dit_Current_Folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended June 30, 2016

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from ___________to _________

 

Commission File Number 1-15589

 


 

amcon_4c_logo.eps

(Exact name of registrant as specified in its charter)

 

Delaware

    

47-0702918

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

 

 

 

7405 Irvington Road, Omaha NE

 

68122

(Address of principal executive offices)

 

(Zip code)

 

Registrant’s telephone number, including area code: (402) 331-3727

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

(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 Exchange Act)  Yes  No

 

The Registrant had 587,185 shares of its $.01 par value common stock outstanding as of July 18, 2016.

 

 

 


 

Table of Contents

Form 10-Q

3rd Quarter

 

INDEX

 

 

PAGE

 

 

PART I — FINANCIAL INFORMATION 

 

 

 

Item 1. Financial Statements: 

 

 

 

Condensed consolidated balance sheets at June 30, 2016 (unaudited) and September 30, 2015 

 

 

Condensed consolidated unaudited statements of operations for the three and nine months ended June 30, 2016 and 2015 

 

 

Condensed consolidated unaudited statements of cash flows for the nine months ended June 30, 2016 and 2015 

 

 

Notes to condensed consolidated unaudited financial statements 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

14 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

22 

 

 

Item 4. Controls and Procedures 

22 

 

 

PART II — OTHER INFORMATION 

 

 

 

Item 1. Legal Proceedings 

23 

 

 

Item 1A. Risk Factors 

23 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

23 

 

 

Item 3. Defaults Upon Senior Securities 

23 

 

 

Item 4. Mine Safety Disclosures 

23 

 

 

Item 5. Other Information 

23 

 

 

Item 6. Exhibits 

24 

 

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PART I — FINANCIAL INFORMATION

 

Item 1.      Financial Statements

 

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Balance Sheets

June 30, 2016 and September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

June

 

September

 

 

    

2016

    

2015

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash

 

$

414,997

 

$

219,536

 

Accounts receivable, less allowance for doubtful accounts of $0.8 million at June 2016 and $0.9 million at September 2015

 

 

33,932,942

 

 

31,866,787

 

Inventories, net

 

 

50,670,660

 

 

60,793,478

 

Deferred income taxes

 

 

1,404,470

 

 

1,553,726

 

Income taxes receivable

 

 

 —

 

 

113,238

 

Prepaid and other current assets

 

 

5,446,628

 

 

2,125,908

 

Total current assets

 

 

91,869,697

 

 

96,672,673

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

12,362,980

 

 

12,753,145

 

Goodwill

 

 

6,349,827

 

 

6,349,827

 

Other intangible assets, net

 

 

3,825,561

 

 

4,090,978

 

Other assets

 

 

289,287

 

 

317,184

 

 

 

$

114,697,352

 

$

120,183,807

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

17,997,838

 

$

17,044,726

 

Accrued expenses

 

 

6,847,950

 

 

7,224,963

 

Accrued wages, salaries and bonuses

 

 

3,423,813

 

 

3,282,354

 

Income taxes payable

 

 

363,114

 

 

 —

 

Current maturities of long-term debt

 

 

359,737

 

 

351,383

 

Total current liabilities

 

 

28,992,452

 

 

27,903,426

 

 

 

 

 

 

 

 

 

Credit facility

 

 

13,708,439

 

 

20,902,207

 

Deferred income taxes

 

 

3,785,570

 

 

3,696,098

 

Long-term debt, less current maturities

 

 

3,113,288

 

 

3,384,319

 

Other long-term liabilities

 

 

29,826

 

 

34,860

 

 

 

 

 

 

 

 

 

Series A cumulative, Convertible Preferred Stock, $.01 par value 100,000 shares authorized and issued, and a total liquidation preference of $2.5 million at both June 2016 and September 2015

 

 

2,500,000

 

 

2,500,000

 

Series B cumulative, Convertible Preferred Stock, $.01 par value 80,000 shares authorized, 16,000 shares issued and outstanding at both June 2016 and September 2015, and a total liquidation preference of $0.4 million at both June 2016 and September 2015

 

 

400,000

 

 

400,000

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $.01 par value, 1,000,000 shares authorized, 116,000 shares outstanding and issued in Series A and B referred to above

 

 

 —

 

 

 —

 

Common stock, $.01 par value, 3,000,000 shares authorized, 587,185 shares outstanding and issued at June 2016 and 621,104 shares outstanding and issued at September 2015

 

 

7,197

 

 

7,061

 

Additional paid-in capital

 

 

16,676,738

 

 

15,509,199

 

Retained earnings

 

 

57,209,248

 

 

53,527,606

 

Treasury stock at cost

 

 

(11,725,406)

 

 

(7,680,969)

 

Total shareholders’ equity

 

 

62,167,777

 

 

61,362,897

 

 

 

$

114,697,352

 

$

120,183,807

 

 

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.

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AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Operations

for the three and nine months ended June 30, 2016 and 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June

 

For the nine months ended June

 

 

    

2016

    

2015

    

2016

    

2015

 

Sales (including excise taxes of $98.9 million and $101.5 million, and $284.9 million and $285.9 million, respectively)

 

$

333,398,723

 

$

334,456,509

 

$

951,856,098

 

$

937,333,849

 

Cost of sales

 

 

314,235,192

 

 

314,957,889

 

 

896,190,425

 

 

880,575,362

 

Gross profit

 

 

19,163,531

 

 

19,498,620

 

 

55,665,673

 

 

56,758,487

 

Selling, general and administrative expenses

 

 

15,335,808

 

 

15,405,676

 

 

45,951,300

 

 

47,072,555

 

Depreciation and amortization

 

 

512,543

 

 

542,307

 

 

1,655,173

 

 

1,709,469

 

 

 

 

15,848,351

 

 

15,947,983

 

 

47,606,473

 

 

48,782,024

 

Operating income

 

 

3,315,180

 

 

3,550,637

 

 

8,059,200

 

 

7,976,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

188,798

 

 

242,266

 

 

562,654

 

 

673,783

 

Other (income), net

 

 

(35,552)

 

 

(20,853)

 

 

(98,634)

 

 

(63,907)

 

 

 

 

153,246

 

 

221,413

 

 

464,020

 

 

609,876

 

Income from operations before income tax expense

 

 

3,161,934

 

 

3,329,224

 

 

7,595,180

 

 

7,366,587

 

Income tax expense

 

 

1,310,000

 

 

1,333,000

 

 

3,241,000

 

 

3,055,000

 

Net income

 

 

1,851,934

 

 

1,996,224

 

 

4,354,180

 

 

4,311,587

 

Preferred stock dividend requirements

 

 

(48,642)

 

 

(48,643)

 

 

(146,462)

 

 

(145,928)

 

Net income available to common shareholders

 

$

1,803,292

 

$

1,947,581

 

$

4,207,718

 

$

4,165,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share available to common shareholders

 

$

3.03

 

$

3.16

 

$

6.91

 

$

6.78

 

Diluted earnings per share available to common shareholders

 

$

2.62

 

$

2.69

 

$

6.07

 

$

5.85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

596,112

 

 

615,822

 

 

609,240

 

 

614,723

 

Diluted weighted average shares outstanding

 

 

707,300

 

 

741,183

 

 

717,875

 

 

737,325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

 

$

0.18

 

$

0.18

 

$

0.82

 

$

0.54

 

 

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.

