AMCON DISTRIBUTING CO
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Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended September 30, 2010 |
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to |
Commission File Number 1-15589
(Exact name of registrant as
specified in its charter)
|
Delaware
|
47-0702918 | |
|
(State or other jurisdiction
of incorporation or organization) |
(I.R.S. Employer
Identification No.) |
|
|
7405 Irvington Road,
Omaha NE (Address of principal executive offices) |
68122
(Zip Code) |
Registrant’s telephone
number, including area code:
(402) 331-3727
Securities registered pursuant
to Section 12(b) of the Act:
|
Title of Each Class
|
Name of Each Exchange on Which Registered
|
|
|
None
|
None |
Securities registered pursuant
to Section 12(g) of the Act:
Common Stock, $.01 Par
Value
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
o
No
þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 of 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to
submit and post such
files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
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. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
(Do
not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
o
No
þ
The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant on
March 31, 2010 was $21,463,007, computed by reference to
the $59.59 closing price of such common stock equity on
March 31, 2010.
As of November 2, 2010 there were 577,432 shares of
common stock outstanding.
Portions of the following document are incorporated by reference
into the indicated parts of this report: definitive proxy
statement for the December 2010 annual meeting of stockholders
to be filed with the Commission pursuant to
Regulation 14A - Part III.
AMCON
DISTRIBUTING COMPANY
Table of
Contents
2
Table of Contents
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
Company’s 2010 and 2009 fiscal years ended
September 30, are herein referred to as fiscal 2010 and
fiscal 2009, respectively. The fiscal year-end balance sheet
dates of September 30, 2010 and September 30, 2009 are
referred to herein as September 2010 and September 2009,
respectively. This report and the documents incorporated by
reference herein, if any, contain forward looking statements,
which are inherently subject to risks and uncertainties. See
“Forward Looking Statements” under Item 7 of this
report.
| ITEM 1. | BUSINESS |
COMPANY
OVERVIEW
AMCON Distributing Company was incorporated in Delaware in 1986
and our common stock is listed on NYSE Amex Equities (formerly
the American Stock Exchange) under the symbol “DIT.”
The Company operates two business segments:
| • | Our wholesale distribution segment (“Wholesale Segment”) distributes consumer products in the Central, Rocky Mountain, and Southern regions of the United States. |
| • | Our retail health food segment (“Retail Segment”) operates fourteen health food retail stores located throughout the Midwest and Florida. |
WHOLESALE
SEGMENT
Our Wholesale Segment serves approximately 4,300 retail outlets
including convenience stores, grocery stores, liquor stores,
drug stores, and tobacco shops. We currently distribute over
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. Our largest customer category is convenience stores.
In October 2010, Convenience Store News ranked us as the ninth
(9th) largest convenience store distributor in the United States
based on annual sales.
Our Wholesale Segment operates five distribution centers located
in Illinois, Missouri, Nebraska, North Dakota and South Dakota.
These distribution centers, combined with cross-dock facilities,
comprise approximately 487,000 square feet of floor space.
Our principal suppliers include Philip Morris USA, RJ Reynolds
Tobacco, Proctor & Gamble, Hershey, Mars, Quaker, and
Nabisco. We also market private label lines of snuff, water,
candy products, batteries, film, and other products. We do not
maintain any long-term purchase contracts with these suppliers.
RETAIL
SEGMENT
The retail health food stores comprising our Retail Segment,
which are operated as Chamberlin’s Market &
Café and Akin’s Natural Foods Market, carry over
30,000 different national and regionally branded and private
label products. These products include high-quality natural,
organic, and specialty foods consisting of produce, baked goods,
frozen foods, nutritional supplements, personal care items, and
general merchandise. Chamberlin’s, which was first
established in 1935, operates six stores in and around Orlando,
Florida. Akin’s, which was also established in 1935, has a
total of eight locations in Oklahoma, Nebraska, Missouri, and
Kansas.
COMPETITIVE
STRENGTHS
We believe that we benefit from a number of competitive
strengths, including the following:
Industry
Experience
The management teams for both of our business segments include
substantial depth in the areas of logistics, sales, and
marketing. This experience is beneficial for the management of
vendor and customer relationships as well as overall operational
execution.
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Table of Contents
Flexible
Distribution Capabilities and Customer Service
Programs
The size and flexibility of our wholesale distribution
operations strategically positions us to service a broad range
of customers from independent retail outlets to large
multi-location retailers. Our customized customer service
programs assist our customers in maximizing vendor promotions
and by providing access to private label and custom food
services, store layout and design consultation, and overall
profitability consulting, all of which have proven particularly
popular.
Unique
Product Selection
Our retail health foods business prides itself in carrying a
unique and superior-quality selection of natural food products
and vitamin supplements. Our unique product set, combined with
highly trained and knowledgeable in-store associates, has
created a loyal customer following where our stores are sought
out destinations, providing a personalized shopping experience.
BUSINESS
STRATEGY
We have a three-pronged business strategy to drive growth and
create shareholder value in which we seek to:
| • | organically grow our wholesale distribution business in the regions in which we operate. |
| • | pursue strategic acquisition opportunities within the wholesale distribution industry. |
| • | judiciously expand our retail health food business through new store openings. |
To execute against this strategy, the Company has rigorous
operational processes in place designed to control costs, manage
credit risk, monitor inventory levels, and maintain maximum
liquidity. The success of our strategy ultimately resides on our
continued ability to provide our customers with unmatched
service, unique product offerings, and leading edge technologies.
PRINCIPAL
PRODUCTS
Sales of cigarettes represented 72% and 71% of the
Company’s consolidated revenue in fiscal 2010 and fiscal
2009, respectively. Sales of candy, beverages, food service,
groceries, health food products, paper products, health and
beauty care products, and tobacco products represented
approximately 28% and 29% of consolidated revenue in fiscal 2010
and fiscal 2009, respectively.
DIVESTITURES
As discussed further in Note 2 to the Consolidated
Financial Statements included in this Annual Report, in fiscal
2009 Trinity Springs, Inc. (“TSI”), a wholly owned
subsidiary of the Company’s, completed the sale of its
operating assets.
INFORMATION
ON SEGMENTS
Information about our segments is presented in Note 15 to
the Consolidated Financial Statements included in this Annual
Report.
COMPETITION —
Wholesale Segment
Our Wholesale Segment is one of the largest distributing
companies of its kind within the regions in which we operate. We
do, however, have a number of both small and large wholesale
distributors operating in the same geographical regions as our
Company, resulting in a highly competitive marketplace. Our
principal competitors are national wholesalers such as McLane
Co., Inc. (Temple, Texas) and Core-Mark International
(San Francisco, California), as well as regional
wholesalers such as Eby-Brown LLP (Chicago, Illinois) and
Farner-Bocken (Carroll, Iowa), along with a host of smaller
grocery and tobacco wholesalers.
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Table of Contents
Competition within the industry is primarily based on the range
and quality of the services provided, pricing, variety of
products offered, and the reliability of deliveries. Our larger
competitors principally compete on pricing and breadth of
product offerings, while our smaller competitors focus on
customer service and their delivery arrangements.
We believe our business model is uniquely positioned to compete
with a wide range of competitors including national, regional,
and local wholesalers. As the ninth (9th) largest convenience
store distributor in the United States based on annual sales
(according to Convenience Store News), our wholesale
distribution business has sufficient economies of scale to offer
competitive pricing as compared to national wholesalers, while
our flexible distribution and support model allows us to provide
a high level of customer service and customized merchandising
solutions. The flexibility of our service offerings has proven
particularly attractive to our small and mid-sized customers
looking to expand.
COMPETITION —
Retail Segment
Food supplement retailing is an intensely competitive business.
We face competition from a variety of sales channels including
local, regional, and national retailers, specialty supermarkets,
membership clubs, farmers’ markets, and other natural foods
stores, each of which competes with us on the basis of product
selection, quality, customer service, and price.
The natural food retail industry is highly fragmented, with more
than 12,000 stores operating independently or as part of small
retail chains and more than 36,000 stores when national chains
such as Whole Foods Markets, General Nutrition Centers
(“GNC”), and Vitamin World are included. The
increasing demand for natural products has fueled an expansion
by national chains which continue to add new stores and complete
acquisitions. Additionally, in recent years conventional
supermarkets have begun offering natural food products adding an
additional layer of competition.
SEASONALITY
Sales in the wholesale distribution industry are somewhat
seasonal and tend to be higher in warm weather months during
which our convenience store customers experience increased
customer traffic. The warm weather months generally fall within
the Company’s third and fourth fiscal quarters. Our retail
health food business does not generally experience significant
seasonal fluctuations in its business.
GOVERNMENT
REGULATION
The Company is subject to regulation by federal, state and local
governmental agencies, including the U.S. Department of
Agriculture, the U.S. Food and Drug Administration
(“FDA”), the Occupational Safety and Health
Administration (“OSHA”), and the U.S. Department
of Transportation (“DOT”). These regulatory agencies
generally impose standards for product quality and sanitation,
workplace safety, and security and distribution policies.
The Company is also subject to state regulations related to the
distribution and sale of cigarettes and tobacco products,
generally in the form of licensing and bonding requirements.
Additionally, both state and federal regulatory agencies have
the ability to impose excise taxes on cigarette and tobacco
products. In recent years a number of states, as well as the
federal government, have increased the excise taxes levied on
cigarettes and tobacco products. We expect this trend to
continue as legislators look for alternatives to fund budget
shortfalls and as a mechanism to discourage tobacco product use.
ENVIRONMENTAL
MATTERS
All of the Company’s facilities and operations are subject
to state and federal environmental regulations. The Company
believes it is in compliance with all such regulations and is
not aware of any violations that could have a material adverse
effect on its financial condition or results of operations.
Further, the Company has not been notified by any governmental
authority of any potential liability or other claim in
connection with any of its properties. The costs and effect on
the Company to comply with state and federal environmental
regulations were not significant in either fiscal 2010 or fiscal
2009.
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Table of Contents
EMPLOYEES
At September 2010, the Company had 674 full-time and
111 part-time employees, which together serve in the
following areas:
|
Managerial
|
36 | |||
|
Administrative
|
87 | |||
|
Delivery
|
104 | |||
|
Sales & Marketing
|
277 | |||
|
Warehouse
|
281 | |||
|
Total Employees
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785 | |||
Approximately thirty of our wholesale delivery employees in our
Quincy, Illinois distribution center are represented by the
International Association of Machinists and Aerospace Workers.
The current labor agreement with the union is effective through
December 2011.
CORPORATE
AND AVAILABLE INFORMATION
The Company’s principal executive offices are located at
7405 Irvington Road, Omaha, Nebraska 68122. The telephone number
at that address is
402-331-3727
and our website address is www.amcon.com. We provide free access
to the various reports we file with the United States Securities
and Exchange Commission through our website. These reports
include, but are not limited to, our Annual Reports on
Form 10-K
and Quarterly Reports on
Form 10-Q.
Please note that any internet addresses provided in this report
are for information purposes only and are not intended to be
hyperlinks. Accordingly, no information found
and/or
provided at such internet addresses is intended or deemed to be
incorporated by reference herein.
You may also read and copy any materials we file with the
Commission at the SEC’s Public Reference Room at
100 F Street NE, Washington, DC 20549 on official
business days during the hours of 10:00 a.m. to
3:00 p.m. You can get information about the Public
Reference Room by calling
1-800-SEC-0330.
The SEC also maintains a website at www.sec.gov which contains
reports, proxies and other company information.
IN
GENERAL
You should carefully consider the risks described below before
making an investment decision concerning our securities.
Additional risks and uncertainties not presently known to us or
that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually materializes, our
business, financial condition or results of operations could be
materially adversely affected. In that case, the trading price
of our common stock could decline substantially. This Annual
Report also contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking
statements as a result of a number of factors, including the
risks described below and elsewhere in this Annual Report. See
“Forward Looking Statements” under Item 7 of this
report for a discussion of forward looking statements.
RISK
FACTORS RELATED TO THE WHOLESALE BUSINESS
| • | Regulation of Cigarette and Tobacco Products by the FDA May Negatively Impact Our Operations. |
In June 2009, the Family Smoking Prevention and Tobacco Control
Act was signed into law which granted the FDA the authority to
regulate the production, distribution, and marketing of tobacco
products in the United States. Specifically, the legislation
established an FDA office to regulate changes to nicotine
yields, chemicals, flavors, ingredients, and the labeling used
to produce and market tobacco products. The new FDA office is
financed through user fees paid by tobacco companies, which is
passed on to wholesale distributors and end consumers in the
form of higher costs.
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Table of Contents
To date, most of the regulatory and compliance burden related to
this legislation has fallen upon product manufacturers. However,
if the FDA were to impose new regulations impacting wholesale
distributors that we are not able to comply with, we could face
remedial actions such as fines, suspension of product
distribution rights,
and/or
termination of operations. Further, if the FDA were to issue
product bans or product restrictions, our future revenue stream
could materially decrease. If any of these items were to occur,
our results from operations, cash flow, business, and overall
financial condition could be negatively impacted.
| • | Our Sales Volume Is Largely Dependent upon the Distribution of and demand for Cigarette Products Which is a Declining Sales Category. |
The distribution of cigarettes represents a significant portion
of our business. During fiscal 2010, approximately 72% of our
consolidated revenues came from the distribution of cigarettes
which generated approximately 27% of our consolidated gross
profit. Due to manufacturer price increases, restrictions on
advertising and promotions, regulation, higher excise taxes,
health concerns, smoking bans, and other factors, the demand for
cigarettes may continue to decline. If this occurs, our results
from operations, cash flow, business, and overall financial
condition could be negatively impacted.
| • | Cigarettes and Other Tobacco Products Are Subject to Substantial Excise Taxes and If These Taxes Are Increased, Our Sales of Cigarettes and Other Tobacco Products Could Decline. |
Cigarette and tobacco products are subject to substantial excise
taxes. Significant increases in cigarette-related taxes
and/or
fees
have been imposed by both individual states and the federal
government in recent years. Further, the new regulatory
responsibilities of the FDA are being funded by fees imposed on
tobacco companies. These fees have been passed on to wholesale
distributors and end consumers in the form of higher prices for
cigarette and tobacco products.
Increases in excise taxes and fees imposed by the FDA may reduce
the long-term demand for cigarette and tobacco products
and/or
result in a sales shift from higher margin premium cigarette and
tobacco products to lower margin deep-discount brands, while at
the same time increasing the Company’s accounts receivable
risk and inventory carrying costs. If any of these events were
to occur, our results from operations, cash flow, liquidity
position, and overall financial condition could be negatively
impacted.
| • | Divestiture and Consolidation Trends Within the Convenience Store Industry May Negatively Impact Our Operations. |
Continued divestitures and consolidations within the convenience
store industry reflect a trend that may result in customer
losses for us if the acquiring entity is served by another
wholesale distributor or we are unable to retain the business.
If we were to lose a substantial volume of business because of
these trends, our results from operations, cash flow, business,
and overall financial condition could be negatively impacted.
| • | Higher Fuel Prices Could Reduce Profit Margins and Adversely Affect Our Business. |
Increases in fuel prices can and do have a negative impact on
our profit margins. If fuel prices increase and we are not able
to meaningfully pass on these costs to customers, it could
adversely impact our results of operations, business, cash flow,
and financial condition.
| • | The Wholesale Distribution of Convenience Store Products Is Significantly Affected by Pricing Decisions and Promotional Programs Offered by Manufacturers. |
We receive payments from the manufacturers of the products we
distribute including allowances, discounts, volume rebates, and
other merchandising incentives in connection with various
incentive programs. In addition, we receive discounts from
states in connection with the purchase of excise stamps for
cigarettes. If the manufacturers or states change or discontinue
these programs or we are unable to maintain the volume of our
sales, our results of operations, business, cash flow, and
financial condition could be negatively affected.
| • | Competition Within The Wholesale Distribution Industry May Have an Adverse Effect on Our Business. |
The wholesale distribution industry is highly competitive. There
are many distribution companies operating in the same
geographical regions as our Company. Our Company’s
principal competitors are national and regional
7
Table of Contents
wholesalers, along with a host of smaller grocery and tobacco
wholesalers. Most of these competitors generally offer a wide
range of products at prices comparable to those offered by our
Company. Some of our competitors have substantial financial
resources and long-standing customer relationships. Heightened
competition may reduce our margins and adversely affect our
business. If we fail to successfully respond to these
competitive pressures or to implement our strategies
effectively, we may lose market share and our results of
operations, business, cash flow, and financial condition could
suffer.
| • | We Occasionally Purchase Cigarettes From Manufacturers Not Covered by The Tobacco Industry’s Master Settlement Agreement (“MSA”), Which May Expose Us to Certain Potential Liabilities and Financial Risks for Which We Are Not Indeminified. |
In June 1994, the Mississippi attorney general brought an action
against various tobacco industry members on behalf of the state
to recover state funds paid for health-care costs related to
tobacco use. Subsequently, most other states sued the major
U.S. cigarette manufacturers based on similar theories. The
cigarette manufacturer defendants settled the first four of
these cases with Mississippi, Florida, Texas and Minnesota by
separate agreements. These states are referred to as non-MSA
states. In November 1998, the major U.S. tobacco product
manufacturers entered into the MSA with 46 states, the
District of Columbia and certain U.S. territories. The MSA
and the other state settlement agreements settled health-care
cost recovery actions and monetary claims relating to future
conduct arising out of the use of, or exposure to, tobacco
products, imposed a stream of future payment obligations on
major U.S. cigarette manufacturers and placed significant
restrictions on the ability to market and sell cigarettes. The
payments required under the MSA resulted in the products sold by
the participating manufacturers being priced at higher levels
than the products sold by non-MSA manufacturers.
In order to limit our potential tobacco related liabilities, we
try to limit our purchases of cigarettes from non-MSA
manufacturers for sale in MSA states. The benefits of liability
limitations and indemnities we are entitled to under the MSA do
not apply to sales of cigarettes manufactured by non-MSA
manufacturers. From
time-to-time,
however, we find it necessary to purchase a limited amount of
cigarettes from non-MSA manufacturers. For example, during a
transition period while integrating distribution operations from
an acquisition we may need to purchase and distribute cigarettes
manufactured by non-MSA manufacturers to satisfy the demands of
customers of the acquired business. With respect to sales of
such non-MSA cigarettes, we could be subject to litigation that
could expose us to liabilities for which we would not be
indemnified.
| • | If the Tobacco Industry’s Master Settlement Agreement Is Invalidated, or Tobacco Manufacturers Cannot Meet Their Obligations to Indemnify Us, We Could Be Subject to Substantial Litigation Liability. |
In connection with the MSA, we are indemnified by many of the
tobacco product manufacturers from which we purchase cigarettes
and other tobacco products for liabilities arising from the sale
of the tobacco products that they supply to us. However, if
litigation challenging the validity of the master settlement
agreement were to be successful and all or part of the master
settlement agreement is invalidated, we could be subject to
substantial litigation due to the sales of cigarettes and other
tobacco products, and we may not be indemnified for such costs
by the tobacco product manufacturers in the future. In addition,
even if we continue to be indemnified by cigarette manufacturers
that are parties to the master settlement agreement, future
litigation awards against such cigarette manufacturers could be
so large as to eliminate the ability of the manufacturers to
satisfy their indemnification obligations. Our results of
operations, business, cash flow, and overall financial condition
could be negatively impacted due to increased litigation costs
and potential adverse rulings against us.
| • | We Face Competition From Sales of Deep-Discount Brands and Illicit and Other Low Priced Sales of Cigarettes. |
Increased selling prices for cigarettes and higher cigarette
taxes have resulted in the growth of deep-discount cigarette
brands. Deep-discount brands are brands generally manufactured
by companies that are not original participants to the MSA, and
accordingly do not have cost structures burdened by master
settlement agreement. Since the MSA was signed, the category of
deep-discount brands manufactured by smaller manufacturers or
supplied by importers has grown substantially. If this growth
continues, our results of operations, business cash flows, and
overall financial condition would be negatively impacted.
