DIT

Business Context and Reporting Period

Company: AMCON Distributing Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010 (Third Fiscal Quarter)
Business Overview: AMCON operates two primary segments: a Wholesale Segment distributing consumer products (cigarettes, tobacco, confectionery, groceries) to approximately 4,200 retail outlets, and a Retail Segment operating 14 health food stores (Chamberlin's Market & Café and Akin's Natural Foods Market). The Company is a smaller reporting company.

Key Financial Metrics

Note: Net cash flows from operating activities for the nine months ended June 30, 2010, were a negative $0.2 million, compared to positive $13.5 million in the prior year period.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated sales increased 10.0% ($24.2 million) for the quarter and 13.1% ($85.9 million) for the nine-month period compared to the prior year.
• Acquisition Impact: The acquisition of Discount Distributors in October 2009 contributed $16.1 million in sales for the quarter and $38.3 million for the nine-month period.
• Volume vs. Price: Wholesale sales growth was driven by a $4.9 million increase in cigarette prices (quarter) and $58.1 million (nine months), partially offset by a decrease in cigarette carton volume ($0.7 million quarter; $15.6 million nine months).
• Operating Expenses: Increased $1.4 million for the quarter and $2.9 million for the nine months, driven by costs associated with the new Arkansas business, higher bad debt expense, and depreciation/amortization.
• Discontinued Operations: The prior year period included a significant one-time gain of $4.7 million from the disposal of Trinity Springs, Inc. assets. No such income was recorded in the current period.

Guidance, Outlook, and Risks

Management Commentary: Management expects the wholesale industry to face continued consolidation due to declining cigarette revenues and credit availability. The Company aims to capitalize on this by expanding its footprint and focusing on higher-margin non-tobacco products. The Retail Segment faces macro-economic headwinds but benefits from a loyal customer base and new store openings.

Liquidity and Capital Resources:

• The Company maintains a $55.0 million revolving credit facility with Bank of America, maturing January 1, 2012.
• As of June 30, 2010, $28.5 million was outstanding, leaving $26.0 million available.
• The Company is in compliance with all debt covenants, including a minimum debt service ratio of 1.0 to 1.0.

Risks and Contingencies:

• Regulatory: Increased FDA regulation of tobacco products and potential excise tax hikes could depress demand.
• Market: Dependence on cigarette sales, which are subject to declining consumption trends.
• Financial: Liquidity is heavily influenced by customer credit risk and access to bank credit. The Company does not currently hedge interest rate or fuel cost risks.

Investor Verification Checklist

• Discontinued Operations: Verify that the high net income in the prior year (Q3 2009 and 9M 2009) was driven by a one-time asset disposal gain, making year-over-year comparisons of net income misleading without adjustment.
• Cash Flow Divergence: Investigate the shift from positive operating cash flow ($13.5M in 9M 2009) to negative operating cash flow ($0.2M in 9M 2010) despite higher net income, driven by increases in accounts receivable and inventory.
• Debt Covenants: Confirm continued compliance with the 1.0 debt service ratio covenant, especially given the reliance on the credit facility for working capital.
• Acquisition Integration: Assess the performance of the Discount Distributors acquisition against the contingent consideration targets ($1.0 million potential additional payment).
• Preferred Stock: Note the existence of Series A and Series B convertible preferred stock ($4.5 million total liquidation preference) which has dividend priority over common stock.