 

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AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Cash Flows

for the nine months ended June 30, 2016 and 2015

 

 

 

 

 

 

 

 

 

 

    

2016

    

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

4,354,180

 

$

4,311,587

 

Adjustments to reconcile net income from operations to net cash flows from operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

1,389,756

 

 

1,435,719

 

Amortization

 

 

265,417

 

 

273,750

 

(Gain) loss on sale of property and equipment

 

 

(69,215)

 

 

5,103

 

Equity-based compensation

 

 

1,050,644

 

 

910,920

 

Deferred income taxes

 

 

238,728

 

 

133,493

 

(Recovery) provision for losses on doubtful accounts

 

 

(39,000)

 

 

193,000

 

Provision for losses on inventory obsolescence

 

 

2,014

 

 

132,793

 

Other

 

 

(5,034)

 

 

(6,034)

 

 

 

 

 

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,027,155)

 

 

(207,224)

 

Inventories

 

 

10,120,804

 

 

(6,393,734)

 

Prepaid and other current assets

 

 

(3,320,720)

 

 

942,531

 

Other assets

 

 

27,897

 

 

118,531

 

Accounts payable

 

 

924,567

 

 

242,760

 

Accrued expenses and accrued wages, salaries and bonuses

 

 

2,825

 

 

1,505,917

 

Income taxes payable

 

 

476,352

 

 

(1,022,572)

 

Net cash flows from operating activities

 

 

13,392,060

 

 

2,576,540

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,013,988)

 

 

(812,624)

 

Proceeds from sales of property and equipment

 

 

112,157

 

 

24,000

 

Net cash flows from investing activities

 

 

(901,831)

 

 

(788,624)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Net payments on bank credit agreements

 

 

(7,193,768)

 

 

(774,559)

 

Principal payments on long-term debt

 

 

(262,677)

 

 

(255,157)

 

Repurchase of common stock

 

 

(4,044,437)

 

 

 —

 

Dividends paid on convertible preferred stock

 

 

(146,462)

 

 

(145,928)

 

Dividends on common stock

 

 

(526,076)

 

 

(348,732)

 

Withholdings on the exercise of equity-based awards

 

 

(121,348)

 

 

(213,605)

 

Net cash flows from financing activities

 

 

(12,294,768)

 

 

(1,737,981)

 

 

 

 

 

 

 

 

 

Net change in cash

 

 

195,461

 

 

49,935

 

 

 

 

 

 

 

 

 

Cash, beginning of period

 

 

219,536

 

 

99,922

 

Cash, end of period

 

$

414,997

 

$

149,857

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

576,681

 

$

677,163

 

Cash paid during the period for income taxes

 

 

2,525,920

 

 

3,944,080

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash information:

 

 

 

 

 

 

 

Equipment acquisitions classified as accounts payable

 

 

51,874

 

 

8,483

 

Issuance of common stock in connection with the vesting and exercise of equity-based awards

 

 

1,174,981

 

 

1,240,842

 

 

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.

 

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AMCON Distributing Company and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

 

AMCON Distributing Company and Subsidiaries (“AMCON” or the “Company”) operate two business segments:

 

·

Our wholesale distribution segment (“Wholesale Segment”) distributes consumer products in the Central, Rocky Mountain, and Southern regions of the United States. Additionally, our Wholesale Segment provides a full range of programs and services to assist our customers in managing their business and profitability.

 

·

Our retail health food segment (“Retail Segment”) operates fifteen health food retail stores located throughout the Midwest and Florida.

 

WHOLESALE SEGMENT

 

Our Wholesale Segment is one of the largest wholesale distributors in the United States serving approximately 4,500 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 16,000 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 foodservice products. Convenience stores represent our largest customer category. In September 2015, Convenience Store News ranked us as the seventh (7th) largest convenience store distributor in the United States based on annual sales.

 

Our wholesale business offers retailers the ability to take advantage of manufacturer and Company sponsored sales and marketing programs, merchandising and product category management services, and the use of information systems and data services that are focused on minimizing retailers’ investment in inventory, while seeking to maximize their sales and profits. In addition, our wholesale distributing capabilities provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from our broad retail coverage, inventory management, efficiency in processing small orders, and frequency of deliveries. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, optimizing inventory, merchandising expertise, information systems, and accessing trade credit.

 

Our Wholesale Segment operates six distribution centers located in Illinois, Missouri, Nebraska, North Dakota, South Dakota, and Tennessee. These distribution centers, combined with cross dock facilities, include approximately 641,000 square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, ITG Brands, Hershey, Kellogg’s, Kraft, and Mars. We also market private label lines of water, candy products, batteries, and other products. We do not maintain any long-term purchase contracts with our suppliers.

 

RETAIL SEGMENT

 

Our Retail Segment is a specialty retailer of natural/organic groceries and dietary supplements which focuses on providing high quality products at affordable prices, with an exceptional level of customer service and nutritional consultation. All of the products carried in our stores must meet strict quality and ingredient guidelines, and include offerings such as gluten-free and antibiotic-free groceries and meat products, as well as products containing no artificial colors, flavors, preservatives, or partially hydrogenated oils. We design our retail sites in an efficient and flexible small-store format, which emphasizes a high energy and shopper-friendly environment.

 

We operate within the natural products retail industry, which is a subset of the large and stable U.S. grocery industry. This industry includes conventional, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, health food stores, dietary supplement retailers, drug stores, farmers markets, mail order and online retailers, and multi-level marketers.

