 39,218,465
Tobacco, food service & other 155,336,664 - - 155,336,664
---------------------------------------------------------------------
Total external revenues 821,232,657 39,218,465 - 860,451,122
Depreciation 1,006,613 350,092 2,712 1,359,417
Amortization - 26,801 - 26,801
Operating income (loss) 12,159,376 3,701,901 (4,202,477) 11,658,800
Interest expense 705,981 998,973 1,281,261 2,986,215
Income (loss) from continuing
operations before taxes 11,493,183 2,746,712 (5,452,697) 8,787,198
Total assets 77,462,906 11,726,718 4,115,734 93,305,358
Capital expenditures 681,533 163,623 - 845,156
FISCAL YEAR ENDED 2007:
External revenues:
Cigarettes $ 607,831,882 $ - $ - $ 607,831,882
Confectionery 57,515,227 - - 57,515,227
Health food - 37,880,246 - 37,880,246
Tobacco, food service & other 150,339,157 - - 150,339,157
---------------------------------------------------------------------
Total external revenues 815,686,266 37,880,246 - 853,566,512
Depreciation 1,256,223 535,265 419 1,791,907
Amortization - 39,733 - 39,733
Operating income (loss) 12,864,294 3,130,394 (4,541,219) 11,453,469
Interest expense 1,017,846 1,506,402 2,292,076 4,816,324
Income (loss) from continuing
operations before taxes 11,886,864 1,671,275 (6,726,386) 6,831,753
Total assets 73,617,793 11,857,395 6,588,397 92,063,585
Capital expenditures 300,897 213,380 - 514,277
/1/ Includes intercompany eliminations, charges incurred by the holding company,
and assets of discontinued operations.
68
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
ITEM 9A(T). CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in company
reports filed or submitted under the Securities Exchange Act of 1934 (the
"Exchange Act") is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in company reports filed or submitted under the Exchange Act is
accumulated and communicated to management, including our principal executive
officer and principal financial and accounting officer, as appropriate to
allow timely decisions regarding required disclosure.
As required by Rules 13a-15(e) and 15d-15(e) under the Exchange Act, an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as of September 30, 2008 was made under the
supervision and with the participation of our senior management, including our
principal executive officer and principal financial officer. Based upon that
evaluation, our principal executive officer and principal financial and
accounting officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rule 13a-15(f) under
the Exchange Act. Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our internal
control over financial reporting includes those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect our transactions and the dispositions of our assets; (2)
provide reasonable assurance that our transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with appropriate authorizations; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material
effect on our financial statements.
Because of its inherent limitations, a system of internal control over
financial reporting can provide only reasonable assurance and may not prevent
or detect all misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Further, because of changes in
conditions, effectiveness of internal control over financial reporting may
vary over time.
69
We have completed our evaluation and testing of our internal control over
financial reporting as required by Section 404 of Sarbanes-Oxley and Item
308T(a) of Regulation S-K (Internal Control Report). Under the supervision
and with the participation of our management, we assessed the effectiveness
of our internal control over financial reporting as of September 30, 2008.
In making this assessment, we used the criteria set forth in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on its assessment,
management has concluded that our internal control over financial reporting
was effective as of September 30, 2008.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this annual report.
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial
Officer, do not expect that our disclosure controls and procedures will
prevent all errors and fraud. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance of achieving the desired control
objectives. Further, the design of a control system must reflect the fact
that there are resource constraints, and management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management's override of the control. The design of any system of controls
also is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Changes in Internal Control Over Financial Reporting
During the fourth fiscal quarter of fiscal 2008, the Company implemented
various polices and procedures in connection with its Section 404
Sarbanes-Oxley compliance efforts. Aside from such changes, there have been
no changes in the Company's internal control over financial reporting that
occurred during the quarter ended September 30, 2008 that have materially
affected or are reasonably likely to materially affect the Company's internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
70
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Registrant's Proxy Statement to be used in connection with the 2008 Annual
Meeting of Shareholders (the "Proxy Statement") will contain under the
captions "Item 1: Election of Directors--What is the structure of our Board
and how often are directors elected?", "Item 1: Election of Directors--Who are
this year's nominees?", "Item 1: Election of Directors--What is the business
experience of the nominees and of our continuing Board members?", "Section
16(a) Beneficial Ownership Reporting Compliance", and "Corporate Governance
and Board Matters--Committees of the Board--Audit Committee", certain
information required by Item 10 of Form 10-K and such information is
incorporated herein by this reference.
