UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 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
---- ---- ----
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 April 16, 2007.
Form 10-Q
2nd Quarter
INDEX
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
--------------------------------------------
Condensed consolidated balance sheets at
March 31, 2007 (unaudited) and September 30, 2006 3
Condensed consolidated unaudited statements of operations
for the three and six months ended March 31, 2007 and
2006 4
Condensed consolidated unaudited statements of cash flows
for the six months ended March 31, 2007 and
2006 5
Notes to condensed consolidated unaudited
financial statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Controls and Procedures 33
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 1A. Risk Factors 34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits 35
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 2007 and September 30, 2006
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March 2007 September 2006
(Unaudited)
------------ --------------
ASSETS
Current assets:
Cash $ 561,851 $ 481,138
Accounts receivable, less allowance for doubtful
accounts of $0.9 million and $0.9 million, respectively 26,579,473 27,815,751
Inventories, net 22,018,639 24,443,063
Deferred income taxes 1,847,894 1,972,988
Current assets of discontinued operations 4,332 1,172,805
Prepaid and other current assets 5,365,424 5,369,154
------------ ------------
Total current assets 56,377,613 61,254,899
Property and equipment, net 11,836,153 12,528,539
Goodwill 5,848,808 5,848,808
Other intangible assets 3,419,936 3,439,803
Deferred income taxes 6,306,489 6,772,927
Noncurrent assets from discontinued operations 2,063,393 3,774,106
Other assets 1,281,938 1,247,464
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$ 87,134,330 $ 94,866,546
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 11,682,815 $ 14,633,124
Accrued expenses 4,710,970 4,687,789
Accrued wages, salaries and bonuses 1,784,919 1,879,699
Income taxes payable 149,354 168,936
Current liabilities of discontinued operations 7,531,674 7,461,549
Current maturities of credit facility 3,646,000 3,896,000
Current maturities of long-term debt 477,190 524,130
------------ ------------
Total current liabilities 29,982,922 33,251,227
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Credit facility, less current maturities 42,319,352 44,927,429
Long-term debt, less current maturities 6,827,727 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 authorized and issued, liquidation preference
$25.00 per share 2,438,355 2,438,355
Series B cumulative, convertible preferred stock, $.01 par value
80,000 shares authorized and issued, liquidation preference
$25.00 per share 1,857,645 1,857,645
Series C cumulative, convertible preferred stock, $.01 par value
80,000 shares authorized and issued, liquidation preference
$25.00 per share 1,982,372 1,982,372
Commitments and contingencies (Note 11)
Shareholders' equity (deficiency):
Preferred stock, $0.01 par, 1,000,000 shares authorized,
none outstanding - -
Common stock, $.01 par value, 3,000,000
shares authorized, 527,062 shares outstanding 5,271 5,271
Additional paid-in capital 6,284,476 6,278,476
Accumulated deficit (7,370,790) (8,030,816)
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Total shareholders' deficiency (1,081,043) (1,747,069)
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$ 87,134,330 $ 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 six months ended March 31, 2007 and 2006
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For the three months For the six months
ended March ended March
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2007 2006 2007 2006
------------- ------------- ------------- -------------
Sales (including excise taxes of $48.4
million and $46.9 million, and $98.0
million and $95.1 million, respectively) $ 201,176,501 $ 195,803,790 $ 410,542,650 $ 394,020,871
Cost of sales 186,809,844 181,164,019 381,134,862 365,353,770
------------- ------------- ------------- -------------
Gross profit 14,366,657 14,639,771 29,407,788 28,667,101
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Selling, general and administrative expenses 13,045,926 12,581,580 25,451,009 25,231,796
Depreciation and amortization 456,204 482,861 914,047 961,587
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13,502,130 13,064,441 26,365,056 26,193,383
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Operating income 864,527 1,575,330 3,042,732 2,473,718
------------- ------------- ------------- -------------
Other expense (income):
Interest expense 1,237,976 1,109,885 2,506,638 2,267,350
Other (income), net (32,225) (28,810) (63,307) (49,591)
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1,205,751 1,081,075 2,443,331 2,217,759
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(Loss) income from continuing operations
before income tax (benefit) expense (341,224) 494,255 599,401 255,959
Income tax (benefit) expense (125,000) 205,000 238,000 126,000
------------- ------------- ------------- -------------
(Loss) income from continuing operations (216,224) 289,255 361,401 129,959
Discontinued operations (Note 2)
(Loss) gain on disposal of discontinued
operations, net of income tax (benefit)
expense of ($0.04) million and $0.6
million, respectively (66,498) - 829,090 -
Loss from discontinued operations,
net of income tax (benefit) of ($0.1)
million and ($0.4) million, and ($0.2)
million and ($1.0) million, respectively (124,283) (789,067) (321,693) (1,816,705)
------------- ------------- ------------- -------------
(Loss) income on discontinued operations (190,781) (789,067) 507,397 (1,816,705)
------------- ------------- ------------- -------------
Net (loss) income (407,005) (499,812) 868,798 (1,686,746)
Preferred stock dividend requirements (103,239) (81,239) (208,772) (156,106)
------------- ------------- ------------- -------------
Net (loss) income available to common
shareholders $ (510,244) $ (581,051) $ 660,026 $ (1,842,852)
============= ============= ============= =============
Basic (loss) earnings per share
available to common shareholders:
Continuing operations $ (0.61) $ 0.39 $ 0.29 $ (0.05)
Discontinued operations (0.36) (1.49) 0.96 (3.45)
------------- ------------- ------------- -------------
Net basic (loss) earnings per share
available to common shareholders $ (0.97) $ (1.10) $ 1.25 $ (3.50)
============= ============= ============= =============
Diluted (loss) earnings per share
available to common shareholders:
Continuing operations $ (0.61) $ 0.37 $ 0.28 $ (0.05)
Discontinued operations (0.36) (1.35) 0.93 (3.45)
------------- ------------- ------------- -------------
Net diluted (loss) earnings per share
available to common shareholders $ (0.97) $ (0.98) $ 1.21 $ (3.50)
============= ============= ============= =============
Weighted average shares outstanding:
Basic 527,062 527,062 527,062 527,062
Diluted 527,062 584,517 546,131 527,062
The accompanying notes are an integral part of these condensed consolidated unaudited financial
statements.