8
Table of Contents
RISK
FACTORS RELATED TO THE RETAIL BUSINESS
| • | Increases in Retail Health Food Store Competition May Have an Adverse Effect on Our Business. |
In the retail health food business, our primary competitors
currently include national natural foods supermarkets, such as
Whole Foods Market, specialty supermarkets, regional natural
foods stores, small specialty stores, and restaurants. In
addition, conventional supermarkets and mass market outlets also
offer natural products. Some of these potential competitors may
have greater financial or marketing resources than we do and may
be able to devote greater resources to sourcing, promoting, and
selling their products. Increased competition may have a
material adverse effect on our results of operations, business,
cash flow, and financial condition as the result of lower sales,
lower gross profits
and/or
greater operating costs such as marketing.
| • | Part of Our Strategy Is to Expand Our Retail Health Food Business Through The Opening of New Stores, If We Are Unsuccessful it May Have an Adverse Effect on Our Business. |
Our expansion strategy is dependent on finding suitable
locations, and we face intense competition from other retailers
for such sites. We also need to be able to open new stores
timely and operate them successfully. In addition, our success
is dependant on our ability to hire, train and integrate new
qualified team members. Our success is also dependent on our
ability to adapt our distribution, management information and
other operating systems to adequately supply products to new
stores at competitive prices so that we can operate the stores
in a successful and profitable manner. If we are not able to
find and open new store locations and close poor performing
stores, this could have a material adverse impact on our results
of operations, business, cash flow, and overall financial
condition.
| • | Changes in the Availability of Quality Natural and Organic Products Could Impact Our Business. |
There is no assurance that quality natural and organic products
including dietary supplements, fresh and processed foods and
vitamins will be available to meet our future needs. If
conventional supermarkets increase their natural and organic
product offerings or if new laws require the reformulation of
certain products to meet tougher standards, the supply of these
products may be constrained. Any significant disruption in the
supply of quality natural and organic products could have a
material adverse impact on our overall sales and product costs.
| • | Perishable Food Product Losses Could Materially Impact Our Results. |
We believe our stores more heavily emphasize perishable products
than conventional supermarket stores. The Company’s
emphasis on perishable products may result in significant
product inventory losses in the event of extended power outages,
natural disasters or other catastrophic occurrences.
RISK
FACTORS RELATED TO THE OVERALL BUSINESS
| • | A Further Deterioration in Economic Conditions May Negatively Impact Sales in Both Our Business Segments |
Our results of operations and financial condition are
particularly sensitive to changes in the overall economy,
including the level of consumer spending. Further changes in
discretionary spending patterns may decrease demand from our
convenience store customers
and/or
impact the demand for natural food products in our retail health
food stores as customers purchase cheaper product alternatives.
Additionally, many of our wholesale segment customers are thinly
capitalized and their access to credit in the current business
environment may be impacted by their ability to operate as a
going concern, presenting additional credit risk for the
Company. If the economic downturn persists or deteriorates
further, it may result in lower sales and profitability as well
as customer credit defaults.
| • | Periods of Significant or Prolonged Inflation or Deflation Affect our Product Costs and Profitability |
Volatile product costs have a direct impact on our business.
Prolonged periods of product cost inflation may have a negative
impact on our profit margins and earnings to the extent that we
are unable to pass on all or a portion of such product cost
increases to our customers, which may have a negative impact on
our business and our profitability. In addition, product cost
inflation may negatively impact consumer spending decisions,
which could adversely impact our sales. Conversely, our business
may be adversely impacted by periods of prolonged product cost
deflation
9
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because we make a significant portion of our non-tobacco sales
at prices that are based on the cost of products we sell plus a
percentage markup. As a result, our profit levels may be
negatively impacted during periods of product cost deflation,
even though our gross profit percentage may remain relatively
constant.
| • | Technology Dependence Could Have a Material Negative Impact on Our Business |
Our ability to decrease costs and increase profits, as well as
our ability to serve customers most effectively, depends on the
reliability of our technology network. We use software and other
technology systems, among other things, to generate and select
orders, to load and route trucks and to monitor and manage our
business on a
day-to-day
basis. Any disruption to these computer systems could adversely
impact our customer service, decrease the volume of our business
and result in increased costs. While the Company has invested
and continues to invest in technology initiatives, these
measures cannot fully insulate us from a disruption that could
result in adverse effects on operations and profits.
| • | Adverse Publicity About Us or Lack of Confidence in Our Products Could Negatively Impact Our Reputation and Reduce Earnings |
Maintaining a good reputation and public confidence in the
products we distribute is critical to our business. Anything
that damages that reputation or the public’s confidence in
our products, whether or not justified, including adverse
publicity about the quality, safety or integrity of our
products, could quickly and adversely affect our revenues and
profits. In addition, such adverse publicity may result in
product liability claims, a loss of reputation, and product
recalls which would have a material adverse effect on our sales
and operations.
| • | Capital Needed for Expansion May Not Be Available. |
The acquisition of other distributors, the opening of new retail
stores, and the development of new production and distribution
facilities requires significant amounts of capital. In the past,
our growth has been funded primarily through proceeds from bank
debt, private placements of equity and debt and internally
generated cash flow. These and other sources of capital may not
be available to us in the future, which could impair our ability
to further expand our business.
| • | Covenants in Our Revolving Credit Facility May Restrict Our Ability to React to Changes Within Our Business or Industry. |
Our revolving credit facility imposes restrictions on us that
could increase our vulnerability to general adverse economic and
industry conditions by limiting our flexibility in planning for
and reacting to changes in our business and industry.
Specifically, these restrictions limit our ability, among other
things, to incur additional indebtedness, make distributions,
pay dividends, issue stock of subsidiaries, make investments,
repurchase stock, create liens, enter into transactions with
affiliates, merge or consolidate, or transfer and sell our
assets.
| • | Failure to Meet Restrictive Covenants in Our Revolving Credit Facility Could Result in Acceleration of the Facility and We May not be Able to Find Alternative Financing. |
Under our credit facility, we are required to maintain a minimum
debt service ratio. Our ability to comply with this covenant may
be affected by factors beyond our control. If we breach, or if
our lender contends that we have breached this covenant or any
other restrictions, it could result in an event of default under
our revolving credit facility, which would permit our lenders to
declare all amounts outstanding thereunder to be immediately due
and payable, and our lenders under our revolving credit facility
could terminate their commitments to make further extensions of
credit under our revolving credit facility.
| • | We May Not Be Able to Obtain Capital or Borrow Funds to Provide Us with Sufficient Liquidity and Capital Resources Necessary to Meet Our Future Financial Obligations. |
We expect that our principal sources of funds will be cash
generated from our operations and if necessary, borrowings under
our revolving credit facility. However, the current and future
conditions in the credit markets may impact the availability of
capital resources required to meet our future financial
obligations, or to provide funds for our working capital,
capital expenditures and other needs for the foreseeable future.
We may require additional equity or debt financing to meet our
working capital requirements or to fund our capital
expenditures. We may not be able to obtain financing on terms
satisfactory to us, or at all.
10
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| • | We Depend on Relatively Few Suppliers for a Large Portion of Our Products, and Any Interruptions in the Supply of the Products That We Sell Could Adversely Affect Our Results of Operations and Financial Condition. |
We do not have any long-term contracts with our suppliers
committing them to provide products to us. Although our
purchasing volume can provide leverage when dealing with
suppliers, suppliers may not provide the products we sell in the
quantities we request or on favorable terms. Because we do not
control the actual production of the products we sell, we are
also subject to delays caused by interruption in production
based on conditions beyond our control. These conditions include
job actions or strikes by employees of suppliers, inclement
weather, transportation interruptions, and natural disasters or
other catastrophic events. Our inability to obtain adequate
supplies of the products we sell as a result of any of the
foregoing factors or otherwise, could cause us to fail to meet
our obligations to our customers.
| • | We Would Lose Business if Cigarette or Other Manufacturers That We Use Decide to Engage in Direct Distribution of Their Products. |
In the past, some large manufacturers have decided to engage in
direct distribution of their products and eliminate distributors
such as our Company. If other manufacturers make similar product
distribution decisions in the future, our revenues and profits
would be adversely affected and there can be no assurance that
we will be able to take action to compensate for such losses.
| • | We May Be Subject to Product Liability Claims Which Could Adversely Affect Our Business. |
We may face exposure to product liability claims in the event
that the use of products sold by us is alleged to cause injury
or illness. With respect to product liability claims, we believe
that we have sufficient liability insurance coverage and
indemnities from manufacturers. However, product liability
insurance may not continue to be available at a reasonable cost,
or, if available, may not be adequate to cover all of our
liabilities. We generally seek contractual indemnification and
insurance coverage from parties supplying the products we sell,
but this indemnification or insurance coverage is limited, as a
practical matter, to the creditworthiness of the indemnifying
party and the insurance limits of any insurance provided by
suppliers. If we do not have adequate insurance or if
contractual indemnification is not available or if the
counterparty cannot fulfill its indemnification obligation,
product liability relating to allegedly defective products could
materially adversely impact our results of operations, business,
cash flow, and overall financial condition.
| • | We Depend on Our Senior Management and Key Personnel. |
We depend on the continued services and performance of our
senior management and other key personnel. While we maintain key
person life insurance policies and have employment agreements
with certain key personnel, the loss of service from any of our
executive officers or key employees could harm our business.
| • | We Operate in a Competitive Labor Market and a Number of Our Employees Are Covered by Collective Bargaining Agreements. |
We compete with other businesses in each of our markets with
respect to attracting and retaining qualified employees. A
shortage of qualified employees could require us to enhance our
wage and benefits packages in order to compete effectively in
the hiring and retention of qualified employees or to hire more
expensive temporary employees.
In addition, at September 2010 approximately thirty of our
delivery drivers in our Wholesale Segment are covered by a
collective bargaining agreement with a labor organization, which
expires in December 2011. If we were not able to renew our
future labor agreements on similar terms, we may be unable to
recover labor cost increases through increased prices or may
suffer business interruptions as a result of strikes or other
work stoppages.
| • | We Are Subject to Significant Governmental Regulation and If We Are Unable to Comply with Regulations That Affect Our Business or If There Are Substantial Changes in These Regulations, Our Business Could Be Adversely Affected. |
As a distributor and retailer of food products, we are subject
to regulation by the FDA. Our operations are also subject to
regulation by OSHA, the Department of Transportation and other
federal, state and local agencies. Each of these regulatory
authorities have broad administrative powers with respect to our
operations. If we fail to
11
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adequately comply with government regulations or regulations
become more stringent, we could experience increased
inspections, regulatory authorities could take remedial action
including imposing fines or shutting down our operations or we
could be subject to increased audit and compliance costs. If any
of these events were to occur, our results of operations,
business, cash flow, and financial condition would be adversely
affected.
We cannot predict the impact that future laws, regulations,
interpretations or applications, the effect of additional
government regulations or administrative orders, when and if
promulgated, or disparate federal, state and local regulatory
schemes would have on our business in the future. They could,
however, require the reformulation of certain products to meet
new standards, the recall or discontinuance of certain products
not able to be reformulated, additional record keeping, expanded
documentation of the properties of certain products, expanded or
different labeling
and/or
scientific substantiation. While we do not manufacture any
products, any of the aforementioned items could disrupt the
supply levels of inventory that we sell. Any or all of such
requirements could have an adverse effect on our results of
operations, business, cash flow, and financial condition.
RISK
FACTORS RELATED TO OUR COMMON STOCK
| • | The Company Has Very Few Shareholders of Record And, If this Number Drops below 300, the Company Will No Longer Be Obligated to Report under the Securities Exchange Act of 1934 and in Such Case We May Be Delisted from NYSE Amex Equities, Reducing the Ability of Investors to Trade in Our Common Stock. |
If the number of owners of record (including direct participants
in the Depository Trust Company) of our common stock falls
below 300, our obligations to file reports under the Securities
Exchange Act of 1934 could be suspended. If we take advantage of
this right we will likely reduce administrative costs of
complying with public company rules, but periodic and current
information updates about the Company would not be available to
investors. In addition, the common stock of the Company would be
removed from listing on NYSE Amex Equities. This would likely
impact investors’ ability to trade in our common stock.
| • | We Have Various Mechanisms in Place to Discourage Takeover Attempts, Which May Reduce or Eliminate Our Stockholders’ Ability to Sell Their Shares for a Premium in a Change of Control Transaction. |
Various provisions of our bylaws and of corporate law may
discourage, delay or prevent a change in control or takeover
attempt of our company by a third party that is opposed by our
management and Board of Directors. These anti-takeover
provisions could substantially impede the ability of public
stockholders to benefit from a change of control or change in
our management and Board of Directors. These provisions include:
| • | classification of our directors into three classes with respect to the time for which they hold office; |
| • | supermajority voting requirements to amend the provision in our certificate of incorporation providing for the classification of our directors into three such classes; |
| • | non-cumulative voting for directors; |
| • | control by our Board of Directors of the size of our Board of Directors; |
| • | limitations on the ability of stockholders to call special meetings of stockholders; and |
| • | advance notice requirements for nominations of candidates for election to our Board of Directors or for proposing matters that can be acted upon by our stockholders at stockholder meetings. |
Not applicable.
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| ITEM 2. | PROPERTIES |
The location and approximate square footage of the
Company’s five distribution centers and fourteen retail
stores at September 2010 are set forth below:
|
Location
|
Square Feet | |||
|
Distribution — IL, MO, ND, NE & SD
|
487,000 | |||
|
Retail — FL, KS, MO, NE & OK
|
140,900 | |||
|
Total Square Footage
|
627,900 | |||
Our Quincy, Illinois; Bismarck, North Dakota; and Rapid City,
South Dakota distribution facilities are owned by our Company,
and are subject to first mortgages granted to
Marshall & Ilsley Bank (“M&I”). The
Company leases its remaining distribution facilities, retail
stores, offices, and certain equipment under noncancellable
operating and capital leases. Management believes that its
existing facilities are adequate for the Company’s present
level of operations, however, larger facilities and additional
cross-dock facilities and retail stores may be required if the
Company experiences growth in certain market areas.
| ITEM 3. | LEGAL PROCEEDINGS |
None.
| ITEM 4. | (REMOVED AND RESERVED) |
EXECUTIVE
OFFICERS OF THE REGISTRANT
Executive officers of our Company are appointed by the Board of
Directors and serve at the discretion of the Board. The
following table sets forth certain information with respect to
all executive officers of our Company.
| Name |
Age
|
Position | ||
|
Christopher H. Atayan
|
50 | Chairman of the Board, Chief Executive Officer, Director | ||
|
Kathleen M. Evans
|
63 | President, Director | ||
|
Andrew C. Plummer
|
36 | Vice President, Chief Financial Officer, and Secretary | ||
|
Eric J. Hinkefent
|
49 | President of Chamberlin’s Market and Cafe and Akin’s Natural Foods Market |
CHRISTOPHER H. ATAYAN
has served as the Company’s
Chairman of the Board since January 2008, its Chief Executive
Officer since October 2006, and has been a director of the
Company since 2004. From March 2006 to October 2006, he served
the Company in various capacities including Vice Chairman and
Chief Corporate Officer. Mr. Atayan is also a consultant to
Draupnir LLC (the parent of Draupnir Capital, LLC), has served
as the Senior Managing Director of Slusser Associates, a private
equity and investment banking firm, since 1988, and has been
engaged in private equity and investment banking since 1982.
KATHLEEN M. EVANS
has been President of the Company since
1991. Prior to that time, Ms. Evans served as Vice
President of the AMCON Corporation (the former parent of the
Company) from 1985 to 1991. From 1978 to 1985, Ms. Evans
acted in various capacities with AMCON Corporation and its
operating subsidiaries.
ANDREW C. PLUMMER
has served as the Company’s Chief
Financial Officer and Secretary since January 2007. From 2004 to
2007, Mr. Plummer served the Company in various roles
including Acting Chief Financial Officer, Corporate Controller,
and Manager of SEC Compliance. Prior to joining AMCON in 2004,
Mr. Plummer practiced public accounting, primarily with the
accounting firm Deloitte and Touche, LLP.
Although not an executive officer of our Company, Eric. J.
Hinkefent is an executive officer of two of our subsidiaries.
His business experience is as follows:
ERIC J. HINKEFENT
has served as President of both
Chamberlin’s Natural Foods, Inc. and Health Food
Associates, Inc. since October 2001. Prior to that time,
Mr. Hinkefent served as President of Health Food
Associates, Inc.
13
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| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
MARKET
FOR COMMON STOCK
The Company’s common stock trades on NYSE Amex Equities
(formerly the American Stock Exchange) under the trading symbol
“DIT”. As of November 1, 2010, the closing stock
price was $69.50 and there were 577,432 common shares
outstanding. As of that date, the Company had approximately 780
common shareholders of record (including direct participants in
the Depository Trust Company). The following table reflects
the range of the high and low closing prices per share of the
Company’s common stock reported by NYSE Amex Equities for
fiscal 2010 and 2009.
| Fiscal 2010 | Fiscal 2009 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
|
4th Quarter
|
$ | 62.00 | $ | 50.95 | $ | 63.63 | $ | 39.35 | ||||||||
|
3rd Quarter
|
59.75 | 47.44 | 44.25 | 25.01 | ||||||||||||
|
2nd Quarter
|
66.00 | 49.80 | 28.00 | 16.50 | ||||||||||||
|
1st Quarter
|
78.00 | 58.26 | 24.50 | 14.00 | ||||||||||||
DIVIDEND
POLICY
On a quarterly basis, the Company’s Board of Directors
evaluates the potential declaration of dividend payments on the
Company’s common stock. Our dividend policy is intended to
return capital to shareholders when it is most appropriate. The
Company’s revolving credit facility provides that it may
not pay dividends on its common shares in excess of $0.72 per
common share on an annual basis.
