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, 2009
OR
/ / Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission File Number 1-15589
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AMCON Distributing Company
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(Exact name of registrant as specified in its charter)
Delaware 47-0702918
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7405 Irvington Road, Omaha NE 68122
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (402) 331-3727
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer", "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
---- ----
Non-accelerated filer (Do not check Smaller reporting company
(if a smaller reporting company) X
---- ----
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act)
Yes No X
---- ----
The Registrant had 570,397 shares of its $.01 par value common stock
outstanding as of April 13, 2009.
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, 2009 (unaudited) and September 30, 2008 3
Condensed consolidated unaudited statements of operations
for the three and six months ended March 31, 2009
and 2008 4
Condensed consolidated unaudited statements of cash flows
for the six months ended March 31, 2009 and 2008 5
Notes to condensed consolidated unaudited
financial statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
Item 4T. Controls and Procedures 36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 1A. Risk Factors 37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
Item 3. Defaults Upon Senior Securities 38
Item 4. Submission of Matters to a Vote of Security Holders 38
Item 5. Other Information 39
Item 6. Exhibits 40
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 2009 and September 30, 2008
----------------------------------------------------------------------------------------------------
March 2009 September
(Unaudited) 2008
------------ ------------
ASSETS
Current assets:
Cash $ 411,760 $ 457,681
Accounts receivable, less allowance for doubtful accounts
of $1.1 million and $0.8 million, respectively 20,993,044 27,198,414
Inventories, net 30,523,160 37,330,969
Deferred income taxes 1,582,880 1,260,609
Current assets of discontinued operations 8,589 18,947
Prepaid and other current assets 4,255,140 3,519,650
------------ ------------
Total current assets 57,774,573 69,786,270
Property and equipment, net 10,764,915 10,907,541
Goodwill 5,848,808 5,848,808
Other intangible assets, net 3,373,269 3,373,269
Deferred income taxes 134,312 234,171
Non-current assets of discontinued operations 2,032,047 2,032,047
Other assets 1,015,606 1,123,252
------------ ------------
$ 80,943,530 $ 93,305,358
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,886,193 $ 14,738,214
Accrued expenses 8,181,597 5,275,697
Accrued wages, salaries and bonuses 2,372,790 2,636,699
Income taxes payable 2,374,671 313,021
Current liabilities of discontinued operations 4,253,096 4,041,837
Current maturities of credit facility 3,046,000 3,046,000
Current maturities of long-term debt 1,509,263 787,128
------------ ------------
Total current liabilities 33,623,610 30,838,596
Credit facility, less current maturities 16,774,215 32,155,005
Long-term debt, less current maturities 5,406,336 6,525,881
Noncurrent liabilities of discontinued operations 6,562,860 6,542,310
Series A cumulative, convertible preferred stock, $.01 par value
100,000 shares authorized and issued, liquidation preference
$25.00 per share 2,500,000 2,438,355
Series B cumulative, convertible preferred stock, $.01 par value
80,000 shares authorized and issued, liquidation preference
$25.00 per share 2,000,000 1,857,645
Series C cumulative, convertible preferred stock, $.01 par value
80,000 shares authorized and issued at September 30, 2008,
liquidation preference $25.00 per share - 1,982,372
Commitments and contingencies (Note 11)
Shareholders' equity:
Preferred stock, $0.01 par, 1,000,000 shares authorized,
180,000 shares outstanding and issued in Series A and B
at March 31, 2009 and 260,000 shares outstanding and issued
in Series A, B and C at September 30, 2008 referred to above - -
Common stock, $0.01 par value, 3,000,000 shares authorized,
570,397 shares outstanding at March 2009 and September 2008 5,704 5,704
Additional paid-in capital 7,245,156 6,995,948
Retained earnings 6,825,649 3,963,542
------------ ------------
Total shareholders' equity 14,076,509 10,965,194
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$ 80,943,530 $ 93,305,358
============ ============
The accompanying notes are an integral part of these condensed consolidated unaudited financial
statements.
3
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of Operations
for the three and six months ended March 31, 2009 and 2008
---------------------------------------------------------------------------------------------------------
For the three months For the six months
ended March ended March
----------------------------- -----------------------------
2009 2008 2009 2008
------------- ------------- ------------- -------------
Sales (including excise taxes of $43.3
million and $46.3 million, and $93.6
million and $97.9 million, respectively) $ 195,442,246 $ 190,411,670 $ 412,819,608 $ 401,074,907
Cost of sales 178,195,212 174,669,957 379,727,926 370,137,346
------------- ------------- ------------- -------------
Gross profit 17,247,034 15,741,713 33,091,682 30,937,561
------------- ------------- ------------- -------------
Selling, general and administrative expenses 13,027,140 12,696,507 25,824,722 24,907,082
Depreciation and amortization 300,988 339,809 611,322 702,283
------------- ------------- ------------- -------------
13,328,128 13,036,316 26,436,044 25,609,365
------------- ------------- ------------- -------------
Operating income 3,918,906 2,705,397 6,655,638 5,328,196
------------- ------------- ------------- -------------
Other expense (income):
Interest expense 408,587 749,558 897,786 1,719,360
Other (income), net (26,476) (39,265) (40,543) (72,476)
------------- ------------- ------------- -------------
382,111 710,293 857,243 1,646,884
------------- ------------- ------------- -------------
Income from continuing operations
before income tax expense 3,536,795 1,995,104 5,798,395 3,681,312
Income tax expense 1,343,000 728,000 2,203,000 1,369,000
------------- ------------- ------------- -------------
Income from continuing operations 2,193,795 1,267,104 3,595,395 2,312,312
Discontinued operations (Note 2)
Loss from discontinued operations,
net of income tax benefit of $0.1
million in each fiscal period (97,437) (97,445) (199,475) (193,440)
------------- ------------- ------------- -------------
Net income 2,096,358 1,169,659 3,395,920 2,118,872
Dividends on convertible preferred stock (314,201) (104,386) (419,734) (209,919)
------------- ------------- ------------- -------------
Net income available to common shareholders $ 1,782,157 $ 1,065,273 $ 2,976,186 $ 1,908,953
============= ============= ============= =============
Basic earnings (loss) per share
available to common shareholders:
Continuing operations $ 3.43 $ 2.16 $ 5.80 $ 3.92
Discontinued operations (0.18) (0.18) (0.36) (0.36)
------------- ------------- ------------- -------------
Net basic earnings per share
available to common shareholders $ 3.25 $ 1.98 $ 5.44 $ 3.56
============= ============= ============= =============
Diluted earnings (loss) per share
available to common shareholders:
Continuing operations $ 2.72 $ 1.48 $ 4.33 $ 2.72
Discontinued operations (0.12) (0.11) (0.24) (0.23)
------------- ------------- ------------- -------------
Net diluted earnings per share
available to common shareholders $ 2.60 $ 1.37 $ 4.09 $ 2.49
============= ============= ============= =============
Weighted average shares outstanding:
Basic 548,619 537,064 547,089 535,473
Diluted 805,236 851,370 830,923 850,314
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, 2009 and 2008
---------------------------------------------------------------------------------------------------
2009 2008
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,395,920 $ 2,118,872
Deduct: Loss from discontinued operations, net of tax (199,475) (193,440)
------------ ------------
Income from continuing operations 3,595,395 2,312,312
Adjustments to reconcile net income from
continuing operations to net cash flows
from operating activities:
Depreciation 611,322 682,417
Amortization - 19,866
Gain on sale of property and equipment (47,700) (17,635)
Stock based compensation 265,800 169,449
Excess tax deficiency on equity-based awards 16,592 -
Deferred income taxes (222,412) 1,246,631
Provision for losses on doubtful accounts 346,000 182,909
Provision for losses on inventory obsolescence 327,673 13,993
Changes in assets and liabilities:
Accounts receivable 5,859,370 5,924,315
Inventories 6,480,136 (3,394,581)
Prepaid and other current assets (735,490) 1,665,605
Other assets 107,646 (367,540)
Accounts payable (2,852,021) (1,571,109)
Accrued expenses and accrued wages, salaries and bonuses 2,641,991 (631,969)
Income tax payable 2,045,058 (132,090)
------------ ------------
Net cash flows from operating activities - continuing operations 18,439,360 6,102,573
Net cash flows from operating activities - discontinued operations 42,692 (128,421)
------------ ------------
Net cash flows from operating activities 18,482,052 5,974,152
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (497,401) (543,156)
Proceeds from sales of property and equipment 76,405 43,821
------------ ------------
Net cash flows from investing activities (420,996) (499,335)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on bank credit agreements (15,380,790) (5,324,674)
Principal payments on long-term debt (397,410) (274,409)
Proceeds from exercise of stock options - 119,637
Excess tax deficiency on vesting equity-based awards (16,592) -
Redemption of Series C convertible preferred stock (2,000,000) -
Dividends paid on convertible preferred stock (198,106) (209,919)
Dividends on common stock (114,079) -
------------ ------------
Net cash flows from financing activities (18,106,977) (5,689,365)
------------ ------------
Net change in cash (45,921) (214,548)
Cash, beginning of period 457,681 717,554
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Cash, end of period $ 411,760 $ 503,006
============ ============
5
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 968,296 $ 1,832,447
Cash paid during the period for income taxes 264,355 136,458
Supplemental disclosure of non-cash information:
Constructive dividends on Series A, B, and C
Convertible Preferred Stock 221,628 -
Acquisition of equipment through capital leases - 277,624
The accompanying notes are an integral part of these condensed consolidated unaudited financial
statements.
