UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 31, 2008
OR
/ / Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission File Number 1-15589
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AMCON Distributing Company
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(Exact name of registrant as specified in its charter)
Delaware 47-0702918
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7405 Irvington Road, Omaha NE 68122
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (402) 331-3727
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer", "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
---- ----
Non-accelerated filer (Do not check Smaller reporting company
(if a smaller reporting company) X
---- ----
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act)
Yes No X
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The Registrant had 570,397 shares of its $.01 par value common stock
outstanding as of January 12, 2009.
Form 10-Q
1st Quarter
INDEX
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
--------------------------------------------
Condensed consolidated balance sheets at
December 31, 2008 (unaudited) and September 30, 2008 3
Condensed consolidated unaudited statements of operations
for the three months ended December 31, 2008 and 2007 4
Condensed consolidated unaudited statements of cash flows
for the three months ended December 31, 2008 and 2007 5
Notes to condensed consolidated unaudited
financial statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4T. Controls and Procedures 31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits 33
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Balance Sheets
December 31, 2008 and September 30, 2008
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December 2008 September
(Unaudited) 2008
------------ ------------
ASSETS
Current assets:
Cash $ 355,534 $ 457,681
Accounts receivable, less allowance for doubtful accounts
of $0.8 million at December 2008 and September 2008 23,330,043 27,198,414
Inventories, net 35,504,911 37,330,969
Deferred income taxes 1,278,575 1,260,609
Current assets of discontinued operations 13,793 18,947
Prepaid and other current assets 2,686,082 3,519,650
------------ ------------
Total current assets 63,168,938 69,786,270
Property and equipment, net 10,834,975 10,907,541
Goodwill 5,848,808 5,848,808
Other intangible assets 3,373,269 3,373,269
Deferred income taxes 168,794 234,171
Non-current assets of discontinued operations 2,032,047 2,032,047
Other assets 1,475,194 1,123,252
------------ ------------
$ 86,902,025 $ 93,305,358
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,761,949 $ 14,738,214
Accrued expenses 5,176,971 5,275,697
Accrued wages, salaries and bonuses 1,413,962 2,636,699
Income taxes payable 901,832 313,021
Current liabilities of discontinued operations 4,137,898 4,041,837
Current maturities of credit facility 3,046,000 3,046,000
Current maturities of long-term debt 1,533,919 787,128
------------ ------------
Total current liabilities 31,972,531 30,838,596
Credit facility, less current maturities 24,288,411 32,155,005
Long-term debt, less current maturities 5,581,359 6,525,881
Noncurrent liabilities of discontinued operations 6,562,860 6,542,310
Series A cumulative, convertible preferred stock, $.01 par value
100,000 shares authorized and issued, liquidation preference
$25.00 per share 2,438,355 2,438,355
Series B cumulative, convertible preferred stock, $.01 par value
80,000 shares authorized and issued, liquidation preference
$25.00 per share 1,857,645 1,857,645
Series C cumulative, convertible preferred stock, $.01 par value
80,000 shares authorized and issued, liquidation preference
$25.00 per share 1,982,372 1,982,372
Commitments and contingencies (Note 11)
Shareholders' equity:
Preferred stock, $0.01 par, 1,000,000 shares authorized,
260,000 shares outstanding and issued in Series A, B and C
referred to above - -
Common stock, $.01 par value, 3,000,000 shares authorized,
570,397 shares outstanding at December 2008 and September 2008 5,704 5,704
Additional paid-in capital 7,112,256 6,995,948
Retained earnings 5,100,532 3,963,542
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Total shareholders' equity 12,218,492 10,965,194
------------ ------------
$ 86,902,025 $ 93,305,358
============ ============
The accompanying notes are an integral part of these condensed consolidated unaudited financial
statements.
3
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of Operations
for the three months ended December 31, 2008 and 2007
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2008 2007
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Sales (including excise taxes of
$50.3 million and $51.6 million,
respectively) $ 217,377,363 $ 210,663,237
Cost of sales 201,532,714 195,467,389
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Gross profit 15,844,649 15,195,848
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Selling, general and administrative expenses 12,797,583 12,210,575
Depreciation and amortization 310,334 362,474
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13,107,917 12,573,049
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Operating income 2,736,732 2,622,799
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Other expense (income):
Interest expense 489,199 969,802
Other (income), net (14,067) (33,211)
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475,132 936,591
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Income from continuing operations
before income taxes 2,261,600 1,686,208
Income tax expense 860,000 641,000
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Income from continuing operations 1,401,600 1,045,208
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Discontinued operations (Note 2)
Loss from discontinued operations,
net of income tax benefit of $0.1 million
in December 2008 and December 2007 (102,038) (95,995)
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Net income 1,299,562 949,213
Preferred stock dividend requirements (105,533) (105,533)
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Net income available to common shareholders $ 1,194,029 $ 843,680
============= =============
Basic earnings (loss) per share
available to common shareholders:
Continuing operations $ 2.38 $ 1.76
Discontinued operations (0.19) (0.18)
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Net basic earnings per share
available to common shareholders $ 2.19 $ 1.58
============= =============
Diluted earnings (loss) per share
available to common shareholders:
Continuing operations $ 1.64 $ 1.23
Discontinued operations (0.12) (0.11)
------------- -------------
Net diluted earnings per share
available to common shareholders $ 1.52 $ 1.12
============= =============
Weighted average shares outstanding:
Basic 545,593 533,900
Diluted 856,052 849,187
The accompanying notes are an integral part of these condensed consolidated unaudited financial
statements.