Our Board of Directors could decide to alter our dividend policy
or not pay quarterly dividends at any time in the future. Such
an action by the Board of Directors could result from, among
other reasons, changes in the marketplace, changes in our
performance or capital needs, changes in federal income tax
laws, disruptions in the capital markets, or other events
affecting our business, liquidity or financial position. The
Company paid cash dividends of $416,779 or $0.72 per common
share in fiscal 2010 and $228,242 or $0.40 per common share in
fiscal 2009.
The Company has Series A and B Convertible Preferred Stock
(“Convertible Preferred Stock”) outstanding at
September 2010 which are not registered under the Securities and
Exchange Act of 1934. The Company paid cash dividends on all
series of Convertible Preferred Stock of $297,025 and $347,025
during fiscal 2010 and fiscal 2009, respectively. See
Note 3 to Consolidated Financial Statements included in
this Annual Report for further information regarding these
securities.
REPURCHASE
OF COMPANY SHARES
During fiscal 2010, the Company’s Board of Directors
authorized a share repurchase program which provided for the
repurchase of up to 50,000 shares of the Company’s
common stock. The Company did not repurchase any shares of its
common stock during either fiscal 2010 or fiscal 2009.
EQUITY
COMPENSATION PLAN INFORMATION
We refer you to Item 12 of this report for the information
required by Item 201(d) of SEC
Regulation S-K.
| ITEM 6. | SELECTED FINANCIAL DATA |
Not applicable.
14
Table of Contents
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes to the Consolidated
Financial Statements under Item 8 and other information in
this report, including Critical Accounting Policies and
Cautionary Information included at the end of this Item 7.
The following discussion and analysis includes the results of
operations for our continuing operations for the twelve month
periods ended September 2010 and September 2009.
A separate discussion of our discontinued operations has been
presented within this Item 7. Accordingly, the sales, gross
profit, selling, general and administrative, depreciation and
amortization, direct interest, other expenses, and income tax
benefit for discontinued operations have not been included in
our analysis of continuing operations. For more information
regarding our business segments, see Item 1
“Business” of this Annual Report.
Business
Update — General
While the U.S. economy has showed modest signs of
stabilization, consumer demand continues to face considerable
headwinds. The national unemployment rate still stands at nearly
10% according to the U.S. Bureau of Labor Statistics, many
real estate markets remain depressed, consumers are redirecting
disposal income to reduce debt levels, and according to the
Bureau of Economic Analysis, the personal savings rate has
increased to approximately 6%, up from just 2% three years ago.
Not surprisingly, consumers remain extremely price sensitive and
value conscious.
Notwithstanding the above economic conditions, we have not
experienced significantly lower demand in either of our business
segments. As discussed further below, our businesses have
remained more resilient than many other distribution and retail
formats and have performed comparatively well given the
challenging operating environment.
Forward looking, we believe that the ongoing economic malaise,
increased regulatory pressures, and the potential for higher
excise taxes and fuel prices could adversely affect our sales,
gross margins, and operating profits. Additionally, the Company
is evaluating what impact the new healthcare legislation might
have on our businesses. Currently, the ultimate impact of this
legislation remains uncertain. We are, however, confident that
our conservative strategy of cost containment and maintaining
maximum liquidity positions us well to capture market share,
execute strategic acquisitions, open new retail stores, and
ultimately reward our shareholders.
Business
Update — Wholesale Segment
Convenience stores constitute the largest portion of our
Wholesale Segment customer base. Despite depressed economic
conditions, convenience store sales remain a vibrant and growing
segment in retailing. According to the September 2010 issue of
Convenience Distribution (a leading trade publication published
by the American Wholesale Marketers Association), in-store sales
for convenience stores increased 4.9% during the 2009 calendar
year, totaling approximately $511.1 billion.
We believe a number of factors have contributed to the continued
success of the convenience store channel. The number one service
characteristic provided by convenience stores is speed.
According to research conducted by National Association of
Convenience Stores (“NACS”), the average time it takes
consumers to purchase an item in a convenience store and depart
is between 3 and 4 minutes. With over 144,000 locations at the
end of the 2009 calendar year, convenience stores outnumbered
all other competing sales channels (supermarkets, drug stores,
tobacco outlets, and mass merchant/dollar stores) combined, and
have become a destination of choice for time-starved customers.
Additionally, because convenience stores dominate a number of
product categories, they have become an unavoidable part of
day-to-day
life for many Americans. For example, during the 2009 calendar
year convenience stores accounted for approximately 80% of all
fuel sales, 64% of all cigarette sales, and 93% of all cold beer
sales. Further, NACS estimates that three out of four American
adults drink coffee on a regular basis, creating a significant
source of potential repeat traffic for convenience stores. Our
Company does not sell fuel or beer,
15
Table of Contents
however, cigarettes, food, and other beverages (i.e. coffee)
represent some of our best selling product categories and
benefit from the high traffic generated by convenience stores.
While the convenience store channel continues to prosper, a
number of significant trends and challenges exist for the
wholesale distributors who serve them.
Industry consolidation
— Economies of scale for both
convenience stores and wholesale distributors are rapidly
becoming a necessary ingredient to a company’s ability to
compete successfully. Accordingly, both wholesale distributors
and convenience stores are consolidating. While this creates
opportunities for our Company to acquire smaller competitors, we
also face a greater risk that our customers may be acquired by
convenience store chains not serviced by us.
Demand for cigarettes
— The sale of cigarettes
represent approximately 36% of in-store sales for convenience
stores according to NACS and represented approximately 72% of
our consolidated revenue during fiscal 2010. The demand for
cigarettes has been decreasing since the 1980’s due to a
general decline in the number of smokers in the United States
and the impact of legislative actions such as smoking bans and
higher state and federal excise taxes.
Additionally, during fiscal 2009 the manufacturing,
distribution, marketing, and sale of cigarette and tobacco
products was placed under the authority of the FDA. To date, the
regulatory actions undertaken by the FDA have been primarily
targeted at cigarette manufacturers and retailers. However,
future regulatory actions by the FDA could further depress
consumer demand for tobacco products. Based on these factors, we
believe the demand for cigarettes will continue to decline.
Food Service
— In an effort to replace
declining cigarette revenues and to counter increased
competition from other retail formats, the convenience store
industry has been remaking itself in recent years, placing a
bigger emphasis on food service. The emphasis on quick-service,
restaurant styled offerings such as
on-the-go
meals, bundled value meal concepts, and expanded beverage and
coffee bars, have proven effective in many markets and will be
an important category for convenience stores going forward.
Technology
— Convenience stores increasingly
are relying on technology to manage their business and to
effectively compete with other distributors. Capabilities such
as inventory scanning, electronic price books, sku
rationalization, category management, maximizing manufacturer
promotions, and access to robust management reporting are
becoming competitive differentiators.
While the convenience store industry is undergoing a number of
structural changes (i.e. consolidation, diversifying away from
tobacco products, increasing reliance on technology etc.), we
believe this retailing channel will remain attractive into the
foreseeable future given its established footprint. During the
past several years we have proactively implemented initiatives
specifically aimed at assisting our customers transition through
these structural shifts. We also believe these same structural
changes will create additional opportunities for us to acquire
smaller distributors who lack the expertise or resources to
offer these expanded services to their convenience stores
customers.
Business
Update — Retail Segment
The retail health food industry has grown significantly over the
past decade as the demand for non-processed natural products
(pesticide-free, hormone-free, and non-genetically modified) has
grown. According to the June 2010 issue of The Natural Foods
Merchandiser (“NFM”), sales for all types of natural
products grew to approximately $61.1 billion during the
2009 calendar year. NFM estimates that approximately 44% of
these sales were made through independent natural food retailers
such as our retail stores, 36% through conventional mass market
retailers, and 20% through all other retail channels (internet,
mail order, multi-level marketing etc.).
We believe a number of key factors have influenced the demand
for natural products including:
| • | heightened awareness about the role that food and nutrition play in long-term health, |
| • | increasing concerns over food safety due to the presence of pesticide residues, growth hormones, and artificial ingredients found in foods purchased through traditional retail outlets, |
16
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| • | growing focus on the impact of chemical additives included in consumer products such as household cleaning agents, |
| • | the impact of chemicals used in consumer goods on the environment, particularly the potential for water and soil contamination, and |
| • | an aging population with a desire to maintain good health and a high quality of life. |
The depth of the economic meltdown over the past several years
has tested the natural products industry, which is characterized
by higher price points and niche specialty products. As reported
by NFM, however, the industry not only survived but managed to
grow, recording overall sales growth of 3.4% for the 2009
calendar year. In fact, certain natural food product categories
such as packaged grocery, produce, and vitamins enjoyed double
digit sales growth during the 2009 calendar year, benefiting
from a shift in household budgets from dining-out to dining-in,
and the overall desire to maintain good health.
While natural foods remain one of the fastest growing categories
in food retailing, the severity of the economic downturn,
particularly in Florida, has slowed sales growth for our retail
stores. We believe a loyal customer following and their
commitment to healthy lifestyles and environmental
sustainability have helped us maintain a strong and profitable
business. Both Chamberlin’s Market & Café
and Akin’s Natural Foods Market have had a local market
presence for over 75 years affording them tremendous brand
recognition in the area of natural products.
Despite slowing sales, during fiscal 2010 we were able to
improve our gross margins, control operating expenses, and
increase operating income as compared to fiscal 2009. During
fiscal 2010, many conventional supermarkets reduced the fringe
product categories they carried, including natural products.
This inventory stocking change by supermarkets allowed us to
obtain improved pricing from our suppliers and increase gross
margins.
Forward looking, we will continue to face a highly competitive
environment based on the expansion of both regional and national
chains. Notwithstanding these challenges, we believe our health
food stores continue to offer a unique value proposition,
carrying product lines not readily found in other stores and
coupled with highly trained store associates who are passionate
about the products we offer. As the economy recovers and
consumer confidence improves, we believe consumer preferences
towards natural products will increase. We believe that these
considerations, combined with aging demographics, will make our
retail health foods stores an attractive portion of our overall
business into the future.
SIGNIFICANT EVENTS IN FISCAL 2010
During fiscal 2010, the Company:
| • | acquired Discount Distributors, a wholesale distributor to convenience stores with annual sales totaling approximately $59.6 million. |
| • | opened a new Akin’s Natural Foods Market store in the Tulsa, Oklahoma market. |
| • | reduced total borrowings on our credit facility by over $4.0 million, while still funding the Discount Distributors acquisition and adding a new retail store location. |
| • | increased income from continuing operations after income taxes to approximately $9.0 million. |
| • | increased fully diluted earnings per common share from continuing operations by $1.12, or 10.3%, as compared to fiscal 2009. |
| • | increased annual dividends paid to common shares holders to $0.72 per share, an 80% increase over fiscal 2009. |
17
Table of Contents
RESULTS
OF OPERATIONS
The following table sets forth an analysis of various components
of the Company’s Statement of Operations as a percentage of
sales for fiscal years 2010 and 2009:
| Fiscal Years | ||||||||
| 2010 | 2009 | |||||||
|
Sales
|
100.0 | % | 100.0 | % | ||||
|
Cost of sales
|
92.9 | 92.5 | ||||||
|
Gross profit
|
7.1 | 7.5 | ||||||
|
Selling, general and administrative expenses
|
5.4 | 5.7 | ||||||
|
Depreciation and amortization
|
0.2 | 0.1 | ||||||
|
Operating income
|
1.5 | 1.7 | ||||||
|
Interest expense
|
0.1 | 0.2 | ||||||
|
Income from continuing operations before income taxes
|
1.4 | 1.5 | ||||||
|
Income tax expense
|
0.5 | 0.6 | ||||||
|
Income from continuing operations
|
0.9 | 0.9 | ||||||
|
Income from discontinued operations, net of tax
|
— | 0.5 | ||||||
|
Net income
|
0.9 | 1.4 | ||||||
|
Preferred stock dividend requirements
|
— | — | ||||||
|
Net income available to common shareholders
|
0.9 | % | 1.4 | % | ||||
| Fiscal Years |
Incr
|
|||||||||||||||
|
(In millions)
|
2010 | 2009 | (Decr)/2/ | % Change/2/ | ||||||||||||
|
CONSOLIDATED:
|
||||||||||||||||
|
Sales/1/
|
$ | 1,010.5 | $ | 907.9 | $ | 102.6 | 11.3 | % | ||||||||
|
Cost of Sales
|
938.8 | 839.8 | 99.0 | 11.8 | ||||||||||||
|
Gross profit
|
71.7 | 68.1 | 3.6 | 5.2 | ||||||||||||
|
Gross profit percentage
|
7.1 | % | 7.5 | % | ||||||||||||
|
Operating expense
|
56.2 | 52.8 | 3.4 | 6.5 | ||||||||||||
|
Operating income
|
15.5 | 15.4 | 0.1 | 0.9 | ||||||||||||
|
Interest expense
|
1.5 | 1.6 | (0.1 | ) | (7.5 | ) | ||||||||||
|
Income tax expense
|
5.1 | 5.4 | (0.2 | ) | (4.2 | ) | ||||||||||
|
Income from continuing operations
|
9.0 | 8.5 | 0.5 | 5.6 | ||||||||||||
|
BUSINESS SEGMENTS:
|
||||||||||||||||
|
Wholesale
|
||||||||||||||||
|
Sales/1/
|
973.8 | 871.3 | 102.4 | 11.8 | ||||||||||||
|
Gross profit
|
55.6 | 52.8 | 2.8 | 5.3 | ||||||||||||
|
Gross profit percentage
|
5.7 | % | 6.1 | % | ||||||||||||
|
Retail
|
||||||||||||||||
|
Sales
|
36.8 | 36.6 | 0.2 | 0.4 | ||||||||||||
|
Gross profit
|
16.1 | 15.3 | 0.8 | 5.2 | ||||||||||||
|
Gross profit percentage
|
43.8 | % | 41.8 | % | ||||||||||||
| /1/ | Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $15.7 million in fiscal 2010 and $15.8 million in fiscal 2009. | |
| /2/ | Amounts calculated based on actual change in the Consolidated Statement of Operations. |
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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 —
Fiscal 2010 vs. Fiscal 2009 (Continuing
Operations)
Sales in our Wholesale Segment increased $102.4 million
during fiscal 2010 as compared to fiscal 2009. Significant items
impacting sales during fiscal 2010 included the following:
| • | $54.6 million increase related to our expansion into Northwest Arkansas with the Discount Distributors acquisition. |
| • | $64.4 million increase due to cigarette price increases implemented by manufacturers. |
| • | $23.1 million decrease, primarily related to a reduction in the volume of cigarette cartons sold. |
| • | $6.5 million increase in our tobacco, beverage, snacks, candy, grocery, health & beauty products, automotive, food service, and store supplies categories (“Other Products”). |
Sales in our Retail Segment increased approximately
$0.2 million during fiscal 2010 as compared to fiscal 2009.
This increase was primarily related to the addition of our new
retail store in Tulsa, Oklahoma during fiscal 2010.
GROSS
PROFIT — Fiscal 2010 vs. Fiscal 2009 (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 in our Wholesale Segment increased
$2.8 million in fiscal 2010 as compared to fiscal 2009.
During fiscal 2010, our gross margins benefited by
$2.5 million due to the gross profit generated by the
Discount Distributors acquisition, $3.0 million due to
improved gross margins in our cigarette and tobacco categories,
and $0.4 million due to changes in sales volume and
promotional allowances. These increases in gross margins were
partially offset by $3.1 million decrease in gross margins
attributable to the benefit of tobacco price increases
recognized during the prior fiscal year.
Gross profit for the Retail Segment increased $0.8 million
in fiscal 2010 as compared to fiscal 2009. This increase was
primarily related to improved gross margins and the addition of
our new retail store in Tulsa, Oklahoma.
OPERATING
EXPENSE — Fiscal 2010 vs. Fiscal 2009 (Continuing
Operations)
Operating expense includes selling, general and administrative
expenses and depreciation and amortization. Selling, general,
and administrative expenses include costs related to our sales,
warehouse, delivery and administrative departments for all
segments. Specifically, purchasing and receiving costs,
warehousing costs and costs of picking and loading customer
orders are all classified as selling, general and administrative
expenses. Our most significant expenses relate to employee
costs, facility and equipment leases, transportation costs, fuel
costs, insurance, and professional fees.
Operating expenses increased approximately $3.4 million in
fiscal 2010 as compared to fiscal 2009. Of this increase,
approximately $1.6 million was attributable to operating
costs incurred servicing our new business in Northwest Arkansas,
$0.3 million related to an increase in bad debt expense,
$0.5 million related to higher depreciation and
amortization expense, $0.4 million related to higher fuel
costs, $0.4 million related to our new retail store in
Tulsa, Oklahoma, and $0.2 million related to an increase in
other operating costs.
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Table of Contents
INTEREST
EXPENSE — Fiscal 2010 vs. Fiscal 2009 (Continuing
Operations)
Fiscal 2010 interest expense decreased $0.1 million as
compared to fiscal 2009. This change was principally related to
lower interest rates and average borrowings on the
Company’s credit facility. In fiscal 2010, the
Company’s average interest rates and average borrowings on
its revolving credit facility were 0.28% and $0.6 million
lower, respectively, as compared to fiscal 2009.
DISCONTINUED
OPERATIONS (Fiscal 2010 vs. Fiscal 2009)
During fiscal 2009, Trinity Springs, Inc. (“TSI”), a
wholly owned subsidiary of the Company, and Crystal Paradise
Holdings, Inc. (“CPH”) completed a transaction in
which CPH exchanged a $5.0 million note receivable plus
$0.1 million in accrued interest due from TSI, for the
operating assets of TSI. The Company recorded a
$4.7 million pre-tax gain ($3.0 million after tax) in
conjunction with the transaction, which included the recognition
of a $1.5 million deferred gain attributable to a
previously executed Mutual Release and Settlement Agreement
between the Company, TSI, and CPH. The $4.7 million gain
has been reflected in the Statement of Operations as a component
of discontinued operations.
Simultaneous with the closing of the CPH transaction discussed
above, the Company fully settled and satisfied $2.7 million
in related party notes payable plus $0.8 million in accrued
interest due from TSI, in exchange for cash payments of
approximately $0.8 million. The Company recorded a
$2.7 million pre-tax gain ($1.7 million after tax)
related to this transaction, which has been reflected in the
Statements of Operations as a component of discontinued
operations.