 

Our Retail Segment operates fifteen  retail health food stores as Chamberlin’s Market & Café and Akin’s Natural Foods Market. These stores carry over 32,000 different national and regionally branded and private label products including high-

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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 established in 1935, operates five stores in and around Orlando, Florida. Akin’s, which was also established in 1935, has a total of ten locations in Arkansas, Kansas, Missouri, Nebraska, and Oklahoma.

 

FINANCIAL STATEMENTS

 

The Company’s fiscal year ends on September 30. The results for the interim period included with this Quarterly Report may not be indicative of the results which could be expected for the entire fiscal year. All significant intercompany transactions and balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, the accompanying condensed consolidated unaudited financial statements (“financial statements”) contain all adjustments necessary to fairly present the financial information included herein, such as adjustments consisting of normal recurring items. The Company believes that although the disclosures contained herein are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with the Company’s annual audited consolidated financial statements for the fiscal year ended September 30, 2015, as filed with the Securities and Exchange Commission on Form 10-K. For purposes of this report, unless the context indicates otherwise, all references to “we”, “us”, “our”, the “Company”, and “AMCON” shall mean AMCON Distributing Company and its subsidiaries. Additionally, the three month fiscal periods ended June 30, 2016 and June 30, 2015 have been referred to throughout this quarterly report as Q3 2016 and Q3 2015, respectively. The fiscal balance sheet dates as of June 30, 2016, June 30, 2015, and September 30, 2015 have been referred to as June 2016, June 2015, and September 2015, respectively.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

The Company is currently evaluating the following new accounting pronouncements and their potential impact, if any, on our consolidated financial statements:

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)  ASU No. 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting: Topic 718” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of how companies account for share-based compensation, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statements of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and early adoption is permitted.

 

In February 2016, FASB issued ASU No. 2016-02 "Leases - Topic 842” ("ASU 2016-02"). ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for all leases greater than one year in duration and classified as operating leases under previous GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and for interim periods within that fiscal year.

 

In November 2015, FASB issued ASU No. 2015-17 "Income Taxes: Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"). ASU 2015-17 eliminates the requirement to bifurcate deferred taxes between current and non-current on the balance sheet and requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. ASU 2015-17 is effective for public entities in fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. The amendments for ASU 2015-17 can be applied retrospectively or prospectively and early adoption is permitted.

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In July 2015, FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory" ("ASU 2015-11"). ASU 2015-11 requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. This ASU is effective for annual reporting periods beginning after December 15, 2016. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.

 

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." This ASU supersedes the revenue recognition requirements in "Accounting Standard Codification 605 - Revenue Recognition" and most industry-specific guidance. The standard requires that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within that fiscal year.

 

2. CONVERTIBLE PREFERRED STOCK

 

The Company has two series of convertible preferred stock outstanding at June 2016 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

 

$

400,000

 

Number of shares outstanding at June 2016:

 

 

100,000

 

 

16,000

 

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

 

 

16,227

 

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 holder’s option, at the liquidation value.  The Series A Preferred Stock and 8,000 shares of the Series B Preferred Stock are owned by Mr. Christopher Atayan, AMCON’s Chief Executive Officer and Chairman of the Board.  The Series B Preferred Stock holders have the right to elect one member of our Board of Directors, pursuant to the voting rights in the Certificate of Designation creating the Series B. Christopher H. Atayan was first nominated and elected to this seat in 2004.

 

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3. INVENTORIES

 

At June 2016 and September 2015, inventories consisted of finished goods and are stated at the lower of cost determined on a First-in, First-out (“FIFO”) basis, or market. The wholesale distribution and retail health food segment inventories consist of finished products purchased in bulk quantities to be redistributed to the Company’s customers or sold at retail. Finished goods included total reserves of approximately $0.9 million at both June 2016 and September 2015. These reserves include the Company’s obsolescence allowance, which reflects estimated unsalable or non-refundable inventory based upon an evaluation of slow moving and discontinued products.

 

4. GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill by reporting segment of the Company consisted of the following:

 

 

 

 

 

 

 

 

 

 

    

June

    

September

 

 

 

2016

 

2015

 

Wholesale Segment

 

$

4,436,950

 

$

4,436,950

 

Retail Segment

 

 

1,912,877

 

 

1,912,877

 

 

 

$

6,349,827

 

$

6,349,827

 

 

Other intangible assets of the Company consisted of the following:

 

 

 

 

 

 

 

 

 

 

    

June

    

September

 

 

 

2016

 

2015

 

Trademarks and tradenames

 

$

3,373,269

 

$

3,373,269

 

Non-competition agreement (less accumulated amortization of approximately $0.5 million at June 2016 and $0.4 million at September 2015)

 

 

 —

 

 

66,667

 

Customer relationships (less accumulated amortization of approximately $1.7 million and $1.5 million at June 2016 and September 2015, respectively)

 

 

452,292

 

 

651,042

 

 

 

$

3,825,561

 

$

4,090,978

 

 

Goodwill, trademarks and tradenames are considered to have indefinite useful lives and therefore no amortization has been taken on these assets. At June 2016, identifiable intangible assets considered to have finite lives were represented by customer relationships which are being amortized over eight years. These intangible assets are evaluated for accelerated attrition or amortization adjustments if warranted. Amortization expense related to these assets was $0.1 million and $0.3 million for the three and nine month periods ended June 2016, respectively, and $0.1 million and $0.3 million for the three and nine month periods ended June 2015, respectively.  

 

Estimated future amortization expense related to identifiable intangible assets with finite lives is as follows at June 2016:

 

 

 

 

 

 

 

 

June

 

 

    

2016

 

Fiscal 2016 (1)

 

$

66,250

 

Fiscal 2017

 

 

265,000

 

Fiscal 2018

 

 

79,375

 

Fiscal 2019

 

 

41,667

 

Fiscal 2020

 

 

 —

 

 

 

$

452,292

 


(1)

Represents amortization for the remaining three months of Fiscal 2016.

 

5. DIVIDENDS

 

The Company paid cash dividends on its common stock and convertible preferred stock totaling $0.2 million and $0.7 million for the three and nine month periods ended June 2016, respectively, and $0.2 million and $0.5 million for the three and nine month periods ended June 2015, respectively.