4
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of Cash Flows
for the six months ended March 31, 2007 and 2006
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2007 2006
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 868,798 $ (1,686,746)
Deduct: income (loss) from discontinued operations, net of tax 507,397 (1,816,705)
------------ ------------
Income from continuing operations 361,401 129,959
Adjustments to reconcile net income from
continuing operations to net cash flows
from operating activities:
Depreciation 894,180 941,722
Amortization 19,867 19,865
(Gain) loss on sale of property and equipment (8,129) 5,171
Stock based compensation 6,000 30,000
Deferred income taxes 591,532 (830,226)
Provision for losses on doubtful accounts (50,195) 319,987
Provision for losses on inventory obsolescence 11,650 136,762
Changes in assets and liabilities:
Accounts receivable 1,286,473 1,673,877
Inventories 2,412,774 (965,064)
Prepaid and other current assets 3,730 550,967
Other assets (34,474) 90,840
Accounts payable (2,950,309) (1,553,341)
Accrued expenses and accrued wages, salaries and bonuses (71,599) (446,058)
Income taxes payable and receivable (19,582) (118,798)
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Net cash flows from operating activities - continuing operations 2,453,319 (14,337)
Net cash flows from operating activities - discontinued operations (1,999,042) (104,783)
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Net cash flows from operating activities 454,277 (119,120)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (211,340) (377,249)
Proceeds from sales of property and equipment 17,675 31,898
Purchase of trademark - (15,000)
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Net cash flows from investing activities - continuing operations (193,665) (360,351)
Net cash flows from investing activities - discontinued operations 3,965,394 (1,021)
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Net cash flows from investing activities 3,771,729 (361,372)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net principal payments on bank credit agreements (2,858,077) (1,620,228)
Net proceeds from preferred stock issuance - 1,982,372
Proceeds from borrowings of long-term debt - 109,811
Dividends paid on preferred stock (208,772) (156,106)
Principal payments on long-term debt (288,570) (334,508)
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Net cash flows from financing activities - continuing operations (3,355,419) (18,659)
Net cash flows from financing activities - discontinued operations (789,874) 558,679
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Net cash flows from financing activities (4,145,293) 540,020
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Net change in cash 80,713 59,528
Cash, beginning of period 481,138 546,273
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Cash, end of period $ 561,851 $ 605,801
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,530,779 $ 2,130,593
Cash paid during the period for income taxes 99,050 1,024
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 -
The accompanying notes are an integral part of these condensed consolidated unaudited financial
statements.
5
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 March 31, 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 ("2006 Annual Report").
For convenience, the second fiscal quarters of 2007 and 2006 have been
referred to throughout this quarterly report as March 2007 and March 2006,
respectively.
6
Stock-based Compensation
------------------------
Prior to its expiration in June 2004, AMCON maintained a stock-based
compensation plan under which the Compensation Committee of the Board of
Directors could grant incentive stock options and non-qualified stock
options. The Company adopted SFAS No. 123 (revised 2004) (SFAS 123R), Share
Based Payment, on October 1, 2005 whereby compensation costs associated with
the unvested portion of previously granted employee stock options have been
recognized in the statement of operations since adoption. This expense has
been reflected in the consolidated statement of operations under "selling,
general and administrative expenses."
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.
7
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 six months ended March 2007 and HNWC, TSI and The Beverage
Group, Inc. ("TBG") for the three and six months ended March 2006.
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 settlement of the pending litigation.
The Beverage Group, Inc. (TBG)
--------------------------------
At March 2006, TBG, which represented the beverage marketing and distribution
component of the Company's former beverage segment, was classified as a
component of discontinued operations. In April 2006, the Company
successfully concluded its wind-down plan of TBG's operations at which time
its residual liabilities were classified in continuing operations.
8
Summary of Financial Information
--------------------------------
Discontinued operations includes the results from operations for HNWC and TSI
for the three and six months ended March 2007 and HNWC, TSI and TBG for the
three and six months ended March 2006. The effects of the 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, 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 Six months ended
March March
------------------------- ---------------------------
2007 2006 2007 2006
----------- ----------- ------------ ------------
Sales $ - $ 2,183,896 $ 862,647 $ 4,650,013
Operating loss (112,305) (1,128,218) (328,286) (2,672,375)
(Loss) gain on disposal of discontinued
operations, before income taxes (107,255) - 1,455,333 -
Income tax (benefit) expense (120,000) (445,000) 433,000 (1,044,000)
(Loss) income from
discontinued operations (190,781) (789,067) 507,397 (1,816,705)
The carrying amounts (net of allowances) of the major classes of assets and
liabilities are as follows (in millions):
March September
2007 2006
---------- ----------
Accounts receivable $ - $ 0.7
Inventories - 0.5
---------- ----------
Total current assets of discontinued operations $ - $ 1.2
========== ==========
Fixed assets $ 2.1 $ 3.8
========== ==========
Accounts payable $ 0.8 $ 2.0
Accrued expenses 1.1 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 $ 7.5 $ 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 debt obligations payable to related
parties from TSI as follows:
- 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.