4
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of Cash Flows
for the three months ended December 31, 2008 and 2007
---------------------------------------------------------------------------------------------------
2008 2007
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,299,562 $ 949,213
Deduct: Loss from discontinued operations, net of tax (102,038) (95,995)
------------ ------------
Income from continuing operations 1,401,600 1,045,208
Adjustments to reconcile net income from
continuing operations to net cash flows
from operating activities:
Depreciation 310,334 352,541
Amortization - 9,933
Gain on sale of property and equipment (43,697) (1,625)
Stock based compensation 132,900 42,950
Excess tax deficiency on vesting of equity-based awards 16,592 -
Deferred income taxes 47,411 653,976
Provision for losses on doubtful accounts 77,006 44,000
Provision for losses on inventory obsolescence 92,790 160,885
Changes in assets and liabilities:
Accounts receivable 3,791,365 3,240,720
Inventories 1,733,268 (4,479,409)
Prepaid and other current assets 833,568 759,013
Other assets (351,942) (438,639)
Accounts payable 1,023,735 (2,381,021)
Accrued expenses and accrued wages, salaries and bonuses (1,321,463) (1,297,619)
Income tax payable 572,219 (173,572)
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Net cash flows from operating activities - continuing operations 8,315,686 (2,462,659)
Net cash flows from operating activities - discontinued operations 19,727 (94,926)
------------ ------------
Net cash flows from operating activities 8,335,413 (2,557,585)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (265,971) (280,619)
Proceeds from sales of property and equipment 71,900 888
------------ ------------
Net cash flows from investing activities (194,071) (279,731)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings on bank credit agreement (7,866,594) 2,523,616
Principal payments on long-term debt (197,731) (117,050)
Proceeds from exercise of stock options - 119,637
Excess tax deficiency on vesting of equity-based awards (16,592) -
Dividends on preferred stock (105,533) (105,533)
Dividends on common stock (57,039) -
------------ ------------
Net cash flows from financing activities (8,243,489) 2,420,670
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Net change in cash (102,147) (416,646)
Cash, beginning of period 457,681 717,554
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Cash, end of period $ 355,534 $ 300,908
============ ============
5
2008 2007
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Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 544,238 $ 992,512
Cash paid during the period for income taxes 182,371 101,595
Supplemental disclosure of non-cash information:
Acquisition of equipment through capital leases - 38,090
The accompanying notes are an integral part of these condensed consolidated unaudited financial
statements.
6
AMCON Distributing Company and Subsidiaries
Notes to Condensed Consolidated Unaudited Financial Statements
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
AMCON Distributing Company and Subsidiaries ("AMCON" and "the Company") is
primarily engaged in the wholesale distribution of consumer products in the
Great Plains and Rocky Mountain regions. In addition, the Company operates
thirteen retail health food stores in Florida and the Midwest.
AMCON's wholesale distribution business ("ADC") includes five distribution
centers that sell approximately 14,000 different consumer products, including
cigarettes and tobacco products, candy and other confectionery, beverages,
groceries, paper products, health and beauty care products, frozen and
chilled products and institutional food service products. The Company
distributes products primarily to retailers such as convenience stores,
discount and general merchandise stores, grocery stores and supermarkets,
drug stores and gas stations. In addition, the Company services
institutional customers, including restaurants and bars, schools, sports
complexes and vendors, as well as other wholesalers.
AMCON also operates six retail health food stores in Florida under the name
Chamberlin's Market & Cafe (Chamberlin's) and seven in the Midwest under the
name Akin's Natural Foods Market (Akin's). These stores carry natural
supplements, groceries, health and beauty care products and other food items.
Results for the interim period are not necessarily indicative of results to
be expected for the entire year.
All significant intercompany transactions and balances have been eliminated
in consolidation. Certain information and footnote disclosures normally
included in our annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
In the opinion of management, the accompanying condensed consolidated
unaudited financial statements contain all adjustments necessary to fairly
present the financial information included therein, such adjustments
consisting of normal recurring items. The Company believes that although the
disclosures are adequate to prevent the information presented from being
misleading, these condensed consolidated unaudited financial statements
should be read in conjunction with the Company's annual audited consolidated
financial statements for the fiscal year ended September 30, 2008, as filed
with the Securities and Exchange Commission on Form 10-K.
For purposes of this report, unless the context indicates otherwise, all
references to "we", "us", "our", "Company", and "AMCON" shall mean AMCON
Distributing Company and its subsidiaries. The wholesale distribution
segment of our Company will be separately referred to as "ADC". Additionally,
the three month fiscal periods ended December 31, 2008 and December 31, 2007
have been referred to throughout this quarterly report as Q1 2009 and
Q1 2008, respectively. The fiscal balance sheet dates of December 31, 2008,
December 31, 2007, and September 30, 2008 have been referred to as December
2008, December 2007, and September 2008, respectively.
7
Accounting Changes
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During Q1 2009, the Company adopted the following accounting standards:
The Company adopted the provisions of 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.
The provisions of SFAS 157 apply to all financial instruments which are
measured and reported at fair value on a recurring basis. In February 2008,
the Financial Accounting Standards Board ("FASB") issued FASB Staff Position
("FSP") FAS 157-2, which delayed the effective date of SFAS 157 to fiscal
years beginning after November 15, 2008 (fiscal 2010 for the Company) for
all nonfinancial assets and liabilities, except those that are recognized
or disclosed at fair value in the financial statements on a recurring basis
(at least annually). Assets and liabilities subject to this deferral include
goodwill, intangible assets, and long-lived assets measured at fair value
for impairment assessments, and nonfinancial assets and liabilities initially
measured at fair value in a business combination. As the Company does not
have any financial assets or liabilities measured at fair value on a
recurring basis, nor does it have any nonfinancial assets and liabilities
not subject to the FSP 157-2 delay, the adoption of SFAS No. 157 did not
have any impact on our consolidated financial position or results of
operations.
The Company adopted the provisions of FASB Statement No. 159 ("SFAS 159"),
"The Fair Value Option for Financial Assets and Financial Liabilities".
