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 June 30, 2007
OR
/ / Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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COMMISSION FILE NUMBER 1-15589
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AMCON Distributing Company
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(Exact name of Registrant as specified in its charter)
Delaware 47-0702918
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7405 Irvington Road, Omaha NE 68122
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(Address of principal executive offices)
Registrant's telephone number, including area code: (402) 331-3727
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer X
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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 527,062 shares of its $.01 par value common stock
outstanding as of July 16, 2007.
Form 10-Q
3rd Quarter
INDEX
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
--------------------------------------------
Condensed consolidated balance sheets at
June 30, 2007 (unaudited) and September 30, 2006 3
Condensed consolidated unaudited statements of operations
for the three and nine months ended June 30, 2007 and
2006 4
Condensed consolidated unaudited statements of cash flows
for the nine months ended June 30, 2007 and
2006 5
Notes to condensed consolidated unaudited
financial statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 1A. Risk Factors 38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
Item 3. Defaults Upon Senior Securities 38
Item 4. Submission of Matters to a Vote of Security Holders 38
Item 5. Other Information 39
Item 6. Exhibits 40
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2007 and September 30, 2006
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June 2007 September
(Unaudited) 2006
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ASSETS
Current assets:
Cash $ 588,135 $ 481,138
Accounts receivable, less allowance for doubtful
accounts of $0.4 million and $0.9 million, respectively 26,653,708 27,815,751
Inventories, net 24,369,429 24,443,063
Deferred income taxes 2,045,006 1,972,988
Current assets of discontinued operations 3,435 1,172,805
Prepaid and other current assets 6,371,027 5,369,154
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Total current assets 60,030,740 61,254,899
Property and equipment, net 11,521,419 12,528,539
Goodwill 5,848,808 5,848,808
Other intangible assets 3,410,003 3,439,803
Deferred income taxes 5,386,739 6,772,927
Noncurrent assets from discontinued operations 2,057,033 3,774,106
Other assets 1,151,044 1,247,464
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$ 89,405,786 $ 94,866,546
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 12,323,037 $ 14,633,124
Accrued expenses 5,660,479 4,687,789
Accrued wages, salaries and bonuses 1,470,837 1,879,699
Income taxes payable 155,716 168,936
Current liabilities of discontinued operations 7,703,401 7,461,549
Current maturities of credit facility 3,346,000 3,896,000
Current maturities of long-term debt 462,198 524,130
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Total current liabilities 31,121,668 33,251,227
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Credit facility, less current maturities 42,521,181 44,927,429
Long-term debt, less current maturities 6,716,001 7,069,357
Noncurrent liabilities of discontinued operations 2,807,000 5,087,230
Series A cumulative, convertible preferred stock, $.01 par value
100,000 shares outstanding, liquidation preference
$25.00 per share 2,438,355 2,438,355
Series B cumulative, convertible preferred stock, $.01 par value
80,000 shares outstanding, liquidation preference
$25.00 per share 1,857,645 1,857,645
Series C cumulative, convertible preferred stock, $.01 par value
80,000 shares outstanding, liquidation preference
$25.00 per share 1,982,372 1,982,372
Commitments and contingencies (Note 11)
Shareholders' equity (deficiency):
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, $.01 par value, 3,000,000
shares authorized, 527,062 shares outstanding 5,271 5,271
Additional paid-in capital 6,316,276 6,278,476
Accumulated deficit (6,359,983) (8,030,816)
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Total shareholders' deficiency (38,436) (1,747,069)
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$ 89,405,786 $ 94,866,546
============ ============
The accompanying notes are an integral part of these condensed consolidated unaudited financial
statements.
3
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of Operations
for the three and nine months ended June 30, 2007 and 2006
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For the three months For the nine months
ended June ended June
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2007 2006 2007 2006
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Sales (including excise taxes of $54.5
million and $52.5 million, and $152.5
million and $147.7 million, respectively) $ 220,072,350 $ 222,190,246 $ 630,615,000 $ 616,211,117
Cost of sales 203,519,915 206,587,430 584,654,778 571,941,200
------------- ------------- ------------- -------------
Gross profit 16,552,435 15,602,816 45,960,222 44,269,917
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Selling, general and administrative expenses 12,950,797 12,855,727 38,401,805 38,087,524
Depreciation and amortization 450,901 469,352 1,364,949 1,430,938
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13,401,698 13,325,079 39,766,754 39,518,462
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Operating income 3,150,737 2,277,737 6,193,468 4,751,455
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Other expense (income):
Interest expense 1,174,440 1,215,463 3,682,951 3,482,814
Other (income), net (79,636) (44,424) (144,816) (94,016)
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1,094,804 1,171,039 3,538,135 3,388,798
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Income from continuing operations
before income tax expense 2,055,933 1,106,698 2,655,333 1,362,657
Income tax expense 809,000 434,000 1,047,000 560,000
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Income from continuing operations 1,246,933 672,698 1,608,333 802,657
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 ($0.1)
million and ($0.2) million, and ($0.2)
million and ($1.2) million, respectively (131,740) (326,447) (453,432) (2,143,152)
------------- ------------- ------------- -------------
(Loss) income on discontinued operations (131,740) (326,447) 375,658 (2,143,152)
------------- ------------- ------------- -------------
Net income (loss) 1,115,193 346,251 1,983,991 (1,340,495)
Preferred stock dividend requirements (104,386) (104,386) (313,158) (260,492)
------------- ------------- ------------- -------------
Net income (loss) available to common
shareholders $ 1,010,807 $ 241,865 $ 1,670,833 $ (1,600,987)
============= ============= ============= =============
Basic earnings (loss) per share
available to common shareholders:
Continuing operations $ 2.17 $ 1.08 $ 2.46 $ 1.03
Discontinued operations (0.25) (0.62) 0.71 (4.07)
------------- ------------- ------------- -------------
Net basic earnings (loss) per share
available to common shareholders $ 1.92 $ 0.46 $ 3.17 $ (3.04)
============= ============= ============= =============
Diluted earnings (loss) per share
available to common shareholders:
Continuing operations $ 1.44 $ 0.79 $ 1.87 $ 0.95
Discontinued operations (0.15) (0.38) 0.44 (3.53)
------------- ------------- ------------- -------------
Net diluted earnings (loss) per share
available to common shareholders $ 1.29 $ 0.41 $ 2.31 $ (2.58)
============= ============= ============= =============
Weighted average shares outstanding:
Basic 527,062 527,062 527,062 527,062
Diluted 862,598 854,187 858,085 606,660
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 nine months ended June 30, 2007 and 2006
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2007 2006
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,983,991 $ (1,340,495)
Deduct: income (loss) from discontinued operations, net of tax 375,658 (2,143,152)
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Income from continuing operations 1,608,333 802,657
Adjustments to reconcile net income from
continuing operations to net cash flows
from operating activities:
Depreciation 1,335,149 1,401,140
Amortization 29,800 29,798
(Gain) loss on sale of property and equipment (16,667) 11,570
Stock based compensation 37,800 45,000
Deferred income taxes 1,314,170 (563,234)
Provision (benefit) for losses on doubtful accounts (93,192) 430,489
Provision for losses on inventory obsolescence 148,568 188,602
Changes in assets and liabilities:
Accounts receivable 1,255,235 (2,784,964)
Inventories (74,934) (6,743,551)
Prepaid and other current assets (1,001,873) 345,108
Other assets 96,420 171,950
Accounts payable (2,310,087) (1,160,812)
Accrued expenses and accrued wages, salaries and bonuses 563,828 (488,713)
Income taxes payable and receivable (13,220) (118,798)
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Net cash flows from operating activities - continuing operations 2,879,330 (8,433,758)
Net cash flows from operating activities - discontinued operations (1,951,797) (806,978)
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Net cash flows from operating activities 927,533 (9,240,736)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (345,637) (595,489)
Proceeds from sales of property and equipment 34,275 34,199
Purchase of trademark - (15,000)
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Net cash flows from investing activities - continuing operations (311,362) (576,290)
Net cash flows from investing activities - discontinued operations 3,965,394 (69)
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Net cash flows from investing activities 3,654,032 (576,359)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net principal (payments) borrowings on bank credit agreements (2,956,248) 7,538,006
Net proceeds from preferred stock issuance - 1,982,372
Proceeds from borrowings of long-term debt - 109,811
Dividends paid on preferred stock (313,158) (260,492)
Principal payments on long-term debt (415,288) (499,359)
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Net cash flows from financing activities - continuing operations (3,684,694) 8,870,338
Net cash flows from financing activities - discontinued operations (789,874) 484,504
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Net cash flows from financing activities (4,474,568) 9,354,842
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Net change in cash 106,997 (462,253)
Cash, beginning of period 481,138 546,273
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Cash, end of period $ 588,135 $ 84,020
============ ============
5
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,729,280 $ 3,488,161
Cash paid (refunded) during the period for income taxes 99,050 (1,577)
Supplemental disclosure of non-cash information:
Buyer's assumption of HNWC lease in connection with
the sale of HNWC's assets - discontinued operations 225,502 -
Issuance of note payable in exchange for
accounts payable - discontinued operations - 362,716
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.
The accompanying condensed consolidated unaudited financial statements
include the accounts of AMCON Distributing Company and its subsidiaries.
The Company continues to consolidate all of the assets, liabilities and
results of operations of its 85% owned subsidiary, Trinity Springs, Inc.
("TSI"), because minority shareholders have not guaranteed any of TSI's debt
or committed additional capital to TSI. TSI is classified as a component of
discontinued operations at June 30, 2007. See Note 11 related to ongoing TSI
litigation.
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 year ended September 30, 2006, as filed with the
Securities and Exchange Commission on Form 10-K, as amended.
For convenience, the third fiscal quarters of 2007 and 2006 have been
referred to throughout this quarterly report as June 2007 and June 2006,
respectively.
7
Recently Issued Accounting Pronouncements
-----------------------------------------
The Company is currently evaluating the impact of implementing the following
new accounting standards:
On July 13, 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, and
Related Implementation Issues" ("FIN 48"). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in a Company's financial
statements in accordance with Statement of Financial Accounting Standard No.