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6. EARNINGS PER SHARE

 

Basic earnings per share available to common shareholders is calculated by dividing net income less preferred stock dividend requirements by the weighted average common shares outstanding for each period. Diluted earnings per share available to common shareholders is calculated by dividing income from operations less preferred stock dividend requirements (when anti-dilutive) by the sum of the weighted average common shares outstanding and the weighted average dilutive options, using the treasury stock method.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June

 

 

 

2016

 

2015

 

 

    

Basic

    

Diluted

    

Basic

    

Diluted

 

Weighted average common shares outstanding

 

 

596,112

 

 

596,112

 

 

615,822

 

 

615,822

 

Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock (1)

 

 

 —

 

 

111,188

 

 

 —

 

 

125,361

 

Weighted average number of shares outstanding

 

 

596,112

 

 

707,300

 

 

615,822

 

 

741,183

 

Net income

 

$

1,851,934

 

$

1,851,934

 

$

1,996,224

 

$

1,996,224

 

Deduct: convertible preferred stock dividends (2)

 

 

(48,642)

 

 

 —

 

 

(48,643)

 

 

 —

 

Net income available to common shareholders

 

$

1,803,292

 

$

1,851,934

 

$

1,947,581

 

$

1,996,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share available to common shareholders

 

$

3.03

 

$

2.62

 

$

3.16

 

$

2.69

 


(1)

Diluted earnings per share calculation includes all stock options, convertible preferred stock, and restricted stock units deemed to be dilutive.

(2)

Diluted earnings per share calculation excludes dividends for convertible preferred stock deemed to be dilutive, as those amounts are assumed to have been converted to common stock of the Company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended June

 

 

 

2016

 

2015

 

 

    

Basic

    

Diluted

    

Basic

    

Diluted

 

Weighted average common shares outstanding

 

 

609,240

 

 

609,240

 

 

614,723

 

 

614,723

 

Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock (1)

 

 

 

 

108,635

 

 

 

 

122,602

 

Weighted average number of shares outstanding

 

 

609,240

 

 

717,875

 

 

614,723

 

 

737,325

 

Net income

 

$

4,354,180

 

$

4,354,180

 

$

4,311,587

 

$

4,311,587

 

Deduct: convertible preferred stock dividends (2)

 

 

(146,462)

 

 

 

 

(145,928)

 

 

 

Net income available to common shareholders

 

$

4,207,718

 

$

4,354,180

 

$

4,165,659

 

$

4,311,587

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share available to common shareholders

 

$

6.91

 

$

6.07

 

$

6.78

 

$

5.85

 

 


(1)

Diluted earnings per share calculation includes all stock options, convertible preferred stock, and restricted stock units deemed to be dilutive.

(2)

Diluted earnings per share calculation excludes dividends for convertible preferred stock deemed to be dilutive, as those amounts are assumed to have been converted to common stock of the Company.

 

 

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7. BUSINESS SEGMENTS

 

The Company 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, and income before taxes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Wholesale

    

Retail

    

 

 

    

 

 

 

 

 

Segment

 

Segment

 

Other

 

Consolidated

 

THREE MONTHS ENDED JUNE 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

External revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

239,244,630

 

$

 

$

 —

 

$

239,244,630

 

Tobacco 

 

 

39,495,721

 

 

 

 

 —

 

 

39,495,721

 

Confectionery

 

 

21,946,660

 

 

 

 

 —

 

 

21,946,660

 

Health food

 

 

 

 

6,541,789

 

 

 —

 

 

6,541,789

 

Foodservice & other

 

 

26,169,923

 

 

 

 

 —

 

 

26,169,923

 

Total external revenue

 

 

326,856,934

 

 

6,541,789

 

 

 —

 

 

333,398,723

 

Depreciation

 

 

322,568

 

 

107,058

 

 

 —

 

 

429,626

 

Amortization

 

 

82,917

 

 

 

 

 

 

82,917

 

Operating income

 

 

4,879,836

 

 

(109,304)

 

 

(1,455,352)

 

 

3,315,180

 

Interest expense

 

 

28,666

 

 

 —

 

 

160,132

 

 

188,798

 

Income from operations before taxes

 

 

4,881,860

 

 

(104,442)

 

 

(1,615,484)

 

 

3,161,934

 

Total assets

 

 

102,432,357

 

 

12,097,050

 

 

167,945

 

 

114,697,352

 

Capital expenditures

 

 

123,260

 

 

198,326

 

 

 

 

321,586

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED JUNE 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

External revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

239,917,539

 

$

 —

 

$

 —

 

$

239,917,539

 

Tobacco

 

 

38,406,568

 

 

 —

 

 

 —

 

 

38,406,568

 

Confectionery

 

 

22,520,687

 

 

 —

 

 

 —

 

 

22,520,687

 

Health food

 

 

 

 

7,744,518

 

 

 

 

7,744,518

 

Foodservice & other

 

 

25,867,197

 

 

 —

 

 

 —

 

 

25,867,197

 

Total external revenue

 

 

326,711,991

 

 

7,744,518

 

 

 —

 

 

334,456,509

 

Depreciation

 

 

341,432

 

 

109,625

 

 

 

 

451,057

 

Amortization

 

 

91,250

 

 

 

 

 

 

91,250

 

Operating income

 

 

5,053,788

 

 

51,812

 

 

(1,554,963)

 

 

3,550,637

 

Interest expense

 

 

32,269

 

 

49,231

 

 

160,766

 

 

242,266

 

Income from operations before taxes

 

 

5,037,641

 

 

7,312

 

 

(1,715,729)

 

 

3,329,224

 

Total assets

 

 

99,443,589

 

 

13,292,026

 

 

200,634

 

 

112,936,249

 

Capital expenditures

 

 

187,605

 

 

13,913

 

 

 

 

201,518

 

 

 

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Wholesale

    

Retail

    

 

 

    

 

 

 

 

 

Segment

 

Segment

 

Other

 

Consolidated

 

NINE MONTHS ENDED  JUNE 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

External revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

682,836,920

 

$

 —

 

$

 —

 

$

682,836,920

 

Tobacco 

 

 

112,880,466

 

 

 —

 

 

 —

 

 

112,880,466

 

Confectionery

 

 

60,838,182

 

 

 —

 

 

 —

 

 

60,838,182

 

Health food

 

 

 

 

21,353,621

 

 

 —

 

 

21,353,621

 

Foodservice & other

 

 

73,946,909

 

 

 —

 

 

 —

 

 

73,946,909

 

Total external revenue

 

 

930,502,477

 

 

21,353,621

 

 

 —

 

 

951,856,098

 

Depreciation

 

 

1,048,665

 

 

341,091

 

 

 —

 

 

1,389,756

 