The information appearing under the caption "Executive Officers of the
Registrant" in Part I of this report also is incorporated herein by reference.
Our Board of Directors has adopted a code of ethical conduct that applies to
our executive officers, including our principal executive officer and our
principal financial officer. This code of ethical conduct is available
without charge to any person who requests it by writing to our corporate
secretary. It also is available on our internet website (www.amcon.com).
Any substantive amendment to, or waiver from, a provision of this code that
applies to our principal executive officer or principal financial officer will
be disclosed on our internet website.
ITEM 11. EXECUTIVE COMPENSATION
The Registrant's Proxy Statement will contain under the captions "Executive
Compensation and Related Matters", "Corporate Governance and Board
Matters--Director Compensation" and "Corporate Governance and Board
Matters--Compensation Committee Interlocks and Insider Participation",
the information required by Item 11 of Form 10-K, and such information is
incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Registrant's Proxy Statement will contain under the captions "Ownership
of Our Common Stock by Our Directors and Executive Officers and Other
Principal Stockholders" and "Compensation of Executive Officers - Equity
Compensation Plan Information" the information required by Item 12 of Form
10-K and such information is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The Registrant's Proxy Statement will contain under the captions "Certain
Relationships and Related Transactions", "Item 1: Election of Directors--What
is the structure of our Board and how often are directors elected?" and
"Corporate Governance and Board Matters--Committees of the Board", the
information required by Item 13 of Form 10-K and such information is
incorporated herein by this reference.
71
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Registrant's Proxy Statement will contain under the caption "Independent
Auditor Fees and Services", the information required by Item 14 of Form 10-K
and such information is incorporated herein by this reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements, Financial Statement Schedules, and Exhibits
(1) Financial Statements
The financial statements filed as part of this filing are listed on
the index to Consolidated Financial Statements, Item 8, page 38.
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable or not required or the information required to be set
forth therein is included in the Consolidated Financial Statements,
Item 8, or notes thereto.
(3) Exhibits
3.1 Restated Certificate of Incorporation of the Company, as amended
May 12, 2004
3.2 Certificate of Amendment of Certificate of Incorporation dated
March 18, 2005
3.3 Second Corrected Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Securities of AMCON Distributing Company
dated August 5, 2004 (incorporated by reference to Exhibit 3.3 of
AMCON's Quarterly Report on Form 10-Q filed on August 9, 2004)
3.4 Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Securities of AMCON Distributing Company dated
October 8, 2004 (incorporated by reference to Exhibit 3.4 of AMCON's
Annual Report on Form 10-K filed on January 7, 2005)
3.5 Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock dated March 6, 2006 (incorporated by
reference to Exhibit 4.1 of AMCON's Current Report on Form 8-K filed
on March 13, 2006)
3.6 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).
72
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit
4.1 of AMCON's Registration Statement on Form S-1 (Registration No.