9
- TSI owes $0.5 million on a loan due to a related party which is
wholly-owned by three of the Company's directors (including the
Chairman and the President) and another significant shareholder.
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 March 2007. TSI has not
obtained default waivers for its debt obligations and the stay on the
litigation as described in Note 11, was removed during the quarter.
Accordingly, all TSI debt obligations are classified in current liabilities
of discontinued operations at March 2007.
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 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 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.
10
3. CONVERTIBLE PREFERRED STOCK
The Company has the following Convertible Preferred Stock outstanding as of
March 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
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 March 31, 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
11
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.
4. INVENTORIES
Inventories consisted of the following at March 2007 and September 2006:
March September
2007 2006
------------ ------------
Finished goods $ 27,916,834 $ 29,407,201
LIFO reserve (5,898,195) (4,964,138)
------------ ------------
$ 22,018,639 $ 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 March 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 March 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.
12
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill by reporting segment of the Company consisted of the following:
March 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:
March September
2007 2006
------------ ------------
Trademarks and tradenames $ 3,373,269 $ 3,373,269
Favorable leases (less accumulated
amortization of $439,333 and $419,466) 46,667 66,534
------------ ------------
$ 3,419,936 $ 3,439,803
============ ============
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 after the completion of its third fiscal quarter.
Amortization expense for intangible assets that are considered to have finite
lives was $9,933 and $19,867 and $9,932 and $19,865 for the three and six
months ended March 2007 and 2006, respectively.
Amortization expense related to intangible assets held at March 2007 for each
of the five years subsequent to September 30, 2006 is estimated to be as
follows:
Fiscal Fiscal Fiscal Fiscal Fiscal
2007 /1/ 2008 2009 2010 2011
--------- --------- -------- -------- --------
Favorable leases 20,000 27,000 - - -
========= ========= ======== ======== ========
/1/ Represents amortization expense of intangible assets with finite lives for the
remaining six months of Fiscal 2007.
13
6. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share available to common shareholders is
calculated by dividing income (loss) from continuing operations less
preferred stock dividend requirements and income (loss) from discontinued
operations by the weighted average common shares outstanding for each period.
Diluted earnings (loss) per share available to common shareholders is
calculated by dividing income (loss) from continuing operations less
preferred stock dividend requirements (when anti-dilutive) and income (loss)
from discontinued operations by the sum of the weighted average common shares
outstanding and the weighted average dilutive options, using the treasury
stock method.
Stock options and potential common stock outstanding at March 2007 and
March 2006 that were anti-dilutive were not included in the computations of
diluted earnings per share. Such potential common shares totaled 330,704 for
the three and six months ended March 2007, and 209,466 and 230,443 for the
three and six months ended March 2006, respectively. The average exercise
prices of these anti-dilutive options and potential common stock were $22.03
for the three and six months ended March 2007, and $28.03 and $26.72 for the
three and six months ended March 2006, respectively.
For the three months ended March
-------------------------------------------------------
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/ - - - 57,455
----------- ----------- ----------- -----------
3. Weighted average number of
shares outstanding 527,062 527,062 527,062 584,517
=========== =========== =========== ===========
4. (Loss) income from
continuing operations $ (216,224) $ (216,224) $ 289,255 $ 289,255
Deduct: preferred stock
dividend requirements /2/ (103,239) (103,239) (81,239) (73,239)
----------- ----------- ----------- -----------
(319,463) (319,463) 208,016 216,016
=========== =========== =========== ===========
5. Loss from discontinued
operations $ (190,781) $ (190,781) $ (789,067) $ (789,067)
=========== =========== =========== ===========
6. Net loss available
to common shareholders $ (510,244) $ (510,244) $ (581,051) $ (573,051)
=========== =========== =========== ===========
7. (Loss) income per share from
continuing operations $ (0.61) $ (0.61) $ 0.39 $ 0.37
=========== =========== =========== ===========
8. Loss per share from
discontinued operations $ (0.36) $ (0.36) $ (1.49) $ (1.35)
=========== =========== =========== ===========
9. Net loss earnings per share
available to common shareholders $ (0.97) $ (0.97) $ (1.10) $ (0.98)
=========== =========== =========== ===========
14
/1/ For the three months ended March 2007, all stock options and Convertible
Preferred Stock Series were anti-dilutive and therefore excluded from the diluted
weighted average number of shares outstanding calculation. For the three months ended
March 2006, dilutive shares included stock options and Series C Convertible Preferred
Stock. All other preferred stock series at March 2006 were anti-dilutive and were not
included as a component of the diluted weighted average number of shares outstanding
calculation.
/2/ For the three months ended March 2006, the Series C Convertible Preferred Stock was
dilutive. Accordingly, the dilutive earnings calculation excludes the Series C
Convertible Preferred stock dividend payments, as this preferred stock series was assumed
to have been converted to common stock of the Company.