A summary of discontinued operations is as follows (dollars in
millions):
|
Year Ended
|
||||||||
| September | ||||||||
| 2010 | 2009 | |||||||
|
Operating loss
|
$ | — | $ | (0.1 | ) | |||
|
Interest expense
|
— | (0.2 | ) | |||||
|
Gain on asset disposal and debt settlement
|
— | 7.4 | ||||||
|
Income tax expense
|
— | 2.6 | ||||||
|
Gain from discontinued operations
|
— | 4.5 | ||||||
LIQUIDITY
AND CAPITAL RESOURCES
OVERVIEW
| • | General . 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. |
| • | Operating Activities . During fiscal 2010, the Company generated cash of approximately $10.4 million from operating activities. The cash generated resulted from higher overall earnings, a reduction in inventory and an increase in accounts payable. These items were partially offset by an increase in prepaid and other current assets and a decrease in income taxes payable. |
Our variability in cash flows from operating activities is
dependent on the timing of inventory purchases and seasonal
fluctuations. For example, periodically we have inventory
“buy-in” opportunities which offer more favorable
pricing terms. As a result, we may have to hold inventory for a
period longer than the payment terms. This generates a cash
outflow from operating activities which we expect to reverse in
later periods. Additionally, during the warm weather months,
which is our peak time of operations, we generally carry higher
amounts of inventory to ensure high fill rates and customer
satisfaction.
| • | Investing Activities . The Company used approximately $4.9 million of cash during fiscal 2010 for investing activities, primarily related to capital expenditures for property and equipment and the acquisition of Discount Distributors. |
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Table of Contents
| • | Financing Activities. The Company used cash of $5.4 million for financing activities during fiscal 2010. Of this amount, $4.0 million related to net payments on the Company’s credit facility, and $0.9 million related to payments on long-term debt, and $0.7 million related to dividends on the Company’s common and preferred stock. Offsetting these items was $0.2 million related to the exercise of stock options. |
| • | Cash on Hand/Working Capital. At September 2010, the Company had cash on hand of $0.4 million and working capital (current assets less current liabilities) of $39.1 million. This compares to cash on hand of $0.3 million and working capital of $35.7 million at September 2009. |
CREDIT
AGREEMENT
The Company has a credit agreement (the “Facility”)
with Bank of America, which includes the following significant
terms:
| • | A January 1, 2012 maturity date and a $55.0 million revolving credit limit. | |
| • | The Facility bears interest at either the bank’s prime rate or at LIBOR plus 250 basis points, 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 that are subject to accounts receivable and inventory limitations. | |
| • | 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. | |
| • | Secured by 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 one-half of one percent (1/2%) of the original maximum loan limit ($60.4 million) if the Company prepays the entire Facility or terminates the credit agreement on or before January 1, 2011. |
The Facility includes a financial covenant which requires the
Company to maintain a minimum debt service ratio of 1.0 to 1.0
as measured by the previous twelve month period then ended. The
Company was in compliance with this covenant at September 2010.
The amount available for use on the Facility at any given time
is subject to a number of factors including eligible accounts
receivable and inventory balances that fluctuate
day-to-day.
Based on our collateral and loan limits as defined in the
Facility agreement, the credit limit of the Facility at
September 2010 was $52.6 million, of which
$18.8 million was outstanding, leaving $33.8 million
available.
At September 2010, the revolving portion of the Company’s
Facility balance bore interest based on the bank’s prime
rate and various short-term LIBOR rate elections made by the
Company. The average interest rate was 2.96% at September 2010.
During fiscal 2010, our peak borrowings under the Facility were
$39.6 million and our average borrowings and average
availability were $30.7 million and $21.3 million,
respectively. Our availability to borrow under the Facility
generally decreases as inventory and accounts receivable levels
increase because of the borrowing limitations that are placed on
collateralized assets.
21
Table of Contents
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. There were no such
cross defaults at September 2010. 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.
Redemption
of Series C Convertible Preferred Stock
During fiscal 2009, the holder of the Company’s
Series C Convertible Preferred Stock redeemed all
80,000 shares of the issuance. The Series C issuance
had been outstanding since 2006, paid a dividend of 6.00% 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.
Dividends
Payments
The Company paid cash dividends of $416,779 or $0.72 per common
share in fiscal 2010 and $228,242 or $0.40 per common share in
fiscal 2009. The Company also paid cash dividends on its
convertible preferred stock of $297,025 and $347,025 in fiscal
2010 and fiscal 2009, respectively.
Other
The Company has several capital leases for office and warehouse
equipment. At September 2010, the outstanding balances on the
capital leases totaled approximately $0.1 million.
The Company has issued a letter of credit for $0.4 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 maintain sufficient levels of
working capital. For our Company and industry in general,
customer credit risk and ongoing access to bank credit heavily
influence liquidity positions.
The Company’s credit facility with Bank of America expires
January 1, 2012. We believe the Company continues to have a
strong working relationship with Bank of America and has
maintained compliance with all related debt covenants. However,
no assurances can be given that our credit facility with Bank of
America will be renewed on acceptable terms, if at all.
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 precipitous change
in market conditions could materially impact the Company’s
future revenue stream as well as its ability to collect on
customer accounts receivable balances and secure bank credit.
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Table of Contents
OTHER
MATTERS — Critical Accounting Estimates
GENERAL
The Consolidated Financial Statements of the Company are
prepared in accordance with U.S. generally accepted
accounting principles, which require the Company to make
estimates, judgments and assumptions that affect the reported
amounts of assets, liabilities, net revenue and expenses, and
the disclosure of contingent assets and liabilities. The Company
bases its estimates on historical experience and on various
other assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. The Company
believes that the accounting estimates employed and the
resulting balances are reasonable; however, actual results may
differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies
reflect the significant estimates and assumptions used in the
preparation of the Consolidated Financial Statements. Our
critical accounting estimates are set forth below and have not
changed during fiscal 2010.
Allowance
for Doubtful Accounts
NATURE OF ESTIMATES REQUIRED.
The allowance
for doubtful accounts represents our estimate of uncollectible
accounts receivable at the balance sheet date. We monitor our
credit exposure on a daily basis and regularly assess the
adequacy of our allowance for doubtful accounts. Because credit
losses can vary significantly over time, estimating the required
allowance requires a number of assumptions that are uncertain.
ASSUMPTIONS AND APPROACH USED.
We estimate our
required allowance for doubtful accounts using the following key
assumptions.
| • | Historical collections – Represented as the amount of historical uncollectible accounts as a percent of total accounts receivable. |
| • | Specific credit exposure on certain accounts – Identified based on management’s review of the accounts receivable portfolio and taking into account the financial wherewithal of particular customers that management deems to have a higher risk of collection. |
| • | Market conditions – We consider a broad range of industry trends and macro-economic issues which may impact the creditworthiness of our customers. |
Inventories
NATURE OF ESTIMATES REQUIRED.
In our
businesses, we carry large quantities and dollar amounts of
inventory. Inventories primarily consist of finished products
purchased in bulk quantities to be sold to our customers. Given
the large quantities and broad range of products we carry, there
is a risk that inventory may become impaired because it has
become unsaleable or unrefundable, slow moving, obsolete, or
because it has been discontinued. The use of estimates is
required in determining the salvage value of this inventory.
ASSUMPTIONS AND APPROACH USED.
We estimate our
inventory obsolescence reserve at each balance sheet date based
on the following criteria:
| • | Slow moving products — Items identified as slow moving are evaluated on a case-by-case basis for impairment. |
| • | Obsolete/discontinued inventory — Products identified that are near or beyond their expiration dates. We may also discontinue carrying certain product lines for our customers. As a result, we estimate the market value of this inventory as if it were to be liquidated. |
| • | Estimated salvage value/sales price — The salvage value of the inventory is estimated using management’s evaluation of the congestion in the distribution channels and experience with brokers and inventory liquidators to determine the salvage value of the inventory. |
23
Table of Contents
Depreciation,
Amortization and Impairment of Long-Lived Assets
Long-lived assets consist primarily of fixed assets and
intangible assets that were acquired in business combinations.
Fixed assets and amortizable identified intangible assets are
assigned useful lives ranging from 2 to 40 years. Goodwill
is not amortized. Impairment of segment reporting units is
measured in the Company’s fourth fiscal quarter. The
reporting units are valued using after-tax cash flows from
operations (less capital expenditures) discounted to present
value. The Company recorded no impairment charges in either
fiscal 2010 or fiscal 2009.
NATURE OF ESTIMATES REQUIRED.
Management has
to estimate the useful lives of the Company’s long lived
assets. In regard to the Company’s impairment analysis, the
most significant assumptions include management’s estimate
of the annual growth rate used to project future sales and
expenses.
ASSUMPTIONS AND APPROACH USED.
For fixed
assets, depreciable lives are based on our accounting policy
which is intended to mirror the expected useful life of the
asset. In determining the estimated useful life of amortizable
intangible assets, such as customer lists, we rely on our
historical experience to estimate the useful life of the
applicable asset and consider Industry norms as a benchmark. In
evaluating potential impairment of long-lived assets, we
primarily use an income based approach (discounted cash flow
method) in addition to both public and private company
information. A discounted cash flow methodology requires
estimation in (i) forecasting future earnings
(ii) determining the discount rate applicable to the
earnings stream being discounted, and (iii) computing a
terminal value at some point in the future.
The forecast of future earnings is an estimate of future
financial performance based on current year results and
management’s evaluation of the market potential for growth.
The discount rate is a weighted average cost of capital using a
targeted
debt-to-equity
ratio using the Industry average under the assumption that it
represents our optimal capital structure and can be achieved in
a reasonable time period. The terminal value is determined using
a commonly accepted growth model.
Insurance
The Company’s insurance for workers’ compensation,
general liability and employee-related health care benefits are
provided through high-deductible or self-insured programs. As a
result, the Company accrues for its workers’ compensation
liability based upon claim reserves established with the
assistance of a third-party administrator, which are then
trended and developed. The reserves are evaluated at the end of
each reporting period. Due to the uncertainty involved with the
realization of claims incurred but unreported, management is
required to make estimates of these claims.
ASSUMPTIONS AND APPROACH USED.
In order to
estimate our reserve for incurred but unreported claims we
consider the following key factors:
Employee Health Insurance Claims
| • | Historical claims experience — We review loss runs for each month to calculate the average monthly claims experience. |
| • | Lag period for reporting claims — Based on analysis and consultation with our third party administrator, our experience is such that we have a minimum of a one month lag period in which claims are reported. |
Workers’ Compensation Insurance Claims
| • | Historical claims experience – We review prior years’ loss runs to estimate the average annual expected claims and review monthly loss runs to compare our estimates to actual claims. |
| • | Lag period for reporting claims – We utilize the assistance of our insurance agent to trend and develop reserves on reported claims in order to estimate the amount of incurred but unreported claims. Our insurance agent uses standard insurance industry loss development models. |
24
Table of Contents
Income
Taxes
The Company accounts for its income taxes by recording taxes
payable or refundable for the current year and deferred tax
assets and liabilities for the future tax consequences of events
that have been recognized in our financial statements or tax
returns. These expected future tax consequences are measured
based on provisions of tax law as currently enacted; the effects
of future changes in tax laws are not anticipated. Future tax
law changes, such as a change in the corporate tax rate, could
have a material impact on our financial condition or results of
operations.
On a periodic basis, we assess the likelihood that our deferred
tax assets will be recovered from future taxable income and
establish a related valuation allowance as appropriate. In
performing our evaluation, we consider all available evidence,
both positive and negative, to determine whether, based on the
weight of the evidence, a valuation allowance is needed.
Evidence used includes information about our current financial
position and our results of operations for the current and
preceding years, as well as all currently available information
about future years, including our anticipated future
performance, the reversal of deferred tax liabilities and tax
planning strategies. When appropriate, we record a valuation
allowance against deferred tax assets to offset future tax
benefits that may not be realized.
ASSUMPTIONS AND APPROACH USED.
In determining
whether a valuation allowance is appropriate, we consider
whether it is more likely than not that all or some portion of
our deferred tax assets will not be realized, based in part upon
management’s judgments regarding future events.
In making that estimate we consider the following key factors:
| • | our current financial position; |
| • | historical financial information; |
| • | future reversals of existing taxable temporary differences; |
| • | future taxable income exclusive of reversing temporary differences and carryforwards; |
| • | taxable income in prior carryback years; and |
| • | tax planning strategies. |
Revenue
Recognition
We recognize revenue in our Wholesale Segment when products are
delivered to customers (which generally is the same day products
are shipped) and in our retail health food segment when products
are sold to consumers. Sales are shown net of returns,
discounts, and sales incentives to customers.
NATURE OF ESTIMATES REQUIRED.
We estimate and
reserve for anticipated sales discounts. We also estimate and
provide a reserve for anticipated sales incentives to customers
when earned under established program requirements.
ASSUMPTIONS AND APPROACH USED.
We estimate the
sales reserves using the following criteria:
| • | Sales discounts — We use historical experience to estimate the amount of accounts receivable that will not be collected due to customers taking advantage of authorized term discounts. |
| • | Volume sales incentives — We use historical experience in combination with quarterly reviews of customers’ sales progress in order to estimate the amount of volume incentives due to the customers on a periodic basis. |
Our estimates and assumptions for each of the aforementioned
critical accounting estimates have not changed materially during
the periods presented, nor are we aware of any reasons that they
would be reasonably likely to change in the future.
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Table of Contents
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
The Company is currently evaluating the impact of implementing
the following new accounting standards:
FASB ASU
2010-20
(“Disclosures about the Credit Quality of Financing
Receivables and Allowance for Credit
Losses”)
– requires additional
information for nonaccrual and past due accounts, the allowance
for credit losses, impaired loans, credit quality, and account
modifications. This pronouncement is effective for interim and
annual reporting periods beginning on or after December 15,
2010 (fiscal 2011 for the Company).
FASB ASC 860
(“Accounting for Transfers of
Financial Assets”)
– requires additional
disclosures regarding the transfer and derecognition of
financial assets and eliminates the concept of qualifying
special-purpose entities. This pronouncement is effective for
fiscal years beginning after November 15, 2009 (fiscal 2011
for the Company).
FASB ASC 810 (“Amendments to FASB
Interpretation:
Consolidation of Variable Interest
Entities”)
– eliminates the quantitative
approach previously required for determining the primary
beneficiary of a variable interest entity and requires ongoing
qualitative reassessments of whether an enterprise is the
primary beneficiary of a variable interest entity. Additionally,
this pronouncement requires additional disclosures about an
enterprise’s involvement in variable interest entities and
is effective for fiscal periods beginning after
November 15, 2009 (fiscal 2011 for the Company).
FORWARD
LOOKING STATEMENTS
This Annual Report on
Form 10-K,
including Management’s Discussion and Analysis of Financial
Condition and Results of Operations 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 in connection with the State Children’s Health Insurance Program (“SCHIP”) law, |
| • | regulation of cigarette and tobacco products by the FDA, in addition to existing state and federal regulations by other agencies, |
| • | potential bans imposed by the FDA on the manufacture, distribution, and sale of certain cigarette and tobacco products, |
| • | 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 |
| • | demand for the Company’s products, particularly cigarette and tobacco products, |
| • | new business ventures or acquisitions, |
| • | domestic regulatory and legislative risks, |
| • | competition, |
| • | poor weather conditions, |
26
Table of Contents
| • | increases in fuel prices, |
| • | consolidation trends 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.
Not applicable.
27
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
|
Index to 2010 Consolidated Financial Statements
|
||||
| 29 | ||||
| 30 | ||||
| 31 | ||||
| 32 | ||||
| 33 | ||||
| 35 |
28
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
AMCON Distributing Company
Omaha, Nebraska
We have audited the consolidated balance sheets of AMCON
Distributing Company and subsidiaries as of September 30,
2010 and 2009, and the related consolidated statements of
operations, shareholders’ equity and cash flows for the
years then ended. These consolidated financial statements are
the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness on the Company’s internal control over
financial reporting. Accordingly we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of AMCON Distributing Company
and subsidiaries as of September 30, 2010 and 2009, and the
results of their operations and their cash flows for the years
ended September 30, 2010 and 2009, in conformity with
U.S. generally accepted accounting principles.
/s/
McGLADREY &
PULLEN LLP
Omaha, Nebraska
November 8, 2010
29
Table of Contents
AMCON
Distributing Company and Subsidiaries
| September 30, | ||||||||
| 2010 | 2009 | |||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash
|
$ | 356,735 | $ | 309,914 | ||||
|
Accounts receivable, less allowance for doubtful accounts of
$1.6 million and $0.9 million in 2010 and 2009,
respectively
|
27,903,689 | 28,393,198 | ||||||
|
Inventories, net
|
35,005,957 | 34,486,027 | ||||||
|
Deferred income taxes
|
1,905,974 | 1,701,568 | ||||||
|
Prepaid and other current assets
|
3,013,485 | 1,728,576 | ||||||
|
Total current assets
|
68,185,840 | 66,619,283 | ||||||
|
Property and equipment, net
|
11,855,669 | 11,256,627 | ||||||
|
Goodwill
|
6,149,168 | 5,848,808 | ||||||
|
Other intangible assets, net
|
4,807,644 | 3,373,269 | ||||||
|
Other assets
|
1,069,050 | 1,026,395 | ||||||
| $ | 92,067,371 | $ | 88,124,382 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 16,656,257 | $ | 15,222,689 | ||||
|
Accrued expenses
|
6,007,900 | 6,768,924 | ||||||
|
Accrued wages, salaries and bonuses
|
3,161,817 | 3,257,832 | ||||||
|
Income taxes payable
|
2,366,667 | 3,984,258 | ||||||
|
Current maturities of credit facility
|
— | 177,867 | ||||||
|
Current maturities of long-term debt
|
893,291 | 1,470,445 | ||||||
|
Total current liabilities
|
29,085,932 | 30,882,015 | ||||||
|
Credit facility, less current maturities
|
18,816,709 | 22,655,861 | ||||||
|
Deferred income taxes
|
1,075,861 | 1,256,713 | ||||||
|
Long-term debt, less current maturities
|
5,226,586 | 5,066,185 | ||||||
|
Other long-term liabilities
|
587,479 | — | ||||||
|
Series A cumulative, convertible preferred stock,
$.01 par value 100,000 authorized and issued, liquidation
preference $25.00 per share
|
2,500,000 | 2,500,000 | ||||||
|
Series B cumulative, convertible preferred stock,
$.01 par value 80,000 authorized and issued, liquidation
preference $25.00 per share
|
2,000,000 | 2,000,000 | ||||||
|
Commitments and contingencies (Note 13)
|
||||||||
|
Shareholders’ equity:
|
||||||||
|
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, 180,000 shares outstanding and issued in
Series A and B at September 2010 and 2009
|
— | — | ||||||
|
Common stock, $0.01 par value, 3,000,000 shares
authorized, 577,432 shares outstanding at September 2010
and 573,232 shares outstanding at September 2009
|
5,774 | 5,732 | ||||||
|
Additional paid-in capital
|
8,376,640 | 7,617,494 | ||||||
|
Retained earnings
|
24,392,390 | 16,140,382 | ||||||
|
Total shareholders’ equity
|
32,774,804 | 23,763,608 | ||||||
| $ | 92,067,371 | $ | 88,124,382 | |||||
The accompanying notes are an integral part of these
consolidated financial statements.