6
AMCON Distributing Company and Subsidiaries
Notes to Condensed Consolidated Unaudited Financial Statements
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
AMCON Distributing Company and Subsidiaries ("AMCON" and "the Company") is
primarily engaged in the wholesale distribution of consumer products in the
Great Plains and Rocky Mountain regions. In addition, the Company operates
thirteen retail health food stores in Florida and the Midwest.
AMCON's wholesale distribution business ("ADC") includes five distribution
centers that sell approximately 14,000 different consumer products, including
cigarettes and tobacco products, candy and other confectionery, beverages,
groceries, paper products, health and beauty care products, frozen and
chilled products and institutional food service products. The Company
distributes products primarily to retailers such as convenience stores,
discount and general merchandise stores, grocery stores and supermarkets,
drug stores and gas stations. In addition, the Company services
institutional customers, including restaurants and bars, schools, sports
complexes and vendors, as well as other wholesalers.
AMCON also operates six retail health food stores in Florida under the name
Chamberlin's Market & Cafe (Chamberlin's) and seven in the Midwest under the
name Akin's Natural Foods Market (Akin's). These stores carry natural
supplements, groceries, health and beauty care products and other food items.
Results for the interim period are not necessarily indicative of results to
be expected for the entire year.
All significant intercompany transactions and balances have been eliminated
in consolidation. Certain information and footnote disclosures normally
included in our annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
In the opinion of management, the accompanying condensed consolidated
unaudited financial statements contain all adjustments necessary to fairly
present the financial information included therein, such adjustments
consisting of normal recurring items. The Company believes that although
the disclosures are adequate to prevent the information presented from being
misleading, these condensed consolidated unaudited financial statements
should be read in conjunction with the Company's annual audited consolidated
financial statements for the fiscal year ended September 30, 2008, as filed
with the Securities and Exchange Commission on Form 10-K.
For purposes of this report, unless the context indicates otherwise, all
references to "we", "us", "our", "Company", and "AMCON" shall mean AMCON
Distributing Company and its subsidiaries. The wholesale distribution
segment of our Company will be separately referred to as "ADC". Additionally,
the three month fiscal periods ended March 31, 2009 and March 31, 2008 have
been referred to throughout this quarterly report as Q2 2009 and Q2 2008,
respectively. The fiscal balance sheet dates of March 31, 2009, March 31,
2008, and September 30, 2008 have been referred to as March 2009, March 2008,
and September 2008, respectively.
7
Accounting Changes
------------------
The Company adopted the following accounting standards effective
October 1, 2008 (beginning of fiscal 2009):
Financial Accounting Standards Board ("FASB") FASB No. 157, "Fair Value
Measurements" ("SFAS 157"): SFAS 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. The provisions of SFAS 157 apply to all financial instruments
which are measured and reported at fair value on a recurring basis. In
February 2008, the FASB issued FASB Staff Position ("FSP") FAS 157-2, which
delayed the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008 (fiscal 2010 for the Company) for all nonfinancial assets
and liabilities, except those that are recognized or disclosed at fair value
in the financial statements on a recurring basis (at least annually). Assets
and liabilities subject to this deferral include goodwill, intangible assets,
and long-lived assets measured at fair value for impairment assessments, and
nonfinancial assets and liabilities initially measured at fair value in a
business combination. As the Company does not have any financial assets or
liabilities measured at fair value on a recurring basis, nor does it have any
nonfinancial assets and liabilities not subject to the FSP 157-2 delay, the
adoption of SFAS 157 did not have any impact on our consolidated financial
position or results of operations.
FASB No. 159 "The Fair Value Option for Financial Assets and Financial
Liabilities" ("SFAS 159"): This standard provides an option for companies to
report selected financial assets and liabilities at fair value. Although the
Company adopted the provisions of SFAS 159, it did not elect the fair value
option for any financial instruments or other items held by the Company.
Therefore, the adoption of SFAS 159 did not have any impact on the Company's
consolidated financial position or results of operations.
Recently Issued Accounting Pronouncements
-----------------------------------------
The Company is currently evaluating the impact of implementing the following
new accounting standards:
In June 2008, the FASB issued FSP-EITF No. 03-6-1, "Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities". FSP EITF 03-6-1 provides that unvested share-based payment
awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings per share pursuant to the
two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning
after December 15, 2008 (fiscal 2010 for the Company). Upon adoption, a
company is required to retrospectively adjust its earnings per share data
(including any amounts related to interim periods, summaries of earnings and
selected financial data) to conform to the provisions of FSP EITF 03-6-1.
8
In April 2008, the FASB issued FSP No. FAS 142-3, "Determination of the
Useful Life of Intangible Assets" ("FSP No. FAS 142-3"). FSP No. FAS 142-3
requires companies estimating the useful life of a recognized intangible
asset to consider their historical experience in renewing or extending
similar arrangements or, in the absence of historical experience, to consider
assumptions that market participants would use about renewal or extension as
adjusted for SFAS No. 142's, Goodwill and Other Intangible Assets,
entity-specific factors. FSP No. FAS 142-3 is effective for fiscal years
beginning after December 15, 2008 (fiscal 2010 for the Company).
2. DISPOSITIONS
Discontinued operations include the residual assets, liabilities, and results
of operations of Trinity Springs, Inc. ("TSI") for the three and six month
fiscal periods ended March 2009 and March 2008. TSI operated a water
bottling facility in Idaho prior to its closure.
In September 2007, the Company signed a Mutual Release and Settlement
Agreement (the "Settlement Agreement") to resolve litigation among and
between AMCON, TSI, and Crystal Paradise Holdings, Inc. ("CPH") related to
a 2004 Asset Purchase Agreement ("Asset Purchase Agreement"), under which
TSI acquired certain assets from CPH. In conjunction with the Settlement
Agreement, AMCON entered into a $5.0 million note payable to CPH. The note
is due in September 2012 and accrues interest at 5.0%. The Settlement
Agreement also provided CPH with an option to purchase TSI's remaining
assets for a price equivalent to the amount due CPH under the $5.0 million
note payable, plus accrued interest. In conjunction with the Settlement
Agreement, the Company recorded a $1.5 million pre-tax deferred gain.
This deferred gain has been classified as a component of noncurrent
liabilities of discontinued operations in the Company's Consolidated
Balance Sheets.
In March 2009, CPH notified the Company that it was exercising its option
under the Settlement Agreement to acquire the assets of TSI in exchange
for the $5.0 million note payable, plus accrued interest. Upon completion
of the transaction, the Company will recognize the aforementioned $1.5
million deferred gain, in addition to any other settlement gains and losses.
The transaction is scheduled to close in April 2009 and is subject to the
satisfaction of various closing conditions.
9
A summary of discontinued operations is as follows:
Three months ended Six months ended
March March
------------------------- ---------------------------
2009 2008 2009 2008
----------- ----------- ------------ ------------
Operating loss (41,434) (42,695) (85,562) (81,940)
Interest expense (114,003) (113,750) (230,012) (229,500)
Income tax benefit (58,000) (59,000) (116,000) (118,000)
Loss from discontinued operations (97,437) (97,445) (199,475) (193,440)
The carrying amounts of the major classes of assets and liabilities included
in discontinued operations are as follows (in millions):
March September
2009 2008
---------- ----------
Fixed assets - total noncurrent assets of
discontinued operations $ 2.0 $ 2.0
========== ==========
Accounts payable $ 0.6 $ 0.5
Accrued expenses 0.9 0.7
Current portion of long-term debt due related party /1/ 2.8 2.8
---------- ----------
Total current liabilities of discontinued operations $ 4.3 $ 4.0
========== ==========
Deferred gain on CPH settlement $ 1.5 $ 1.5
Long-term debt, less current portion 5.1 5.0
---------- ----------
Noncurrent liabilities of discontinued operations $ 6.6 $ 6.5
========== ==========
/1/ TSI's related party debt obligations were in default at both March 2009 and September
2008. TSI has not obtained associated debt default waivers for the related party
obligations and accordingly has classified these obligations as current liabilities
of discontinued operations.
10
3. CONVERTIBLE PREFERRED STOCK
The Company had two convertible preferred stock series outstanding at
March 2009 as identified in the following table:
Series A Series B
------------- ---------------
Date of issuance: June 17, 2004 October 8, 2004
Optionally redeemable beginning June 18, 2006 October 9, 2006
Par value (gross proceeds): $2,500,000 $2,000,000
Number of shares: 100,000 80,000
Liquidation preference per share: $25.00 $25.00
Conversion price per share: $30.31 $24.65
Number of common shares in
which to be converted: 82,481 81,136
Dividend rate: 6.785% 6.37%
The Series A Convertible Preferred Stock ("Series A") and Series B
Convertible Preferred Stock ("Series B"), collectively (the Preferred Stock),
are convertible at any time by the holders into a number of shares of AMCON
common stock equal to the number of preferred shares being converted times
a fraction equal to $25.00 divided by the conversion price. The conversion
prices for the Preferred Stock are subject to customary adjustments in the
event of stock splits, stock dividends and certain other distributions on
the Common Stock. Cumulative dividends for the Preferred Stock are payable
in arrears, when, as and if declared by the Board of Directors, on March 31,
June 30, September 30 and December 31 of each year.