For the six months ended March
-------------------------------------------------------
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/ - 19,069 - -
----------- ----------- ----------- -----------
3. Weighted average number of
shares outstanding 527,062 546,131 527,062 527,062
=========== =========== =========== ===========
4. Income from continuing
operations $ 361,401 361,401 $ 129,959 $ 129,959
Deduct: preferred stock
dividend requirements (208,772) (208,772) (156,106) (156,106)
----------- ----------- ----------- -----------
152,629 152,629 (26,147) (26,147)
=========== =========== =========== ===========
5. Income (loss) from discontinued
operations $ 507,397 $ 507,397 $(1,816,705) $(1,816,705)
=========== =========== =========== ===========
6. Net income (loss) available
to common shareholders $ 660,026 $ 660,026 $(1,842,852) $(1,842,852)
=========== =========== =========== ===========
7. Earnings (loss) per share
from continuing operations $ 0.29 $ 0.28 $ (0.05) $ (0.05)
=========== =========== =========== ===========
8. Earnings (loss) per share from
discontinued operations $ 0.96 $ 0.93 $ (3.45) $ (3.45)
=========== =========== =========== ===========
9. Net earnings (loss) per share
available to common shareholders $ 1.25 $ 1.21 $ (3.50) $ (3.50)
=========== =========== =========== ===========
/1/ For the six months ended March 2007, in the money stock options were dilutive, while all
the Preferred Stock Series were anti-dilutive. Accordingly, the preferred stock series
have been excluded as a component of the diluted weighted average number of shares
outstanding calculation for the six months ended March 2007. For the six months ended
March 2006, stock options and Series A, B and C Convertible Preferred Stock were
anti-dilutive and have not been included as a component of the diluted weighted average
number of shares outstanding calculation.
15
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 six months ended March 2006. There were no
such reconciling items to net income or accumulated other comprehensive
income (loss) balances, during the three and six months ended March 2007.
For the three months For the six months
ended March 2006 ended March 2006
-------------------- ------------------
Net loss $ (499,812) $(1,686,746)
Interest rate swap valuation
adjustment, net of income tax
benefit of $18,000 and $29,000
for the three and six months
ended March 2006 (29,351) (47,480)
----------- -----------
Comprehensive loss $ (529,163) $(1,734,226)
=========== ===========
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 $1.7 million at March 31, 2007 for a total credit
facility limit of $56.7 million at March 31, 2007.
- Bears interest at the bank's prime interest rate.
- 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 two percent (2%) and one percent (1%) of the
prepayment loan limit of $55.0 million if prepayment occurs on or before
April 30, 2007 and April 30, 2008, respectively.
The Facility also includes quarterly debt service and cumulative earnings
before interest, taxes, depreciation and amortization ("EBITDA") financial
covenants. A minimum debt service ratio of 1.0 to 1.0 is required beginning
with the fiscal quarter ending September 30, 2007 for the twelve month period
then ended.
16
The cumulative minimum EBITDA requirements are as follows: (a) $1,000,000 for
the three months ending December 31, 2006, December 31, 2007 and December 31,
2008 (b) $2,000,000 for the six months ending March 31, 2007, March 31, 2008,
and March 31, 2009,(c) $4,500,000 for the nine months ending June 30, 2007,
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 all the
aforementioned covenants at March 31, 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 March 31, 2007, the available credit on the revolving portion of the
Facility, including accounts receivable and inventory limitations, was $51.3
million and the outstanding balance was $44.3 million. The Facility bears
interest at the bank's prime rate, which was 8.25% as of March 31, 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 March 31, 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 March 31, 2007) and is payable in monthly installments of
$100,000. The outstanding balances on Term Note A and Term Note B were
$0.7 million and $1.0 million, respectively, as of March 31, 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 $6.0 million as of March 31, 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"), who is
also a participant lender on the Company's revolving line of credit.
17
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 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.
The Company accounted for the 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 using the Black-Scholes option pricing model. 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. Options under the expired Plan were generally granted at
the stock's fair market value at date of grant. Options issued to
shareholders holding 10% or more of the Company's stock were generally issued
at 110% of the stock's fair market value at date of grant.
On October 1, 2005, the Company adopted SFAS No. 123R, Shared Based Payment
(SFAS 123R). The Company chose to apply the modified prospective transition
method as permitted by SFAS 123R and therefore has not restated prior
periods. Under this transition method, compensation cost associated with
employee stock options recognized for the three and six months ended March
2007, includes amortization related to the remaining unvested portion of
stock options granted prior to September 30, 2005. The Company's only stock
option grant since fiscal 2003 was a non-qualified option to purchase 25,000
shares of the Company's common stock awarded to the Company's Chief Executive
Officer in April 2007 as discussed in Note 12.
As a result of adopting SFAS 123R, net income (loss) before incomes taxes
included share-based compensation expense of $3,000 and $6,000 and $15,000
and $30,000 for the three and six months ended March 2007 and March 2006,
respectively. At March 2007, there were 29,635 options fully vested and
exercisable under the Stock Option Plan and unamortized compensation expense
totaled approximately $7,000.
18
Options issued and outstanding to management employees pursuant to the Stock
Option Plan are summarized below:
Number of Number Aggregate
Date Exercise Price Options Exercisable Intrinsic Value
Outstanding March 2007
------------------------------------------------------------------------------
Fiscal 1998 $ 15.68 9,171 9,171 $ 74,469
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 -
------ ------ --------
23,065 21,447 $ 74,469
====== ====== ========
At March 2007, there were 8,188 options fully vested and exercisable issued
to outside directors outside the Stock Option Plan as summarized as follows:
Number of Number Aggregate
Date Exercise Price Options Exercisable Intrinsic Value
Outstanding March 2007
------------------------------------------------------------------------------
Fiscal 1998 $ 15.68 1,834 1,834 $ 14,892
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 $ 14,892
====== ====== ========
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 six months
ended March 2007.
March 2007
-----------------
Weighted
Number Average
of Exercise
Shares Price
-----------------
Outstanding at beginning of period 31,253 $30.62
Granted - -
Exercised - -
Forfeited/Expired - -
-----------------
Outstanding at end of period 31,253 $30.62
=================
Options exercisable at end of period 29,635
========
19
The following summarizes all stock options outstanding at March 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 1.1 years $15.68 11,005 $15.68
1999 Options $36.82-$51.14 10,535 2.6 years $46.53 10,535 $46.53
2000 Options $34.50 3,165 3.7 years $34.50 3,165 $34.50
2002 Options $26.94 1,668 5.9 years $26.94 1,668 $26.94
2003 Options $28.26-$28.80 4,880 6.2 years $28.71 3,262 $28.66
------ ------ ------ ------
31,253 $30.62 29,635 $30.72
====== ====== ====== ======
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 MARCH 2007:
External revenue:
Cigarettes $ 143,291,673 $ - $ - $ 143,291,673
Confectionery 13,485,184 - - 13,485,184
Health food - 9,812,607 - 9,812,607
Tobacco, food service & other 34,587,037 - - 34,587,037
------------- ----------- ---------- -------------
Total external revenue 191,363,894 9,812,607 - 201,176,501
Depreciation 307,568 138,703 - 446,271
Amortization - 9,933 - 9,933
Operating income (loss) 1,489,830 849,053 (1,474,356) 864,527
Interest expense 282,711 373,975 581,290 1,237,976
Income (loss) from continuing
operations before taxes 1,217,567 485,740 (2,044,531) (341,224)
Total assets 65,221,350 11,591,894 10,321,086 87,134,330
Capital expenditures 33,251 7,280 - 40,531
QUARTER ENDED MARCH 2006:
External revenue:
Cigarettes $ 141,811,011 $ - $ - $ 141,811,011
Confectionery 13,038,041 - - 13,038,041
Health food - 9,711,316 - 9,711,316
Tobacco, food service & other 31,243,422 - - 31,243,422
------------- ----------- ---------- -------------
Total external revenue 186,092,474 9,711,316 - 195,803,790
Depreciation 312,657 160,272 - 472,929
Amortization - 9,932 - 9,932
Operating income (loss) 1,640,706 944,798 (1,010,174) 1,575,330
Interest expense 328,612 397,520 383,753 1,109,885
Income (loss) from continuing
operations before taxes 1,331,140 557,042 (1,393,927) 494,255
Total assets 63,188,858 12,642,701 16,065,716 91,897,275
Capital expenditures 238,212 24,495 - 262,707
20
Wholesale
Distribution Retail Other /1/ Consolidated
------------- ----------- ---------- -------------
SIX MONTHS ENDED MARCH 2007:
External revenue:
Cigarettes $ 294,149,869 $ - $ - $ 294,149,869
Confectionery 26,923,892 - - 26,923,892
Health food - 18,891,317 - 18,891,317
Tobacco, food service & other 70,577,572 - - 70,577,572
------------- ----------- ---------- -------------
Total external revenue 391,651,333 18,891,317 - 410,542,650
Depreciation 613,640 280,540 - 894,180
Amortization - 19,867 - 19,867
Operating income (loss) 4,079,396 1,350,621 (2,387,285) 3,042,732
Interest expense 581,791 760,530 1,164,317 2,506,638
Income (loss) from continuing
operations before taxes 3,512,517 609,977 (3,523,093) 599,401
Total assets 65,221,350 11,591,894 10,321,086 87,134,330
Capital expenditures 123,756 87,584 - 211,340
SIX MONTHS ENDED MARCH 2006:
External revenue:
Cigarettes $ 286,249,377 $ - $ - $ 286,249,377
Confectionery 25,243,784 - - 25,243,784
Health food - 18,725,875 - 18,725,875
Tobacco, food service & other 63,801,835 - - 63,801,835
------------- ----------- ---------- -------------
Total external revenue 375,294,996 18,725,875 - 394,020,871
Depreciation 617,193 324,529 - 941,722
Amortization - 19,865 - 19,865
Operating income (loss) 2,838,846 1,446,110 (1,811,238) 2,473,718
Interest expense 702,855 806,207 758,288 2,267,350
Income (loss) from continuing
operations before taxes 2,166,819 658,667 (2,569,527) 255,959
Total assets 63,188,858 12,642,701 16,065,716 91,897,275
Capital expenditures 321,638 55,611 - 377,249
/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
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, 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) 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
21
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 owing
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.
With respect to the claims asserted by CPH in its recently filed complaint,
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.
12. SUBSEQUENT EVENT
Stock Option Grant
------------------
On December 11, 2006, 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
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 amount of compensation expense to be recorded in the
Company's financial statements in connection with this grant, in accordance
with SFAS 123R, was measured as of April 17, 2007, the date of shareholder
approval.
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,
22
- 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.
CRITICAL ACCOUNTING ESTIMATES
Certain accounting estimates used in the preparation of the Company's
financial statements require us to make judgments and estimates and the
financial results we report may vary depending on how we make these
judgments and estimates. Our critical accounting estimates are set forth in
our 2006 Annual Report to Shareholders on Form 10-K for the fiscal year ended
September 30, 2006 filed with the Securities and Exchange Commission. There
have been no significant changes with respect to these policies during the
first six months of fiscal 2007.
COMPANY OVERVIEW - SECOND FISCAL QUARTER 2007
The following discussion and analysis includes the Company's results of
operations from continuing operations for the three and six months ended
March 2007 and March 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 ("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 second fiscal quarters ended on March
31, 2007 and March 31, 2006. For ease of discussion, AMCON's second fiscal
quarters, which ended on March 31, 2007 and March 31, 2006, are referred to
herein as March 2007 and 2006, respectively or Q2 2007 and Q2 2006,
respectively.
23
During the second quarter of fiscal 2007, the Company:
- experienced a $5.4 million or 2.7%, increase in sales compared to Q2 2006.
- reduced total continuing operations debt by $3.1 million compared to
such debt as of September 2006.
- recognized (loss) income from continuing operations per basic share of
($0.61)and $0.39 for the three months ended March 2007 and March
2006, respectively, and $0.29 and ($0.05) for the six months ended
March 2007 and March 2006, respectively.
- recognized (loss) income from discontinued operations per basic share
of ($0.36) and ($1.49) for the three months ended March 2007 and
March 2006, respectively, and $0.96 and ($3.45) for the six months
ended March 2007 and March 2006, respectively.
Wholesale Distribution Segment
------------------------------
The wholesale distribution business represents approximately 95% 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 six months ended March 2007 as compared to 24% for the
same period in the prior year.
The Company has adopted a number of operating strategies which 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 velocity
management reports.
24
Management has worked to improve ADC's operating efficiency by investing in
information technology systems to automate our buying and financial control
functions, as well as minimizing inventory costs. 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
--------------------------
The retail health food industry is experiencing growth primarily because of
the demand for natural products and more health conscious consumers. Our
retail health food segment has benefitted from this trend, experiencing sales
growth in many product categories including 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.
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 as follows:
(i) changes to selling prices, which is largely controlled by
our product suppliers and excise taxes imposed on
cigarettes and tobacco products by various states; and
(ii) changes in the volume of products sold to our customers, either
due to a change in purchasing patterns resulting from consumer
preferences or the fluctuation in the comparable number of
business days in our reporting period.
Sales by business segment for the three and six month periods ended March
2007 and March 2006 are as follows (dollars in millions):
Three months Six months
ended March ended March
----------------------- ------------------------
2007 2006 Incr 2007 2006 Incr
------ ------ ------ ------ ------- ------
Wholesale distribution segment $191.4 $186.1 $ 5.3 $391.6 $ 375.3 $ 16.3
Retail health food segment 9.8 9.7 0.1 18.9 18.7 0.2
------ ------ ------ ------ ------- ------
$201.2 $195.8 $ 5.4 $410.5 $ 394.0 $ 16.5
====== ====== ====== ====== ======= ======
25
Three months ended March 2007 comparison - continuing operations
----------------------------------------------------------------
Sales for Q2 2007 increased $5.4 million, or 2.7% as compared to Q2 2006.
Sales are reported net of costs associated with sales incentives provided to
retailers, totaling $4.0 million and $3.6 million, for Q2 2007 and Q2 2006,
respectively.
Sales from our wholesale distribution segment increased $5.3 million for the
three months ended March 2007 as compared to the same period in the prior
year. This increase was comprised of a $1.5 million increase in cigarette
sales and a $3.8 million increase in tobacco, confectionary, food service and
other product sales in Q2 2007 as compared to Q2 2006.
Significant items impacting sales during Q2 2007 were price increases
implemented by major cigarette manufacturers and increases in cigarette
excise taxes imposed by certain states during Q2 2007. These items had the
impact of increasing cigarette sales by approximately $3.1 million and $2.5
million, respectively, during Q2 2007 as compared to Q2 2006. The remaining
change in cigarette sales during Q2 2007 is due to changes in product mix and
a 3.3% decrease in carton volume as compared to Q2 2006. The increase in
tobacco, confectionary, food service and other product sales is primarily the
result of fluctuations in the product mix sold, price increases and changes
in sales volumes.
Sales from our retail health food segment increased slightly to $9.8 million
in Q2 2007 as compared to $9.7 million in Q2 2006.
Six months ended March 2007 comparison - continuing operations
--------------------------------------------------------------
Sales for the six month period ended March 2007 increased $16.5 million, or
4.2% compared to the same period in the prior fiscal year. Sales for the six
months ended March 2007 and 2006, were net of costs associated with sales
incentives provided to retailers, totaling $7.9 million and $7.2 million,
respectively.
Sales from our wholesale distribution segment increased $16.3 million for the
six months ended March 2007 as compared to the same period in the prior year.
Of this increase, cigarette sales increased $7.9 million and sales of
tobacco, confectionary and other products increased $8.4 million. Significant
items impacting sales in this segment during the first six months of fiscal
2007 were price increases implemented by major cigarette manufacturers and
increases in cigarette excise taxes imposed by certain states during the
first six months of fiscal 2007. These items had the impact of increasing
cigarette sales by approximately $5.0 million and $2.5 million, respectively,
during the first six months of fiscal 2007 as compared to the same period in
the prior year. The remaining change in our wholesale distribution segment
sales is primarily the result of fluctuations in the product mix sold, price
increases within the tobacco, confectionary, food service and other product
categories and changes in sales volumes.
Sales from our retail health food segment increased $0.2 million or 1.0%,
during the first six months of fiscal 2007 as compared to the same period in
2006.