This standard provides an option for companies to report selected financial
assets and liabilities at fair value. Although the Company adopted the
provisions of SFAS 159, it did not elect the fair value option for any
financial instruments or other items held by the Company. Therefore, the
adoption of SFAS 159 did not have any impact on the Company's consolidated
financial position or results of operations.
The Company adopted the provisions of Emerging Issues Task Force ("EITF")
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. The adoption of EITF 06-10 did not
have any impact on our consolidated financial position or results of
operations.
The Company adopted the provisions of FASB 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 adoption of this standard did not have an
impact on the Company's financial statements.
8
Recently Issued Accounting Pronouncements
-----------------------------------------
The Company is currently evaluating the impact of implementing the following
new accounting standards:
In June 2008, the FASB issued FSP-EITF No. 03-6-1, "Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities". FSP EITF 03-6-1 provides that unvested share-based payment
awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings per share pursuant to the
two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning
after December 15, 2008 (fiscal 2010 for the Company) and interim periods
within those years. Upon adoption, a company is required to retrospectively
adjust its earnings per share data (including any amounts related to interim
periods, summaries of earnings and selected financial data) to conform to the
provisions of FSP EITF 03-6-1.
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). The Company is currently evaluating the impact of implementing
FAS 142-3.
2. DISPOSITION
Discontinued operations include the residual assets, liabilities, and
results of operations of Trinity Springs, Inc. ("TSI") for Q1 2009 and
Q1 2008. TSI operated a water bottling facility in Idaho prior to its
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. If CPH elects to exercise the asset purchase
option, CPH is required to cancel the $5.0 million note payable, including
any accrued interest. CPH's asset purchase option expires March 31, 2009 and
had not been exercised as of December 31, 2008.
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.
9
A summary of discontinued operations is as follows:
Q1 2009 Q1 2008
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Operating loss (44,129) (39,245)
Interest expense (116,009) (115,750)
Income tax benefit (58,000) (59,000)
Loss from discontinued operations (102,038) (95,995)
The carrying amounts (net of allowances) of the major classes of assets and
liabilities included in discontinued operations are as follows (in millions):
December September
2008 2008
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Fixed assets - Total noncurrent assets of
discontinued operations $ 2.0 $ 2.0
========== ==========
Accounts payable $ 0.5 $ 0.5
Accrued expenses 0.8 0.7
Current portion of long-term debt due related party /1/ 2.8 2.8
---------- ----------
Total current liabilities of discontinued operations $ 4.1 $ 4.0
========== ==========
Deferred gain on CPH settlement $ 1.5 $ 1.5
Long-term debt, less current portion 5.1 5.0
---------- ----------
Noncurrent liabilities of discontinued operations $ 6.6 $ 6.5
========== ==========
/1/ TSI's related party debt obligations were in default at both December 2008 and September
2008. TSI has not obtained associated debt default waivers for the related party
obligations and accordingly has classified these obligations as current liabilities
of discontinued operations.
3. CONVERTIBLE PREFERRED STOCK:
The Company had three series of Convertible Preferred Stock outstanding at
December 2008 as identified in the following table:
Series A Series B Series C
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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%
10
The Series A Convertible Preferred Stock ("Series A"), Series B Convertible
Preferred Stock ("Series B"), and Series C Convertible Preferred Stock
("Series C"), collectively (the "Preferred Stock"), are convertible at any
time by the holders into a number of shares of AMCON common stock equal to
the number of preferred shares being converted times a fraction equal to
$25.00 divided by the conversion price. The conversion prices for the
Preferred Stock are subject to customary adjustments in the event of stock
splits, stock dividends and certain other distributions on the Common Stock.
Cumulative dividends for the Preferred Stock are payable in arrears, when, as
and if declared by the Board of Directors, on March 31, June 30, September 30
and December 31 of each year.
In the event of a liquidation of the Company, the holders of the Preferred
Stock, are entitled to receive the liquidation preference plus any accrued
and unpaid dividends prior to the distribution of any amount to the holders
of the Common Stock. The Preferred Stock also contain redemption features
which trigger based on certain circumstances such as a change of control,
bankruptcy, or minimum ownership thresholds in AMCON by Mr. William Wright
("Mr. Wright") and his family. Mr. Wright is AMCON's founder, largest common
shareholder, and a Company director. The shares of Preferred Stock are
optionally redeemable by the Company beginning on various dates, as listed in
the above table, at redemption prices equal to 112% of the liquidation
preference. The redemption prices decrease 1% annually thereafter until the
redemption price equals the liquidation preference, after which date it
remains the liquidation preference. The Company's credit facility prohibits
the redemption of the Series A and Series B. Series C is only redeemable so
long as no event of default is in existence at the time of, or would occur
after giving effect to, any such redemption, and the Company has excess
availability under the credit facility of not less than $2.0 million after
giving effect to any such redemption.
The Company believes that redemption of these securities by the holders is
not probable based on the following evaluation. Our executive officers and
directors as a group beneficially own approximately 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, there is no expectation that there would be any effort by
the holders of the 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.
11
4. INVENTORIES
Inventories consisted of the following at December 2008 and September 2008:
December September
2008 2008
------------ ------------
Finished goods $ 35,504,911 $ 37,330,969
============ ============
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 $0.7 million and $0.6 million
at December 2008 and September 2008, 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.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill by reporting segment of the Company consisted of the following:
December September
2008 2008
------------ ------------
Wholesale $ 3,935,931 $ 3,935,931
Retail 1,912,877 1,912,877
------------ ------------
$ 5,848,808 $ 5,848,808
============ ============
Other intangible assets of the Company consisted of the following:
December September
2008 2008
------------ ------------
Trademarks and tradenames $ 3,373,269 $ 3,373,269
============ ============
Goodwill, trademarks and tradenames are considered to have indefinite
useful lives and therefore no amortization has been taken on these assets.
The Company performs annual impairment testing of goodwill and other
intangible assets during the fourth fiscal quarter of each year.
6. DIVIDENDS:
On October 23, 2008, the Company declared a cash dividend of $0.10 per
common share payable on November 21, 2008 to shareholders of record as
of November 3, 2008. Cash dividends paid to common shareholders during
Q1 2009 totaled $57,039.
12
7. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share available to common shareholders is
calculated by dividing income (loss) from continuing operations less
preferred stock dividend requirements and income (loss) from discontinued
operations by the weighted average common shares outstanding for each period.
Diluted earnings (loss) per share available to common shareholders is
calculated by dividing income (loss) from continuing operations less
preferred stock dividend requirements (when anti-dilutive) and income (loss)
from discontinued operations by the sum of the weighted average common shares
outstanding and the weighted average dilutive options, using the treasury
stock method.
Stock options and potential common stock outstanding at December 2008 and
December 2007 that were anti-dilutive were not included in the computations
of diluted earnings per share. Such potential common shares totaled 41,983
and 9,248 at December 2008 and December 2007, respectively. The average
exercise price of anti-dilutive options and potential common stock was
$26.74 and $47.39 at December 2008 and December 2007, respectively.
For the three months ended December
------------------------------------------------------
2008 2007
------------------------- ------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
Weighted average common
shares outstanding 545,593 545,593 533,900 533,900
Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds
used to purchase treasury
stock and conversion of
preferred stock /1/ - 310,459 - 315,287
----------- ----------- ----------- -----------
Weighted average number of
shares outstanding 545,593 856,052 533,900 849,187
=========== =========== =========== ===========
Income from continuing operations $ 1,401,600 $ 1,401,600 $ 1,045,208 $ 1,045,208
Deduct: preferred stock
dividend requirements /2/ (105,533) - (105,533) -
----------- ----------- ----------- -----------
1,296,067 1,401,600 939,675 1,045,208
=========== =========== =========== ===========
Loss from discontinued
operations $ (102,038) $ (102,038) $ (95,995) $ (95,995)
=========== =========== =========== ===========
Net income available
to common shareholders $ 1,194,029 $ 1,299,562 $ 843,680 $ 949,213
=========== =========== =========== ===========
Income per share from
continuing operations $ 2.38 $ 1.64 $ 1.76 $ 1.23
=========== =========== =========== ===========
Loss per share from
discontinued operations $ (0.19) $ (0.12) $ (0.18) $ (0.11)
=========== =========== =========== ===========
Net earnings per share
available to common shareholders $ 2.19 $ 1.52 $ 1.58 $ 1.12
=========== =========== =========== ===========
13
/1/ Diluted earnings per share calculation includes all stock options,
Convertible Preferred Stock, and restricted stock, in each case, that
are 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.
8. DEBT
The Company has a credit agreement with Bank of America (the "Facility"),
which includes the following significant terms:
- A June 2011 maturity date.
- A $55.0 million revolving credit limit, plus the outstanding balance
on Term Note A. Term Note A had an outstanding balance of $0.3 million
at December 2008.
- The Facility bears interest at either the bank's prime rate or at
a LIBOR based rate at the election of the Company.
- The Facility provides for an additional $5.0 million of credit available
for certain 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.
14
The Facility also includes quarterly debt service and cumulative earnings
before interest, taxes, depreciation and amortization ("EBITDA") financial
covenants. A minimum debt service ratio of 1.0 to 1.0 must be maintained,
as measured by the twelve month period then ended. The cumulative minimum
EBITDA requirements are as follows:
(a) $1,000,000 for the three months ending December 31, 2008 and;
(b) $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 December 2008.
The Company's maximum available credit limit for the revolving portion of the
Facility was $49.5 million at December 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 December 2008, the outstanding balance on the revolving portion of the
Facility was $27.0 million. The Facility bears interest at a variable rate
equal to the bank's prime rate, which was 3.25% at December 2008. Based on
our collateral and loan limits as defined by the Facility agreement, the
Company's excess availability under the Facility at December 2008 was
approximately $22.5 million.
Cross Default and Co-Terminus Provisions
-----------------------------------------
The Company's owned real estate in Bismarck, ND, Quincy, IL, and Rapid City,
SD, and certain warehouse equipment in the Rapid City, SD warehouse is
financed through term loans with Marshall and Ilsley Bank ("M&I"), which is
also a participant lender on the Company's revolving line of credit. The
M&I loans contain cross default provisions which cause all loans with M&I to
be considered in default if any one of the loans where M&I is a lender,
including the revolving credit facility, is in default. In addition, the M&I
loans contain co-terminus provisions which require all loans with M&I to be
paid in full if any of the loans are paid in full prior to the end of their
specified terms.
OTHER
-----
AMCON has issued a letter of credit for $0.8 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.
15
9. EQUITY-BASED INCENTIVE AWARDS
Stock Options
-------------
At December 2008, the Company had two groups of stock option awards issued
and outstanding. The first award group includes incentive and non-qualified
stock options issued to management employees and outside directors pursuant
to the Company's stock-based compensation plan ("the Stock Option Plan").
The Stock Option Plan expired in fiscal 2004 and all compensation expense
related to the plan was fully amortized in prior fiscal periods.
The second award group includes 25,000 non-qualified stock options issued
to the Company's Chief Executive Officer in fiscal 2007. These stock options
vest in equal installments over a three year period and have an exercise
price of $18.00 per share. At December 2008, 16,666 of these stock options
had vested.
Stock options issued and outstanding to management employees at December 2008
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 16,666
------ ------
37,884 29,550
====== ======
Stock options issued and outstanding to the Company's outside directors at
December 2008 are summarized as follows:
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
====== ======
16
The following summarizes all stock options outstanding at December 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 0.38 years $47.35 9,159 $47.35
2000 Options $34.50 3,123 1.45 years $34.50 3,123 $34.50
2002 Options $26.94 834 3.62 years $26.94 834 $26.94
2003 Options $28.26-$28.80 4,004 3.99 years $28.69 4,004 $28.69
2007 Options $18.00 25,000 8.00 years $18.00 16,666 $18.00
------ ------ ------ ------
42,120 $26.80 33,786 $32.56
====== ====== ====== ======
The following is a summary of the activity of the stock plans for the quarter
ended December 2008:
Weighted
Number Average
of Exercise
Shares Price
-----------------
Outstanding at September 2008 42,120 $26.80
Granted - -
Exercised - -
Forfeited/Expired - -
-----------------
Outstanding at December 2008 42,120 $26.80
=================
Options exercisable at end of period 33,786
========
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 compensation expense related to
stock options of approximately $0.03 million in both Q1 2009 and Q1 2008.
Total unamortized compensation expense related to stock options at December
2008 totaled approximately $0.1 million. This unamortized stock 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 December 2007
was approximately $0.4 million and the aggregate intrinsic value of stock
options exercisable at December 2007 was approximately $0.1 million.
At December 2008, stock options outstanding and exercisable had no
intrinsic value.
The total intrinsic value of stock options exercised during Q1 2008 was
approximately $0.2 million. There were no stock options exercised during
Q1 2009. The total fair value of stock options vested in Q1 2009 and
Q1 2008 was approximately $0.1 million and $0.3 million, respectively.
17
Omnibus Plan
------------
The Company has an Omnibus Incentive Plan ("the Omnibus Plan") which
provides for equity incentives to employees. The Omnibus Plan was designed
with the intent of encouraging employees 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.
Pursuant to the Omnibus Plan, the Compensation Committee of the Board of
Directors has authorized and approved the restricted stock awards as
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 December 2008: $264,000 $124,000
/1/ 8,000 shares vested on October 16, 2008. The remaining 16,000 shares will
vest in equal amounts (8,000 per year) on October 16, 2009 and 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 $0.1 million and $0.01 in Q1 2009 and Q1 2008, respectively. Total
unamortized compensation expense related to restricted stock awards at
December 2008 was approximately $0.8 million. This unamortized compensation
expense is expected to be amortized over approximately the next two fiscal
years (the expected weighted-average period).
18
The following summarizes restricted stock activity under the Omnibus Plan
during Q1 2009:
Number Weighted Average
of Grant Date
Shares Fair Value
---------------------------
Nonvested restricted stock
at September 2008 31,500 $40.16
Granted - -
Vested/Issued (8,000) $42.50
Forfeited/Expired - -
---------------------------
Nonvested restricted stock
at December 2008 23,500 $39.35
===========================
10. BUSINESS SEGMENTS
AMCON has two reportable business segments: the wholesale distribution of
consumer products and the retail sale of health and natural food products.
The retail health food stores' operations are aggregated to comprise the
retail segment because such operations have similar economic characteristics,
as well as similar characteristics with respect to the nature of products
sold, the type and class of customers for the health food products and the
methods used to sell the products. 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
------------- ----------- ---------- -------------
THREE MONTHS ENDED DECEMBER 2008:
External revenue:
Cigarettes $ 152,262,945 $ - $ - $ 152,262,945
Confectionery 15,461,696 - - 15,461,696
Health food - 8,980,794 - 8,980,794
Tobacco, food service & other 40,671,928 - - 40,671,928
------------- ----------- ---------- -------------
Total external revenue 208,396,569 8,980,794 - 217,377,363
Depreciation 248,164 61,023 1,147 310,334
Amortization - - - -
Operating income (loss) 3,288,077 587,839 (1,139,184) 2,736,732
Interest expense 132,679 169,545 186,975 489,199
Income (loss) from continuing
operations before taxes 3,159,150 428,609 (1,326,159) 2,261,600
Total assets 71,535,006 11,341,987 4,025,032 86,902,025
Capital expenditures 128,490 137,481 - 265,971
19
Wholesale
Distribution Retail Other /1/ Consolidated
------------- ----------- ---------- -------------
THREE MONTHS ENDED DECEMBER 2007:
External revenue:
Cigarettes $ 149,611,531 $ - $ - $ 149,611,531
Confectionery 14,107,957 - - 14,107,957
Health food - 9,521,555 - 9,521,555
Tobacco, food service & other 37,422,194 - - 37,422,194
------------- ----------- ---------- -------------
Total external revenue 201,141,682 9,521,555 - 210,663,237
Depreciation 231,766 120,319 456 352,541
Amortization - 9,933 - 9,933
Operating income (loss) 2,812,633 811,374 (1,001,208) 2,622,799
Interest expense 230,235 324,206 415,361 969,802
Income (loss) from continuing
operations before taxes 2,589,985 498,470 (1,402,247) 1,686,208
Total assets 73,379,656 11,302,023 6,976,532 91,658,211
Capital expenditures 269,232 11,387 - 280,619
/1/ Includes intercompany eliminations, charges incurred by the holding company,
and assets of discontinued operations.
11. CONTINGENCIES
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.
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 December 31, 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the Management's Discussion and
Analysis and other sections, contains forward looking statements that are
subject to risks and uncertainties and which reflect management's current
beliefs and estimates of future economic circumstances, industry conditions,
20
FORWARD LOOKING STATEMENTS (continued)
company performance and financial results. Forward looking statements
include information concerning the possible or assumed future results of
operations of the Company and those statements preceded by, followed by or
that include the words "future," "position," "anticipate(s)," "expect,"
"believe(s)," "see," "plan," "further improve," "outlook," "should" or
similar expressions. For these statements, we claim the protection of the
safe harbor for forward looking statements contained in the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
not guarantees of future performance or results. They involve risks,
uncertainties and assumptions. You should understand that the following
important factors, in addition to those discussed elsewhere in this document,
could affect the future results of the Company and could cause those results
to differ materially from those expressed in our forward looking statements:
- increases in state and federal excise taxes on cigarette and tobacco
products, including proposed legislation to renew and expand the
State Children's Health Insurance Program ("SCHIP"), which would be
largely funded through significant increases to federal excise taxes
on cigarette and tobacco products
- 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,
- decreased availability of capital resources due to recent events
in the credit markets,
- 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.
Changes in these factors could result in significantly different results.
Consequently, future results may differ from management's expectations.
Moreover, past financial performance should not be considered a reliable
indicator of future performance. Any forward looking statement contained
herein is made as of the date of this document. Except as required by law,
the Company undertakes no obligation to publicly update or correct any
of these forward looking statements in the future to reflect changed
assumptions, the occurrence of material events or changes in future
operating results, financial conditions or business over time.
CRITICAL ACCOUNTING ESTIMATES
Certain accounting estimates used in the preparation of the Company's
financial statements require us to make judgments and estimates and the
financial results we report may vary depending on how we make these
judgments and estimates. Our critical accounting estimates are set forth
in our Form 10-K for the fiscal year ended September 30, 2008, as filed
with the Securities and Exchange Commission. There have been no significant
changes with respect to these policies during the three months ended December
2008.
21
COMPANY OVERVIEW - FIRST FISCAL QUARTER 2009 (Q1 2009)
The following discussion and analysis includes the Company's results of
operations from continuing operations for the three months ended December
2008 and 2007. Continuing operations are comprised of our wholesale
distribution and retail health food segments. A separate discussion of our
discontinued operations has been presented following our analysis of
continuing operations. Accordingly, the sales, gross profit (loss), selling,
general and administrative, depreciation and amortization, direct interest,
other expenses and income tax benefit from our discontinued operations have
been aggregated and reported as income (loss) from discontinued operations
and are not a component of the aforementioned continuing operations
discussion.
During Q1 2009, the Company:
- generated $2.7 million in operating income as compared to $2.6 million
for Q1 2008.
- recognized income from continuing operations per basic share of
$2.38 and $1.76 for the three months ended December 2008 and
December 2007, respectively.
- recognized a loss from discontinued operations per basic share
of ($0.19) and ($0.18) for the three months ended December 2008 and
December 2007, respectively.
- paid a $0.10 dividend per common share.
Wholesale Distribution Segment (ADC)
------------------------------------
Our wholesale distribution segment represents approximately 96% of the
Company's consolidated sales. ADC serves approximately 4,000 retail outlets
in the Great Plains and Rocky Mountain regions and is ranked as a top ten
convenience store supplier according to Convenience Store News. While we
provide our retailers with a broad selection of merchandise in all product
categories, we remain largely dependent on cigarette sales, which account for
approximately 70% of ADC total sales. ADC is also focused on growing its
sales of non-tobacco products, which offer higher profit margins and greater
revenue stream diversity.
The wholesale distribution industry is mature and highly competitive.
To differentiate itself, ADC leverages a number of strategies focused around
providing market-leading customer service programs and offering flexible
delivery capabilities. These strategies have helped position ADC as a
distributor of choice for both small independent retail outlets and multi-
location retail outlets.
ADC has significant alliances with the major cigarette manufacturers which we
believe control over 90% of the cigarette industry volume. While some of our
competitors have focused on the lower-priced cigarette brands, ADC has made a
conscious decision to support and grow our national brand segment and align
our business with the major players in the industry. We believe that it is
important not to compete against the major cigarette manufacturers because of
their commitment to growing and maintaining their market share in a declining
category. Additionally, we believe that consumers' preference for premium
brands currently drives the category volume.
22
The wholesale distribution industry continues to experience significant
changes driven by higher excise taxes, the popularity of deep-discount
cigarette brands, and consolidation within the industry's customer base
(principally convenience stores and tobacco shops). Collectively, we expect
these items will continue to pressure profit margins industry-wide and could
potentially decrease the Company's profitability.
To capitalize on the industry-wide changes mentioned above, ADC
aggressively manages its cost structure, heavily leverages inventory
management strategies, and deploys new technologies and automation tools
where possible. These actions have allowed ADC to maintain competitive
pricing and position itself to capture new business, sell new services to
our existing customers, explore acquisition opportunities, and further
penetrate the convenience store market.
Retail Health Food Segment
--------------------------
AMCON's retail health food stores, which are operated as Chamberlin's Market
& Cafe ("Chamberlin's" or "CNF") and Akin's Natural Foods Market ("Akin's" or
"ANF"), offer thousands of different product selections to their customers.
Chamberlin's, which was first established in 1935, is an award-winning and
highly-acclaimed chain of six health and natural product retail stores, all
offering an extensive selection of natural supplements and herbs, baked
goods, dairy products, and organic produce. Chamberlin's operates all of its
stores in and around Orlando, Florida.
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 high growth
rates as the demand for non-processed natural products (pesticide-free,
hormone-free, non-genetically modified) become popular among more health
conscious consumers. Our retail health food segment has successfully
capitalized on this trend through its continuous efforts offer only the
highest quality products in combination with targeted marketing efforts.
Most recently, however, rising food commodity prices and weak economic
conditions have decreased growth rates industry-wide.
ECONOMIC CONDITIONS
-------------------
The current economic downturn, characterized by falling real estate values,
battered retirement portfolio values, higher food prices, and disruptions in
the availability of credit, have collectively impacted 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.
23
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 will negatively impact purchasing patterns such as the
frequency of shopping trips or price sensitivity. Accordingly, we intend
to continue our conservative strategy of maintaining financial flexibility
and investing in long-term growth opportunities for the Company.
RESULTS OF OPERATIONS - Continuing Operations
SALES:
------
Changes in sales are driven by two primary components:
(i) changes to selling prices, which are largely controlled by
our product suppliers, and excise taxes imposed on
cigarettes and tobacco products by various states; and
(ii) changes in the volume of products sold to our customers, either
due to a change in purchasing patterns resulting from consumer
preferences or the fluctuation in the comparable number of
business days in our reporting period.
Sales by business segment for the three month period ended December 2008 and
December 2007 are as follows (dollars in millions):
Three months
ended December
------------------------
Incr
2008 2007 (Decr)
------ ------- -------
Wholesale distribution segment $ 208.4 $ 201.2 $ 7.2
Retail health food segment 9.0 9.5 (0.5)
------- ------- ------
$ 217.4 $ 210.7 $ 6.7
======= ======= ======
SALES - Q1 2009 vs. Q1 2008 (continuing operations)
---------------------------------------------------
Sales for Q1 2009 increased $6.7 million, or 3.2%, as compared to Q1 2008.
Sales are reported net of costs associated with sales incentives provided to
retailers, totaling $3.8 million in Q1 2009 and $3.6 million in Q1 2008.
Sales in our wholesale distribution segment ("wholesale") increased
$7.2 million, or 3.6%, in Q1 2009 as compared to Q1 2008. This change
included a $2.6 million increase in cigarette sales and a net $4.6 million
increase in our tobacco, beverages, snacks, candy, grocery, health & beauty
products, automotive, food service, and store supplies categories ("Other
Products").
24
Significant items impacting our Q1 2009 wholesale segment sales included:
- $2.6 million increase in cigarette sales over Q1 2008, primarily due
to price increases implemented by major manufacturers. /1/
- $4.6 million net increase in our Other Products category sales over
Q1 2008, primarily the result of higher tobacco, confectionary, food
service, and store supplies sales.
/1/ As price increases are passed on to our customers, they result in a
corresponding increase in the cost of sales.
Sales in our retail health food segment decreased approximately $0.5 million,
or 5.7%, in Q1 2009 as compared to Q1 2008. This decrease was primarily
related to lower sales volumes in our Florida retail stores, which have
been impacted by a severe regional economic downturn and increased
competition from other natural food chains.
GROSS PROFIT - Q1 2009 vs. Q1 2008 (continuing operations)
----------------------------------------------------------
Our gross profit does not include fulfillment costs and costs related
to the distribution network which are included in selling, general and
administrative costs, and may not be comparable to those of other entities.
Some entities may classify such costs as a component of cost of sales.
Cost of sales, a component used in determining gross profit, for the
wholesale and retail segments includes the cost of products purchased from
manufacturers, less incentives we receive which are netted against such
costs.
Gross profit by business segment for the three month period ended
December 2008 and December 2007 are as follows (dollars in millions):
Three months
ended December
----------------------
Incr
2008 2007 (Decr)
------ ------ ------
Wholesale distribution segment $ 12.2 $ 11.3 $ 0.9
Retail health food segment 3.6 3.9 (0.3)
------ ------ ------
$ 15.8 $ 15.2 $ 0.6
====== ====== ======
25
GROSS PROFIT - Q1 2009 vs. Q1 2008 (continuing operations)
----------------------------------------------------------
Overall gross profit for Q1 2009 increased $0.6 million, or 4.3%, as compared
to Q1 2008.
Gross profit in our wholesale segment increased $0.9 million, or 8.0%,
as compared to the same prior year period. This increase is primarily the
result of higher sales volume in our Other Product categories.
Gross profit for the retail health segment decreased $0.3 million in Q1 2009
as compared to Q1 2008. Of this decrease, approximately $0.2 million related
to lower sales volume, with the remaining change attributable to sales mix
and higher throw-out costs.
OPERATING EXPENSE - Q1 2009 vs. Q1 2008
---------------------------------------
Operating expense includes selling, general and administrative expenses and
depreciation and amortization. Selling, general and administrative include
costs related to our sales, warehouse, delivery and administrative
departments for all segments. Specifically, purchasing and receiving costs,
warehousing costs and costs of picking and loading customer orders are all
classified as selling, general and administrative expenses. Our most
significant expenses relate to employee costs, facility and equipment leases,
transportation costs, fuel costs, insurance and professional fees.
Q1 2009 operating expenses increased approximately $0.5 million as compared
to Q1 2008. Significant items impacting operating expenses included a
$0.3 million increase in insurance costs and a $0.2 million increase in
compensation costs.
INTEREST EXPENSE - Q1 2009 vs. Q1 2008
--------------------------------------
Q1 2009 interest expense decreased approximately $0.5 million as compared
to Q1 2008. The decrease in interest expense 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 its revolving credit facility were 3.47% lower
and our average borrowings the revolving credit facility were $6.3 million
lower in Q1 2009 as compared to Q1 2008.
26
DISCONTINUED OPERATIONS - Q1 2009 vs. Q1 2008
---------------------------------------------
Losses from discontinued operations are primarily the result of interest
charges on debt and costs incurred to preserve assets. The Company recorded
a loss from discontinued operations of $0.1 million in both Q1 2009 and
Q1 2008.
Q1 2009 Q1 2008
---------- ----------
Operating loss (44,129) (39,245)
Interest expense (116,009) (115,750)
Income tax benefit (58,000) (59,000)
Loss from discontinued operations (102,038) (95,995)
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 Q1 2009, the Company
generated cash of approximately $8.3 million from operating activities.
The cash generated primarily resulted from higher overall earnings, a
decrease in accounts receivable, inventory, and prepaid assets balances,
and an increase accounts payable balances. These items were partially
offset by a reduction in accrued expenses.
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 $0.2 million of cash
Q1 2009 for investing activities, primarily related to capital expenditures
for property and equipment.
Financing Activities. The Company used cash of $8.2 million for financing
activities during Q1 2009. Of this amount, $7.9 million related to net
payments on the Company's credit facility, $0.2 million related to principal
payments on long-term debt, and $0.1 million related to dividends on the
Company's common and preferred stock.
Cash on Hand/Working Capital. At December 2008, the Company had cash on hand
of $0.4 million and working capital (current assets less current liabilities)
of $31.2 million. This compares to cash on hand of $0.5 million and working
capital of $38.9 million at September 2008.
27
CREDIT AGREEMENT
----------------
The Company has a credit agreement with Bank of America (the "Facility"),
which includes the following significant terms:
- A June 30, 2011 maturity date.
- A $55.0 million revolving credit limit, plus the outstanding balance
on Term Note A. Term Note A had an outstanding balance of $0.3 million
at December 31, 2008.
- The Facility bears interest at either the bank's prime rate or at
a LIBOR based rate at the election of the Company.
- The Facility provides for an additional $5.0 million of credit available
for certain 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) $1,000,000 for the three months ending December 31, 2008 and;
(b) $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 December 2008.
28
The Company's maximum available credit limit for the revolving portion of the
Facility was $49.5 million at December 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 December 2008, the outstanding balance on the revolving portion of the
Facility was $27.0 million. The Facility bears interest at a variable rate
equal to the bank's prime rate, which was 3.25% at December 2008. Based on
our collateral and loan limits as defined by the Facility agreement, the
Company's excess availability under the Facility at December 2008 was
approximately $22.5 million.
During Q1 2009, our peak borrowings under the Facility were $37.7 million and
our average borrowings and average availability were $32.6 and $18.3 million,
respectively. Our availability to borrow under the Facility generally
decreases as inventory and accounts receivable levels go up because of the
borrowing limitations that are placed on collateralized assets.
As part of the July 2007 Television Events & Marketing, Inc. ("TEAM")
litigation settlement, the Company became obligated to pay $46,875 in
quarterly installments through October 2010 and $31,250 in quarterly
installments thereafter through October 2011. Mr. Wright has personally
guaranteed these payment obligations, which totaled approximately $0.4
million at December 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.
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.
TSI Financing
-------------
As previously disclosed, TSI has approximately $2.8 million in related party
debt obligations, which were in default at December 2008. TSI has not
obtained associated debt default waivers for these related party obligations.
At this time, the Company does not anticipate the defaults will materially
impact its future liquidity position.
OTHER
-----
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.
29
Dividend Payments
-----------------
During Q1 2009, the Company paid cash dividends of $0.10 per common share,
totaling $57,039. The Company paid no dividends on its common stock during
Q1 2008.
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 $105,533 in both Q1 2009 and Q1 2008.
See Note 3 to the condensed consolidated unaudited financial statements
included in this Quarterly Report for further information regarding these
securities.
Contractual Obligations
-----------------------
There have been no significant changes to the Company's contractual
obligations as set forth in the Company's Form 10-K for the fiscal period
ended September 30, 2008.
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.
The Company renewed its credit facility with Bank of America in July 2008
and believes it continues to have a strong working relationship with that
financial institution. Additionally, the Company was in compliance with all
debt covenants as of December 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 December 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. A continued steep deterioration in market conditions could
materially impact our liquidity position.
30
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 January 2009, the United States House of Representatives passed
legislation which would significantly increase the federal excise taxes
imposed on cigarette and tobacco products to fund the State Children's Health
Insurance Program ("SCHIP"). If such legislation is eventually signed into
law, it will further accelerate the declining demand for cigarettes and
tobacco products. In Q1 2009, sales of cigarette products accounted for
approximately 70% of the Company's consolidated sales and approximately 22%
of its consolidated gross profit.
Slumping economic conditions, disruptions in the credit markets, and
increasing credit card fees have negatively impacted profit margins for
many of our customers. Collectively, these items have created a challenging
business environment for convenience stores, our largest customer segment.
In the short term, we believe the aforementioned items will pressure future
wholesale profits. We do not, however, believe such items will materially
impact our liquidity position. While these market conditions present risks,
we believe that on a long-term basis, they provide opportunities to enhance
shareholder value as smaller distributors are forced from the market creating
opportunities for us to win market share and complete strategic acquisitions
at more attractive prices.
Retail Health Food Segment - While we enjoy a loyal customer following in
this business segment, weak economic conditions combined with higher natural
food costs and increased competition may decrease both future sales and gross
profit margins.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4T. 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.
31
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 December 31, 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.
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
----------------------------------------------------
There were no changes in our internal control over financial reporting that
occurred during the quarter ended December 31, 2008, that materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to this item may be found in Note 11 to the
condensed consolidated unaudited financial statements in Item 1, which is
incorporated herein by reference and supplements the information provided or
referred to in Item 3 of the Company's Form 10-K for the fiscal year ended
September 30, 2008.
32
Item 1A. Risk Factors
There have been no material changes to the Company's risk factors as
previously disclosed in Item 1A "Risk Factors" on Form 10-K for the fiscal
year ended September 30, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not applicable.
Item 6. Exhibits
(a) Exhibits
10.1 Eleventh Amendment to the Amended and Restated Loan and
Security Agreement, dated January 15, 2009
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, Chief Financial
Officer, and Principal Financial Officer furnished pursuant to section
302 of the Sarbanes-Oxley Act
32.1 Certification by Christopher H. Atayan, Chief Executive Officer
and Chairman, furnished pursuant to section 906 of the
Sarbanes-Oxley Act
32.2 Certification by Andrew C. Plummer, Vice President, Chief Financial
Officer, and Principal Financial Officer furnished pursuant to section
906 of the Sarbanes-Oxley Act
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMCON DISTRIBUTING COMPANY
(registrant)
Date: January 16, 2009 /s/ Christopher H. Atayan
---------------- -----------------------------
Christopher H. Atayan,
Chief Executive Officer and Chairman
Date: January 16, 2009 /s/ Andrew C. Plummer
---------------- -----------------------------
Andrew C. Plummer, Vice President,
Chief Financial Officer, and
Principal Financial Officer
34