Amortization

 

 

265,417

 

 

 

 

 

 

265,417

 

Operating income

 

 

11,802,629

 

 

429,366

 

 

(4,172,795)

 

 

8,059,200

 

Interest expense

 

 

88,066

 

 

 —

 

 

474,588

 

 

562,654

 

Income from operations before taxes

 

 

11,799,231

 

 

443,333

 

 

(4,647,384)

 

 

7,595,180

 

Total assets

 

 

102,432,357

 

 

12,097,050

 

 

167,945

 

 

114,697,352

 

Capital expenditures

 

 

705,137

 

 

308,851

 

 

 —

 

 

1,013,988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NINE MONTHS ENDED  JUNE 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

External revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

671,006,822

 

$

 —

 

$

 —

 

$

671,006,822

 

Tobacco

 

 

110,276,853

 

 

 —

 

 

 —

 

 

110,276,853

 

Confectionery

 

 

60,589,226

 

 

 —

 

 

 —

 

 

60,589,226

 

Health food

 

 

 

 

23,750,098

 

 

 

 

23,750,098

 

Foodservice & other

 

 

71,710,850

 

 

 —

 

 

 —

 

 

71,710,850

 

Total external revenue

 

 

913,583,751

 

 

23,750,098

 

 

 —

 

 

937,333,849

 

Depreciation

 

 

1,088,027

 

 

345,818

 

 

1,874

 

 

1,435,719

 

Amortization

 

 

273,750

 

 

 

 

 

 

273,750

 

Operating income

 

 

11,629,871

 

 

633,735

 

 

(4,287,143)

 

 

7,976,463

 

Interest expense

 

 

98,400

 

 

145,616

 

 

429,767

 

 

673,783

 

Income from operations before taxes

 

 

11,581,352

 

 

502,145

 

 

(4,716,910)

 

 

7,366,587

 

Total assets

 

 

99,443,589

 

 

13,292,026

 

 

200,634

 

 

112,936,249

 

Capital expenditures

 

 

692,394

 

 

120,230

 

 

 —

 

 

812,624

 

 

 

8. DEBT

 

The Company primarily finances its operations through a credit facility agreement (the “Facility”) and long-term debt agreements with banks. The Facility is provided through Bank of America acting as the senior agent and with BMO Harris Bank participating in a loan syndication.  The Facility included the following significant terms at June 2016:

 

·

A July 2018 maturity date without a penalty for prepayment.

 

·

$70.0 million revolving credit limit.

 

·

Loan accordion allowing the Company to increase the size of the credit facility agreement by $25.0 million.

 

·

A provision providing an additional $10.0 million of credit advances for certain inventory purchases if elected by the Company.

 

·

Evergreen renewal clause automatically renewing the agreement for one year unless either the borrower or lender provides written notice terminating the agreement at least 90 days prior to the end of any original or renewal term of the agreement.

 

·

The Facility bears interest at either the bank’s prime rate, or at LIBOR plus 125 - 175 basis points depending on certain credit facility utilization measures, at the election of the Company (weighted average rate of 2.71% at June 2016).

 

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·

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 June 2016 was $69.6 million, of which $13.7 million was outstanding, leaving $55.9 million available.

 

·

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.

 

·

A financial covenant requiring a fixed charge coverage ratio of at least 1.0 as measured by the previous twelve month period then ended only if excess availability falls below 10% of the maximum loan limit as defined in the credit agreement. The Company’s availability has not fallen below 10% of the maximum loan limit and the Company’s fixed charge ratio is over 1.0.

 

·

Provides that the Company may not pay dividends on its common stock in excess of $1.00 per share on an annual basis.  There is, however, no limit on common stock dividends if certain excess availability measurements have been maintained for the thirty day period immediately prior to the payment of any such dividends or distributions and if immediately after giving effect to any such dividend or distribution payments the Company has a Fixed Charge Coverage Ratio of at least 1.10 to 1.0 as defined in the credit facility agreement.

 

Cross Default and Co-Terminus Provisions

 

The Company’s owned real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, is financed through a term loan with BMO Harris, NA (“BMO”) which is also a participant lender on the Company’s revolving line of credit. The BMO loan contains cross default provisions which cause the loan with BMO to be considered in default if the loans where BMO is a lender, including the revolving credit facility, is in default. There were no such cross defaults at June 2016. In addition, the BMO loan contains co-terminus provisions which require all loans with BMO to be paid in full if any of the loans are paid in full prior to the end of their specified terms.

 

Other

 

The Company 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. COMMON STOCK REPURCHASE

 

During the three and nine month periods ended June 2016, the Company repurchased 16,837 and 47,556 shares of its common stock, respectively, for cash totaling approximately $1.5 million and $4.0 million, respectively. All repurchased shares were recorded in treasury stock at cost.

 

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Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including the Management’s Discussion and Analysis 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:

 

·

increasing competition in our wholesale and retail health food segments,

 

·

increases in state and federal excise taxes on cigarette and tobacco products,

 

·

higher commodity prices which could impact food ingredient costs for many of the products we sell,

 

·

regulation of cigarette, tobacco, and e-cigarette products by the FDA, in addition to existing state and federal regulations by other agencies,

 

·

potential bans or restrictions imposed by the FDA on the manufacture, distribution, and sale of certain cigarette and tobacco products,

 

·

changes in fuel prices,

 

·

increases in manufacturer prices,

 

·

increases in inventory carrying costs and customer credit risk,

 

·

changes in promotional and incentive programs offered by manufacturers,

 

·

demand for the Company’s products, particularly cigarette and tobacco products,

 

·

risks associated with opening new retail stores,

 

·

the expansion of large and well capitalized national and regional health food retail store chains,

 

·

increasing competition in our retail health food segment from conventional retailers (grocery stores, mass merchants etc.),

 

·

management periodically reviews market conditions and the demand for various assets that may lead to acquisitions, divestitures, new business ventures, or efforts to expand, each which carries integration and execution risk,

 

·

increasing health care costs and the potential impact on discretionary consumer spending,

 

·

changes in laws and regulations and ongoing compliance with the Patient Protection and Affordable Care Act,

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·

decreased availability of capital resources,

 

·

domestic regulatory and legislative risks,

 

·

poor weather conditions,

 

·

consolidation trends within the convenience store, wholesale distribution, and retail health food industries,

 

·

natural disasters and domestic unrest,

 

·

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.