In the event of a liquidation of the Company, the holders of the Preferred
Stock, are entitled to receive the liquidation preference plus any accrued
and unpaid dividends prior to the distribution of any amount to the holders
of the Common Stock. The Preferred Stock also contain redemption features
which trigger based on certain circumstances such as a change of control,
bankruptcy, or minimum ownership thresholds in AMCON by Mr. William Wright
("Mr. Wright") and his family. Mr. Wright is AMCON's founder, largest
common shareholder, and a Company director. The shares of Preferred Stock
are optionally redeemable by the Company beginning on various dates, as
listed in the above table, at redemption prices equal to 112% of the
liquidation preference. The redemption prices decrease 1% annually
thereafter until the redemption price equals the liquidation preference,
after which date it remains the liquidation preference. The Company's
credit facility prohibits the redemption of the Series A and Series B.
The Series A is owned by Mr. Wright and a private equity firm (Draupnir, LLC)
of which Mr. Jeremy Hobbs, a Company director, is a member. The Series B
Preferred Stock is owned by an institutional investor which has elected
Mr. Chris Atayan to serve on the Company's board of directors. Mr. Atayan
is AMCON's Chief Executive Officer and Chairman of the Company's Board of
Directors.
11
In February 2009, the holder of the Company's Series C Convertible Preferred
Stock ("Series C") redeemed all 80,000 shares of the issuance. The Series C
issuance had been outstanding since 2006, paid a dividend of 6.00% percent
per annum, and was convertible into 146,842 shares of common stock. The
Company paid the liquidation value, or $2.0 million, plus accumulated and
unpaid dividends to fully redeem all of the outstanding shares. The
redemption was funded by our credit facility and satisfied all of the
Company's obligations under the Series C Convertible Preferred Stock
Agreement. In conjunction with the Series C redemption, the Company also
adjusted the carrying value of the Series A and Series B issuances to their
respective redemption values, as they are currently redeemable by the
holders. The adjustment to redemption value had no impact on our Income
from Continuing Operations or Net Income.
4. INVENTORIES
Inventories consisted of the following at March 2009 and September 2008:
March September
2009 2008
------------ ------------
Finished Goods $ 30,523,160 $ 37,330,969
============ ============
The wholesale distribution and retail health food segment inventories consist
of finished products purchased in bulk quantities to be redistributed to
the Company's customers or sold at retail. The wholesale distribution
inventories are stated at the lower of cost (first-in, first-out or "FIFO"
method) or market and consist of the cost of finished goods. The retail
health food operation utilizes the retail inventory method of accounting
stated at the lower of cost (FIFO) or market and consists of the costs of
finished goods.
Inventory also included total reserves of approximately $0.8 million and
$0.6 million at March 2009 and September 2008, respectively. These reserves
include the Company's obsolescence allowance, which reflects estimated
unsaleable or non-refundable inventory based upon an evaluation of slow
moving and discontinued products.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill by reporting segment of the Company consisted of the following:
March September
2009 2008
------------ ------------
Wholesale $ 3,935,931 $ 3,935,931
Retail 1,912,877 1,912,877
------------ ------------
$ 5,848,808 $ 5,848,808
============ ============
12
Other intangible assets of the Company consisted of the following:
March September
2009 2008
------------ ------------
Trademarks and tradenames $ 3,373,269 $ 3,373,269
============ ============
Goodwill, trademarks and tradenames are considered to have indefinite
useful lives and therefore no amortization has been taken on these assets.
The Company tests goodwill and other intangibles for impairment on an annual
basis, or between annual tests if an event occurs or circumstances change
that may reduce their respective fair values below carrying value.
6. DIVIDENDS:
In January 2009, the Company declared cash dividends of $0.10 per common
share to shareholders of record as of February 9, 2009. Cash dividends paid
to common shareholders for the three and six months ended March 2009 totaled
$57,040 and $114,079, respectively.
7. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share available to common shareholders is
calculated by dividing income (loss) from continuing operations less
preferred stock dividend requirements and income (loss) from discontinued
operations by the weighted average common shares outstanding for each period.
Diluted earnings (loss) per share available to common shareholders is
calculated by dividing income (loss) from continuing operations less
preferred stock dividend requirements (when anti-dilutive) and income (loss)
from discontinued operations by the sum of the weighted average common shares
outstanding and the weighted average dilutive options, using the treasury
stock method.
Stock options and potential common stock outstanding at March 2009 and
March 2008 that were anti-dilutive were not included in the computations
of diluted earnings per share. Such potential common shares totaled 15,286
for both the three and six months ended March 2009 and 12,279 for the three
and six month periods ended March 2008, respectively. The average exercise
price of anti-dilutive options and potential common stock was $39.94 for both
the three and six months ended March 2009 and $44.09 for the three and six
month periods ended March 2008, respectively.
13
For the three months ended March
------------------------------------------------------
2009 2008
------------------------- ------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
Weighted average common
shares outstanding 548,619 548,619 537,064 537,064
Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds
used to purchase treasury
stock and conversion of
preferred stock /1/ - 256,617 - 314,306
----------- ----------- ----------- -----------
Weighted average number of
shares outstanding 548,619 805,236 537,064 851,370
=========== =========== =========== ===========
Income from continuing operations $ 2,193,795 $ 2,193,795 $ 1,267,104 $ 1,267,104
Deduct: convertible preferred
stock dividends /2/ (314,201) - (104,386) -
----------- ----------- ----------- -----------
1,879,594 2,193,795 1,162,718 1,267,104
=========== =========== =========== ===========
Loss from discontinued operations $ (97,437) $ (97,437) $ (97,445) $ (97,445)
=========== =========== =========== ===========
Net income available
to common shareholders $ 1,782,157 $ 2,096,358 $ 1,065,273 $ 1,169,659
=========== =========== =========== ===========
Income per share from
continuing operations $ 3.43 $ 2.72 $ 2.16 $ 1.48
=========== =========== =========== ===========
Loss per share from
discontinued operations $ (0.18) $ (0.12) $ (0.18) $ (0.11)
=========== =========== =========== ===========
Net earnings per share
available to common shareholders $ 3.25 $ 2.60 $ 1.98 $ 1.37
=========== =========== =========== ===========
/1/ Diluted earnings per share calculation includes all stock options,
convertible preferred stock, and restricted stock deemed to be dilutive.
/2/ Diluted earnings per share calculation excludes dividends for convertible
preferred stock deemed to be dilutive, as those amounts are assumed to
have been converted to common stock of the Company.
14
For the six months ended March
------------------------------------------------------
2009 2008
------------------------- ------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
Weighted average common
shares outstanding 547,089 547,089 535,473 535,473
Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds
used to purchase treasury
stock and conversion of
preferred stock /1/ - 283,834 - 314,841
----------- ----------- ----------- -----------
Weighted average number of
shares outstanding 547,089 830,923 535,473 850,314
=========== =========== =========== ===========
Income from continuing operations $ 3,595,395 $ 3,595,395 $ 2,312,312 $ 2,312,312
Deduct: convertible preferred
stock dividends /2/ (419,734) - (209,919) -
----------- ----------- ----------- -----------
3,175,661 3,595,395 2,102,393 2,312,312
=========== =========== =========== ===========
Loss from discontinued operations $ (199,475) $ (199,475) $ (193,440) $ (193,440)
=========== =========== =========== ===========
Net income available
to common shareholders $ 2,976,186 $ 3,395,920 $ 1,908,953 $ 2,118,872
=========== =========== =========== ===========
Income per share from
continuing operations $ 5.80 $ 4.33 $ 3.92 $ 2.72
=========== =========== =========== ===========
Loss per share from
discontinued operations $ (0.36) $ (0.24) $ (0.36) $ (0.23)
=========== =========== =========== ===========
Net earnings per share
available to common shareholders $ 5.44 $ 4.09 $ 3.56 $ 2.49
=========== =========== =========== ===========
/1/ Diluted earnings per share calculation includes all stock options,
convertible preferred stock, and restricted stock deemed to be dilutive.
/2/ Diluted earnings per share calculation excludes dividends for convertible
preferred stock deemed to be dilutive, as those amounts are assumed to have
been converted to common stock of the Company.
15
8. DEBT
The Company has a credit agreement with Bank of America (the "Facility"),
which includes the following significant terms:
- A June 2011 maturity date.
- A $55.0 million revolving credit limit, plus the outstanding balance
on Term Note A. Term Note A had an outstanding balance of $0.3 million
at March 2009.
- The Facility bears interest at either the bank's prime rate or at
a LIBOR based rate at the election of the Company.
- The Facility provides for an additional $5.0 million of credit available
for certain inventory purchases. These advances bear interest at the
bank's prime rate plus one-quarter of one-percent (1/4%) per annum and
are payable within 45 days of each advance.
- Lending limits subject to accounts receivable and inventory
limitations, and an unused commitment fee equal to one-quarter of
one percent (1/4%) per annum on the difference between the maximum
loan limit and average monthly borrowings.
- Collateral including all of the Company's equipment, intangibles,
inventories, and accounts receivable.
- Provides that the Company may not pay dividends on its common stock in
excess of $0.72 per share on an annual basis.
- The Facility includes a prepayment penalty equal to a predetermined
percentage of the original maximum loan limit of $60.4 million if the
Company prepays the entire Facility and terminates the credit agreement
before specified dates. The prepayment penalty percentages are as
follows: (1) one percent (1%) if prepayment occurs on or before
June 30, 2009, and (2) one-half of one percent (1/2%) if prepayment
occurs subsequent to June 30, 2009 but on or before June 30, 2010.
The Facility also includes quarterly debt service and cumulative earnings
before interest, taxes, depreciation and amortization ("EBITDA") financial
covenants. A minimum debt service ratio of 1.0 to 1.0 must be maintained,
as measured by the twelve month period then ended and the cumulative minimum
EBITDA requirement is $2,000,000 for the six months ending March 31, 2009.
The Company was in compliance with the required debt service and minimum
EBITDA covenants at March 2009.