109, "Accounting for Income Taxes" ("SFAS 109"). FIN 48 prescribes a
recognition threshold and measurement attribute for a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 clarifies the principle that fair value should be
based on assumptions market participants would use when pricing an asset or
liability and establishes a fair value hierarchy that prioritizes information
used to develop those assumptions. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. SFAS 157 is effective for the Company's fiscal year beginning
October 1, 2008, with early adoption permitted.
In September 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 provides interpretive guidance on the
consideration of the effects of the carryover or reversal of prior year
misstatements in quantifying a current year misstatement. The SEC recommends
quantifying errors using both a balance sheet and income statement approach
for purposes of materiality assessments. The guidance is effective for
fiscal years ending after November 15, 2006.
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.
2. DISPOSITIONS
Discontinued operations include the residual assets, liabilities and results
of operations of Hawaiian Natural Water Company, Inc. ("HNWC") and TSI for
the three and nine months ended June 2007 and June 2006. The results of
operations for the first nine months of fiscal 2006 also include The Beverage
Group, Inc. ("TBG"), which was the beverage marketing and distribution
component of the Company's former beverage segment. In April 2006, the
Company successfully concluded its wind-down plan of TBG's operations at
which time its residual liabilities were classified as a component of
continuing operations.
8
Prior to the classification of these businesses as discontinued operations,
the Company allocated interest expense to its subsidiaries using an invested
capital calculation. In accordance with Emerging Issues Task Force ("EITF")
87-24 "Allocation of Interest to Discontinued Operations", the Company has
reclassified interest expense previously allocated to discontinued operations
to continuing operations.
Hawaiian Natural Water Company, Inc. (HNWC)
-------------------------------------------
In September 2006, the Company classified HNWC as a component of discontinued
operations in accordance with SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". On November 20, 2006, all of the operating
assets of HNWC were sold for approximately $3.8 million in cash plus the
buyer's assumption of all operating and capital leases. The significant
operating assets consisted of accounts receivable, inventory, furniture and
fixtures, intellectual property and all of its bottling equipment. In
connection with the sale, the Company has recorded a $1.6 million pretax gain
on disposal of discontinued operations.
Trinity Springs, Inc. (TSI)
---------------------------
During fiscal 2006, the Company discontinued the operations of TSI due to
recurring losses, a lack of capital resources to sustain operations, and the
litigation discussed in Part II Item I of this quarterly report on Form 10-Q.
TSI operated a water bottling facility in Idaho and was a component of the
Company's former beverage segment. TSI has been reflected in the accompanying
condensed consolidated financial statements as a component of discontinued
operations. As discussed more fully in Note 11, the Company continues to
vigorously work towards the final resolution of the pending litigation.
Summary of Financial Information
--------------------------------
The effects of discontinued operations on net income (loss) available to
common shareholders and per share data are reflected within the consolidated
financial statements. Operating results from discontinued operations for
HNWC and TSI, which have been excluded from income from continuing operations
in the accompanying condensed consolidated unaudited statements of
operations, are presented as follows:
Three months ended June Nine months ended June
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2007 2006 2007 2006
----------- ----------- ------------ ------------
Sales $ - $ 1,797,459 $ 862,647 $ 6,447,472
Operating loss (114,230) (473,441) (442,516) (3,054,110)
Gain on disposal of discontinued
operations, before income taxes - - 1,455,333 -
Income tax (benefit) expense (80,000) (181,000) 353,000 (1,190,000)
(Loss) income from discontinued operations (131,740) (326,447) 375,658 (2,143,152)
9
The carrying amounts (net of allowances) of the major classes of assets and
liabilities are as follows (in millions):
June September
2007 2006
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Accounts receivable $ - $ 0.7
Inventories - 0.5
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Total current assets of discontinued operations $ - $ 1.2
========== ==========
Fixed assets $ 2.1 $ 3.8
========== ==========
Accounts payable $ 0.8 $ 2.0
Accrued expenses 1.3 1.0
Accrued wages, salaries and bonuses - 0.3
Current portion of long-term debt 2.8 1.4
Current portion of long-term debt due related party 2.8 2.8
---------- ----------
Total current liabilities of discontinued operations $ 7.7 $ 7.5
========== ==========
Water royalty, in perpetuity $ 2.8 $ 2.8
Long-term debt, less current portion - 2.3
---------- ----------
Noncurrent liabilities of discontinued operations $ 2.8 $ 5.1
========== ==========
Included in discontinued operations are the following TSI related party debt
obligations:
- TSI owes a director of the Company $1.0 million on a revolving credit
facility with an interest rate of 8.0% per annum. The loan is
secured by a second mortgage on TSI's real property on an equal basis
with the Company's existing second mortgage on TSI's real property.
- TSI owes $0.5 million on a loan due to a related party which is
wholly-owned by two of the Company's directors (including its
Chairman). The note bears interest at 7.0% per annum.
- TSI obtained unsecured, subordinated loans totaling $0.5 million from
unaffiliated businesses of two of the Company's directors, including a
Company of which the Chairman of the Board is a partner. The loan
bears interest of 7.0% per annum.
- TSI owes Draupnir, LLC, a private equity firm of which two of the
Company's directors are Members, $750,000 on a note bearing interest at
a floating rate of 300 basis points above the ten year treasury note
yield, compounded annually and adjusted concurrently with any
adjustments to the yield on the ten year treasury note.
All of the aforementioned related party notes payable, in addition to all
other TSI long-term debt, were in default at June 2007. TSI has not obtained
associated debt default waivers and accordingly all of its debt obligations
have been classified as current liabilities of discontinued operations at
June 2007.
10
TSI Water Royalty
------------------
As part of the June 17, 2004 asset purchase agreement in which the Company
purchased the assets to form TSI, TSI became obligated to pay Crystal
Paradise Holdings, Inc. ("CPH"), in perpetuity, an amount equal to the
greater of $0.03 per liter of water extracted from the source or 4.0% of
water revenues (as defined by the purchase agreement). The agreement is
guaranteed by AMCON up to a maximum of $5.0 million, subject to a floor of
$288,000 annually. Accordingly, the Company has recorded a $2.8 million
liability related to the present value of the future minimum water royalty
payments and related broker fees to be paid in perpetuity. This liability is
classified in noncurrent liabilities of discontinued operations.
The water royalty is secured by a first priority security interest and
mortgage on the acquired assets, other than inventory and accounts
receivable. CPH retains the right to receive any water royalty payment for
the first five years in shares of AMCON common stock up to maximum of 41,666
shares. The water royalty can be cancelled after ten years have elapsed and
the business of TSI is sold to an unaffiliated third party, in which case CPH
would be entitled to receive the appraised fair market value of the water
royalty but not less than $5.0 million. The Company's Chairman has in turn
guaranteed AMCON's performance in connection with AMCON's obligation for
these payments. The Company is in settlement discussions with respect to the
TSI litigation discussed in Note 11, pursuant to which it is undertaking to
divest substantially all of the assets and liabilities of TSI as part of a
complete settlement of any and all claims against the Company by CPH.
Management believes that the recorded balances of the subject assets and
liabilities have been recognized at their respective fair values.
3. CONVERTIBLE PREFERRED STOCK
The Company has the following three series of Convertible Preferred Stock
outstanding as of June 2007:
Series A Series B Series C
------------- --------------- ---------------
Date of issuance: June 17, 2004 October 8, 2004 March 6, 2006
Optionally redeemable beginning June 18, 2006 October 9, 2006 March 4, 2008
Par value (gross proceeds): $2,500,000 $2,000,000 $2,000,000
Number of shares: 100,000 80,000 80,000
Liquidation preference per share: $25.00 $25.00 $25.00
Conversion price per share: $30.31 $24.65 $13.62
Number of common shares in
which to be converted: 82,481 81,136 146,842
Dividend rate: 6.785% 6.37% 6.00%
The Series A Convertible Preferred Stock ("Series A"), Series B Convertible
Preferred Stock ("Series B") and Series C Convertible Preferred Stock
("Series C"), collectively (the "Preferred Stock"), are convertible at any
time by the holders into a number of shares of AMCON common stock equal to
the number of preferred shares being converted times a fraction equal to
$25.00 divided by the conversion price. The conversion prices for the
Preferred Stock are subject to customary adjustments in the event of stock
11
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,
minimum thresholds of ownership by the Chairman and his family in AMCON, or
bankruptcy. The Preferred Stock are optionally redeemable by the Company
beginning on various dates, as listed above, 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 also 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 60% of the outstanding
common stock as of June 30, 2007. Mr. William Wright, who has been AMCON's
Chairman of the Board since AMCON's founding, beneficially owns 27% of the
outstanding common stock without giving effect to shares owned by his adult
children. There is an 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, the Company's
Chairman, and a private equity firm (Draupnir, LLC) of which Mr. Petersen and
Mr. Hobbs, both of whom are directors of the Company, are Members. The
Series B Preferred Stock is owned by an institutional investor which has
elected Mr. Chris Atayan, now AMCON's Chief Executive Officer and Vice
Chairman, to AMCON's Board of Directors pursuant to voting rights in the
Certificate of Designation creating the Series B Preferred Stock. The Series
C is owned by Draupnir Capital LLC, which is a subsidiary of Draupnir, LLC
(the owner of Series A). Mr. Petersen and Mr. Hobbs are also Members 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 future.