 

CRITICAL ACCOUNTING ESTIMATES

 

Certain accounting estimates used in the preparation of the Company’s financial statements require us to make judgments and estimates and the financial results we report may vary depending on how we make these judgments and estimates. Our critical accounting estimates are set forth in our annual report on Form 10-K for the fiscal year ended September 30, 2015, as filed with the Securities and Exchange Commission. There have been no significant changes with respect to these policies during our fiscal quarter ended June 2016.

 

THIRD FISCAL QUARTER 2016 (Q3 2016)

 

The following discussion and analysis includes the Company’s results of operations for the three and nine months ended June 2016 and June 2015:

 

Wholesale Segment

 

Our Wholesale Segment is one of the largest wholesale distributors in the United States serving approximately 4,500 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 16,000 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 foodservice products. Convenience stores represent our largest customer category. In September 2015, Convenience Store News ranked us as the seventh (7th) largest convenience store distributor in the United States based on annual sales.

 

Our wholesale business offers retailers the ability to take advantage of manufacturer and Company sponsored sales and marketing programs, merchandising and product category management services, and the use of information systems and data services that are focused on minimizing retailers’ investment in inventory, while seeking to maximize their sales and profits. In addition, our wholesale distributing capabilities provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from our broad retail coverage, inventory management, efficiency in processing small orders, and frequency of deliveries. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, optimizing inventory, merchandising expertise, information systems, and accessing trade credit.

 

 

Our Wholesale Segment operates six distribution centers located in Illinois, Missouri, Nebraska, North Dakota, South Dakota, and Tennessee. These distribution centers, combined with cross dock facilities, include approximately 641,000

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square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, ITG Brands, Hershey, Kellogg’s, Kraft, and Mars. We also market private label lines of water, candy products, batteries, and other products. We do not maintain any long-term purchase contracts with our suppliers.

 

Retail Segment

 

Our Retail Segment is a specialty retailer of natural/organic groceries and dietary supplements which focuses on providing high quality products at affordable prices, with an exceptional level of customer service and nutritional consultation. All of the products carried in our stores must meet strict quality and ingredient guidelines, and include offerings such as gluten-free and antibiotic-free groceries and meat products, as well as products containing no artificial colors, flavors, preservatives, or partially hydrogenated oils. We design our retail sites in an efficient and flexible small-store format, which emphasizes a high energy and shopper-friendly environment.

 

We operate within the natural products retail industry, which is a subset of the large and stable U.S. grocery industry. This industry includes conventional, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, health food stores, dietary supplement retailers, drug stores, farmers markets, mail order and online retailers, and multi-level marketers.

 

Our Retail Segment operates fifteen retail health food stores as Chamberlin’s Market & Café and Akin’s Natural Foods Market. These stores carry over 32,000 different national and regionally branded and private label products including 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 established in 1935, operates five stores in and around Orlando, Florida. Akin’s, which was also established in 1935, has a total of ten locations in Arkansas, Kansas, Missouri, Nebraska, and Oklahoma.

 

Business Update - Wholesale Segment

 

The wholesale distribution industry which services convenience stores (c-stores) is facing a number of headwinds. Growing compliance costs related to a number of new federal regulations has increased operating costs. At the same time, consolidation and changing ownership of the industry’s vendor base has led to more cautious marketing and promotional spending by product manufacturers. Additionally, cash strapped local governments across the country are proposing a range of new consumption taxes on products such as soda.

 

We believe these trends will drive further consolidation within the wholesale distribution industry as distributors without sufficient scale seek to exit the market. The growing demand for robust technology solutions by c-store owners will likely only accelerate this trend.    

 

Despite these factors, our business remains healthy. The convenience store industry continues to grow sales and add new stores and the trends discussed above should present our Company with additional opportunies to make strategic acquisitions and expand our geopgraphic reach. 

 

Ultimately, we view our business as a platform to help c-stores deliver convenience to on-the-go customers. A platform which is highly nimble and responsive to changes in consumer tastes and preferences, delivering a wide range of products, services, and technologies. We remain committed to developing programs that enable our customers to compete against quick service restaurants.

 

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Business Update - Retail Segment

 

The retail health food sector remains challenged with an influx of new competition and aggressive expansion efforts by regional and nations chains such as Whole Foods Market, Trader Joe’s, Sprouts Farmers Market, Natural Grocers, Vitamin Shoppe, General Nutrition Centers (“GNC”), Lucky’s Market, and Fresh Thyme. At the same time, we have seen conventional grocery stores aggressively expand their natural, organic, and fresh product offerings. This highly competitive environment has pressured sales across the industry and has impacted our stores as well.  

 

In response to this competitive landscape, we are taking a number of steps to better position our stores. Many of these efforts are centered around a comprehensive plan to update certain stores within our portfolio, providing for a modern and highly engaged shopping experience. These efforts will be coupled with a program to customize a unique product set for each store, overlaid by new marketing and promotional campaigns. In some cases, we may opportunistically relocate certain stores as existing leases expire. This was the case in May 2016 when we closed one of our Florida market stores at the end of its lease. This store is being relocated and is expected to open in the fall of 2016. Our Q3 2016 operating results were impacted as we work to transition existing customers and develop new customer relationships for this new location. We expect this store relocation to impact our future near term operating results as well. 

 

We will continue to refine our business model as the market evolves. Carrying a highly differentiated product mix that is more difficult to copy has been the hallmark of our business over the years and will be central to our strategy as we work towards implementing various growth initiatives.

 

RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June

 

 

    

2016

    

2015

    

Incr (Decr)

    

% Change

 

CONSOLIDATED:

 

 

 

 

 

 

 

 

 

 

 

 

Sales(1)

 

$

333,398,723

 

$

334,456,509

 

$

(1,057,786)

 

(0.3)

 

Cost of sales

 

 

314,235,192

 

 

314,957,889

 

 

(722,697)

 

(0.2)

 

Gross profit

 

 

19,163,531

 

 

19,498,620

 

 

(335,089)

 

(1.7)

 

Gross profit percentage

 

 

5.7

%  

 

5.8

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expense

 

 

15,848,351

 

 

15,947,983

 

 

(99,632)

 

(0.6)

 

Operating income

 

 

3,315,180

 

 

3,550,637

 

 

(235,457)

 

(6.6)

 

Interest expense

 

 

188,798

 

 

242,266

 

 

(53,468)

 

(22.1)

 

Income tax expense

 

 

1,310,000

 

 

1,333,000

 

 

(23,000)

 

(1.7)

 

Net income

 

 

1,851,934

 

 

1,996,224

 

 

(144,290)

 

(7.2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BUSINESS SEGMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

326,856,934

 

$

326,711,991

 

$

144,943

 

0.0

 

Gross profit

 

 

16,416,415

 

 

16,334,296

 

 

82,119

 

0.5

 

Gross profit percentage

 

 

5.0

%  

 

5.0

%  

 

 

 

 

 

Retail

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

6,541,789

 

$

7,744,518

 

$

(1,202,729)

 

(15.5)

 

Gross profit

 

 

2,747,116

 

 

3,164,324

 

 

(417,208)

 

(13.2)

 

Gross profit percentage

 

 

42.0

%  

 

40.9

%  

 

 

 

 

 


(1)

Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $5.8 million in Q3 2016 and $5.9 million in Q3 2015.