The Company's maximum available credit limit for the revolving portion of the
Facility was $41.2 million at March 2009, however, the amount available for
use at any given time is subject to many factors including eligible accounts
receivable and inventory balances.
16
At March 2009, the outstanding balance on the revolving portion of the
Facility was $19.5 million. The Facility bears interest at a variable rate
equal to the bank's prime rate, which was 3.25% at March 2009. Based on our
collateral and loan limits as defined by the Facility agreement, the
Company's availability under the Facility at March 2009 was approximately
$21.7 million.
Cross Default and Co-Terminus Provisions
-----------------------------------------
The Company's owned real estate in Bismarck, ND, Quincy, IL, and Rapid City,
SD, and certain warehouse equipment in the Rapid City, SD warehouse is
financed through term loans with Marshall and Ilsley Bank ("M&I"), which is
also a participant lender on the Company's revolving line of credit. The
M&I loans contain cross default provisions which cause all loans with M&I to
be considered in default if any one of the loans where M&I is a lender,
including the revolving credit facility, is in default. In addition, the M&I
loans contain co-terminus provisions which require all loans with M&I to be
paid in full if any of the loans are paid in full prior to the end of their
specified terms.
OTHER
-----
AMCON has issued a letter of credit for $0.8 million to its workers'
compensation insurance carrier as part of its self-insured loss control
program.
Off-Balance Sheet Arrangements
------------------------------
The Company does not have any off-balance sheet arrangements.
9. EQUITY-BASED INCENTIVE AWARDS
Stock Options
-------------
At March 2009, the Company had two groups of stock option awards issued and
outstanding. The first award group includes incentive and non-qualified stock
options issued to management employees and outside directors pursuant to the
Company's stock-based compensation plan ("the Stock Option Plan"). The Stock
Option Plan expired in fiscal 2004 and all compensation expense related to
the plan was amortized in prior fiscal periods.
The second award group includes 25,000 non-qualified stock options issued
to the Company's Chief Executive Officer in fiscal 2007. These stock options
vest in equal installments over a three year period and have an exercise
price of $18.00 per share. At March 2009, 16,666 of these stock options had
vested.
17
Stock options issued and outstanding to management employees at March 2009
are summarized as follows:
Number of Number
Date Exercise Price Options Exercisable
Outstanding
------------------------------------------------------------
Fiscal 1999 $ 45.68 - $ 51.14 6,591 6,591
Fiscal 2000 $ 34.50 3,123 3,123
Fiscal 2003 $ 28.80 3,170 3,170
Fiscal 2007 $ 18.00 25,000 16,666
------ ------
37,884 29,550
====== ======
Stock options issued and outstanding to the Company's outside directors at
March 2009 are summarized as follows:
Number of Number
Date Exercise Price Options Exercisable
Outstanding
-------------------------------------------------------------
Fiscal 1999 $ 49.09 734 734
Fiscal 2002 $ 26.94 834 834
Fiscal 2003 $ 28.26 834 834
------ ------
2,402 2,402
====== ======
The following summarizes all stock options outstanding at March 2009:
Exercisable
Remaining ----------------------------
Exercise Number Weighted-Average Weighted-Average Number Weighted-Average
Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------- ----------- ---------------- ---------------- ----------- ----------------
1999 Options $45.68-$51.14 7,325 0.13 years $49.99 7,325 $49.99
2000 Options $34.50 3,123 1.20 years $34.50 3,123 $34.50
2002 Options $26.94 834 3.37 years $26.94 834 $26.94
2003 Options $28.26-$28.80 4,004 3.74 years $28.69 4,004 $28.69
2007 Options $18.00 25,000 7.75 years $18.00 16,666 $18.00
------ ------ ------ ------
40,286 $26.34 31,952 $32.56
====== ====== ====== ======
18
The following is a summary of the activity of the stock plans for the six
months ended March 2009:
Weighted
Number Average
of Exercise
Shares Price
-----------------
Outstanding at September 2008 42,120 $26.80
Granted - -
Exercised - -
Expired (1,834) $36.82
-----------------
Outstanding at March 2009 40,286 $26.34
=================
Options exercisable at end of period 31,952
========
The Company's stock options have varying vesting schedules, ranging
up to five years and expiring ten years subsequent to the grant date.
Net income before income taxes included compensation expense related to
stock options of approximately $0.03 million and $0.1 million for both the
three and six month fiscal periods ended March 2009 and March 2008. Total
unamortized compensation expense related to stock options at March 2009
totaled approximately $0.1 million. This unamortized stock expense is
expected to be amortized over approximately the next twelve months (the
expected weighted-average period).
Omnibus Plan
------------
The Company has an Omnibus Incentive Plan ("the Omnibus Plan") which
provides for equity incentives to employees. The Omnibus Plan was designed
with the intent of encouraging employees to acquire a vested interest in the
growth and performance of the Company. The Omnibus Plan permits the issuance
of up to 150,000 shares of the Company's common stock in the form of stock
options, restricted stock awards, restricted stock units, performance share
awards as well as awards such as stock appreciation rights, performance
units, performance shares, bonus shares, and dividend share awards payable
in the form of common stock or cash.
19
Pursuant to the Omnibus Plan, the Compensation Committee of the Board of
Directors has authorized and approved the restricted stock awards as
summarized below:
Restricted Stock /1/ Restricted Stock /2/
-------------------- --------------------
Date of award: December 6, 2007 January 29, 2008
Number of shares: 24,000 7,500
Service period: 34 months 36 months
Estimated fair value of
award at grant date/3/: $963,000 $229,000
Intrinsic value of awards
outstanding at March 2009: $400,000 $125,000
/1/ 8,000 shares were vested at March 2009. The remaining 16,000 shares will
vest in equal amounts (8,000 per year) on October 16, 2009 and October 16, 2010.
/2/ 2,500 shares were vested at March 2009. The remaining 5,000 shares will vest in
equal amounts (2,500 per year) on January 29, 2010 and January 29, 2011.
/3/ Amount is net of estimated forfeitures.
There is no direct cost to the recipients of the restricted stock awards,
except for any applicable taxes. The restricted stock held by recipients
are entitled to full voting rights and the customary adjustments in the
event of stock splits, stock dividends, and certain other distributions on
the Company's common stock. All cash dividends and/or distributions payable
to restricted stock recipients will be held in escrow until all the
conditions of vesting have been met.
The Company recognizes compensation expense related to restricted
stock awards on a straight-line basis over the requisite service period.
Accordingly, net income before income taxes included compensation expense
of $0.1 million and $0.2 million for the three and six months ended March
2009, and approximately $0.1 million for both the three and six months ended
March 2008. Total unamortized compensation expense related to restricted
stock awards at March 2009 was approximately $0.7 million. This unamortized
compensation expense is expected to be amortized over approximately the next
two fiscal years (the expected weighted-average period).
The following summarizes restricted stock activity under the Omnibus Plan
for the six months ended March 2009:
Number Weighted Average
of Grant Date
Shares Fair Value
---------------------------
Nonvested restricted stock
at September 2008 31,500 $40.16
Granted - -
Vested/Issued (10,500) $40.16
Expired - -
---------------------------
Nonvested restricted stock
at March 2009 21,000 $40.16
===========================
20
10. BUSINESS SEGMENTS
AMCON has two reportable business segments: the wholesale distribution of
consumer products and the retail sale of health and natural food products.
The retail health food stores' operations are aggregated to comprise the
retail segment because such operations have similar economic characteristics,
as well as similar characteristics with respect to the nature of products
sold, the type and class of customers for the health food products and the
methods used to sell the products. Included in the "Other" column is
intercompany eliminations, charges incurred by the holding company, and
assets of discontinued operations. The segments are evaluated on revenues,
gross margins, operating income (loss), and income before taxes.
Wholesale
Distribution Retail Other /1/ Consolidated
------------- ----------- ---------- -------------
THREE MONTHS ENDED MARCH 2009:
External revenue:
Cigarettes $ 136,018,967 $ - $ - $ 136,018,967
Confectionery 14,667,301 - - 14,667,301
Health food - 9,564,810 - 9,564,810
Tobacco, food service & other 35,191,168 - - 35,191,168
------------- ----------- ---------- -------------
Total external revenue 185,877,436 9,564,810 - 195,442,246
Depreciation 244,988 54,854 1,146 300,988
Amortization - - - -
Operating income (loss) 4,180,906 1,076,330 (1,338,330) 3,918,906
Interest expense 126,365 140,313 141,909 408,587
Income (loss) from continuing
operations before taxes 4,070,742 946,290 (1,480,237) 3,536,795
Total assets 65,160,730 11,416,692 4,366,108 80,943,530
Capital expenditures 174,540 56,890 - 231,430
THREE MONTHS ENDED MARCH 2008:
External revenue:
Cigarettes $ 132,066,675 $ - $ - $ 132,066,675
Confectionery 13,513,561 - - 13,513,561
Health food - 10,529,463 - 10,529,463
Tobacco, food service & other 34,301,971 - - 34,301,971
------------- ----------- ---------- -------------
Total external revenue 179,882,207 10,529,463 - 190,411,670
Depreciation 242,555 86,824 497 329,876
Amortization - 9,933 - 9,933
Operating income (loss) 2,321,460 1,377,648 (993,711) 2,705,397
Interest expense 181,730 258,320 309,508 749,558
Income (loss) from continuing
operations before taxes 2,152,385 1,131,587 (1,288,868) 1,995,104
Total assets 68,732,684 11,680,923 6,246,151 86,659,758
Capital expenditures 138,238 124,299 - 262,537
/1/ Includes intercompany eliminations, charges incurred by the holding company,
and the assets of discontinued operations.