30
Table of Contents
AMCON
Distributing Company and Subsidiaries
| Fiscal Years Ended September | ||||||||
| 2010 | 2009 | |||||||
|
Sales (including excise taxes of $335.8 million and
$263.7 million, respectively)
|
$ | 1,010,538,035 | $ | 907,953,044 | ||||
|
Cost of sales
|
938,830,204 | 839,813,225 | ||||||
|
Gross profit
|
71,707,831 | 68,139,819 | ||||||
|
Selling, general and administrative expenses
|
54,445,189 | 51,539,775 | ||||||
|
Depreciation and amortization
|
1,736,817 | 1,216,089 | ||||||
| 56,182,006 | 52,755,864 | |||||||
|
Operating income
|
15,525,825 | 15,383,955 | ||||||
|
Other expense (income):
|
||||||||
|
Interest expense
|
1,504,899 | 1,627,373 | ||||||
|
Other (income), net
|
(85,886 | ) | (104,259 | ) | ||||
| 1,419,013 | 1,523,114 | |||||||
|
Income from continuing operations before income tax expense
|
14,106,812 | 13,860,841 | ||||||
|
Income tax expense
|
5,141,000 | 5,367,000 | ||||||
|
Income from continuing operations
|
8,965,812 | 8,493,841 | ||||||
|
Discontinued operations (Note 2)
|
||||||||
|
Gain on asset disposal and debt settlement, net of income tax
expense of $2.7 million
|
— | 4,666,264 | ||||||
|
Loss from discontinued operations, net of income tax benefit of
$0.1 million
|
— | (186,370 | ) | |||||
|
Income on discontinued operations
|
— | 4,479,894 | ||||||
|
Net income
|
8,965,812 | 12,973,735 | ||||||
|
Preferred stock dividend requirements
|
(297,025 | ) | (568,653 | ) | ||||
|
Net income available to common shareholders
|
$ | 8,668,787 | $ | 12,405,082 | ||||
|
Basic earnings per share available to common shareholders:
|
||||||||
|
Continuing operations
|
$ | 15.36 | $ | 14.45 | ||||
|
Discontinued operations
|
— | 8.16 | ||||||
|
Net basic earnings per share available to common shareholders
|
$ | 15.36 | $ | 22.61 | ||||
|
Diluted earnings per share available to common shareholders:
|
||||||||
|
Continuing operations
|
$ | 11.99 | $ | 10.87 | ||||
|
Discontinued operations
|
— | 5.74 | ||||||
|
Net diluted earnings per share available to common shareholders
|
$ | 11.99 | $ | 16.61 | ||||
|
Weighted average shares outstanding:
|
||||||||
|
Basic
|
564,355 | 548,616 | ||||||
|
Diluted
|
747,862 | 781,265 | ||||||
The accompanying notes are an integral part of these
consolidated financial statements.
31
Table of Contents
AMCON
Distributing Company and Subsidiaries
|
Additional
|
||||||||||||||||||||
| Common Stock |
Paid in
|
Retained
|
||||||||||||||||||
| Shares | Amount | Capital | Earnings | Total | ||||||||||||||||
|
Balance, September 30, 2008
|
570,397 | $ | 5,704 | $ | 6,995,948 | $ | 3,963,542 | $ | 10,965,194 | |||||||||||
|
Dividends on common stock, $0.40 per share
|
— | — | — | (228,242 | ) | (228,242 | ) | |||||||||||||
|
Dividends on convertible preferred stock
|
— | — | — | (568,653 | ) | (568,653 | ) | |||||||||||||
|
Compensation expense on equity-based awards
|
— | — | 531,600 | — | 531,600 | |||||||||||||||
|
Issuance of stock in connection with stock-based
incentive plans
|
2,835 | 28 | 87,701 | — | 87,729 | |||||||||||||||
|
Net excess tax benefit on equity-based awards
|
— | — | 2,245 | — | 2,245 | |||||||||||||||
|
Net income
|
— | — | — | 12,973,735 | 12,973,735 | |||||||||||||||
|
Balance, September 30, 2009
|
573,232 | 5,732 | 7,617,494 | 16,140,382 | 23,763,608 | |||||||||||||||
|
Dividends on common stock, $0.72 per share
|
— | — | — | (416,779 | ) | (416,779 | ) | |||||||||||||
|
Dividends on convertible preferred stock
|
— | — | — | (297,025 | ) | (297,025 | ) | |||||||||||||
|
Compensation expense on equity-based awards
|
— | — | 486,294 | — | 486,294 | |||||||||||||||
|
Issuance of stock in connection with stock-based
incentive plans
|
4,200 | 42 | 131,711 | — | 131,753 | |||||||||||||||
|
Net excess tax benefit on equity-based awards
|
— | — | 141,141 | — | 141,141 | |||||||||||||||
|
Net income
|
— | — | — | 8,965,812 | 8,965,812 | |||||||||||||||
|
Balance, September 30, 2010
|
577,432 | $ | 5,774 | $ | 8,376,640 | $ | 24,392,390 | $ | 32,774,804 | |||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
32
Table of Contents
AMCON
Distributing Company and Subsidiaries
| Fiscal Years Ended September | ||||||||
| 2010 | 2009 | |||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net income
|
$ | 8,965,812 | $ | 12,973,735 | ||||
|
Deduct: Income from discontinued operations, net of tax
|
— | 4,479,894 | ||||||
|
Income from continuing operations
|
8,965,812 | 8,493,841 | ||||||
|
Adjustments to reconcile income from continuing operations to
net cash flows from operating activities:
|
||||||||
|
Depreciation
|
1,459,156 | 1,216,089 | ||||||
|
Amortization
|
277,661 | — | ||||||
|
(Gain) loss on sale of property and equipment
|
(32,996 | ) | 24,915 | |||||
|
Stock based compensation
|
486,294 | 531,600 | ||||||
|
Net excess tax benefit on equity-based awards
|
(141,141 | ) | (2,245 | ) | ||||
|
Deferred income taxes
|
(385,258 | ) | 1,049,925 | |||||
|
Provision for losses on doubtful accounts
|
686,426 | 124,574 | ||||||
|
Provision for (recoveries) losses on inventory obsolescence
|
(74,083 | ) | 299,155 | |||||
|
Other
|
75,083 | — | ||||||
|
Changes in assets and liabilities:
|
||||||||
|
Accounts receivable
|
(196,917 | ) | (1,319,358 | ) | ||||
|
Inventories
|
1,535,651 | 2,545,787 | ||||||
|
Prepaid and other current assets
|
(1,289,549 | ) | 1,791,074 | |||||
|
Other assets
|
(42,655 | ) | 96,857 | |||||
|
Accounts payable
|
1,395,362 | (80,446 | ) | |||||
|
Accrued expenses and accrued wages, salaries and bonuses
|
(857,039 | ) | 2,113,154 | |||||
|
Income taxes payable
|
(1,476,450 | ) | 3,673,482 | |||||
|
Net cash flows from operating activities — continuing
operations
|
10,385,357 | 20,558,404 | ||||||
|
Net cash flows from operating activities —
discontinued operations
|
— | (2,673,712 | ) | |||||
|
Net cash flows from operating activities
|
10,385,357 | 17,884,692 | ||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Purchase of property and equipment
|
(1,920,655 | ) | (1,673,432 | ) | ||||
|
Proceeds from sales of property and equipment
|
71,606 | 107,255 | ||||||
|
Acquisition
|
(3,099,836 | ) | — | |||||
|
Net cash flows from investing activities
|
(4,948,885 | ) | (1,566,177 | ) | ||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Net payments on bank credit agreements
|
(4,017,019 | ) | (12,367,277 | ) | ||||
|
Principal payments on long-term debt
|
(931,722 | ) | (788,712 | ) | ||||
|
Proceeds from exercise of stock options
|
131,753 | 87,729 | ||||||
|
Net excess tax benefit on equity-based awards
|
141,141 | 2,245 | ||||||
|
Redemption of Series C convertible preferred stock
|
— | (2,000,000 | ) | |||||
|
Dividends paid on convertible preferred stock
|
(297,025 | ) | (347,025 | ) | ||||
|
Dividends on common stock
|
(416,779 | ) | (228,242 | ) | ||||
|
Net cash flows from financing activities — continuing
operations
|
(5,389,651 | ) | (15,641,282 | ) | ||||
|
Net cash flows from financing activities —
discontinued operations
|
— | (825,000 | ) | |||||
|
Net cash flow from financing activities
|
(5,389,651 | ) | (16,466,282 | ) | ||||
|
Net change in cash
|
46,821 | (147,767 | ) | |||||
|
Cash, beginning of year
|
309,914 | 457,681 | ||||||
|
Cash, end of year
|
$ | 356,735 | $ | 309,914 | ||||
33
Table of Contents
AMCON
Distributing Company and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS — (Continued)
| Fiscal Years | ||||||||
| 2010 | 2009 | |||||||
|
Supplemental disclosure of cash flow information:
|
||||||||
|
Cash paid during the year for interest
|
$ | 1,506,661 | $ | 1,719,895 | ||||
|
Cash paid during the year for income taxes
|
7,002,708 | 3,249,594 | ||||||
|
Supplemental disclosure of non-cash information:
|
||||||||
|
Acquisition of equipment through capital leases
|
$ | 14,969 | $ | 12,333 | ||||
|
Equipment acquisitions classified as accounts payable
|
38,206 | 11,580 | ||||||
|
Constructive dividends on Series A, B and C Convertible
Preferred Stock
|
— | 221,628 | ||||||
|
Business acquisition (see Note 2):
|
||||||||
|
Inventory
|
$ | 1,981,498 | $ | — | ||||
|
Property and equipment
|
122,978 | — | ||||||
|
Customer relationships intangible asset
|
1,620,000 | — | ||||||
|
Goodwill
|
300,360 | — | ||||||
|
Note payable
|
500,000 | — | ||||||
|
Contingent consideration
|
425,000 | — | ||||||
|
TSI disposition — discontinued operations:
|
||||||||
|
Property and equipment, net
|
$ | — | $ | (2,032,047 | ) | |||
|
Accrued expenses
|
— | (925,452 | ) | |||||
|
Long-term debt
|
— | (6,945,548 | ) | |||||
|
Deferred gain on CPH settlement
|
— | (1,542,312 | ) | |||||
The accompanying notes are an integral part of these
consolidated financial statements.
34
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: |
(a) Company
Operations:
AMCON Distributing Company and Subsidiaries (“AMCON”
and “the Company”) is primarily engaged in the
wholesale distribution of consumer products in the Central and
Rocky Mountain regions of the United States.
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, drug stores, and gas
stations. In addition, the Company services institutional
customers, including restaurants and bars, schools, sports
complexes, as well as other wholesalers.
AMCON also operates six retail health food stores in Florida
under the name Chamberlin’s Market & Café
(“Chamberlin’s”) and eight in the Midwest under
the name Akin’s Natural Foods Market
(“Akin’s”). These stores carry natural
supplements, groceries, health and beauty care products and
other food items.
The Company’s operations are subject to a number of factors
which are beyond the control of management, such as changes in
manufacturers’ cigarette pricing, state excise tax
increases, or the opening of competing retail stores in close
proximity to the Company’s retail stores. While the Company
sells a diversified product line, it remains dependent upon
cigarette sales which represented approximately 72% of revenue
and 27% of gross profit in fiscal 2010 and 71% of revenue and
27% of gross profit in fiscal 2009.
(b) Accounting
Period:
The Company’s fiscal year ends on September 30 and the
fiscal years ended September 30, 2010 and
September 30, 2009 have been included herein.
(c) Principles
of Consolidation and Basis of Presentation:
The Consolidated Financial Statements include the accounts of
AMCON and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
(d) Cash
and Accounts Payable:
AMCON utilizes a cash management system under which an overdraft
is the normal book balance in the primary disbursing accounts.
Overdrafts included in accounts payable at fiscal 2010 and
fiscal 2009 totaled approximately $1.1 million and
$1.2 million, respectively, and reflect checks drawn on the
disbursing accounts that have been issued but have not yet
cleared through the banking system. The Company’s policy
has been to fund these outstanding checks as they clear with
borrowings under its revolving credit facility (see
Note 8). These outstanding checks (book overdrafts) are
classified as cash flows from operating activities in the
Consolidated Statements of Cash Flows.
(e) Accounts
Receivable:
Accounts receivable consist primarily of amounts due to the
Company from its normal business activities. An allowance for
doubtful accounts is maintained to reflect the expected
uncollectibility of accounts receivable based on past collection
history, evaluation of impact of economic conditions on our
customers, and specific risks identified in the portfolio. The
Company determines the past due status of trade receivables
based on contractual terms with each customer.
(f) Inventories:
Inventories consisted of finished goods at September 2010 and
2009 and are stated at the lower of cost, determined on a FIFO
basis, or market. The wholesale distribution and retail health
food segment inventories consist of finished
35
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
products purchased in bulk quantities to be redistributed to the
Company’s customers or sold at retail. Finished goods
include total reserves of approximately $0.8 million and
$0.9 million at September 2010 and September 2009,
respectively. These reserves include the Company’s
obsolescence allowance, which reflects estimated unsaleable or
non-refundable inventory based upon an evaluation of slow moving
and discontinued products.
(g) Prepaid
Expenses and Other Current Assets:
A summary of prepaid expenses and other current assets is as
follows (in millions):
|
September
|
September
|
|||||||
| 2010 | 2009 | |||||||
|
Prepaid expenses
|
$ | 0.7 | $ | 1.0 | ||||
|
Prepaid inventory
|
2.3 | 0.7 | ||||||
| $ | 3.0 | $ | 1.7 | |||||
Prepaid inventory represents inventory in-transit that has been
paid for but not received.
(h) Property
and Equipment:
Property and equipment are stated at cost less accumulated
depreciation or amortization. Major renewals and improvements
are capitalized and charged to expense over their useful lives
through depreciation or amortization charges. Repairs and
maintenance are charged to expense in the period incurred. The
straight-line method of depreciation is used to depreciate
assets over the estimated useful lives as follows:
| Years | ||
|
Buildings
|
40 | |
|
Warehouse equipment
|
5-7 | |
|
Furniture, fixtures and leasehold improvements
|
2-12 | |
|
Vehicles
|
5 |
Costs and accumulated depreciation applicable to assets retired
or sold are eliminated from the accounts, and the resulting
gains or losses are reported as a component of operating income.
Amortization expense related to capital leases has been included
as a component of depreciation expense in the statement of
operations.
(i) Long-Lived
Assets:
The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable.
Long-lived assets are reviewed annually during our fourth fiscal
quarter for impairment and are reported at the lower of the
carrying amount or fair value less the cost to sell. The Company
recorded no impairment charges in either fiscal 2010 or fiscal
2009.
(j) Goodwill,
Intangible and Other Assets:
Our goodwill consists of the excess purchase price paid in
business combinations over the fair value of assets acquired.
Our intangible assets consist of trademarks, tradenames, and
customer relationships assumed in acquisitions. Goodwill,
trademarks, and tradenames are considered to have indefinite
lives.
The Company employs the
non-amortization
approach to account for purchased goodwill and intangible assets
having indefinite useful lives. Under the
non-amortization
approach, goodwill and intangible assets having indefinite
useful lives are not amortized into the results of operations,
but instead are reviewed annually, or more frequently if events
or changes in circumstances indicate that the assets might be
impaired, to assess whether their fair value exceeds their
carrying value. The Company performs its annual impairment
testing of goodwill and indefinite-lived intangible assets
during the fourth fiscal quarter of each year.
36
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company tests goodwill impairment at a reporting unit level
using the two-step impairment test method. The Company’s
primary reporting units tested for impairment are Akin’s,
Chamberlin’s, and the Springfield, MO and Quincy, IL
divisions of our Wholesale Segment. Both Akin’s and
Chamberlin’s are components of our Retail Segment. The
first step of our goodwill impairment testing compares the
carrying value of a reporting unit, including goodwill, with its
fair value, as determined by its estimated discounted cash
flows. If the carrying value of a reporting unit exceeds its
fair value, we then complete the second step of the impairment
test to determine the amount of impairment to be recognized. In
the second step, we estimate an implied fair value of the
reporting unit’s goodwill by allocating the fair value of
the reporting unit to all of the assets and liabilities other
than goodwill (including any unrecognized intangible assets). If
the carrying value of a reporting unit’s goodwill exceeds
its implied fair value, the Company records an impairment loss
equal to the difference in that period.
Non-amortized
indefinite-lived assets are tested for impairment by comparing
the carrying value of the Company’s assets to their
estimated fair value. The Company estimates the fair value of
these assets using a discounted cash flow methodology. If the
assets are determined to be impaired, their carrying value is
reduced to their fair value and an impairment loss is recorded
in that period.
We arrive at our estimates of fair value using a discounted cash
flow methodology which requires us to estimate the future cash
flows anticipated to be generated by particular assets and to
select a discount rate to measure the present value of those
anticipated cash flows. Estimating future cash flows requires
significant judgment and includes making assumptions about
projected growth rates, industry-specific factors, working
capital requirements, weighted average cost of capital, and
current and anticipated operating conditions. The use of
different assumptions or estimates for future cash flows could
produce different results. The Company has not made any material
changes in its impairment assessment methodology during the past
two fiscal years and we do not believe the estimates used in our
current methodology are likely to change materially in the
foreseeable future. However, we regularly assess these estimates
based on the performance of our reporting units. There were no
impairments of goodwill or indefinite-lived intangibles assets
identified during either fiscal 2010 or fiscal 2009.
Identifiable intangible assets with finite lives are amortized
over their estimated useful lives and are tested for impairment
at least annually or whenever events or circumstances change
which may indicate that the carrying amount of the assets may
not be recoverable. Identifiable intangible assets that are
subject to amortization are evaluated for impairment using a
process similar to that used in evaluating the elements of
property, plant and equipment. If impaired, the related asset is
written down to its fair value. There were no impairments of
identifiable intangible assets with finite lives identified
during fiscal 2010 or fiscal 2009.
The benefit related to increases in the cash surrender value of
split dollar life insurance policies are recorded as a reduction
to insurance expense. The cash surrender value of life insurance
policies is limited to the lesser of the cash value or premiums
paid in accordance with regulatory guidance.
(k) Debt
Issuance Costs:
The costs related to the issuance of debt are capitalized in
other assets and amortized on an effective interest method to
interest expense over the terms of the related debt agreements.
(l) Revenue
Recognition:
AMCON recognizes revenue when title passes to our customers. In
our Wholesale Segment, this occurs when products are delivered
to customers (which generally is the same day products are
shipped) and in our retail health food segment when products are
sold to consumers. Sales are shown net of returns and discounts.