 

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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 — Q3 2016 vs. Q3 2015

 

Sales in our Wholesale Segment increased $0.1 million during Q3 2016 as compared to Q3 2015. Significant items impacting sales during Q3 2016 included a $6.7 million increase in sales related to price increases implemented by cigarette manufacturers and a $0.8 million increase in sales related to higher sales volume in our  tobacco, beverage, snacks, candy, grocery, health & beauty products, automotive, foodservice, and store supplies categories (“Other Products”).  These increases were partially offset by a $7.4 million decrease in sales related to the volume and mix of cigarette cartons sold.

 

Sales in our Retail Segment decreased $1.2 million in Q3 2016 as compared to Q3 2015. Of this change, approximately $0.7 million related to the impact of closing one of our Florida market stores as we relocate it as previously discussed and $0.5 million related to lower sales in our remaining stores which have experienced increased competition.

 

GROSS PROFIT — Q3 2016 vs. Q3 2015

 

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 $0.1 million during Q3 2016 as compared to Q3 2015 primarily related to higher sales in our Other Products category. Q3 2016 gross profit in our Retail Segment decreased $0.4 million as compared to Q3 2015. Of this change, $0.3 million related to the impact of closing one of our Florida market stores as we relocate it and $0.1 million related to lower sales volume in our remaining stores.

 

OPERATING EXPENSE — Q3 2016 vs. Q3 2015

 

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, and insurance costs. Our Q3 2016 operating expenses decreased $0.1 million as compared to Q3 2015. Significant items impacting Q3 2016 operating expenses included a $0.2 million reduction in our wholesale delivery costs and $0.3 million reduction in our Retail Segment operating costs. These reductions in operating costs were partially offset by a $0.4 million increase in other operating costs including employee benefits.  

 

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RESULTS OF OPERATIONS — NINE MONTHS ENDED JUNE 2016: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended June

 

 

    

2016

    

2015

    

Incr (Decr)

    

% Change

 

CONSOLIDATED:

 

 

 

 

 

 

 

 

 

 

 

 

Sales(1)

 

$

951,856,098

 

$

937,333,849

 

$

14,522,249

 

1.5

 

Cost of sales

 

 

896,190,425

 

 

880,575,362

 

 

15,615,063

 

1.8

 

Gross profit

 

 

55,665,673

 

 

56,758,487

 

 

(1,092,814)

 

(1.9)

 

Gross profit percentage

 

 

5.8

%  

 

6.1

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

47,606,473

 

 

48,782,024

 

 

(1,175,551)

 

(2.4)

 

Operating income

 

 

8,059,200

 

 

7,976,463

 

 

82,737

 

1.0

 

Interest expense

 

 

562,654

 

 

673,783

 

 

(111,129)

 

(16.5)

 

Income tax expense

 

 

3,241,000

 

 

3,055,000

 

 

186,000

 

6.1

 

Net income

 

 

4,354,180

 

 

4,311,587

 

 

42,593

 

1.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BUSINESS SEGMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

930,502,477

 

$

913,583,751

 

$

16,918,726

 

1.9

 

Gross profit

 

 

46,555,712

 

 

46,794,647

 

 

(238,935)

 

(0.5)

 

Gross profit percentage

 

 

5.0

%  

 

5.1

%  

 

 

 

 

 

Retail

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

21,353,621

 

$

23,750,098

 

$

(2,396,477)

 

(10.1)

 

Gross profit

 

 

9,109,961

 

 

9,963,840

 

 

(853,879)

 

(8.6)

 

Gross profit percentage

 

 

42.7

%  

 

42.0

%  

 

 

 

 

 


(1)

Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $17.2 million for the nine months ended June 2016 and $16.2 million for the nine months ended June 2015.

 

SALES — Nine months Ended June 2016

 

Sales in our Wholesale Segment increased $16.9 million for the nine months ended June 2016 as compared to the same prior year period. Significant items impacting sales during the period included a $19.4 million increase in sales related to price increases implemented by cigarette manufacturers and a $5.1 million increase in sales related to higher sales in our tobacco, beverage, snacks, candy, grocery, health & beauty products, automotive, foodservice, and store supplies categories (“Other Products”). These increases were partially offset by a $7.6 million decrease in sales related to the volume and mix of cigarette cartons sold.

 

Sales in our Retail Segment for the nine months ended June 2016 decreased $2.4 million as compared to the same prior year period. Of this change, approximately $0.7 million related to the impact of closing one of our Florida market stores as we relocate it and $1.7 million related to lower sales in our remaining stores which have experienced increased competition.

 

GROSS PROFIT — Nine months Ended June 2016  

 

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 decreased $0.2 million for the nine month period ended June 2016 as compared to the same prior year period. Significant items impacting gross profit during the period included a $1.0 million decrease in gross profit related to the volume and mix of cigarette cartons sold. This decrease was partially offset by a $0.8 million increase in our Other Product category gross profit resulting from higher sales.

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Gross profit in our Retail Segment decreased $0.9 million for the nine month period ended June 2016 as compared to the same prior year period. Of this change, $0.3 million related to the impact of closing one of our Florida market stores as we relocate it and $0.6 million related to lower sales volume at our remaining stores.

 

OPERATING EXPENSE — Nine months Ended June 2016 

 

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, and insurance costs. Operating expenses decreased $1.2 million during the nine months ended June 2016 as compared to the same prior year period. Significant items impacting operating costs during the nine month period ended June 2016 included a $0.8 million decrease in our Wholesale Segment delivery costs and a $0.7 million reduction in our Retail Segment operating costs. These decreases were partially offset by a $0.3 million increase in other operating costs including employee benefits. 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Overview

 

The Company requires cash to pay operating expenses, purchase inventory, and make capital investments. In general, the Company finances its cash flow requirements through a credit facility agreement (the “Facility”), long‑term debt agreements with banks, and cash generated from operations. The Facility is provided through Bank of America acting as the senior agent and with BMO Harris Bank participating in a loan syndication. The Facility included the following significant terms at June 2016:

 

·

A July 2018 maturity date without a penalty for prepayment.