26
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 that we receive which are netted against such costs.
Gross profit by business segment for the three and six month periods ended
March 2007 and March 2006 are as follows (dollars in millions):
Three Months Six Months
ended March ended March
----------------------- -----------------------
Incr Incr
2007 2006 (Decr) 2007 2006 (Decr)
------ ------ ------ ------ ------- ------
Wholesale distribution segment $ 10.4 $ 10.6 $ (0.2) $21.9 $ 21.1 $ 0.8
Retail health food segment 3.9 4.0 (0.1) 7.5 7.6 (0.1)
------ ------ ------ ------ ------- ------
$ 14.3 $ 14.6 $ (0.3) $29.4 $ 28.7 $ 0.7
====== ====== ====== ====== ======= ======
Three months ended March 2007 comparison - continuing operations
----------------------------------------------------------------
Gross profit for the three month period ended March 2007 decreased $0.3
million, or 1.9% as compared to Q2 2006 and gross profit as a percent of
sales decreased to 7.1% as compared to 7.5% in Q2 2006.
During Q2 2007, gross profit in our wholesale distribution segment decreased
$0.2 million or 1.9%, compared to Q2 2006. Decreasing gross profit in this
segment during the three month period was a $0.7 million higher inventory
LIFO reserve charge as compared to the same period in the prior year,
partially offset by a $0.6 million benefit resulting from excise tax
increases during Q2 2007. The remaining 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 for the retail health segment decreased slightly in Q2 2007 to
$3.9 million from $4.0 million in Q2 2006. Decreasing gross profit during
Q2 2007 was attributable to a $0.2 million higher inventory LIFO reserve
charge as compared to the same period in the prior year. This higher LIFO
reserve charge was partially offset by the impact of an improved sales mix of
higher margin products.
Six months ended March 2007 comparison - continuing operations
--------------------------------------------------------------
For the six months ended March 2007, gross profit increased $0.7 million, or
2.6% compared to the same period in the prior fiscal year. Gross profit as a
percent of sales decreased slightly to 7.2% from 7.3% for the six month
period ended March 2007, as compared to the same period in 2006.
27
Gross profit from our wholesale distribution segment increased approximately
$0.8 million or 3.8%, for the six months ended March 2007 as compared to the
same period in the prior year. Increasing gross profit during the six month
period was approximately a $0.6 million benefit resulting from excise tax
increases during the first six months of fiscal 2007. This increase was
offset by a $0.6 million higher inventory LIFO reserve charge incurred during
the first six months of 2007 as compared to the same period in the prior
year. The remaining 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 decreased approximately $0.1
million in the first six months of fiscal 2007 as compared to the same period
in fiscal 2006. Decreasing gross profit during the first six months of
fiscal 2007 was a $0.2 million higher inventory LIFO reserve charge as
compared to the same period in the prior year. This higher LIFO reserve
charge was partially offset by the impact of an improved sales mix of higher
margin products.
OPERATING EXPENSE - three and six months ended March 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.
In Q2 2007, operating expenses increased approximately $0.4 million, or 3.4%
as compared to Q2 2006. This increase was primarily related to higher
insurance, compensation and professional expenses incurred during Q2 2007,
partially offset by a decrease in bad debt expense as compared to Q2 2006.
For the six month period ended March 2007, total operating expenses increased
by approximately $0.2 million, or 0.7% as compared to the same period in the
prior year. This increase was primarily related to higher compensation
costs, partially offset by a decrease in bad debt expense, during the first
six months of fiscal 2007 as compared to the same period in the prior year.
INTEREST EXPENSE - three and six months ended March 31, 2007 comparison
Interest expense for the three and six months ended March 2007, increased
$0.1 million and $0.2 million, respectively as compared to the same periods
in 2006. These changes were principally related to increases in the prime
interest rate, which is the rate at which the Company primarily borrows, and
the maturity of an interest rate swap which expired in fiscal 2006. 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%.
On average, the Company's borrowing rates on variable rate debt were 0.87%
higher and the average borrowings on variable rate debt were $1.5 million
lower in Q2 2007 as compared to Q2 2006. For the six months ended March
2007, variable interest rates were on average 1.14% higher and average
28
borrowings on variable rate debt were $1.9 million higher as compared to the
same period in 2006.
DISCONTINUED OPERATIONS - three and six months ended March 2007
Discontinued operations include the residual assets, liabilities and results
of operations of Hawaiian Natural Water Company, Inc. ("HNWC") and Trinity
Springs, Inc. ("TSI") for the three and six months ended March 2007 and HNWC,
TSI and The Beverage Group, Inc. ("TBG") for the three and six months ended
March 2006. In April 2006, the Company successfully concluded its wind-down
plan of TBG's operations at which time its residual liabilities were
classified in continuing operations.
(Loss) income from discontinued operations totaled ($0.2) million and $0.5
million for the three and six months ended March 2007 compared to ($0.8)
million and ($1.8) million for the same periods in the prior year. The
change in (loss) income compared to the same periods in the prior fiscal
year, is primarily attributable to the November 2006 sale of HNWC's assets
for pretax gain of $1.6 million. Additionally, TSI's operations were closed
in March 2006, which has stemmed further operating losses in the current
fiscal year. Also, during Q2 2007 the former distribution warehouse for TSI
was sold at a foreclosure sale for approximately $0.2 million. The proceeds
of this sale were used to reduce TSI's outstanding debt and resulted in a
pretax loss of approximately $0.1 million for the three months ended March
2007.