(m) Insurance:
The Company’s workers’ compensation, general
liability, and employee-related health care benefits are
provided through high-deductible or self-insurance programs. As
a result, the Company accrues for its workers’ compensation
and general liability based upon a claim reserve analysis. The
Company has issued a letter of credit in the
37
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
amount of $0.4 million to its workers’ compensation
insurance carrier as part of its loss control program. The
reserve for incurred, but not reported, employee health care
benefits is based on approximately one month of claims,
calculated using the Company’s historical claims experience
rate, plus specific reserves for large claims. The reserves
associated with the exposure to these liabilities are reviewed
by management for adequacy at the end of each reporting period.
(n) Income
Taxes:
The Company uses the asset and liability method to calculate
deferred income taxes. Deferred tax assets and liabilities are
recognized on temporary differences between financial statement
and tax bases of assets and liabilities using enacted tax rates.
The effect of tax rate changes on deferred tax assets and
liabilities is recognized in income during the period that
includes the enactment date.
(o) Stock-Based
Compensation:
The Company recognizes expense for its share-based compensation
based on the fair value of the awards that are granted. The fair
value of the stock options is estimated at the date of grant
using the Black-Scholes option pricing model. Option pricing
methods require the input of highly subjective assumptions,
including the expected stock price volatility. The fair value of
restricted stock awards is based on the Company’s stock
price on the date of grant. Measured compensation cost is
recognized ratably over the vesting period of the related
share-based compensation award and is reflected in our
Consolidated Statement of Operations under “selling,
general and administrative expenses.”
(p) Customer
Sales Incentives:
The Company provides sales rebates or discounts to customers.
These incentives are recorded as a reduction of sales revenue as
earned by the customer.
(q) Per-share
results:
Basic earnings or loss per share data are based on the
weighted-average number of common shares outstanding during each
period. Diluted earnings or loss per share data are based on the
weighted-average number of common shares outstanding and the
effect of all dilutive potential common shares including stock
options and conversion features of the Company’s preferred
stock issuances.
(r) Use
of Estimates:
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(s) Recently
Issued Accounting Standards:
The Company is currently evaluating the impact of implementing
the following new accounting standards:
FASB ASU
2010-20
(“Disclosures about the Credit Quality of Financing
Receivables and Allowance for Credit
Losses”)
– requires additional
information for nonaccrual and past due accounts, the allowance
for credit losses, impaired loans, credit quality, and account
modifications. This pronouncement is effective for interim and
annual reporting periods beginning on or after December 15,
2010 (fiscal 2011 for the Company).
FASB ASC 860
(“Accounting for Transfers of
Financial Assets”)
– requires additional
disclosures regarding the transfer and derecognition of
financial assets and eliminates the concept of qualifying
special-purpose entities. This pronouncement is effective for
fiscal years beginning after November 15, 2009 (fiscal 2011
for the Company).
38
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FASB ASC 810
(“Amendments to FASB
Interpretation:
Consolidation of Variable
Interest Entities”) – eliminates the quantitative
approach previously required for determining the primary
beneficiary of a variable interest entity and requires ongoing
qualitative reassessments of whether an enterprise is the
primary beneficiary of a variable interest entity. Additionally,
this pronouncement requires additional disclosures about an
enterprise’s involvement in variable interest entities and
is effective for fiscal periods beginning after
November 15, 2009 (fiscal 2011 for the Company).
| 2. | ACQUISITION AND DISPOSITIONS |
ACQUISITION
During fiscal 2010, the Company acquired the convenience store
distribution assets of Discount Distributors from its parent
Harps Food Stores, Inc. (“Harps”). Discount
Distributors was a wholesale distributor to convenience stores
in Arkansas, Oklahoma, and Missouri with annual sales of
approximately $59.6 million. The Company paid
$3.1 million cash, issued a $0.5 million note payable
in quarterly installments over two years, and could pay an
additional $1.0 million in contingent consideration for
certain fixed assets, inventory, and customer lists of Discount
Distributors. The contingent consideration is based on achieving
predetermined two-year revenue targets. This transaction was
funded through the Company’s existing credit facility. No
significant liabilities were assumed in connection with the
transaction and the costs incurred to effect the acquisition
were not significant and were expensed as incurred. The
acquisition expands the Company’s strategic footprint in
the southern portion of the United States and enhances our
ability to service customers in that region.
The following table summarizes the consideration paid for the
acquired assets and their related acquisition date fair values.
The fair value of the assets acquired have been measured in
accordance with ASC 805 “Business Combinations.”
In valuing identifiable intangible assets, the Company has
estimated the fair value using the discounted cash flows
methodology. The purchase price allocation reflects various
preliminary estimates and analyses and is subject to change
during the measurement period (generally one year from the
acquisition date). The acquired assets are reported as a
component of our Wholesale Segment.
|
Amount
|
||||
|
Total Consideration
|
(In millions) | |||
|
Cash
|
$ | 3.1 | ||
|
Note payable
|
0.5 | |||
|
Fair value of contingent consideration
|
0.4 | |||
|
Fair value of consideration transferred
|
$ | 4.0 | ||
|
Weighted
|
||||||
|
Average
|
||||||
|
Amount
|
Amortization
|
|||||
|
Recognized Amounts of Identifiable Assets Acquired
|
(In millions) | Period | ||||
|
Inventory
|
$ | 2.0 | — | |||
|
Property and equipment
|
0.1 | 5 years | ||||
|
Identifiable intangible assets:
|
||||||
|
Customer relationships
|
1.6 | 8 years | ||||
|
Total identifiable net assets
|
3.7 | |||||
|
Goodwill
|
0.3 | |||||
|
Total identifiable assets and goodwill
|
$ | 4.0 | ||||
The Company has estimated that the undiscounted payments
required under the contingent consideration arrangement will
approximate $0.7 million ($0.4 million fair value).
The $0.3 million of goodwill arising from the acquisition
primarily represents synergies and economies of scale generated
through reductions in selling, general,
39
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
and administrative expenses. This goodwill has been assigned to
the Company’s Wholesale Segment and is expected to be
deductible for tax purposes. No measurement adjustments related
to this transaction were recorded during fiscal 2010.
The following table sets forth the unaudited actual revenue and
earnings included in the Company’s statement of operations
related to the acquisition and the pro forma revenue and
earnings of the combined entity if the acquisition had occurred
as of the beginning of the Company’s prior fiscal year.
These pro forma amounts do not purport to be indicative of the
actual results that would have been obtained had the acquisition
occurred at that time.
|
Twelve Months Ended
|
||||||||
| September | ||||||||
|
(In millions)
|
2010 | 2009 | ||||||
|
Revenue — Actual Results
|
$ | 54.6 | $ | — | ||||
|
Revenue — Supplemental pro forma results
|
$ | 59.6 | $ | 57.0 | ||||
|
Net Income — Actual Results
|
$ | 0.4 | $ | — | ||||
|
Net Income — Supplemental pro forma results
|
$ | 0.4 | $ | 0.4 | ||||
DISPOSITIONS —
DISCONTINUED OPERATIONS
During fiscal 2009, Trinity Springs, Inc. (“TSI”), a
wholly owned subsidiary of the Company, and Crystal Paradise
Holdings, Inc. (“CPH”) completed a transaction in
which CPH exchanged a $5.0 million note receivable plus
$0.1 million in accrued interest due from TSI, for the
operating assets of TSI. The Company recorded a
$4.7 million pre-tax gain ($3.0 million after tax) in
conjunction with the transaction, which included the recognition
of a $1.5 million deferred gain attributable to a
previously executed Mutual Release and Settlement Agreement
between the Company, TSI, and CPH. The $4.7 million gain
has been reflected in the Statement of Operations as a component
of discontinued operations.
Simultaneous with the closing of the CPH transaction discussed
above, the Company fully settled and satisfied $2.7 million
in related party notes payable plus $0.8 million in accrued
interest due from TSI, in exchange for cash payments of
approximately $0.8 million. The Company recorded a
$2.7 million pre-tax gain ($1.7 million after tax)
related to this transaction, which has been reflected in the
Statements of Operations as a component of discontinued
operations.
A summary of discontinued operations is as follows (dollars in
millions):
|
Year Ended
|
||||||||
| September | ||||||||
| 2010 | 2009 | |||||||
|
Operating loss
|
$ | — | $ | (0.1 | ) | |||
|
Interest expense
|
— | (0.2 | ) | |||||
|
Gain on asset disposal and debt settlement
|
— | 7.4 | ||||||
|
Income tax expense
|
— | 2.6 | ||||||
|
Gain from discontinued operations
|
— | 4.5 | ||||||
40
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 3. | CONVERTIBLE PREFERRED STOCK: |
The Company had two series of convertible preferred stock
outstanding at September 2010 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 multiplied by 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, 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 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 Preferred Stock is redeemable at the liquidation
value and at the option of the holder. The Series A
Preferred Stock is owned by Mr. Chris Atayan, AMCON’s
Chief Executive Officer and Chairman of the Board. The
Series B Preferred Stock is owned by an institutional
investor which has elected Mr. Atayan, pursuant to the
voting rights in the Certificate of Designation creating the
Series B, as its representative on our Board of Directors.
During fiscal 2009, the holder of the Company’s
Series C Convertible Preferred Stock redeemed all
80,000 shares of the issuance. The Series C issuance
had been outstanding since 2006, paid a dividend of 6.00% 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 through borrowings on our credit facility and satisfied
all of the Company’s obligations under the Series C
Convertible Preferred Stock Agreement.
| 4. | EARNINGS PER SHARE: |
Basic earnings per share available to common shareholders is
calculated by dividing income from continuing operations less
preferred stock dividend requirements and income from
discontinued operations by the weighted average common shares
outstanding for each period. Diluted earnings per share
available to common shareholders is calculated by dividing
income from continuing operations less preferred stock dividend
requirements (when anti-dilutive) and income from discontinued
operations by the sum of the weighted average common shares
outstanding and the weighted average dilutive options, using the
treasury stock method.
41
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
There were no anti-dilutive stock options or potential common
stock options at September 2010. Anti-dilutive stock options and
potential common stock outstanding at September 2009 were
excluded from the computation of diluted earnings per share.
Such anti-dilutive potential common shares totaled 1,956 and had
an average exercise price of $34.50.
| For Fiscal Years | ||||||||
|
2010
|
2009
|
|||||||
| Basic | Basic | |||||||
|
Weighted average number of shares outstanding
|
564,355 | 548,616 | ||||||
|
Income from continuing operations
|
$ | 8,965,812 | $ | 8,493,841 | ||||
|
Deduct: convertible preferred stock dividends
|
(297,025 | ) | (568,653 | ) | ||||
| $ | 8,668,787 | $ | 7,925,188 | |||||
|
Income from discontinued operations
|
$ | — | $ | 4,479,894 | ||||
|
Net income available to common shareholders
|
$ | 8,668,787 | $ | 12,405,082 | ||||
|
Income per share from continuing operations
|
$ | 15.36 | $ | 14.45 | ||||
|
Income per share from discontinued operations
|
— | 8.16 | ||||||
|
Net earnings per share available to common shareholders
|
$ | 15.36 | $ | 22.61 | ||||
|
2010
|
2009
|
|||||||
| Diluted | Diluted | |||||||
|
Weighted average common shares outstanding
|
564,355 | 548,616 | ||||||
|
Weighted average of net additional shares outstanding assuming
dilutive options exercised and proceeds used to purchase
treasury stock/1/
|
183,507 | 232,649 | ||||||
|
Weighted average number of shares outstanding
|
747,862 | 781,265 | ||||||
|
Income from continuing operations
|
$ | 8,965,812 | $ | 8,493,841 | ||||
|
Deduct: convertible preferred stock dividends/2/
|
— | — | ||||||
| $ | 8,965,812 | $ | 8,493,841 | |||||
|
Income from discontinued operations
|
$ | — | $ | 4,479,894 | ||||
|
Net income available to common shareholders
|
$ | 8,965,812 | $ | 12,973,735 | ||||
|
Income per share from continuing operations
|
$ | 11.99 | $ | 10.87 | ||||
|
Income per share from discontinued operations
|
— | 5.74 | ||||||
|
Net earnings per share available to common shareholders
|
$ | 11.99 | $ | 16.61 | ||||
| /1/ | Diluted earnings per share calculation includes all stock options, convertible preferred stock, and restricted stock deemed to be dilutive. | |
| /2/ | Diluted earnings per share calculation excludes dividend payments for convertible preferred stock deemed to be dilutive, as those amounts are assumed to have been converted to common stock of the Company. |
42
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 5. | PROPERTY AND EQUIPMENT, NET: |
Property and equipment at September 2010 and 2009 consisted of
the following:
| 2010 | 2009 | |||||||
|
Land
|
$ | 648,818 | $ | 648,818 | ||||
|
Buildings and improvements
|
9,148,547 | 9,133,476 | ||||||
|
Warehouse equipment
|
7,991,655 | 7,104,959 | ||||||
|
Furniture, fixtures and leasehold improvements
|
8,092,452 | 7,179,610 | ||||||
|
Vehicles
|
1,707,185 | 1,648,496 | ||||||
|
Capital equipment leases
|
396,269 | 381,300 | ||||||
|
Construction in progress
|
151,027 | 536,499 | ||||||
| 28,135,953 | 26,633,158 | |||||||
|
Less accumulated depreciation and amortization:
|
||||||||
|
Owned buildings and equipment
|
(16,022,685 | ) | (15,212,951 | ) | ||||
|
Capital equipment leases
|
(257,599 | ) | (163,580 | ) | ||||
| $ | 11,855,669 | $ | 11,256,627 | |||||
| 6. | GOODWILL AND OTHER INTANGIBLE ASSETS: |
Goodwill by reporting segment at fiscal year ends 2010 and 2009
was as follows:
| 2010 | 2009 | |||||||
|
Wholesale
|
$ | 4,236,291 | $ | 3,935,931 | ||||
|
Retail
|
1,912,877 | 1,912,877 | ||||||
| $ | 6,149,168 | $ | 5,848,808 | |||||
Other intangible assets at fiscal year ends 2010 and 2009
consisted of the following:
| 2010 | 2009 | |||||||
|
Trademarks and tradenames
|
$ | 3,373,269 | $ | 3,373,269 | ||||
|
Customer relationships (less accumulated amortization of
$185,625)
|
1,434,375 | — | ||||||
| $ | 4,807,644 | $ | 3,373,269 | |||||
Goodwill, trademarks and tradenames are considered to have
indefinite useful lives and therefore no amortization has been
taken on these assets. The Company performs its annual
impairment testing of goodwill and other intangible assets
during the fourth fiscal quarter of each year. This review
identified no impairments in fiscal 2010 or fiscal 2009.
At September 2010, intangible assets considered to have finite
lives represented acquired customer relationships. These
customer relationships are being amortized over eight years.
Amortization expense related to these assets totaled $185,625
for fiscal 2010. The Company has no amortization expense related
to these intangible assets during fiscal 2009. Amortization
expense for customer relationships for the periods subsequent to
September 2010 is as follows:
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | |||||||||||||||||||
|
Customer relationships
|
$ | 202,500 | $ | 202,500 | $ | 202,500 | $ | 202,500 | $ | 202,500 | $ | 421,875 | ||||||||||||
43
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 7. | OTHER ASSETS: |
Other assets at fiscal year ends 2010 and 2009 consisted of the
following:
| 2010 | 2009 | |||||||
|
Cash surrender value of life insurance policies
|
$ | 824,751 | $ | 819,343 | ||||
|
Other
|
244,299 | 207,052 | ||||||
| $ | 1,069,050 | $ | 1,026,395 | |||||
| 8. | DEBT: |
The Company primarily finances its operations through a credit
facility agreement with Bank of America (the
“Facility”) and long-term debt agreements with banks.
CREDIT
FACILITY
The Facility consisted of the following at fiscal 2010 and 2009:
| 2010 | 2009 | |||||||
|
Revolving portion of the Facility, interest payable at 2.96% at
September 2010 (primarily LIBOR plus 250 basis points),
principal due January 2012
|
$ | 18,816,709 | $ | 22,655,861 | ||||
|
Term Note A, payable in monthly installments of $16,333
plus interest at the bank’s prime rate
|
— | 177,867 | ||||||
| 18,816,709 | 22,833,728 | |||||||
|
Less current maturities
|
— | 177,867 | ||||||
| $ | 18,816,709 | $ | 22,655,861 | |||||
The Facility includes the following significant terms:
| • | A January 1, 2012 maturity date and a $55.0 million revolving credit limit. |
| • | The Facility bears interest at either the bank’s prime rate or at LIBOR plus 250 basis points, at the election of the Company. |
| • | The Facility provides for an additional $5.0 million of credit advances 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. |
| • | 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. |
| • | Secured by 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 one-half of one percent (1/2%) of the original maximum loan limit ($60.4 million) if the Company prepays the entire Facility or terminates the credit agreement on or before January 1, 2011. |
44
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Facility includes a financial covenant which requires the
Company to maintain a minimum debt service ratio of 1.0 to 1.0
as measured by the previous twelve month period then ended. The
Company was in compliance with this covenant at September 2010.
In addition to the Facility, the Company also had the following
long-term obligations at fiscal 2010 and fiscal 2009 as follows:
| 2010 | 2009 | |||||||
|
Note payable to a bank (“Real Estate Loan”), interest
payable at a fixed rate of 6.75% with monthly installments of
principal and interest of $58,303 per month through May 2013
with remaining principal due June 2013, collateralized by two
owned distribution facilities
|
$ | 4,829,414 | $ | 5,185,256 | ||||
|
Note payable to a bank, interest payable monthly at a fixed rate
of 5.21% plus monthly principal payments of $4,237 through
December 2012 at which time the remaining principal is due,
collateralized by the Rapid City building and equipment
|
724,470 | 770,800 | ||||||
|
Note payable, interest payable at a fixed rate of 5.00%, with
quarterly installments of principal and interest of $66,067
through October 30, 2011
|
316,244 | — | ||||||
|
Obligations under capital leases, payable in monthly
installments with interest rates from 4.96% to 8.25% through
April 2013
|
53,079 | 165,714 | ||||||
|
Notes payable, interest payable at a fixed rate between
8.0% — 9.5% with monthly installments of principal and
interest of $2,226 — $2,677 per month through July
2011 collateralized by delivery vehicles
|
34,395 | 87,525 | ||||||
|
Note payable, interest payable discounted at a rate of 8.25%
with quarterly installments of principal and interest of
$31,250 — $46,875 through October 2011, secured by
Mr. Wright’s personal guaranty (see Note 12)
|
162,275 | 327,335 | ||||||
| 6,119,877 | 6,536,630 | |||||||
|
Less current maturities
|
893,291 | 1,470,445 | ||||||
| $ | 5,226,586 | $ | 5,066,185 | |||||
The aggregate minimum principal maturities of the long-term debt
for each of the five fiscal years following September 2010 are
as follows:
|
Fiscal Year Ending
|
||||
|
2011
|
$ | 893,291 | ||
|
2012
|
559,212 | |||
|
2013
|
4,667,374 | |||
|
2014
|
— | |||
|
2015
|
— | |||
|
Thereafter
|
— | |||
| $ | 6,119,877 | |||
Market rate risk for fixed rate debt is estimated as the
potential increase in fair value of debt obligations resulting
from decreases in interest rates. Based on the borrowing rates
currently available to the Company for bank loans with similar
terms and average maturities, the fair value of the
Company’s long-term debt approximated its carrying value at
September 2010.