33-82848) filed on August 15, 1994)
4.2 Specimen Series A Convertible Preferred Stock Certificate (incorporated
by reference to Exhibit 4.2 of AMCON's Quarterly Report on Form 10-Q
filed on August 9, 2004)
4.3 Specimen Series B Convertible Preferred Stock Certificate (incorporated
by reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed
on January 7, 2005)
4.4 Specimen Series C Convertible Preferred Stock Certificate (incorporated
by reference to Exhibit 4.2 of AMCON's Current Report on Form 8-K filed
on March 13, 2006)
4.5 Securities Purchase Agreement dated June 17, 2004 between AMCON
Distributing Company, William F. Wright and Draupnir, LLC (incorporated
by reference to Exhibit 4.3 of AMCON's Quarterly Report on Form 10-Q
filed on August 9, 2004)
4.6 Securities Purchase Agreement dated October 8, 2004 between AMCON
Distributing Company and Spencer Street Investments, Inc. (incorporated
by reference to Exhibit 4.5 of AMCON's Annual Report on Form 10-K filed
on January 7, 2005)
4.7 Securities Purchase Agreement dated March 3, 2006 between AMCON
Distributing Company and Draupnir Capital, LLC. (incorporated
by reference to Exhibit 4.3 of AMCON's Current Report on Form 8-K filed
on March 13, 2006)
10.1 Amended and Restated Loan and Security Agreement, dated September 30,
2004, between the Company and LaSalle National Bank, as agent
(incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on
Form 10-K filed on January 7, 2005)
10.2 Revised First Amendment To Amended and Restated Loan and Security
Agreement, dated April 14, 2005 (incorporated by reference to Exhibit
10.2 of AMCON's Quarterly Report on Form 10-Q filed on May 27, 2005)
10.3 Revised Second Amendment to Amended and Restated Loan and Security
Agreement, dated May 23, 2005 (incorporated by reference to Exhibit
10.3 of AMCON's Quarterly Report on Form 10-Q filed on May 27, 2005)
10.4 Third Amendment to Amended and Restated Loan and Security Agreement,
dated August 12, 2005 (incorporated by reference to Exhibit 10.4 of
AMCON's Quarterly Report on Form 10-Q filed on August 22, 2005)
10.5 Fourth Amendment and Waiver to Amended and Restated Loan and Security
Agreement, dated January 9, 2006 (incorporated by reference to Exhibit
10.5 of AMCON's Annual Report on Form 10-K filed on August 23, 2006)
73
10.6 Fifth Amendment to Amended and Restated Loan and Security Agreement,
dated February 8, 2006 (incorporated by reference to Exhibit 10.6 of
AMCON's Annual Report on Form 10-K filed on August 23, 2006)
10.7 Sixth Amendment to Amended and Restated Loan and Security Agreement,
dated March 3, 2006 (incorporated by reference to Exhibit
10.1 of AMCON's Current Report on Form 8-K filed on March 13, 2006)
10.8 Seventh Amendment to Amended and Restated Loan and Security Agreement,
dated November 6, 2006 (incorporated by reference to Exhibit 10.37 of
AMCON's Quarterly Report on Form 10-Q filed on November 20, 2006)
10.9 Eighth Amendment to Amended and Restated Loan and Security Agreement,
dated December 28, 2006 (incorporated by reference to Exhibit 10.9 of
AMCON's Annual Report on Form 10-K filed December 29, 2006)
10.10 Ninth Amendment to Amended and Restated Loan and Security Agreement,
dated July 17, 2008 (incorporated by reference to Exhibit 10.9
of AMCON's Quarterly Report on Form 10-Q filed July 17, 2008)
10.11 Tenth Amendment to Amended and Restated Loan and Security Agreement,
dated October 15, 2008
10.12 First Amended and Restated AMCON Distributing Company 1994 Stock Option
Plan (incorporated by reference to Exhibit 10.17 of AMCON's Current
Report on Form 10-Q filed on August 4, 2000)*
10.13 AMCON Distributing Company Profit Sharing Plan (incorporated by
reference to Exhibit 10.8 of Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-82848) filed on
November 8, 1994)*
10.14 2007 Omnibus Incentive Plan dated April 17, 2007 (incorporated herein
by reference to Exhibit 10.12 to AMCON's Annual Report on Form 10-K
filed on November 9, 2007) *
10.15 Nonqualified Stock Option Agreement for Christopher H. Atayan
dated December 12, 2006 (incorporated herein by reference to Exhibit
10.13 to AMCON's Annual Report on Form 10-K filed on November 9, 2007)*
10.16 Agreement, dated September 26, 2006, between the Company and
William F. Wright regarding Mr. Wright's services to the Company
(incorporated by reference to Exhibit 10.1 of AMCON's Current Report
on Form 8-K filed on October 10, 2006)*
10.17 Agreement, dated December 10, 2004 between AMCON Distributing Company
and William F. Wright with respect to split dollar life insurance
(incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on
Form 10-K filed on January 7, 2005)*
10.18 Agreement, dated December 15, 2004 between AMCON Distributing Company
and Kathleen M. Evans with respect to split dollar life insurance
(incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on
Form 10-K filed on January 7, 2005)*
74
10.19 Security Agreement, dated June 17, 2004 by and between TSL Acquisition
Corp., AMCON Distributing Company and Trinity Springs, Ltd.
