DIT

AMCON Distributing Co. - 10-Q Summary (Q1 2009)

Business Context and Reporting Period

This filing covers the first quarter of fiscal year 2009, ended December 31, 2008. AMCON Distributing Company operates two primary segments: wholesale distribution of consumer products (primarily cigarettes and tobacco) in the Great Plains and Rocky Mountain regions, and retail health food stores in Florida and the Midwest. The company is a smaller reporting company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 3.2% ($6.7 million) driven by a 3.6% increase in the wholesale segment. This was primarily due to a $2.6 million increase in cigarette sales (due to manufacturer price hikes) and a $4.6 million increase in non-tobacco products.
• Retail Decline: The retail health food segment saw a 5.7% sales decrease ($0.5 million), attributed to lower volumes in Florida stores due to regional economic downturns and competition.
• Profitability: Operating income rose to $2.7 million. Gross profit increased 4.3% overall, with the wholesale segment up 8.0% and retail down 7.7%.
• Interest Expense: Interest expense dropped significantly by approximately $0.5 million (from $0.97 million to $0.49 million) due to lower prime rates and reduced average borrowings.
• Cash Flow: Operating cash flow improved dramatically from a negative $2.6 million in Q1 2008 to a positive $8.3 million in Q1 2009, aided by reductions in accounts receivable and inventory balances.

Outlook, Risks, and Contingencies

• Economic Environment: Management cites a challenging economic climate, including falling real estate values, higher food prices, and credit market disruptions, which may negatively impact consumer confidence and sales volume in both segments.
• Regulatory Risk: The company faces potential risks from proposed federal legislation to increase excise taxes on cigarettes and tobacco products to fund the State Children's Health Insurance Program (SCHIP), which could accelerate the decline in cigarette demand.
• Discontinued Operations: The company continues to report losses from discontinued operations (Trinity Springs, Inc.), primarily due to interest charges on related-party debt. A $5.0 million note payable to Crystal Paradise Holdings, Inc. remains outstanding with an asset purchase option expiring March 31, 2009.
• Liquidity: The company maintains a $55.0 million revolving credit facility with Bank of America. As of December 31, 2008, outstanding borrowings were $27.0 million with approximately $22.5 million in excess availability. The company is in compliance with all debt covenants.
• Dividends: The company paid a $0.10 per share cash dividend on common stock and $105,533 in dividends on convertible preferred stock.

Investor Verification Checklist

• Credit Facility Covenants: Verify continued compliance with the minimum EBITDA and debt service ratio covenants, especially given the economic downturn.
• Discontinued Operations Resolution: Monitor the status of the Crystal Paradise Holdings, Inc. asset purchase option expiring March 31, 2009, and the associated $5.0 million note.
• Customer Credit Risk: Assess the impact of the economic downturn on the company's wholesale customers, many of whom are described as "thinly capitalized."
• Excise Tax Legislation: Track the progress of federal legislation regarding increased cigarette excise taxes and its potential impact on the 70% of sales derived from cigarettes.
• Inventory Levels: Review inventory turnover and obsolescence reserves, particularly in the retail segment where sales volumes have declined.