45
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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. There were no such
cross defaults at September 2010. In addition, the M&I
loans contain co-terminus provisions which require all loans
with M&I to be paid in full if any of the loans are paid in
full prior to the end of their specified terms.
Capital
leases
The Company has several capital leases for office and warehouse
equipment. At September 2010, the outstanding balances on the
capital leases totaled approximately $0.1 million.
Other
AMCON has issued a letter of credit in the amount of
approximately $0.4 million to its workers’
compensation insurance carrier as part of its self-insured loss
control program.
| 9. | OTHER INCOME, NET: |
Other income, net consisted of the following for fiscal 2010 and
2009:
| 2010 | 2009 | |||||||
|
Interest income
|
$ | 43,924 | $ | 50,033 | ||||
|
Other
|
41,962 | 54,226 | ||||||
| $ | 85,886 | $ | 104,259 | |||||
| 10. | INCOME TAXES: |
The components of income tax expense from continuing operations
for fiscal 2010 and fiscal 2009 consisted of the following:
| 2010 | 2009 | |||||||
|
Current: Federal
|
$ | 4,756,241 | $ | 3,730,935 | ||||
|
Current: State
|
770,017 | 586,140 | ||||||
| 5,526,258 | 4,317,075 | |||||||
|
Deferred: Federal
|
(353,436 | ) | 945,877 | |||||
|
Deferred: State
|
(31,822 | ) | 104,048 | |||||
| (385,258 | ) | 1,049,925 | ||||||
|
Income tax expense
|
$ | 5,141,000 | $ | 5,367,000 | ||||
46
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The difference between the Company’s income tax expense in
the accompanying consolidated financial statements and that
which would be calculated using the statutory income tax rate of
35% for both fiscal 2010 and fiscal 2009 on income before income
taxes is as follows:
| 2010 | 2009 | |||||||
|
Tax at statutory rate
|
$ | 4,937,384 | $ | 4,851,295 | ||||
|
Amortization of goodwill and other intangibles
|
(5,207 | ) | (5,207 | ) | ||||
|
Nondeductible business expenses
|
32,248 | 30,758 | ||||||
|
State income taxes, net of federal tax benefit
|
496,820 | 421,636 | ||||||
|
Valuation allowance, net operating losses
|
(157,809 | ) | (25,422 | ) | ||||
|
Other
|
(162,436 | ) | 93,940 | |||||
| $ | 5,141,000 | $ | 5,367,000 | |||||
Temporary differences between the financial statement carrying
balances and tax basis of assets and liabilities giving rise to
the net deferred tax asset at fiscal year ends 2010 and 2009
relate to the following:
| 2010 | 2009 | |||||||
|
Deferred tax assets:
|
||||||||
|
Current:
|
||||||||
|
Allowance for doubtful accounts
|
$ | 591,662 | $ | 337,193 | ||||
|
Accrued expenses
|
915,153 | 879,806 | ||||||
|
Inventory
|
408,557 | 441,248 | ||||||
|
Other
|
241,435 | 316,608 | ||||||
| 2,156,807 | 1,974,855 | |||||||
|
Noncurrent:
|
||||||||
|
Property and equipment
|
$ | 682,411 | $ | 625,536 | ||||
|
Net operating loss carry forwards — federal
|
517,968 | 564,009 | ||||||
|
Net operating loss carry forwards — state
|
651,283 | 669,092 | ||||||
| 1,851,662 | 1,858,637 | |||||||
|
Total deferred tax assets
|
4,008,469 | 3,833,492 | ||||||
|
Valuation allowance
|
(783,037 | ) | (940,846 | ) | ||||
|
Net deferred tax assets
|
$ | 3,225,432 | $ | 2,892,646 | ||||
|
Deferred tax liabilities:
|
||||||||
|
Current:
|
||||||||
|
Trade discounts
|
$ | 250,833 | $ | 273,287 | ||||
| 250,833 | 273,287 | |||||||
|
Noncurrent:
|
||||||||
|
Property and equipment
|
674,726 | 620,489 | ||||||
|
Goodwill
|
794,025 | 701,104 | ||||||
|
Section 481 deferral
|
— | 355,694 | ||||||
|
Intangible assets
|
675,735 | 497,217 | ||||||
| 2,144,486 | 2,174,504 | |||||||
|
Total deferred tax liabilities
|
$ | 2,395,319 | $ | 2,447,791 | ||||
|
Net deferred tax assets (liabilities):
|
||||||||
|
Current
|
$ | 1,905,974 | $ | 1,701,568 | ||||
|
Noncurrent
|
(1,075,861 | ) | (1,256,713 | ) | ||||
| $ | 830,113 | $ | 444,855 | |||||
47
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
At September 2010, the Company had a $0.5 million
noncurrent deferred tax asset related to federal net operating
loss carryforwards. These federal net operating loss
carryforwards totaled approximately $1.5 million and were
primarily attributable to the Company’s fiscal 2002
purchase of Hawaiian Natural Water Company, Inc.
(“HNWC”), a wholly owned subsidiary of the Company.
The utilization of HNWC’s net operating losses is limited
by Internal Revenue Code Section 382 to approximately
$0.1 million per year through 2022.
At September 2010, the Company had a valuation allowance of
approximately $0.8 million against certain state and
federal net operating losses, which more likely than not will
not be utilized. The Company had no material unrecognized tax
benefits, interest, or penalties during fiscal 2010 or fiscal
2009, and the Company does not anticipate any such items during
the next twelve months. The Company’s policy is to record
interest and penalties directly related to income taxes as
income tax expense in the Consolidated Statements of Operations.
The Company files income tax returns in the U.S. and
various states and the tax years 2007 and forward remain open
under U.S. and state statutes.
| 11. | PROFIT SHARING PLAN: |
The Company sponsors a profit sharing plan (i.e. a
section 401(k) plan) covering substantially all employees.
The plan allows employees to make voluntary contributions up to
100% of their compensation, subject to Internal Revenue Service
limits. The Company matches 50% of the first 4% contributed and
100% of the next 2% contributed for a maximum match of 4% of
employee compensation. The Company made matching contributions
to the profit sharing plan of approximately $0.6 million
(net of employee forfeitures) for both fiscal 2010 and fiscal
2009.
| 12. | RELATED PARTY TRANSACTIONS: |
The Company’s Series A Preferred Stock is owned by
Mr. Chris Atayan, AMCON’s Chief Executive Officer and
Chairman of the Board. During fiscal 2010 and fiscal 2009 the
Company paid Mr. Atayan cash dividends of $169,625 and
$51,213, respectively, related to his ownership of the
Series A Preferred Stock.
The Company was charged fees of $18,000 and $72,000 in fiscal
2010 and fiscal 2009, respectively, by AMCON Corporation as
consideration for office rent and management services.
Mr. Wright, a former Company Director, owns a controlling
interest in AMCON Corporation. These fees have been included as
a component of selling, general and administrative expense.
Mr. Wright personally guarantees a Company note payable due
to Television Events and Marketing, Inc. (“TEAM”). In
exchange for this guarantee, the Company pays Mr. Wright a
fee equal to 2% of the guaranteed principal. These fees totaled
approximately $5,000 and $9,000 during fiscal 2010 and fiscal
2009, respectively. This guarantee is secured by a pledge of the
Company’s shares in Chamberlin’s, Akin’s, HNWC,
and TSI. The note payable due to TEAM carried a balance of
$0.2 million at September 2010.
Our Retail Segment leases warehouse space from TIP Properties,
LLC, which is owned by Eric Hinkefent, President of
Chamberlin’s Natural Foods, Inc. and Health Food
Associates, and another Company employee. Annual rental payments
related to this lease were $56,796 in fiscal 2010 and $72,649 in
fiscal 2009.
| 13. | COMMITMENTS AND CONTINGENCIES: |
Future
Lease Obligations
The Company leases certain office and warehouse equipment under
capital leases. The carrying value of these assets was
approximately $0.1 million and $0.2 million at fiscal
2010 and fiscal 2009, respectively, (net of accumulated
amortization of $0.3 million and $0.2 million). The
Company also leases various office and warehouse facilities and
equipment under noncancellable operating leases. Rents charged
to expense under these operating leases totaled approximately
$4.0 million in both fiscal 2010 and fiscal 2009.
48
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
At September 2010 the minimum future lease commitments were as
follows:
|
Capital
|
Operating
|
|||||||
|
Fiscal Year Ending
|
Leases | Leases | ||||||
|
2011
|
$ | 43,661 | $ | 3,550,128 | ||||
|
2012
|
8,027 | 2,969,020 | ||||||
|
2013
|
3,139 | 2,286,671 | ||||||
|
2014
|
— | 1,208,574 | ||||||
|
2015
|
— | 840,631 | ||||||
|
Thereafter
|
— | 803,320 | ||||||
|
Total minimum lease payments
|
$ | 54,827 | $ | 11,658,344 | ||||
|
Less amount representing interest
|
1,748 | |||||||
|
Present value of net minimum lease payments
|
$ | 53,079 | ||||||
Liability
Insurance
The Company carries property, general liability, vehicle
liability, directors and officers liability and workers’
compensation insurance. Additionally, the Company carries an
umbrella liability policy to provide excess coverage over the
underlying limits of the aforementioned primary policies.
The Company’s insurance programs for workers’
compensation, general liability, and employee related health
care benefits are provided through high deductible or
self-insured programs. Claims in excess of self-insurance levels
are fully insured. Accruals are based on historical claims
experience, actual claims filed, and estimates of claims
incurred but not reported.
The Company’s liabilities for unpaid and incurred, but not
reported claims, for workers’ compensation, general
liability, and health insurance at September 2010 and 2009 was
$1.7 million and $1.6 million, respectively. These
amounts are included in accrued expenses in the accompanying
Consolidated Balance Sheets. While the ultimate amount of claims
incurred is dependent on future developments, in the
Company’s opinion, recorded reserves are adequate to cover
the future payment of claims previously incurred. However, it is
possible that recorded reserves may not be adequate to cover the
future payment of claims.
Adjustments, if any, to claims estimates previously recorded,
resulting from actual claim payments, are reflected in
operations in the periods in which such adjustments are known.
A summary of the activity in the Company’s self-insured
liabilities reserve is set forth below (in millions):
| 2010 | 2009 | |||||||
|
Beginning balance
|
$ | 1.6 | $ | 1.3 | ||||
|
Charged to expense
|
4.3 | 4.3 | ||||||
|
Payments
|
4.2 | 4.0 | ||||||
|
Ending balance
|
$ | 1.7 | $ | 1.6 | ||||
| 14. | EQUITY-BASED INCENTIVE AWARDS: |
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
49
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
Stock
Options
During fiscal 2010, the Compensation Committee of the Board of
Directors awarded various employees of the Company incentive
stock options to purchase 6,000 shares of the
Company’s common stock. These awards vest in equal
installments over a five year service period and have an
exercise price of $51.50 per share.
The Company has estimated that the fair value of the incentive
stock option awards was approximately $0.1 million using
the Black-Scholes option pricing model. This amount will be
amortized to compensation expense on a straight-line basis over
the five year service period. The following assumptions were
used in connection with the Black-Scholes option pricing
calculation:
|
Stock Option
|
||||
|
Pricing
|
||||
| Assumptions | ||||
|
Risk-free interest rate
|
3.04 | % | ||
|
Dividend yield
|
1.30 | % | ||
|
Expected volatility
|
49.3 | % | ||
|
Expected life in years
|
7 | |||
The stock options issued by the Company expire ten years from
the grant date and include graded vesting schedules up to five
years in length. Stock options issued and outstanding to
management employees at September 2010 are summarized as follows:
|
Number of
|
||||||||||||||||||||||||
|
Options
|
Number
|
|||||||||||||||||||||||
|
Date
|
Exercise Price | Outstanding | Exercisable | |||||||||||||||||||||
|
Fiscal 2003
|
$ | 28.80 | 84 | 84 | ||||||||||||||||||||
|
Fiscal 2007
|
$ | 18.00 | 25,000 | 25,000 | ||||||||||||||||||||
|
Fiscal 2010
|
$ | 51.50 | 6,000 | — | ||||||||||||||||||||
| 31,084 | 25,084 | |||||||||||||||||||||||
| Stock options issued and outstanding to the Company’s outside directors at September 2010 are summarized as follows: | ||||||||||||||||||||||||
|
Number of
|
||||||||||||||||||||||||
|
Options
|
Number
|
|||||||||||||||||||||||
|
Date
|
Exercise Price | Outstanding | Exercisable | |||||||||||||||||||||
|
Fiscal 2002
|
$ | 26.94 | 834 | 834 | ||||||||||||||||||||
| The following summarizes all stock options outstanding at September 2010: | ||||||||||||||||||||||||
|
Remaining
|
Exercisable | |||||||||||||||||||||||
|
Exercise
|
Number
|
Weighted-Average
|
Weighted-Average
|
Number
|
Weighted-Average
|
|||||||||||||||||||
| Price | Outstanding | Contractual Life | Exercise Price | Exercisable | Exercise Price | |||||||||||||||||||
|
2002 Options
|
$ | 26.94 | 834 | 1.87 years | $ | 26.94 | 834 | $ | 26.94 | |||||||||||||||
|
2003 Options
|
$ | 28.80 | 84 | 2.07 years | $ | 28.80 | 84 | $ | 28.80 | |||||||||||||||
|
2007 Options
|
$ | 18.00 | 25,000 | 6.20 years | $ | 18.00 | 25,000 | $ | 18.00 | |||||||||||||||
|
2010 Options
|
$ | 51.50 | 6,000 | 9.58 years | $ | 51.50 | — | $ | — | |||||||||||||||
| 31,918 | $ | 24.56 | 25,918 | $ | 18.32 | |||||||||||||||||||
50
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following is a summary of the activity of the stock plans
for fiscal 2010:
|
Number of
|
Weighted Average
|
|||||||
| Shares | Exercise Price | |||||||
|
Outstanding at September 2009
|
30,118 | $ | 20.16 | |||||
|
Granted
|
6,000 | $ | 51.50 | |||||
|
Exercised
|
(4,200 | ) | $ | 31.45 | ||||
|
Forfeited/Expired
|
— | $ | — | |||||
|
Outstanding at September 2010
|
31,918 | $ | 24.56 | |||||
Net income before income taxes included compensation expense
related to stock options of approximately $0.1 million in
both fiscal 2010 and fiscal 2009. At September 2010, total
unamortized compensation expense related to stock options was
approximately $0.1 million. This unamortized compensation
expense is expected to be amortized over approximately the next
55 months.
The aggregate intrinsic value of stock options outstanding was
approximately $1.2 million at both at September 2010 and
September 2009. The aggregate intrinsic value of stock options
exercisable was approximately $1.1 million and
$0.8 million at September 2010 and September 2009,
respectively.
The total intrinsic value of stock options exercised was
approximately $0.1 million in both fiscal 2010 and fiscal
2009. The total fair value of stock options vested was
approximately $0.5 in both fiscal 2010 and fiscal 2009.
Restricted
Stock
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 September 2010:
|
$500,000 | $100,000 |
| /1/ | The remaining 8,000 shares will vest on October 16, 2010. | |
| /2/ | The remaining 2,500 shares will vest 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 recipients of
restricted stock 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 $0.4 million in both
fiscal 2010 and 2009, resulting in a recognized income tax
benefit of approximately $0.1 million in each fiscal year.
Total unamortized compensation expense related to restricted
stock awards at September 2010 was approximately
$0.1 million. This unamortized compensation expense is
expected to be amortized over approximately the next month (the
expected weighted-average period). The total fair value of
restricted stock vested was approximately $0.6 million in
both fiscal 2010 and fiscal 2009.
51
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following summarizes restricted stock activity under the
Omnibus Plan for the twelve months ended September 2010:
|
Weighted
|
||||||||
|
Average
|
||||||||
|
Number of
|
Grant Date
|
|||||||
| Shares | Fair Value | |||||||
|
Nonvested restricted stock at September 2009
|
21,000 | $ | 40.16 | |||||
|
Granted
|
— | — | ||||||
|
Vested
|
(10,500 | ) | $ | 40.16 | ||||
|
Expired
|
— | — | ||||||
|
Nonvested restricted stock at September 2010
|
10,500 | $ | 40.16 | |||||
| 15. | BUSINESS SEGMENTS: |
AMCON has two reportable business segments: the wholesale
distribution of consumer products and the retail sale of health
and natural food products. The retail health food stores’
operations are aggregated to comprise the Retail Segment because
such operations have similar economic characteristics, as well
as similar characteristics with respect to the nature of
products sold, the type and class of customers for the health
food products and the methods used to sell the products.
Included in the “Other” column are intercompany
eliminations, and assets held and charges incurred by our
holding company. The segments are evaluated on revenues, gross
margins, operating income (loss), and income before taxes.
|
Wholesale
|
||||||||||||||||
| Distribution | Retail | Other | Consolidated | |||||||||||||
|
FISCAL YEAR ENDED 2010:
|
||||||||||||||||
|
External revenues:
|
||||||||||||||||
|
Cigarettes
|
$ | 731,384,660 | $ | — | $ | — | $ | 731,384,660 | ||||||||
|
Confectionery
|
66,055,461 | — | — | 66,055,461 | ||||||||||||
|
Health food
|
— | 36,769,283 | — | 36,769,283 | ||||||||||||
|
Tobacco, food service & other
|
176,328,631 | — | — | 176,328,631 | ||||||||||||
|
Total external revenues
|
973,768,752 | 36,769,283 | — | 1,010,538,035 | ||||||||||||
|
Depreciation
|
1,122,021 | 332,967 | 4,168 | 1,459,156 | ||||||||||||
|
Amortization
|
277,661 | — | — | 277,661 | ||||||||||||
|
Operating income (loss)
|
17,168,907 | 3,766,927 | (5,410,009 | ) | 15,525,825 | |||||||||||
|
Interest expense
|
484,253 | 456,367 | 564,279 | 1,504,899 | ||||||||||||
|
Income (loss) from continuing operations before taxes
|
16,718,386 | 3,347,006 | (5,958,580 | ) | 14,106,812 | |||||||||||
|
Total assets
|
78,662,748 | 12,408,831 | 995,792 | 92,067,371 | ||||||||||||
|
Capital expenditures
|
1,049,666 | 870,989 | — | 1,920,655 | ||||||||||||
|
FISCAL YEAR ENDED 2009:
|
||||||||||||||||
|
External revenues:
|
||||||||||||||||
|
Cigarettes
|
$ | 646,410,368 | $ | — | $ | — | $ | 646,410,368 | ||||||||
|
Confectionery
|
65,004,545 | — | — | 65,004,545 | ||||||||||||
|
Health food
|
— | 36,616,477 | — | 36,616,477 | ||||||||||||
|
Tobacco, food service & other
|
159,921,654 | — | — | 159,921,654 | ||||||||||||
|
Total external revenues
|
871,336,567 | 36,616,477 | — | 907,953,044 | ||||||||||||
|
Depreciation
|
1,000,137 | 211,365 | 4,587 | 1,216,089 | ||||||||||||
|
Operating income (loss)
|
17,442,291 | 3,490,989 | (5,549,325 | ) | 15,383,955 | |||||||||||
|
Interest expense
|
517,383 | 573,737 | 536,253 | 1,627,373 | ||||||||||||
|
Income (loss) from continuing operations before taxes
|
16,962,838 | 2,958,236 | (6,060,233 | ) | 13,860,841 | |||||||||||
|
Total assets
|
75,507,359 | 11,605,457 | 1,011,566 | 88,124,382 | ||||||||||||
|
Capital expenditures
|
1,172,059 | 501,373 | — | 1,673,432 | ||||||||||||
52
Table of Contents
NONE
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 officer, as
appropriate to allow timely decisions regarding required
disclosure.