12
4. INVENTORIES
Inventories consisted of the following at June 2007 and September 2006:
June September
2007 2006
------------ ------------
Finished goods $ 30,759,598 $ 29,407,201
LIFO reserve (6,390,169) (4,964,138)
------------ ------------
$ 24,369,429 $ 24,443,063
============ ============
The wholesale distribution and retail health food segment inventories consist
of finished products purchased in bulk quantities to be redistributed to the
Company's customers or sold at retail. The wholesale distribution
inventories are stated at the lower of cost (last-in, first-out or "LIFO"
method) or market and consist of the cost of finished goods. The retail
health food operation utilizes the retail inventory method of accounting
stated at the lower of cost (LIFO) or market and consists of the costs of
finished goods. The LIFO reserves at June 2007 and September 2006 represent
the amount by which LIFO inventories were less than the amount of such
inventories valued on a first-in, first-out basis, respectively. Inventory
also includes an allowance for obsolescence of $0.4 million at June 2007 and
September 2006. The Company's obsolescence allowance reflects estimated
unsaleable or non-refundable inventory based upon an evaluation of slow
moving and discontinued products.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill by reporting segment of the Company consisted of the following:
June September
2007 2006
------------ ------------
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:
June September
2007 2006
------------ ------------
Trademarks and tradenames $ 3,373,269 $ 3,373,269
Favorable leases (less accumulated
amortization of $449,266 and $419,466) 36,734 66,534
------------ ------------
$ 3,410,003 $ 3,439,803
============ ============
13
Goodwill, trademarks and tradenames are considered to have indefinite useful
lives and therefore no amortization has been taken on these assets. The
Company performs an annual impairment testing of goodwill and other
intangible assets during its fourth fiscal quarter.
Amortization expense for intangible assets that are considered to have finite
lives was $9,933 and $29,800 for the three and nine months ended June 2007
and $9,933 and $29,798 for the three and nine months ended June 2006.
Amortization expense related to intangible assets held at June 2007 for each
of the five years subsequent to September 30, 2006 is estimated as follows:
Fiscal Fiscal Fiscal Fiscal Fiscal
2007 /1/ 2008 2009 2010 2011
--------- --------- -------- -------- --------
Favorable leases 10,000 27,000 - - -
========= ========= ======== ======== ========
/1/ Represents amortization expense of intangible assets with finite lives for the
remaining three months of Fiscal 2007.
6. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share available to common shareholders is
calculated by dividing income (loss) from continuing operations less
preferred stock dividend requirements and income (loss) from discontinued
operations by the weighted average common shares outstanding for each period.
Diluted earnings (loss) per share available to common shareholders is
calculated by dividing income (loss) from continuing operations less
preferred stock dividend requirements (when anti-dilutive) and income (loss)
from discontinued operations by the sum of the weighted average common shares
outstanding and the weighted average dilutive options, using the treasury
stock method.
Stock options and potential common stock outstanding at June 2007 and
June 2006 that were anti-dilutive were not included in the computations of
diluted earnings per share. Such potential common shares totaled 20,245 for
the three and nine months ended June 2007, and 44,078 and 209,466 for the
three and nine months ended June 2006, respectively. The average exercise
price of anti-dilutive options and potential common stock was $38.74 for the
three and nine months ended June 2007, and $30.43 and $28.03 for the three
and nine months ended June 2006,respectively.
14
For the three months ended June
-------------------------------------------------------
2007 2006
------------------------- -------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
1. Weighted average common
shares outstanding 527,062 527,062 527,062 527,062
2. Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds
used to purchase treasury
stock and conversion of
preferred stock /1/ - 335,536 - 327,125
----------- ----------- ----------- -----------
3. Weighted average number of
shares outstanding 527,062 862,598 527,062 854,187
=========== =========== =========== ===========
4. Income from
continuing operations $ 1,246,933 $ 1,246,933 $ 672,698 $ 672,698
Deduct: preferred stock
dividend requirements /2/ (104,386) - (104,386) -
----------- ----------- ----------- -----------
1,142,547 1,246,933 568,312 672,698
=========== =========== =========== ===========
5. Loss from discontinued
operations $ (131,740) $ (131,740) $ (326,447) $ (326,447)
=========== =========== =========== ===========
6. Net income available
to common shareholders $ 1,010,807 $ 1,115,193 $ 241,865 $ 346,251
=========== =========== =========== ===========
7. Income per share from
continuing operations $ 2.17 $ 1.44 $ 1.08 $ 0.79
=========== =========== =========== ===========
8. Loss per share from
discontinued operations $ (0.25) $ (0.15) $ (0.62) $ (0.38)
=========== =========== =========== ===========
9. Net earnings per share
available to common shareholders $ 1.92 $ 1.29 $ 0.46 $ 0.41
=========== =========== =========== ===========
/1/ For the three months ended June 2007 and June 2006, all stock options and Convertible
Preferred Stock Series were dilutive and have been included as a component of the
diluted weighted average number of shares outstanding calculation.
/2/ For the three months ended June 2007 and June 2006, the dilutive earnings calculation
excludes dividend payments for Series A, B & C Preferred Stock, as they are assumed to
have been converted to common stock of the Company.
15
For the nine months ended June
-------------------------------------------------------
2007 2006
------------------------- -------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
1. Weighted average common
shares outstanding 527,062 527,062 527,062 527,062
2. Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds
used to purchase treasury
stock and conversion of
preferred stock /1/ - 331,023 - 79,598
----------- ----------- ----------- -----------
3. Weighted average number of
shares outstanding 527,062 858,085 527,062 606,660
=========== =========== =========== ===========
4. Income from continuing
operations $ 1,608,333 $ 1,608,333 $ 802,657 $ 802,657
Deduct: preferred stock
dividend requirements /2/ (313,158) - (260,492) (222,159)
----------- ----------- ----------- -----------
1,295,175 1,608,333 542,165 580,498
=========== =========== =========== ===========
5. Income (loss) from discontinued
operations $ 375,658 $ 375,658 $(2,143,152) $(2,143,152)
=========== =========== =========== ===========
6. Net income (loss) available
to common shareholders $ 1,670,833 $ 1,983,991 $(1,600,987) $(1,562,654)
=========== =========== =========== ===========
7. Earnings per share
from continuing operations $ 2.46 $ 1.87 $ 1.03 $ 0.95
=========== =========== =========== ===========
8. Earnings (loss) per share from
discontinued operations $ 0.71 $ 0.44 $ (4.07) $ (3.53)
=========== =========== =========== ===========
9. Net earnings (loss) per share
available to common shareholders $ 3.17 $ 2.31 $ (3.04) $ (2.58)
=========== =========== =========== ===========
/1/ For the nine months ended June 2007, all stock options and Convertible Preferred Stock
Series were dilutive and have been included as a component of the diluted weighted average
number of shares outstanding calculation. For the nine months ended June 2006, Series A
and B Convertible Preferred Stock were anti-dilutive and have not been included as a
component of the diluted weighted average number of shares outstanding calculation.
/2/ For the nine months ended June 2007, the dilutive earnings calculation excludes dividend
payments for Series A, B & C Preferred Stock,, as they are assumed to have been converted
to common stock of the Company. For the nine months ended June 2006, the dilutive earnings
calculation excludes dividend payments for Series C Preferred Stock as it is assumed to
have been converted to common stock of the Company.
16
7. COMPREHENSIVE INCOME (LOSS)
The following is a reconciliation of net income (loss) per the accompanying
condensed consolidated unaudited statements of operations to comprehensive
income (loss) for the three and nine months ended June 2006. There were no
such reconciling items to net income or accumulated other comprehensive
income (loss) balances, during the three and nine months ended June 2007.
For the three months For the nine months
ended June 2006 ended June 2006
-------------------- ------------------
Net income (loss) $ 346,251 $(1,340,495)
Interest rate swap valuation
adjustment, net of income tax
benefit of $39,000 and $53,000
for the three and nine months
ended June 2006 (53,814) (101,294)
----------- -----------
Comprehensive income (loss) $ 292,437 $(1,441,789)
=========== ===========
8. DEBT
Credit Agreement
----------------
The Company has a credit agreement with LaSalle Bank (the "Facility"), which
includes the following significant terms:
- A $55.0 million revolving credit limit, plus the outstanding balances
on two term notes ("Term Note A" and "Term Note B") which totaled
approximately $1.3 million at June 30, 2007 for a total credit
facility limit of $56.3 million at June 30, 2007.
- Bears interest at the bank's prime interest rate, except for Term Note B
which bears interest at the bank's prime rate plus 2%.
- Maturity and expiration dates for the Facility and Term Note A of
April 2009 and March 2008 for Term Note B.
- Lending limits subject to accounts receivable and inventory limitations,
and an unused commitment fee equal to 0.25% per annum on the difference
between the maximum loan limit and average monthly borrowings.
- A prepayment penalty of one percent (1%) of the prepayment loan limit of
$55.0 million if prepayment occurs on or before April 30, 2008.
The Facility also includes quarterly debt service and cumulative earnings
before interest, taxes, depreciation and amortization ("EBITDA") financial
covenants. Beginning with the fiscal quarter ended September 30, 2007, the
Company must maintain a minimum debt service ratio of 1.0 to 1.0, as measured
by the twelve month period then ended.
17
The cumulative minimum EBITDA requirements are as follows: (a) $1,000,000
for the three months ending December 31, 2007 and December 31, 2008
(b) $2,000,000 for the six months ending March 31, 2008, and March 31, 2009,
(c) $4,500,000 for the nine months ending June 30, 2007 and June 30, 2008 and
$7,000,000 for the twelve months ending September 30, 2007 and September 30,
2008. The Company was in compliance with the required minimum EBITDA
covenant at June 30, 2007.
The Facility provides that the Company may not pay dividends on its common
stock in excess of $0.72 per share on an annual basis. Additionally, the
Facility contains an event of default if AMCON or its subsidiaries make any
payment (in cash or other property) or a judgment is entered against AMCON or
its subsidiaries requiring a payment (in cash or other property) to be made
under or in connection with the guaranty by AMCON of the TSI acquisition
notes or the water royalty under the asset purchase agreement for the
purported sale of TSI assets.
The Facility also provides for a "springing" lock-box arrangement, under
which, the Company maintains a lock-box from which it may apply cash receipts
to any corporate purpose so long as it is not in default under the Facility.
The bank maintains a security interest in the Company's lock-box and upon the
occurrence of default may redirect funds from the lock-box to a loan account
in the name of the lenders on a daily basis and apply the funds against the
revolving loan balance.
At June 30, 2007, the available credit on the revolving portion of the
Facility, including accounts receivable and inventory limitations, was $52.7
million and the outstanding balance was $44.6 million. The Facility bears
interest at the bank's prime rate, which was 8.25% as of June 30, 2007 and is
collateralized by all of the Company's equipment, intangibles, inventories,
and accounts receivable.