21
Wholesale
Distribution Retail Other /1/ Consolidated
------------- ----------- ---------- -------------
SIX MONTHS ENDED MARCH 2009:
External revenue:
Cigarettes $ 288,281,912 $ - $ - $ 288,281,912
Confectionery 30,128,997 - - 30,128,997
Health food - 18,545,603 - 18,545,603
Tobacco, food service & other 75,863,096 - - 75,863,096
------------- ----------- ---------- -------------
Total external revenue 394,274,005 18,545,603 - 412,819,608
Depreciation 493,152 115,877 2,293 611,322
Amortization - - - -
Operating income (loss) 7,468,983 1,664,169 (2,477,514) 6,655,638
Interest expense 259,044 309,858 328,884 897,786
Income (loss) from continuing
operations before taxes 7,229,893 1,374,899 (2,806,397) 5,798,395
Total assets 65,160,730 11,416,692 4,366,108 80,943,530
Capital expenditures 303,030 194,371 - 497,401
SIX MONTHS ENDED MARCH 2008:
External revenue:
Cigarettes $ 281,678,206 $ - $ - $ 281,678,206
Confectionery 27,621,518 - - 27,621,518
Health food - 20,051,018 - 20,051,018
Tobacco, food service & other 71,724,165 - - 71,724,165
------------- ----------- ---------- -------------
Total external revenue 381,023,889 20,051,018 - 401,074,907
Depreciation 474,320 207,143 954 682,417
Amortization - 19,866 - 19,866
Operating income (loss) 5,134,092 2,189,022 (1,994,918) 5,328,196
Interest expense 411,965 582,526 724,869 1,719,360
Income (loss) from continuing
operations before taxes 4,742,370 1,630,057 (2,691,115) 3,681,312
Total assets 68,732,684 11,680,923 6,246,151 86,659,758
Capital expenditures 407,470 135,686 - 543,156
/1/ Includes intercompany eliminations, charges incurred by the holding company,
and the assets of discontinued operations.
11. CONTINGENCIES
In September 2007, the Company signed a Mutual Release and Settlement
Agreement (the "Settlement Agreement") to resolve litigation among and
between AMCON, TSI, and Crystal Paradise Holdings, Inc. ("CPH") related to
a 2004 Asset Purchase Agreement ("Asset Purchase Agreement"), under which
TSI acquired certain assets from CPH. In conjunction with the Settlement
Agreement, AMCON entered into a $5.0 million note payable to CPH. The note
is due in September 2012 and accrues interest at 5.0%. The Settlement
Agreement also provided CPH with an option to purchase TSI's remaining
assets for a price equivalent to the amount due CPH under the $5.0 million
note payable, plus accrued interest. In conjunction with the Settlement
Agreement, the Company recorded a $1.5 million pre-tax deferred gain.
This deferred gain has been classified as a component of noncurrent
liabilities of discontinued operations in the Company's Consolidated
Balance Sheets.
In March 2009, CPH notified the Company that it was exercising its option
under the Settlement Agreement to acquire the assets of TSI in exchange
for the $5.0 million note payable, plus accrued interest. Upon completion
of the transaction, the Company will recognize the aforementioned $1.5
million deferred gain, in addition to any other settlement gains and losses.
The transaction is scheduled to close in April 2009 and is subject to the
satisfaction of various closing conditions.
22
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the Management's Discussion and
Analysis and other sections, contains forward-looking statements that are
subject to risks and uncertainties and which reflect management's current
beliefs and estimates of future economic circumstances, industry conditions,
company performance and financial results. Forward-looking statements
include information concerning the possible or assumed future results of
operations of the Company and those statements preceded by, followed by or
that include the words "future," "position," "anticipate(s)," "expect,"
"believe(s)," "see," "plan," "further improve," "outlook," "should" or
similar expressions. For these statements, we claim the protection of the
safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
not guarantees of future performance or results. They involve risks,
uncertainties and assumptions. You should understand that the following
important factors, in addition to those discussed elsewhere in this document,
could affect the future results of the Company and could cause those results
to differ materially from those expressed in our forward-looking statements:
- increases in state and federal excise taxes on cigarette and
tobacco products, including recent increases in federal excise taxes
imposed as part of the State Children's Health Insurance Program
("SCHIP") legislation,
- possible regulation of cigarette and tobacco products by the
U.S. Food and Drug Administration ("FDA"), in addition to existing
state and federal regulations by other agencies,
- increases in manufacturer prices,
- increases in inventory carrying costs and customer credit risk,
- changes in promotional and incentive programs offered by manufacturers,
- decreased availability of capital resources due to recent events
in the credit markets,
- demand for the Company's products, particularly cigarette and
tobacco products,
- new business ventures,
- domestic regulatory and legislative risks,
- competition,
- poor weather conditions,
- increases in fuel prices,
- consolidation within the convenience store industry,
- other risks over which the Company has little or no control, and
- any other factors not identified herein.
Changes in these factors could result in significantly different results.
Consequently, future results may differ from management's expectations.
Moreover, past financial performance should not be considered a reliable
indicator of future performance. Any forward-looking statement contained
herein is made as of the date of this document. Except as required by law,
the Company undertakes no obligation to publicly update or correct any
of these forward-looking statements in the future to reflect changed
assumptions, the occurrence of material events or changes in future
operating results, financial conditions or business over time.
23
CRITICAL ACCOUNTING ESTIMATES
Certain accounting estimates used in the preparation of the Company's
financial statements require us to make judgments and estimates and the
financial results we report may vary depending on how we make these
judgments and estimates. Our critical accounting estimates are set forth
in our Form 10-K for the fiscal year ended September 30, 2008, as filed
with the Securities and Exchange Commission. There have been no significant
changes with respect to these policies during the six months ended March
2009.
COMPANY OVERVIEW - SECOND FISCAL QUARTER 2009 (Q2 2009)
The following discussion and analysis includes the Company's results of
operations from continuing operations for the three and six months ended
March 2009 and March 2008. Continuing operations are comprised of our
wholesale distribution and retail health food segments. A separate
discussion of our discontinued operations has been presented following our
analysis of continuing operations. Accordingly, the sales, gross profit
(loss), selling, general and administrative, depreciation and amortization,
direct interest, other expenses and income tax benefit from our discontinued
operations have been aggregated and reported as loss from discontinued
operations and are not a component of the aforementioned continuing
operations discussion.
During Q2 2009, the Company:
- increased operating income by $1.2 million as compared to Q2 2008.
- benefited approximately $2.6 million as a result of price
increases implemented by cigarette and tobacco manufacturers.
- incurred approximately a $1.7 million liability related to a
floor stocks tax imposed in conjunction with the SCHIP legislation.
- was notified by CPH that it was exercising its option under the
Settlement Agreement to acquire the assets of TSI in exchange
for a $5.0 million note payable and accrued interest due from
the Company.
- fully redeemed its Series C Convertible Preferred Stock for
$2.0 million plus accrued but unpaid dividends.
- recognized income from continuing operations per basic share of
$3.43 and $2.16 for the three months ended March 2009 and March 2008,
respectively, and $5.80 and $3.92 for the six months ended March 2009
and March 2008, respectively.
- recognized a loss from discontinued operations per basic share of
($0.18) for the three months ended March 2009 and March 2008, and
($0.36) for the six months ended March 2009 and March 2008.
- paid dividends on common shares totaling $57,040 or $0.10 per share.
24
Wholesale Distribution Segment (ADC)
------------------------------------
Our wholesale distribution segment represents approximately 96% of the
Company's consolidated sales. ADC serves approximately 4,000 retail outlets
in the Great Plains and Rocky Mountain regions and is ranked as a top ten
convenience store supplier according to Convenience Store News. While we
provide our retailers with a broad selection of merchandise in all product
categories, we remain largely dependent on cigarette sales, which account for
approximately 73% of ADC total sales. ADC is focused on growing its sales of
non-tobacco products, which offer higher profit margins and greater revenue
stream diversity.
The wholesale distribution industry is mature and highly competitive.
To differentiate itself, ADC leverages a number of strategies focused around
providing market-leading customer service programs and offering flexible
delivery capabilities. These strategies have helped position ADC as a
distributor of choice for both small independent retail outlets and multi-
location retail outlets.
ADC has significant alliances with the major cigarette manufacturers which we
believe control over 90% of the cigarette industry volume. While some of our
competitors have focused on the lower-priced cigarette brands, ADC has made a
conscious decision to support and grow our national brand segment and align
our business with the major players in the industry. We believe that it is
important not to compete against the major cigarette manufacturers because of
their commitment to growing and maintaining their market share in a declining
category. Additionally, we believe that consumers' preference for premium
brands currently drives the category volume.
The wholesale distribution industry continues to experience significant
changes driven by higher excise taxes, the popularity of deep-discount
cigarette brands, and consolidation within the industry's customer base
(principally convenience stores and tobacco shops). Collectively, we expect
these items will continue to pressure profit margins industry-wide and could
potentially decrease the Company's profitability.
To capitalize on the industry-wide changes mentioned above, ADC
aggressively manages its cost structure, heavily leverages inventory
management strategies, and deploys new technologies and automation tools
where possible. These actions have allowed ADC to maintain competitive
pricing and position itself to capture new business, sell new services to
our existing customers, explore acquisition opportunities, and further
penetrate the convenience store market.