As required by
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act, an evaluation of the effectiveness of
the design and operation of our disclosure controls and
procedures as of September 30, 2010 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 officer concluded that
our disclosure controls and procedures were effective as of the
end of the period covered by this report.
Management’s
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in
Rule 13a-15(f)
under the Exchange Act. Our internal control over financial
reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. Our internal control
over financial reporting includes those policies and procedures
that: (1) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect our transactions
and the dispositions of our assets; (2) provide reasonable
assurance that our transactions are recorded as necessary to
permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with
appropriate authorizations; and (3) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements.
Because of its inherent limitations, a system of internal
control over financial reporting can provide only reasonable
assurance and may not prevent or detect all misstatements.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
statement preparation and presentation. Further, because of
changes in conditions, effectiveness of internal control over
financial reporting may vary over time.
We have completed our evaluation and testing of our internal
control over financial reporting as required by Section 404
of Sarbanes-Oxley and Item 308(a) of
Regulation S-K
(Internal Control Report). Under the supervision and with the
participation of our management, we assessed the effectiveness
of our internal control over financial reporting as of
September 30, 2010. In making this assessment, we used the
criteria set forth in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on its assessment, management
has concluded that our internal control over financial reporting
was effective as of September 30, 2010.
The Company is neither an accelerated filer nor a large
accelerated filer, as defined in
Rule 12b-2
under the Exchange Act, and is not otherwise including in this
annual report an attestation report of the Company’s
registered public accounting firm regarding internal control
over financial reporting. Therefore, Management’s report
was not required to be attested by the Company’s registered
public accounting firm pursuant to Item 308(b) of
Regulation S-K.
53
Table of Contents
Limitations
on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief
Financial Officer, do not expect that our disclosure controls
and procedures will prevent all errors and fraud. In designing
and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable, not absolute, assurance of achieving the desired
control objectives. Further, the design of a control system must
reflect the fact that there are resource constraints, and
management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls
and procedures. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent
limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can
be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management’s
override of the control.
The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in
achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of
changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal control that occurred
during the fiscal quarter ended September 30, 2010, that
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
Not applicable.
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The Registrant’s Proxy Statement to be used in connection
with the December 2010 Annual Meeting of Shareholders (the
“Proxy Statement”) will contain under the captions
“Item 1: Election of Directors — What is the
structure of our board and how often are directors
elected?”, “Item 1: Election of
Directors — Who are this year’s nominees?”,
“Item 1: Election of Directors — What is the
business experience of the nominees and of our continuing board
members and the basis for the inclusion that each such person
should serve on our board?”, “Section 16(a)
Beneficial Ownership Reporting Compliance”, “Corporate
Governance and Board Matters — Code of Ethics”,
and “Corporate Governance and Board Matters —
Committees of the Board — Audit Committee”,
certain information required by Item 10 of
Form 10-K
and such information is incorporated herein by this reference.
The information appearing under the caption “Executive
Officers of the Registrant” in Part I of this report
also is incorporated herein by reference. Our Board of Directors
has adopted a code of ethical conduct that applies to our
executive officers, including our principal executive officer
and our principal financial officer. This code of ethical
conduct is available without charge to any person who requests
it by writing to our corporate secretary. It also is available
on our internet website (www.amcon.com) by clicking on the
“Corporate Governance” tab under “Investor
Relations”. Any substantive amendment to, or waiver from, a
provision of this code that applies to our principal executive
officer or principal financial officer will be disclosed on our
internet website and, if required by rules of the SEC or NYSE
Amex Equities, on the reports we file with the SEC.
| ITEM 11. | EXECUTIVE COMPENSATION |
The Registrant’s Proxy Statement will contain under the
captions “Executive Compensation and Related Matters”
and “Corporate Governance and Board Matters —
Director Compensation” the information required by
Item 11 of
Form 10-K,
and such information is incorporated herein by this reference.
54
Table of Contents
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The Registrant’s Proxy Statement will contain under the
captions “Ownership of Our Common Stock by Our Directors
and Executive Officers and Other Principal Stockholders”
and “Executive Compensation and Related Matters —
Equity Compensation Plan Information” the information
required by Item 12 of
Form 10-K
and such information is incorporated herein by this reference.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The Registrant’s Proxy Statement will contain under the
captions “Certain Relationships and Related Party
Transactions”, “Item 1: Election of
Directors — What is the structure of our board and how
often are directors elected?” and “Corporate
Governance and Board Matters — Committees of the
Board”, the information required by Item 13 of
Form 10-K
and such information is incorporated herein by this reference.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The Registrant’s Proxy Statement will contain under the
caption “Independent Auditor Fees and Services”, the
information required by Item 14 of
Form 10-K
and such information is incorporated herein by this reference.
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Table of Contents
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) Financial Statements, Financial Statement Schedules,
and Exhibits
(1)
Financial Statements
The financial statements filed as part of this filing are listed
on the index to Consolidated Financial Statements under
Item 8.
(2)
Financial Statement Schedules
Not Applicable.
(3)
Exhibits
| 3 | .1 | Restated Certificate of Incorporation of the Company, as amended May 12, 2004 (incorporated by reference to Exhibit 3.1 of AMCON’s Annual Report on Form 10-K filed November 7, 2008) | ||
| 3 | .2 | Certificate of Amendment of Certificate of Incorporation dated March 18, 2005 (incorporated by reference to Exhibit 3.2 of AMCON’s Annual Report on Form 10-K filed November 7, 2008) | ||
| 3 | .3 | Second Corrected Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Securities of AMCON Distributing Company dated August 5, 2004 (incorporated by reference to Exhibit 3.3 of AMCON’s Quarterly Report on Form 10-Q filed on August 9, 2004) | ||
| 3 | .4 | Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Securities of AMCON Distributing Company dated October 8, 2004 (incorporated by reference to Exhibit 3.4 of AMCON’s Annual Report on Form 10-K filed on January 7, 2005) | ||
| 3 | .5 | Amended and Restated Bylaws of the Company dated January 29, 2008 (incorporated by reference to Exhibit 3.2 of AMCON’s Current Report on Form 8-K filed on February 4, 2008). | ||
| 4 | .1 | Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of AMCON’s Registration Statement on Form S-1 (Registration No. 33-82848) filed on August 15, 1994) | ||
| 4 | .2 | Specimen Series A Convertible Preferred Stock Certificate (incorporated by reference to Exhibit 4.2 of AMCON’s Quarterly Report on Form 10-Q filed on August 9, 2004) | ||
| 4 | .3 | Specimen Series B Convertible Preferred Stock Certificate (incorporated by reference to Exhibit 3.4 of AMCON’s Annual Report on Form 10-K filed on January 7, 2005) | ||
| 4 | .4 | Securities Purchase Agreement dated October 8, 2004 between AMCON Distributing Company and Spencer Street Investments, Inc. (incorporated by reference to Exhibit 4.5 of AMCON’s Annual Report on Form 10-K filed on January 7, 2005) | ||
| 10 | .1 | Amended and Restated Loan and Security Agreement, dated September 30, 2004, between the Company and LaSalle National Bank, as agent (incorporated by reference to Exhibit 3.4 of AMCON’s Annual Report on Form 10-K filed on January 7, 2005) | ||
| 10 | .2 | Revised First Amendment To Amended and Restated Loan and Security Agreement, dated April 14, 2005 (incorporated by reference to Exhibit 10.2 of AMCON’s Quarterly Report on Form 10-Q filed on May 27, 2005) | ||
| 10 | .3 | Revised Second Amendment to Amended and Restated Loan and Security Agreement, dated May 23, 2005 (incorporated by reference to Exhibit 10.3 of AMCON’s Quarterly Report on Form 10-Q filed on May 27, 2005) | ||
| 10 | .4 | Third Amendment to Amended and Restated Loan and Security Agreement, dated August 12, 2005 (incorporated by reference to Exhibit 10.4 of AMCON’s Quarterly Report on Form 10-Q filed on August 22, 2005) | ||
| 10 | .5 | Fourth Amendment and Waiver to Amended and Restated Loan and Security Agreement, dated January 9, 2006 (incorporated by reference to Exhibit 10.5 of AMCON’s Annual Report on Form 10-K filed on August 23, 2006) |
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Table of Contents
| 10 | .6 | Fifth Amendment to Amended and Restated Loan and Security Agreement, dated February 8, 2006 (incorporated by reference to Exhibit 10.6 of AMCON’s Annual Report on Form 10-K filed on August 23, 2006) | ||
| 10 | .7 | Sixth Amendment to Amended and Restated Loan and Security Agreement, dated March 3, 2006 (incorporated by reference to Exhibit 10.1 of AMCON’s Current Report on Form 8-K filed on March 13, 2006) | ||
| 10 | .8 | Seventh Amendment to Amended and Restated Loan and Security Agreement, dated November 6, 2006 (incorporated by reference to Exhibit 10.37 of AMCON’s Quarterly Report on Form 10-Q filed on November 20, 2006) | ||
| 10 | .9 | Eighth Amendment to Amended and Restated Loan and Security Agreement, dated December 28, 2006 (incorporated by reference to Exhibit 10.9 of AMCON’s Annual Report on Form 10-K filed December 29, 2006) | ||
| 10 | .10 | Ninth Amendment to Amended and Restated Loan and Security Agreement, dated July 17, 2008 (incorporated by reference to Exhibit 10.9 of AMCON’s Quarterly Report on Form 10-Q filed July 17, 2008) | ||
| 10 | .11 | Tenth Amendment to Amended and Restated Loan and Security Agreement, dated October 15, 2008 (incorporated by reference to Exhibit 10.11 of AMCON’s Annual Report on Form 10-K filed November 7, 2008) | ||
| 10 | .12 | Eleventh Amendment to the Amended and Restated Loan and Security Agreement, dated January 15, 2009 (incorporated by reference to Exhibit 10.1 of AMCON’s Quarterly Report on Form 10-Q filed January 20, 2009) | ||
| 10 | .13 | Twelfth Amendment to the Amended and Restated Loan and Security Agreement, dated July 14, 2009 (incorporated by reference to Exhibit 10.1 of AMCON’s Quarterly Report on Form 10-Q filed July 17, 2009) | ||
| 10 | .14 | Thirteenth Amendment to the Amended and Restated Loan and Security Agreement, dated October 2, 2009 (incorporated by reference to Exhibit 10.14 of AMCON’s Annual Report on Form 10-K filed November 6, 2009). | ||
| 10 | .15 | Fourteenth Amendment to the Amended and Restated Loan and Security Agreement, dated July 19, 2010 (incorporated by reference to Exhibit 10.1 of AMCON’s Quarterly Report on Form 10-Q filed July 19, 2010). | ||
| 10 | .16 | First Amended and Restated AMCON Distributing Company 1994 Stock Option Plan (incorporated by reference to Exhibit 10.17 of AMCON’s Current Report on Form 10-Q filed on August 4, 2000)* | ||
| 10 | .17 | AMCON Distributing Company Profit Sharing Plan (incorporated by reference to Exhibit 10.8 of Amendment No. 1 to the Company’s Registration Statement on Form S-1 (Registration No. 33-82848) filed on November 8, 1994)* | ||
| 10 | .18 | 2007 Omnibus Incentive Plan dated April 17, 2007 (incorporated herein by reference to Exhibit 10.12 to AMCON’s Annual Report on Form 10-K filed on November 9, 2007)* | ||
| 10 | .19 | Nonqualified Stock Option Agreement for Christopher H. Atayan dated December 12, 2006 (incorporated herein by reference to Exhibit 10.13 to AMCON’s Annual Report on Form 10-K filed on November 9, 2007)* | ||
| 10 | .20 | Agreement, dated September 26, 2006, between the Company and William F. Wright regarding Mr. Wright’s services to the Company (incorporated by reference to Exhibit 10.1 of AMCON’s Current Report on Form 8-K filed on October 10, 2006)* | ||
| 10 | .21 | Agreement, dated December 10, 2004 between AMCON Distributing Company and William F. Wright with respect to split dollar life insurance (incorporated by reference to Exhibit 10.6 of AMCON’s Annual Report on Form 10-K filed on January 7, 2005)* | ||
| 10 | .22 | Agreement, dated December 15, 2004 between AMCON Distributing Company and Kathleen M. Evans with respect to split dollar life insurance (incorporated by reference to Exhibit 10.7 of AMCON’s Annual Report on Form 10-K filed on January 7, 2005)* |
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Table of Contents
| 10 | .23 | Guaranty Fee, Reimbursement and Indemnification Agreement, dated as of September 30, 2004, between AMCON Distributing Company and William F. Wright (incorporated by reference to Exhibit 10.17 of AMCON’s Annual Report on Form 10-K filed on January 7, 2005) | ||
| 10 | .24 | Amendment to Guaranty Fee, Reimbursement and Indemnification Agreement, dated July 31, 2007, between AMCON Distributing Company and William F. Wright (incorporated by reference to Exhibit 10.23 to AMCON’s Annual Report on Form 10-K filed on November 9, 2007) | ||
| 10 | .25 | Term Real Estate Promissory Note, dated December 21, 2004, issued by AMCON Distributing Company to M&I (incorporated by reference to Exhibit 10.21 of AMCON’s Quarterly Report on Form 10-Q filed on February 14, 2005) | ||
| 10 | .26 | One Hundred Eighty Day Redemption Mortgage and Security Agreement by and between AMCON Distributing Company and M&I (incorporated by reference to Exhibit 10.23 of AMCON’s Quarterly Report on Form 10-Q filed on February 14, 2005) | ||
| 10 | .27 | Security Agreement by and between AMCON Distributing Company and M&I (incorporated by reference to Exhibit 10.24 of AMCON’s Quarterly Report on Form 10-Q filed on February 14, 2005) | ||
| 10 | .28 | Change of Control Agreement between the Company and Christopher H. Atayan, dated December 29, 2006 (incorporated by reference to Exhibit 10.40 of AMCON’s Annual Report on Form 10-K filed on December 29, 2006)* | ||
| 10 | .29 | Change of Control Agreement between the Company and Kathleen M. Evans, dated December 29, 2006 (incorporated by reference to Exhibit 10.41 of AMCON’s Annual Report on Form 10-K filed on December 29, 2006)* | ||
| 10 | .30 | Settlement Agreement and Mutual General Release dated July 31, 2007 by and between Television Events & Marketing, Inc., Tom Kiely, The Beverage Group, Inc., AMCON Distributing Company, AMCON Corporation, William F. Wright, Archie Thornton and The Thornton Works (incorporated by reference to Exhibit 10.42 to AMCON’s Annual Report on Form 10-K filed on November 9, 2007) | ||
| 10 | .31 | Mutual Release and Settlement Agreement between AMCON Distributing Company, Trinity Springs, Inc., and Crystal Paradise Holdings, Inc. dated September 30, 2007 (incorporated by reference to Exhibit 10.43 to AMCON’s Annual Report on Form 10-K filed on November 9, 2007) | ||
| 10 | .32 | Executive Restricted Stock Award Agreement under the 2007 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.45 to AMCON’s Annual Report on Form 10-K filed on November 7, 2008)* | ||
| 10 | .33 | Director Restricted Stock Award Agreement under the 2007 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.46 to AMCON’s Annual Report on Form 10-K filed on November 7, 2008)* | ||
| 11 | .1 | Statement re: computation of per share earnings (incorporated by reference to Note 4 to the Consolidated Financial Statements included as a part of this report on Form 10-K under Item 8) | ||
| 21 | .1 | Subsidiaries of the Company | ||
| 23 | .1 | Consent of Independent Registered Public Accounting Firm (McGladrey & Pullen LLP) | ||
| 31 | .1 | Certification by Christopher H. Atayan, Chief Executive Officer and Chairman, furnished pursuant to section 302 of the Sarbanes-Oxley Act | ||
| 31 | .2 | Certification by Andrew C. Plummer, Vice President and Chief Financial Officer, furnished pursuant to section 302 of the Sarbanes-Oxley Act | ||
| 32 | .1 | Certification by Christopher H. Atayan, Chief Executive Officer and Chairman, furnished pursuant to section 906 of the Sarbanes-Oxley Act | ||
| 32 | .2 | Certification by Andrew C. Plummer, Vice President and Chief Financial Officer, furnished pursuant to section 906 of the Sarbanes-Oxley Act |
| * | Represents management contract or compensation plan or arrangement. |
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Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
November 8, 2010
|
AMCON DISTRIBUTING COMPANY
(registrant) |
|
|
By:
/s/ Christopher
H. Atayan
Christopher
H. Atayan,
Chief Executive Officer and Chairman |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
November 8, 2010
|
/s/ Christopher H. Atayan | |||
|
|
||||
|
Christopher H. Atayan,
Chief Executive Officer Chairman of the Board and Director (Principal Executive Officer) |
||||
|
November 8, 2010
|
/s/ Kathleen M. Evans | |||
|
|
||||
|
Kathleen M. Evans
President and Director |
||||
|
November 8, 2010
|
/s/ Andrew C. Plummer | |||
|
|
||||
|
Andrew C. Plummer
Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
||||
|
November 8, 2010
|
/s/ Jeremy W. Hobbs | |||
|
|
||||
|
Jeremy W. Hobbs
Director |
||||
|
November 8, 2010
|
/s/ John R. Loyack | |||
|
|
||||
|
John R. Loyack
Director |
||||
|
November 8, 2010
|
/s/ Raymond F. Bentele | |||
|
|
||||
|
Raymond F. Bentele
Director |
||||
|
November 8, 2010
|
/s/ Stanley Mayer | |||
|
|
||||
|
Stanley Mayer
Director |
||||
|
November 8, 2010
|
/s/ Timothy R. Pestotnik | |||
|
|
||||
|
Timothy R. Pestotnik
Director |
59
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. (removed and Reserved)Part IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules