DIT

AMCON Distributing Company - 10-K Summary (Fiscal Year Ended Sept 30, 2007)

Business Context and Reporting Period

This report covers the fiscal year ended September 30, 2007. AMCON Distributing Company operates two primary segments: a wholesale distribution segment (ADC) serving approximately 4,000 retail outlets in the Great Plains and Rocky Mountain regions, and a retail health food segment operating 13 stores in Florida and the Midwest. The wholesale segment accounted for approximately 96% of total revenue, with cigarette sales representing roughly 71% of total company revenue. The company changed its inventory valuation method from LIFO to FIFO during the fourth quarter of 2007, with prior periods restated.

Key Financial Metrics

Note: Debt figures exclude the revolving credit facility balance of $37.9 million at period end.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased by $14.1 million (1.7%) driven by a $13.0 million increase in wholesale distribution and $1.1 million in retail health food. Wholesale growth was fueled by state excise tax increases (adding ~$15.6M to sales) and manufacturer price hikes, partially offset by volume declines due to higher taxes.
• Profitability: Operating income improved significantly to $11.5 million from $6.7 million. Gross profit margin expanded to 7.5% from 7.2%, aided by a $1.7 million benefit from excise tax increases in the wholesale segment.
• Discontinued Operations: The company recorded a $1.6 million pre-tax gain from the sale of Hawaiian Natural Water Company (HNWC) assets and a $1.5 million deferred gain from settling litigation with Crystal Paradise Holdings (CPH) regarding Trinity Springs, Inc. (TSI). This turned a loss from discontinued operations in 2006 into a gain in 2007.
• Accounting Change: The retroactive adoption of FIFO inventory valuation increased reported net income for prior years and adjusted balance sheet items.

Guidance, Outlook, and Risks

Outlook and Strategy: Management is focused on sustaining core segments, improving liquidity through debt reduction, and aggressively managing costs. The company aims to grow non-tobacco product sales which offer higher margins. The company successfully regained compliance with American Stock Exchange (AMEX) listing standards by increasing shareholders' equity to $5.5 million.

Key Risks:

• Cigarette Dependency: Approximately 71% of revenue comes from cigarettes, a declining market due to health concerns, advertising restrictions, and rising excise taxes.
• Margin Pressure: High fuel costs and competition from deep-discount cigarette brands (non-participants in the Master Settlement Agreement) threaten margins.
• Liquidity and Debt: The company relies heavily on a $55.9 million revolving credit facility. Covenants require maintaining specific debt service and EBITDA ratios. Failure to meet these could trigger a default.
• Regulatory Environment: Potential increases in federal and state excise taxes on tobacco products could further reduce consumer demand and increase working capital requirements.

Investor Verification Checklist

• Credit Facility Compliance: Verify the company's ability to maintain the required debt service ratio (1.0 to 1.0) and cumulative EBITDA covenants under the LaSalle Bank facility.
• Cigarette Volume Trends: Monitor the impact of rising excise taxes on actual cigarette carton volumes versus price-driven revenue increases.
• Discontinued Operations Settlement: Confirm the status of the CPH asset purchase option regarding TSI assets and the recognition timeline for the $1.5 million deferred gain.
• Liquidity Position: Assess the adequacy of the $11.4 million excess availability under the credit facility given the low cash on hand ($0.7 million).
• AMEX Listing Status: Confirm the company maintains the required shareholders' equity for two successive quarters to fully satisfy the AMEX compliance plan.