State Children's Health Insurance Program ("SCHIP")
--------------------------------------------------
In February 2009, the President signed a bill reauthorizing the State
Children's Health Insurance Program. The program will be largely funded
through significant increases in the federal excise taxes imposed on
cigarette and tobacco products. For cigarettes, which account for
approximately 73% of ADC's revenues, the new law increases the federal
excise taxes from $0.39 per pack to $1.01 per pack, or approximately $6.17
per carton. The new law also includes a floor stocks tax payable to the
United States Alcohol and Tobacco Tax and Trade Bureau ("TTB"). The total
floor stocks tax payable by the Company is approximately $1.7 million and is
due by July 31, 2009.
25
For our wholesale segment, the increased excise taxes create long-term
strategic challenges. According to a study by the American Wholesale
Marketers Association, aggregate demand for cigarettes in the United States
has been declining since 1980, decreasing up to two-percent (2%) annually. We
believe the increased excises taxes will accelerate the historical trend of
decreasing consumer demand, while at the same time increasing the Company's
inventory carrying costs and accounts receivable credit risk, with limited
benefits to our gross margins.
Retail Health Food Segment
--------------------------
AMCON's retail health food stores, which are operated as Chamberlin's Market
& Cafe ("Chamberlin's" or "CNF") and Akin's Natural Foods Market ("Akin's" or
"ANF"), offer thousands of different product selections to their customers.
Chamberlin's, which was first established in 1935, is an award-winning and
highly-acclaimed chain of six health and natural product retail stores, all
offering an extensive selection of natural supplements and herbs, baked
goods, dairy products, and organic produce. Chamberlin's operates all of its
stores in and around Orlando, Florida.
Akin's, established in 1935, is also an award-winning chain of seven health
and natural product retail stores, each offering an extensive line of natural
supplements and herbs, dairy products, and organic produce. Akin's has
locations in Tulsa and Oklahoma City, Oklahoma; Lincoln, Nebraska;
Springfield, Missouri; and Topeka, Kansas.
ECONOMIC CONDITIONS
-------------------
The worldwide economic crisis has impacted consumer confidence and
discretionary spending patterns across the states in which we operate.
In our wholesale segment, demand at the retail level (convenience stores)
continues to reflect weakness in our cigarette and tobacco product
categories, with demand in our non-tobacco categories such as confection
and food service, showing modest year-over-year growth.
Industry-wide, gross margin erosion for convenience stores has prompted
aggressive bidding from competing distributors and is driving consolidation
amongst convenience stores as they struggle to remain profitable. Many of our
wholesale segment customers are thinly capitalized and their access to credit
is limited. Additionally, our weaker customers may go out of business or be
sold to another retailer using a different distributor.
Our retail segment is experiencing weakness in both of its geographic
markets. In recent years, the natural food industry has experienced high
growth rates as the demand for non-processed products (pesticide-free,
hormone-free, non-genetically modified) became popular among more health
conscious consumers. In the near term, however, our retail segment faces a
challenging operating environment as consumer behavior has been negatively
impacted by the current recession. We believe the economic hardships
consumers now face are influencing purchasing patterns such as the frequency
of shopping trips, the types of products purchased, and price sensitivity.
These factors have contributed to lower transaction counts and average basket
sizes in our retail stores. In particular, retail level demand in our
26
Florida stores has been hurt by the severe economic downturn in that
state, in addition to increased competition from other natural food chains.
Accordingly, we have adjusted our retail segment cost structure to align with
current demand. In the long-term, however, we believe trends for the natural
foods industry are positive, and as such, we continue to evaluate potential
sites for future locations.
RESULTS OF OPERATIONS - Continuing Operations
SALES:
------
Changes in sales are driven by two primary components:
(i) changes to selling prices, which are largely controlled by
our product suppliers, and excise taxes imposed on
cigarettes and tobacco products by various states; and
(ii) changes in the volume of products sold to our customers, either
due to a change in purchasing patterns resulting from consumer
preferences or the fluctuation in the comparable number of
business days in our reporting period.
Sales by business segment for the three and six month periods ended
March 2009 and March 2008 are as follows (dollars in millions):
Three months Six months
ended March ended March
----------------------- ------------------------
Incr. Incr.
2009 2008 (Decr) 2009 2008 (Decr)
------ ------ ------ ------ ------ ------
Wholesale distribution segment $185.9 $179.9 $ 6.0 $394.3 $381.1 $ 13.2
Retail health food segment 9.5 10.5 (1.0) 18.5 20.0 (1.5)
------ ------ ------ ------ ------ ------
$195.4 $190.4 $ 5.0 $412.8 $401.1 $ 11.7
====== ====== ====== ====== ====== ======
SALES - Q2 2009 vs. Q2 2008 (continuing operations)
---------------------------------------------------
Sales for Q2 2009 increased $5.0 million, or 2.6%, as compared to Q2 2008.
Sales are reported net of costs associated with sales incentives provided to
retailers, totaling $4.0 million in Q2 2009 and $3.8 million in Q2 2008.
Sales in our wholesale distribution segment ("wholesale") increased
$6.0 million, or 3.3%, in Q2 2009 as compared to Q2 2008. This change
included a $4.0 million increase in cigarette sales and a net $2.0 million
increase in our tobacco, beverages, snacks, candy, grocery, health & beauty
products, automotive, food service, and store supplies categories ("Other
Products").
27
Significant items impacting our Q2 2009 wholesale segment sales included:
- $4.0 million net increase in cigarette sales over Q2 2008, resulting from
a $10.1 million increase in sales due to price increases implemented by
manufacturers, partially offset by a $6.1 million decrease in sales
primarily due to a decrease in the volume of cigarette cartons sold in
Q2 2009. The decrease in volume was largely attributable to a reduction
in purchases by our customers in March 2009 in anticipation of the floor
stocks tax imposed as part of the SCHIP legislation.
- $2.0 million net increase in our Other Products category sales over
Q2 2008, primarily the result of higher tobacco, confectionary, food
service, and store supplies sales.
Sales in our retail health food segment decreased approximately $1.0 million,
or 9.2%, in Q2 2009 as compared to Q2 2008. This decrease was primarily
related to lower sales volumes in our highly perishable food categories,
particularly in our Florida retail stores, which have been impacted by a
severe regional economic downturn and increased competition from other
natural food chains.
SALES - Six Months Ended March 2009 (continuing operations)
-----------------------------------------------------------
Sales for the six month period ended March 2009 increased $11.7 million, or
2.9%, as compared to the same prior year period. Sales for the six months
ended March 2009 and 2008, were net of costs associated with sales incentives
provided to retailers, totaling $7.9 million and $7.3 million, respectively.
Sales in our wholesale distribution segment increased $13.2 million, or 3.5%,
for the six months ended March 2009 as compared to the same prior year
period. This change included a $6.6 million increase in cigarette sales and
a net $6.6 million increase in Other Products.
Significant items impacting our wholesale segment sales for the six months
ended March 2009 included:
- $6.6 million net increase in cigarette sales over Q2 2008, resulting
from a $13.1 million increase in sales due to price increases implemented
by manufacturers, partially offset by a $6.5 million decrease in sales
primarily due to a decrease in the volume of cigarette cartons sold
in during the six month period. The decrease in volume was largely
attributable to a reduction in purchases by our customers in March 2009
in anticipation of the floor stocks tax imposed as part of the SCHIP
legislation.
- $6.6 million net increase in our Other Products category sales over same
prior year period, primarily the result of higher tobacco, confectionary,
food service, and store supplies sales.
Sales in our retail health food segment decreased approximately $1.5 million,
or 7.5%, for the six months ended March 2009 as compared to the same prior
year period. This decrease was primarily related to lower sales volumes in
our highly perishable food categories, particularly in our Florida retail
stores, which have been impacted by a severe regional economic downturn and
increased competition from other natural food chains.
28
GROSS PROFIT (continuing operations)
------------------------------------
Our gross profit does not include fulfillment costs and costs related
to the distribution network which are included in selling, general and
administrative costs, and may not be comparable to those of other entities.
Some entities may classify such costs as a component of cost of sales.
Cost of sales, a component used in determining gross profit, for the
wholesale and retail segments includes the cost of products purchased from
manufacturers, less incentives we receive which are netted against such
costs.
Gross profit by business segment for the three and six month periods ended
March 2009 and March 2008 are as follows (dollars in millions):
Three Months Six Months
ended March ended March
----------------------- -----------------------
Incr Incr
2009 2008 (Decr) 2009 2008 (Decr)
------ ------ ------ ------ ------- ------
Wholesale distribution segment $ 13.2 $ 11.2 $ 2.0 $25.4 $ 22.5 $ 2.9
Retail health food segment 4.0 4.5 (0.5) 7.7 8.4 (0.7)
------ ------ ------ ------ ------- ------
$ 17.2 $ 15.7 $ 1.5 $ 33.1 $ 30.9 $ 2.2
====== ====== ====== ====== ======= ======
GROSS PROFIT - Q2 2009 vs. Q2 2008 (continuing operations)
----------------------------------------------------------
Overall gross profit for Q2 2009 increased $1.5 million, or 9.6%, as compared
to Q2 2008.
Gross profit in our wholesale segment increased $2.0 million, or 18.4%, as
compared to the same prior year period. During Q2 2009, our wholesale gross
profit benefitted by approximately $2.6 million as a result of price
increases implemented by cigarette and tobacco manufacturers. The remaining
change in our wholesale segment gross profit is primarily attributable to the
net impact of changes in manufacturer promotional allowances, product mix
sold, and lower cigarette carton shipment volumes.
Gross profit for the retail health segment decreased $0.5 million in Q2 2009
as compared to Q2 2008. Of this decrease, approximately $0.4 million related
to lower sales volume, with the remaining change primarily attributable to
sales mix and higher inventory throw-out costs.