A summary of discontinued operations is as follows:
Three months ended Six months ended
March March
------------------------- ---------------------------
2007 2006 2007 2006
----------- ----------- ------------ ------------
Sales $ - $ 2,183,896 $ 862,647 $ 4,650,013
Operating loss (112,305) (1,128,218) (328,286) (2,672,375)
(Loss) gain on disposal of discontinued
operations, before income taxes (107,255) - 1,455,333 -
Income tax (benefit) expense (120,000) (445,000) 433,000 (1,044,000)
(Loss) income from
discontinued operations (190,781) (789,067) 507,397 (1,816,705)
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 six months ended March 2007, the Company generated
cash of approximately $0.5 million from operating activities. This change in
cash was primarily related to a reduction in inventory and accounts
receivable levels in our wholesale distribution segment, partially offset by
the pay down of accounts payable and accrued expenses in both our continuing
and discontinued operations.
29
Our variability in cash flows from operating activities is heavily dependent
on the timing of inventory purchases and seasonal fluctuations. For example,
in the circumstance where we are "buying-in" to obtain favorable terms on
particular product or to maintain our LIFO layers, we may have to retain the
inventory for a period longer than the payment terms. This generates a cash
outflow from operating activities that we expect to reverse in later periods.
Additionally, during the warm weather months, which is our peak time of the
year operationally, we generally carry larger inventory back stock to ensure
high fill rates to maintain customer satisfaction.
Investing Activities. The Company generated approximately $3.8 million in
cash from investing activities during the first six 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 included as part of our discontinued operations. These
cash proceeds were partially offset by $0.2 million in capital expenditures
for property, plant and equipment.
Financing Activities. The Company used net cash of $4.1 million for
financing activities during the first six months of fiscal 2007. Of this
net change in cash, the Company used cash of $2.9 million for principal
payments on its bank credit facility, $1.0 million for principal payments on
long-term debt for both continuing and discontinued operations, and $0.2
million for the payment of preferred stock dividend payments.
Cash on Hand/Working Capital. As of March 2007, the Company had cash on hand
of $0.6 million and working capital (current assets less current liabilities)
of $26.4 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, in fiscal 2006
Company management decided to cease operations of TSI due to recurring
losses, lack of capital resources, and the litigation discussed in Part II,
Item 1, Legal Proceedings regarding the ownership of the assets of TSI. As a
result of this decision, there are no revenues and only minimal expenses at
TSI. 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 are funded at
TSI.
Contractual Obligations
-----------------------
There have been no significant changes to the Company's contractual
obligations as set forth in the Company's Annual Report on Form 10-K for
the fiscal period ended September 30, 2006.
30
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 March 31, 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 $1.7 million at March 31, 2007 for a total credit
facility limit of $56.7 million at March 31, 2007.
- Bears interest at the bank's prime interest rate.
- 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 two percent (2%) and one percent (1%) of the
prepayment loan limit of $55.0 million if prepayment occurs on or before
April 30, 2007 and April 30, 2008, respectively.
The Facility also includes quarterly debt service and cumulative earnings
before interest, taxes, depreciation and amortization ("EBITDA") financial
covenants. A minimum debt service ratio of 1.0 to 1.0 is required beginning
with the fiscal quarter ending September 30, 2007 for 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, 2006, December 31, 2007 and December 31,
2008 (b) $2,000,000 for the six months ending March 31, 2007, 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 all the
aforementioned covenants at March 31, 2007.
The Company's maximum available credit limit under the Facility was $51.3
million at March 31, 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 March 31, 2007,
the outstanding balance on the revolving portion of the Facility was $44.3
million. The Facility bears interest at a variable rate equal to the bank's
prime rate, which was 8.25% at March 31, 2007. Based on our collateral and
loan limits, the Company's excess availability under the Facility at March
31, 2007 was approximately $7.0 million.
During the first six months of fiscal 2007, our peak borrowings under the
Facility were $52.6 million and our average borrowings and average
availability were $47.6 and $2.7 million, respectively. Our availability to
borrow under the Facility generally decreases as inventory and accounts
receivable levels go up because of the borrowing limitations that are placed
on the collateralized assets.
31
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 March 31, 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 March 31, 2007) and is payable in monthly installments of
$100,000. The outstanding balances on Term Note A and Term Note B were
$0.7 million and $1.0 million, respectively, as of March 31, 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 $6.0 million as of March 31, 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., 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 March 31, 2007, the Company had $46.0 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 March 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.
32
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules
13a-15(f) and 15d-15(e) under the 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 related 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 Securities Exchange Act
of 1934 is (1) accumulated and communicated to management, including the
Company's Chief Executive Officer and Chief Financial Officer, 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
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, 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) 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
33
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 owing
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.
With respect to the claims asserted by CPH in its recently filed complaint,
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.
Item 1A. Risk Factors
There have been no material changes to the Company's risk factors as
previously disclosed in Item 1A "Risk Factors" in our 2006 Annual Report to
Shareholders on Form 10-K 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
There were no submission of matters to a vote of security holders to be
reported during the three month fiscal period ended March 31, 2007.
Item 5. Other Information
Not applicable.
34
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: April 17, 2007 /s/ Christopher H. Atayan
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Christopher H. Atayan,
Chief Executive Officer and
Vice Chairman
Date: April 17, 2007 /s/ Andrew C. Plummer
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Andrew C. Plummer,
Chief Financial Officer and Principal
Financial and Accounting Officer
35