As a component of the credit agreement, the Company has two term notes,
Term Note A and Term Note B, with LaSalle Bank. Term Note A bears interest
at the bank's prime rate (8.25% at June 30, 2007) and is payable in monthly
installments of $16,333. Term Note B bears interest at the bank's prime rate
plus 2% (10.25% at June 30, 2007) and is payable in monthly installments of
$100,000. The outstanding balances on Term Note A and Term Note B were
$0.6 million and $0.7 million, respectively, as of June 30, 2007.
The Company's Chairman has personally guaranteed repayment of the Facility
and the term loans. However, the amount of his guaranty is capped at $10.0
million and is automatically reduced by the amount of the repayment on Term
Note B, which resulted in the guaranteed principal outstanding being reduced
to approximately $5.7 million as of June 30, 2007. AMCON pays the Company's
Chairman an annual fee equal to 2% of the guaranteed principal in return for
the personal guarantee. This guarantee is secured by a pledge of the shares
of Chamberlin's Natural Foods Inc., Health Food Associates Inc. ("Akin's
Natural Foods Inc."), HNWC and TSI.
18
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 in the amount of approximately $1.0
million to its workers' compensation insurance carrier as part of its self-
insured loss control program.
9. STOCK PLANS
Prior to its expiration in June 2004, AMCON maintained a stock-based
compensation plan ("the Stock Option Plan") which provided the Compensation
Committee of the Board of Directors authorization to grant incentive stock
options and non-qualified stock options, pursuant to the Stock Option Plan,
of up to 550,000 shares. No shares have been issued under the Stock Option
Plan since the end of fiscal year 2003 and unamortized compensation expense
under the Plan totaled approximately $4,000 at June 2007.
On October 1, 2005, the Company adopted SFAS No. 123R, Shared Based Payment
(SFAS 123R). The Company applied the modified prospective transition method
as permitted by SFAS 123R and therefore has not restated prior periods.
Prior to October 1, 2005, the Company accounted for stock option grants in
accordance with Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" using the intrinsic value method
under which compensation cost was measured by the excess, if any, of the fair
market value of its common stock on the date of grant over the exercise price
of the stock option. Accordingly, stock-based compensation costs related to
stock option grants was not reflected in income or loss as all options
granted under the Plan had an exercise price equal to or above the market
value of the underlying stock on the date of grant.
On December 11, 2006, prior to the approval of the Omnibus Plan referred to
below, the Compensation Committee of the Board of Directors awarded
Christopher Atayan, Chief Executive Officer, Vice Chairman and a Director of
the Company, a non-qualified option to purchase 25,000 shares of the
Company's common stock, subject to shareholder approval. On April 17, 2007,
the Company's shareholders approved the stock option grant, which vests in
three equal installments over a three year period and has an exercise price
of $18.00 per share, the December 11, 2006 closing price of the Company's
common stock on the American Stock Exchange.
The Company has estimated that the fair value of the non-qualified stock
option award to Mr. Atayan was approximately $347,000 using the Black-Scholes
option pricing model. This cost will be amortized to compensation expense
over a three year service period. The following assumptions were used in
connection with the Black-Scholes option pricing calculation:
19
Stock Option Pricing Assumptions
--------------------------------
Fiscal 2007 Awards
------------------
Risk-free interest rate 4.69%
Dividend yield 1.65%
Expected volatility 46%
Expected life in years 7
On April 17, 2007, the Board of Directors of the Company approved an equity
incentive plan, the 2007 Omnibus Incentive Plan ("the Omnibus Plan"), to
encourage employees of the Company and subsidiaries to acquire a proprietary
and vested interest in the growth and performance of the Company. The
Omnibus Plan permits the issuance of up to 150,000 shares of the Company's
common stock in the form of stock options, restricted stock awards,
restricted stock units, performance share awards as well as awards such as
stock appreciation rights, performance units, performance shares, bonus
shares and dividend share awards payable in the form of common stock or cash.
As of June 2007, no awards have been granted under the Omnibus Plan.
Net income (loss) before incomes taxes for the three and nine months ended
June 2007 included share-based compensation expense of $31,800 and $37,800,
respectively, and $15,000 and $45,000 for the three and nine months ended
June 2006, respectively. At June 2007, there were 29,635 options fully
vested and exercisable under the Stock Option Plan and unamortized
compensation expense totaled approximately $323,000.
Options issued and outstanding to management employees pursuant to the Stock
Option Plan, in addition to those issued subsequent to the plan's expiration
in June 2004, are summarized below:
Number of Number Aggregate
Date Exercise Price Options Exercisable Intrinsic Value
Outstanding June 2007
------------------------------------------------------------------------------
Fiscal 1998 $ 15.68 9,171 9,171 $ 71,717
Fiscal 1999 $ 45.68 - $ 51.14 6,683 6,683 -
Fiscal 2000 $ 34.50 3,165 3,165 -
Fiscal 2003 $ 28.80 4,046 2,428 -
Fiscal 2007 $ 18.00 25,000 - 137,500
------ ------ --------
48,065 21,447 $209,217
====== ====== ========
20
At June 2007, there were 8,188 options fully vested and exercisable issued to
outside directors, outside of the Stock Option Plan, as summarized as
follows:
Number of Number Aggregate
Date Exercise Price Options Exercisable Intrinsic Value
Outstanding June 2007
------------------------------------------------------------------------------
Fiscal 1998 $ 15.68 1,834 1,834 $ 14,342
Fiscal 1999 $ 36.82 - $ 49.09 3,852 3,852 -
Fiscal 2002 $ 26.94 1,668 1,668 -
Fiscal 2003 $ 28.26 834 834 -
------ ------ --------
8,188 8,188 $ 14,342
====== ====== ========
The stock options have varying vesting schedules ranging up to five years and
expire ten years after the date of grant.
The following is a summary of stock option activity during the nine months
ended June 2007.
June 2007
-----------------
Weighted
Number Average
of Exercise
Shares Price
-----------------
Outstanding at beginning of period 31,253 $30.62
Granted 25,000 $18.00
Exercised - -
Forfeited/Expired - -
-----------------
Outstanding at end of period 56,253 $25.07
=================
Options exercisable at end of period 29,635
========
The following summarizes all stock options outstanding at June 2007:
Exercisable
Remaining ----------------------------
Exercise Number Weighted-Average Weighted-Average Number Weighted-Average
Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------- ----------- ---------------- ---------------- ----------- ----------------
1998 Options $15.68 11,005 0.4 years $15.68 11,005 $15.68
1999 Options $36.82-$51.14 10,535 1.9 years $46.53 10,535 $46.53
2000 Options $34.50 3,165 3.0 years $34.50 3,165 $34.50
2002 Options $26.94 1,668 5.2 years $26.94 1,668 $26.94
2003 Options $28.26-$28.80 4,880 5.5 years $28.71 3,262 $28.66
2007 Options $18.00 25,000 9.8 years $18.00 - -
------ ------ ------ ------
56,253 $25.07 29,635 $30.72
====== ====== ====== ======
21
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
interest expense previously allocated to HNWC and TSI, intercompany
eliminations, charges incurred by the holding company, and assets of
discontinued operations. The segments are evaluated on revenues, gross
margins, operating income (loss), and income before taxes.
Wholesale
Distribution Retail Other /1/ Consolidated
------------- ----------- ---------- -------------
QUARTER ENDED JUNE 2007:
External revenue:
Cigarettes $ 155,739,405 $ - $ - $ 155,739,405
Confectionery 15,322,855 - - 15,322,855
Health food - 9,481,074 - 9,481,074
Tobacco, food service & other 39,529,016 - - 39,529,016
------------- ----------- ---------- -------------
Total external revenue 210,591,276 9,481,074 - 220,072,350
Depreciation 311,516 129,452 - 440,968
Amortization - 9,933 - 9,933
Operating income (loss) 4,139,846 623,667 (1,612,776) 3,150,737
Interest expense 230,871 376,989 566,580 1,174,440
Income (loss) from continuing
operations before taxes 3,913,769 259,462 (2,117,298) 2,055,933
Total assets 68,822,931 11,316,558 9,266,297 89,405,786
Capital expenditures 83,313 50,984 - 134,297
QUARTER ENDED JUNE 2006:
External revenue:
Cigarettes $ 159,182,489 $ - $ - $ 159,182,489
Confectionery 15,236,546 - - 15,236,546
Health food - 9,046,326 - 9,046,326
Tobacco, food service & other 38,724,885 - - 38,724,885
------------- ----------- ---------- -------------
Total external revenue 213,143,920 9,046,326 - 222,190,246
Depreciation 317,829 141,590 - 459,419
Amortization - 9,933 - 9,933
Operating income (loss) 2,803,727 447,693 (973,683) 2,277,737
Interest expense 456,854 382,080 376,529 1,215,463
Income (loss) from continuing
operations before taxes 2,381,877 75,009 (1,350,188) 1,106,698
Total assets 78,906,392 12,357,226 9,703,096 100,966,714
Capital expenditures 122,503 94,786 - 217,289
NINE MONTHS ENDED JUNE 2007:
External revenue:
Cigarettes $ 449,889,274 $ - $ - $ 449,889,274
Confectionery 42,246,747 - - 42,246,747
Health food - 28,372,391 - 28,372,391
Tobacco, food service & other 110,106,588 - - 110,106,588
------------- ----------- ---------- -------------
Total external revenue 602,242,609 28,372,391 - 630,615,000
Depreciation 925,156 409,993 - 1,335,149
Amortization - 29,800 - 29,800
Operating income (loss) 8,219,243 1,974,288 (4,000,063) 6,193,468
Interest expense 812,662 1,139,392 1,730,897 3,682,951
Income (loss) from continuing
operations before taxes 7,426,286 869,439 (5,640,392) 2,655,333
Total assets 68,822,931 11,316,558 9,266,297 89,405,786
Capital expenditures 207,069 138,568 - 345,637
22
Wholesale
Distribution Retail Other /1/ Consolidated
------------- ----------- ---------- -------------
NINE MONTHS ENDED JUNE 2006:
External revenue:
Cigarettes $ 445,431,863 $ - $ - $ 445,431,863
Confectionery 40,480,330 - - 40,480,330
Health food - 27,772,201 - 27,772,201
Tobacco, food service & other 102,526,723 - - 102,526,723
------------- ----------- ---------- -------------
Total external revenue 588,438,916 27,772,201 - 616,211,117
Depreciation 935,021 466,119 - 1,401,140
Amortization - 29,798 - 29,798
Operating income (loss) 5,672,572 1,893,803 (2,814,920) 4,751,455
Interest expense 1,159,707 1,188,287 1,134,820 3,482,814
Income (loss) from continuing
operations before taxes 4,578,696 733,676 (3,949,715) 1,362,657
Total assets 78,906,392 12,357,226 9,703,096 100,966,714
Capital expenditures 445,093 150,396 - 595,489
/1/ Includes interest expense previously allocated to HNWC and TSI, intercompany eliminations,
charges incurred by the holding company, and assets of discontinued operations.
11. CONTINGENCIES
Trinity Springs. Inc. / Crystal Paradise Holdings, Inc. Litigation
-----------------------------------------------------------------
The Company and its consolidated subsidiary, TSI, were involved in litigation
regarding shareholder approval of the purchase of substantially all of the
assets of Trinity Springs, Ltd. (which later changed its name to Crystal
Paradise Holdings, Inc. ("CPH")). That litigation has been settled and the
presiding Court has approved the settlement and dismissed the lawsuit with
prejudice.
The settlement resolved all disputes between the minority shareholder
plaintiffs and CPH, AMCON, TSI and the Defendant Directors. The Company
faces no further known liability from that lawsuit or settlement. However,
the settlement did not resolve claims that AMCON and TSI may have against
CPH, or that CPH may have against AMCON and TSI.
On December 21, 2006, CPH filed a first amended complaint in the Fourth
Judicial District of the State of Idaho (Elmore County) (the "Court") against
AMCON and TSI and other defendants relating to the transfer of the assets of
CPH to TSI and TSI's operation of the business thereafter. In this lawsuit,
CPH asserts claims of foreclosure; breach of the asset purchase agreement,
promissory notes and water royalty obligations; quantum meruit; unjust
enrichment; and collection and enforcement of its security interest. In
addition, CPH seeks a declaratory judgement that: (i) AMCON and TSI are
obligated to perform under the asset purchase agreement and other agreements
related to the asset purchase transaction; (ii) the actions of AMCON and TSI
constituted events of default; (iii) TSI has not cured the events of default;
(iv) TSI's obligations are accelerated under certain promissory notes; and
(v) AMCON is liable to CPH under a guaranty and suretyship agreement for all
amounts owed to CPH under the asset purchase agreement and related
agreements. Finally, CPH seeks its costs and attorney fees.
23
AMCON disagrees with the assertions made by CPH and intends to vigorously
defend against CPH's claims and to pursue its own claims against CPH. At
AMCON's request, on May 14, 2007, the Court ordered that venue be changed
from Elmore County to Ada County in Idaho. On May 29, 2007, AMCON and TSI
filed its answer stating defenses against claims asserted by CPH. In
addition, AMCON and TSI asserted the following counterclaims against CPH: (i)
a declaratory judgment that (a) the asset purchase agreement is unenforceable
against the parties, (b) AMCON and TSI are excused from performance under the
asset purchase agreement, and (c) CPH, TSI, and AMCON are required to return
each other to their pre-contractual positions; (ii) CPH breached the asset
purchase agreement; (iii) CPH breached an implied covenant of good faith and
fair dealing; (iv) CPH made fraudulent misrepresentations to AMCON and TSI;
(v) CPH fraudulently induced AMCON into entering into the transaction; (vi)
CPH breached numerous representations and warranties in the asset purchase
agreement; (vii) CPH was negligent; (viii) CPH has been unjustly enriched;
and (ix) AMCON and TSI are entitled to an offset for CPH's failure to
mitigate damages. AMCON and TSI also seek to recover their costs and
attorney fees.
With respect to the claims asserted by CPH in its recently filed complaint
and AMCON's and TSI's counterclaims asserted against CPH, AMCON's management,
after consulting with the trial counsel, is unable at this time to state that
any outcome unfavorable to AMCON is either probable or remote and therefore
cannot estimate the amount or range of any potential loss, if any, because
substantial discovery is needed, several unresolved legal issues exist, and
other pretrial work is yet to be completed.
Television Events and Marketing, Inc. vs. AMCON Distributing Company
--------------------------------------------------------------------
An action entitled Television Events & Marketing, Inc. vs. AMCON Distributing
Co., The Beverage Group, Inc., The Beverage Group aka AMCON Beverage Group,
AMCON Corporation and William F. Wright, Civil No. CV 05-00259 ACK KSC, was
filed in the First Circuit Court of the State of Hawaii in Honolulu, Hawaii
on March 8, 2005 and then moved on April 12, 2005 to the United States
District Court for the District of Hawaii. This action concerns the alleged
breach of two trademark licensing agreements between Television Events &
Marketing, Inc. ("TEAM") and the Company's subsidiary, The Beverage Group,
Inc., and purportedly, the other named defendants. On December 21, 2005, the
plaintiffs filed a Second Amended Complaint in the First Circuit Court of the
State of Hawaii in Honolulu, Hawaii. This Second Amended Complaint seeks
(i) an unstated amount of damages for an alleged breach of those agreements
and alleged misrepresentation; (ii) interest and reasonable attorney's fees
and costs; and (iii) such other relief as the court deems just and proper.
The Company, together with its named subsidiary has successfully obtained
dismissal of certain legal theories by motions for summary judgment. The
Company and its subsidiary also filed a Counterclaim in the action on
July 5, 2006 against TEAM and Archie Thornton alleging: (1) Thornton was an
undisclosed dual agent and breached his fiduciary duty to TBG, Inc.; (2) TEAM
tortuously assisted Thornton in breaching his fiduciary duty; (3) unjust
enrichment/restitution; (4) TEAM breached its duty of good faith and fair
dealing; (5) TEAM and Thornton's failure to disclose Thornton's agency
relationship with TEAM constituted fraud and misrepresentation; and (6)
punitive damages. The parties to the litigation are currently engaged in
ongoing mediation and settlement discussions. The Company and Plaintiff are
currently engaged in court supervised mediation. Trial is set for November
2007.
24
After taking into account the claims, counterclaims and liabilities recorded
for all of the foregoing matters, management believes that ultimate
resolution of such matters should not have a material adverse effect on the
Company's financial position.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the Management's Discussion and
Analysis and other sections, contains forward looking statements that are
subject to risks and uncertainties and which reflect management's current
beliefs and estimates of future economic circumstances, industry conditions,
company performance and financial results. Forward looking statements
include information concerning the possible or assumed future results of
operations of the Company and those statements preceded by, followed by or
that include the words "future," "position," "anticipate(s)," "expect,"
"believe(s)," "see," "plan," "further improve," "outlook," "should" or
similar expressions. For these statements, we claim the protection of the
safe harbor for forward looking statements contained in the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are not
guarantees of future performance or results. They involve risks,
uncertainties and assumptions. You should understand that the following
important factors, in addition to those discussed elsewhere in this document,
could affect the future results of the Company and could cause those results
to differ materially from those expressed in our forward looking statements:
- treatment of TSI transaction and litigation,
- changing market conditions with regard to cigarettes,
- changes in promotional and incentive programs offered by manufacturers,
- the demand for the Company's products,
- new business ventures,
- domestic regulatory risks,
- competition,
- poor weather conditions,
- increases in fuel prices,
- collection of guaranteed amounts,
- other risks over which the Company has little or no control, and
- any other factors not identified herein could also have such an effect.
Changes in these factors could result in significantly different results.
Consequently, future results may differ from management's expectations.
Moreover, past financial performance should not be considered a reliable
indicator of future performance. Any forward looking statement contained
herein is made as of the date of this document. Except as required by law,
the Company undertakes no obligation to publicly update or correct any of
these forward looking statements in the future to reflect changed
assumptions, the occurrence of material events or changes in future operating
results, financial conditions or business over time.
25
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 on
our Form 10-K, as amended, for the fiscal year ended September 30, 2006, as
filed with the Securities and Exchange Commission. There have been no
significant changes with respect to these policies during the first nine
months of fiscal 2007.
COMPANY OVERVIEW - THIRD FISCAL QUARTER 2007
The following discussion and analysis includes the Company's results of
operations from continuing operations for the three and nine months ended
June 2007 and June 2006. Continuing operations is 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.
AMCON Distributing Company and Subsidiaries ("AMCON" or the "Company") is
primarily engaged in the wholesale distribution business in the Great Plains
and Rocky Mountain regions of the United States. In addition, AMCON operates
thirteen retail health food stores in Florida and the Midwest. As used
herein, unless the context indicates otherwise, the term "ADC" means the
wholesale distribution segment and "AMCON" or the "Company" means AMCON
Distributing Company and its consolidated subsidiaries. AMCON's third fiscal
quarters ended on June 30, 2007 and June 30, 2006. For ease of discussion,
AMCON's third fiscal quarters are referred to herein as June 2007 and 2006,
respectively or Q3 2007 and Q3 2006, respectively.
During the third quarter of fiscal 2007, the Company:
- experienced a $0.9 million increase in income from continuing operations
before income taxes as compared to Q3 2006.
- incurred a $0.5 million higher LIFO inventory charge in Q3 2007 as
compared to Q3 2006.
- reduced total continuing operations debt by $3.4 million compared to
September 2006.
- recognized income from continuing operations per basic share of
$2.17 and $1.08 for the three months ended June 2007 and June
2006, respectively, and $2.46 and $1.03 for the nine months ended
June 2007 and June 2006, respectively.
- recognized (loss) income from discontinued operations per basic share
of ($0.25) and ($0.62) for the three months ended June 2007 and
June 2006, respectively, and $0.71 and ($4.07) for the nine months
ended June 2007 and June 2006, respectively.
26
Wholesale Distribution Segment
------------------------------
The wholesale distribution business represents approximately 96% of our
consolidated sales. ADC serves approximately 5,000 retail outlets in the
Great Plains and Rocky Mountain regions and is ranked as a top ten
convenience store supplier by Convenience Store News.
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.
We provide our retailers with a broad selection of merchandise in all product
categories and continue to focus on growing our non-cigarette categories,
which represented approximately 25% of our total wholesale distribution
segment sales for the nine months ended June 2007 as compared to 24% for the
same period in the prior year.
The Company has adopted a number of operating strategies who management
believes provide the Company with distinctive competitive advantages within
this customer segment. One key operating strategy is our commitment to
provide market leading customer service. In a continuing effort to provide
superior customer service, ADC offers a complete point-of-sale (POS) program
to assist customers with image management, product promotions, private label
and custom food service programs and overall profit maximization.
Additionally, ADC has a policy of next-day delivery and sells products in
cut-case quantities or "by the each" (i.e. individual units). The Company
also offers planograms to convenience store customers to assist in the design
of stores and the display of products within the store. In addition,
customers are able to use our web site to order products and promotions,
manage inventory and retail prices, as well as obtain periodic management
reports. By offering superior customer service and aggressively managing
operating costs, management believes ADC is better positioned to compete with
both smaller and larger distributors.
Increases in fuel prices, in addition to increases in other operating costs,
are having a significant impact on all distributors in the United States.
We expect that competition and the pressure on profit margins will continue
to affect both large and small distributors resulting in additional industry
consolidation.
Retail Health Food Segment
--------------------------
In recent years the retail health food industry has experienced strong growth
driven primarily by more health conscious consumers and the overall demand
for natural food products. Our retail health food segment has benefitted
from this trend, experiencing sales growth in many product categories such as
grocery and supplements. Management continues to evaluate locations for new
stores and closely reviews existing locations for opportunities to close,
relocate or expand strong performing stores.
27
AMCON's retail health food stores are managed collectively through a main
office in Tulsa, Oklahoma. The Company strives to maintain the local
identity of each store while leveraging the operating synergies of
centralized management operations.
RESULTS OF OPERATIONS - Continuing Operations
SALES
Changes in sales are driven by two primary components:
(i) changes to selling prices, which are largely controlled by
our product suppliers, and excise taxes imposed on
cigarettes and tobacco products by various states; and
(ii) changes in the volume of products sold to our customers, either
due to a change in purchasing patterns resulting from consumer
preferences or the fluctuation in the comparable number of
business days in our reporting period.
Sales by business segment for the three and nine month periods ended June
2007 and June 2006 are as follows (dollars in millions):
Three months Nine months
ended June ended June
----------------------- ------------------------
2007 2006 Incr 2007 2006 Incr
(Decr) (Decr)
------ ------ ------ ------ ------- ------
Wholesale distribution segment $210.6 $213.2 $ (2.6) $602.2 $588.4 $ 13.8
Retail health food segment 9.5 9.0 0.5 28.4 27.8 0.6
------ ------ ------ ------ ------ ------
$220.1 $222.2 $ (2.1) $630.6 $616.2 $ 14.4
====== ====== ====== ====== ====== ======
Three months ended June 2007 comparison - continuing operations
---------------------------------------------------------------
Sales for Q3 2007 decreased $2.1 million, or 1.0% as compared to Q3 2006.
Sales are reported net of costs associated with sales incentives provided to
retailers, totaling $3.8 million and $4.0 million, for Q3 2007 and Q3 2006,
respectively.
Sales from our wholesale distribution segment decreased $2.6 million for the
three months ended June 2007 as compared to the same period in the prior
year. Of this decrease, $3.5 million related to a decrease in cigarette
sales, partially offset by a $0.9 million increase in tobacco, confectionary,
food service and other product sales.
Significant items impacting Q3 2007 sales included the following items.
During fiscal 2007, certain states imposed sizable increases in excise taxes
levied on cigarettes. As excise taxes pass through to our customers, the
associated increase in our prices had the impact of increasing our Q3 2007
sales by approximately $6.2 million as compared to Q3 2006. The increase in
excise taxes also had the impact of decreasing the demand for cigarettes in
the related states and accordingly reduced sales by an offsetting amount of
approximately $9.1 million.
28
Other items impacting cigarette sales during Q3 2007 were price increases
implemented by major cigarette manufacturers during fiscal 2007, which had
the effect of increasing Q3 2007 sales by approximately $3.4 million as
compared to Q3 2006. The remaining change in cigarette sales as compared to
Q3 2006 was primarily attributable to a 2.1% decrease in cigarette carton
volumes in states not impacted by excise tax increases. The $0.9 million
increase in tobacco, confectionary, food service and other product sales was
primarily the result of price increases and changes in sales volumes.
Sales from our retail health food segment increased slightly to $9.5 million
in Q3 2007 as compared to $9.0 million in Q3 2006.
Nine months ended June 2007 comparison - continuing operations
--------------------------------------------------------------
Sales for the nine month period ended June 2007 increased $14.4 million, or
2.3% as compared to the same period in the prior fiscal year. Sales for the
nine months ended June 2007 and 2006, were net of costs associated with sales
incentives provided to retailers, totaling $11.7 million and $11.2 million,
respectively.
Sales from our wholesale distribution segment increased $13.8 million for the
nine months ended June 2007 as compared to the same period in the prior year.
Of this increase, $4.5 million was attributable to an increase in cigarette
sales and $9.3 million was attributable to an increase in tobacco,
confectionary, food service and other product sales.
Significant items impacting sales during the first nine months of fiscal 2007
include the following items. During fiscal 2007, certain states imposed
sizable increases in excise taxes levied on cigarettes. As excise taxes pass
through to our customers, the associated increase in our prices had the
impact of increasing sales for the nine months ended June 2007 by
approximately $8.7 million, as compared to the same period in the prior year.
The increase in excise taxes also had the impact of decreasing the demand for
cigarettes in the related states and accordingly reduced sales by an
offsetting amount of approximately $11.2 million.
Other items impacting cigarette sales were the effect of price increases
implemented by major cigarette manufacturers during fiscal 2007, which
increased sales for the first nine months of fiscal 2007 by approximately
$8.4 million as compared to the same period in the prior year. The remaining
change in cigarette sales for the nine month period, as compared to the same
prior year period, was primarily attributable to slight decrease in cigarette
carton volumes in states not impacted by excise tax increases. The $9.3
million increase in tobacco, confectionary, food service and other product
sales was primarily the result of price increases and changes in sales
volumes.
Sales from our retail health food segment increased $0.6 million or 2.1%,
during the first nine months of fiscal 2007 as compared to the same period in
2006. This increase was primarily the result of higher sales volumes in our
vitamin and supplement product categories.
29
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 those of other entities.
Some entities may classify such costs as a component of cost of sales.
Cost of sales, a component used in determining gross profit, for the
wholesale and retail segments includes the cost of products purchased from
manufacturers, less incentives we receive which are netted against such
costs.
Gross profit by business segment for the three and nine month periods ended
June 2007 and June 2006 are as follows (dollars in millions):
Three Months Nine Months
ended June ended June
----------------------- -----------------------
2007 2006 Incr 2007 2006 Incr
------ ------ ------ ------ ------ ------
Wholesale distribution segment $ 12.9 $ 12.1 $ 0.8 $ 34.8 $ 33.3 $ 1.5
Retail health food segment 3.7 3.5 0.2 11.2 11.0 0.2
------ ------ ------ ------ ------ ------
$ 16.6 $ 15.6 $ 1.0 $ 46.0 $ 44.3 $ 1.7
====== ====== ====== ====== ====== ======
Three months ended June 2007 comparison - continuing operations
----------------------------------------------------------------
Gross profit for the three month period ended June 2007 increased $1.0
million, or 6.1% as compared to Q3 2006 and gross profit as a percent of
sales increased to 7.5% as compared to 7.0% in Q3 2006.
During Q3 2007, gross profit in our wholesale distribution segment increased
$0.8 million or 6.0% as compared to Q3 2006. Increasing wholesale segment
gross profit during Q3 2007 was a $1.2 million benefit resulting from the
impact of excise tax increases. This benefit was partially offset by a $0.3
million higher inventory LIFO reserve charge in Q3 2007 as compared to
Q3 2006. The remaining change in our wholesale distribution segment gross
profit was primarily the result of fluctuations in product mix sold,
promotional allowances received from manufacturers, price increases within
our non-cigarette product categories and changes in unit volumes sold.
Gross profit for the retail health segment increased approximately $0.2
million in Q3 2007 as compared to Q3 2006. Retail segment gross profits
benefitted approximately $0.3 million during Q3 2007 due to higher volumes,
improved sales mix and lower throw-out costs. These increases were partially
offset by a higher $0.1 million LIFO inventory charge in Q3 2007 as compared
to Q3 2006.
Nine months ended June 2007 comparison - continuing operations
--------------------------------------------------------------
For the nine months ended June 2007, gross profit increased $1.7 million, or
3.8% compared to the same period in the prior fiscal year. Gross profit as a
percent of sales increased slightly to 7.3% for the nine month period ended
June 2007, as compared to 7.2% for the same period in 2006.
30
Gross profit from our wholesale distribution segment increased approximately
$1.5 million or 4.6%, for the nine months ended June 2007 as compared to the
same period in the prior year. Increasing gross profit during the nine month
period was approximately a $1.7 million benefit resulting from excise tax
increases during fiscal 2007. This benefit was offset by a $1.3 million
higher inventory LIFO reserve charge incurred during the first nine months of
2007 as compared to the same period in the prior year. The remaining $1.1
million change in our wholesale distribution segment gross margin was
primarily the result of fluctuations in the product mix sold, promotional
allowances received from manufacturers, price increases within our non-
cigarette product categories and changes in unit volumes sold.
Gross profit in our retail health food segment increased approximately $0.2
million in the first nine months of fiscal 2007 as compared to the same
period in fiscal 2006. Retail gross profit benefitted approximately $0.5
million during the nine month period ended June 2007 due to higher volumes,
improved sales mix and lower throw-out costs. These increases in gross
profit were partially offset by a higher $0.3 million LIFO inventory charge
incurred during the first nine months of fiscal 2007 as compared to the same
period in the prior year.
OPERATING EXPENSE - three and nine months ended June 2007 comparison
Operating expense includes selling, general and administrative expenses and
depreciation and amortization. Selling, general and administrative include
costs related to our sales, warehouse, delivery and administrative
departments for all segments. Specifically, purchasing and receiving costs,
warehousing costs and costs of picking and loading customer orders are all
classified as selling, general and administrative expenses. Our most
significant expenses relate to employee costs, facility and equipment leases,
transportation costs, fuel costs, insurance and professional fees.
Q3 2007 operating expenses were flat in comparison to Q3 2006, increasing
only $0.1 million. This increase was primarily related to higher litigation
related costs, partially offset by lower insurance and compensation costs.
Operating expenses for the nine month period ended June 2007 increased
approximately $0.2 million or 1.0% as compared to the same period in the
prior year. This increase was primarily related to higher litigation related
costs, partially offset by a decrease in bad debt expense, other professional
fees and insurance expense during the first nine months of fiscal 2007 as
compared to the same period in the prior year.
INTEREST EXPENSE - three and nine months ended June 30, 2007 comparison
Interest expense for the three months ended June 2007 decreased slightly as
compared to same period in the prior year, while interest expense for the
nine months ended June 2007 increased approximately $0.2 million over the
comparable prior year period. The increase in interest expense for the nine
month period ended June 2007 was principally related to higher prime interest
rates and the impact of an interest rate swap, which matured in the prior
fiscal year. The interest rate swap had the effect of converting $10.0
million of the Company's credit facility borrowings to a fixed interest rate
of 4.87%. Interest expense for the nine months ended June 2007 was partially
offset by the impact of lower average borrowings as compared to the same
period in the prior year.
31
The Company primarily borrows at the prime interest rate. On average, the
Company's borrowing rates on variable rate debt were 0.43% higher and the
average borrowings on variable rate debt were $6.0 million lower in Q3 2007
as compared to Q3 2006. For the nine months ended June 2007, variable
interest rates were on average 0.91% higher and average borrowings on
variable rate debt were $3.3 million lower as compared to the same period in
2006.
DISCONTINUED OPERATIONS - three and nine months ended June 2007
Discontinued operations include the residual assets, liabilities and results
of operations of Hawaiian Natural Water Company, Inc. ("HNWC") and TSI for
the three and nine months ended June 2007 and June 2006. The results of
operations for the first nine months of fiscal 2006 also include The Beverage
Group, Inc. ("TBG"), which was the beverage marketing and distribution
component of the Company's former beverage segment. In April 2006, the
Company successfully concluded its wind-down plan of TBG's operations at
which time its residual liabilities were classified as a component of
continuing operations.
(Loss) income from discontinued operations totaled ($0.1) million and $0.4
million for the three and nine months ended June 2007 as compared to losses
of ($0.3) million and ($2.1) million for the same periods in the prior year.
The improvement in operating results in comparison to the prior fiscal year,
is primarily attributable to the November 2006 sale of HNWC's assets for a
pretax gain of $1.6 million. Additionally, TSI's operations were closed in
March 2006, which stemmed further operating losses in the current fiscal
year.
A summary of discontinued operations is as follows:
Three months ended June Nine months ended June
------------------------- ---------------------------
2007 2006 2007 2006
----------- ----------- ------------ ------------
Sales $ - $ 1,797,459 $ 862,647 $ 6,447,472
Operating loss (114,230) (473,441) (442,516) (3,054,110)
Gain on disposal of discontinued
operations, before income taxes - - 1,455,333 -
Income tax (benefit) expense (80,000) (181,000) 353,000 (1,190,000)
(Loss) income from discontinued operations (131,740) (326,447) 375,658 (2,143,152)
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 these cash needs from the cash flow generated by its operating
activities, credit facility borrowings and preferred stock issuances, as
necessary. During the nine months ended June 2007, the Company generated
cash of approximately $0.9 million from operating activities. The cash
generated was primarily the result of a reduction in accounts receivable and
an increase accrued expenses in our continuing operations, partially offset
by the pay down of accounts payable and accrued expenses in discontinued
operations.
32
Our variability in cash flows from operating activities is heavily 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 generated approximately $3.7 million in
cash from investing activities during the first nine months of fiscal 2007.
Of the cash generated, approximately $3.8 million resulted from the sale of
HNWC's assets in November 2006 and $0.2 million related to the sale of TSI's
distribution warehouse, which is included as a component of our discontinued
operations. The cash proceeds from these items was partially offset by $0.3
million in capital expenditures for property, plant and equipment.
Financing Activities. The Company used net cash of $4.5 million for
financing activities during the first nine months of fiscal 2007. Of this
net change in cash, the Company used cash of $3.0 million for principal
payments on its bank credit facility, $1.2 million for principal payments on
long-term debt for both continuing and discontinued operations, and $0.3
million for the payment of preferred stock dividend payments.
Cash on Hand/Working Capital. As of June 2007, the Company had cash on hand
of $0.6 million and working capital (current assets less current liabilities)
of $28.9 million. This compares to cash on hand of $0.5 million and working
capital of $28.0 million as of September 2006.
TSI Litigation
--------------
As discussed in Note 2 to the Condensed Consolidated Unaudited Financial
Statements included within this Quarterly Report on Form 10-Q, the Company
ceased the operations of TSI during fiscal 2006 due to recurring losses, lack
of capital resources, and the litigation regarding the ownership of TSI's
assets as discussed in Part II, Item 1, Legal Proceedings. As a result of
this decision, there are no revenues and only minimal expenses were incurred
by TSI during the nine months ended June 2007. Management is working to
divest substantially all of the assets of TSI in an attempt to achieve a
complete resolution of any and all claims by CPH against the Company and that
the Company has against CPH. The impact of this decision on our future cash
flows is that only minimal expenses will be funded at TSI.
Contractual Obligations
-----------------------
There have been no significant changes to the Company's contractual
obligations as set forth in the Company's Form 10-K, as amended, for the
fiscal period ended September 30, 2006.
33
CREDIT AGREEMENT
----------------
The Company's primary source of borrowing for liquidity purposes is its
revolving credit facility with LaSalle Bank (the "Facility"). The significant
terms of the Facility at June 30, 2007 include:
- A $55.0 million revolving credit limit, plus the outstanding balances
on two term notes ("Term Note A" and "Term Note B") which totaled
approximately $1.3 million at June 30, 2007 for a total credit
facility limit of $56.3 million at June 30, 2007.
- Bears interest at the bank's prime interest rate, except for Term Note B
which bears interest at the bank's prime rate plus 2%.
- Maturity and expiration dates for the Facility and Term Note A of
April 2009 and March 2008 for Term Note B.
- Lending limits subject to accounts receivable and inventory limitations,
an unused commitment fee equal to 0.25% per annum on the difference
between the maximum loan limit and average monthly borrowings.
- A prepayment penalty of one percent (1%) of the prepayment loan limit of
$55.0 million if prepayment occurs on or before April 30, 2008.
The Facility also includes quarterly debt service and cumulative earnings
before interest, taxes, depreciation and amortization ("EBITDA") financial
covenants. Beginning with the fiscal quarter ended September 30, 2007, the
Company must maintain a minimum debt service ratio of 1.0 to 1.0, as measured
by the twelve month period then ended.
The cumulative minimum EBITDA requirements are as follows: (a) $1,000,000
for the three months ending December 31, 2007 and December 31, 2008
(b) $2,000,000 for the six months ending March 31, 2008, and March 31, 2009,
(c) $4,500,000 for the nine months ending June 30, 2007 and June 30, 2008 and
$7,000,000 for the twelve months ending September 30, 2007 and September 30,
2008. The Company was in compliance with the required minimum EBITDA
covenant at June 30, 2007.
The Company's maximum available credit limit under the Facility was $52.7
million at June 30, 2007, however, the amount available for use at any given
time is subject to many factors including eligible accounts receivable and
inventory balances that are evaluated on a daily basis. On June 30, 2007,
the outstanding balance on the revolving portion of the Facility was $44.6
million. The Facility bears interest at a variable rate equal to the bank's
prime rate, which was 8.25% at June 30, 2007. Based on our collateral and
loan limits, the Company's excess availability under the Facility at June 30,
2007 was approximately $8.1 million.
During the first nine months of fiscal 2007, our peak borrowings under the
Facility were $52.6 million and our average borrowings and average
availability were $46.9 and $3.9 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.
34
As a component of the credit agreement, the Company has two term notes,
Term Note A and Term Note B, with LaSalle Bank. Term Note A bears interest
at the bank's prime rate (8.25% at June 30, 2007) and is payable in monthly
installments of $16,333. Term Note B bears interest at the bank's prime rate
plus 2% (10.25% at June 30, 2007) and is payable in monthly installments of
$100,000. The outstanding balances on Term Note A and Term Note B were
$0.6 million and $0.7 million, respectively, as of June 30, 2007.
The Company's Chairman has personally guaranteed repayment of the Facility
and the term loans. However, the amount of his guaranty is capped at $10.0
million and is automatically reduced by the amount of the repayment on Term
Note B, which resulted in the guaranteed principal outstanding being reduced
to approximately $5.7 million as of June 30, 2007. AMCON pays the Company's
Chairman an annual fee equal to 2% of the guaranteed principal in return for
the personal guarantee. This guarantee is secured by a pledge of the shares
of Chamberlin's Natural Foods Inc., Health Food Associates Inc. ("Akin's
Natural Foods Inc."), 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.
OTHER
-----
AMCON has issued a letter of credit for approximately $1.0 million to its
workers' compensation insurance carrier as part of its self-insured loss
control program.
Off-Balance Sheet Arrangements
------------------------------
The Company does not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to interest rate risk on its variable rate debt.
At June 30, 2007, the Company had $45.9 million of variable rate debt
outstanding with maturities through April 2009. The interest rate on this
debt ranged from 8.25% to 10.25% at June 2007. We estimate that our annual
cash flow exposure relating to interest rate risk based on our current
borrowings is approximately $0.3 million for each 1% change in our lender's
prime interest rate.