(incorporated by reference to Exhibit 10.17 of AMCON's Quarterly Report
on Form 10-Q filed on August 9, 2004)
10.20 Guaranty and Suretyship Agreement, dated June 17, 2004, by and between
AMCON Distributing Company and Trinity Springs, Ltd. (incorporated by
reference to Exhibit 10.19 of AMCON's Quarterly Report on Form 10-Q
filed on August 9, 2004)
10.21 Amended and Restated Guaranty and Suretyship Agreement dated September
30, 2007 by AMCON Distributing Company for the benefit of Crystal
Paradise Holdings, Inc. (formerly known as Trinity Springs,
Ltd.)(incorporated herein by reference to Exhibit 10.20 to AMCON's
Annual Report on Form 10-K filed on November 9, 2007)
10.22 Mortgage, dated June 17, 2004, by and between TSL Acquisition Corp.,
AMCON Distributing Company and Trinity Springs, Ltd. (incorporated by
reference to Exhibit 10.20 of AMCON's Quarterly Report on Form 10-Q
filed on August 9, 2004)
10.23 Guaranty Fee, Reimbursement and Indemnification Agreement, dated as of
September 30, 2004, between AMCON Distributing Company and William F.
Wright (incorporated by reference to Exhibit 3.4 of AMCON's Annual
Report on Form 10-K filed on January 7, 2005)
10.24 Amendment to Guaranty Fee, Reimbursement and Indemnification Agreement,
dated July 31, 2007, between AMCON Distributing Company and William
F. Wright (incorporated herein by reference to Exhibit 10.23 to AMCON's
Annual Report on Form 10-K filed on November 9, 2007)
10.25 Guaranty and Suretyship Agreement between William F. Wright and the
Company, dated June 17, 2004, regarding the guaranty of the Company's
indebtedness to Trinity Springs, Ltd. (now Crystal Paradise Holdings)
under the Three Year Note, the Ten Year Note and the Water Royalty
(subject to a $5.0 million cap on the Water Royalty). (incorporated by
reference to Exhibit 10.26 of AMCON's Annual Report on Form 10-K filed
December 29, 2006)
10.26 Secured Promissory Note ($1,000,000), dated December 14, 2004, issued
by Trinity Springs, Inc. to Allen D. Petersen (incorporated by
reference to Exhibit 3.4 of AMCON's Annual Report on Form 10-K filed
on January 7, 2005)
10.27 Modification and Extension of Second Lien Commercial Mortgage,
Assignment of Leases and Rents, and Fixture Filing, dated as of
December 14, 2004 between Trinity Springs, Inc. and Allen D. Petersen
(incorporated by reference to Exhibit 3.4 of AMCON's Annual Report on
Form 10-K filed on January 7, 2005)
10.28 Term Real Estate Promissory Note, dated December 21, 2004, issued by
AMCON Distributing Company to M&I (incorporated by reference to
Exhibit 10.21 of AMCON's Quarterly Report on Form 10-Q filed on
February 14, 2005)
75
10.29 Term Equipment Promissory Note, dated December 21, 2004 issued by AMCON
Distributing Company to M&I (incorporated by reference to
Exhibit 10.22 of AMCON's Quarterly Report on Form 10-Q filed on
February 14, 2005)
10.30 One Hundred Eighty Day Redemption Mortgage and Security Agreement by
and between AMCON Distributing Company and M&I (incorporated by
reference to Exhibit 10.23 of AMCON's Quarterly Report on Form 10-Q
filed on February 14, 2005)
10.31 Security Agreement by and between AMCON Distributing Company and M&I
(incorporated by reference to Exhibit 10.24 of AMCON's Quarterly
Report on Form 10-Q filed on February 14, 2005)