29
GROSS PROFIT - Six months ended March 2009 (continuing operations)
------------------------------------------------------------------
Overall gross profit for the six months ended March 2009 increased
$2.2 million, or 7.0%, as compared to the same prior year period.
Gross profit in our wholesale segment increased $2.9 million, or 13.2%,
for the six month period ended March 2009 as compared to the same period
in the prior year. For the six months ended March 2009, our wholesale
segment gross profit benefitted approximately $2.6 million as a result
of price increases implemented by cigarette and tobacco manufacturers.
The remaining change in our wholesale segment gross profit is primarily
attributable to the net impact of higher manufacturer promotional allowances,
product mix sold, and lower cigarette carton shipment volumes.
Gross profit for the retail health segment decreased $0.7 million for
the six month period ended March 2009. Of this decrease, approximately
$0.6 million related to lower sales volume, with the remaining change
primarily attributable to sales mix and higher inventory throw-out costs.
OPERATING EXPENSE - three and six months ended March 2008 comparison
--------------------------------------------------------------------
Operating expense includes selling, general and administrative expenses
and depreciation and amortization. Selling, general and administrative
include costs related to our sales, warehouse, delivery and administrative
departments for all segments. Specifically, purchasing and receiving costs,
warehousing costs and costs of picking and loading customer orders are
all classified as selling, general and administrative expenses. Our most
significant expenses relate to employee costs, facility and equipment
leases, transportation costs, fuel costs, insurance and professional fees.
Q2 2009 operating expenses increased approximately $0.3 million as compared
to Q2 2008. Significant items impacting operating expenses included a
$0.3 million increase in health insurance costs, a $0.3 million increase
in compensation costs, and a $0.1 million increase in bad debt expense.
These items were partially offset by a $0.4 million decrease in fuel costs.
Operating expenses for the six month period ended March 2009 increased
approximately $0.8 million as compared to the same prior year period.
Significant items impacting operating expenses included a $0.5 million
increase in health insurance costs, a $0.5 million increase in compensation
costs, and a $0.2 million increase in bad debt expense. These items were
partially offset by a $0.4 million decrease in fuel costs.
INTEREST EXPENSE - three and six months ended March 2008 comparison
-------------------------------------------------------------------
Q2 2009 interest expense decreased approximately $0.3 million as compared
to Q2 2008, and interest expense for the six months ended March 2009
decreased approximately $0.8 million as comparable to the same prior year
period. These decreases in interest expense were principally related
to lower prime interest rates and lower average borrowings.
30
The Company primarily borrows at the prime interest rate. The Company's
average borrowing rates on its revolving credit facility were 2.97% lower
and average borrowings on our revolving credit facility were $0.3 million
lower in Q2 2009 as compared to Q2 2008. For the six months ended March 2009,
average borrowing rates on our revolving credit facility were 3.15% lower and
average borrowings on our revolving credit facility were $3.3 million lower
as compared to the same prior year period.
DISCONTINUED OPERATIONS - three and six months ended March 2009 comparison
--------------------------------------------------------------------------
Discontinued operations include the results of operations of TSI. Losses
from discontinued operations totaled $0.1 million and $0.2 million for both
the three and six month fiscal periods ended March 2009 and March 2008,
respectively. These losses primarily resulted from asset preservation costs.
As discussed further in Note 2, in March 2009 CPH notified the Company
that it was exercising its option under the Settlement Agreement to acquire
the assets of TSI in exchange for a $5.0 million note payable due from the
Company. Upon completion of the transaction, the Company will recognize
a previously related deferred gain of $1.5 million, in addition to any other
settlement gains and losses. The transaction is scheduled to close in April
2009 and is subject to the satisfaction of various closing conditions.
A summary of discontinued operations is as follows:
Three months ended Six months ended
March March
------------------------- ---------------------------
2009 2008 2009 2008
----------- ----------- ------------ ------------
Operating loss (41,434) (42,695) (85,562) (81,940)
Interest expense (114,003) (113,750) (230,012) (229,500)
Income tax benefit (58,000) (59,000) (116,000) (118,000)
Loss from discontinued operations (97,437) (97,445) (199,475) (193,440)
LIQUIDITY AND CAPITAL RESOURCES
Overview
----------
Operating Activities: The Company requires cash to pay operating expenses,
purchase inventory, and make capital investments. In general, the Company
finances its cash flow requirements with cash generated from operating
activities and credit facility borrowings. For the six months ended March
2009, the Company generated cash of approximately $18.5 million from
operating activities. The cash generated primarily resulted from higher
overall earnings and a decrease in accounts receivable and inventory
balances, as well as an increase in accrued expenses. These items were
partially offset by a decrease in accounts payable. As discussed below,
accounts receivable and inventory balances decreased in March 2009 as our
customers temporarily reduced purchases because of the SCHIP legislation
which imposed a floor stocks tax on inventory onhand.
31
Investing Activities: The Company used cash of approximately $0.4 million
for investing activities during the six month period ended March 2009. Cash
used was primarily for capital expenditures related to property and equipment
purchases.
Financing Activities: The Company used cash of $18.1 million for financing
activities during the six months ended March 2009. Of this amount, $15.4
million related to net payments on the Company's credit facility, $2.0
million related to the redemption of the Company's Series C Convertible
Preferred Stock, $0.4 million related to principal payments on long-term
debt, and $0.3 million related to dividends on the Company's common and
preferred stock.
Cash on Hand/Working Capital: At March 2009, the Company had cash on hand
of $0.4 million and working capital (current assets less current liabilities)
of $24.2 million. This compares to cash on hand of $0.5 million and working
capital of $38.9 million at September 2008.
The decrease in working capital is due, in large part, to a decrease in
accounts receivable and inventory that were converted into cash through
collections and sales. In March 2009, accounts receivable and inventory
balances trended lower as our customers temporarily reduced purchases because
of SCHIP legislation passed in February 2009 requiring a floor stocks tax on
inventory held for sale on April 1, 2009. The funds generated from lower
accounts receivable and inventory were used to pay down the Company's
revolving portion of the bank line from $34.9 million to $19.5 million, a
decrease of $15.4 million.
During the period there was also an increase in accrued expenses related to
the Company's payable for floor stocks excise taxes for approximately $1.7
million, which reduced working capital during the period.
We believe that our working capital will increase to more historical levels
in the next fiscal quarter as our customers resume normal purchasing
patterns.
CREDIT AGREEMENT
----------------
The Company has a credit agreement with Bank of America (the "Facility"),
which includes the following significant terms:
- A June 30, 2011 maturity date.
- A $55.0 million revolving credit limit, plus the outstanding balance
on Term Note A. Term Note A had an outstanding balance of $0.3 million
at March 2009.
- The Facility bears interest at either the bank's prime rate or at
a LIBOR based rate at the election of the Company.
- The Facility provides for an additional $5.0 million of credit available
for certain inventory purchases. These advances bear interest at the
bank's prime rate plus one-quarter of one-percent (1/4%) per annum and
are payable within 45 days of each advance.
32
- Lending limits subject to accounts receivable and inventory
limitations, and an unused commitment fee equal to one-quarter of
one percent (1/4%) per annum on the difference between the maximum
loan limit and average monthly borrowings.
- Collateral including all of the Company's equipment, intangibles,
inventories, and accounts receivable.
- Provides that the Company may not pay dividends on its common stock in
excess of $0.72 per share on an annual basis.
- The Facility includes a prepayment penalty equal to a predetermined
percentage of the original maximum loan limit of $60.4 million if the
Company prepays the entire Facility and terminates the credit agreement
before specified dates. The prepayment penalty percentages are as
follows: (1) one percent (1%) if prepayment occurs on or before
June 30, 2009, and (2) one-half of one percent (1/2%) if prepayment
occurs subsequent to June 30, 2009 but on or before June 30, 2010.
The Facility also includes quarterly debt service and cumulative earnings
before interest, taxes, depreciation and amortization ("EBITDA") financial
covenants. A minimum debt service ratio of 1.0 to 1.0 must be maintained,
as measured by the twelve month period then ended and the cumulative minimum
EBITDA requirement is $2,000,000 for the six months ended March 31, 2009.
The Company was in compliance with the required debt service and minimum
EBITDA covenants at March 2009.
The Company's maximum available credit limit for the revolving portion of the
Facility was $41.2 million at March 2009, however, the amount available for
use at any given time is subject to many factors including eligible accounts
receivable and inventory balances.
At March 2009, the outstanding balance on the revolving portion of the
Facility was $19.5 million. The Facility bears interest at a variable rate
equal to the bank's prime rate, which was 3.25% at March 2009. Based on our
collateral and loan limits as defined by the Facility agreement, the
Company's excess availability under the Facility at March 2009 was
approximately $21.7 million.
For the six month period ended March 2009, our peak borrowings under
the Facility were $38.4 million and our average borrowings and average
availability were $33.0 and $17.6 million, respectively. Our availability
to borrow under the Facility generally decreases as inventory and accounts
receivable levels go up because of the borrowing limitations that are placed
on collateralized assets.
33
Cross Default and Co-Terminus Provisions
----------------------------------------
The Company's owned real estate in Bismarck, ND, Quincy, IL, and Rapid City,
SD, and certain warehouse equipment in the Rapid City, SD warehouse is
financed through term loans with Marshall and Ilsley Bank ("M&I"), which is
also a participant lender on the Company's revolving line of credit. The
M&I loans contain cross default provisions which cause all loans with M&I to
be considered in default if any one of the loans where M&I is a lender,
including the revolving credit facility, is in default. In addition, the M&I
loans contain co-terminus provisions which require all loans with M&I to be
paid in full if any of the loans are paid in full prior to the end of their
specified terms.