 

·

$70.0 million revolving credit limit.

 

·

Loan accordion allowing the Company to increase the size of the credit facility agreement by $25.0 million.

 

·

A provision providing an additional $10.0 million of credit advances for certain inventory purchases.

 

·

Evergreen renewal clause automatically renewing the agreement for one year unless either the borrower or lender provides written notice terminating the agreement at least 90 days prior to the end of any original or renewal term of the agreement.

 

·

The Facility bears interest at either the bank’s prime rate, or at LIBOR plus 125 - 175 basis points depending on certain credit facility utilization measures, at the election of the Company.

 

·

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.

 

·

A financial covenant requiring a fixed charge coverage ratio of at least 1.0 as measured by the previous twelve month period then ended only if excess availability falls below 10% of the maximum loan limit as defined in the credit agreement. The Company’s availability has not fallen below 10% of the maximum loan limit and the Company’s fixed charge ratio is over 1.0.

 

 

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·

Provides that the Company may not pay dividends on its common stock in excess of $1.00 per share on an annual basis. There is, however, no limit on common stock dividends if certain excess availability measurements have been maintained for the thirty day period immediately prior to the payment of any such dividends or distributions and if immediately after giving effect to any such dividend or distribution payments the Company has a Fixed Charge Coverage Ratio of at least 1.10 to 1.0 as defined in the credit facility agreement.

 

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 June 2016 was $69.6 million, of which $13.7 million was outstanding, leaving $55.9 million available.

 

At June 2016, 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 2.71% at June 2016. For the nine months ended June 2016, our peak borrowings under the Facility were $40.1 million, and our average borrowings and average availability under the Facility were $22.7 million and $45.1 million, respectively.

 

Cross Default and Co-Terminus Provisions

 

The Company’s owned real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, is financed through a term loan with BMO Harris, NA (“BMO”) which is also a participant lender on the Company’s revolving line of credit. The BMO loan contains cross default provisions which cause the loan with BMO to be considered in default if the loans where BMO is the lender, including the revolving credit facility, is in default. There were no such cross defaults at June 2016. In addition, the BMO loan contains co-terminus provisions which require all loans with BMO to be paid in full if any of the loans are paid in full prior to the end of their specified terms.

 

Dividends Payments

 

The Company paid cash dividends on its common stock and convertible preferred stock totaling $0.2 million and $0.7 million for the three and nine month periods ended June 2016, respectively, and $0.2 million and $0.5 million for the three and nine month periods ended June 2015, respectively. 

 

Contractual Obligations

 

There have been no significant changes to the Company’s contractual obligations as set forth in the Company’s annual report on Form 10-K for the fiscal period ended September 30, 2015.

 

Other

 

The Company 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.

 

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 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.

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Table of Contents

 

The Company believes its liquidity position going forward will be adequate to sustain operations. However, a precipitous change in operating environment could materially impact the Company’s future revenue stream as well as its ability to collect on customer accounts receivable or secure bank credit.

 

Item 3.      Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4.      Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2016 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.

 

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 June 30, 2016, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Table of Contents

PART II — OTHER INFORMATION

 

Item 1.      Legal Proceedings

 

None.

 

Item 1A.      Risk Factors

 

There have been no material changes to the Company’s risk factors as previously disclosed in Item 1A “Risk Factors” of the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2015.

 

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table summarizes the purchases made by or on behalf of our Company or certain affiliated purchasers of shares of our common stock during the quarterly period ended June 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

    

(d) Maximum Number (or

 

 

 

(a) Total

 

 

 

 

 

 

Approximate Dollar Value)

 

 

 

Number of

 

(b) Average

 

(c) Total Number of Shares

 

of Shares (or Units) that

 

 

 

Shares (or

 

Price Paid

 

(or Units) Purchased as Part

 

May Yet Be Purchased

 

 

 

Units)

 

per Share (or

 

of Publicly Announced

 

Under the Plans or

 

Period

 

Purchased

 

Unit)

 

Plans or Programs

 

Programs *

 

April 1-30, 2016

 

 —

 

 

 —

 

 —

 

50,000

 

May 1-31, 2016

 

16,837

 

$

88.90

 

16,837

 

33,163

 

June 1-30, 2016

 

 —

 

 

 —

 

 —

 

33,163

 

Total

 

16,837

 

$

88.90

 

16,837

 

33,163

 


*In April 2016, the Company’s Board of Directors authorized purchases of up to 50,000 shares of our Company's common stock in open market or negotiated transactions. Management was given discretion to determine the number and pricing of the shares to be purchased, as well as the timing of any such purchases.

 

 

Item 3.      Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.      Mine Safety Disclosures

 

Not applicable.

 

Item 5.      Other Information

 

Not applicable.

 

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Table of Contents

Item 6.      Exhibits

 

(a) Exhibits

 

 

31.1

Certification by Christopher H. Atayan, Chief Executive Officer and Chairman, filed pursuant to section 302 of the Sarbanes-Oxley Act

 

 

 

 

31.2

Certification by Andrew C. Plummer, Vice President, Chief Financial Officer, and Principal Financial Officer filed pursuant to section 302 of the Sarbanes-Oxley Act

 

 

 

 

32.1

Certification by Christopher H. Atayan, Chief Executive Officer and Chairman, furnished pursuant to section 906 of the Sarbanes-Oxley Act

 

 

 

 

32.2

Certification by Andrew C. Plummer, Vice President, Chief Financial Officer, and Principal Financial Officer furnished pursuant to section 906 of the Sarbanes-Oxley Act

 

 

 

 

101

Interactive Data File (filed herewithin electronically)

 

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Table of Contents

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

AMCON DISTRIBUTING COMPANY

 

(registrant)

 

 

Date: July 18, 2016

/s/ Christopher H. Atayan

 

Christopher H. Atayan,

 

Chief Executive Officer and Chairman

 

 

Date: July 18, 2016

/s/ Andrew C. Plummer

 

Andrew C. Plummer,

 

Vice President, Chief Financial Officer

 

(Principal Financial and Accounting Officer)

 

25