10.32 Promissory Note, dated March 30, 2005 issued by Trinity Springs, Inc.
to Nebraska Distributing Company (incorporated by reference to Exhibit
10.28 of AMCON's Quarterly Report on Form 10-Q filed on August 22,
2005)
10.33 Subordinated Promissory Note, dated August 8, 2005 issued
by Trinity Springs, Inc. to Draupnir, LLC (incorporated by reference
to Exhibit 10.29 of AMCON's Quarterly Report on Form 10-Q filed on
August 22, 2005)
10.34 Subordinated Promissory Note, dated August 8, 2005 issued
by Trinity Springs, Inc. to Aristide Investments, L.P.(incorporated by
reference to Exhibit 10.30 of AMCON's Quarterly Report on Form 10-Q
filed on August 22, 2005)
10.35 Subordination Agreement, dated as of August 8, 2005, among Trinity
Springs, Inc., Artiside Investment L.P., and Draupnir, LLC
(incorporated by reference to Exhibit 10.31 of AMCON's Quarterly Report
on Form 10-Q filed on August 22, 2005)
10.36 $400,000 Subordinated Promissory Note by and between Trinity Springs,
Inc. and Draupnir, LLC dated October 20, 2005 (incorporated by
reference to Exhibit 10.34 of AMCON's Quarterly Report on Form 10-Q
filed on September 29, 2006)
10.37 $200,000 Subordinated Promissory Note by and between Trinity Springs,
Inc. and Draupnir, LLC dated November 7, 2005 (incorporated by
reference to Exhibit 10.35 of AMCON's Quarterly Report on Form 10-Q
filed on September 29, 2006)
10.38 $150,000 Subordinated Promissory Note by and between Trinity Springs,
Inc. and Draupnir, LLC dated December 1, 2005 (incorporated by
reference to Exhibit 10.36 of AMCON's Quarterly Report on Form 10-Q
filed on September 29, 2006)
10.39 $5,000,000 Secured Promissory Note by Trinity Springs, Inc.
for the benefit of Crystal Paradise Holdings, Inc. (also known as
Trinity Springs, Ltd.) dated September 30, 2007 (incorporated herein
by reference to Exhibit 10.39 to AMCON's Annual Report on Form 10-K
filed on November 9, 2007)
76
10.40 Change of Control Agreement between the Company and Christopher H.
Atayan, dated December 29, 2006 (incorporated by reference to Exhibit
10.40 of AMCON's Annual Report on Form 10-K filed on December 29, 2006)*
10.41 Change of Control Agreement between the Company and Kathleen M. Evans,
dated December 29, 2006 (incorporated by reference to Exhibit 10.41 of
AMCON's Annual Report on Form 10-K filed on December 29, 2006)*
10.42 Settlement Agreement and Mutual General Release dated July 31, 2007 by
and between Television Events & Marketing, Inc., Tom Kiely, The Beverage
Group, Inc., AMCON Distributing Company, AMCON Corporation, William F.
Wright, Archie Thornton and The Thornton Works (incorporated herein by
reference to Exhibit 10.42 to AMCON's Annual Report on Form 10-K filed
on November 9, 2007)
10.43 Mutual Release and Settlement Agreement between AMCON Distributing
Company, Trinity Springs, Inc., and Crystal Paradise Holdings, Inc.
dated September 30, 2007 (incorporated herein by reference to Exhibit
10.43 to AMCON's Annual Report on Form 10-K filed on November 9, 2007)
10.44 Asset Purchase Agreement between Hawaiian Natural Water Company, Inc.
and Hawaiian Springs, LLC dated November 20, 2006 (incorporated by
reference to Exhibit 10.42 of AMCON's Quarterly Report on Form 10-Q
filed on January 29, 2007)
10.45 Executive Restricted Stock Award Agreement under the 2007 Omnibus
Incentive Plan*
10.46 Director Restricted Stock Award Agreement under the 2007 Omnibus
Incentive Plan*
11.1 Statement re: computation of per share earnings (incorporated by
reference to Note 4 to the Consolidated Financial Statements included
as a part of this report on Form 10-K under Item 8)
18.1 Preferability Letter Regarding Change in Accounting Principle
(incorporated herein by reference to Exhibit 18.1 to AMCON's Annual
Report on Form 10-K filed on November 9, 2007)
21.1 Subsidiaries of the Company
23.1 Consent of Independent Registered Public Accounting Firm (McGladery &
Pullen LLP)
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
77
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
* Represents management contract or compensation plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
November 5, 2008 AMCON DISTRIBUTING COMPANY
(registrant)
By: /s/ Christopher H. Atayan
-----------------------------
Christopher H. Atayan,
Chief Executive Officer
and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 5th day of November 2008.
Signature Title
--------- -----
/s/ Christopher H. Atayan Chief Executive Officer,
------------------------ Chairman of the Board and Director
Christopher H. Atayan
/s/ Kathleen M. Evans President and Director
------------------------
Kathleen M. Evans
/s/ Andrew C. Plummer Vice President and Chief Financial
------------------------ Officer (Principal Financial and
Andrew C. Plummer Accounting Officer)
78
Signature Title
--------- -----
/s/ William F. Wright Director
------------------------
William F. Wright
/s/ Jeremy W. Hobbs Director
------------------------
Jeremy W. Hobbs
/s/ John R. Loyack Director
------------------------
John R. Loyack
/s/ Raymond F. Bentele Director
------------------------
Raymond F. Bentele
/s/ Stanley Mayer Director
------------------------
Stanley Mayer
/s/ Timothy R. Pestotnik Director
------------------------
Timothy R. Pestotnik
79
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
AMCON Distributing Company
Omaha, Nebraska
We have audited the consolidated financial statements of AMCON Distributing
Company and subsidiaries (the Company) as of September 30, 2008 and 2007 for
the years ended September 30, 2008 and 2007 and have issued our report thereon
dated November 7, 2008, which report expresses an unqualified opinion.
This consolidated financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.
/s/ McGladrey & Pullen LLP
Omaha, Nebraska
November 7, 2008
S-1
AMCON Distributing Company
Consolidated Financial Statement Schedule
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
Net
Amounts
Balance at Provision (Written Off) Balance at
Description Beginning of Period (Benefit) Recovered End of Period
------------------ ---------------------- --------- ------------- -----------------------
Allowance for
doubtful accounts Sep 30, 2006 934,457 82,425 (737,882)/1/ Sep 30, 2007 279,000
Sep 30, 2007 279,000 666,856 (161,856) Sep 30, 2008 784,000
Allowance for
inventory
obsolescence Sep 30, 2006 434,143 49,244 - Sep 30, 2007 483,387
Sep 30, 2007 483,387 101,998 - Sep 30, 2008 585,385
/1/ Includes $405,261 allowance for doubtful accounts for TBG, which was
reclassified from discontinued operations to continuing operations
in fiscal 2006 and written off against the associated accounts
receivable in fiscal 2007.
S-2