TSI Financing
-------------
As previously disclosed, TSI has approximately $2.8 million in related party
debt obligations, which were in default at March 2009. TSI has not obtained
associated debt default waivers for these related party obligations. At this
time, the Company does not anticipate the defaults will materially impact its
future liquidity position.
Redemption of Series C Convertible Preferred Stock
--------------------------------------------------
In February 2009, the holder of the Company's Series C Convertible Preferred
Stock ("Series C") redeemed all 80,000 shares of the issuance. The Series C
issuance had been outstanding since 2006, paid a dividend of 6.00% percent
per annum, and was convertible into 146,842 shares of common stock. The
Company paid the liquidation value, or $2.0 million, plus accumulated and
unpaid dividends to fully redeem all of the outstanding shares. The
redemption was funded by our credit facility and satisfied all of the
Company's obligations under the Series C Convertible Preferred Stock
Agreement.
Dividend Payments
-----------------
In January 2009, the Company declared cash dividends of $0.10 per common
share to shareholders of record as of February 9, 2009. Cash dividends paid
to common shareholders for the three and six months ended March 2009 totaled
$57,040 and $114,079, respectively.
Cash dividends paid on the Company's convertible preferred stock issuances
(Series A, Series B, and Series C) for the three and six month periods ended
March 2009 totaled $92,573 and $198,106, respectively. See Note 3 to the
condensed consolidated unaudited financial statements for further information
regarding these securities.
Contractual Obligations
-----------------------
There have been no significant changes to the Company's contractual
obligations as set forth in the Company's Form 10-K for the fiscal period
ended September 30, 2008.
34
OTHER
-----
AMCON has issued a letter of credit for $0.8 million to its workers'
compensation insurance carrier as part of its self-insured loss control
program.
Off-Balance Sheet Arrangements
------------------------------
The Company does not have any off-balance sheet arrangements.
Liquidity Risk
--------------
The Company's liquidity position is significantly influenced by its ability
to obtain sufficient levels of working capital. For our Company and the
industry in general, customer credit risk and continuing access to bank
credit (primarily for the purpose of funding inventory purchases and the lag
period on accounts receivable collections) are important factors impacting
our overall liquidity position.
The Company renewed its credit facility with Bank of America in July 2008
and believes it continues to have a strong working relationship with that
financial institution. Additionally, the Company was in compliance with all
debt covenants at March 2009. Our customers, many of whom are thinly
capitalized, do present credit risk. The Company, however, aggressively
monitors its exposure in this area and believes it had adequate reserves in
place at March 2009.
The Company does not currently hedge its exposure to interest rate risk or
fuel costs. Accordingly, significant price movements in these areas can and
do impact the Company's profitability.
The Company believes its liquidity position going forward will be adequate
to sustain operations. However, a continued steep decline in economic
conditions and the impact of increased excise taxes being imposed as
discussed below, could materially impact the Company's future revenue stream
as well its ability to collect on customer accounts receivable balances and
secure bank credit.
Factors That Could Affect Future Results
----------------------------------------
Wholesale Segment: Our wholesale distribution business continues to
experience a decline in the demand for cigarettes, resulting in part
from legislative actions such as higher excise taxes and smoking bans,
as well as a general decline in the number of smokers in the United States.
In February 2009, the President signed a bill reauthorizing the State
Children's Health Insurance Program. The program will be largely funded
through significant increases in the federal excise taxes imposed on
cigarette and tobacco products. For our wholesale segment, the increased
excise taxes create some long-term challenges as we believe they will
accelerate historical trends of declining consumer demand, while at the
same time increasing the Company's inventory carrying costs and accounts
receivable credit risk, with limited benefits to our gross margins.
35
In addition to the February 2009 SCHIP legislation, in April 2009 the U.S.
House of Representatives approved legislation which provides the FDA with the
authority to regulate cigarette and tobacco products. If such legislation
were to become law, cigarette manufacturers would have to comply with any new
regulations and could face remedial actions such as fines, suspension of
product distribution rights, termination of operations, and increased
compliance costs. The costs associated with such actions would likely be
passed on to distributors such as us.
Retail Health Food Segment: While we enjoy a loyal customer following in
this business segment, depressed economic conditions combined with higher
natural food costs and increased competition may decrease both sales and
gross profit margins from their existing levels.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in company
reports filed or submitted under the Securities Exchange Act of 1934 (the
"Exchange Act") is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in company reports filed or submitted under the Exchange Act is
accumulated and communicated to management, including our principal executive
officer and principal financial and accounting officer, as appropriate to
allow timely decisions regarding required disclosure.
As required by Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of March 31, 2009 was made under
the supervision and with the participation of our senior management,
including our principal executive officer and principal financial officer.
Based upon that evaluation, our principal executive officer and principal
financial and accounting officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this report.
Limitations on Effectiveness of Controls
----------------------------------------
Our management, including our Chief Executive Officer and Chief Financial
Officer, do not expect that our disclosure controls and procedures will
prevent all errors and fraud. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance of achieving the desired control
objectives. Further, the design of a control system must reflect the fact
that there are resource constraints, and management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible
36
controls and procedures. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management's override of the control. The design of any system of controls
also is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions, or the
degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control Over Financial Reporting
----------------------------------------------------
There were no changes in our internal control over financial reporting that
occurred during the quarter ended March 31, 2009, that materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to this item may be found in Note 11 to the
condensed consolidated unaudited financial statements in Item 1, which is
incorporated herein by reference and supplements the information provided or
referred to in Item 3 of the Company's Form 10-K for the fiscal year ended
September 30, 2008.
Item 1A. Risk Factors
Except as discussed below, there have been no material changes to the
Company's risk factors as previously disclosed in Item 1A "Risk Factors" on
Form 10-K for the fiscal year ended September 30, 2008.
RISK FACTORS RELATED TO OUR WHOLESALE BUSINESS
----------------------------------------------
- Possible Regulation of Cigarette and Tobacco Products by the U.S. Food
and Drug Administration ("FDA") May Negatively Impact Our Operations
In April 2009, the U.S. House of Representatives approved legislation which
provides the FDA with the authority to regulate cigarette and tobacco
products. If such legislation were to become law, cigarette manufacturers
would have to comply with any new regulations and could face remedial actions
such as fines, suspension of product distribution rights, termination of
operations, and increased compliance costs. If any of these events were to
occur, our results from operations, cash flow, business, and overall
financial condition could be negatively impacted.
37
- Recent Increases in the Federal Excise Taxes Imposed on Cigarette and
Tobacco Products May Materially Reduce Our Wholesale Sales Volume.
In February 2009, the President signed a bill reauthorizing the State
Children's Health Insurance Program. The program will be largely funded
through significant increases in the federal excise taxes imposed on
cigarette and tobacco products. The increased excise taxes may dramatically
reduce consumer demand for cigarette and tobacco products, while at the
same time increasing the Company's inventory carrying costs and accounts
receivable credit risk, with limited benefits to our gross margins. If there
is a significant decline in the demand for cigarette and tobacco products,
our results from operations, cash flow, business, and overall financial
condition could be negatively impacted.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on January 26, 2009
for the purpose of electing three Class II directors, and ratifying of the
appointment of its independent registered public accounting firm. The
election and ratification results are as follows:
Class III Director Election
---------------------------
NAME OF NOMINEE FOR WITHHELD
--------------- --- --------
Kathleen M. Evans 478,471 33,113
John R. Loyack 472,493 39,013
Timothy R. Pestotnik 407,843 103,741
There was no solicitation in opposition to the nominee proposed to be elected
by the Stockholders in the Proxy Statement. In addition to the directors
elected at the Annual Meeting, the following directors continued their term
of office: Jeremy W. Hobbs, Stanley Mayer, William F. Wright, Christopher H.
Atayan, and Raymond F. Bentele.
38
Ratification of Independent Auditors
------------------------------------
The ratification of the appointment of McGladrey and Pullen LLP as its
independent registered public accounting firm for the Company for the fiscal
year ending September 30, 2009 was approved by the Stockholders with 509,846
votes FOR, 1,724 votes AGAINST, and 14 votes ABSTAINED.
There were no broker non-votes.
Further information regarding these matters is contained in the Company's
Proxy Statement dated December 28, 2008.
Not Applicable
Item 5. Other Information
Not applicable.
39
Item 6. Exhibits
(a) Exhibits
31.1 Certification by Christopher H. Atayan, Chief Executive Officer
and Chairman, furnished pursuant to section 302 of the
Sarbanes-Oxley Act
31.2 Certification by Andrew C. Plummer, Vice President, Chief Financial
Officer, and Principal Financial Officer furnished pursuant to section
302 of the Sarbanes-Oxley Act
32.1 Certification by Christopher H. Atayan, Chief Executive Officer
and Chairman, furnished pursuant to section 906 of the
Sarbanes-Oxley Act
32.2 Certification by Andrew C. Plummer, Vice President, Chief Financial
Officer, and Principal Financial Officer furnished pursuant to section
906 of the Sarbanes-Oxley Act
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMCON DISTRIBUTING COMPANY
(registrant)
Date: April 16, 2009 /s/ Christopher H. Atayan
-------------- -----------------------------
Christopher H. Atayan,
Chief Executive Officer and Chairman
Date: April 16, 2009 /s/ Andrew C. Plummer
-------------- -----------------------------
Andrew C. Plummer, Vice President,
Chief Financial Officer, and
Principal Financial Officer
40