We do not utilize financial instruments for trading purposes and hold no
derivative financial instruments which could expose us to significant market
risk.
35
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), that are designed to ensure that information required
to be disclosed in the Company's reports filed or furnished under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Exchange Act rules and forms of the SEC.
Such information is accumulated and communicated to the Company's management,
including its Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), as appropriate, to allow timely decisions regarding required
disclosures. Any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance of achieving
the desired control objectives.
The Company carried out the evaluation required by paragraph (b) of the
Exchange Act Rules 13a-15 and 15d-15, under the supervision and with the
participation of our management, including the CEO and CFO, of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report on Form 10-Q, the
Company's disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed by the Company
in the reports the Company files or submits under the Exchange Act is (1)
accumulated and communicated to management, including the Company's CEO and
CFO, to allow timely decisions regarding required disclosures and (2)
recorded, processed, summarized and reported, within the time periods
specified in the Commission's rules and forms.
There have been no changes in the Company's internal controls over financial
reporting during the quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, such internal
controls.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Trinity Springs. Inc. / Crystal Paradise Holdings, Inc. Litigation
-----------------------------------------------------------------
The Company and its consolidated subsidiary, TSI, were involved in litigation
regarding shareholder approval of the purchase of substantially all of the
assets of Trinity Springs, Ltd. (which later changed its name to Crystal
Paradise Holdings, Inc. ("CPH")). That litigation has been settled and the
presiding Court has approved the settlement and dismissed the lawsuit with
prejudice.
The settlement resolved all disputes between the minority shareholder
plaintiffs and CPH, AMCON, TSI and the Defendant Directors. The Company
faces no further known liability from that lawsuit or settlement. However,
the settlement did not resolve claims that AMCON and TSI may have against
CPH, or that CPH may have against AMCON and TSI.
On December 21, 2006, CPH filed a first amended complaint in the Fourth
Judicial District of the State of Idaho (Elmore County) (the "Court") against
AMCON and TSI and other defendants relating to the transfer of the assets of
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CPH to TSI and TSI's operation of the business thereafter. In this lawsuit,
CPH asserts claims of foreclosure; breach of the asset purchase agreement,
promissory notes and water royalty obligations; quantum meruit; unjust
enrichment; and collection and enforcement of its security interest. In
addition, CPH seeks a declaratory judgement that: (i) AMCON and TSI are
obligated to perform under the asset purchase agreement and other agreements
related to the asset purchase transaction; (ii) the actions of AMCON and TSI
constituted events of default; (iii) TSI has not cured the events of default;
(iv) TSI's obligations are accelerated under certain promissory notes; and
(v) AMCON is liable to CPH under a guaranty and suretyship agreement for all
amounts owed to CPH under the asset purchase agreement and related
agreements. Finally, CPH seeks its costs and attorney fees.
AMCON disagrees with the assertions made by CPH and intends to vigorously
defend against CPH's claims and to pursue its own claims against CPH. At
AMCON's request, on May 14, 2007, the Court ordered that venue be changed
from Elmore County to Ada County in Idaho. On May 29, 2007, AMCON and TSI
filed its answer stating defenses against claims asserted by CPH. In
addition, AMCON and TSI asserted the following counterclaims against CPH: (i)
a declaratory judgment that (a) the asset purchase agreement is unenforceable
against the parties, (b) AMCON and TSI are excused from performance under the
asset purchase agreement, and (c) CPH, TSI, and AMCON are required to return
each other to their pre-contractual positions; (ii) CPH breached the asset
purchase agreement; (iii) CPH breached an implied covenant of good faith and
fair dealing; (iv) CPH made fraudulent misrepresentations to AMCON and TSI;
(v) CPH fraudulently induced AMCON into entering into the transaction; (vi)
CPH breached numerous representations and warranties in the asset purchase
agreement; (vii) CPH was negligent; (viii) CPH has been unjustly enriched;
and (ix) AMCON and TSI are entitled to an offset for CPH's failure to
mitigate damages. AMCON and TSI also seek to recover their costs and
attorney fees.
With respect to the claims asserted by CPH in its recently filed complaint
and AMCON's and TSI's counterclaims asserted against CPH, AMCON's management,
after consulting with the trial counsel, is unable at this time to state that
any outcome unfavorable to AMCON is either probable or remote and therefore
cannot estimate the amount or range of any potential loss, if any, because
substantial discovery is needed, several unresolved legal issues exist, and
other pretrial work is yet to be completed.
Television Events and Marketing, Inc. vs. AMCON Distributing Company
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An action entitled Television Events & Marketing, Inc. vs. AMCON Distributing
Co., The Beverage Group, Inc., The Beverage Group aka AMCON Beverage Group,
AMCON Corporation and William F. Wright, Civil No. CV 05-00259 ACK KSC, was
filed in the First Circuit Court of the State of Hawaii in Honolulu, Hawaii
on March 8, 2005 and then moved on April 12, 2005 to the United States
District Court for the District of Hawaii. This action concerns the alleged
breach of two trademark licensing agreements between Television Events &
Marketing, Inc. ("TEAM") and the Company's subsidiary, The Beverage Group,
Inc., and purportedly, the other named defendants. On December 21, 2005, the
plaintiffs filed a Second Amended Complaint in the First Circuit Court of the
State of Hawaii in Honolulu, Hawaii. This Second Amended Complaint seeks
(i) an unstated amount of damages for an alleged breach of those agreements
and alleged misrepresentation; (ii) interest and reasonable attorney's fees
and costs; and (iii) such other relief as the court deems just and proper.
37
The Company, together with its named subsidiary has successfully obtained
dismissal of certain legal theories by motions for summary judgment. The
Company and its subsidiary also filed a Counterclaim in the action on
July 5, 2006 against TEAM and Archie Thornton alleging: (1) Thornton was an
undisclosed dual agent and breached his fiduciary duty to TBG, Inc.; (2) TEAM
tortuously assisted Thornton in breaching his fiduciary duty; (3) unjust
enrichment/restitution; (4) TEAM breached its duty of good faith and fair
dealing; (5) TEAM and Thornton's failure to disclose Thornton's agency
relationship with TEAM constituted fraud and misrepresentation; and (6)
punitive damages. The parties to the litigation are currently engaged in
ongoing mediation and settlement discussions. The Company and Plaintiff are
currently engaged in court supervised mediation. Trial is set for November
2007.
After taking into account the claims, counterclaims and liabilities recorded
for all of the foregoing matters, management believes that ultimate
resolution of such matters should not have a material adverse effect on the
Company's financial position.
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, as amended, for
the fiscal year ended September 30, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on April 17, 2007
for the purpose of electing six directors, ratification of the appointment of
its independent registered public accounting firm, approval of a non-
qualified stock option award to Christopher Atayan, Chief Executive Officer,
Vice Chairman and a Director of the Company, and approval of the 2007 Omnibus
Incentive Plan.
The following sets forth the results of the election of directors:
NAME OF NOMINEE FOR WITHHELD
--------------- --- --------
Class III Director
------------------
Kathleen M. Evans 495,031 99.9% 381
John R. Loyack 495,031 99.9% 381
Timothy R. Pestotnik 495,031 99.9% 381
38
NAME OF NOMINEE FOR WITHHELD
--------------- --- --------
Class I Director
----------------
Stanley Mayer 495,031 99.9% 381
William F. Wright 495,031 99.9% 381
In addition to the above elections, the holder of the Company's Series C
Convertible Preferred Stock was entitled to elect one member of the board of
directors, and as such designated Jeremy W. Hobbs as the individual it
elected as a Class I director by casting all 80,000 of its votes for such
election.
There was no solicitation in opposition to the nominees proposed to be
elected by the Stockholders in the Proxy Statement. In addition to the
directors elected at the Annual Meeting, the following directors continued
their term of office: Christopher H. Atayan, Raymond F. Bentele and
Allen D. Petersen.
The ratification of the appointment of McGladrey and Pullen LLP as its
independent registered public accounting firm for the Company for the fiscal
year ending September 30, 2007 was approved by the Stockholders with 494,712
votes FOR (99.9% of votes cast), 5 votes AGAINST, and 695 votes ABSTAINED.
The award of a non-qualified stock option to purchase 25,000 shares of the
Company's common stock at $18.00 per share to Christopher Atayan, Chief
Executive Officer, Vice Chairman and a Director of the Company, was approved
by shareholders with 239,792 votes FOR (97.0% of votes cast), 7,298 votes
AGAINST and 54 votes ABSTAINED.
The 2007 Omnibus Incentive Plan, an equity incentive plan, was approved by
shareholders with 232,030 votes FOR (93.9% of votes cast), 15,043 votes
AGAINST and 71 votes ABSTAINED.
With respect to the approval of the non-qualified stock option award to
Mr. Atayan and the 2007 Omnibus Incentive Plan, there were 248,268 broker
non-votes.
Further information regarding these matters is contained in the Company's
Proxy Statement dated March 9, 2007.
Item 5. Other Information
Not applicable.
39
Item 6. Exhibits
(a) Exhibits
31.1 Certification by Christopher H. Atayan, Chief Executive Officer and
Vice Chairman, furnished pursuant to section 302 of the Sarbanes-Oxley
Act
31.2 Certification by Andrew C. Plummer, Vice President and Chief
Financial Officer, furnished pursuant to section 302 of the Sarbanes-
Oxley Act
32.1 Certification by Christopher H. Atayan, Chief Executive Officer and
Vice Chairman, furnished pursuant to section 906 of the Sarbanes-Oxley
Act
32.2 Certification by Andrew C. Plummer, Vice President and Chief
Financial Officer, furnished pursuant to section 906 of the Sarbanes-
Oxley Act
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
AMCON DISTRIBUTING COMPANY
(registrant)
Date: July 17, 2007 /s/ Christopher H. Atayan
------------------ -----------------------------
Christopher H. Atayan,
Chief Executive Officer and
Vice Chairman
Date: July 17, 2007 /s/ Andrew C. Plummer
------------------ -----------------------------
Andrew C. Plummer,
Chief Financial Officer and Principal
Financial and Accounting Officer
40